Healthcare Funds in the U.S.

You know there are lots of mutual funds and hedge funds in the U.S. But how many?

Hedge funds may be secretive and repelling to general investors because of its high level of speculation, mutual funds, on the other hand, are restrictive on investment and safer.

There are 24708 mutual funds listed in Finance Google, under around 80 fund families such as BlackRock, Fidelity investments, Eaton Vance, legg Mason, Vanguard Group et al.

There are more than 200 funds among them are themed with Biopharmaceuticals, Biotechnology and other Healthcare companies.

How do they manage volatile Healthcare stocks and what are the performances?

Let’s take a look at the 73 mutual funds that invest majorly in biotechnology.  The thee biotech mutual funds with largest NAV are: Fidelity Select biotechnology (FBIOX), Franklin Biotechnology Discovery Adv (FRAN_BIOT_DISC_1TI80UR) and Putnam Global Health Care Y (PHSYX).

First, let’s take a look at their performance via the chart in Google, Fidelity outperformed both Franklin and Putnam’s funds.

Why FBIOX outperformed its competitors? I would like to read what the portfolio manager Rajiv Kaul’s message to investors in its recent annual report:

“During the past year, the fund returned 9.11%, topping the 6.78% gain of the MSCI® U.S. IM Biotechnology 25/50 Index but lagging the broadly based S&P 500®. Versus the MSCI index, the fund’s performance was aided the most by stock selection in the biotechnology industry, where roughly 92% of the fund’s net assets, on average, were invested during the period. A small out-of-index stake in health care equipment also lifted the fund’s result. Alexion Pharmaceuticals was the top individual contributor on both a relative and absolute basis. In October, the company raised its financial guidance for 2010. The stock also benefited from an inexpensive valuation to start the period and positive data in a Phase 2 study of its drug Soliris® as a treatment for atypical Hemolytic Uremic Syndrome (aHUS). Underweighting three large, underperforming index components – Gilead Sciences, Celgene and Amgen – also aided performance. That said, Amgen was by far the fund’s largest holding at period end, although it still was underweighted relative to the MSCI index. Amgen also was the fund’s largest absolute detractor. In December, the share price of another contributor to fund performance, InterMune, soared from around $14 per share to almost $35 after the company announced a positive opinion from European drug regulators regarding the marketing of Esbriet®, a treatment for idiopathic pulmonary fibrosis, a progressive and fatal lung disease. Conversely, out-of-index exposure to the pharmaceuticals group held back the fund’s performance. Most of the damage was attributable to a position in Auxilium Pharmaceuticals, the fund’s biggest relative detractor. The stock suffered a loss of roughly 25% due to investor concern about the prospects for XIAFLEX®, the company’s treatment for an uncommon hand deformity called Dupuytren’s contracture, among other ailments. Other detractors included Acorda Therapeutics and underweighted exposures to strong-performing index components Biogen Idec and Genzyme. In the latter’s case, the company received a takeover bid during the period from French drug firm Sanofi-Aventis, which lifted Genzyme’s stock price. I sold Genzyme during the period to lock in profits. Lastly, the shares of Allos Therapeutics struggled during the period because of a slower-than-expected launch of FOLOTYN®, an injectable treatment for patients with relapsed or refractory peripheral T-cell lymphoma.”

His analysis is thorough and insightful. Accordingly, I notice that holding on Amgen, Inc (AMGN) was reduced from 17.6% of fund’s NAV to 13.6%, Gilead Sciences, Inc. (GILD) increased from 4.6% to 10.6%, Biogen Idec, Inc (BIIB) increased from 4.3% to 6.1%, Celgen Corp. (CELG) was added into the portfolio. Pharmasset, Inc. was increased from 1.7% to 3.3%, which was acquired by Gilead Sciences, Inc. in January 17,  2012 with a premium of 59% above its all-time high (disclosed in the semi-annual report  ended October 28, 2011).

Nice job, so what’s the situation for Franklin Biotechnology Discovery Adv (FRAN_BIOT_DISC_1TI80UR)?

In contrast, the PM of this fund didn’t discuss its biotechnology fund in a specific area, except mentioning briefly that “ other disappointments included pharmacy benefit manager Medco Health Solutions, an out-of-index position in China Life Insurance” when explaining the mediocre performance of the fund. And this fund is actually under Fidelity Magellan Fund umbrella.

Third, how about Putnam Global Health Care Y (PHSYX)?

