Fund Watch: Unnecessary Heart Surgery, A Driver For Healthcare Funds? (FSPHX, PRHSX, VCHSX, JEHSX)

Healthcare funds are doing very well right now, but what if these funds are winning because of unnecessary procedures being rampant in the medical system?  Today’s news carries reports of a new study that shows about one in eight angioplasties is unnecessary. About 600,000 of the surgeries are performed annually in the US at a cost of about $20,000 each. The surgery, which is used to treat coronary artery disease, usually results in the implantation of a stent to keep the artery from collapsing again.

The best performing mutual fund sector for the past year has been healthcare, and in light of the news about angioplasties, we thought we’d look at four high-performing health care funds: Fidelity Select Health Care (FSPHX), T. Rowe Price Health Services (PRHSX), VALIC Company I Health Services (VCHSX), and JHT Health Sciences Trust Series I (JEHSX). All have 4-star ratings from Morningstar and two are $1 billion+ funds and the other two have assets valued at less than $300 million. It is not fair to just single out one surgical area as the driver of healthcare.  But what about administering $50 aspirin tablets and $100 I.V. hook-ups with saline solution?  And what about $500 for basic surgical instruments that have been the same for a half-century?

The Fidelity Select Health Care (FSPHX) fund holds assets totaling $2.3 billion and is styled as a mid-cap growth fund. Year-to-date return is 16.48% and its one-year return is 39.75%. There are 98 stocks in the fund and the top holding is Covidien Ltd. The fund holds no shares in two of the largest stent makers, Abbott Laboratories and Johnson & Johnson. Boston Scientific, another large stent maker, is the fund’s tenth largest holding.

The T. Rowe Price Health Services (PRHSX) fund boasts total assets of $3.3 billion and is also styled as a mid-cap growth fund. Year-to-date return is 20.54% and the one-year return is 48.75%. The fund holds 179 different stocks, with Alexion Pharmaceuticals as its top holding. Covidien is its fourth-largest holding. Like FSPHX, it holds no shares of Abbott, J&J, or Boston Scientific.

The VALIC Company I Health Services (VCHSX) fund holds assets valued at $230 million, and is styled as a mid-cap growth fund. Year-to-date return is 20.32% and the one-year return is 48.37%. There are 173 stocks in the fund, and the top holding is Alexion. The fund’s top six holdings are identical to the top six holdings of PRHSX, though the weightings are different. None of the stent makers is included in the fund’s holdings.

The JHT Health Sciences Trust Series I (JEHSX) fund holds total assets of $175 million, and is styled as a mid-cap growth fund. Year-to-date return is 20.45% and the one-year return is 48.53%. The fund holds 173 stocks and the top 9 holdings are identical with VCHSX, but again the weightings are different. J&J is represented in the fund’s portfolio, but neither of the other big stent makers is.

The angioplasty study, by itself, won’t have much impact on any of these funds nor on most health care funds. But the larger issue, which is beginning to come into focus and will be more visible during the coming election season, is the cost of healthcare in general and on the great game of overcharging and outright bilking. Doing the math on the number of unneeded angioplasties yields a savings of $1.44 billion in annual health care spending. Much of that will be saved in Medicare and Medicaid spending.

The more intense the scrutiny becomes on health care practices, the greater the chance that the boom in health care funds will slow. The changes that are in store for the delivery of healthcare in the US could have a substantial impact on fund returns.

Paul Ausick