Money: Many healthy returns

Alison Eadie looks at healthcare in our series on specialist funds

The election this week of a Democrat to the White House and a Republican majority to Congress was viewed by Wall Street as positive for healthcare stocks and they duly shot up in price. The last great bear market in healthcare stocks was in 1992, prompted by fears that Hillary Clinton was trying to nationalise America's healthcare industry. Her reforms failed and the consensus view now is that any further attempts at change will be much less radical.

Although pharmaceutical and healthcare companies have to compete globally to succeed, the market is dominated by the US because of its high private sector spending on health and because it spawns so many innovative companies. With some 1,000 quoted healthcare companies to choose from in the US alone, the range and opportunity is enough to keep most managers of specialist healthcare funds busy.

Framlington's Health Fund is usually 75 to 80 per cent invested in the US, but fund manager Antony Milford points out that in recent months European holdings have been the best performers. He would like to invest more in Europe. The fund holds a range of UK and European stocks including Pliva, a Croatian drug company. It has little in South-east Asia, as there are few domestic healthcare plays there. Mr Milford expects rising world demand for drugs and medical services to be met by US and European firms.

Advances in medical science generate new demand. The price of success is to some extent new diseases seeking a cure like Alzheimer's. Finally creeping privatisation of underfunded national healthcare systems in many developed countries opens opportunities to healthcare companies to step into the breach.

Big pharmaceutical companies are once again the stock market's darlings. In the past six months they have bounded ahead, leaving smaller healthcare companies behind. Bio-tech stocks, which could do no wrong at the start of year, are firmly out of favour. The reversal of sentiment has hurt funds like Framlington and GT Healthcare, which focus on smaller companies, more than those like Finsbury Worldwide Pharmaceutical, which has a 60/40 split of large to small companies.

Framlington's long-term record is excellent. Over five years it has returned 180 per cent, compared with a rise in the S&P Healthcare Index of 85 per cent, but it has fallen since its peak in May, its problems compounded by a strong pound.

Some 35 per cent of the fund is in what Mr Milford describes as quoted venture capital. These are companies about to launch their first products but as yet making no profits. The risks involved in such a strategy are mitigated by the fund's spread of investment.

GT Healthcare, managed out of San Francisco, took a beating in the summer after the speculative bubble burst. Manager Mike Yellen says disenchantment with over-valued new issues spilled into high-quality later-stage bio- techs. His response was to buy and the fund is up 21 per cent since January against an average for US healthcare funds of 7 per cent.

The bio-tech sector is also diverging, Mr Yellen says. Blue-sky companies present too great a risk, too long a wait before drugs get to market and too great a requirement for capital to offer shareholders a worthwhile return. However, later stage-companies with drugs undergoing final trials can produce greater than expected sales when the drug finally hits the market.

Finsbury Worldwide Pharmaceutical, an investment trust which invests only in pharmaceutical and bio-tech companies, has been a victim of its own success. Demand for its shares has pushed their price to a consistent premium to net asset value. According to Micropal the trust shows total returns of 55 per cent over the past year. The trust's asset values have moved sideways in the past six months, but the premium persists.

British investors keen to buy into the long-term healthcare story have a limited range of retail funds to choose from. Unit trusts include Framlington Healthcare, Jupiter World Healthcare and City Financial Beckman Bio-tech. GTF's fund is a Dublin-based European unit trust. Among investment trusts there is Finsbury's Worldwide Pharmaceutical and Rothschild's International Biotechnology.

A new investment trust was also launched last month to participate in the $2,500bn annual global healthcare spend. The Healthcare Reform Investment Trust, managed by HealthReform Partners in the US, invests in the whole spectrum of medical activity, with particular emphasis on medical devices and services. These, it points out, account for 90 per cent of healthcare industry spending, as opposed to just 10 per cent on drugs.