It has been a difficult few years for funds specializing in biotech stocks, and investors are pulling money from the sector fast.
More than $11 billion has flowed out of health-care/biotechnology funds so far this year, according to Lipper data from Refinitiv. That is worse than 2018, when just $430 million had flowed out by the end of September, and the year before, when $3.5 billion left.
The fund flight comes as valuations of sector stalwarts decline. In August 2017, Regeneron Pharmaceuticals (REGN) was trading at 30 times projected earnings; it is now valued at just 11 times projected earnings. Biotech giants like Alexion Pharmaceuticals (ALXN), Celgene (CELG), and Biogen (BIIB) have had similar drops.
Indeed, large-cap names across the sector have stumbled, as they struggle with aging patents and the lightning-in-a-bottle challenge of replicating the scientific breakthroughs that built the companies.
For investors betting on a biotech turnaround, pure-play mutual funds and exchange-traded funds offer less risk than picking individual stocks.
iShares Nasdaq Biotechnology (IBB)
The IBB, which functions as a Wall Street benchmark for the sector, is an ETF that holds shares of about 220 biotech companies listed on the Nasdaq market. Its makeup is weighted toward large-cap biotech companies, which helps explain why it has lost 14.9% of net asset value over the past 12 months, 11.8 percentage points worse than the S&P 1500 Health Care sector index. Long-term performance isn’t much better: IBB has returned 1.1% of annualized net value over the past three years, trailing the S&P 1500 health-care sector index by 8.5 percentage points.
Fidelity Select Biotechnology Portfolio (FBIOX)
This fund, with large positions in AbbVie (ABBV) and Amgen (AMGN), holds 228 largely biotech stocks. Like IBB, it is relatively heavily weighted toward large-cap companies, with 25% of its holdings in AbbVie, Amgen, Gilead Sciences (GILD), and Alexion as of the end of July. It had a total return of negative 13.6% over the past 12 months, though it has done better this year, with a year-to-date total return of 11%. Its historical performance is a bit lackluster, with a total return of 3.8% over the past three years.
Franklin Biotechnology Discovery (FBDIX)
This fund’s large holdings include Alexion, Gilead, and Amgen. The fund has returned 11.1% so far this year, the best of the bunch, though it still had a total return of negative 12.7% over the past 12 months. Its portfolio of 71 equity holdings includes clinical-stage companies, like Crispr Therapeutics (CRSP) and Trevi Therapeutics (TRVI), in addition to large biotech names.
If those choices appear too risky, there is another option: mutual funds that invest in biotech but also own other health-care stocks:
T. Rowe Price Health Sciences (PRHSX)
This fund, managed by Biotech Roundtable participant Ziad Bakri, owns biotech stocks along with stocks from pharmaceutical, medical-device, and other health-care subsectors. Bakri told Barron’s this summer that he was bullish on biotech: ”There is so much innovation going on right now in health care, and especially in biotech and drug development—things that we once thought were science fiction.”
The fund has a total return of negative 6% over the past year, but has returned 10.2% over the past three years, beating the S&P 1500 Health Care sector index, the IBB, FBDIX, and FBIOX.
Vanguard Health Care (VGHCX)
Vanguard’s health-care fund, which has a Gold rating from Morningstar, also has significant exposure to biotech, with Vertex Pharmaceuticals (VRTX) and Alnylam Pharmaceuticals (ALNY) among its larger holdings. This fund has returned 5.8% over the past three years, and the same so far this year. Its performance over the past 12 months has been rocky, with a total return of negative 5.1%.
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