Kris Jenner, the longtime manager ofTD Health Sciences, believes that smaller companies are likely to be the source of most of the biggest returns in the health-care sector.
"The majority of value historically is in companies that can come up with a product in therapeutics. And in that regard," says Jenner, "the opportunity for transformation is significantly greater in the smaller company." Jenner, a portfolio manager and vice-president at Baltimore-based T. Rowe Price Associates Inc., has been the sole manager of the $175-million TD fund since June 2000. His responsibilities include managing approximately US$3 billion in assets.
About 75% of the fund is invested in therapeutics-based companies such as drug makers, with 25% in what is referred to as health-care services. According to Jenner, if you look at the most valuable companies in the health sector, judging by market capitalization, about 80% are therapeutic-based.
The risk of focusing on smaller companies, with one or no other product, has to be balanced. The two best means of controlling risk, says Jenner, are how large a stake you take in any one company, and how much you're willing to pay for something.
Emphasizing diversification, and using a primarily bottom-up process, the fund holds approximately 170 companies. While the number of holdings may be considered higher than the norm, says Jenner, there are concentrations of positions in the top holdings.
"We have what I would call a long tail," says Jenner, "in that we have several small holdings, and these would be the more risky, speculative biotech companies." The more speculative investments play a role in the fund where the opportunity for a powerful stock outweighs the risk.
Large companies such as pharmaceuticals giant Merck & Co., Inc. ( MRK/NYSE), are found in the top 25 holdings. While the top positions vary, the weight in the portfolio of any one name is usually no more than 4%.
Jenner points out that the fund is not simply an industry-specific fund investing in the U.S. It has a global reach, currently holding about 17% of its portfolio in companies domiciled outside the U.S.
When it comes to research in health science companies, the most important criterion for Jenner is seeing a reasonable amount of data in humans (say among 50 to 60 patients), to determine that a drug is behaving in a predictable way within safety guidelines.
Once the critical data is reviewed, Jenner seeks companies that have at least one to two years of cash reserves, a credible management team and a record of achievement. Fundamental, quantitative models and qualitative measures are used to compare a company's valuations and growth prospects to those of its peers.
The TD fund's top holding, and long-standing investment Gilead Sciences Inc.( GILD/NASDAQ), exemplifies the two major themes of the fund. Gilead successfully grew from a small to large-capitalization, therapeutic-based company.
The benefits that Gilead products provided to HIV-positive patients has resulted in tremendous creation of shareholder value, says Jenner. Secondly, management has an "outstanding" track record of sound judgment, strong planning and pro-active approaches to scientific research.
Despite Jenner's long-term approach to investing, he acknowledges that the portfolio turnover of the TD fund "is more like a 12 to 24-month time horizon." The sell discipline is based on "trims (in core positions) and eliminations," he adds.
While the returns of Health Care Equity funds have been feeble, TD Health Sciences [#150] I has fared better than most. Under Jenner's tenure it has a five-year annualized return of 3.3%, compared with the median of zero, as of April 30. Over a 10-year period, the fund has returned 2.8%, compared with the median of 1%.
With a physician's background, Jenner, 46, combines a personal interest in medical development with a passion for investing. He attended the University of Illinois at Champagne-Urbana, where he graduated with a bachelor of science in 1984.
He pursued further studies at Oxford University, where he obtained a doctor of philosophy in molecular biology in 1987. The following year, he entered medical school and earned an MD degree from Johns Hopkins University's school of medicine. Starting an investment club during medical school awakened his interest in stocks.
From 1993 to 1995, Jenner continued his studies and trained to be a general surgeon. However, while doing laboratory work at The Brigham & Women's Hospital, Harvard Medical School, he changed his career path. Pursuing his fascination with investing, in July 1997, he joined T. Rowe Price as an assistant biotechnology analyst.
Today, while still functioning as an analyst covering large U.S. pharmaceuticals and biotechnology companies, Jenner draws on the expertise of six other full-time analysts on the health-care team.
While Jenner thinks that the long-term drivers in health care, such as accelerating demographics and the need for new medicine still exist, negative factors pose challenges.
"For one thing, the Canadian dollar strengthening and the holdings being primarily in U.S. dollars has hurt Canadian investors," says Jenner. "And if health-care products increasingly become price-controlled by government, that will be a serious negative."
