The role of specialization in mutual fund investment strategies: An exploratory study of the life sciences industry.
DOI:
https://doi.org/10.5912/jcb610Keywords:
Specialty mutual funds, investment strategy, life sciences, biotechnologyAbstract
This paper explores possible differences in investment strategies between specialty and non-specialty funds in the life sciences industry. The results were based on proprietary information collected in telephone interviews from 28 mutual funds located in nine European countries. As predicted, specialty funds have shorter holding periods, are more event-driven, and are more likely to focus their investment strategies on established technologies. Counter to our predictions, specialty funds are no less likely to invest in novel technologies. Also counter to predictions, specialty funds place more importance on conventional finance methods in selecting firms, and they are no more likely to use non-conventional finance valuation or non-financial criteria when selecting companies for their portfolios. This exploratory study provides new insights into differences in investment strategies between specialty and non-specialty mutual funds, which may help to explain the underlying performance difference, found in previous research. Furthermore, this study may be helpful to alert life sciences entrepreneurs to the factors that these mutual fund managers are likely to consider when determining their investment strategies. Finally, it provides insights relevant to investors seeking to build better investment strategies for life sciences stocks.
References
Cuthbertson, K., Nitzsche, D. and O'Sullivan, N. (2010) Mutual Fund Performance: Measurement and Evidence,Financial Markets, Institutions & Instruments 19: 95–187.
Kaushik, A., Pennathur, A. and Barnhart, S. (2010) Market timing and the determinants of performance of sector funds over the business cycle. Managerial Finance 36(7): 583–602.
Dellva, W.L., DeMaskey A.L. and Smith C.A. (2001) Selectivity and market timing performance of Fidelity sector mutual funds. The Financial Review 36: 39–54.
Kacperczyk, M., Sialm C. and Zheng, L. (2005) On the industry concentration of actively managed equity mutual funds. Journal of Finance 60(4): 1983–2011.
Kjetsaa, R. (2005). The performance of sector mutual funds relative to benchmarks. Journal of Academy of Business and Economics. 5(2): 85–99.
Brands, S., Brown, S.J. and Gallagher, D.R. (2005) Portfolio concentration and investment manager performance. International Review of Finance 5(3-4):149–74.
Burlacu, R., Fontaine, R. and Jimenez-Garces, S. (2006) Industry specialization and performance: a study of mutual funds. Finance 27: 33–70.
Huij, J. and Derwall, J. (2011) Global equity fund performance, portfolio concentration, and the fundamental law of active management. Journal of Banking & Finance 35: 155–165.
Duan, Y., Hu, G. and McLean, R.D. (2009) When is stock-picking likely to be successful? evidence from mutual funds. Financial Analysts Journal 65(2): 1–29.
Mazzucato, M. and Tancioni, M. (2008) Innovation and idiosyncratic risk: an industry- and firm-level analysis. Industrial and Corporate Change 17(4): 779–811.
Golec, H. and Vernon, J.A. (2009) Financial risk of the biotech industry versus the pharmaceutical industry. Applied Health Economics and Health Policy 7(3): 155–65.
Paul, S.M., Mytelka D.S., Dunwiddie C.T., Persinger C.C., Munos B.H., Lindborg S.R. and Schacht, A.L. (2010) How to improve R&D productivity: the pharmaceutical industry’s grand challenge. Nature Review Drug Discovery 9(3): 203–214.
Dohlman, E., Hall, T. and Somwaru, A. (2002) Regulatory events and biotech firm share prices. Applied Economic Perspectives and Policy 24: 108–122.
Bastin, V. and Hubner, G. (2006) Concentrated announcements on clustered data: an event study on biotechnology stocks. Financial Management 35: 129–57.
Mc Namara, P. and Baden-Fuller, C. (2007) Shareholder returns and the exploration–exploitation dilemma: R&D announcements by biotechnology firms. Research Policy 36(4): 548–565.
Lazonicka, W. and Tulumb, O. (2011) US biopharmaceutical finance and the sustainability of the biotech business model. Research Policy 40(9): 1170–1187.
Silverman, E. (2006) Who took the tech out of biotech? Nature Biotechnology 24(3): 255–256.
Pisano, G.P. (2006) Can science be a business? Lessons from biotech. Harvard Business
Review 84(10): 114–125.
Pisano G.P. (2006) Science Business: The Promise, The Reality, and The Future of Biotech. Boston: Harvard Business School Publishing.
Hopkins, A.L. and Groom, C. R. (2002) The druggable genome. Nature Review Drug Discovery 1: 727–730.
Kramer, J.A., Sagart, J.E. and Morris, D.L. (2007) The application of discovery toxicology and pathology towards the design of safer pharmaceutical lead candidates. Nature Review Drug Discovery 6(8): 636–649.
Büning, H. (2013) Gene therapy enters the pharma market: The short story of a long journey. EMBO Molecular Medicine 5(1): 1–3.
Lam, P. et al. (2013) The innovative evolution of cancer gene and cellular therapies. Cancer Gene Therapy, advance online publication 1 February, doi: 10.1038/cgt.2012.93
Hartmann, M. and Hassan, A. (2006) Application of real options analysis for pharmaceutical R&D project valuation—empirical results from a survey. Research Policy 35(3): 343–354.
Copeland, T.E. and Keenan, P.T. (1998) Making real options real. The McKinsey Quarterly 3: 128–141.
Villiger, R. and Bogdan, B. (2005) Getting real about valuations in biotech. Nature Biotechnology 23(4): 423–428.
Investment Company Institute. (2012) A review of trends and activity in the U.S. investment company industry. Investment Company Factbook, http://www.icifactbook.org/2012_factbook.pdf, accessed 13 September 2012.
Switzer, L.N. and Huang, Y. (2007) How does human capital affect the performance of small and midcap mutual funds? Journal of Intellectual Capital 8(4): 666–681.
Fletcher, J. and Ntozi-Obwale, P. (2008) Arbitrage bounds and UK unit trust performance. Journal of Business Finance and Accounting 35(3-4): 580–600.
Yan, X. (2008) Liquidity, Investment Style and the Relation between Fund Size and Fund Performance. Journal of Financial and Quantitative Analysis 43(3): 741–768.
Cremers, M.J.K. and Petajisto, A. (2009) How Active Is Your Fund Manager? A New Measure That Predicts Performance. The Review of Financial Studies 22(9): 3329 – 3365.
