Of Mutual Interest

Health care debate doesn’t close all doors

Fund managers Adam Strauss (left) and Rosanne Ott both see ways to invest in health care despite the uncertainty. Fund managers Adam Strauss (left) and Rosanne Ott both see ways to invest in health care despite the uncertainty.
By Mark Jewell
Associated Press / August 30, 2009

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Mutual fund investors: Don’t hold your breath if you’re hoping the health care debate will come to a speedy resolution and the path to an investment strategy will become clear.

If you do, you might end up in intensive care - along with President Obama’s hopes for a government-run insurance option.

Many citizens and members of Congress are growing skeptical that widely expanding health care coverage is affordable or even desirable, and Obama has been dialing down expectations. Congress and the president are taking vacation breaks, with no substantive action expected for at least several more weeks.

The apparent demise of Obama’s push for a public option has eased some of the weight that had been holding back many health care stocks.

Those stocks proved to be strong defensive bets early in this recession, but haven’t done much this year despite a market rally that kicked in a couple months after Obama took office.

Health care stocks are up 11 percent so far this year, trailing a nearly 16 percent climb for the Standard & Poor’s 500. But over the last three months, they’re about even, with health care and the broad market index both up nearly 14 percent.

Fund managers who specialize in the sector have been left to cut through the clouds the health care debate has created. They’re searching for an investment strategy to play off whatever changes eventually emerge from Washington, which appears to be taking its time in search of consensus.

“They’re all on vacation now, so there is kind of an information vacuum, which investors never like,’’ said David Farhadi, comanager of the Alger Health Sciences Fund (AHSAX).

Even with the uncertainty, fund managers see some clear opportunities that don’t necessarily hinge on the health care outcome. Here are a few themes from recent interviews with managers of three funds that either specialize in health care or hold a hefty weighting in the sector:

Still finding bargains: Rose Ott, Farhadi’s comanager at Alger Health Sciences, says there are plenty of good deals in stocks of companies like Life Technologies Corp. that make laboratory and diagnostic tools for biotech and other life sciences firms. Those stocks are benefiting from increased research funding that’s part of the federal economic stimulus package.

Despite the recent market rally, Ott said there are plenty of bargains across the health care sector.

“I still think health care, generally speaking, is inexpensive and it is under-owned by a majority of Wall Street,’’ she said.

Managed care scare: Sam Isaly, manager of the Eaton Vance Worldwide Health Sciences Fund (ETHSX), has focused on health care investing since 1968. Isaly favors biotechnology, pharmaceutical, and medical device stocks, but he’s usually not afraid to venture into health insurers. However, his fund isn’t currently holding any managed-care stocks because of the health care debate. He still sees a risk that a public-option plan will emerge, putting the government in competition with private insurers.

“Whether or not there will be a public option in my opinion is a coin flip,’’ he said. “When it gets down to the investment implications of that, the managed-care guys are the end of the whip that cracks. We would consider buying managed-care stocks, but we don’t know which way this is going to fall.’’

Pharma play: Big pharmaceutical companies are likely to see pressure on drug pricing and their bottom lines from the cost controls in any health care package that becomes law. But many fund managers still like big pharma. They figure any reform program will bring new customers into the health care system and expand the pharma market opportunity.

And pharma companies with extensive overseas sales will be insulated from drug pricing pressures at home. That’s one reason why the two biggest stock holdings at the Appleseed Fund (APPLX) are Pfizer Inc. and Johnson & Johnson.

And companies like J&J have plenty of products in consumer goods, such as Band-Aids and baby shampoo that “are completely unaffected by health care reform,’’ said Adam Strauss, a portfolio manager at Appleseed.

Isaly’s fund, meanwhile, has a hefty 30 percent weighting in overseas stocks - in part to limit domestic exposure from the possible hit some US health care companies might take from reforms.

“We are not rushing out of America right now, but we do have major holdings in Switzerland and Germany, and a little bit in the UK,’’ he said.

Diversify, diversify: Alger Health Sciences has invested recently in companies like Medicis Pharmaceuticals Corp. that are in cosmetic dermatology - an area where elective procedures are mostly paid out-of-pocket, with little or no impact from any changes to health care reimbursement.

“Some of these pharma companies are branching out into consumer health, and animal health, or other areas, and we’re kind of doing the same with our portfolio,’’ Farhadi said.

Demographic drivers: Strauss believes demographic factors favor health care generally as a growth industry, whatever system is in place.

“Not only is the US population aging, but the world population is aging,’’ Strauss said. There’s a combination of solid business prospects with very low valuations.

“For that reason,’’ he says, “it’s a perfect sector for investment now.’’

Mark Jewell is a personal finance writer for the Associated Press.