During the time of the COVID-19 pandemic, the world realized the importance of sustainability, including healthcare and well-being. As a result, the investment of mutual funds to sustainability-linked industries has increased. As of November 2021, the investment of Environmental, Social and Governance (ESG) funds was recorded at 6.1 trillion USD, accounting for 10% of fund assets. Consequently, many sustainability indexes rose significantly over the last two years, for example, the MSCI World ESG Leaders’ index grew over 20% in 2021 .
A number of studies investigated the allocation of mutual funds and found healthcare as one of the most popular industries for mutual fund investment. For instance, Brière et al. (2017) examined the investment of ESG funds in the US and found that investment in the healthcare industry accounted for 15% of the allocation of these funds, making healthcare rank as the second industry that most fund flew into, followed by investment in the financial industry (13%). The sector that ESG funds in the US invested most in was technology, accounting for 21%. On the other hand, conventional funds invested in healthcare accounted for only 11% of their fund.
There has been significant growth in the number of healthcare-focused funds, especially since the COVID-19 pandemic started. As of August 2022, the largest healthcare-focused fund was Vanguard Health Care Fund with a net asset of 46.24 billion USD, which was even greater than the GDP of more than 100 countries. The total net asset of global healthcare funds was greater than 140 billion USD. This indicates that the world is paying more attention to health and well-being. However, there are only a handful of studies on healthcare mutual funds, and existing studies only focus on the performance of funds.
Steffy et al. (2017) investigated the performance and characteristics of healthcare mutual funds, such as turnover ratio, expense ratio, front and deferred loads, and tenure of fund managers. The study investigated the performance of healthcare mutual funds over the period 2000-2012 with 12-month total returns with and without load and tax adjustment, using a three-year alpha and the Sharpe ratio. The result revealed that the Sharpe ratios of healthcare mutual funds were negative in some years. Kaushik et al. (2014) examined the performance of 115 active healthcare mutual funds in a period from 2000 to 2011, similar to the data period of Steffy et al. (2017). Their data were retrieved from Morningstar Direct Database. Unlike Steffy et al. (2017), Kaushik et al. (2014) measured risk-adjusted returns on these funds with alphas obtained from single and four-factor Fama and French models and found that healthcare mutual funds outperformed the passive index. Using the same approach, Chen et al. (2018) employed a broader sample including 132 healthcare mutual funds and 43 healthcare ETFs to investigate the risk-adjusted performance of healthcare funds. Their finding was consistent with that of Kaushik et al. (2014); healthcare mutual funds had a positive alpha. Adding these funds into a market portfolio could result in higher return and lower volatility. However, when the market was very volatile, healthcare funds and ETFs performed quite poorly.
Another study by Martí-Ballester (2020) compared the performance of biotechnology funds, healthcare funds, and other conventional mutual funds by using Carhart’s multifactor model and Bollen and Busse’s timing multifactor model. The samples were 34 biotechnology funds, 178 healthcare funds, and 4,352 conventional funds. The biotechnology and healthcare mutual funds performed better than conventional mutual funds, and, in particular, biotechnology funds had a better selectivity and market timing ability than healthcare funds.
In conclusion, with growing interests in sustainability in recent years, there has been a significant increase in mutual funds in healthcare and healthcare-related industries. Both ESG and non-ESG funds allocate over 10% of their funds to healthcare investee companies. As a result, positive returns on healthcare funds have been recorded in recent empirical studies. The evidence supports the argument that sustainable investment can lead to positive returns. Healthcare investment through fund investment can help improve the quality of healthcare services as well as the quality of life; thus, such investment can benefit both investors and society. More investigation of healthcare mutual funds especially in other aspects than performance is needed to help investors understand more about these healthcare funds.
References:
Brière, M., Peillex, J., & Ureche-Rangau, L., ‘Do Social Responsibility Screens Matter When Assessing Mutual Fund Performance?’, Financial Analysts Journal, vol. 73, no. 3, 2017, pp. 53-66.
Chen, H., Estes, J. & Pratt, W., ‘Investing in the Healthcare Sector: Mutual Funds and ETFs’, Managerial Finance, vol. 44 no. 4, 2018, pp. 495-508
Kaushik, A.K., Saubert, L. K., & Saubert, R. W., ‘Performance and Persistence of Healthcare Mutual Funds’, Financial Services Review, vol. 23., no. 1, 2014, pp. 77-91
Martí-Ballester, C., ‘Financial Performance of SDG Mutual Funds Focused on Biotechnology and Healthcare Sectors’, Sustainability, vol. 12, no. 2032, 2020
Steffy, T., Malhota, D. K. & Poteau R. R., Decoding the Characteristics of Healthcare Mutual Funds, International Journal of Management Research, vol.8, no. 2, 2017
