On June 3, 2015, I wrote an article aimed at identifying the best of 23 actively managed healthcare mutual funds. Looking at performance since 2007 for all funds, I favored the Fidelity Select Pharmaceuticals Portfolio (MUTF:FPHAX). This fund achieved 17.9% CAGR, lost "only" 30.4% during the financial crisis, and consistently generated positive alpha and a high Sharpe ratio.
I gave honorable mentions to the Fidelity Select Health Care Portfolio (MUTF:FSPHX), the Janus Global Life Sciences Fund Class T (MUTF:JAGLX), and the Fidelity Select Biotechnology Portfolio (MUTF:FBIOX).
As you can see in Figure 1, the healthcare sector hit a bit of a rough patch starting in August 2015. The Health Care Select sector SPDR ETF (NYSEARCA:XLV) is down 11.3% since my original article, while the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is down 7.7%.
The purpose of this article is to see how the 23 funds previously examined performed during the last 9 months. Were any of the funds able to dodge major losses? Are FPHAX, FSPHX, JAGLX, and FBIOX still on top?
I used Yahoo! Finance to obtain historical prices (Adj Close column), and I analyzed data and created figures in R.
Pool of Healthcare Mutual Funds
Table 1 shows the full list of 23 mutual funds included in my original article. Note that DGHCX is not included in this follow-up analysis as it is no longer investable.
Table 1. Healthcare mutual funds included in analysis.
|Alger Health Sciences Fund C||AHSCX|
|AllianzGI Health Sciences Fund Class D||DGHCX|
|Fidelity Select Biotechnology Portfolio||FBIOX|
|Fidelity Advisor Biotechnology Fund Institutional Class||FBTIX|
|Fidelity Advisor Health Care Fund Institutional Class||FHCIX|
|Fidelity Select Pharmaceuticals Portfolio||FPHAX|
|Fidelity® Select Health Care Services Portfolio No Load||FSHCX|
|Fidelity Select Medical Equipment and Systems Portfolio||FSMEX|
|Fidelity Select Health Care Portfolio||FSPHX|
|Invesco Global Health Care Fund Investor Class||GTHIX|
|ICON Healthcare Fund Class S||ICHCX|
|Janus Global Life Sciences Fund Class T||JAGLX|
|Live Oak Health Sciences Fund||LOGSX|
|Kinetics Medical Fund No Load Class||MEDRX|
|Putnam Global Health Care Fund Class Y||PHSYX|
|T. Rowe Price Health Sciences Fund||PRHSX|
|Rydex Health Care Fund Class Investor||RYHIX|
|Rydex Basic Biotechnology Fund Class Investor||RYOIX|
|Saratoga Health & Biotechnology Portfolio Fund Class Institutional||SBHIX|
|Deutsche Health and Wellness Fund Class S||SCHLX|
|BlackRock Health Sciences Opportunities Portfolio Service Shares||SHISX|
|Schwab Health Care Fund||SWHFX|
|Vanguard Health Care Fund Investor Shares||VGHCX|
Performance Since May 31, 2015
The original analysis was based on performance from Jan. 3, 2007 to May 31, 2015, so let's look at May 31, 2015 to Feb. 18, 2016. Figure 1 shows MDD vs. growth during this period.
First of all notice that the maximum drawdown and growth over this 9-month period are very highly correlated (Pearson r = -0.99). It makes sense that the funds that fell the farthest also tended to have the worst net decline.
Interestingly, only 3 funds (13.6%) outperformed XLV in terms of either metric. These were LOGSX, SBHIX, and FSMEX. The four funds I favored in the original article (red dots) all underperformed XLV.
My favorite fund from the original article, FPHAX, was 9th in terms of growth, and 8th in terms of best MDD. VBIOX was 2nd worst in both metrics, and both JAGLX and FSPHX were generally below average.
Paying for Underperformance
I am surprised to see so few funds outperform XLV. My first thought is that these funds must be more aggressive than XLV, resulting in worse losses as the sector declines. But that theory is not supported by the finding in the original article that these funds tend to have beta lower than 1.
Underperformance during a bear market can usually be explained by one of two conditions: beta > 1, or alpha < 0. The first is not true here, so the funds are probably generating negative alpha. Indeed only 2 funds (9.1%) had positive alpha - they were LOGSX and SBHIX.
So over the past 9 months, managers for actively managed healthcare funds have done very poorly. As a group, they have made bad picks and generated negative alpha. I would say they have not earned their ~1% expense ratios.
Let's look at the big picture and see where the funds stand in terms of overall performance since 2007. It is certainly still possible that some of these funds have outperformed XLV, generated positive alpha overall, etc.
Here is MDD vs. CAGR for the full period, Jan. 3, 2007 to Feb. 18, 2016.
FPHAX still looks great here. Second highest CAGR, and lowest MDD.
PRHSX had the highest CAGR, by quite a lot.
Let's close things out by seeing how the funds rank in terms of alpha generation and Sharpe ratio over the entire period.
In terms of Sharpe ratio, 14 of the 22 (63.6%) funds outperformed XLV, with FPHAX achieving the highest Sharpe ratio at 0.050.
All but 4 of the funds (81.8%) generated positive alpha. FPHAX also led this category with alpha of 0.020%.
PRHSX, which had the highest CAGR, was 2nd in both Sharpe ratio and alpha.
The recent decline in the healthcare sector provides a nice opportunity to compare actively managed healthcare funds. They have not done particularly well. Of the 22 examined here, 19 underperformed the healthcare sector ETF XLV since May 31, 2015.
The fund I recommended in my original analysis, FPHAX, did somewhat above average compared to the other funds, but underperformed XLV (16.9% loss vs. 11.3% loss).
Looking at overall performance since 2007, FPHAX remains the clear winner. It had the best MDD, second best CAGR, highest alpha, and highest Sharpe ratio.
I have to strip the "honorable mention" label from FSPHX, JAGLX, and FBIOX. These funds performed relatively poorly over the past 9 months, and no longer separate themselves from the other funds.
I will give honorable mention to PRHSX instead. This fund has the highest CAGR at a remarkable 15.3%, and 2nd highest alpha and Sharpe ratio.
An open question is whether the average investor who believes healthcare will outperform the market should choose an actively managed fund or simply invest in XLV. Despite poor performance over the last 9 months, healthcare funds do have a track record of generating alpha and outperforming XLV. However, some (or all) of the apparent outperformance of actively managed funds vs. XLV could be due to survivorship bias. Healthcare funds that were discontinued due to mediocre performance would not have been included in my original or follow-up analyses.
If I decided to bet on an actively managed fund, I'd go with FPHAX, PRHSX, or perhaps Vanguard's VGHCX, which has a low expense ratio (0.34%) and a long track record of solid performance.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author used Yahoo! Finance to obtain historical stock prices and used R to analyze the data and generate figures. Any opinion, findings, and conclusions or recommendations expressed in this material are those of the author and do not necessarily reflect the views of the National Science Foundation.