Health-Care Mutual Funds Still Weak Performers

Despite a recent recovery in drug stocks--highlighted by news Wednesday that two of the industry’s biggest players, American Home Products and Warner-Lambert, are thinking of merging--shareholders of health-care sector mutual funds continue to suffer.

While the average U.S. diversified stock fund is up more than 10% year to date through Tuesday, the typical health-care fund is down nearly 2%, according to the Chicago fund-tracker Morningstar Inc.

Take out the performance of four funds that invest exclusively in biotechnology companies, including the Rydex Biotechnology fund--which is up more than 34.2% in 1999--and the performance of these sector funds is significantly worse.

Part of the problem is that despite the 19% rise in drug stocks since Aug. 11, the Standard & Poor’s index of drug stocks is still off nearly 4% since the beginning of the year. And nearly half of the average health-care fund’s assets are tied up in drug stocks.

As of the end of July, 80% of health-care funds held Warner-Lambert stock, while two-thirds of the funds owned shares of American Home Products.

Also dragging down the performance of these funds has been the continuing woes of health-maintenance organizations, or HMOs, whose shares are off more than 13% since the beginning of the year. They’re down nearly 30% since hitting their highs on June 16.

And while biotechnology stocks are up nearly 40% for the year, making them one of the best-performing sectors in 1999, the average health-care fund has only a modest stake in biotech. What’s more, since peaking on Sept. 9, the AMEX biotechnology index has skidded more than 12%.