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 After a year-long buying spree, he now has more than a quarter of
his $17 million Tanaka Growth fund portfolio in healthcare companies
such as Gilead Sciences Inc, up from just 5 percent at the start of
last year.
That bet is paying off: his fund is beating the S&P 500 by about 13
percentage points since the start of the year, putting Tanaka in the
top 1 percent of equity fund managers tracked by Morningstar. Even
with his big bet on healthcare, he's planning on adding more.
"With aging demographics in the US and the developed world,
healthcare needs are going to grow dramatically faster than GDP,"
Tanaka said.
In the eleven months since Yellen's warning, other fund managers
have benefitted by shaking off concerns about high valuations and
increasing their holdings of healthcare companies. The average U.S.
large cap equity fund run by a stockpicker now holds 15.8 percent of
its portfolio in healthcare stocks, a position higher than any of
the last 3 years, according to Lipper data.
With a 10 percent rally in the sector so far this year, that
outsized bet on healthcare is helping fund managers post their best
performance relative to the S&P 500 since 2007, the year before the
financial crisis. Should the rally in healthcare continue, funds may
finally be able to turn around a six-year skid in which stockpickers
have struggled to outperform benchmarks.
Yet some market strategists and analysts said that the move to
healthcare after its significant outperformance reminds them of the
tech bubble of the late 1990s, when stock funds piled into the hot
sector just before the dot-com crash.
"Being negative on pharmaceuticals and biotech has not been the
right move thus far in 2015, but almost all the objective data
suggests that underperformance is likely in the months ahead," said
Tobias Levkovich, chief U.S. equity strategist at Citigroup, in a
note to clients Tuesday, citing a declining number of upward
earnings revisions. "Few investors are willing to back off what has
been a very rewarding strategy, which also means that when they back
away it could get somewhat messy."
Still, because health spending is becoming a larger part of the
economy, a broad selloff in healthcare companies akin to the popping
of the tech bubble is unlikely, said Randy Gwirtzman, co-portfolio
manager of the $95 million Baron Discovery fund, who more than
doubled his holdings of healthcare companies over the last year.
Healthcare is expected to rise to 19.9 percent of U.S. GDP by 2022
from 17.1 percent in 2013, according to the Office of the Actuary at
the Centers for Medicare and Medicaid Services. GDP itself is
expected to grow 2.4 percent this year, according to a Reuters poll
of economists.
Gwitzman is looking for companies that can help cut costs, rather
than biotechs that offer the promise of new drugs, he said.
His top holding, Foundation Medicine Inc, offers a form of cancer
testing that allows doctors to offer targeted therapy more
effectively. Shares of the company are up nearly 60 percent for the
year after Swiss pharma giant Roche took a majority interest in the
company in January.
"There's a lot to like in healthcare other than biotech," he said.
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If there is a pullback in the healthcare sector, it could be sharp,
analysts such as Levkovich said. The Nasdaq Biotechnology index fell
nearly 6 percent in three days after Yellen noted high valuations in
July. After a subsequent rally, the biotech sector is now trading 43
percent higher than it was before she noted the high valuations.
BUYING BEYOND BIOTECH
While few big-name funds are significantly reducing their healthcare
holdings, some top-performing funds are becoming more cautious
because of the extent of the rally in biotech and pharma companies.
The Nasdaq Biotechnology index is up 52 percent over the last year,
while the S&P Pharmaceuticals index is up 33 percent over the same
time.
Those high prices are making it harder for fund managers to find
attractive places to put their money. T. Rowe Price closed its $14.1
billion Health Sciences Fund to new investors Monday after receiving
$1.1 billion in new investor dollars over the first four months of
the year.
"We've seen extraordinary returns from stocks like Gilead, but we
haven't been taking on any new positions until we find extraordinary
discounts," said Rafael Resendes, whose Toreador Core fund has
bested 98 percent of other large cap funds over the last three
years. Shares of Gilead are up 19 percent for the year to date, and
nearly 40 percent over the last 12 months.
Resendes, who still holds Gilead, expects to pare down his holdings
of healthcare stocks this year because they no longer offer
attractive prices.
Other managers are sticking with healthcare, but branching out
beyond its hottest sectors. Matthew Kaufler, a portfolio manager who
oversees the $997 million Federated Clover Value fund, has been
buying healthcare services companies as more baby boomers age.
Kaufler owns shares in companies such as Brookdale Senior Living
Inc, which runs upscale assisted living and retirement centers.
Shares of the company are up 2.8 percent for the year to date.
Healthcare companies overall in the S&P 500 are expected to post an
average earnings growth of 11.4 percent in 2015 compared with just a
0.6 percent gain among the index overall, according to S&P Capital
IQ.
(Reporting by David Randall; editing by Linda Stern and John
Pickering)
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