Few Mutual Funds Are Big Fans Of Biotechnology Stocks Despite Rally
Dow Jones Online News, Wednesday, May 06, 1998 at 00:31
(Published on Tuesday, May 05, 1998 at 21:19)
By Pui-Wing Tam, Staff Reporter of The Wall Street Journal
If you are thinking about buying into the scorching rally in many
biotechnology stocks, don't count on your mutual fund to help you.
Over the past few days, the share prices of many biotechnology stocks
have skyrocketed, in part triggered by the news that EntreMed Inc., a
small, Rockville, Md., company, had developed two drugs that have killed
cancer tumors in mice. On Monday, EntreMed's shares quadrupled on the
Nasdaq Stock Market. While the company's stock price tumbled Tuesday,
the prices of other biotechnology stocks, such as Agouron
Pharmaceuticals Inc., rode the hoopla.
But most managers who run biotech-stock or health-care-stock funds
aren't biting. After all, they note, biotechnology companies, which
focus on gene research and protein-based treatments, face many obstacles
and years of testing before an approved product reaches the shelves. As
a result, many managers have kept allocations of biotechnology stocks in
their funds to a minimum.
Biotechnology stocks "are generally not good long-term investments,
unless you buy the companies at really cheap prices," says Michael
Yellen, San Francisco-based fund manager of the $600 million GT Global
Healthcare Fund. He adds that he has slashed his weighting in
biotechnology stocks to 10% of the fund, down from 30% a year ago. "Most
of these (biotechnology) companies just burn money," he says. Instead,
GT Global Healthcare is heavy on the stocks of pharmaceutical companies
and producers of medical devices.
According to data from Morningstar Inc., a Chicago-based
fund-research firm, only a few mutual funds reported holding shares in
EntreMed before the stock spiked upward, including Heritage Small-Cap
Stock Fund and GW&K Equity Fund. The stock rally consequently caused
nary a ripple in the performance of many funds that concentrate on
health-care and biotechnology stocks. As an example, the net asset value
of Franklin Biotechnology Discovery Fund, one of the few funds focused
purely on the biotech area, rose only 0.14% after Monday's rally.
Have fund managers missed out on a golden opportunity? A look at the
performance history of biotechnology stocks suggests that most managers
are just being prudent. The biotechnology sector is famously volatile.
After strong gains at the start of the decade, share prices in the
sector dropped rapidly. In 1995, biotechnology stocks picked up again
for a brief period. Since then, however, the sector has lagged behind
the rest of the market.
The volatility of the biotechnology sector is reflected in the
performance of biotech funds over the past few months. According to
Lipper Analytical Services Inc., the biotechnology-fund sector has
turned in losses in four out of the past 13 weeks -- that's at a time
when the stock market generally has roared ahead.
So far this year, the sector is up an average 12.58%, Lipper says.
Only a few biotechnology and health-care funds beat the sector's average
return. Those included Warburg Pincus Health Sciences Fund and Fidelity
Select Healthcare Fund, with gains of more than 17%.
Biotechnology funds have been out of vogue with the public for a
while. Robert Adler, president of AMG Data Services in Arcata, Calif.,
says the rate of investors' cash flowing into biotechnology funds had
declined to $23 million a week by midMarch from $118.5 million a week at
the start of February. In the most recent week, ended April 29, only
$2.5 million trickled into the sector.
Fund managers are currently adopting a wait-and-see attitude toward
EntreMed and the stock rally it has sparked. EntreMed's two anticancer
drugs are to date in the preclinical stage of research -- that is, they
have been tested only in mice and not in humans-and the company is still
five years away from putting a product out to the public. As a result,
many fund managers say they are waiting for evidence that the drug works
in humans before buying the stock.
Most biotechnology companies in general still need to grow up, fund
managers add. Kurt von Emster, fund manager of the Franklin
Biotechnology Discovery Fund, notes that the market capitalizations of
most biotechnology companies are tiny. Indeed, the entire 350 or so
publicly listed concerns in the biotechnology sector together make up
just $100 billion in market capitalization, he calculates. That compares
with the $145 billion market capitalization for pharmaceutical company
Pfizer alone.
To be safe, managers of biotechnology portfolios say they are thus
focusing on those larger biotechnology companies that are just two years
away from launching a product. "These companies are more appealing to us
than speculative companies" that haven't yet shown drugs work in humans,
says Franklin's Mr. von Emster.
At Fidelity Investments, James Harmon, manager of the Fidelity Select
Biotechnology Portfolio, agrees that investors would be "best suited by
investing in companies with strong data showing efficacy of drugs in
humans." He, too, goes by the criteria of investing only in
biotechnology companies that are just two years away from bringing their
products to market. Mr. Harmon, whose fund has 75 holdings, is a firm
believer in a diversified biotech fund because of the sector's
volatility. In contrast, Mr. von Emster's fund currently holds 30 "long"
positions and 10 "short."
What's an investor who is bent on getting into the biotechnology
sector to do at a time like this? Laura Lallos, a senior analyst at
Morningstar, suggests caution is key. Since the biotechnology sector is
so volatile, only a small amount of an investor's portfolio should be
allocated to a biotechnology fund, she suggests.
A health-care fund, which invests in biotechnology stocks and other
health-care-related sectors, such as pharmaceutical companies and
medical-device manufacturers, is an even better investment bet, Ms.
Lallos says. Because of their diversified holdings, these funds tend to
rely less on the performance of small biotechnology funds and spread
their risk through their holdings in larger pharmaceutical companies.
Copyright (c) 1998 Dow Jones & Company, Inc.
All Rights Reserved. |
