Last year was an amazing time to be in health care funds. According to Lipper, the average health care fund rose a whopping 48% in 2013 compared with 33% for the average stock fund. It was also the third consecutive year health care has outperformed the market as a whole.
All this has happened at a time when companies in the sector have expressed concerns and fears about how the new health care regulations could impact the industry. New regulations will mandate how health insurance is delivered, what it must cover and how health care service providers document performance and deliver patient care. Although they remain cautious, industry analysts and executives are also relatively positive. Impacts will vary by subsector, but analysts say the new requirements on health insurance companies could be offset by the benefits of receiving millions of new customers. And from pharmaceutical companies to health care services providers, experts say the boom in business could bode well for health care stocks and funds in the coming years.
If you’re shopping for a health care fund to complement other sectors in your diverse portfolio, Todd Rosenbluth, director of ETF and mutual fund research with S&P Capital IQ, recommends taking a careful look at the underlying subsectors in the fund. Many health care funds are especially heavy on biotech and pharmaceuticals because of their spectacular performance in recent years. Effective managers may adjust allocations in the coming years to capitalize on certain positive trends that may come from the changes in health care regulations.
Despite the run-up, Rosenbluth remains positive on a number of widely health health care stocks and funds. He says investors should still view the sector positively as long as it remains a proportionate part of a properly diversified portfolio.
“We think you should be increasing your exposure to health care but not replacing your broadly diversified funds with health care because it may not continue to outperform,” says Rosenbluth.
Investors who own a large-cap index fund likely already have between 10% and 15% of their assets in the health care sector, says Morningstar fund analyst Flynn Murphy. He says investors should double-check their portfolio to ensure they’re properly diversified and have the appropriate exposure to the sector. Another advantage of the health care sector is that it typically provides a buffer in down markets.
Companies in this sector “are not immune to a broader downturn in the economy, but they do tend to mitigate losses, and whereas demand for consumer goods may drop, the demand for health care doesn’t fall as sharply,” says Murphy.