"Flight" to Biotech Fund ...
12/24/2004 12:00 am EST
An 8-hour flight from Zurich turned out to be an unexpected learning experience for Eric Roseman, who notes, "Sitting next to a leading European biotech fund manager made this one of the most rewarding flights I’ve taken in a long time."
"The gentleman was a co-manager for the highly-rated Pictet Biotechnology Fund in Luxembourg. The fund has smashed its benchmark index since 1996 with explosive returns. What did I learn? Biotechnology stocks will continue to be one of the fastest growing segments of the stock market in the 2000s, while the broader market languishes. The biotech stocks should continue to grow earnings at about 20% to 25% in 2005 as new discoveries for cancer treatment and other illnesses power earnings. Though certainly a hugely volatile sector, biotechnology stocks can augment portfolio returns.
"Biotechnology stocks offer far greater lucrative returns compared to large-cap healthcare stocks. That’s because biotech stocks are at the forefront of exciting ‘make or break’ medical discoveries while the majority of healthcare stocks are essentially growing their earnings from maturing products. The race to discover new drugs in the never-ending battle to cure cancer remains the drug industry’s biggest challenge. I truly believe that over the next 5 to 10 years, leading biotech firms will develop new drugs to treat cancer patients with less pain, and eventually, help eradicate this deadly disease altogether.
"The problems with investing in biotechnology is the acute volatility associated with breakthrough medical discoveries and of course, disappointments. In some years, an investor will earn a small fortune and in other years, will lose a good chunk of capital. That’s the nature of the beat for this sector. When biotech stocks head south, they don’t just decline – they can crash. By the same token, a good year for this sector can easily result in calendar year profits in excess of 75% and in some cases, even 100% or more as was the case recently in 2003, 2000, and 1999. However, if the investor is patient and holds the right position size in their portfolio to withstand occasional bouts of downside volatility, then the long-term benefits can be extremely profitable. That’s why it’s absolutely essential to diversify your portfolio with a proven money manager in this area, and to limit your exposure.
"For US investors, the PIMCO RCM Biotechnology Fund C (RCBTX) has earned 197% since Dec. 30, 1997. That’s a pretty impressive rate of return. The volatility of this fund is consistent with the index – and it’s pretty dizzy. The fund is up 11.5% in 2004, versus a flat NASDAQ Biotech Index. The fund’s best year was in 1999, when it earned a spectacular 111%, followed by another 82% in 2000. But then a major drawdown hit the fund, resulting in a crippling 65% loss in 2001 and 2002. In 2003, the fund gained 39.9%.
"We note that the fund levies a 2.35% annualized total expense ratio. The class A shares, though charging 1.55% in annual fees, levies a hefty 5.5% up-front sales load. The class C shares allow the investor to put 100% of their investment to work at net asset value. Please note that PIMCO also charges a 2% redemption fee on assets sold less than sixty days following the initial purchase and a 1% contingent deferred sales charge, which is waved to 0% after eighteen months. If you hold on to this investment for more than 18 months, you won’t have to pay an deferred load charged. We suggest that no more than 5% of one’s assets be invested in this area. With this allocation, an investor can participate in the long term discoveries associated with exciting biotechnology and healthcare companies over this decade."