Daniel P. Wiener almost never uses mutual funds that zero in on a single industry and try to pick the very best companies within it. But when it comes to the health care, Mr. Wiener is making an exception. He's all in. And his tool of choice is the Hartford Healthcare Fund (HGHAX), an actively managed fund that focuses exclusively on that zippy industry.
“You really are giving up a tremendous amount in the performance space in health care if you just go with an index,” said Mr. Wiener, who is chairman and chief executive of Adviser Investments, based in Newton, Mass. “Active management in this space is worth its weight in diamonds.”
There's nothing even remotely new about sector funds. In the late 1920s, investors turned to products like the John Hancock National Aviation & Technology Fund for access to the growth of new and exciting industries. Yet as investors have turned against actively managed U.S. stock-picking funds — they've seen outflows in seven of the last eight years — sector specialists have become a bright spot for firms with large actively managed lineups.
There may be no clearer example of that this year than in health care. In a year that's seen slim returns for U.S. stocks, health care has been leading the charge. Health care stocks in the S&P 500, which collectively have gained 12.1% year-to-date, helped to drive — and easily beat — the 2.1% return of index itself.
Despite the oversized gains in the sector this year, most analysts and advisers are still bullish long-term, expecting the drivers for the sector's outperformance to continue for perhaps years.
And the rising health-care tide has lifted most boats across the sector.
Stock-pickers and index-trackers alike have benefited if they had products effectively positioned for the rally. Health-sector funds and ETFs have brought in $31 billion over the last year, according to estimates by Morningstar Inc. More than half of those flows have moved into actively managed products.
Thus far the winner of that surge has been Fidelity Investments, a firm that has been working to win assets against a trend toward index funds. Last year, the firm reported mutual fund outflows despite a bull market, and senior executives there have cited “cyclical” investor interest in passive investing for the disappointing leakage.
This year, though, those numbers are looking positive. That's due in part to an estimated $8 billion in inflows in to health-sector funds.
Other top winners have included the Vanguard Group Inc., the T. Rowe Price Group Inc. and Janus Capital Group Inc. The chief executive of Denver-based Janus, Richard Weil, even specifically praised the manager of the firm's health-care fund during an earnings call this week, alongside star bond manager Bill Gross.
“Stock picking in general is a very difficult profession, and when you throw in the … risk of some of the biotechnology companies, it's an area that I think it really pays to invest with a well-resourced firm,” said Brian B. Hogan, president of the equity division at Fidelity Management & Research Co., which is responsible for more than $1 trillion in assets.
“We made a significant investment into our team seven or eight years ago because we saw some of these changes on the horizon, and I would say that we've been fairly pleased with how our resources have come together,” he said.
Those successes are built on the back of a booming health-care industry, seen by bulls as rife with technological innovation, protected advantages for winners who get drugs approved and millions of new customers globally due to rising wages in emerging markets and the Affordable Care Act, or Obamacare.
Beyond the active biotech space, there's been a wave of mergers this year among health insurers that are looking to add to their competitive clout as they go up against larger hospital groups.
In addition, pharmacies have also been on an acquisition spree, including deals this year involving CVS Health and Rite Aid.
“A well-diversified S&P 500 Index is barely up, whereas if you chose the sector correctly you could see huge or much stronger performance,” said Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ. “It's one of our favorite sectors.”
ETFs, too, have benefited from a surge in interest both in index funds that track the space and in active, tactical allocations to health care. Managers have used the funds to make sector bets that have paid dividends.
And, while few products have launched to meet the new demand, one in particular has had a stellar launch. The ALPS Medical Breakthroughs ETF, which has an intricate methodology for selecting winning stocks and debuted Dec. 30, is up 58% for the year through Thursday.
For advisers, results like these lead to the usual conundrum: let your winners run, or take some stakes off the table, plowing some capital gains into assets that have fallen on hard times and may be overdue for a rebound.
Mr. Wiener, the adviser, said that he's trimmed exposures to health care a bit for the first time in years. But he's leaving an overall overweight to healthcare through his Hartford fund and a core exposure managed by the Primecap Management Co. that includes an overweight to health care.
While it's been topped by some of its peers in the recent rally, the Wellington Management Co.-managed Hartford fund beats the S&P North American Health Care Sector benchmark over one, three, five, 10 and 15 years, according to Morningstar.
KEEP IT IN CHECK
Despite his overall optimism about the health-care sector, Mr. Rosenbluth warns that “overweight” sector exposures should be kept in check. Some funds keep large exposures to volatile companies. They include Biogen Inc., a biotechnology firm that that reported weak results this week, which tumbled nearly 20% in trading by midday on Friday.
And stock-pickers do face extraordinary challenges in picking among biotech companies with value that simply can't be predicted, according to Michael Krause, president of AltaVista Research in New York, which has a service for advisers that specializes in exchange-traded funds.
“You are essentially being asked to be a venture capitalist, so it makes sense that they don't trade on fundamentals,” said Mr. Krause. “People don't have specialized knowledge of the potential for these drugs in development.
"You wouldn't even know how to analyze or read a report on how these drugs potentially address a particular disease," he said. "And even experts can't predict how clinical trials are going to play out.”