Healthcare stocks did very well in 2017, contributing considerably to the stock market's big gains. The mutual funds that specialize in healthcare stocks also had good performance, with various managers doing an even better job of identifying the best prospects within healthcare to maximize returns.
The three best-performing healthcare mutual funds over the past year as determined using Morningstar's fund screening tool took different approaches to making the most of the opportunities in the sector. By looking more closely at their success, you can learn some tricks that could help you increase your own returns going forward.
Best healthcare mutual funds
The Eventide fund blew away the competition over the past year, using a research method based on company fundamentals to identify the stocks most likely to rise in value. The fund pays close attention to clinical trials and the feedback that companies get from the U.S. Food and Drug Administration in assessing a company's chances of making it through the approval process and having candidate treatments put out into the market.
Biotech stocks make up nearly 75% of the Eventide fund's portfolio, and that has been an especially smart bet recently, given that sector's bounce last year from weaker returns in 2016. Large-cap stocks also make up a small fraction of the portfolio, and Eventide's emphasis on mid-sized and small-cap companies makes it a riskier choice that can maximize returns during good times.
The Alger fund also has the goal of pursuing high-growth stocks in the healthcare sector, with the fund's approach looking specifically for what managers call "positive dynamic change." Unlike the Eventide fund, Alger isn't afraid to look at some of the biggest stocks in the industry to get exposure to healthcare, numbering among its holdings the largest provider of health insurance services and some of the biggest pharmaceutical manufacturers in the sector.
Biotechnology plays a key role in the Alger fund, but its roughly 50% allocation isn't quite as strong as what drove Eventide's outsized returns. Healthcare and equipment stocks make up more than 20% of the portfolio, while pharmaceuticals, healthcare providers, and life sciences tools and services make up most of the rest of the fund's exposure to the sector.
The Delaware fund takes a global approach to its focused exposure to healthcare, putting its emphasis on leaders whose shares aren't overpriced and that have sustainable competitive advantages. About a third of the fund's assets are invested in overseas stocks, and the Delaware fund takes a very different approach to investing in the space, putting more than 40% of its assets into large-cap medical products stocks. That leaves less than a 30% allocation to biotechnology, and 10% allocations to smaller medical products companies and healthcare services stocks round out the portfolio.
The Delaware fund includes some holdings that don't seem to fit within a healthcare portfolio. For instance, the fund touted exposure to Chinese internet companies, saying that they're likely to do well as use of the internet in China and the rise of the consumer class there increase. Diversification is often smart, but it's unclear whether sector mutual fund investors really want nonhealthcare companies in their fund portfolios.
All three of these funds have share classes that impose sales loads on new investors, making them expensive ways to get access to the sector. If you can jump in through institutional-class shares that don't impose a load, then they could be solid performers for your mutual fund portfolio.
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