Proper allocation to healthcare sector?

[Spanky]

What's an appropriate allocation to health care sector (e.g, Vanguard Health Care fund) within the equity portion of a portfolio? I understand that sector bet may not be prudent, but the health care sector has been performing well and the decline (-21%) is less severe than that of the total market (-40%). It is true that the future may be significantly different will the past. Any thoughts or comments?

 

[Lsbcal]

If I were going to make a specialized bet I'd bet on the midcap value index. That is were I've overweighted.

Generally the health sector has been viewed as a defensive play and it did hold up relatively better in 2008. I personally do not make sector bets. I used to have Johnson & Johnson and Merck stocks back in my gunslinger days.

 

[Midpack]

Health care costs have increased much faster than inflation & GDP for decades, and that coupled with a relative lack of competition has enabled higher profitability at least in part. If you believe that will continue indefinitely, a health care sector tilt might be advisable. IMO something's going to have to give re:health care costs so I wouldn't overweight the sector, but it's not likely to happen anytime soon either.

I am overweight in Energy VGELX, though I no longer think the outlook there is what it once was (with shale/fracking).

 

[SteveL]

I have had 1 to 2% in VHT, Vanguard Healthcare EFT. It is up 40% in the last 12 months. If you own broader market index funds, you already have coverage for all sectors of the market.

This amount isn't large enough to swing your overall results much either way.

 

[Animorph]

I have 10% in REITs and 10% in natural resources. No health care, though VGHCX was tempting back when I started my AA, and the demographic trend should be good. On the other hand, there will be more government involvement and expansion doesn't guarantee profits.

Enough weight to be significant, but not so much that it will wag the entire portfolio.

 

[LakeTravis]

I keep 5% in the Vanguard Healthcare Fund and 5% in the Vanguard Energy Fund.

 

[Spanky]

I keep 5% in the Vanguard Healthcare Fund and 5% in the Vanguard Energy Fund.

The rule of thumb, I heard, is to limit each sector exposure to 5%.

BTW - I also consider consumer staple (another defensive) sector as well.

 

[Lsbcal]

The rule of thumb, I heard, is to limit each sector exposure to 5%.

Where did you hear this from?

 

[Spanky]

Where did you hear this from?

"Morningstar recommends that investors limit their exposure to any given sector to 5% of their portfolio."

An Introduction To Sector Mutual Funds

 

[photoguy]

Well the total stock market is already like 12% healthcare.

Another way of thinking about this is what do you want to underweight to make room for more healthcare.

 

[CaliforniaMan]

IMO the healthcare sector is the only one that seems almost certain to gain an increasing percentage of the GDP over the next decade or so. So, while I mostly market index, I keep an additional bit in the Vanguard Healthcare Index, not been disappointed so far.

 

[Lsbcal]

IMO the healthcare sector is the only one that seems almost certain to gain an increasing percentage of the GDP over the next decade or so. So, while I mostly market index, I keep an additional bit in the Vanguard Healthcare Index, not been disappointed so far.

The question to answer is does the market already discount the possible increases in healthcare business prospects? We've known about demographics for many years now and the new health care legislation is hardly a secret.

 

[In-control]

VG Health care

I have been ~ 5% in this fund for ~ 20 yrs. It is in my taxable part of the portfolio. I sell each year to fund a Roth IRA, VG Wellesly Income fund.

Advisers always tell me to sell it as it is, in their mind, risky. I don't think people getting older or need medicine is risky - it just happens!

 

[Spanky]

Advisers always tell me to sell it as it is, in their mind, risky.

This is the general thinking: Sector bet is risky! This may not be true for the healthcare and consumer staple sectors, however.

 

[Spanky]

Well the total stock market is already like 12% healthcare.

Another way of thinking about this is what do you want to underweight to make room for more healthcare.

Example:

Current:
12% healthcare
88% others

New:
20% healthcare
80% others

 

[Animorph]

VGHCX is an actively managed fund that has done very well in the past. Luck, good sector, or good stock selection? The manager has recently left and been replaced. I'm a little leery of performance chasing here. It's easy to be convinced by demographics and healthcare growth and inflation when the past performance looks good. And it is low cost.

 

[CaliforniaMan]

VGHCX is an actively managed fund that has done very well in the past. Luck, good sector, or good stock selection? The manager has recently left and been replaced. I'm a little leery of performance chasing here. It's easy to be convinced by demographics and healthcare growth and inflation when the past performance looks good. And it is low cost.

You are right. I don't know why anyone would choose the actively managed fund. I have been in Vanguard Health Care Indx, VHCIX, which also seems to have the better return.

 

[veremchuka]

The question to answer is does the market already discount the possible increases in healthcare business prospects? We've known about demographics for many years now and the new health care legislation is hardly a secret.

Didn't seem to be discounted in 2013! With interest rates rising I'm tempted to move Vg REITs allocation (about 2.5% of total portfolio) to HC. REITs returned about 3.5% last year.

 

[Lsbcal]

Didn't seem to be discounted in 2013! With interest rates rising I'm tempted to move Vg REITs allocation (about 2.5% of total portfolio) to HC. REITs returned about 3.5% last year.

A few years back I tried to find a good way to move between REIT and Health Care sectors. This was with 20 years of backtest data. I couldn't find a reliable way that was better then other methodologies over that 20 year timespan. Not to say it can't be done. I'm not a fan of market timing without some decent backtest of the strategy.

 

[photoguy]

Does the healthcare sector exhibit anomalously high returns under a factor model? (e.g. once you control for size/value premiums). I don't think I've seen sectors as a predictive variable in any of the models that explain returns.

 

[LakeTravis]

You are right. I don't know why anyone would choose the actively managed fund. I have been in Vanguard Health Care Indx, VHCIX, which also seems to have the better return.

Could be the $100K price of admission for VHCIX.

 

[RobLJ]

Depends on how much you want to overweight and your sense of risk/reward.
I've had 2-5% in Fidelity Biotech over the last 15 years and more recently an add-on to Fidelity Select Health. I sold more than half of the former in the early 2000s when it shot to the moon, then dollar cost averaged in monthly (small amounts); sold 1/3 before the 2008 and dollar cost-averaged, etc. Now it's on a another moon shot. It's about 12% of total portfolio gains, many realized despite never being more than 3-4% of the portfolio.
Your mileage may vary, probably will, particularly after the gains of the last few years.

After going nowhere to negative for quite a few years (I think the 5 year returns in '09 were -5%), Select Health has been moving similarly markedly, over the last 3 years and 5 years (annual returns of 23-24%). The question for me in sectors like this is how to harvest gains (and limit losses), although it's not as acute a question as in individual stocks.

What's an appropriate allocation to health care sector (e.g, Vanguard Health Care fund) within the equity portion of a portfolio? I understand that sector bet may not be prudent, but the health care sector has been performing well and the decline (-21%) is less severe than that of the total market (-40%). It is true that the future may be significantly different will the past. Any thoughts or comments?