Your Funds on Drugs: Any Questions?

Some of the brightest minds in the mutual-fund business have their sights on pharmaceuticals. At first glance, it's hard to understand why: The sector has been plagued by weak drug pipelines, product liability lawsuits, and fears of a nationalized healthcare policy that could slap price controls on drug companies, says Morningstar. Indeed, the market has taken note of drug companies' slower revenue and earnings growth over the past few years, resulting in deflating or stagnating stock prices, writes analyst John Coumarianos:

You have an industry, whose growth has already slowed, beset by political uncertainty regarding its future. If there's one thing that the market can't abide and penalizes in spades, it's uncertainty, and the recent prices of pharmaceutical stocks are no exception.

Here's a rundown of smart managers who are currently high on pharmaceuticals: Bruce Berkowitz of the Fairholme Fund, who has loaded up on Pfizer, WellPoint, and a few mid-size drug companies; the team at Dodge & Cox, which has more than 20 percent of its flagship Dodge & Cox Stock Fund in health companies, including Sanofi-Aventis, Novartis, GlaxoSmithKline, Pfizer, and Amgen; and the Vanguard Primecap team, which is betting big on Eli Lilly, Novartis, and Amgen.

All have their reasons for gravitating to this unloved sector, including heavy spending on R&D, free cash flow, and opportunities to cut costs and grow revenue in emerging markets. Above all, these managers believe investors are too pessimistic and that current stock prices heavily discount future growth.