Q&A With Dresdner RCM's Faraz Naqvi

Meet the Family Q&A

(DRBNX)Dresdner RCM Biotechnology and (DGHCX)Dresdner RCM Global Health Care Co-Manager Faraz Naqvi

(DRBNX)Dresdner RCM Biotechnology looks positioned to accomplish something pretty amazing: back-to-back years in the Century Club.

The Century Club (and if you have to ask, it means you missed out on some big gains last year) includes mutual funds that had a calendar-year return of 100% or better. If a fund does it once, it's pretty impressive. If it does it twice, it's worth talking to the folks who run the thing.

Faraz Naqvi is co-manager of the fund along with fellow M.D., Camilo Martinez. The doctors have been awesome: The fund is up 109% so far this year according to Morningstar, after surging 111% in 1999. As if that weren't enough, Naqvi has also co-managed the (DGHCX)Dresdner RCM Global Health Care fund, racking up a 79.3% return so far this year.

The key going forward is, can Dr. Naqvi continue to operate so well when the biotech sector cools off a bit?

TSC: Biotech's had some pretty wild ups and down this year. What's your take on where the sector's been and where it's heading?

Naqvi: Well, the sector overheated [early on]. In just January through March, the entire sector was up some 60%. Then in March, President Clinton and [British Prime Minister] Tony Blair made some statements about the proprietary nature of the human genome, trying to make [that information] public, not private. By itself, that's not something that would kill the industry. But it spooked investors, so you saw general outflows of money. That's when we lost a lot of our gains. But we actually recovered over the summer.

TSC: Why the recovery?

Naqvi: Our thesis was that the first mapping of the human genome [announced in June 2000] was going to generate a lot of investor interest. So up until the late summer we focused on the genomics-type companies, which deal in information from the mapping of the human genome.

Then we made a shift into product [biotech] companies, which are either selling or developing drugs and treatments. They may marginally have to do with genomics, but it's not really their immediate business.

I think that shift served us well in terms of outperforming our peers.

TSC: Both your funds have had a lot of turnover this year. (According to MoneyCentral, turnover at the Biotech fund is 431% and at Global Health Care is 394%. That compares with average category turnover of 310%.) Is this typical for your funds?

Naqvi: Turnover is a little bit artificially elevated because at the beginning of the year, both funds were really small. In a 10-month span, the biotech fund increased from $14 million to $950 million. We had a huge amount of subscriptions and redemptions when the fund was small. So there's been a real amplification of that turnover effect.

We tax-managed our fund through Oct. 31 to get rid of a lot of losses. The hit investors will take to the fund in terms of distribution will be zero in the biotech fund. Though the turnover was high, the impact to shareholders will be negligible or zero. But for people buying into the fund, they should expect yearly turnover around 80% to 100%.

TSC: Are you concerned that biotech won't be able to sustain high returns going forward? How would you respond to someone who says not to buy into a volatile sector after a really good run?

Naqvi: In terms of buying in now, my belief is that in some of the biotech companies we will see some profit-taking. Some will underperform for the remainder of the year, and some will do fine.

We've basically reduced our overall biotech exposure [in the global health care fund]. We've been really selective at choosing companies that will do well. Our general philosophy in global health care is not that we'll just invest in big-cap pharmaceutical, but that we'll go with whatever's making money. [But] right now we're reducing our overall biotech holdings and increasing our pharmaceutical exposure. Earlier this year or last year, you knew biotech was going to do well; now we think pharmaceuticals are going to do very well.

TSC: Why will pharmaceuticals start to look good?

Naqvi: There's been some shifting of general portfolio managers into pharmaceuticals because of their defensive nature. [The election] has been held up as something that could hold these companies down, but we don't think it's going to be that bad [for pharmaceuticals].

The names [we hold] are in both biotech and pharmaceuticals. If you actually look at our portfolios, it takes a lot for us to introduce or change a name, but the weightings change. These are companies we believe in on a long-term basis.

TSC: What names do you like now?

Naqvi: In biotech, we're investing in companies that have been beaten down as of late, like Amgen(AMGN), Biogen(BGEN) and Metamune. Those names have really declined in market value. They're pretty equivalent to the big pharmas in terms of valuation on a P/E-to-growth basis. They're very fast-growing, though on a price-to-earnings basis, they're still expensive.

We like Pfizer(PFE) a lot, because of the pipeline Pfizer's developing and the growth rate. We really like Pharmacia(PHA). It seems to us to have a lot of growth potential, and also to have come down recently. On a valuation basis, it's really attractive. Another name we're warming up to is Schering-Plough(SGP), because of their potential for not only second- generation Claritin, but they also have an entire franchise in Hepatitis C.

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