Putnam Global Health Care Fund has been in the market for almost 30 years. But the performance is quite disappointing:

Regarding to specific insight into their portfolio, two managers Kelsey and Chris mentioned the following points:

“Kelsey: One of the top performers for the fund was the stock of Pharmasset, a biotechnology company that specializes in the treatment of hepatitis C. Like many small biotech companies, Pharmasset is not yet profitable, but the company has delivered very promising data on hepatitis C compounds in development. We believe a successful launch of these drugs could help Pharmasset gain a significant share of the hepatitis C market. Investor optimism about these developments helped boost Pharmasset’s stock price during the period.

Chris: Another highlight for the period was the stock of Covidien, a medical supply company headquartered in Dublin, Ireland. The company had been delivering earnings above expectations, and then raised its guidance for the remainder of 2011. In our view, Covidien is a fundamentally strong company, and its stock remains attractively valued, particularly relative to other health-care stocks.

Kelsey: We have also been pleased with the performance of Aetna, a health-care benefits company that serves approximately 35.3 million people. Unlike many health-care companies, HMOs like Aetna benefit from declines in utilization trends. When fewer people visit the doctor, elect to have surgery, or otherwise cut back on health-related spending, the result is lower expenses for health insurers. Consequently, Aetna has been able to deliver solid financial results that exceeded expectations and drove up the stock’s price. Also, last year, investors had considerable concerns about the health-care reform bill and its potential impact on HMOs. A key issue was the effect of the medical loss ratio [MLR] provision, which limits the amount of premium that is spent on costs outside of medical care. It now appears that the MLR provision may be less constraining to these companies, and this also helped Aetna’s performance.

One of our biggest disappointments for the fiscal year has been Dendreon, a biotechnology company that specializes in cancer treatments. In 2010, Dendreon’s stock rallied after the company received FDA approval for Provenge, a vaccine that stimulates a patient’s immune system to target and attack prostate cancer. The FDA gave Dendreon approval to quadruple the production capacity of the drug, which can extend the life of prostate cancer patients. Despite this positive news, sales of the drug have been slower than anticipated, and Dendreon’s stock has struggled. This is mainly due to investor concerns about government reimbursement in this very uncertain macroeconomic environment. Because of the high cost of the treatment, Medicare has undertaken a review to decide if it will cover the costs of Provenge. Physicians are more hesitant to prescribe expensive drugs without the assurance that they will be reimbursed.

We saw a similar challenge for Human Genome Sciences, another biotechnology company. This stock performed very well in 2010 after the company completed two successful FDA Phase III trials for Benlysta. Earlier this year, the FDA approved Benlysta, the first medication sanctioned for treating systemic lupus in the United States since 1955. However, as is the case with Provenge, uncertainty about reimbursement has dampened enthusiasm somewhat, and Human Genome Sciences’s stock declined.

Chris: One detractor among the fund’s international holdings was the stock of Teva Pharmaceutical, an Israel-based generic drug company. Teva’s recent struggles have been due in part to one of its branded drugs, Copaxone, the number-one prescribed treatment for multiple sclerosis. Investors have become increasingly concerned about generic competition for Copaxone, which has been a highly profitable product for Teva. The regulatory pathway is still unclear for generic competitors, but speculation has created negative sentiment toward Teva. In addition, pricing pressures — particularly in international markets — and a lack of new generic product approvals have dampened investor sentiment.”

I would say that the two PMs’ points on distractors are elusive. It’s easy to blame something while not easy to catch the point. The fund must have incurred huge loss on Dendreon Corporation (DNDN) whose stock price plunged from $40.67 to $10.37 in early August 2011, while by as of August 31, 2011, the fund still held 1026070 shares of DNDN, worthing$12600140 value. TEVA is a great company with solid pipeline of generic medicines, they can’t blame TEVA for their lousy performance just because their entering time was bad.

There are 7 hedge funds with big chunk of proportion in Healthcare. They are Glenview Capital Management LLC (33.1%, AUM=$7.5 billion), Orbimed Advisor, LLC (98.02%, AUM=$3.8 billion), HealthCor Management, L.P. (88.1% ,AUM=$2.87 billion), Visium Asset Management, L.P. (79.5%, AUM=$2.1 billion), Baker Bros. Advisors, LLC (100% AUM=$1.9 billion), Bridger Management, LLC (36.2% AUM=$1.5 billion) and Deerfield Management Company (95.6% AUM=$1.2 billion). Because hedge funds are not mandated to SEC filings, I can’t find more information about these mysterious mangers.

In summary, no matter mutual funds or hedge funds, to win out in the risky Healthcare sector, the portfolio managers must know ins and outs of this industry and also feel the right pulse of the market.

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