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Gene geniuses give new twist to biotech story

The mapping of the human genome may have given the biotechnology industry

the impetus to become the next top-performing fund sector.

Given the strong performances over the last quarter, biotechnology and

health are being recommended by some as the next areas to watch.

Developments of the magnitude of the human genome project have the ability

to affect the performance of funds dramatically although opinionis divided

as to how soon.

But imagine the value of the company that discovers a cure for cancer or

Aids. The chance of these kind of events happening makes biotech and health

funds particularly attractive.

Rothschild Asset Management assistant director Robert Burdett refers to

the sector as being very “news-flow driven”. Biotech relies on major

discoveries to advance profitability more than any other area except,

perhaps, technology, media and telecoms stocks.

Burdett says: “It has had very positive news flow in general terms since

the beginning of the year. The human genome project has certainly helped in

that aspect.”

Yet high risk and volatility mean that investment IFAs are not convinced

to recommend biotech funds.

Chase de Vere investment adviser Justin Modray says: “It is an area IFAs

rarely use because of volatility. For those who have a well-balanced,

spread-out portfolio, it has good long-term growth. But for the average

client, I would likely tell them to stay away.”

A consistent sector leader is the Framlington health fund. According to

the most recent Lipper UK unit trust quarterly survey, the fund led the

entire market in the second quarter of this year with a return of 30.5 per


To put these results in context, the second strongest performer was City

Financial BioTech which returned 21.7 per cent. The only two tech funds

that had positive returns were the Henderson global technology fund and the

Artemis new enterprises fund at 1 per cent and 5.6 per cent respectively.

Framlington internatio-nal marketing director Peter Hicks puts the health

fund&#39s success down to two factors. First, he cites the experience of fund

manager Antony Milford, who has been at the reins since 1989.

Second is the strategy of investing broadly across the health sector,

especially in small and mid-cap companies, while most competitors

concentrate on the major pharmaceutical companies.

Fifty per cent of the fund is invested in biotech companies and the

remainder in firms providing medical services and devices. When the market

correction occurred earlier this year, the biotech side of the fund lost

half its value but the stability of the other holdings helped minimise the


Biotech is still a relatively small sector with few players. In the UK

there are only four mainstream investment funds – Framlington health, the

newly created Schroder health fund, City Financial BioTech and the

International BioTech investment trust.

The tale of the biotech sector is an interesting one. Four to five years

ago, it was one of the most sought after areas of investment. But from May

1997 to October 1999, the market was virtually dead. Share and fund prices

were stagnant.

Then, in the view of one analyst, prices “started to go ballistic”. Even

though the shares had not moved, the companies had been growing and

developing new product lines.

Hicks estimates that some stocks grew by 250 to 300 per cent in the period

up until March this year. Even at the height of the tech boom, investors

would have been hard pressed to receive returns of that magnitude.

Hargreaves Lansdown investment manager Ben Yearsley says: “Biotech made a

tremendous start to this year. Until mid-March, it was top of the tables

but then the wheels fell off.”

But when the correction began in March, biotech was hit almost as hard as

TMT. In the US, biotech shares plummeted by nearly 65 per cent on average

although UK pri-ces did not fall to that extent.

It is this uncertainty that makes advisers wary to recommend biotech and

health funds. The message is clearly that those looking for short-term

gains risk being burnt. For investors looking to diversify, though, it is

an area offering huge potential but they should only buy into the sector

with the full awareness that they may get stung.

Modray acknowledges the potential growth in the sector but is cautious

about recommending the sector because of the volatility.

He says: “People pour their money into biotech funds going for the

short-term gain and then they get burnt. It is a high-risk sector. People

should be aware of this and look towards long-term growth.”

At the end of the day, it is an area that promises a good ride. But its

volatility means it is unlikely it will ever grab the attentions of most


Chamberlain de Broe technical director Mark Bolland says: “Biotech funds

are not for widows and orphans, much like the tech funds. They have to be

bought speculatively with the realisation that they are not going to make a

profit for years down the road.”


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