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The Daily Screen: The Best Health Care Funds With Steady Managers

And you thought it was tough to find a good tech fund?

This year's sizzling performance in the biotech sector has boosted health care funds to the top of the fund heap -- six of the top 10 performers this year are health funds. Fund investors have wrapped their arms around health funds and fund companies, in turn, have rushed to roll new ones out. Today there are 40 health care/biotech funds out there, but more than half of them are less than three years old, according to Morningstar and

In a Word, Healthy
Avg. Health Care Fund S&P 500
YTD Return 49.5% -9%
1-Year Return 62.9 -5.8
5-Year Return 21.3 18.7
10-Year Return 20.5 17.5
Source: Morningstar. Annualized performance through Dec. 19.

It's a similar situation to tech funds: There's a glut of choices out there but few have been around for long. So, choosing a health care fund is far from easy, a point made by today's Daily Screen.

Over the last couple of weeks we've sifted a slew of fund categories, including big-cap growth, big-cap value and tech/telecom funds, looking for those that beat their average peer this year and over the last five years with the same manager at the helm. We tried that with health care funds and only two made the cut. Then we loosened the time criterion to three years and ended up with the same two funds. Well, here they are. We'll take a look at each and then weigh a couple of other candidates.

A Dynamic Duo
A Dynamic Duo Year-to-Date Return Five-Year Annualized Manager Tenure
(ETHSX) 75.9% 30.8% 11
(VGHCX) 55.5 30.5 16
Avg. health care fund 49.5 21.3 2
S&P 500 -9 18.7 -
Source: Morningstar. Annualized performance through Dec. 19.

Since 1989, Sam Isaly has run the broker-sold (ETHSX) fund. He typically focuses on stocks of pharmaceutical and biotech shops and at the end of October more than 29% of the fund was invested in foreign stocks, triple the average overseas position of its peers. He also isn't afraid to buy small-cap stocks, with a median market cap that's half that of the fund's average competitor.

That approach has worked out well. The fund beats the S&P 500 and some 90% of its peers over the last one-, three-, five- and 10-year periods, according to Morningstar. The fund's 25.1%, 10-year annualized return beats the S&P 500 by more than seven percentage points and 90% of the fund's peers.

The no-load $17.5 billion (VGHCX) fund is the biggest sector fund in the country and might be the best health care fund. Manager Ed Owens, who's run the fund for 16 years, spreads its hefty assets broadly around the sector, making modest adjustments to emphasize the industries he likes best at any given time.

The fund is the top health care fund over the last five and 10 years, according to Morningstar. And over the last three years, when pure biotech funds had the wind at their back, Owens beats three-quarters of his peers.

One problem, however, is that Vanguard recently upped the fund's minimum investment to $25,000 on standard and retirement accounts. Since sector investments, those in the know say, are supposed to make up no more than 10% of a diversified portfolio, that makes investors with portfolios worth less than $250,000 think very hard before buying the fund.

In addition to these funds, you might check out (FSPHX) or (FBIOX). The firm's Select funds tend to have high manager turnover and that's true here, where both managers have been in place for less than a year. This kicks these funds out of screens looking for stable management, but a deep bench of analysts typically makes them solid performers.

For most investors looking for broad exposure to health care stocks, the Vanguard fund might be a good choice. The fund's diversification has kept it behind its biotech-heavy peers this year, but its long-term returns illustrate its attributes. The fund's 22.8%, 10-year annualized return beats the S&P 500 by more than five percentage points and 70% of the fund's peers, as well.

If you're looking for a biotech fund, check out Fidelity Select Biotechnology, where greater focus has led to higher volatility, but higher returns than most peers. That said, the fund's 23%, 10-year annualized return is only slightly better than its more diversified and less volatile sibling.

One drawback to both of these Fido health care funds is the maximum 3% front-end load , or sales charge, they levy. For long-term investors, this toll won't add up to much over 10 years.

If you're wondering what stocks the two funds that made our cut are betting on, look no further. Below you'll find the funds' cumulative top-10 holdings. For pharmaceutical stock shoppers, this might be worth a look.

Under the Hood
The stocks with the biggest weighting in the combined portfolios of the two funds listed above.
Stock Weighting in Top Funds
Pharmacia(PHA) 5.8%
Pfizer(PFE - Get Report) 4.4
American Home Products(AHP - Get Report) 3.2
Abbott Labs(ABT) 2.9
Novartis(NVSDF) 2.8
Eli Lilly(LLY) 2.7
Fujisawa Pharma 2.6
Genzyme, General Division(GENZ) 2.3
Eisai 2
Source: Morningstar, as of funds' most recent portfolio reports.
Editorial Assistant Dan Bernstein contributed to this article.

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