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Health care and biotech firms posted the highest average returns for closed end funds in July, with a 9% mean return. Financial service funds were the next best, averaging 1.71% -- no doubt fuelled by speculation that the worst for the financial sector is over -- though that seems unlikely.

This rebound in financial stocks appears to be more of a "dead cat bounce" or "sucker's rally" than anything else.

The clear advantage the health care and biotech firms have over the rest of the fund classifications, which aside from the financials yielded negative average returns for the month, suggests that these sectors may have some run left in them going into August and possibly beyond.

However, as with commodities, which enjoyed a runup for most of the year, investors should be careful not to get in too late in playing a sector rotation strategy, and then have to face running for the exists once the same fate presents itself to the health care and biotech space.

There is still a lot of money chasing few genuine investment opportunities and investors can profit from momentum in a given sector as long as they are early in and early out. Be smart and take profits when you get them.

In the current volatile markets it is likely that this type of sector rotation strategy, for example coming out of oil and going into health-care and biotech, will repeat. Currently, the market is rallying on the pullback in oil. However, there are numerous underlying challenges to the economy in the form of clear evidence of a U.S. and global slowdown. The related pullback in consumer spending and rise in unemployment is the real threat.

Oil and inflation are issues, but not the key issues. We may actually be headed for a period of deflation, as predicted by the Bank of International Settlement, in which case sectors such as health care and electrical utilities may be where investors should start looking.

Looking at the top health care and biotech funds, we also dissect their holdings to give investors a feel for the individual stocks that may also be an investment options.

The top health care and biotech funds were the

Hambrecht & Quist Life Sciences Investors Fund

(HQL) - Get Tekla Life Sciences Investors Report

and the

Engex Fund



Some of the stocks held in these funds include:

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Gilead Sciences

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Becton Dickinson

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Teva Pharmaceutical

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Sam Patel, CFA, is the manager of mutual fund research for the Ratings.

In keeping with TSC's Investment Policy, employees of Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.

While Patel cannot provide investment advice or recommendations, he appreciates your feedback;

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