You don't need to be a doctor or an economist to know that rising interest rates have been something of a tonic for Big Pharma. And you also don't need to be a mutual fund portfolio manager to know that the rise in drug stocks is making health care fund managers feel better.
The nearly indistinguishable one-month charts plotting the rising yield on the 10-year Treasury note and the Amex Pharmaceutical Index (DRG) shows the tight connection between rising rates and drug stock performance. Both benchmarks bottomed out in late March, with the yield on the 10-year Treasury dropping to 3.67% on March 24, and then rocketing up to its recent range around the 4.40% level. Over the same period, the pharma index rose 4.5% vs. only 3.2% for the S&P 500.
Since diversified health care funds have their heaviest weightings in large-cap drug stocks (on average between 40% to 60%), the rise in Big Pharma also powered health care funds toward the best one-month performance of any category of domestic equity funds, rising 2.37%, according to Morningstar.
"Historically, when the
Fed begins to raise rates, the pharma stocks are relative outperformers," says David Moscowitz, analyst at Friedman Billings Ramsey. (To see a contrarian view on this topic published last week,
| Checking Up on Health Care Funds
(Returns through 4/15/04)
|Fund||Ticker||YTD||3 Years||5 Years||Expense Ratio|
|Eaton Vance Worldwide Health Sciences||ETHSX||4.41%||4.06%||18.14%||1.97%|
|Evergreen Health Care||EHCYX||6.25||15.79||-||1.75|
|Fidelity Select Health Care||FSPHX||6.03||-||-||0.99|
|State Street Research Health Sciences||SHSSX||8.64||18.48||-||1.25|
|T. Rowe Price Health Sciences||PRHSX||10.03||10.06||11.96||1.00|
|Vanguard Health Care||VGHCX||3.93||7.47||13.03||0.28|
|Amex Pharmaceutical Index||^DRG||-2.4||-13.9||-16.5||-|