With commodity-related stocks taking it on the chin this year, it’s not surprising to see the Sector Equity Funds macro-group (+8.34%) significantly underperform its U.S. Diversified Equity (USDE) Funds (+14.95%) macro-classification cohort on a cumulative year-to-date performance basis through the week ended May 16, 2013. Seven of the ten equity classifications that are suffering negative year-to-date returns are found in Lipper’s Sector Equity Funds macro group, with Precious Metals Equity Funds (-38.16%), Commodities Precious Metals Funds (-15.00%), and Commodities Base Metals Funds (-12.30%) suffering some of the largest declines in the equity universe. As might be expected given the strong market rally, the bear-oriented Dedicated Short-Bias Funds classification (-16.88%), located in Lipper’s USDE Funds macro-classification, has suffered the second worst decline in the equity universe during the period.
Figure 1 Lipper Sector Equity Fund Classifications’ Year-to-Date Performance Through May 16, 2013
Source: Lipper
As a result of investors’ recent preference to take on more risk and because of the prevailing tailwinds from the current market rally, three of the five top-performing equity classifications are also found in the Sector Equity macro group: Health/Biotechnology Funds (+23.12%), Global Health/Biotechnology Funds (+21.42%), and Consumer Services Funds (+20.01%). These three classifications are surpassed only by Equity Leverage Funds (+24.85%) and Japanese Funds (+23.85%).
Digging a little deeper into the Health/Biotechnology Funds classification, we see that funds more heavily weighted toward biotechnology issues have benefitted from the U.S. Federal Drug Administration’s more accommodative approvals process, from new products in the pipeline, and from better-than-expected Q1 earnings reports. From a year-to-date performance perspective the three top-performing health/biotechnology funds show biotechnology exposure in excess of 87%. However, the average fund in the health/biotechnology classification shows a 35.8% exposure to biotechnology issues, while 28.2% is in pharmaceuticals, 21.5% in healthcare providers and services issues, and 15.9% in healthcare equipment and supplies. To put this difference into perspective, the over-allocation of Fidelity Select Biotechnology Portfolio (+32.46% year-to-date return) in biotechnology issues (96%) compared to the 36% exposure to biotechnology issues in the average health/biotechnology fund in Lipper’s database (+23.12%) accounts for a 6.07-percentage-point outperformance, according to Lipper’s Active Indices.
Table 1 Returns for the Three Top-Performing Health/Biotechnology Funds, Year to Date through May 16, 2013
Table 2 Three-Year Lipper Leader Ratings (as of April 2013) and Select GICS Industries for the Three Top-Performing Health/Biotechnology Funds, Year to Date through May 16, 2013
Some investors are asking themselves if this rally in biotechnology issues can continue, since many of the stalwarts in the industry have been setting new highs. Many argue that the stronger-than-expected profit margins, improved regulatory environment, and solid fundamentals bode well for this group. Time will tell.
Investors who wish to do a little more research on the top-performing funds in the health/biotechnology group (or any other) can visit our fund screener page on Reuters.com or click on the following links to drill down further on the funds presented in this segment. While these funds are not to be considered a recommended list, they are a few funds you might want to further research.
Market Vectors Biotech ETF
Fidelity Select Biotechnology Portfolio
Fidelity Advisor Biotechnology Fund A Shares
