Tag Archives: mutual-fund

Exclusive Interview With Paul Yook, BioShares’ Portfolio Manager

Summary I interview Paul Yook, the portfolio manager of BioShares. We spoke about the BioShares Biotechnology Clinical Trials ETF (BBC). This ETF offers investors pure exposure to the biotech market without exposure to special pharmaceutical companies. After my article on iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ) portfolio strategy, many readers have asked about other biotech ETFs that could act as replacements for IBB. Though my first reaction is to say ALPS Medical Breakthroughs ETF (NYSEARCA: SBIO ) because I was previously long on SBIO, I realized I don’t know much of the differences among the different biotech stocks. SBIO is often brought up when BioShares Biotechnology Clinical Trials ETF (NASDAQ: BBC ) is mentioned, but much of the information on BBC – and the differences between it and SBIO – seem to be elusive, at least online. So, I scheduled an interview with Paul Yook, the portfolio manager of BBC to ask him more about this little-known biotech ETF. The interview follows. Q : Because most drugs fail their clinical trials, many of the holdings in BioShares Biotechnology Clinical Trials ETF will likely fall, requiring the handful of winners to compensate for the losses. What is the likelihood of such compensation? PY : Great question. Let’s keep in mind that most publicly trading biotech companies have a number of shots on goals. Though the majority of products fail, most companies have follow-on products. So, companies have multiple compounds focusing on the same downstream target. And they’ll have multiple programs – different disease targets and drug candidates. So it doesn’t necessarily require the lead product or one individual product to make a successful drug. There are a number of successful publicly traded companies such as Regeneron (NASDAQ: REGN ) who had a number of failures in their early years but ended up being successful investments over time. So, when you ask the odds of successful investments in biotech, we believe that diversification through a variety of investments is important. It is really difficult to pick a single winning stock and stomaching the volatility that goes with investing in biotech. Having a diverse basket is really important in investing in clinical stage companies. Q : So basically, all of the holdings you have in BBC have multiple shots at success? PY : They do because – again every company is different – most publicly trading companies have a diverse pipeline. In addition, these management teams really are portfolio managers in a way. They are assessing the risk of these programs over time. And they can pivot: They can move into another program; they can acquire a program; they can change their scientific approach. You’re really investing in a management team, just as you are in an individual drug or portfolio of drugs. Q : If I’m not mistaken, BBC removes a company from their holdings if that company doesn’t currently have a drug in a clinical trial, correct? PY : Exactly right. BBC invests in companies with lead companies in phases I, II, and III. Q : What is your stance on the increasing failure rate of clinical trials? PY : As far as clinical trials over time, there is variability from year to year. Some of the scientific approaches we’ve seen have sped up the time it takes to get a drug approved, starting from inception or conception of the idea. There are other disease categories such as heart failure or stroke that have had very poor statistical results. We look at failure rate across category. We believe investing across these categories is the most prudent way to invest. Q : So you’re looking at the failure for each type of drug instead of simply clinical trials in general? PY : Exactly. Certain categories tend to be of lower risk. For example, if a company is developing an enzyme replacement therapy for a genetic disease, it will tend to have a very high success rate because the biology of such a therapy is well known. Q : In general, what are the criteria you use to pick your holdings? PY : Our criteria for our index funds are rules-based. They are really very simple. We first screen for biotech companies that are primarily focused on human therapeutic drugs. There are other companies that focus on other industries, such as specialty pharmaceuticals, diagnostics, or life science tools. We exclude these from our biotech funds because we believe biotech ETFs should give investors biotech-only exposure. We also screen companies that have a minimize size and liquidity: 250 million in market cap and $200 million of average traded volume. This way we exclude smaller companies that have problems with financing and capital. Of course, our main criterion is that the company being in the clinical trial stage. We split the universe up into the companies in that early stage, which go into BBC, from the later stage companies that go into the BBP fund. Q : Seeing as BBC is not actively managed, how much weight should investors give to the biotech specialists behind this ETF? PY : I have been involved in active management, and what I find in the investment universe today is that biotech investors have become very knowledgeable. What you have today is many scientists at large institutions such as hedge funds and mutual funds. You also have highly sophisticated retail individuals active on blogs and Twitter. I think the playing field has become much more equalized, and the market has become much more efficient for biotech investing. I think the differential between active and management has really narrowed. In many ways, I think there’s an edge to investing in passive strategies. What we’ve seen is what I call “alpha destruction” from active studies. There was a Bloomberg study in the summer that looked at a variety of healthcare and biotech hedge funds and mutual funds, finding them to underperform the passive ETF strategies. Of course, active strategies also have negative tax ramifications, lockup minimums, and liquidity issues. This