So, what exactly is the difference between a biotechnology fund and a healthcare fund, and which ones might present a good investment opportunity?
A biotechnology fund invests primarily in companies that use biological processes in the development or manufacture of a product, or in the technological solution to a problem.
For example, a biotechnology company may use genetic research to develop the kinds of drugs prescribed by specialist consultants in hospitals. Such bio drugs cater for niche needs and are often used to treat terminal conditions such as cancer by extending survival or improving quality of life.
A healthcare, or pharmaceutical, fund will invest in companies that make a more diverse range of products than biotech companies. These may include consumer products such as toothpaste, baby milks, vitamins and nutritional drinks, alongside the types of drugs prescribed by local GPs.
Pharmaceutical companies tend to have a very different business model from biotechnology companies. They are often very large organisations with high research, employee and marketing costs associated with multiple products.
Biotechnology companies on the other hand tend to be small, niche and cash generative with lower costs.
Biotech, Healthcare vs. FTSE All Share, 3yr
One fund investing in biotechnology companies is the AXA Framlington Biotech fund: a higher-risk fund, ideal for investors looking to inject additional diversification and a degree of specialism into their portfolio.
The fund is managed by Andy Smith who has a doctorate in molecular biology and previously spent six years developing products for SmithKline Beecham Pharmaceuticals.
Smith looks to identify companies that offer the potential for high-quality growth, a robust financial discipline and strong management team, while analysing key metrics such as earnings growth ratios, together with current and future projections.
Smith’s approach has certainly paid off, with the AXA Framlington Biotech fund demonstrating a positive five-year return to 5 February of 30.1 cent on a cumulative basis.
In the healthcare/pharmaceutical sector, the AXA Framlington Health fund has enjoyed similar success, with a positive five-year return to 5 February of 18.96 per cent on a cumulative basis.
The fund is suitable for investors looking for exposure to large blue-chip pharmaceutical companies in what is widely regarded as one of the most defensive and least volatile individual company sectors.
The AXA Framlington Health fund aims to achieve growth through investment in healthcare, medical services and medical product companies worldwide.
But what about the concerns over healthcare reform in the US? Fund manager Deane Donnigan is convinced many investors will return to the sector once the overhang of healthcare reform begins to lift and economic recovery matures.
As for 2010, she believes the sector is well positioned for a strong year of performance and advocates being selective at both an industry and stock level to best take advantage of the diversity of fundamentals and valuations inherent in the sector.
Andy Parsons is Advice Team Manager at The Share Centre. The views expressed here are his own and do not necessarily reflect those of his company.