Deep Dive: Five outperforming health-care funds and the top 10 stocks they hold

Deep Dive: Five outperforming health-care funds and the top 10 stocks they hold

Markets 27 Jun, 2018

(This is the second in a series of articles about actively managed U.S. equity funds with excellent track records that are focused on sectors. The first article covered the information-technology sector.)

It’s more difficult than ever for active managers of equity funds to compete with index funds and ETFs for an obvious reason: They tend to underperform their benchmark indexes.

Which is why the exceptions to this trend are enlightening. Morningstar has provided a list of actively managed mutual funds that are concentrated in specific sectors and have the highest ratings (five stars) from the fund-research firm. Today we tackle health-care funds.

Performance

Removing the one share class on the list with a front-end sales charge (which you should never pay for any fund), we are left with five funds focused on health care that have five-star ratings. Here’s how they have fared (after expenses) against the S&P 500 SPX, +0.22% health-care sector over the past five years:

Morningstar

Here are average returns for the five funds (listed in alphabetical order and, again, after expenses) for various time periods, along with their current annual expense ratios.

Ticker Total return - 2018 through June 25 Avg. return - 3 years Avg. return - 5 years Avg. return - 10 years Avg. return - 15 years Annual expense ratio Delaware Healthcare - Class I DLHIX, -0.32% 12.0% 10.1% 17.5% 19.5% N/A 1.13% Fidelity Advisor Health Care - Class I FHCIX, -0.08% 14.6% 5.6% 19.0% 16.0% 12.7% 0.78% Fidelity Select Health Care FSPHX, -0.04% 14.5% 5.4% 18.9% 16.0% 12.7% 0.73% Fidelity Select Medical Technology and Devices FSMEX, +0.64% 18.2% 16.2% 21.9% 14.8% 13.7% 0.76% T. Rowe Price Health Sciences PRHSX, +0.08% 8.3% 4.7% 19.1% 17.1% 15.1% 0.77% S&P 500 health care sector 2.7% 5.3% 14.2% 12.8% 9.2% Sources: Morningstar, FactSet

All of the funds’ current annual expense ratios are considered “low” by Morningstar, except for the Delaware Healthcare Fund DLHIX, -0.32% for which expenses are considered “above average.”

Regardless of the expenses, those funds have significantly outperformed the S&P 500 health-care sector over the five- and 10-year periods. The four that have been around for 15 years have all beaten the sector by wide margins. The results are mixed for the three-year period, during which the T. Rowe Price Health Sciences Fund PRHSX, +0.08%  has underperformed.

Top holdings of each fund

You will see some big companies held by most of the funds, especially because three of the funds are managed by Fidelity. But the concentration of each fund in its top 10 holdings varies widely, and there are big differences among some of the funds.

Here are the top 11 holdings (of 76) of the $732 million Delaware Healthcare Fund DLHIX, -0.32%  as of April 30. We are showing 11 instead of 10 because the fund holds shares of Sanofi issued in France as well as the American depositary receipts (ADRs) traded in the U.S.

Company Ticker Share of fund Total return - 2018 through June 21 Total return - 2017 Total return - 3 years Total return - 5 years MorphoSys AG MOR, -1.25% 7.3% 36% 57% 52% 186% Chugai Pharmaceutical Co. 4519, -0.67% 5.2% 2% 74% 43% 225% Arena Pharmaceuticals Inc. ARNA, +2.76% 3.2% 28% 139% 0% -46% Pfizer Inc. PFE, +0.00%   3.0% 2% 16% 19% 55% UniQure N.V. QURE, -0.25% 2.9% 82% 250% 18% N/A Sanofi ADR SNY, -0.77% 2.8% -3% 9% -15% -7% Zimmer Biomet Holdings Inc. ZBH, +1.65% 2.8% -8% 18% 0% 54% Eli Lilly and Co. LLY, -0.77% 2.8% 3% 18% 9% 101% Sanofi S.A. SAN, -0.09% 2.8% 1% -4% -16% 10% McKesson Corp. MCK, -0.78% 2.5% -6% 12% -35% 36% Roche Holding Ltd. ROG, +0.05% 2.5% -9% 9% -11% 17% Sources: Morningstar, FactSet

The Delaware Healthcare Fund was about 38% concentrated in its top 10 holdings as of April 30. DLHIX, -0.32%

While the next two Fidelity funds each had 90 stocks as of April 30, they had higher concentrations in their top-10 holdings than the Delaware Healthcare Fund — about 45.5%. The Fidelity Advisor Health Care Fund FHCIX, -0.08% and the Fidelity Select Health Care Fund FSPHX, -0.04%  share management and are run with pretty much the same strategy, although their top 10 holdings vary slightly.