has been widely written about. There are large advantages in passive, ETF strategies. I believe that passive strategies really help investors avoid some of the pitfalls of those active strategies. A lot of investors tend to sell out of fear, whereas passive strategies by rule avoid that pitfall. Q : Right. I think a lot of investors are looking for ETFs because of the lower management fees involved. BBC charges 0.85%. In addition, many investors don’t have the science background to make good choices in the biotech market, which is why it’s important for an ETF to employ specialists in index creation. So for BBC, what is the general background of your fund’s biotech specialists? PY : Keep in mind that we do have a passive strategy. I did lay out our rules, which are fairly simple. But it is important that we manage our own index. We employ 25 specialists, both biotech and industry specialists. We look for people with a passion in investing in biotech and currently have 6 Ph.D. level scientists. We have a wide variety of investment and capital market experience, from investment banks and equity research to hedge funds and mutual funds. The reason it’s important to have specialists creating our biotech indexes is because we employ a level of understanding in the creation of these indexes. Most indexes today date back to the 1990s. At that time, the biotech industry was in its infancy. It was unclear the direction the industry was heading. It was also unclear what the eventual profit model would be. Back then, we saw sub-industries like genomics and stem cell technologies that people didn’t really understand. Today, the industry is very different. There are many sub-segments of the biotech industry. We apply a lot more understanding of the nuances of the industry and have designed truly investable, broad indexes. Q : I am currently long on ALPS Medical Breakthroughs ETF. Convince me to switch to BBC. PY : I think anyone who’s invested in any other biotech fund has probably had a very good experience because the biotech industry has made a lot of technological advances and financial results over the five years. I wouldn’t want to convince anyone to move out of a biotech stock, mutual fund, or competing ETF. But I think it’s important to understand the differences between the investments. Our funds are unique, and it’s important to understand that. Our funds are equally weighted, which means that no company will be an outsized exposure. Biotech is very interesting because you will usually have outsized weighting to an individual drug, regardless of company size. Gilead (NASDAQ: GILD ) showed that to investors about a year ago, last December, when there were pricing concerns that surfaced for its largest drug – Sovaldi and Harvoni for hepatitis C. Within two trading days, Gilead traded down 19%. To have a $150 billion market cap company show that volatility really does show that market cap weighting tends to increase volatility. So, as you can imagine, there are a number of market-weighted biotech ETFs, and they showed higher-than-normal volatility during that period. I think splitting up the risk into the higher-volatility BBC fund and the lower-volatility BBP fund is important because we view them as totally different asset classes: high-risk biotech and low-risk biotech. Some people will want a mix of them; others will want to focus their exposure to these asset classes separately. And because you asked, a third important feature of our fund is that we give people pure biotech exposure. By design, we have excluded special pharmaceuticals, which have been knocked on lately. I think specialty pharma can be good, but some have had political scrutiny these days. It’s important to differentiate these two types of companies because specialty pharma tends to invest 5 to 10% of sales in R&D, whereas biotech companies – even very large ones such as Biogen (NASDAQ: BIIB ) – will invest more than 20% of their sales into R&D. Therefore, specialty pharma companies do not exist in the BBC fund. I think probably every other ETF fund does contain these companies. A lot of other biotech companies have become diluted in what BBC holds because of the emergence of the mega biotech company, such as Biogen or Gilead, as well as the specialty pharma model, such as Horizon, whom we would not classify as a biotech company. Q : Final question: What would you say to an investor who believes the biotech industry is currently a bubble? PY : Well, I think that we have had a 30% or more correction over the past few months and that the long-term growth prospects remain very strong. There are strong arguments that pricing needs to be addressed. I believe these concerns are valid. But some of the scientific approaches are nothing short of remarkable. And valuations have come in significantly. I’m seeing some individual stocks that are making investing in the biotech industry as a whole through ETFs very interesting. Summary Overall, the emphasis Paul Yook expressed in this interview was one of “purity.” While other biotech ETFs diverge out from the biotech industry, investing in big pharma, the BioShares ETFs focus exclusively on biotech. In fact, while BBC currently pales in comparison to most other biotech ETFs in terms of popularity, BioShares holds a second ETF – clearly for the purpose of keeping BBC purely clinical trial based. Hence, the emphasis of “purity” seen for BBC makes this ETF a good investment for an investor who wants biotech and only biotech. That is, if you want explicit exposure to the price gains seen by the creators of up-and-coming drugs, this is your best bet. If you’re looking for something more broad, such as exposure to companies no longer creating drugs but currently in the marketing and sales phase in addition to those up-and-comers, another ETF would be more suitable. Of course, you can gain exposure to both by putting some capital in BBC and some more in BBP or a healthcare ETF. In either case, BBC has a place in the portfolio of investors who believe in the future of biotech breakthroughs.

