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Mutual Fund Commentary

For Q1 2015, Healthcare mutual funds continued the momentum they experienced in 2014. Healthcare funds soared over 30% to emerge as the best gainers among the sector equity funds in 2014. Mergers and acquisitions (M&As) and licensing agreements dominated in 2014, and the trend has been repeated in first quarter 2015 as well. Though new rules by the Treasury Department muted the tax inversion deals, it has not deterred the M&A activities.

So far, biotech companies with new therapies or interesting pipeline candidates have been attracting a lot of attention. The M&A frenzy shows no signs of slowing down, and bellwethers are actively busy in licensing activity to bolster their beleaguered pipelines. Thus, the sector promises to be profitable going forward, just as it has been last year.

Sector Performance

Looking at the broader markets, markets had a choppy first quarter 2015. The Dow snapped a three-quarter winning streak. However, the S&P 500 gained 0.4% and extended its quarterly winning streak to nine quarters. The Nasdaq advanced 3.5%, also extending its winning streak to nine quarters, its longest stretch of quarterly gains ever.

Nonetheless, gains in the biotech sector have been far greater. The NASDAQ Biotechnology index jumped 13.2% in the first quarter. As of Apr 15, it boasts year-to-date gains of 18.7%. The Health Care SPDR ETF (XLV) notched up gains of 6% in Q1 and as of Apr 15, it is the top gainer among the S&P industry groups with gains of 8.2%.

Looking at the mutual funds, the healthcare mutual funds were once again the best gainers among the sector equity funds. Its robust 10.7% return in Q1 was far above the second-placed Real Estate sector’s return of about 4.4%.

Sector Equity Funds Return (in %)
1Q15 1 Year
Health 10.71 32.38
Real Estate 4.37 22.52
Global Real Estate 4.06 12.87
Consumer Cyclical 3.88 13.01
Technology 2.99 13.1
Consumer Defensive 2.55 12.5
Communications 2.11 4
Industrials 1.77 8.06
Financial 0.15 3.39
Energy Limited Partnership -1.29 2.68
Equity Energy -1.35 -19.95
Natural Resources -1.35 -15.63
Utilities -2.26 7.08
Equity Precious Metals -3.88 -22.91
Source: Morningstar

Keep reading our Mutual Fund Commentary section, where we are reporting on performances and best picks from fund families and varied categories.

M&A Activities, Q1 Earnings Season

M&As continued to be a key event for the pharma and biotech sector. AbbVie’s $21 billion acquisition agreement with Pharmacyclics was among the biggest deals. Separately, Actavis–Allergan, Shire-NPS Pharmaceuticals, Endo– Auxilium, and Pfizer-Hospira deals have been in the news.

The first quarter earnings season was off to a soft start. However as of Apr 15 morning, 1.9% companies from the medical sector reported 100% beat ratio. While the Q1 total earnings projected to be down 2.9% year over year on a 5.1% drop in revenues, the Medical sector boasted Q1 earnings estimates of a 10.6% y/y surge on an estimated 9.1% sales growth.

Click here to read more Earnings Outlook articles

Top 15 Biotech Mutual Funds in Q1

Below we present the top 15 Healthcare funds with best returns of Q1 2015:

Fund Name 3 Month Total Return 3 Mo % Rank vs Obj % Yield Average EPS Growth Expense Ratio Beta vs S&P 500 Load
Turner Medical Science Lng/Srt Inv (TMSFX - MF report) 24.76 1 0 0 2.18 0.4 N
Fidelity Adv Biotechnology A (FBTAX - MF report) 14.66 4 0 15.5 1.08 1.18 Y
Franklin Biotechnology Discovery A (FBDIX - MF report) 14.4 7 0 15.5 1.08 1.03 Y
T. Rowe Price Health Sciences (PRHSX - MF report) 14 10 0 13.1 0.77 0.91 N
VALIC Co I Health Sciences Fund (VCHSX - MF report) 14 9 0 12.67 1.11 0.92 N
Rydex Biotechnology A (RYBOX - MF report) 13.85 12 0 16.06 1.61 1.13 Y
Janus Global Life Sciences A (JFNAX - MF report) 13.15 19 0 12.65 1.03 0.78 Y
AllianzGI Health Sciences Fund A (RAGHX) 12.03 25 0 13.54 1.46 0.65 Y
Eventide Healthcare&Life Sciences A (ETAHX - MF report) 11.84 27 0 32.67 1.66  -- Y
Fidelity Adv Health Care A (FACDX - MF report) 11.75 31 0 10.18 1.07 0.94 Y
Alger Health Sciences Fund A (AHSAX) 11.31 36 0.5 11.87 1.31 0.78 Y
Fidelity Select Medcl Equip & Sys (FSMEX - MF report) 10.76 38 0.09 13.12 0.78 1.05 N
Fidelity Select Pharmaceuticals (FPHAX) 10.71 39 0.65 11.29 0.8 0.7 N
Rydex Health Care A (RYHEX) 10.34 43 0 13.63 1.62 0.89 Y
Highland Lg/Sh Healthcare A (HHCAX) 10.34 43 0 15.23 1.7 0.28 Y
Note: The list excludes the same funds with different classes, and institutional funds have been excluded. Funds having minimum initial investment above $5000 have been excluded. 3-M % Rank vs Objective* equals the percentage the fund falls among its peers. Here, 1 being the best and 99 being the worst.

Fidelity funds seem to be dominating this space. Four Fidelity funds managed to be among the top healthcare funds gainers. For the best Fidelity performers, you may read Best Performing Fidelity Mutual Funds of Q1 2015.

T. Rowe Price Health Sciences (PRHSX - MF report) and Janus Global Life Sciences A (JFNAX - MF report) carry the Zacks Mutual Fund Rank #1 (Strong Buy). T. Rowe Price Health Sciences is also featured among the top 10 gainers for the last 5 years return while markets entered into the 6th year of its Bull Run. (Read: Bull Market Turns 6: Top Mutual Fund Gainers).

Separately, Franklin Biotechnology Discovery A (FBDIX - MF report), VALIC Co I Health Sciences Fund (VCHSX - MF report), Fidelity Adv Health Care A (FACDX - MF report) and Fidelity Select Medcl Equip & Sys (FSMEX - MF report) carry a Zacks Mutual Fund Rank #2 (Buy).

However, the second-highest gainer Fidelity Adv Biotechnology A (FBTAX - MF report) has recently bagged the Lipper award in the Health/Biotechnology Funds categories over the 3-year period. (Read: Invest in Award Winning Mutual Funds Only?). However, it carries a Zacks Mutual Fund Rank #5 (Strong Sell). In fact, Turner Medical Science Lng/Srt Investor (TMSFX - MF report) also carries a Strong Sell rating. Eventide Healthcare&Life Sciences A (ETAHX - MF report), Fidelity Select Pharmaceuticals (FPHAX) and Rydex Health Care A (RYHEX) carry a Zacks Mutual Fund Rank #4 (Sell).

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. Pick the best mutual funds with the Zacks Rank.

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