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Blip in the biotech story

Schroder is kicking off the second Isa season by launching a global

healthcare fund and analysts believe its timing could not be better.

The healthcare sector has been driven by biotech stocks and valuations

have soared. But the jitters in technology stocks have caused biotechs to

plunge and analysts expect this could open up a buying opportunity.

Framlington sales & marketing director Craig Walton says: “The biotech

story has got way ahead of itself. Tech funds and smaller companies funds

have been piling into them because they think they are like internet

plays.”

But people are living longer and healthcare provision is moving into the

hands of private sector, which should boost the healthcare market over the

long term.

Schroder is aiming to capitalise on companies making new advances in the

field of medicine and takeover activity in pharmaceutical stocks with the

launch of its Medical Discovery fund.

Its move is not surprising given the performance of the only two

healthcare-related unit trusts on the market, the Framlington health and CF

biotech funds.

The Framlington fund has seen its most dramatic growth during the last few

months, with its price per unit rocketing to a recent high of 760p from

270p last October. But the recent tail-off has seen the price fall to 581p.

The main driver of Framlington&#39s outperformance has been the surge in

biotech stocks. These accounted for 53 per cent of the fund until last

month but the weighting has reduced to 45 per cent.

The rest of the portfolio is split evenly between drugs and drug delivery,

medical devices and medical services.

The CF fund is the fourth-best-performing unit trust over the year with a

return of 171 per cent. But while the performance of the two funds is

enough to woo any would-be investor, analysts warn that the sector is

volatile, particularly in the biotech area.

A classic example of the sector&#39s volatile nature is biotech company

Cambridge Antibody. Its share price has been as low as 165p in the last

year but it has also hit a high of £52.50. It now stands at £22.37.

Hargreaves Lansdown head of research Mark Dampier tipped the Framlington

fund at the beginning of the year and he also favoured Rothschild&#39s

international biotechnology investment trust.

But he called the market correctly and sold all his holdings a few weeks

ago. He says: “Framlington&#39s fund was up by 130 per cent at one stage since

I bought it last November.

“But it is an extremely volatile and specialist area. I do not think the

sector is ready to be a core holding in a portfolio and should only be

about 2 per cent. The correction could open up a buying opportunity later

in the summer.”

Schroder insists its fund is not a biotech fund and says it will cover a

broader remit of medical companies.

Client services director Robin Stoakley says: “The Medical Discovery fund

is not a biotech fund but will encompass a broader spectrum of medical

companies. It will look at pharmaceuticals, medical technology, medical

supply, biotechs and healthcare.”

Stoakley says it is vital that medical companies are able to deliver new

products. A company may have developed successful drugs but it needs to

have new products in the pipeline for when patents expire.

For example, Astra Zeneca is expected to generate $6bn in sales this year

but its valuation has been hit by the imminent patent expiry of its

anti-ulcer drug Losec. But Schroder believes its shares could be given an

uplift because it has an improved version of Losec up its sleeve as well as

a stable of new drugs to treat cancer and high cholesterol.

Schroder has added a twist to its offering. The Medical Discovery fund has

linked up with Cancer Research and half of any retained initial charge

together with a percentage of the annual charge will be paid to the

charity.

But the fund manager insists this is not a marketing gimmick and says it

was contacted by the charity. “Cancer Research approached us but it is a

very sound investment story in its own right,” says Stoakley.

Despite the recent volatility, analysts are optimistic for the long-term

biotech story, not least because of the breakthrough made by the Human

Genome Project.

The project has found a way to identify and classify every form of human

DNA. It should help scientists identify which genes cause cancer and other

diseases which are effectively untreatable at the moment.

Framlington holds top US firms such as Medarex, Alexion Pharmaceuticals

and CV Therapeutics in its fund because they are directly involved in

genomics.

The Schroder launch may lead to speculation that a flood of similar funds

will be brought to the market by fund managers worried they are missing the

boat. But many are not convinced that the bandwagon will become overloaded.

Walton says: “We launched our fund in April 1987 and have had the game

pretty much to ourselves. I do not see that changing either. It is a very

specialist field and there are not many experts out there who will be able

to manage such funds.”

The view is shared by Dampier, who says: “It is a very specialist area and

someone like Antony Milford who runs the Framlington fund is an expert in

the field.”

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