Efficient Market Hypothesis And Random Walk Theory: Buy ‘David Swensen’s Portfolio’

Summary The author recommends using “David Swensen’s portfolio” as a key component of the Core Portfolio. Recommendation for the Satellite Portfolio will be covered in a separate article. Recommendation is in line with the implications of Efficient Market Hypothesis (EMH) and Random Walk Hypothesis (RWH). EMH and RWH imply that it’s impossible to consistently beat the market and suggest the utilization of passive investment approach. Recommended Portfolio Allocation The main goal of this series of articles is to introduce new stock investors to academic theories and help them develop their own approach to stock investing. Knowing academic theories and their implications should help investors gain confidence in their chosen path. That confidence is key in ensuring that investors consistently execute their chosen investment strategy. As we will discuss in the next articles, consistency is one of the main friends of stock investors. I will be suggesting an approach to stock investing that will be based on findings of Nobel laureates and market practitioners. With each article, we will be moving one step closer to developing an investment approach/portfolio that individual investors will be comfortable holding on to through thick and thin. We will start with David Swensen, CIO of Yale endowment since 1985, where he manages over $20 billion (as of Q3 2014, endowment assets were $23.9 billion). Over the decade (through 2009), the endowment realized an average annual return of 11.8 percent. It is an impressive performance given that this period covers the financial crisis of 2008. David’s consistent track record sparked debates if the new college building should be named after him. He is believed to be the alumni who contributed the most to the school through his management of the Yale endowment portfolio. David is credited with inventing the Yale Model (an application of modern portfolio theory that we will discuss in the next article). David Swensen suggests that individual investors should limit their portfolio to a handful, well-selected ETFs that will provide diversification across major asset classes (e.g. stock, real estate, and bonds) and geographies (i.e. developed and emerging countries) at a low-cost and tax-efficient manner. His recommendation is very much in line with the approach suggested by John Bogle (founder of Vanguard). David lays out the proposed allocation across asset classes as following: Asset Class Allocation Domestic Equity 30% Foreign Developed Equity 15% Emerging Market Equity 5% Real Estate 20% U.S. Treasury Bonds 15% U.S. Treasury Inflation Protected Securities 15% Source: David Swensen Strategy’s Strengths and Limitations MarketWatch developed a list of funds that closely resembles exposures that David Swensen proposed. The list of funds and its historical performance is presented in the table below. As you can see from the table, the proposed allocation has underperformed the S&P 500. As of 11/14/15 Fund Allocation 1-Year Return 3-Year Return 5-Year Return 10-Year Return Total Stock Market VTSMX 30% 0.62% 15.89% 13.05% 7.45% Foreign Developed VTMGX 15% -2.85% 7.67% 3.98% 3.73% Emerging Market VEIEX 5% -16.37% -3.49% -3.85% 4.44% Real Estate VGSIX 20% 0.36% 10.45% 11.04% 7.05% Long-term Bonds VUSTX 15% 2.99% 0.92% 6.82% 6.66% TIPS VIPSX 15% -2.17% -2.64% 1.98% 3.85% S&P 500 1.29% 16.18% 13.40% 7.31% Source: David Swensen, MarketWatch Main drivers of the underperformance are allocations to foreign developed markets, long-term bonds, TIPS and emerging markets. It’s not much of a surprise to see fixed-income instruments (i.e. long-term bonds and TIPS) underperform stocks (due to equity risk premium) over the long term. Analyzing the shorter period (up to 3-5 years), one can think of many reasons for the outperformance of US stocks vs. foreign developed and EM stocks. For long-term investors, arguments of mean reversion should make them comfortable holding on to diversified portfolio over the