Do Health Care Mutual Funds Provide Healthy Risk-Adjusted Returns?

Abstract

Specialty mutual funds, such as health care funds, offer an investor the opportunity to focus on high total return, income, and further diversification within a specific industry. Although extensive research has been conducted on mutual fund performance as well as other specialty mutual fund performance, little research has focused on the performance of health care mutual funds. This article seeks to decode the characteristics of health care mutual funds and their performance by examining their risk-adjusted rate of return from 2001 to 2018. The authors find that, on average, equally weighted portfolios of health care mutual funds did not perform better relative to Dow Jones Health Care Index. Net four-factor alphas of health care mutual funds were positive but insignificant. In addition, based on the two performance models studied, these categories of funds have not consistently created positive net alphas for their investors over longer time periods, such as measured the 2001–2018 period. TOPICS:Mutual fund performance, wealth management Key Findings • Specialty mutual funds, such as health care, offer an investor the opportunity to focus on high total return, income, and further diversification within a specific industry. • We found that, on average, on the basis of risk-adjusted returns, equally weighted portfolios of health care mutual funds did not perform better relative to Dow Jones Health Care Index, but they did outperform Dow Jones Total Market and CRSP Value weighted index. • In addition our results indicated that, based on the four-factor alpha model used in our study, health care mutual funds did not have significantly positive net alphas for their investors over the period of this study (January 2001–December 2018).