Biotech mutual funds: A safe way to beat the market?
Today's Financial News - Posted February 19, 2009
The biotech sector is hot. Many investors want to get in on the action but are too timid to make the plunge. A strong biotech mutual fund is exactly what they need.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): I have mixed feelings about mutual funds. On one hand, they are expensive, bland and often do not live up to their stated goals. But on the other hand, they offer the average investor a safer way to play an industry or sector without the risk of investing in a single stock.
If you do not mind paying somebody you never met to make investments that will rarely come close to beating the Street, mutual funds are a good choice. While it may not sound appealing, there are plenty of times when lagging the S&P 500 is appropriate.
For example, any properly diversified portfolio will contain a rich array of investments. Combined, their goal is to beat the long-accepted average return of about 8% annually. Some of the investments are ultra-conservative. Others are more aggressive.
Many times there is room for an ultra-aggressive investment or two in a strong portfolio. They should not be looked at as long-term assets, but more like short-term gambles. If they pay off, expect double- or triple-digit gains. If they do not, which is often the better bet, they will take a small knick out of the overall portfolio’s performance. But they will not destroy it.
If speculative plays fall behind the averages, it’s okay. The portfolio’s diversification will pick up the slack.
Always a good question
The reason I mention the subject is because a reader recently asked me to take a look at some biotech mutual funds. While I would never recommend such a topsy-turvy industry play a significant role in an investor’s retirement fund, risky investments absolutely have their place in the average portfolio.
The biotech sector offers plenty of interesting mutual funds, but one of my favorites is Fidelity’s Select Biotechnology (FBIOX) fund. It is managed by Rajiv Kaul and invests in large biotechs like Amgen (NASDAQ:AMGN), Genentech (NYSE:DNA) and Gilead Sciences (NASDAQ:GILD).
There are three reasons I like this mutual fund over its competitors like Rydex’s Biotechnology Inv (RYOIX) and Quaker’s Biotech Pharma-Healthcare (QBPAX) fund.
First, Fidelity’s fund is cheaper. With a total expense ratio of just 0.89%, versus the sector average of 1.68%, the fund is dramatically cheaper. If the funds are virtually investing in the same set of companies, it is irresponsible not to invest in the cheapest fund available.
Another positive aspect of Fidelity’s fund is it invests in slightly larger companies. Instead on focusing on smaller, mid-cap biotechs, Fidelity goes after the big guys. If I were picking individual investments out of the sector, this would not be my technique, but when putting them together, bigger is better.
When working with biotech small- and mid-caps, you had better do your homework. Until they grow mature product pipelines, the losers greatly outnumber the winners.
Finally, I like Fidelity’s risk figures. With sector-beating alpha and beta figures (5.74 and .71, respectively), the fund is quite attractive. In fact, over the last year, it has managed to solidly beat the standard benchmark, the S&P 500, just look at the chart.
If you read my columns with any regularity, you know I am a trader at heart. So it is tough for me to stand behind a mutual fund. But the investments have their place. As long as they have an appropriately weighted spot in your portfolio and you do not expect to get rich from them, they are good investments.
If you are too timid to place a few individual biotech bets, a good, inexpensive mutual fund may be for you.
Next Article: Don’t trust the Dow. It’s a liar
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October 15th, 2009 at 9:25 am
Great post – Thanks