Funds Benefiting from a Healthy Biotechnology Industry

The Biotechnology industry has provided a surprising shelter from the current market turmoil. Generally, the biotech arena is one of the most volatile around. For example,  iShares Nasdaq Biotechnology Index (IBB) is about 50% more risky--as measured by standard deviation--than the Dow Jones Wilshire 5000 Index, a common barometer for the U.S. Market. That can mean big dips into the red when markets sour. In the past, for example, iShares Nasdaq Biotechnology lost nearly half its value from inception in early 2001 until the end of 2002 (which captures most of the 2000-02 bear market). But today the story is much different. While the S&P 500 Index continues to swim in red ink--down a striking 24% for the year to date through Oct. 3, 2008--the biotechnology industry is above water for the year. According to Morningstar's data, the Biotechnology industry is up 5.8% for the same period, which is the second best industry in our coverage list.

There are several factors responsible for this surprising performance. A number of positive drug results and promising findings for innovative medical procedures have given this industry a big boost. For example,  Amgen's (AMGN) osteoporosis drug candidate, denosumab, recently showed positive results in terms of safety and effectiveness against reducing bone fractures. In August, the company also received Food and Drug Administration approval for a drug designed to treat patients with a rare bleeding disorder. As a result of this positive news, Amgen's stock is up 27% so far this year.

Another solid performer has been  Celgene , which is up over 30% for the year to date. A big part of the firm's success this year stems from its successful drug Revlimid, which is used to treat multiple myeloma. As Morningstar's Karen Anderson notes, the drug continues to capture market share based on cost-effectiveness and positive efficacy data.

One of the biggest movers in the biotech arena has been  Sequenom , which has more than doubled its share price for the year to date. The company has released promising data for a noninvasive prenatal screen for Down syndrome. Sequenom's innovative noninvasive procedure has enormous potential because current screens for Down syndrome involve a procedure of withdrawing fetal DNA from a mother's womb using a needle, which carries a small risk of miscarriage.

Mergers and acquisitions were another reason for the impressive gains in Biotech. The one grabbing the most headlines is  Genentech , which at $92 billion in market cap, is a behemoth. (Most biotech firms are in the sub-$1 billion range.) In late July, Genentech's stock rose sharply as a result of a $43.7 billion acquisition bid from  Roche (RHHBY). Although Genentech rejected the bid as too low, the stock is still up over 30% for the year to date. Another acquisition bid in late July boosted the share price of  ImClone Systems , which was targeted by drug giant  Bristol-Myers Squibb  (BMY). That stock has climbed over 50% so far this year on the news of the buyout.

With nearly every mutual fund deep in the red this year, we were interested to see what diversified mutual funds have benefited from a healthy dose of biotech names in their portfolio. Specifically, we were interested to see what funds benefited from a combined exposure to some of the industry's top performing stocks, namely, Amgen, Celgene, and Genentech. The following table shows the top 10 diversified funds with the largest combined exposure to these three biotechs, including each fund's size; the combined percentage of the portfolio in Amgen, Celgene and Genentech; its total return for the year to date; and the fund's rank in its respective category.

Diversified Funds with the Greatest Exposure to Amgen, Celgene, and Genentech
	Size ($Mil)	% Assets in Amgen, Celgene, Genentech	Total Return YTD	% Rank Cat YTD
Legg Mason Partners Large Cap Growth (SBLGX)	2,484.0	12.66	-23.84	17
SunAmerica Focused Growth	310.3	11.25	-40.17	97
Permanent Portfolio Aggressive Growth (PAGRX)	21.6	10.48	-24.39	46
McCarthy Multi-Cap Stock Instl	37.6	9.51	-20.48	12
Profit	8.4	9.18	-24.04	18
American Growth (AMRGX)	31.0	7.38	-21.47	8
Allianz OCC Growth (PGWCX)	473.7	6.88	-27.48	46
AllianceBernstein Growth	800.0	6.83	-31.50	79
Edgewood Growth Instl (EGFIX)	467.9	6.63	-23.45	15
Janus Twenty	11,709.5	6.32	-31.44	78
* As of 10-03-2008.

From the table, it appears a dose of biotech has given most of the funds on this list a boost. For example, seven of the 10 funds in this list are in the upper half of their performance quartile, and five of them are better than three fourths of their respective peers. But a big dose of biotech didn't guarantee success. For example,  SunAmerica Focused  had the second highest amount of the aforementioned biotech names, but it wasn't enough to offset other problems in the portfolio, which is clearly evident in the fund's 40% drop for the year to date.

Of the funds on the list, we are partial to  Legg Mason Partners Large Cap Growth (SBLGX) and  Janus Twenty . Legg Mason Partners Large Cap Growth has been out of favor for years but remains a solid choice. We think this fund stands out because of lead manager Alan Blake's long-term approach and its low expense ratio. The fund's single digit turnover ratio implies a holding period of greater than 10 years, and its expense ratio is much lower than the average front-load fund in this category. Janus Twenty is another one on the list we like, although it's gotten killed lately. At the end of August, this fund was holding up exceptionally well--its 7% loss was in the top decile among large-growth peers. But the fund's 6.3% slug of the aforementioned biotech names wasn't enough to offset big losses in Lehmann Brothers,  Apple (AAPL), and  Research in Motion (RIMM). Still, despite recent losses, the fund remains a solid offering.