Recently, investors have begun to move away from sectors which offered higher dividends at lower risk towards companies. Funds are now being allocated to areas which offer growth at the cost of higher risk. This essentially signifies a move from sectors such as utilities and real estate to the likes of consumer discretionary financials and biotechnology stocks
Several IPO launches
The flurry of biotech IPOs witnessed recently is the clearest indication that the sector is back in favour. This year witnessed more than 30 new biotech IPOs, the highest number since 2000. In fact this is the second best year in terms of IPOs, if one considers the number of offerings.
Clearly, these new launches are a result of young companies, which started of in the 2010-2012 period doing rather well. Stocks like Clovis Oncology, Inc. (CLVS), Tesaro, Inc. (TSRO) and Aegerion Pharmaceuticals, Inc. (AEGR) have gained 300% to 500% since they were launched. Aside from the occasional disappointment such as Pacific Biosciences of California, Inc. (PACB), this proves that the large number of IPOs is a good indicator of the sectors resurgence.
For a greater part of the last decade, many mutual funds had studiously avoided biotech stocks after the genomics bubble burst. The risk-return trade-off in the case of biotechnology companies was considered too high for them become solid investments.
Again, post 2010, the scenario has changed rapidly. The Nasdaq Biotech Index has outperformed other segments in a most conclusive fashion. The margin is close to 10,000 basis points or 100%.
This means that general funds, investing across sectors, who have assigned lower weightages to their biotech holdings, have underperformed those with overweight positions. Sector specific funds, focussing solely on biotech, have performed even better.
The Long Term Case
Over the past fifty years, life expectancy figures have steadily increased across the world. This is primarily attributable to better access to healthcare. This trend is expected to continue and life expectancy will only increase.
As a result, the demand for healthcare will increase, particularly treatments for diseases related to advancing age such as cancer and Alzheimer’s disease. At the same time, income levels continue to rise and there is no reason why such treatments cannot command premium pricing.
Mutual Fund Picks
ProFunds Biotechnology UltraSector (BIPSX)
Launched in June 2000, this fund has net assets in excess of $354 million. The fund seeks to deliver daily performance which is 150% of the Dow Jones U.S. Biotechnology Index. It is non-diversified and has a year-to date-return of 68.48%
The mutual fund holds 30 securities in all. Its top 10 holdings make up nearly 55% of its assets, making it fairly concentrated. Its top 3 holdings are Amgen Inc. (AMGN), Gilead Sciences Inc. (GILD), and AbbVie Inc. (ABBV). The fund has returned 80.75% over the last one year and has a Zacks Rank #1(Strong Buy).
Franklin Biotechnology Discovery A (FBDIX)
This is a fund with a minimum initial investment requirement of $1,000 and was launched in September 1997. This fund focusses on investing in biotechnology companies and drug discovery companies. The fund focusses on acquiring common stock and has a year-to date-return of 48.07%
This fund holds a total of 82 securities. Its top 10 holdings account for more than 46% of its assets. Its top three assets are Gilead Sciences Inc., Celgene Corporation (CELG) and Biogen Idec Inc. (BIIB). The fund returned 45.83% over the last one year and has a Zacks Rank #1(Strong Buy).
Fidelity Select Biotechnology (FBIOX)
This is the oldest of the funds, launched in December 1985 and has a minimum initial requirement of $2,500. The fund invests focusses on investing in common stock of biotechnology companies. It may purchase both domestic and common stocks and has a year-to date-return of 46.59%.
The fund is more diversified compared to our other choices and has a total of 158 assets. It is most heavily invested in Gilead Sciences Inc., which makes up 14.48% of its assets. The next two, Amgen Inc. and Celgene Corporation, together make up 18.83% of its assets. The fund returned 50.47% over the last one year and has a Zacks Rank #1(Strong Buy).
As markets move from risk-averse sectors and seek out growth in emerging segments, the biotech sector has emerged as a significant gainer. Its prospects over the long term are also exceedingly bright and these funds would make excellent additions to your portfolio.
Read the analyst report on BIPSXRead the analyst report on FBDIXRead the analyst report on FBIOX
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