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Despite their current malaise, long-term investors shouldn't write off all health care funds -- just the expensive ones.

Screen Gems: High Returns, Low Fees

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Health funds led the market last year with a 55.4% average gain, compared with a 9.1% loss for the

S&P 500, as investors fled the cooling tech sector. This year pharmaceutical, biotech, HMO and hospital stocks are falling from last year's high valuations, and health care funds are falling with them, trailing all stock fund categories with a 8.2% loss so far this year, according to


. In fact, only one health fund, the broker-sold


AIM Global Health Care, is in the black since Jan. 1.

If you're rattled, I don't blame you, but if we look beyond these funds' mercurial streak over the past 14 months or so, we see a more attractive picture. Given the wave of aging baby boomers, it's logical to suspect that demand for health care will grow in coming years. And health care stocks haven't exactly been wallflowers. Over the past 10 years, the average health fund's 18.6% annualized return tops the S&P 500 by more than two percentage points.

Bad Health
It's been a tough year so far for health care funds

Source: Morningstar. Annualized performance figures through Feb. 13.

So, this year's weakness might give you a good opportunity to add a health fund without paying last year's pie-in-the-sky valuations. As usual, the Big Screen is helping you winnow the field. We screened the 41-fund category to find those that beat their average peer over the past one- and three-year periods, while also having expenses below the category's rather steep 1.76% average because high fees can erode your investment over time. You wouldn't think these criteria are


stringent, but we're left with just three funds.

In other screens along this theme, we also yanked out funds that charged a

load or sales charge, but only one

no-load fund made the cut, the

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TheStreet Recommends


Vanguard Health Care fund.

Here are the three funds that cleared our hurdles, ranked by their annualized gains over the past three years.

When we screened health funds

just a couple of months ago, the list was longer, with many biotech and biotech-heavy health funds because many of these cutting-edge drug shops saw their shares rocket to triple-digit gains in 1999 and last year. But they've since cooled, so today's list is mostly comprised of more diversified sector funds. That might sound like an oxymoron, but broader sector funds are best for most investors.

The best example of a diversified approach might be the no-load Vanguard Health Care fund, the nation's largest sector fund with more than $17 billion in assets. Ed Owens has run this fund since its 1984 inception, and he tends to spread its vast assets broadly, adjusting his industry weightings modestly and opportunistically.

That might sound like a vanilla approach, but Owens has beaten the S&P 500 and at least 70% of his peers over the past one-, three-, five- and 10-year periods, according to Morningstar. The fund also carries the category's lowest expense ratio, 0.39%, but to keep inflows manageable Vanguard has raised the fund's minimum investment for taxable and IRA accounts to a whopping $25,000.

If you're looking for another no-load option, the pickings are pretty slim. You might want to look at the


Dresdner RCM Global Health Care fund, but only if you're an aggressive investor who doesn't mind a strong biotech/pharmaceutical-stock flavor. The fund rode those sectors to a heady 73% gain last year, but its 10.7% gain over the past 12 months lags more than 80% of its peers, according to Morningstar.

You might be tempted to look at the no-load


Invesco Health Sciences fund, given the fund's solid reputation for growth investing, but there's reason to hold off on buying shares. After all, co-manager John Schroer just left, and the fund trails its average peer over the past one-, three-, five- and 10-year periods.

Otherwise, if you're looking for a health fund with a solid three-year record vs. its peers, you're probably looking at funds that levy loads.

You might look at


Merrill Lynch Healthcare, where Jordan Schreiber has held the reins since 1983. Schreiber, who stopped by


for a

10 Questions interview not too long ago, tends to own a broad swath of health stocks. He does rotate opportunistically among health care industries and that hasn't always gone well, but overall his track record is solid.

The fund, which carries a maximum 5.25% load or sales charge on Class A shares, beats its average peers and the S&P 500 over the past one-, three-, five- and 10-year periods.

The broker-sold


MSDW Health Sciences fund is probably worth a look, too. Manager Teresa McRoberts took the reins at the end of 1998, but she's been following the industry since 1985. The fund, which carries a maximum 5.25%

front-end load or sales charge on Class A shares, has followed a diversified strategy to solid returns. The fund's one- and three-year returns beat the S&P 500 and its average peer.

Another fund that's worthy of consideration is the broker-sold


Eaton Vance Worldwide Health Sciences fund. Sam Isaly has run the fund since 1989, blending pharmaceutical and biotech picks with a healthy dose of foreign stocks.

The strategy has led to solid results. The fund beats more than 80% of its peers over the past one-, three-, five- and 10-year periods, according to Morningstar. The fund's 24.8% 10-year annualized gain, compared with 16.8% for the S&P 500, tops all health funds. Why isn't the fund on our list? Its 1.79% annual expense ratio is higher than the category's 1.76% average.

If you're curious about what stocks propelled the funds that are on our list, look no further. As usual, we tossed the funds on our list into a pot and sifted their cumulative top 10 holdings. Here you'll find names you know and expect, like pharmaceutical giant



, but there are also some names you might not know, like chart-topper

AmeriSource Health


, a pharmaceutical and health care wholesaler based in Malvern, Pa. The company's shares are up more than 240% over the past 12 months, according to Morningstar.