long term. As such, investors should not discard the model portfolio proposed by Swensen just yet. As mentioned, the list of carefully selected ETFs (must be low-cost and tax-efficient) should form the base of your portfolio. We will refer to this portion of the suggested portfolio approach as “Core Portfolio”. We will discuss the second portion of the proposed portfolio “Satellite Portfolio” in the future articles and share the rational for having such a satellite portfolio that might utilize a non-passive approach. Suffice it to say that EMH and RWH should provide enough confidence to individual investors to stick with the Core Portfolio allocations as long as the investors keep in mind that over the long run stocks provide positive real return. Actual Portfolio Allocations and ETFs Given the tax efficiency of ETFs, the author finds it more appropriate to use ETFs instead of mutual funds for the Core Portfolio. The actual list of ETFs and corresponding allocations is presented below: Asset Class ETFs Allocation Domestic Equity VTI 30% Foreign Developed Equity VEA 15% Emerging Market Equity VWO 5% Real Estate VNQ 20% Long-Term Treasuries TLT 15% TIPS TIP 15% There are a number of reasons for this recommendation: 1. The actual allocation to various asset classes is in line with David Swensen’s proposed allocations. Theoretical underpinning for passive investing is presented in the last section of this article. 2. The approach utilizes low-cost and tax-efficient ETFs. Typically, Vanguard ETFs are on the low end of fees. Also, ETFs are more tax-efficient than the mutual fund structure. A word of caution before you start implementing the recommendation – I’m not a tax advisor, and therefore, I strongly suggest you consult your tax advisor for any tax-related matters. Also, I would like to mention that this article is just the first one in the series. In the next articles, we will continue exploring the stock market theories and how they impact the way I invest. Next stop will be Harry Markowitz’s Modern Portfolio Theory and the need to diversify across a broad spectrum of asset classes. This article will be followed by Noisy Market Hypothesis, which should lift the spirits of investors who would like to “beat the market”. Appendix: Theory Dr. Eugene Fama, a Nobel Laureate, is thought of as the Father of Efficient Market Hypothesis (EMH). EMH suggests that current asset prices fully reflect all currently available information. To put it simply, stock prices should react only to news; and as you know, news is random in its nature. Due to this randomness, EMH implies that consistently outperforming the market on a risk-adjusted basis is impossible. In other words, don’t put your money into an individual “hot” stock or entrust to an active asset manager. Talking about randomness, one cannot skip mentioning the Random Walk Hypothesis (RWH), which traces back to Louis Bachelier. RWH argues that stock prices are random: chances that a professional analyst identifies a winning stock is similar to a flip of the coin. In a 1965 article, “Random Walks in Stock Market Prices”, Dr. Fama draws the parallels between EMH and RWH. As already mentioned, EMH and RWH imply that stock investors would be better off investing in passive index funds or mimicking such fund investments. On average, active investing (e.g. intentionally investing a higher portion of the portfolio in a specific stock or sector) is expected to yield similar risk-adjusted returns as passive investments. Some behavioral economists (note: we will cover behavioral finance and its implications in the future articles) would even argue that active investing should result in inferior returns, as emotions of investors will make them buy hot stocks just before these stocks peak and throw the towel just before the market bottoms. Industry practitioners, such as John Bogle of Vanguard, would further argue that investing is a zero-sum game: few basis points of alpha that one active manager generates come at the expense of another active manager. Furthermore, a