Potential of Biotech Funds Intrigues Analysts

It’s been a long time between celebrations for investors in biotechnology mutual funds.

For 2 1/2 years these specialized funds, and the stocks in which they invest, have been mired in a severe bear market. After losing ground in 1992 and staging only a weak rally in ‘93, biotech funds have been tumbling again lately. In the first half of 1994 they fell 8.74%, according to Lipper Analytical Services Inc.

At the end of 1992, the Fidelity Select Biotechnology Fund, one of the biggest entries in this field, had assets of $680 million. By this spring it had shrunk to $481 million, at a time when most funds were enjoying rapid growth.

At the Putnam Health Sciences Trust, a fund with broader health care holdings, assets of its Class A shares fell from $970 million to $691 million.

In recent weeks another fund, Oppenheimer Global Bio-Tech, said it was seeking shareholders’ approval to convert to a global emerging growth format.

All this represents a big comedown for an industry that was once the darling of Wall Street. From 1988 through 1991, biotech funds racked up four straight years of double-digit gains.

That trend was ended by the push for health care reform. Investors’ visions of unlimited potential for a whole new class of medicines and other scientific breakthroughs gave way to fears of a hostile political climate.

“The health care industry remains highly volatile,” says the Value Line Mutual Fund Survey. “Political uncertainty and investor fears have made this a difficult industry to forecast.”

But after so long a stretch of retrenchment, several contrary-minded analysts have lately grown intrigued with biotech’s potential once again.

“Here’s one sector that has flown too close to the sun, but has already had its comeuppance,” says James Grant, editor of the biweekly commentary Grant’s Interest Rate Observer, and a vocal bear on most stock and bond investments.

Says the current issue of his letter: “Grant’s, although it knows nothing about science, does know a market cycle when it sees one. Biotech has the look and feel of opportunity.”

In its earlier heyday, biotech’s fans were investing in little more than distant hopes among companies that were years away from profitability and in many cases didn’t even have products on the market yet.

Today the biotech business “is still far from mature, but it is producing genuine business and investment winners,” says Norman Fosback, editor of the Market Logic advisory in Fort Lauderdale, Fla. “Technological progress continues at a breathtaking pace.

“From an investment standpoint, our thesis is that biotechnology is the energy source for tomorrow’s health care industry, just as oil fueled the industrial age.”

If ever an investment proposition seemed suited to mutual funds, this would seem to be it. For one thing, studying biotech companies requires an expertise most individual investors can’t hope to muster.

For another, the failure rate of individual enterprises in this frontier setting is bound to be high. So a diversified portfolio, selected by specialized professionals, looks like the obvious way to go.

Even in a fund, though, big risks persist. After all, a bear market that lasts 30 months has already shown its powers of endurance and its eagerness to prey on “bargain hunters.”

Anybody who buys now should be willing to wait a while longer, and perhaps to ride a bit lower, before expecting any sort of payoff.

In addition, nobody yet knows what health care legislation will be passed this year, or in years to come, or how biotechnology will fit into the government policies and financial systems for health care that emerge from the present debate.

Still, analysts say hazards like those could prove to be worth braving. Declared Fosback, “The industry as a whole will provide rich rewards to investors well into the next century.”