What if someone handed you $150 million and asked you to invest it?
You may think you hit the lottery, but that describes the month of January for John Schroer, portfolio manager of Invesco Strategic Health Sciences and Global Health Sciences.
The two mutual funds he oversees have $1.8 billion in assets invested exclusively in healthcare, an industry overachiever on Wall Street during 1995. While the Dow Jones industrial average raced 33.5% last year, healthcare stocks bounded 40% (Jan. 8, p. 3).
Mirroring that trend, healthcare stocks have fueled strong returns by mutual funds. Schroer's Strategic Health Sciences rose 59% last year, and Global Health Sciences was up 68%.
"Healthcare is a very resilient place to put your money," the Denver-based portfolio manager said.
Mutual funds are among the ranks of institutional investors that provide an influential foundation to publicly held healthcare companies (See chart).
Although institutional investors include banks and pension funds, mutual funds are becoming a bigger slice of that investment pie.
Obviously, getting in the good graces of mutual fund managers can swing a lot of buy orders for a favored stock. Simply put, healthcare service companies are achieving profits through the industry's consolidation and restructuring. Investors recognize those results and buy stock. That, in turn, lifts the stock price, creating an even greater following.
Mutual funds amplify the phenomenon. While many investors want to play the stock market, they often have no idea which companies to choose. So they park their money in mutual funds.
That strategy is well-documented. A record $24.5 billion was invested in equity mutual funds in January alone, according to the Investment Company Institute. The surge of money helped propel the Dow Jones to five straight records in a single week in early February as fund managers put that invested money to work.
In terms of niches, healthcare funds are providing juicy returns to investors, heating up demand for healthcare stocks and healthcare mutual funds even further.
In January, for example, T. Rowe Price, a Baltimore-based group of no-load funds with $71 billion in assets, introduced its Health Sciences Fund. "Rapid advances in health sciences, medicine and healthcare delivery offer substantial opportunities for superior long-term capital appreciation," Skip Klein, the company's executive vice president, said of the fund's birth.
He said the fund will focus on companies with high-quality management teams that own an equity stake and with high or growing market share resulting from a sustainable competitive advances.
Columbia/HCA Healthcare Corp. fits both criteria. Top Columbia executives Richard Scott and Thomas Frist Jr. own hefty equity stakes, and the company is acquiring hospitals on almost a weekly basis to increase market share.
In fact, Columbia is on many mutual fund lists. Scan the mutual funds that have filed prospectuses with the Securities and Exchange Commission in the past few months and many have Columbia as a holding. In some cases it's the only holding.
For example, John Hancock Institutional Series Trust has 12 mutual funds. Only 1% of its assets are invested in healthcare, but that money goes to just two companies: Nashville, Tenn.-based Columbia, with shares worth $648,000, and Health Management Associates, a Naples, Fla.-based hospital chain, with shares worth $216,000.
Another fund, Oppenheimer Quest Opportunity Value Fund, has 4.5% of its money invested in healthcare. All of it-shares valued at $134,000-is in Columbia.
Columbia is "the largest, and they have a very compelling consolidation story," Schroer said.
Columbia now has a market capitalization of $25 billion, putting it in the ranks of blue-chip companies favored by mutual funds, said Victor Campbell, Columbia's senior vice president of investor relations. Fund managers are saying, "If you're going to invest in healthcare, you should have a portion here (in Columbia)."
Columbia has 752 institutional investors, but it doesn't have a breakdown of how many are strictly mutual funds because many institutional investors manage both mutual and pension funds.
Campbell said Columbia's institutional investors' percentage would be even higher, but it's offset by a large employee ownership portion. Some 50,000 Columbia employees own 75 million shares of the company, which represents a 17% stake. He said Columbia employees invested $45 million in company stock last year alone.
Columbia's story clearly has captivated Fidelity Magellan. With $55 billion in assets, it's the nation's largest mutual fund. Columbia is one of Fidelity Magellan's top 10 holdings, a survivor among Fidelity's changing weave of investments. Last month, Fidelity attracted national press because it slashed its holdings of technology stocks.
Fidelity's stake in Columbia is substantial. Valued at $185 million, it totals 7.5% of the company's 450 million shares. That includes all of Fidelity's investments, not just Magellan.
As of Sept. 30, 1995, Columbia was Magellan's eighth-largest holding. That's down from No. 4 in 1994.
Invesco's Schroer also has downsized his holdings in Columbia. Last year, his funds held shares of Columbia; Nashville-based OrNda HealthCorp, the nation's third-largest for-profit hospital chain; and HMA. However, he sold those hospital stocks late last year, citing "deceleration in industry fundamentals."
Although the hospital stocks continue to do well, he attributes that to the lack of Medicare and Medicaid budget cuts so far in 1996. He sees problems in 1997. "The budget cuts are going to be worse because you'll have one more year to pay for," Schroer said.
He remains strong on physician companies, including a substantial holding in PhyCor, a Nashville-based physician practice management company.
Despite Schroer's sell-off of hospital stocks, Invesco remains a strong investor in Columbia through pension funds. The company is the hospital chain's third-largest institutional investor.