typical individual investor who entrusted his/her funds to an active manager would come out short after receiving an average market return, less management fees and tax bill. Typical high turnover of active asset management mandates leads to higher transactions costs (e.g. bid-ask spread) and higher tax bill (i.e. short-term gains are taxed at a higher rate than long-term capital gains and dividends). All of the above suggests that low-cost, tax-efficient ETFs are optimal investment instruments for the Core Portfolio. References/Bibliography George A. Akerlof and Robert J. Shiller, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism , Princeton University Press, 2009 John Bogle on Investing: The First 50 Years , McGraw-Hill, 2000 Colin Read, The Efficient Market Hypothesists: Bachelier, Samuelson, Fama, Ross, Tobin and Shiller , Palgrave Macmillan, 2012 David Swensen, Unconventional Success: A Fundamental Approach to Personal Investment, Free Press, 2005 Next article: M odern Portfolio Theory: Introduce Alternatives To Your Portfolio

Tech Mutual Funds That Were Better Off In Q3

The technology sector has impressed with the third-quarter earnings numbers. The encouraging quarterly results have come at a time when the overall growth picture remains challenged. In such a backdrop, tech bellwethers such as Google’s parent Alphabet (NASDAQ: GOOG ), Facebook (NASDAQ: FB ), Apple (NASDAQ: AAPL ) and Microsoft (NASDAQ: MSFT ) have came up with impressive results, raising hopes of a sustainable momentum in this key sector. The tech sector’s stock-price performance reflects strength as tech stocks in the S&P 500 have outperformed the index over the trailing 4-week period. We at Zacks had predicted the momentum the tech sector should enjoy, as there were many key tech companies with positive Earnings ESP. However, the sector’s mutual funds were far from enjoying such encouraging trends. In a tough third quarter, Morningstar data reveled that the Technology fund category lost 7.7%. This dismal return is in line with the broader trends as benchmarks suffered their worst quarterly performance in four years. The Dow, S&P 500 and Nasdaq declined 7.6%, 7% and 7.4%, respectively. Just 17% of the mutual funds managed to finish in the green. This was a slump from 41% in the second quarter, which was again a sharp fall from 87% of the funds ending in the positive territory in the first quarter. However, the tech sector’s 7.7% loss was narrower than Healthcare’s loss of 13.7% and much narrower than the Energy sector’s 22.1% slump. Nonetheless, much like these two sectors, none of the technology mutual funds could finish in the positive territory in the third quarter. While the smallest loss from the tech sector came from the ICON Information Technology S Fund (MUTF: ICTEX ) that lost 1.4%, the biggest loser was the Matthews Asia Science & Tech Fund (MUTF: MATFX ) that lost 16.7%. Keep reading our Mutual Fund Commentary section, where we are reporting on performances and best picks from fund families and varied categories. Comparative Study: Technology Funds in Q3 As mentioned, much like the healthcare and energy fund categories, none of the technology mutual funds could finish in the green. However, technology was better off than the two sectors. In fact, the biggest loss among technology mutual funds was narrower than the smallest loser in the energy category. For the energy sector, the minimum loss was 16.9% posted by the Calvert Global Energy Solutions Y Fund (MUTF: CGAYX ). The ProFunds Oil Eqpmt Svc & Distr Svc Fund (MUTF: OEPSX ) was the biggest loser in third quarter with a 33.6% slump. As for the healthcare category, the smallest loser was the Turner Medical Science Lng/Srt Fund (MUTF: TMSFX ), which lost 5.4%. As for the biggest loser, the ProFunds Biotech Ultra Sector Svc Fund (MUTF: BIPSX ) lost 24.3% in the quarter. (Please Note: Two energy funds (same fund with different asset classes) ended in the green, but they were Trading Inverse or Bear funds that bet against the energy sector.) All the 199 technology