Contrarian Thoughts – Biotech Edition

When mutual fund sales people come to visit, they come with a bag full of presentations on their ‘hottest funds’. These include whatever funds have nice charts that go from the bottom left to the upper right, or whatever happens to be the hot topic of the day (unconstrained, short duration bond funds were quite popular over the past 6 months). This makes sense. Their job is to sell their funds, and they focus on whatever funds they think will capture our interest. As such, they are invariably thrown for a loop when I ask them to tell me about their worst fund.

I do this, because our job is to select investments that will make money, not those that already have, or have already seen a massive inflow of funds. And it is the under-owned, beaten down sectors that tend to have the greatest degree of out-performance when they finally manage to turn around.

One of the hottest sectors over the past couple of years has been biotech. From 2012 until last summer, biotechnology stocks experienced a sensational rally. Since then, however, their performance has been pretty grim. Here’s a chart of the popular iShares NASDAQ Biotechnology ETF:

ibb

Biotech is a field that I know very little about, but I have a high degree of certainty it will be one of the defining industries of the next 20 years and beyond. As such, I believe that a fund manager with a high degree of experience and investment acumen in the field of biotechnology should be able to outperform the index over the long term. In the short term, however, you can’t fight the tape. Sell-offs in hot sectors tend to be violent and all encompassing. And we have been waiting for a sell-off just like this.

Here is an excerpt from the February a comment from a highly rated biotech fund manager:

“As we’ve said previously, while many investors may be struggling to find reasons to be optimistic right now, the fundamentals of the global biotechnology sector should inspire confidence and enthusiasm. The reason is that a powerful technology and product cycle is underway and supplying exciting new medical solutions to the demands of healthcare systems around the world struggling to keep up with the profound secular demographic forces of ageing populations.”

Can biotech stocks keep falling? Of course. But the time to take a good, hard look at them is when they have sold off and are no longer attracting ‘hot money’, not when they are trading at their highs.