Here are the top 10 holdings (of 90) of the $3 billion Fidelity Advisor Health Care Fund as of April 30:

Company Ticker Share of fund Total return - 2018 through June 21 Total return - 2017 Total return - 3 years Total return - 5 years UnitedHealth Group Inc. UNH, -0.37% 9.5% 15% 40% 115% 326% Becton, Dickinson and Co. BDX, +2.02% 6.9% 10% 31% 73% 160% Boston Scientific Corp. BSX, -0.37% 5.6% 30% 15% 76% 256% Humana Inc. HUM, -1.01% 5.0% 21% 23% 55% 269% Amgen Inc. AMGN, -0.42% 4.3% 8% 22% 26% 116% Vertex Pharmaceuticals Inc. VRTX, -2.11% 3.2% 3% 103% 21% 98% AstraZeneca PLC ADR AZN, -0.26%   3.1% 4% 33% 21% 84% Baxter International Inc. BAX, -0.61% 2.7% 14% 47% 94% 113% Stryker Corp. SYK, +1.16% 2.6% 10% 31% 84% 182% Biogen Inc. BIIB, -0.09% 2.6% -8% 22% -23% 59% Sources: Morningstar, FactSet

Here are the top 10 holdings (of 90) of the $6.8 billion Fidelity Select Health Care Fund as of April 30:

Company Ticker Share of fund Total return - 2018 through June 21 Total return - 2017 Total return - 3 years Total return - 5 years UnitedHealth Group Inc. UNH, -0.37% 9.5% 15% 40% 115% 326% Becton, Dickinson and Co. BDX, +2.02% 6.8% 10% 31% 73% 160% Boston Scientific Corpo.ration BSX, -0.37% 5.7% 30% 15% 76% 256% Humana Inc. HUM, -1.01% 5.2% 21% 23% 55% 269% Amgen Inc. AMGN, -0.42% 4.3% 8% 22% 26% 116% Vertex Pharmaceuticals Inc. VRTX, -2.11% 3.2% 3% 103% 21% 98% AstraZeneca PLC ADR AZN, -0.26% 3.0% 4% 33% 21% 84% Stryker Corp. SYK, +1.16% 2.6% 10% 31% 84% 182% Baxter International Inc. BAX, -0.61% 2.6% 14% 47% 94% 113% Intuitive Surgical Inc. ISRG, +1.96% 2.5% 30% 73% 187% 183% Sources: Morningstar, FactSet

Here are the top 10 holdings (of 49) of the $4.6 billion Fidelity Select Medical Technology and Devices Fund as of April 30:

Company Ticker Share of fund Total return - 2018 through June 21 Total return - 2017 Total return - 3 years Total return - 5 years Becton, Dickinson and Co. BDX, +2.02% 13.3% 10% 31% 73% 160% Boston Scientific Corp.n BSX, -0.37% 10.1% 30% 15% 76% 256% Stryker Corp. SYK, +1.16%   7.0% 10% 31% 84% 182% Intuitive Surgical Inc. ISRG, +1.96% 6.0% 30% 73% 187% 183% Baxter International Inc. BAX, -0.61% 5.0% 14% 47% 94% 113% Thermo Fisher Scientific Inc. TMO, +0.11% 4.7% 8% 35% 58% 152% Medtronic PLC MDT, +0.14% 4.0% 8% 16% 22% 85% Danaher Corp. DHR, +0.26% 3.9% 7% 20% 55% 115% Edwards Lifesciences Corp. EW, +0.16% 3.5% 33% 20% 107% 346% UnitedHealth Group Inc. UNH, -0.37%   2.7% 15% 40% 115% 326% Sources: Morningstar. FactSet

The Fidelity Select Medical Technology and Devices Fund was 60% concentrated in its top 10 holdings as of April 30, making it by far the most highly concentrated fund listed here. This is an important distinction among large mutual funds, whose managers can easily be accused of being “closet-indexers.” A high degree of conviction sets the fund apart and may help explain why it has been the best performer of the funds listed here over the past three and five years.

And here are the top 10 holdings (of 115) of the $12.4 billion T. Rowe Price Health Sciences Fund as of March 31:

Company Ticker Share of fund Total return - 2018 through June 21 Total return - 2017 Total return - 3 years Total return - 5 years UnitedHealth Group Inc. UNH, -0.37% 7.0% 15% 40% 115% 326% Becton, Dickinson and Co. BDX, +2.02% 4.8% 10% 31% 73% 160% Intuitive Surgical Inc. ISRG, +1.96% 4.6% 30% 73% 187% 183% Vertex Pharmaceuticals Inc. VRTX, -2.11% 3.6% 3% 103% 21% 98% SAGE Therapeutics Inc. SAGE, +4.88% 2.6% -11% 223% 103% N/A Stryker Corp. SYK, +1.16% 2.6% 10% 31% 84% 182% Anthem Inc. ANTM, -0.85% 2.6% 9% 59% 50% 230% Thermo Fisher Scientific Inc. TMO, +0.11% 2.3% 8% 35% 58% 152% Agilent Technologies Inc. A, +1.27% 2.3% -8% 48% 57% 112% Cigna Corp. CI, -0.52% 2.2% -14% 52% 2% 146% Sources: Morningstar, FactSet

This fund was about 35% concentrated in its top 10 holdings as of March 31, the lowest among the funds listed here.

The purpose of listing all these funds’ holdings is to show you which names are favorites among some of the most successful health-care-fund managers. If you are interested in making a long-term investment in any of these stocks, it’s best to do your own research and form an opinion as to how likely a company is to succeed against its competitors over the next decade.

As we discussed when looking at the best-rated technology funds, you need to find out how shares are distributed if you are interested in any of these funds and also read the prospectus for any fund you are considering.

If you are required to go through an investment adviser, keep in mind that these returns do not reflect the advisers’ annual fees. According to several industry studies, those average 1%, which is a hefty amount if you consider its effect over time. It may more than double your expenses for a fund.

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