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Biotech&#39s testing time

The biotech sector has had a volatile year. Despite two relatively hefty corrections in March and November, biotech funds still top the unit trust performance tables, with Framlington Health and CF Bio-Tech placed first and second respectively in the Micro pal unit trust rankings.

For the 12 months to date, these are the only two funds to have produced triple-figure returns, with Fram lington Health showing an annual return of over 240 per cent on a number of occasions during the past six months. The latest Fram lington Health ad boasts that £1,000 invested in the fund 10 years ago would now be worth over £18,000.

But with the Isa season moving into full swing, there are mixed opinions on bio tech&#39s forthcoming fortunes. Although most remain positive about the long term, many IFAs are uncertain of the sector&#39s short-term pros pects.

The camps are divided bet ween those believing bio tech has taken a big enough knock already and those thinking there may be further instab ility over the next six months. The Nasdaq bio tech index is now around 1,100, some 30 per cent below its March peak.

Framlington portfolio liaison director Peter Hicks belie ves the sector is looking fair value and is optimistic about its long-term prospects.

He says: “We think it has taken quite a big knock in the past couple of months. Since the US presidential election,a lot of biotech stocks are down by 10 or 20 per cent.

“There have been two pretty sharp corrections in the past 12 months. The reason we had the first correction was that there was a lot of hype over the genome project. You had a lot of people running into biotech who did not really understand it – institutional as well as retail inves tors.

“The second correction was caused partly by the uncertainty of the presidential election. It also got caught up in the Nasdaq tech fall over the past two months. If we thought biotech was overvalu
ed in March, then we would have to say it was fair value now.”

The fortunes of the sector over the next six months are likely to depend heavily on investor sentiment. The end of tax year Isa rush is renow ned for investors&#39 tendency to pick a bandwagon sector.

Last year, technology was in favour for the first quarter, only to meet with a major crash in April. This year, IFAs are worried that biotech may suffer a similar fate to technology, media and tele comms (TMT) last year.

The direct investment market has a tendency to look for the strongest performers over the past 12 months to make this year&#39s selection. Biotech is clearly a prime target to be this year&#39s bandwagon sector.

Bates Investment senior analyst James Dalby does not believe biotech is set to suffer the same fortunes as technology. He says: “I do not think the bottom is going to fall out of biotech like it did with TMT last April. The biggest problem is that people are trying to chase its very high performance.

“Take Framlington Hea lth, for example. It has posted some great short-term numbers but you have got to put the brakes on people&#39s future short-term expectations.

“There is still scope for further falls. Now the American election fiasco is out of the way, we might see the Nasdaq settle down and then see some good progress.”

Dalby warns that although biotech should be part of portfolios, investors should not get carried away with it. He continues: “It is all about not overweighting it. At the moment, it should make up part of a portfolio but we would not be putting any more than 5 per cent in it really. Just because it has had a really str ong run does not mean it is going to continue in the same vein.”

The biotech sector has always carried more risk than most others. The fortunes of individual stocks rely heavily on new developments with drugs being developed and receiving Government app roval. Its fortunes are also intertwined with those of tech nology and the Nasdaq index.

Hargreaves Lansdown head of research Mark Dampier says: “Biotech is usually the last thing to go up and then the last to fall. I still think it has got a bit of a way to fall from here. Trusts such as Fram lington Health may be up several hundred per cent over the past year but you are not likely to see that again. I certainly would not want to put a lot of money into it in the short term.

“If I have ever seen the sign of a fund peaking, it is when they send you a board game for Christmas, like I received from Framlington Health last week. It is a definite sell signal.”

But, like most IFAs, Dam pier is confident about the sector&#39s long-term performance. The developments of the gen ome project and increased funding for medical science will ensure the sector continues to thrive.

Michael Philips partner Michael Both recalls a recent healthcare fund ad which sums up the sector&#39s fortunes. He says: “The ad said no one&#39s able to cheat death but they will certainly spend a lot of money trying. I certainly wou ld not write the sector off for the long-run.”

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