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Summary

  • Healthcare mutual funds dominated outperformance over past short and long periods, and 2008.
  • 3 mutual funds stood out as top performers.
  • 12 top individual stock are held in common between the 3 top mutual funds.

Except for one gas utility fund (MUTF:GASFX), only Health Care mutual funds outperformed the S&P 500 over multiple long and short periods (including 2008) with "reasonable" volatility for return generated.

As we inspected those Health Care funds, we identified 3 that had the most attractive overall set of performance attributes. They are:

  • (MUTF:FSPHX) Fidelity Select Health Care
  • (MUTF:JAGLX) Janus Global Life Sciences
  • (MUTF:PRHSX) T. Rowe Price Health Sciences

The top 12 individual stocks held by all three of those mutual funds are (with relative weights) as of last available report:

  • (NASDAQ:GILD) Gilead Sciences [17.90%]
  • (NYSE:ACT) Actavis [14.60%]
  • (NASDAQ:BIIB) Biogen [13.90%]
  • (NASDAQ:CELG) Celgene [9.71%]
  • (NYSE:ABBV) AbbVie [9.08%]
  • (NASDAQ:ALXN) Alexion Pharmaceuticals [8.45%]
  • (NASDAQ:VRTX) Vertex Pharmaceuticals [4.61%]
  • (NYSE:TEVA) Teva Pharmaceutical Indust. [6.08%]
  • (NYSE:VRX) Valeant Pharmaceuticals Intl [4.61%]
  • (NYSE:HCA) HCA Holdings [3.72%]
  • (NASDAQ:JAZZ) Jazz Pharmaceuticals [3.24%]
  • (NASDAQ:HTWR) Heartware International [2.29%]

[Important Note: This article is provided as an information aid to do-it-yourself investors. This IS NOT a specific recommendation to buy or sell any security, nor a statement of suitability for any particular investor.]

THE MUTUAL FUNDS

Here is how the mutual funds have done versus the S&P 500 (NYSEARCA:SPY) , the S&P 500 Health Care sector (NYSEARCA:XLV), and the Biotech sub-sector (NASDAQ:IBB):

10-Years

2007-2009

1-Year

1-Month

10-Year Comparative Accumulated Portfolio

The red line is based on owning the 3 mutual funds in equal weight and rebalanced monthly (no tax effect, so represents tax exempt or tax deferred account). The blue area plot represents the S&P 500. We did not provide dollar figures here simply to show the visual proportions.

The Health Care funds outperformed during the 2008 crash as well as over the full 10-year period. That does not mean they will necessarily outperform in a future bear market. The world is different now than then, the Affordable Care Act not the least of the differences. However, we are encouraged by historical relative performance.

40-Quarter Performance Spread

This histogram presents the quarterly performance of the 3 funds in equal weight versus less the performance of the S&P 500.

3-yr, 5-yr and 10-yr Sharpe Ratio:

The 3 funds held in an equal weight portfolio had a significantly better Sharpe Ratio over 3, 5 and 10 years - less volatility per unit of return.

Valuation and Operating Statistics

The 3 funds have higher P/E, P/B, P/S and P/CF valuations than the S&P 500 benchmark (but with higher growth rates, not shown).

The funds have lower net margin, lower ROE and ROA than the benchmark, due in part to the development stage of some of the biotech holdings.

THE TOP CONSENSUS INDIVIDUAL STOCK HOLDINGS

The 12 top stocks held by each of the three funds substantially outperformed the S&P 500 as well as the 3 mutual funds over the past 10 years.

We must point out that those 12 stocks were not the top 12 consensus stocks throughout the 10 year period that the mutual funds were measured. These stocks are a current snapshot of the funds' holdings. There have been very recent developments, such as the Gilead Hep-C drug approval, which may not have had analogs in the past and may not have analogs in the future.

Here is how the individual stocks have done versus the S&P 500 Health Care sector , and the Biotech sub-sector :

10-Year Comparative Accumulated Portfolio

If the 12 stocks had been purchased 10 years ago and held in equal weight and rebalanced monthly in an account with tax deferral or tax exemption (such as an IRA, pension or foundation), this chart shows how the accumulated value of the stocks (red line) compares to the S&P 500 (blue area plot). We did not provide dollar figures here simply to show the visual proportions.

They did much better relative to the S&P 500 than the mutual funds (noting that these stocks probably were not the top 12 consensus stocks 10 years ago).

40-Quarter Performance Spread vs. S&P 500

3-yr, 5-yr and 10-yr Sharpe Ratio:

The top 12 consensus stocks help in equal weight produced a higher Sharpe Ratio than the 3 mutual funds held in equal weight - experienced less volatility per unit of return than the mutual funds.

Valuation and Operating Statistics

The 12 stocks have higher valuation ratios than the funds, and lower net margin, but somewhat better ROE and ROA.

Valuation Metrics for the Individual Stocks:

These charts present the Revenue, EBITDA and Dividend payments over the past 10 years for each of the individual top 12 consensus stocks:

Investment Quality Ratings By Wright's:

Wright's rates each stock by four key attributes: Investor Acceptance, Financial Strength, Profitability and Growth (using 8 criteria for each of the four attributes). Investment Grade is defined as a rating of BBB4 or better. (see explanation of rating levels)

  • Gilead Sciences [ABA15]
  • Actavis [ABC6]
  • Biogen [AAA16]
  • AbbVie [ABA19]
  • Alexion Pharmaceuticals [AAA20]
  • Vertex Pharmaceuticals [ABNN]
  • Teva Pharmaceutical Indust. [ABB5]
  • Valeant Pharmaceuticals Intl [ADNN]
  • HCA Holdings [ALNN]
  • Jazz Pharmaceuticals [ABC20]
  • Heartware International [LBNN]

Links to Yahoo key statistic data, Morningstar key ratios, BarChart short-term technical rating, and StockCharts price chart with some averages and technical indicators and the StockCharts Technical Rank for each of the 12 stocks are available here:

  • Gilead Sciences || Y, M, B, S ||
  • Actavis || Y, M, B, S ||
  • Biogen || Y, M, B, S ||
  • AbbVie || Y, Mo, B, S ||
  • Alexion Pharmaceuticals || Y, M, B, S ||
  • Vertex Pharmaceuticals || Y, M, B, S ||
  • Teva Pharmaceutical Indust. || Y, M, B, S ||
  • Valeant Pharmaceuticals Intl || Y, M, B, S ||
  • HCA Holdings || Y, M, B, S ||
  • Jazz Pharmaceuticals || Y, M, B, S ||
  • Heartware International || Y, M, B, S ||

For those who want health care exposure, don't need strong dividend income, don't want to research and monitor individual stocks positions, and want active management; the three identified mutual funds are an interesting choice.

For those who want health care exposure, don't need strong dividend income, and prefer to invest in individual stocks; some of the top 12 consensus stocks may be an interesting choice.

General Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.

Disclosure: QVM has positions in one of the mutual funds and some of the individual stocks as of the creation date of this article (August 9, 2014). We certify that except as cited herein, this is our work product. We received no compensation or other inducement from any party to produce this article, and are not compensated by Seeking Alpha in any way relating to this article.

Source: 12 Top Consensus Stock Holdings From Best 3 Health Care Active Mutual Funds