Money: Looking for a healthy return

Is investing in the healthcare sector a prescription for profits? By Rachel Fixsen

Fancy buying an option on a dialysis machine? How about some shares in an infectious diseases unit?

Hoping to make money out of the sick might seem in bad taste. Those of us who grew up with the good old National Health Service are used to keeping our money and health quite separate.

But in the US, where the healthcare sector is largely privately owned, curing illness has long been big business. It is becoming big business in all developed countries where treating the sick costs ever greater proportions of GDP.

More and more of us are now living to old age, and the elderly are the heaviest users of healthcare services. Scientists are coming up with amazing treatments, but the new drugs and technologies cost money.

This is where investment opportunities come in. Governments, struggling to manage ballooning healthcare costs, are having to look to the private sector in the hope that increased competition will provide better-value services.

This is good news for investors in healthcare companies poised to take advantage of this, and for you if you can view senile dementia not as a sad goodbye to your grey cells but as a growth market.

For example, in the US, a new breed of insurance company called healthcare maintenance organisations (HMOs) has sprung up. Instead of your health insurer simply coughing up when you get a bill from your doctor, with little control over how much it pays out, with an HMO you make a fixed monthly payment for whatever treatment you might need.

Framlington has a unit trust which holds shares in healthcare services firms, medical devices companies and pharmaceutical and biotechnology shares.

One firm it invests in, Cardiothoracic Systems, has developed tools making heart bypass surgery possible without stopping the heart. Another, Neurosearch, addresses "major market opportunities such as depression, anxiety, Alzheimer's and Parkinson's disease," to quote from the Framlington brochure. However good the arguments for investing in healthcare sound, this is a high-risk trust. If you had invested pounds l,000 in it a year ago you would have lost 36p by now, not to mention the money you could have earned with a diversified fund.

"It is a relatively volatile sector in that it is dealing with embryonic companies in the main," says Craig Walton, Framlington's marketing director. "I don't think somebody should be in this unless they're thinking about investing in it for five years." Longer term, performance has indeed been strong. After five years pounds l,000 would have grown to pounds 2,222.93, according to MoneyFacts, the specialist financial information provider.

"Any specialist area will be much higher than average risk," says Fiona Price of London-based independent financial advisers Fiona Price & Co. "The vast majority of its investment is in the US, which again adds to the risk element.

"The safest way is to go into this on a monthly basis. When the price goes down, it will work to your advantage." Then you can buy cheaply, cashing in on the next rise in unit prices, says Ms Price.

The Framlington trust allows you to invest pounds 50 a month. The minimum lump sum investment is pounds 500 and subsequent investments must be at least pounds 100. There is a 5.5 per cent initial charge and a 1.5 per cent annual management charge. These charges are reflected in the price of the units.

Framlington's unit trust can only be used as a tax-free PEP up to pounds l,500 a year, because it invests in America, Japan, Europe and the UK. But Framlington does offer a PEP which links its health fund to its Extra Income Trust for which you can use the full pounds 6,000 allowance.

A serious investor might be advised to invest up to 5 per cent of their portfolio in the Framlington fund, she says. "But anyone who's cautious shouldn't get involved."

Another avenue is Healthcare Reform Investment Trust, a new healthcare investment vehicle set up last September. Most of its cash goes to the US, focusing on companies trying to take advantage of government efforts to control healthcare costs, such as HMOs.

Healthcare Reform Investment Trust shares have fallen to 97.5p at last count after being offered to investors for pounds l in September. But better times are seen ahead. David Talbot, president of Health Reform Partners ,which manages the trust, says most of its stocks are overdue for significant recovery.

Pharmaceuticals stocks offer another route for investors.

Glaxo Wellcome, Zeneca and SmithKline Beecham are the UK's main drug stocks. BZW Securities has a "buy" recommendation on Zeneca and Glaxo, which means it expects them to outperform the stock market by more than 10 per cent over the next 12 months. It recommends holding SmithKline Beecham, expecting it to perform in line with the market.

Drugs stocks tend to suffer, rather than benefit, from efforts to curb healthcare spending. But you do get the excitement of hoping the company's research wizards will come up with a blockbuster cure for cancer or Aids. Who knows?