Betting Responsibly on Healthcare

This article was originally published in the November 2016 issue of Morningstar FundInvestor. After its release, the results of the presidential election prompted a brief surge in healthcare stocks. However, while the typical health-sector fund gained 3.7% in November, it was still down 10.4% for the year through Dec. 11, even as all other domestic sector and diversified stock fund categories remained well in the black. Download a complimentary copy of FundInvestor here.

Healthcare funds were down 13.4% for the year through Oct. 31, following a big rally in prior years. Morningstar's stock analysts see opportunities here: They expect pricing power for drug and biotech companies to remain strong, research and development to remain productive, and mergers and acquisitions to continue at a steady pace.

Heavy sector concentrations always come with risk. That said, a long-term bet on the broad growth opportunities in the healthcare sector is not the same level of risk as, say, a tactical precious-metals play (as attractive as such a play might seem in hindsight at the moment). We ranked Morningstar Medalists in the Morningstar 500 by their healthcare positions and found eight domestic-equity funds with more than a fourth of assets staked there. All of them fall within a growth category.

Four of these are Gold-rated funds run by the Primecap team that won the Morningstar Domestic-Stock Fund Manager of the Year accolade in 2014 and back in 2003:

Bronze-rated

Two small-cap growth funds also made the list, with healthcare stakes just above 25%: Gold-rated