Is the Rally Over for Biotech Funds?

After five years of considerable returns, biotech stocks gains have been halted by the stock market turmoil. We take a look at the stats

Karen Kwok 21 January, 2016 | 1:02PM
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Turmoil has returned to global stock markets, and investors are struggling to see a way through the market volatility. The pessimist predict that the rest of 2016 will be just as rocky as these first few weeks; but is the reality as grim as all that?

“Markets are still struggling with falling earnings and deteriorating conditions in credit markets, although there was at least some stabilization in China's currency,” said Russ Koesterich, BlackRock’s Global Chief Investment Strategist.

“But the losses were widespread — and brutal. U.S. small caps have now entered a bear market; biotech, a popular momentum trade, is down more than 30% from last summer's high; and stocks in China have suffered a mini bear market, down 20% in just two weeks.

Steady Growth in Biotechnology Halted

As well as Chinese equities, one sector which has been badly hit year to date is biotech. MSCI World Biotechnology has lost 9% but has made impressive average gains over the last five years of 31% a year. Similarly MSCI World Health Care dropped 4% year to date but its three year annualised return was 19%. The five year annualised return was 18%. Funds of biotechnology stocks appear to be positive over a long term view as well, but have suffered year to date.

Candriam Equities L Biotechnology is Bronze rated by Morningstar analyst. It also has a four stars rating, which indicates impressive long term performance – with 28% annualised returns over three years and a 25% annualised returns over five years. But the fund has lost 15% year to date

Pictet-Biotech also has attractiver long-term results, particularly in weaker market phrases, Morningstar analysts say. The fund has managed a 21% three year annualised return, and a 17% annualised five year return, but has dropped 14% year to date.

The focus of the fund lies on biotechnology companies that are about to license new pharmaceutical products or are in the early stages of marketing new products. Although small companies are riskier, they also offer a higher price potential than established companies, Morningstar analyst Barbara Claus says. The fund manager also looks for companies with solid finances and good corporate management. Each stock in the fund is assigned a price target, and the manager does not shy away from taking profit when this price is reached. The fund is a neutral rated fund with one star rating, which is considered as overvalued.

AXA Framlington Biotech fund is a three star performance rating. It has dropped 14% year to date, but has gained over both a three and five year term, with average annual gains of 28% and 25% respectively. The fund seeks to provide long-term capital appreciation by investing principally in equity securities of companies in the biotechnology, genomic and medical research industries worldwide, Morningstar analysts say.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
AXA Framlington Biotech R Acc260.40 GBP-0.34Rating
Candriam Eqs L Biotech C USD Cap835.54 USD-0.35Rating
Pictet-Biotech R USD752.50 USD-0.55Rating

About Author

Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk

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