Large-cap prescription aids top performance
AIM Global Health Sciences favours U.S.
pharmaceutical giants, figuring risks in small
firms are greater than rewards big ones offer.
Thursday, May 20, 1999
GORDON POWERS
Special to The Globe and Mail
If anything about the future is predictable, it's this:
Everybody's getting older.
And while 33-year-old John Schroer, manager of
the $554.7-million AIM Global Health Sciences
Fund, doesn't worry too much about his own
long-term health needs, he does know that a lot of
other people do. And that, he says, can only mean
continuing opportunity ahead for the
pharmaceutical and health-care firms in which his
fund invests.
In calendar 1998, AIM Global Health Sciences
was the top performer among the six health-care
sector funds in Canada, chalking up a
43.7-per-cent return. The fund also boasts an
extremely attractive annualized return of 26.3 per
cent over the five years ended April 30.
Such returns, however, can change quickly. Last
month alone, for instance, the fund dropped
almost 10 per cent. Its one-year return of 13.2 per
cent to April 30 didn't lead the pack.
This demonstrates why industry analysts are
forever cautioning about how the lack of
diversification in theme funds can make them
volatile.
"Buying a sector fund means making a
concentrated bet on a market niche," says Ian
Filderman, a Toronto-based fund analyst with
Scotia McLeod Inc. Nevertheless, the benefit is
that "it gives you more downside protection than
you might get with an individual stock, and much
greater potential than a more broadly diversified
fund," he says.
All of this makes the choice of a fund's manager
much more important, he says. And he casts a
strong vote in Mr. Schroer's favour.
Mr. Filderman, who speaks to several portfolio
managers each month, says he's always impressed
with Mr. Schroer's exhaustive knowledge of the
health-care industry. "John always seems to know
who is doing what and has an excellent rapport
with the FDA [U.S. Food and Drug
Administration] and other regulators."
Mr. Schroer joined Denver-based Invesco Trust
Co. Inc. in 1992 and has been the lead manager of
its $1.6-billion (U.S.) Invesco Health Sciences
Fund in the United States since 1994. AIM Global
Health Sciences is a duplicate of that fund.
During his tenure, he has transformed the fund
from a collection of small biotech companies into
a package of U.S. pharmaceutical giants. The
move has driven the fund's top performance.
As in the rest of the market, performance in the
health-care sector has been dominated by a small
group of stocks, particularly the big
pharmaceutical companies. Small-company stocks
in areas such as biotech, medical devices and
health-management services have struggled, hit
hard by U.S. government cuts in insurance
payments and rising medical costs.
"We're primarily interested in volume-driven
companies and most pharmaceuticals have high
single- or low-double-digit revenue growth," he
says. "That's not something you see a lot of with
HMOs, physician practice management groups or
smaller biotechs."
The risks involved in smaller companies trying to
develop the next wonder drug are far greater than
the rewards the industry giants offer, Mr Schroer
says. Drug developers in early clinical trials have
roughly a 10-per-cent chance of receiving FDA
approval and, even then, many lack the means to
capitalize on their investment, he maintains.
"The mature companies have the global reach that
smaller companies simply can't match," he says.
"As a result, even when the smaller players do
come up with a viable product, they frequently
have to step back to get it finally approved and in
the market."
As a result, he only buys biotech companies with
products in late-stage clinical trials, preferably
phase III, or that have products already on the
market, like Amgen Inc., North America's largest
biotech company.
Mr. Schroer typically puts 50 per cent to 60 per
cent of the fund's assets in its top 10 holdings.
Right now, the overall mix is roughly 65 per cent
in major pharmaceuticals, 22 per cent in medical
equipment, 10 per cent in biotechnology, and the
rest in cash.
Recently, he has been adding to positions in
several big-name stocks on the hope that a fresh
round of mergers and acquisitions might drive
prices skyward once again. One current favourite
is American Home Products Corp., whose failed
marriage with Monsanto Co. sent its stock price
reeling last fall.
While the company has developed few
blockbuster drugs relative to competitors like
Pfizer Inc. and Merck and Co. Inc. (which he also
owns), it's poised to launch several new products,
including a new sleeping pill and a treatment for
rheumatoid arthritis that should prove popular.
"Despite its decline last year, this group of new
products could transform American Home into
one of the fastest-growing drug companies in the
country," he predicts, adding that it could also
make the company attractive again as an
acquisition target.
Mr. Schroer has also overweighted his portfolio
with medical-device companies, now that U.S.
physicians, no longer leery of health-care reform,
have begun ordering these costly products again.
Medtronic Inc. and Guidant Corp., the No. 1 and
No. 2 suppliers of pacemakers and other
cardiac-rhythm products, are the types of
high-margin category killers he favours. Their
research and development spending is twice that
of their competitors, with the result that they
introduce a greater number of products more
quickly than their peers, he says.
"It's all about holding position. New products are
much less vulnerable to being turned into
commodities," he explains. "They sell on their
features, not price. That keeps weaker
competitors at bay."
Given the AIM fund's concentrated portfolio, it's
probably not suitable as a core holding, Mr.
Filderman says. Nevertheless, he notes that the
kinds of companies it favours are not available in
the Canadian market, which makes the fund a
great diversifier.
He considers AIM "an excellent fund that could
find its way into most portfolios. But for most
investors, 10 to 15 per cent of their overall
portfolio is likely the limit," he says.
Those investing outside an RRSP may instead
want to consider the identical $324.9-million
(Canadian) AIM GT Global Health Care Class,
he suggests. The reason: for tax purposes, it is part
of a larger umbrella fund, which allows investors
to switch among half a dozen other sector funds
that are also part of the umbrella fund without
triggering any capital gains. You don't get such a
tax-deferral opportunity with the health sciences
fund.
AIM GLOBAL HEALTH SCIENCES FUND
Category: Science and technology
Manager: John Schroer
Load status: Optional
Total assets: $554.7-million
Management expense ratio: 2.31%
Returns to April 30, 1999
1-month simple rate of return: -9.2%
3-month simple rate of return: -10.1%
6-month simple rate of return: -0.2%
1-year simple rate of return: 13.2%
2-year compound annual rate: 23.8%
3-year compound annual rate: 14.4
Telephone: 1-800-588-5684
Top 10 holdings
To April 30, 1999
1. Medtronic Inc 7.7%
2. Johnson & Johnson Inc 5.6
3. Merck & Co. Inc 5.6
4. Pfizer Inc 5.4
5. Guidant Corp 5.2
6. Warner-Lambert Co 5.1
7. Bristol-Myers Squibb Co 5.1
8. Pharmacia & Upjohn Inc 5.0
9. American Home Products 4.8
10. Schering-Plough Corp 4.3
Breakdown by sector
Pharmaceuticals 65%
Medical equipment 22%
Biotechnology 10%
Cash 3%
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