Diagnosis favorable for health care

Between innovations and boomer demands, health care sector could see real gains this year

Jan 6, 2013 @ 12:01 am

By Liz Skinner

Baby boomers are the overriding reason many advisers are betting that health care investments will be winners in 2013.

“Health care is a good sector to be in,” said Joe Heider, a principal at Rehmann Financial LLC. “Ten thousand baby boomers [are] turning 65 every day for the next 18 years, combined with the fact that it's the most affluent generation in world history, and a generation that doesn't want to accept the fact that they're getting old.”

In addition to their sheer numbers, aging baby boomers will continue to spend in the health care sector both for necessary medical treatments and drugs, and for discretionary products and services to help them fight the inevitable effects of aging, he said.

The health care sector also has a positive recent track record of spawning new products and services. These trends and more could make the health care sector a good hedge against inflation, and essentially recession-proof, experts contend.

Mr. Heider is among a majority of advisers bullish on health care investments for the new year. The InvestmentNews 2013 Investment Outlook survey of 592 financial advisers asked which equity sectors they expect to perform best and worst in 2013. The sector thought to have the greatest promise was health/biotechnology, selected by 77% of respondents.

OPTIMISM ABOUNDS

Most health care experts back advisers' optimism, despite some uncertainty about the impact of the continuing rollout of the Affordable Care Act.

“If you look over a one-, three- or even 10-year period, health care has outperformed or performed in line with the broader market,” said Mark Bussard, health care analyst for T. Rowe Price Group Inc. “That's a good predictor for the future because several reasons for its success are still present.”

In addition to the demographic tail wind provided by the baby boomers, innovations in health care will continue to create new products and new value, Mr. Bussard said. Also, the desire for health care and wellness in emerging markets will expand the marketplace.

One piece of the Affordable Care Act, better known to most Americans as Obamacare, is a 2.3% tax on revenue generated in the U.S. from medical technologies, which took effect Jan. 1. The tax is expected to bring in $20 billion through 2019 to help pay for health insurance coverage for the uninsured.

The stock market largely already has factored the tax into corporate-earnings estimates and expectations, Mr. Bussard said.

Many medical-device companies are a good health care play for this year, according to Mr. Bussard. For example, Edwards Lifesciences Corp. (EW) is expecting to see U.S. sales of its artificial heart valve, which is implanted without requiring open-heart surgery, rise in 2013 because of additional regulatory hurdles it met last year.

T. Rowe is looking for therapeutics companies with novel therapies that address conditions that have no current solution or those that treat disorders more effectively, Mr. Bussard said. Pharmacyclics Inc. (PCYC), for instance, has a cancer drug candidate that appears to be very safe and produces fewer side effects than most of the current treatments for cancer patients, he said.

On the services side of the industry, Mr. Bussard hunts for the best of the firms in the health care food chain that don't manufacture and sell a drug or device but focus on delivery and patient care, such as hospitals, nursing homes, pharmaceutical benefits managers and drug or device distributors.

“We look for business models that are novel in that they can either reduce costs or improve outcomes — or in a perfect world, do both,” he said.

Not all advisers are convinced that the health care industry will continue to outperform. In the InvestmentNews survey, 23% of advisers said they expect health/biotechnology to be a worst-performing sector in 2013.

Financial adviser Rick Holbrook, principal of Holbrook Global Strategies, said he thinks health care will perform well, but he's not confident that it will outperform the market in 2013.

“If anything, perhaps in 2013 we'll see a return from some of the areas that have been beaten down more, like technology and commodities,” Mr. Holbrook said.

Rehmann Financial looks to use investment managers who overweight the health care sector because they believe the sector will outperform. The firm also generally uses health care exchange-traded funds to overweight a portfolio, Mr. Heider said.

Three health care ETFs that boast more than $1 billion in assets are State Street Global Advisors' Health Care Select Sector SPDR Fund (XLV), the iShares Nasdaq Biotechnology Index Fund (IBB) and the Vanguard Health Care Index Fund (VHT). Their 2012 returns of 13.5%, 28% and 15.6%, respectively, suggest that the sector helped buoy many portfolios last year.

REFORM IMPLICATIONS

Mr. Heider, who has many clients in the medical profession, said some physicians are concerned with health care reform even though they believe that something is needed to improve the fiscal health of their industry. Their fear, he believes, stems mostly from not knowing exactly how their profession will be affected by the government-directed changes.

“People don't seem to be talking about health care investment that much because of the uncertainty of Obamacare,” Mr. Heider said. “Some people want to wait and see the effect and see for themselves where things shake out.”

Health care bulls expect that medical professionals eventually will realize that the reforms were a blessing in disguise.

lskinner@investmentnews.com Twitter: @skinnerliz

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