3 Biotech Fund Choices For Strong Returns
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The biotech sector stood out last year and the NASDAQ Biotechnology Index delivered a stellar 34 percent return for 2014. It was an eventful year with mergers and acquisitions (M&As) and deals showing no signs of slowing down. Moreover, several companies came out with important and highly-awaited pipeline updates.
M&As, Licensing Dominate
Last year was one of the most active years where M&As and licensing agreements are concerned. While tax inversion deals were being actively pursued until a few months back, these cross-border deals do not look all that attractive now considering new rules imposed by the Treasury Department.
Most of the deals signed with big pharma companies are focused on cancer and immuno-oncology, which has been attracting a lot of interest. Immuno-oncology therapies have the potential to change the treatment paradigm for cancer -- they basically use the natural capability of the patient's own immune system to fight the cancer.
Q4 Earnings Mixed
The Q4 earnings season has been good so far for the health care sector, with total earnings up 21.4 percent on revenue growth of 9.1 percent with earnings beat ratio of 81.8 percent and revenue beat ratio of 63.6 percent.
Though patent expirations and a strong dollar took a toll on most of the pharma companies' revenues and profitability, they surpassed Zacks earnings estimates. Currency headwinds could become an obstacle for growth for the sector going forward.
Outlook Remains Bright
Strong pipelines, innovative treatments, impressive results, growing demand for drugs especially for rare-to-treat diseases, an aging population and increased health care spending should support growth in the biotech sector. The development of personalized treatments will also gain momentum.
With the sector witnessing a lot of M&A and licensing activity in 2014, expectations are high that more such deals will follow. In the latest of these deals, Pfizer Inc. (NYSE: PFE) announced its intention to acquire Hospira, Inc. (NYSE: HSP) – a leading sterile injectable drugs and biosimilars manufacturer – in a cash transaction valued at about $17 billion or $90 per share. The offer price represents a significant premium (39 percent) over Hospira's Feb 4 closing price.
Here we will list 3 healthcare mutual funds investing substantially in biotech companies that carry a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy) as we expect the funds to outperform its peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.
These funds also have proven impressive performance, as they have a minimum 30 percent return over 1-year period and a minimum 33 percent three-year annualized return. The funds have a relatively low expense ratio and carry no sales load. The maximum initial investment required is $2,500.
Fidelity Select Health Care Portfolio (FSPHX) seeks capital growth with a secondary objective of income appreciation. The fund invests a lion's share of its assets in financial services companies whose securities are attractively priced relative to their underlying value. It may invest all of its assets in foreign securities.
FSPHX carries a Zacks Mutual Fund Rank #1 (Strong Buy). The fund has a one-year return of 30.9 percent and three-year annualized return of 33.3 percent. It carries an expense ratio of 0.76 percent as compared to category average of 1.43 percent.
T. Rowe Price Health Sciences (PRHSX) invests the majority of its assets in common stocks of companies whose primary operations are related to health sciences. The fund focuses on investing in large and mid-cap firms. It may also invest in non U.S. securities. The healthcare mutual fund returned 32.21 percent over the last one year period.
PRHSX carries a Zacks Mutual Fund Rank #2 (Buy). The fund has a one-year return of 34.2 percent and three-year annualized return of 34.4 percent. It carries an expense ratio of 0.79 percent as compared to category average of 1.43 percent.
VALIC Company I Health Sciences (VCHSX) invests the majority of its assets in common stocks of healthcare products, medicine or life sciences related companies. It focuses mainly on investing in large and mid-cap companies. A maximum of 35 percent of its assets is invested foreign companies.
VCHSX carries a Zacks Mutual Fund Rank #2 (Buy). The fund has a one-year return of 33.9 percent and three-year annualized return of 34.1 percent. It carries an expense ratio of 1.11 percent as compared to category average of 1.43 percent.
About Zacks Mutual Fund Rank
By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank at www.zacks.com/funds/mutual-funds.
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