funds we studied ended up in the red. The average loss for these 199 funds was 8%. This too compares favorably with the average losses recorded by the energy and healthcare categories. As for the energy sector, the average loss for the 103 funds was a staggering 23%. The average loss for the 115 healthcare funds was 13.4%. However, the technology mutual funds’ third-quarter performance lags the second-quarter performance. In the second quarter, 126 funds out of the 201 funds we studied had finished in the positive territory. The average gain for these 126 funds was 2.4%. While one fund had break even return, the remaining 74 posted an average loss of 1.2%. Coming back to the third-quarter performance, only 30 out of the 199 tech funds posted less than 5% loss. Meanwhile, 33 funds posted above 10% loss. Note: The above mentioned numbers include the same funds with varied asset classes. 15 Technology Funds with Least Losses Below we present the top 15 Technology mutual funds with best returns in Q3 2015: Fund Name Family Name Q3 Total Return YTD Total Return Average EPS Growth Expense Ratio Beta vs S&P 500 ICON Information Technology A (MUTF: ICTTX ) ICON Funds -1.41 1.94 21.7 1.75 1.19 MFS Technology Fund A (MUTF: MTCAX ) MFS -2.36 0 13.49 1.3 1.05 Fidelity Select Sftwr & Comp Svcs (MUTF: FSCSX ) Fidelity -2.43 -1.92 23.49 0.77 1 Saratoga Technology & Comm A (MUTF: STPAX ) Saratoga Adv -2.46 -2.28 15.21 2.27 0.99 T. Rowe Price Global Technology (MUTF: PRGTX ) T. Rowe Price -3.14 4.87 16 0.91 0.98 Goldman Sachs Tech Tollkeeper A (MUTF: GITAX ) Goldman Sachs -4.34 -1.06 20.63 1.49 0.91 Dreyfus Tech Growth A (MUTF: DTGRX ) Dreyfus Prem -4.45 -0.65 18.88 1.29 0.89 Red Oak Technology Select (MUTF: ROGSX ) Oak Associates -4.46 -7.18 13.92 1.11 1.14 Columbia Global Technology Growth A (MUTF: CTCAX ) Columbia -4.98 0.61 14.06 1.4 0.93 T. Rowe Price Media & Telecom (MUTF: PRMTX ) T. Rowe Price -5.24 1.09 9.77 0.79 0.6 Putnam Global Technology A (MUTF: PGTAX ) Putnam Funds -5.37 -2.44 15.57 1.26 0.91 Wasatch World Innovators (MUTF: WAGTX ) Wasatch -5.92 0 23.77 1.77 0.74 Deutsche Science and Technology A (MUTF: KTCAX ) Deutsche AWM -6.08 -3.25 15.45 0.98 1.21 Henderson Global Technology A (MUTF: HFGAX ) Henderson -6.25 -1.73 8.24 1.36 0.85 Victory Munder Growth Opport Fd A (MUTF: MNNAX ) Victory -6.39 -1.4 16.97 1.49 1.02 The list of 15 smallest losers in the third quarter is spread across diverse fund families, with key names like Fidelity, T. Rowe Price, Goldman Sachs and Putnam Funds. Except for two funds from the T. Rowe Price, T. Rowe Price Global Technology Fund and the T. Rowe Price Media & Telecom Fund, all fund families have only one fund featuring in this list. However, among the fund families we mentioned, Fidelity’s Fidelity Select Sftwr & Comp Svcs Fund lost the least and was followed by T. Rowe Price, Goldman Sachs and Putnam Funds. Meanwhile, seven of these mutual funds carry a favorable Zacks Mutual Fund Rank. Funds such as the MFS Technology Fund A, the Fidelity Select Sftwr & Comp Svcs, the Dreyfus Tech Growth A Fund, the T. Rowe Price Media & Telecomm and Putnam Global Technology A Fund sport a Zacks Mutual Fund Rank #1 (Strong Buy). Separately, the Columbia Global Technology Growth A Fund, the Wasatch World Innovators Fund and the Deutsche Science and Technology A Fund hold a Zacks Mutual Fund Rank #2 (Buy). Only three funds carry a Sell rating. These are the Saratoga Technology & Comm A Fund, the T. Rowe Price Global Technology Fund and the Goldman Sachs Tech Tollkeeper A Fund. They presently carry a Zacks Mutual Fund Rank #4 (Sell). Notably, 13 out of these 15 funds boast an average EPS growth over 10%. This is encouraging and compliments the positive earnings season the sector enjoyed. Among the 52 of the 64 tech companies in the S&P 500 that have reported results, total earnings jumped 7% year on year on 4.8% higher revenues. While 69.2% beat EPS estimates, 57.7% beat revenue estimates. Investors will thus hope to see a rebound in the fourth quarter. Link to the original post on Zacks.com