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FUNDS
Ripe for a Comeback
(Page 2 of 2)
by Steven Goldberg
Aster looks for companies that he thinks can generate sustainable yearly profit growth of at least 15%. But he avoids stocks trading at high P/Es and thus owned no Internet or telecom stocks during the bubble of the late 1990s. Consequently, Aster lagged his rivals during the tech frenzy but lost just 2% during the entire 2000-02 bear market, a remarkable achievement for a growth fund. But with tech stocks hurting in '04, Aster has been buying. More than 25% of the fund is in tech -- mainly in semiconductor and component stocks that, he says, investors have sold indiscriminately.
Just the right cure
The collapse of Merck's stock following the drug giant's decision to take Vioxx off the market (see "Merck's Headache," Dec.) is just the tip of the performance iceberg for pharmaceutical stocks. The group fell 13% in 2004 through mid November and has essentially done nothing over the past five years, although earnings have grown, on average, by more than 25%.
Drug stocks are as cheap as they've been at any time since 1993, when some investors worried that sweeping health-care reform proposed by the Clinton administration might lead to price controls. Drug-stock P/Es are now below that of the S&P 500, a reversal of the normal state of affairs. Given inevitable increases in health-care spending, these stocks aren't likely to stay cheap for long.
The best way to play a medical recovery is through Vanguard Health Care (VGHCX; 800-635-1511). It is the top-performing fund of any kind over the past 20 years, during which it returned an annualized 20% -- nearly four percentage points per year better than the average health-care fund. And it did so with two-thirds the volatility of its average competitor. The fund boasts a superlow expense ratio of 0.28%. One downside: Vanguard Health requires a minimum initial investment of $25,000.
Ed Owens, 58, who has run the fund since its 1984 launch, likes to buy stocks when they're out of favor -- and hence, cheap. The fund owns all sorts of health stocks, but its biggest weighting is in domestic drug companies, representing 35% of assets. One-fourth of assets are in foreign companies, and many of those are drugmakers as well.
Global telecom player
As its name suggests, T. Rowe Price Media & Telecommunications (PRMTX; 800-638-5660) focuses on two sectors that overlap to some degree. Neither media stocks (which have been hurt by sluggish advertising spending) nor telecom issues (which still suffer from excess capacity and intense competition) have been especially rewarding for investors in recent years.
All this should change soon, says the fund's manager, Robert Gensler. He says media stocks should perform better as the economy continues to strengthen. The picture is fuzzier for telecom, but Gensler says he's finding attractively priced wireless stocks. On a P/E basis, some of his wireless holdings, such as Vodafone and Nextel, are nearly as cheap as Baby Bell stocks. Yet his wireless companies are growing much faster.
Gensler, 47, says one advantage he has over managers of similar funds is that he can circle the globe in search of attractive stocks (47% of assets were recently in foreign names). Gensler says the "insane amount of time" he spends traveling enables him to get a glimpse of trends that may be taking hold in far-flung corners of the world. "I don't think I'm smarter than everybody else," he says. "I just get lucky because I get to see things globally."
Since Gensler came on board at the start of 2000, the fund has finished in the top 30% of telecom funds each year. It is the top-ranked telecom fund over the past five years, having returned an annualized 2%. That's 12 percentage points per year better during that period than the average of all telecom funds. Granted, Gensler may have an edge because he can own media stocks, too. Consider that a blessing.
--Research: Elizabeth Kountze and Katy Marquardt
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