Biotechnology Fund To Battle Fidelity With Small-Caps
10/23/97 NEW YORK --The Franklin Biotechnology Discovery Fund is aiming to outperform the only other pure-play biotechnology mutual fund by investing more in small- and microcapitalization companies.
Launched Sept. 15, the fund is competing head-to-head with Fidelity Select Biotechnology. Morningstar Inc. in Chicago tracks 17 health-care funds - which include biotechnology funds - and Fidelity's fund is the only one that invests solely in the biotechnology industry, says Russ Kinnel, senior equity analyst at Morningstar. Franklin's fund is too new to be in the company's database.
At $40 million, the Franklin fund has 25 stocks, 90% in small- and mid-cap companies, says Kurt von Emster, who manages this fund and the Franklin Global Health Care Fund. Biotechnology Discovery has gained nearly 10% since it opened, he says.
At the end of September, Select Biotechnology had $685.3 million in assets and 67 holdings. Of its top 10 holdings, three are large-caps, three are mid-caps and four are small-caps.
Select Biotechnology has returned 23.19% year-to-date, compared to 26.63% for its health-care and biotechnology peers, says Lipper Analytical Services Inc. in New York. That ranks it 25 of 31 such funds. Its long-term record is worse, returning 16.91% over a 10-year period, placing it last among its peers. They had a 19.23% average return.
Since 1992, health-care and biotechnology funds have underperformed the Standard & Poor's 500 index four out of six years, including this year, according to Lipper.
While he's aware of the performance numbers, von Emster says that over the past three months, the biotechnology sector is up 35%, with most of those gains coming from smaller companies. In addition, the industry is seeing a flurry of biotechnology drug approvals, with 17 last year. In 2002, 50% of drugs approved are expected to be biotech drugs, up from 3% in 1992, he says.
Von Emster expects small- and microcap companies to have better returns than larger companies in the next few years, thanks to better growth prospects from new products. Many health-care portfolios are dominated by large-cap stocks, and the earnings and revenues of those companies aren't affected as much when a new product comes out as are smaller companies.
Von Emster is trying to offset the risk of investing so much in small-caps by holding many different types of biotechnology companies. He is limiting the fund to between 15 and 30 stocks, although he'd prefer it have no more than 20 stocks.
'A biotechnology fund is all about stock-picking, and once you get above 20, it almost becomes an index-like fund, given the number of companies available,' he says.
Despite its small- and microcap preference, the fund's average market capitalization is already $850 million because of three mid-cap holdings that have a combined market cap of $5.5 billion. The holdings are Canadian-based BioChem Pharma Inc. (BCHE), which develops products to detect, prevent and treat diseases, at 3.3%; Agouron Pharmaceuticals Inc. (AGPH), a company in La Jolla, Calif., that researches and develops small-molecule drugs to treat diseases, at 3.7%; and Sepracor Inc. (SEPR) in Marlborough, Mass., which makes safer and cleaner versions of existing drugs through a purification process, at 4.48%.
Sepracor and Chiroscience Group PLC (U.CCC) - another holding at 3.9% - are the only companies that specialize in this purification process, and the federal government wants to see more of these types of drugs approved, says von Emster.
Another holding, Gilead Sciences Inc. (GILD) in Foster City, Calif., made news recently after a trial showed that an inhibitor developed by the company cuts in half the period of time a person has the flu. Another round of trials will begin this month and a third in 1998. The stock is up more than 61% year-to-date. The fund has a 4.3% holding in the company.
'This is a biotech product that wasn't even in the clinic (trial phase) until this March, and they've already done two trials and it's worked in both,' he says.
Biotechnology Discovery will close to new investors when its assets reach $150 million. Von Emster expects that to occur between January and March, since investors poured in $37 million the first 5 1/2 weeks. He says the assets will be limited so its holdings can have a greater impact on the fund's performance.
Biotechnology Discovery is part of the Franklin Templeton Group of Funds, whose parent company is Franklin Resources Inc. (BEN) in San Mateo, Calif., which manages more than $225 billion in assets.
-By Desiree J. Hanford, WSJ Interactive AP-Dow Jones |
