Back to top

Mutual Fund Commentary

The improving economy is probably letting Americans take better care of their health now. Citizens who delayed their treatments are now able to afford the healthcare costs, eventually helping healthcare spending to move up. A report from PricewaterhouseCoopers’s (PwC) Health Research Institute has forecasted a modest 6.8% increase in healthcare spending in 2015. Some may call the term ‘modest’ a misnomer as the forecasted growth is in stark contrast to the five-year contraction in costs the industry witnessed.

Along with the improving economy, the Patient Protection and Affordable Care Act (PPACA) or the Affordable Care Act (ACA) or “Obamacare” has also played significant role. Total health spending will probably trend up as more people can avail the insurance under ACA. The aging society, hospitals acquiring more in-house physicians and costly technologies are among other factors that may drive healthcare spending upward.

Before we suggest top-ranked healthcare funds, let’s look at the healthcare spending forecast and the Obamacare effects.

Healthcare Spending

Healthcare spending is forecasted to rise 6.8% in 2015, up from a 6.5% increase expected this year. The increase may seem a bit tepid compared to double-digit growth in medical inflation recorded ahead of the economic downturn. However, this reverses the five-year contraction, thanks to economic recovery. Ceci Connolly, managing director of PwC’s Health Research Institute and the report’s co-author said: “Now that overall economy has improved and come back significantly, we see for 2015 that health spending is also loosening up”.

This is largely due to Americans being in a better position to afford medical costs. “Folks who postponed some services — some elective, some more serious — are going ahead and taking care of it,” commented Connolly.

Health Insurance Plan

The healthcare spending forecast is the difference in cost to treat patients from one year to the next. This analysis tracks the cost increase in employer-based health plan market that has 150 million people under its ambit. The forecast combines the services cost and the amount of services used.

However, the increase in healthcare spending is expected to have “little effect on employer health spending”.  This is because employers usually adjust the plan offerings based on the spending trend. High-deductible plans are already rising and employers may further increase employees’ burden, i.e. the amount they are required to pay before the insurance coverage is effective. “It probably means some additional cost shifted to individuals,” Connolly said.

The net increase is thus projected at around 4.8%.

The PwC study also notes that 44% of employers are considering health plans as the only insurance option for employees for the next three years.

Affordable Care Act or “Obamacare”

Talking of insurance plan, the Obamacare should also up the healthcare spending. "Obamacare" that was enacted in Mar 2010 and was taken as a bitter pill is now unveiling the significance for a systematic healthcare reform in the U.S. (Read: Will Obamacare Happen Smoothly?)  

The World Health Organization had stated that healthcare expenditure per person in the United States is the highest in the world.

Despite the large amount of money spent on health care, millions of Americans lacked health insurance coverage or were underinsured. This was mostly due to a dysfunctional system. To expand coverage, President Obama introduced drastic health care reforms in Mar 2010, which aimed at bringing down the country’s uninsured rate.

The multi-year implementation of ACA is finally reflected in positive signs from healthcare providers (in the form of improved earnings), consumers (higher enrolments) and the market (wider coverage at lower healthcare spending). This paves the way for affordable healthcare facilities and expanded coverage for patients with pre-existing health conditions, while also bringing about 32 million uninsured citizens under the coverage umbrella.

Additionally, the ACA aims to invest in information technology and state-based exchanges to curb any fraud and mishandling of policies, hence offering complete authentic health insurance coverage in the long run.

As for the hospitals, the ACA is making the consumers stronger and the hospital industry can no longer cherry-pick their customers. (Read: Obamacare Plays: 3 Hospital Stocks to Buy)

Jason Furman of the Council of Economic Advisers said healthcare spending will most likely jump in coming quarters “as the millions of people who gained health insurance coverage during the Affordable Care Act’s first open enrollment period begin to use their new coverage”. Many Americans got their insurance at the first quarter end; thereby opening up the possibility of higher healthcare spending.

3 Healthcare Funds to Buy Now

The rise in healthcare spending, if true, will increase business for hospitals, diagnostic centers and healthcare related industry. Eventually, the healthcare industry should benefit and help healthcare funds be better investment potential.

Below we will share with you 3 healthcare funds that carry a Zacks Mutual Fund Rank #1 (Strong Buy) as we expect the funds to outperform its peers in the future.
 
Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

These funds have relatively high returns year to date and over the last one-year period. The asset allocation for non-US stocks is low.

ICON Healthcare A (ICHAX - MF report) invests a lion’s share of its assets in companies related to Healthcare industry. It invests in common and preferred stocks of firms irrespective of their market cap. This healthcare mutual fund is non-diversified and has returned 12.8% year to date. In the last one-year period the fund has returned 30.1%.

The top 5 holdings include Johnson & Johnson (JNJ - Analyst Report), McKesson Corporation (MCK - Analyst Report), Celgene Corporation (CELG - Analyst Report), Gilead Sciences, Inc. (GILD - Analyst Report) and UnitedHealth Group Inc. (UNH - Analyst Report).

ProFunds Pharmaceuticals Ultra Sector Investor (PHPIX - MF report) seeks daily returns which are 150% of the daily return of the Dow Jones U.S. Pharmaceuticals Index. To achieve the desired results, it invests in a mix of securities and derivatives. The fund primarily invests in pharmaceutical companies. This healthcare mutual fund is non-diversified and has returned 18.3% year to date. In the last one-year period the fund has returned 31.6%.

The top 5 holdings include Johnson & Johnson, Pfizer Inc. (PFE - Analyst Report), Merck & Co., Inc. (MRK - Analyst Report), Bristol-Myers Squibb Co (BMY - Analyst Report), Eli Lilly and Co (LLY - Analyst Report).

ProFunds UltraSector Health Care Fund Service Class (HCPSX - MF report) seeks daily returns which are 150% of the daily return of the Dow Jones U.S. Pharmaceuticals SM Index. The fund invests in equity securities and derivatives that in the opinion of the fund advisors possess daily return characteristics identical to one and a half times the daily return of the Index. This healthcare mutual fund is non-diversified and has returned 16.1% year to date. In the last one-year period the fund has returned 31.2%.

The top 5 holdings include Johnson & Johnson, Pfizer Inc., Merck & Co., Inc., Gilead Sciences, Inc. and Amgen, Inc (AMGN)

To view the Zacks Rank and past performance of all healthcare mutual funds, investors can click here to see the complete list of funds.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank in our Mutual Fund Center.

Please login to Zacks.com or register to post a comment.