The Sector Strategist: Using New Asset Allocation Techniques to Reduce Risk and Improve Investment Returns

CHAPTER 3

The Health Care Sector

Be careful about reading health books, you may die of a misprint.

Mark Twain

The U.S. health care industry is the largest single slice of the U.S. economy, amounting to expenditures of $2.6 trillion in 2010. The health care sector is quite diverse and includes pharmaceutical companies, health care facilities, managed care/HMOs, medical supply manufacturers, and biotechnology. Each of these subsectors is affected by different issues, but all share a common goal: to profit while preserving or restoring the health of their clients.

This sector represents 11.0% of the market capitalization of the S&P 500, making it the fifth largest sector. The health care sector has delivered exceptional investment returns over the 24-year period ending December 31, 2010. As demonstrated in Chapter 2, the category's returns were the second-highest of any sector; an 11.3% annualized return. Just as important are the defensive characteristics. Since 1986, the health care sector has suffered only five losing years (see Table 2.1). This is the lowest number of negative return years of any of the major sectors within the S&P 500 stock index. The sector also fared well in 1990, 1994, and 2000, losing years in the general market. Health care stocks generally outperform the market when the economy is heading into recession and many other stocks are losing value (see Table 3.1).

TABLE 3.1 Health Care Sector: Losing Years since 1986

1987	−1.16%
1992	−6.65%
2001	−12.55% ...