Biotech Balance

Mutual fund diversification lets investors temper biotech's risk

There is a peculiar split down the middle of the health sciences industry. On one side, there are stalwart pharmaceutical companies, such as Merck and Pfizer, which put out blockbuster medications and earn billions of dollars a year. On the other side are upstart biotechnology outfits that are discovering new treatments on the frontier of medicine. Their stocks can be big winners or equally large disappointments.

Morningstar reports that funds that focus only on the biotech sector, such as Fidelity Advisor Biotech (FBTAX) or Alliance Bernstein SIS Biotech (ASBAX), were up between 20% and 50% in the first half of 2003. The flip side: Those same funds were down more than 20% in 2001 and 40% in 2002.

Some mutual funds can put together a portfolio that combines the pop of the biotech industry with the stability of the pharmaceutical industry, but it can be tricky. The three-year average annual return for the Fidelity Select Biotechnology fund (FBIOX), which has a 76% stake in biotech stocks, was rather rocky — 18.26% at the end of June, despite a healthy jump in early 2003. A more staid fund, the T. Rowe Price Health Sciences (PRHSX) portfolio, may put just 38% of its assets in biotech stocks, but it provides investors a smoother ride. The fund’s three-year average annual total return was 0.26% as of the end of June.

“It’s been a great year for biotech, but investors have to remember just how volatile the sector is,” says Christopher Davis, a fund analyst with Morningstar. “The numbers are impressive now, but some of the companies in the group lost 50% or 60% of their value a couple of years ago.” That said, we approached Morningstar to screen its database for health sciences funds with just under 50% of their assets in biotech stocks. Those funds were then ranked by three-year average annual total return as a way to measure their portfolio managers’ work over the long-term.

Evergreen Health Care (EHCBX) came out on top with a 26% weighting in biotech. Under the guidance of portfolio manager Liu-Er Chen, the fund logged a 5% total return over the three-year period ending June 30, and tallied a 28% gain in the first six months of 2003. Among Chen’s largest holdings were biotech companies Amgen and Genentech, counterbalanced by pharmaceutical mainstays Pfizer, Johnson & Johnson, and Merck.

Morningstar’s Davis says T. Rowe Price Health Sciences has also maintained a solid record of mixing investments in big drug manufacturers with doses of biotech. Portfolio manager Kris Jenner enjoyed a 23.6% gain year-to-date as of the end of June, thanks in part to biotech companies such as Amgen.

Top Domestic Biotech Funds

Fund Name (Ticker) 1-Year Return* 3-Year Return* Phone Number Minimum Investment
Evergreen Health Care B (EHCBX) 19.77% 6.75% 800-343-2898 $1,000
T. Rowe Price Health Sciences (PRHSX) 14.65 -0.21 800-638-5660 2,500
Eaton Vance Worldwide Health Sci A (ETHSX) 14.32 -1.12 800-225-6265 500
Morgan Stanley Health Sciences B (HCRBX) 8.39 -1.16 800-869-3863 1,000
Kinetics Medical Fund (MEDRX) 13.39 -6.65 800-930-3828 2,500
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