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How biotech funds made investors wealthy

A graph is worth a thousand words.

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.

COMMENTS   27

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ja well no fine! I believe MH commented that he had made a million rand out of his biotech investments over the years – then lost that amount thru bad property purchases that were not based in western cape (hout bay properties for sale now over 200!). well I too have made well over a million rand BUT by buying direct initially into a company called GILEAD when they were introducing their hepatitis vaccine and more recently in a company called KITE with their revolutionary cancer immunology therapy – who were (believe it or not) bought out by GILEAD. its a small world! BUT unlike MH I haven’t lost same amount thru silly home purchases- in fact about to rent out my “close to pacific ocean” duplex for almost a million rand a year!!!!

and yet (despite all the money) you remain desperately unhappy and bitter…

hey!! – ALL my children are safely ensconced in Aussieland. yes the fact that my wife of 35 years is not around (she passed away from cancer 3 months ago)means that she is not seeing the benefits of all our hard work and sacrifices over the years to get established here in Australia. no – my task now is to convince people to listen to people like MH who KNOWS what he is talking about (except about buying property in w cape)!.

if I can make ONE comment and ONE remark. biotechs are VERY risky. its called a beta play – either it works or it doesn’t- nothing in-between. will have to have your stops in play 24/7. its is pointless making snide remarks as a) I ignore them in the same way I ignored all the “know alls” who said KITE was going nowhere b) your remarks only show up your own “hopeless” situation – over which I REFUSE TO GLOAT

Oh Robbie, please tell us more about your wonderful self and all your marvelous successes! MW should devote a full article on you!
Is there anything that you dont know?
You are lucky to be able to voice your opinion from so far away, mate. Any closer and you would not be tolerated.
Do you have any real mates who show face to face interest in your vast knowledge,mate? You are the strangest dude mate!

I am meeting MH in joburg in January – I am sure together we will toast our success in making money from the us biotech sector – which clearly you guys cannot understand

@Robertinsydney

How did you pick those two cos to invest?

Did you invest in other biotechs that did not produce?

Dear Magnus, another option (apart from Momentum Health’s biotech funds), is to invest in Ishares Nasdaq Biotechnology ETF which is available via the Easy Equities USD platform. Your comments on this option will be appreciated.

The ETF will be the best way to gain exposure to Biotech stocks. The Momentum guys are just an extra layer of fees

Whilst the returns have been good, the volatility (risk) is also very high. Only play with biotech if you can afford to lose the money.

Let’s be clear- on 11-9-2017 MH advised Moneyweb readers to follow his example and invest all their retirement capital in the biotech sector. (If that is not the case I hope he will urgently clarify exactly what he advises here, before someone gets hurt.)

I admire him for pulling no punches – he obviously has nothing but contempt for the field of study called finance and consigns the decades of research undertaken by academics in this field to the rubbish bin.

As someone who has read all the important papers published in finance related to funding retirement from Markowitz through Sharpe, Fama, Bodie, Shiller and many others I cannot more strongly disagree with this advice.

This is simply a a punt, a gamble. I do not believe anyone has the ability to predict that the current market value assigned to a specific sector is so widely wrong, that it is advisable to throw all caution to the wind and load up on one of the most volatile sectors, thereby putting at risk your welfare in old age.

Off course I concede that looking back 5 years from now, it may well be that biotech outperformed the broad market, it may even be the best performing sector over this time. It is much riskier than the broad market (partly because it is priced for much more growth, and it faces more risk of disruption) so the expected return should be higher. But we can’t eat expected returns.

I would equally not be surprised if someone acting on this advice finds their retirement plans in ruins 5 years hence.

Those guided by the science of finance realise that investing for retirement is not a maximisation sum, but an optimisation sum.

biotechs (like emigrating) is not for the faint hearted – need nerves of steel or very strong stop losses in place 24/7

Absolutely right. Those who want to cash in their preservation funds to follow the advice in this reckless article please take heed.

>> emigrating) is not for the faint hearted

Bob, living in South Africa is not for the faint hearted, mate.

What exactly is there that you are afraid of in Australia – the Chinese, or the ghosts of all those murdered native Australians ?

