Apart from a couple of blips along the way, healthcare has been on a tear since August 2010. This fund is no exception, gaining an annualized 34% in the past five years.
Much of this growth has been fueled by excitement over advances such as the mapping of the human genome, great strides in cancer research, and potential merger and acquisition activity. There have also been regulatory changes that make it more difficult for the drug companies to launch new products.
This T. Rowe Price managed offering has become my top pick in the sector, after CI Global Health Sciences stumbled earlier in the year. The manager, Taylor Tamaddon, focuses on U.S. based healthcare companies that derive more than 50% of their revenues from the research, development, production, or distribution of products or services related to health care, medicine, or the life sciences.
Despite it being favourite, I am not recommending it right now, as the valuations are just too rich. The Fund has a price to earnings ratio of nearly 25 times. In comparison the S&P/TSX Composite has a P/.E of 17 times and the S&P 500 is around 19 times, both well above average levels.
While the long term picture for healthcare remains strong, particularly in light of an aging population and increasing global access, the valuations make it a bit too risky in the near term. While the momentum may keep pushing prices higher, there will need to be a correction at some point.