In a recent screen of Value Line’s Health Care objective group, Franklin Biotechnology Discovery A (FBDIX) turned up among the top performers. This isn’t surprising for a fund that has a history of beating its peers. That said, in years when the fund isn’t at the top, it typically finds itself all the way at the bottom of its peer group. This fact alone should dissuade conservative investors from further research (of course, the focus on biotech companies probably should have had that effect already). The niche investment universe of the fund, however, should interest both more aggressive investors and those that believe biotech stocks are poised for long-term growth.
As its name suggests, the fund invests the bulk of its assets in the equity securities of biotechnology companies and discovery research firms worldwide (the vast majority of its holding are based in The United States). This includes companies in the therapeutics, drug delivery, and gene therapy spaces, among others. In the search for these companies, co-managers Evan McCulloch (he joined the fund in 1997) and Vincent W. Xiang (he started at the fund in 2004) look for companies that they believe have strong management teams, solid financial characteristics, and attractive valuations.
The duo uses a bottom-up approach to individual stock selection, with a focus on fundamental analysis and primary research. They assess the products of investments and potential investments through such avenues as reviews of relevant medical literature, consulting with community and academic physicians, and attending scientific meetings and symposiums. The end goal is to find companies with competitive products, strong product development pipelines, large market opportunities, and strong intellectual property, all of which is supported by thoughtful clinical and market development strategies. The pair hopes to take advantage of what it views as solid long-term prospects in the broader biotech space.
The fund has an interesting year-by-year history, with top performing years, versus relevant peers, often followed by bottom quintile years. This isn’t surprising since this highly focused fund falls into the broader category of Health Care funds—though even this broader group is quite focused relative to the typical growth fund. Basically, in years where biotech stocks outperform more generalized health care stocks, Franklin Biotechnology Discovery Fund is likely to churn out a stellar year—and vise versa.
The interesting aspect of the fund’s performance, however, is that it has, over time, produced materially more return for the level of risk it takes on than the broader Health Care objective group. The fund’s alpha (a measure of risk adjusted performance) is 50% above the average for the group. Moreover, it scored higher than the group on 1-, 5-, and 10-year Growth Persistence measures, a proprietary Value Line statistic that tracks the consistency with which a fund outperforms its peers without regard to magnitude.
These positives aside, the fund’s on again, off again performance has left it with middling scores versus its objective over longer time periods. While this isn’t a very compelling endorsement, a poor showing in 2009 currently biases long-term historical returns. Indeed, year to date through the end of July, the fund is a top performer in its objective, besting the group by some five percentage points.
In the final analysis, the fund is a solid option for those seeking specific biotechnology exposure. That said, the fund carries a load, so self-directed investors should probably look elsewhere. And, its expense ratio is fairly high, suggesting that cost-conscious investors can probably find cheaper alternatives elsewhere (the focused nature of its investments could be used as a justification for the costs, however).
At the time of this article's writing, the author did not have positions in any of the companies mentioned.