I will most certainly look at the Easy Equities website today.
If Biotechs are included it would most certainly be a welcome and easy addition.
The problem with Biotechs thus far has always been the high minimums required ($15 000) to get it via the Momentum platform, or offshore directly.
I will do a road test and offer some comments later today….

i1 >> Hey Bob. In SA we can now easily buy US Equities and ETFs at low cost through http://www.EasyEquities.co.za

Magnus Heystek >> I will most certainly look at the Easy Equities website today.

hmmm…

As I said, a couple of my internet “friends” have been consistently having a go at me for recommending-as part of international diversification–to invest in biotech.
I cannot understand where such bitterness and jealousy comes from.
BILO SELHI has been of them.
Nowhere in the article, or in any other article before, have I even remotely recommended that investors abandon good diversification principles and invest all their retirement capital into biotech.
But very few South Africans have exposure to biotech in their portfolios as local fund managers have either been too lazy or ignorant to include this sector in local funds.
The closest we have is the Sygnia 4th Industrial Revolution fund.
Go and Google the fund fact sheets yourselves.
But it concerns me greatly when I see how poorly our local funds are doing, relative to offshore funds, fully understanding that we are dealing with future retirement benefits here.
By not exposing local clients to offshore investing and the exciting returns that potentially can be earned by doing so, fund managers are dooming their clients to a future of below par- returns.

In the article above MH says:
“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.”

But then in the above comment he says:
“Nowhere in the article, or in any other article before, have I even remotely recommended that investors abandon good diversification principles and invest all their retirement capital into biotech.”

So is this a case of the adviser not following his own advice – Can you take investment advice from someone who feels that same advice is not good enough when it comes to their own portfolio.

I hope MH can clarify exactly what % of a portfolio earmarked for an SA retirement should be in biotech as of 11-9-2017 in his opinion.
Also tell us what % of your retirement portfolio at that time was shipped off mostly into biotech. If the subsequent returns were so life changing it must have been a substantial proportion.

Those who stick to the scientific principles of finance would be hard pressed to allocate more than +- 5% of their and their client’s retirement portfolios to this volatile single sector.

Hi Bylo Selhi

What part of– ** I am not giving advice. Please consider your risk profile and capacity to take risk before you invest—do you not understand?
My preservation fund is less than 10% of my total retirement capital and I am comfortable with volatility.
If you want to find a stick to beat me, find one which is based on fact and not conjecture and your own biases.

I fail to see how less than 10% of someone’s life savings growing by 280% in 5 years can be described in those terms. (eg if the rest of the portfolio grew by 10% pa over those 5 years, the return for the whole portfolio was less than 13%pa.)

You should understand that people read Moneyweb to get financial advice. Some will read the above and phone up their advisers to tell them: “Magnus Heystek withdrew his retirement savings – paid the full extortionate tax (losing out on the future tax benefits) invested in biotech and got rich- now he says there is a unique second opportunity to duplicate this result. I want to abandon the plan you drew up for me even though my portfolio returned 12.5% pa over the last 5 years, and jump into biotech. 12.5% pa does not feel life changing.”

In the mean time the returns and risk profile of your portfolio were probably not very different to this cient’s (only you paid more tax than him). You just confused him with extravagant claims which amounted to nothing once the full picture became clearer.

MH writes “…….I think I should name my yacht Biotech ”

I am clearly in the wrong business, if a mere 10% of my net worth can buy and maintain a yacht! a real one!

Either that – or it is an extremely small yacht.

Seriously, I get you MH – you did something you believe in and it worked for you – well done!

The R140B Allan Gray Balanced fund returned 12.5% pa over the exact 5 year period referenced in this article. The Nedgroup core diversified fund (a balanced index fund) returned 11.8% pa over the 5 years. The Orbis Global equity fund returned 24.4% pa over the same period.
What did MH earn on the other >90% of his portfolio? Did he manage beat these sensible diversified strategies?

Gee wiz guys, don’t you know when I am joking….
I don’t have a yacht, don’t want one and never will. I rent from my friends desperate to earn a little income on their poor investment.
Such a great feeling –after a great day on the ocean— you have the skipper drop you off in front of your apartment and he has to go and clean it and wash it and park it and insure it and pay it off….etc.

MH – probably the only comment where I agree with you.

Ok, unfortunately there are no tracker funds for MH or Roberts ego’s – They would easily outperform any market (even the biotech sector!) – But the EasyEquities platform have funds that can track the biotech index (i-shares Biotech) and the Nasdaq index (Powershares QQQ Trust ETF)

Thanks for more food for thought Mangnus-
as for ”The wimp in Oz” whenever i go to Oz which i love , and it’s people especially , most of the
ex-Saffas keep trying to convince me and mainly themselves that they made the right decision
i compare their poky little house to my spread back in Jackal Jo’ burg (not Wolf of Wall street LOL )and i think that rootless(gutless ?)never achieve anything on this planet.

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