Healthcare, particularly in Canada was one of the bright spots of the year, with the S&P/TSX Health Care Index gaining an impressive 22%, while the S&P Global 1200 Health Care Sector Index rose by a more modest 6.0%. Factoring in the drop in the Canadian dollar, and the unhedged return to Canadian investors would have been in the ballpark of 26%.
Posting a gain of nearly 33% in Canadian dollar terms, this was the best performing healthcare mutual fund for the year.
It invests in companies that are involved in the research, development, production, or distribution of products or services related to health care, medicine, or the life sciences. To qualify for selection, companies must derive at least 50% of their assets, revenues, or operating profits from those activities. The manager tends to focus in the U.S. where more than 90% of the fund is invested.
Performance has been strong on an absolute and relative basis, posting first quartile performance in all time periods. It has also done a great job in protecting investors’ money. Historically, when the healthcare sector has lost money, this fund has lost much less, while managing to outperform when markets are rallying.
While I like the fund and the sector for the long term, I remain concerned about valuations. According to Morningstar, the fund is trading at more than 21 times future earnings, and more than 14 times cash flow. In comparison, the S&P 500 trades at 17 times forward earnings and 10 times cash flow. Another factor to consider is a substantial portion of the 2015 gains were the result of a 20% jump in the U.S. dollar relative to the Canadian dollar – again, something that is unlikely to be repeated. I’m not saying to avoid the fund, but be aware that it is unlikely that historic returns can be repeated from these levels. That said, if you’re comfortable with the risks and are looking for direct health care exposure, this is my top pick.