As a result, their near fully invested mandates drive more money toward the “defensive” sectors (Healthcare) and then to the sectors within those industries (and companies) that offer the best safe haven for troubled times.

There are ETFs available for each industry above:
 

• Pharmaceuticals (IHE)
• Biotech (IBB)
• Managed Care (IHF)
• Medical Devices (IH)

The following chart shows their relative stock price performance over the past two years:


Click to enlarge.

What is crystal clear in this chart is the disparate performance of each industry, with medical devices and biotech (IBB) well ahead of the other 2 and the S&P 500.

Investment Strategy Implications

Since many professional investors must remain near or fully invested and are likely to seek “defensive” sectors like Healthcare, two forces will conspire to act upon the sector – more money flowing in and more funds being allocated to the industries that offer the better investment opportunities. Armed with this knowledge, the non-professional investor can allocate money toward those industries in which the professional investor is likely to invest.

As the above chart shows, that trend has been fairly clear - strong into medical devices and biotech, away from big pharma and managed care. Since big pharma represents the largest percentage of the healthcare sector (nearly 50%), any funds moving out of big Pharma but staying within the Healthcare sector will gravitate toward those industries with the best relative performance potential.

Going forward, the secular trend of big Pharma companies like Pfizer (PFE), GlaxoSmithKline (GSK), and Novartis (NVS) may come under pressure from healthcare reform, dwindling product pipeline, patented products coming off protection, competition from generics and large cash positions. Such a trend would favor biotech, which enjoys a good pipeline and less vulnerability to the issues facing big pharma.