More MS news articles for February 2001

Cure for the common portfolio

Monday, February 26, 2001

Whoever discovers a cure for cancer or Alzheimerís disease will become an instant gazillionaire. Bet youíd like to have a piece of that.

Hoping to capitalize on every investorís ultimate dream, mutual fund companies are scrambling to come up with ways to strike both a financial and a social chord with investors.

Thus the surge of highly specialized biotech mutual funds that not only invest in health care and pharmaceutical companies, but also focus strictly on companies involved in futuristic medical research, ranging from the search for a cure for cancer and treatment of attention deficit disorder to the prevention of various birth defects.

The funds are catching more investor interest, and companies are responding with more choices: In roughly the last year, the number of biotech mutual funds has doubled. At the same time, their focus is getting narrower and narrower - giving investors an opportunity to feel like theyíre supporting a specific cause, but also making the funds more risky in an already precarious sector.

Not unexpected The explosion in the last year is no surprise given the recent performance of biotech funds: the four veteran biotech funds posted returns averaging 77 percent in 1999, well above the 19.6 percent return for health funds overall and the 21 percent increase in the S&P 500 in 1999.

In the broader health-care category, of which biotech is a subsector, investors pumped in more than $14 billion last year. Much of that investment arguably stemmed from the success of health funds last year, which posted an average 55 percent return. The S&P 500, by comparison, dropped 9 percent.

While there arenít figures detailing how much investors socked into biotech last year - itís not yet regarded as its own category - the 11 funds that are most clearly biotech have net assets of more than $3 billion. About $350 million of that is in the five newest funds.

Emily Hall, a health and biotech stock analyst for the investment research company Morningstar Inc. of Chicago, said the biotech bonanza is similar to past rushes toward Internet and wireless technology investments.

"Youíll often see a surge in companies trying to capitalize on this," she said. "There definitely has been a spurt."

Peter Di Teresa, biotech and health fund senior editorial analyst with Morningstar, said five new biotech-focused funds were launched in 2000, taking the number of fairly pure biotech mutual funds to 10.

And that doesnít include other new investment options such as iShares Nasdaq Biotechnology, a fund whose shares trade like stock. It was launched three weeks ago.

Only one before 1997 Before 1997, the only biotech fund was Fidelity Select Biotech (FBIOX).

"Research into things like cancer and diabetes and gene therapy is huge now," Di Teresa said.

Among the most intriguing new funds is Kinetics Medical Fund (MEDRX), which is touted as the only fund focusing primarily on companies researching a cure for cancer.

Portfolio manager Paul Abel of Kinetics Asset Management in New York said the fund is a way for investors to get in on a cure for cancer. "There is so much interesting research and development going on right now," he said.

The fund posted a 57 percent return last year, its first full year, and now has $60 million in assets.

Abel acknowledged that the fund, started in October 1999, is potentially riskier than the average high-caffeine biotech fund. But he noted that all major research labs and universities are involved in cancer studies. "By choosing to focus on cancer, we felt we were capturing the best of the best of the pharmaceuticals."

Kinetics Medical Fund is split evenly among large-cap pharmaceuticals, profitable biotech companies and "unprofitable but promising" biotech companies.

Another new biotech entry is (GENEX), which focuses largely on the study of human genes. Genomics is all the rage because of the public/private Human Genome Project to map out human DNA and find the true origins of devastating diseases. Just last month, the U.S. Department of Energy announced an alliance to dig into humansí genetic makeup. Part of the project involves building a powerful computer to sort through the genome sequence to find out where each gene is located and what each one does.

Another company, the Monument Genomics Fund, announced its own effort in November. Maryland-based Monument boasts that its fund manager has the unusual combination of both a doctorate in genetics and a masterís in business administration.

Monument was preceded last year by Amerindo Health & Biotechnology (DNAAX), which launched in May, and American Century Life Sciences (ALSIX) and SunAmerica Biotech/Health (SBHAX), both in June.

"Yes, itís growing and itís growing fast," Hall said.

The surge in biotech even caused the Monterey Murphy New World (MNWBX) fund to switch in 1997 from casinos and leisure investments to medical research.

Other mutual fund companies push efforts to find cures for diabetes and multiple sclerosis, treat obesity, and develop drugs for illnesses like autism, depression and anxiety.

The excitement of that research and the potential financial returns are what drove Frank Semancik of Bay Village to the Franklin Biotechnology Discovery Fund (FBDIX), which had a 98 percent return in 1999.

"I was looking for an area to invest in that was burgeoning," said Semancik, who invested in the Franklin fund early last year. "Overall it should be a strong performer because everybody, at one time or another, is going to get sick and is going to need some drugs. Itís always going to be important to have that kind of research."

Semancik said he wanted in before the fund closed, which it did last year. Heís invested nearly $10,000 in the fund to date.

While he enjoyed a 47 percent return last year, heís been jolted by the fundís 14 percent decline in the first seven weeks of 2001.

The pre-eminent biotech funds are all down for the year, with declines ranging from 6 percent to 19 percent. Health funds overall are down about 7 percent for the year. The S&P is up about 3.6 percent.

The typical biotech firm will spend five to 15 years and up to $1 billion to get a product to market. And thatís if it works and the U.S. Food and Drug Administration approves it.

But with the vaccines, treatments and immunizations that have come in our lifetimes, itís not hard to imagine cures for cancer and paralysis in the not-too-distant future.

Many companies these funds invest in, however, will close or run out of money before they get to the finish line. Because of this and the extreme uncertainty of medical research, Di Teresa and Hall both recommend limiting biotech investments to 5 percent of your portfolio.

"The long-term prospects of making money look good, but a lot of these funds can be a really wild ride," Di Teresa said. "They do have products going to market. Itís just a matter of when."


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