March 28, 2010 in Business

Health care outcome clears fog for fund managers

Mark Jewell Associated Press

BOSTON – If your money is in a mutual fund that specializes in health care stocks, now might be a good time to congratulate yourself for sticking with it while others gave up.

The fog that’s kept these funds in the dumps has mostly lifted, and their managers see clear opportunities ahead.

As debate slogged on over President Barack Obama’s overhaul, health sector funds posted a 41 percent average return over the past 12 months. As strong as that might seem, the sector trailed the pack in the bull market that started last March. Health funds rank next to last among 21 domestic fund categories, according to Morningstar.

Meanwhile, investors pulled a net $3.5 billion out of health funds, paring the category’s total assets to $38 billion.

Blame uncertainty, the mortal enemy of investors. The highly partisan back-and-forth over whether to pass a bill and what to include became a drag on health care stocks.

With the finishing touches now in place, the key unanswered questions are how quickly the changes will affect corporate bottom lines and which health care companies can best adapt to government’s expanding regulatory reach.

Until now, health care companies have been reluctant to adjust earnings expectations in response to the law. That’s likely to end as early as next month, when companies begin reporting first-quarter earnings. Investors will closely watch for any changes and perhaps sell shares of companies that don’t appear to be forthcoming about the impacts on their bottom lines.

David Farhadi, co-manager of Alger Health Sciences, says the initial earnings impact will be so negligible that few companies will adjust 2010 expectations. But that will change as more pieces of the law are phased in next year. He expects many health care companies will trim 2011 earnings expectations 2 to 3 percent overall. The big shift will come in 2014, when states set up exchanges offering new low-cost coverage options for those without employer-based plans.

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