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VIDEOHealth Care Stocks to Heal Your Portfolio
By
Josh Lipton Sep 08, 2010 9:00 am
T. Rowe Price's health care pro weighs in with his top picks.
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Year to date, the SPDR S&P 500 ETF (SPY) is down 2%. The SPDR Health-Care ETF (XLV) is down 7%. Health-care mutual funds have struggled this year, with the typical offering in the category down 3.5%, one of the largest losses of any equity category, according to Morningstar.
Analysts rattle off the reasons for worry: big pharmaceutical companies losing patent protection on many blockbuster drugs, budget-cutting European governments slashing payments to drug companies, and, of course, nervousness about the impact of President Obama’s historic overhaul of the health-care system.
But Kris Jenner, manager of the $2.1 billion T. Rowe Price Health Sciences Fund (PRHSX), sees reasons for optimism. Looking ahead, the 48-year-old stock-picking pro believes that current low valuations mean the sector is positioned to perform well in the near future.
“There are stocks that are now just too cheap,” Jenner says. “But it won’t stay that way indefinitely. There are also companies still producing a fair amount of innovation, which will provide a lot of opportunity.”
For investors, Jenner is certainly worth a careful listen: He’s proven a capable captain of PRHSX since taking the helm in February 2000. Through September 7, the fund’s 10-year annualized return of 4.54% beats the S&P 500 by 5.86 percentage points and bests its Morningstar rivals by 3.25 percentage points, or 80% of competitors.
PRHSX has an expense ratio of 0.87% and requires a minimum investment of $2,500.
Recently, we caught up with Jenner to talk about his outlook for the health-care sector, top stock picks right now, and why he decided to make a career change from physician to professional investor.
Minyanville: What do you look for in a stock?
Kris Jenner: The portfolio is divided into two broad areas. About 75% is in therapeutics, which is generally anything you would get from a physician while you’re in a hospital such as pills or implants. The industries we’re referencing are pharmaceutical business models, biotechnology, and medical devices. These are all the companies that discover, develop, and commercialize medical products that specifically address some type of disease.
We want to see products that are highly innovative and have high impact. All the better when we can find those products in a smaller versus a bigger company.
About 25% of the fund is devoted to health-care services. These are companies that provide a product or a service that’s involved in the delivery of health care, but is not something you generally think of as directly consumed by the patient. So we’re talking about hospitals, distributors, and insurance companies.
We want to find companies that provide an important component in the delivery of health care but do so in ways that improve quality and lower cost.
Minyanville: How has the health-care reform law changed your investment strategy?
Jenner: There are three major issues with health care in this country: the number of uninsured, the overall quality of health care delivered, and the overall cost.
In my opinion, this bill doesn’t do much more than provide coverage for 32 million more Americans. So we will see use of health-care services increase significantly and costs rise substantially. It wouldn’t surprise me if, by the end of this decade, we see another attempt at health-care reform that addresses the issues of reducing cost and delivering higher-quality care for the same amount of money.
There aren’t any clear-cut winners in health-care reform other than health-care information technology groups because there are new requirements to improve and disseminate electronic health records. This is an area where we’ve increased exposure.
No positions in stocks mentioned.
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