Investing

How biotech funds made investors wealthy

It’s not often that investors get a second bite at an investment cherry. But two forces are lining up very nicely for a re-run of the spectacular returns local investors have made by investing in the booming biotechnology industry, an industry mostly centered in the US.

There is no domestic equivalent of a biotech-industry so if you want to join this somewhat volatile but very rewarding investment roller-coaster, you have no choice but to invest in either a biotech ETF or one of the FSB-approved biotech funds available to local investors.*

The two factors which are contributing to this exciting new window-period opening up for new and existing investors are the current strength of the rand versus the USD  and the other is the fundamental and technical signs coming from the industry itself. My advice** would be to strongly consider such an opportunity. It might not come around again for the foreseeable future.

It’s been more than five years since I became fascinated by the extraordinary scientific developments coming out of the biotech sector in and around Palo Alto, California and other parts of the US. Most of my research has been done on my own as the local investment industry, for some or other reason, has completely ignored this sector, which has been the best performing sector worldwide over most periods over the last five years.

The investment industry, in many respects, will only promote what they can sell and thereafter manage. I have no problem with that. 

As most investment advisors in this country are, in one way or another, linked to the large corporate giants, they too are not exposed to these funds and sectors. In the end it is the ordinary investor who is stuck with poorly-performing investments, simply because these wealth-creating investment opportunities are not being presented to them.

I have written several columns on Moneyweb over the years about my preference for biotech as an investment opportunity. I also took some severe criticism from some of my internet “friends”, especially after the sector took an almighty tumble during the US presidential campaign at the end of 2015.

Extraordinary returns

The performance of the biotech sector, rands or dollars, over the past five years has been extraordinary (see chart and table).

The cumulative return of the biotech sector over this period has been 279%, compared to the paltry 80% you would have made if you had invested your money in the local stock market.

For some investors, including myself, the returns have been life-changing. I cashed in my preservation fund at the time, paid the taxes, and shipped all of it offshore, mostly into biotech stocks. I think I should name my yacht Biotech.

And just to complete the comparison, I once again compared the returns with an investment in SA gold shares. Have a look at the chart dear gold investor and weep. It’s a bottomless pit of losses.

Why do people still own gold shares in this country? The only people making money out of the local gold industry are the directors who somehow keep on paying themselves millions of rands in salaries, bonus and share options, while ordinary investors keep hanging on — hoping that, Phoenix-like, gold shares will soar again and create enormous wealth — as one certain television presenter keeps on assuring his ever-dwindling audience will happen again.

The rand has surprised most, including myself, by being so strong over the past year or so. Despite the strong rand an investment in biotech still did better than an investment on the JSE over one year. I’m not even going to compare the returns over three and five years respectively. It’s been worse than a smack-down during a televised wrestling match.

The rand is not strong because of renewed optimism over SA’s economic fortunes. Far from it. The rand, like all other emerging currencies, is benefitting from the weak US dollar and the havoc Donald Trump is causing, not only in his country but all over the world.

Structural problems getting worse

At some time the underlying structural problems in the SA economy will come to the fore again, most probably if and when we get the final downgrade to junk status from credit ratings agency Moody’s later this year. This —together with an expected increase in US interest rates at about the same time — will lead to renewed rand weakness.

The second part of the puzzle comes from the biotech industry itself. I recently had the opportunity to listen via a video-call to Evan McCulloch one of the fund managers of the Franklin Biotech Discovery Fund. (Sorry to those ETF groupies—one cannot have a conversation with an index or exchange-traded fund).

From the discussion the following became apparent:

  • From a technical perspective, biotechnology is starting to lead the US market.
  • Approvals of new drugs by the FDA (Food and Drug Administration, the regulatory body in the US which controls the industry) has picked up, meaning the pipeline of new products is increasing. A pipeline of products means higher sales down the road.
  • If you can’t  beat them, buy them. One way of getting new products is for the cash-rich giants (Biogen, Amgen, Pfizer) to simply buy smaller start-ups who own more exciting products they might be working on). It’s sometimes cheaper to buy such companies, paying over the odds, than doing it themselves. Gilead recently paid $12 billion for Kite Pharmaceuticals, which sparked a rally in this sector, as investors are expecting more deals of this nature. Gilead acquired a futuristic oncology cellular therapy platform along with Axicel, a drug treatment for blood cancer which is expected to be approved later this year.

So far this year, the biotech sector is up 26% in US dollar terms but is still 17% down from its all-time high recorded in 2015.

The sector has been boosted by positive news flow over the past few months, with approval of several groundbreaking gene editing treatments.

Novartis, for example, recently received first-ever approval for a personalised gene-editing cancer treatment known as Car-T, with its drug Kymriah, which is aimed at targeting a type of bone marrow cancer or leukaemia.

This is what Scott Gottlieb, the head of the FDA, had to say at the time of the approval: “We’re entering a new frontier in medical innovation with the ability to reprogramme a patient’s own cells to attack a deadly cancer. New technologies such as gene and cell therapies hold out the potential to transform medicine and create an inflection point in our ability to treat and even cure many intractable illnesses. At the FDA, we are committed to helping expedite the development and review of groundbreaking treatments that have the potential to be life-saving.”

There you are, dear investor. If you don’t have any biotech’s in your portfolio, I suggest you reconsider this decision, especially if are still clinging onto your long-suffering gold (and for that matter platinum shares). I cannot do more.

If you don’t want to grow your wealth by investing in one of the most exciting industries in the world — albeit with a bit more volatility than the broader market — then there is nothing more I can do.

*The Momentum Wealth platform has two funds. One is the Franklin Biotech Discovery Fund and the other is the Nasdaq Total Return Biotech ETF. Investors can access biotech directly offshore or by making use of asset swaps, in discretionary as well as retirement portfolios.

** This is not advice. Consider your tolerance and capacity to take risk before making an investment. 

***Magnus Heystek is investment strategist at Brenthurst Wealth. He can be reached at magnus@heystek.co.za for ideas and suggestions.

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