Value Line’s Health objective group is a fairly small, yet surprisingly diverse, collection of mutual funds.  Clearly, the funds in this category invest the vast majority of their assets in healthcare and related businesses.  That said, there are a number of different variants within what would seem an otherwise narrow space.

The two biggest areas of differentiation are biotechnology and general healthcare funds.  The former, such as Franklin Biotechnology Discovery Fund (FBDIX), focus exclusively on companies at the forefront of medicine in what is called biotechnology—often these are small companies with novel drug compounds in the testing stage of research.  The latter, meanwhile, may own shares of biotech companies, but enjoy a much broader mandate to invest in healthcare across all of its subsectors, like T. Rowe Price Health Sciences Fund (PRHSX).  These offerings often own both mature companies, like the major pharmaceutical firms, and developing companies, like the biotechs or small medical device makers.

There are, of course, index offerings, such as Vanguard Health Care Index Fund (VHCIX), and leveraged funds, such as ProFunds Biotech Ultra Sector Fund (BIPIX) and ProFunds HealthCare UltraSector Fund (HCPIX).  In addition, funds take different approaches to foreign exposure, with some using words like “global” in their name to highlight their worldwide focus while others, without such words in their names, may have a more domestic mandate. 

There are also funds that focus on subsectors beyond the more established biotech niche, including ProFunds Pharmacuticals UltraSector Fund (PHPIX), a leveraged fund focusing on drug stocks, Fidelity Select Medical Delivery Fund (FSHCX), and Fidelity Select Medical Equipment and Systems Fund (FSMEX).  Some of these niche categories are so narrow that there is just one fund specializing on the space (such as the two Fidelity offerings), while others have multiple entrants, such as the drug-focused ProFund. 

Ultimately, if there is a particular healthcare niche one is interested in, there might just be a fund to fill the need—It’s just important to ensure it is managed in a way that is complementary to one’s overall investment approach.  For most investors, however, a broad-based healthcare focused fund is probably most appropriate. 

Over the long term, the Health objective group has been a good performer relative to the broader market, as measured by the Russell 3000 Index.  For the 10-year period ended July 31, 2010, the group had an annualized gain of 1.1%, while the Russell 3000 Index reported an annualized loss of 0.1%.  For five years and three years, the group had a 0.7% return and an annualized loss of 2.0%, respectively, while the Index reported a gain of 0.1% and a loss of 6.3% respectively.

Recently, however, the Health objective group has not been as strong. During the one year period ended July 31, 2010, the group reported a return of 5.6%, compared with 14.8% for the Russell 3000 Index. The objective group also underperformed the index in the year-to-date period through July 31, 2010. Health funds reported a loss of 4.7% compared with a gain of 0.5% for the Russell 3000 Index. Still, the Health objective group has a better-than-average risk rank of 2, indicating that these funds may appeal to many investors, including those that are risk conscious. 

One fund with a relatively high year-to-date return through July 31, 2010 is Eaton Vance Worldwide Health Sciences Fund (ETHSX).  This fund’s investment objective is long-term capital growth. To achieve its objective, the fund normally invests at least 80% of its assets in equity and equity-related securities of companies principally engaged in the discovery, development, production, or distribution of products or services related to scientific advances in healthcare.  These include biotechnology, pharmaceuticals, diagnostics, managed healthcare, medical equipment, and medical supplies. 

A company is considered to be a health sciences company if 50% or more of its sales, earnings, or assets will arise from, or will be dedicated to, the application of scientific advances related to healthcare.  The fund invests in U.S. and foreign securities, and will normally be invested in companies located in at least three countries.  It invests at least 25% of its assets in the medical research and healthcare industries.  The fund may invest up to 5% of its assets in royalty bonds, and is allowed to use derivatives to enhance returns and hedge against fluctuations in securities prices, interest rates, and/or currency exchange rates.

Another fund with very good year-to-date return is Franklin Biotechnology Discovery Fund.  This fund seeks long-term capital appreciation.  The fund normally invests at least 80% of its assets in biotechnology companies and discovery research firms in the U.S., Europe, and other countries.

The fund invests primarily in companies engaged in the research, development, manufacture, and distribution of various biotechnological or biomedical products, services, and processes. This may include genomics, genetic engineering, and gene therapy.  It also includes companies involved in the application and development of biotechnology in areas such as healthcare, pharmaceuticals, and agriculture.  The fund further defines a biotechnology company as one that has at least 50% of its earnings derived from biotechnology activities, or at least 50% of its assets devoted to such activities based on the company’s most recent fiscal year. 

Under normal conditions, the fund will invest more of its assets in U.S. securities than in those of any other single country, although the fund may have more than 50% of its total assets in non-U.S. securities.  The fund may take a temporary defensive position, such as holding a higher-than-normal percentage of assets in cash, and is allowed to use derivatives as a way of enhancing its pursuit of long-term capital appreciation. 

A third fund with a very good return through the first seven months of 2010 is Fidelity Select Pharmaceuticals Fund (FPHAX).  This fund’s objective is capital appreciation.  To achieve this objective, the fund typically invests at least 80% of its assets in the common stock of companies engaged in the research, development, manufacture, sale, or distribution of pharmaceuticals and drugs of all types.  The fund may invest in domestic and foreign issuers.  Management uses fundamental analysis of factors such as each issuer’s financial condition and industry position, as well as market and economic conditions, to select investments. 

In the table below, we have listed 10 top-performing funds through July 31, 2010 that we follow in our Fund Advisor database.

10 Top Health Funds Performance