An Opening for Biotech Mutual Funds?

This article was originally published in 2016, but its message continues to be valid.

What a surprise! Some drug companies discovered that increasing the price of a life-saving drug by hundreds of percent in one swoop will alienate customers and regulators. Biotech stocks, and biotech mutual funds, have suffered as a result of these ill-considered price increases. For example, the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB) has lost 16% this year.

But an article in Fox Business, The Big Reason You Shouldn’t Give Up on Big-Cap Biotech, obviously has a more optimistic take on the sector,

“Undeniably, biotech investing is risky, and past success doesn’t guarantee future success. But studies have proven time and time again that long-haul thinking outperforms short-term trading, and that suggests that rather than selling big-cap biotechs like Gilead Sciences, Celgene, and Regeneron, you might want to be buying.”

The article argues that these names each have major catalysts that could do good things for shareholders in the future.

The same thinking holds for biotech mutual funds with these and other big names; there may be brighter days ahead if you can be patient. This is not a recommendation, just a heads-up on a future opportunity.

Mutual Fund Flows

It’s not a terribly big deal for most of us, but worth knowing about nonetheless: mutual fund flows.

A company called Lippers (now part of Thomson Reuters), tracks the amount of money flowing into and out of mutual funds. That includes not only mutual funds as a whole, but different sectors such as large cap, emerging market, healthcare and so on. Here’s an example, by way of an article on the Lipper website,

“Thomson Reuters Lipper’s fund macro-groups (including both mutual funds and exchange-traded funds [ETFs]) suffered for the fund-flows week ending Wednesday, October 5, their worst weekly net outflows of 2016. The total negative flows of $34.4 billion surpassed the previous amount of $33.3 billion for the fund-flows week ending March 31, 2016. This past week’s outflows were driven by money market funds (-$28.5 billion) and equity funds (-$9.1 billion). Taxable bond mutual funds (+$2.9 billion) and municipal bond funds (+$325 million) were both able to take in net new money for the week, somewhat reducing the overall net outflows.”

As I say, it’s not really a big deal, but worth knowing that big picture stuff like this can affect our individual mutual funds in a minor way.

As we can imagine, when more money is flowing in than flowing out, demand is increasing so prices will go up; on the other side of the coin, when demand for mutual funds goes down (by way of more money flowing out than in, then prices will go down).

In most cases, the difference it will make to our fund prices may be imperceptible, but mutual fund flows are there in the background.