Biotech funds hot property with investors

With the recent popularity in the global biotech industry sending investors into a spin, Kate Kachor looks at the current opportunities for investing in biotechnology for local investors.

In the last year, Australian fund managers have played follow the leader in the biotech stakes, launching individual biotech funds one after the other.

Until recently biotechnology was realm of fiction but in 1997 a Scottish genetic research company, the Roslin Institute revealed an example of biotechnology in practice with the unveiling of Dolly the sheep, the worlds first cloned sheep.

This scientific discovery started a chain reaction across the globe, grabbing the attention of corporations and investors alike with the prospect of investment opportunities.

A loose definition of biotechnology would read as the study and manipulation of genetic material and biological processes for use in a wide range of fields such as the production of antibiotics, hormones, genetic modified food and animals and medical research into disease.

According to Assirt Equities Research biotechnology analyst Dr Lisa Springer there has been a great surge in interest lately in Australia. This has been powering the boom that is happening right now in biotech as an industry and as a source of investment.

"There is a big history with Australia and trying to make headway in the biotechnology industry. Most of the work on the human genome has been in the States, and has become a benchmark for the rest of the global biotech groups."

So with the history behind biotech funds and with the current industry boom, is biotechnology where Australian investors should place their money? Springer is confident that there is potential but urges a close examination of any investments.

"As to whether investors are going to get returns, its important to look at the quality of the mangers and the advisory board to assess the technology. Look at the type of investments the fund is offering and look at what advancements they are making with technology," she says.

In regards to current biotech figures for Australian funds, Springer says it is too early to make full judgements as the market is still young with the size of funds only in the range of $6 million to $30 million.

Biotech funds, according to Springer fall into a variety of categories. These include, venture capital type funds: these funds tend to have inhouse expertise and also invest in at least a third in their own technology. There are also pool development funds: which are funds that allow investors to get tax free capital gains.

At present, three leading Australian fund managers have launched funds that are either solely focused on biotechnology or offers a biotech element as part of the overall fund.

Challenger International entered the biotech market earlier this year with its pooled development biotech fund, BioTech Capital.

"We saw a perceived hole in the market but we couldn't find a product that did it very well. So we decided to provide funds that weren't generally available," Challenger International's biotech fund director Harry Karelis says.

The fund, coined a 'pure fund' because of its sole focus on biotechnology invests in unlisted Australian companies.

Karelis says the fund has achieved widespread support from brokers and financial planners in the retail sector. At present the fund has 6,500 shareholders and closed oversubscribed in August this year, exceeding the company's target of $40 million under management.

"Our investment point of view is to look at Australia. We didn't think we could add value in listed Australian companies, or to the international market where many of the bigger competitors has already made their presence felt," Karelis says.

"We found real opportunities in unlisted companies and we wanted to invest in Australia."

The fund focuses on the areas of gene research, medical devices, biological information and enabling technologies.

Another entrant in the biotech fund industry is JB Were & Son, with its global health and biotech fund. The fund is partially managed in Australia and partially managed internationally by Wellington Management, a Boston based investment management group. The fund, which was launched early last month currently has 800 investors with $15 million under management.

JB Were & Son Australian fund director Jim McKay says the fund has a broader focus than a purely focused biotech fund.

"Obviously, the key drivers to our healthcare element of the fund are people getting older across the world," he says.

McKay says the local Australian market place is not as diversified as international areas with health care issues, which is the reason for the alliance with Wellington Management.

"What we're seeing are sophisticated investors wanting more exposure overseas and don't mind taking a little risk for future of returns," McKay says.

"In our fund structure biotech is one of the five subsectors but it remains part of the focus. If it was just biotech it would increase the risk profile to another level."

"It is worth remembering that biotech is still a very small part of the health care industry and a very specialised form of investing. Given the risks clients are entering into we'd expect this to be only five to 10 per cent of a well diversified portfolio," he says.

The third entrant into the biotech market is Colonial First State who like JB Were & Son have leaned more towards a healthcare focus than solely focusing on biotechnology.

The fund is based out of London and managed by fund director, Dr Joe Anderson.

Anderson describes the fund as a health and biotechnology fund which invests across the range of companies involved in pharmaceuticals, biotechnology, medical devices and medical services, with the biotechnology component of the fund being currently less than 15 per cent of the portfolio.

"We launched the fund for a number of factors. These industries are among the most globalised in the world, and yet there are few investment opportunities in Australia, making it difficult for individual investors to invest directly in the many opportunities available in the sector," he says.

Anderson says the fund provides direct access to this global sector for Australian investors, combined with the normal benefits of a managed fund, such as portfolio diversification. The fund is also aimed at investors who are seeking access to fast-growing global sectors, and who recognise the risks and rewards of this area.

The fund currently invests in 43 companies globally with more than 13, 000 investors. Funds under management are more than $95 million in its retail fund, with an additional $10 million from wholesale investors. Inflows since launching in May have contributed most of those figures with $84 million pouring into the retail fund. However at the same time the fund's performance has been strong at more than 32 per cent.

Anderson says investors interested in the fund should not adopt a short term focus but have a six to seven year timeframe in mind when investing.

The reason for this is only about three per cent of the industry is pure biotechnology while the remainder is other medical and health care investments.

Colonial on the other hand has taken a 14 per cent exposure to this area because it felt a number of companies presented opportunities for the fund.

However, despite the current boost in fund opportunities Karelis says the logic and reason behind investing remain the same and investor education is still a need that should be addressed.

"Investors are not very well educated about biotech funds. Its difficult to educate people when it comes to technical areas in funds such as this which are relatively new."

But it also means more work for advisers to brush up on their knowledge as Anderson says educating investors on the finer details within the fund needs to be a high priority.

"We recommend investors speak to their financial adviser about how this fund might fit their investment profile. The prospectus for the fund contains basic information on how the fund invests, however, with the continually changing nature of these industries we don't seek to include educational material there," he says.