Same Song, New Verse: Hot Money Arrives Late for Biotech Party

Despite Wednesday's rally, it appears many latecomers are underwater on their biotech fund investments.
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Today's rally notwithstanding, if you bought a biotech or health care mutual fund in the past few weeks, you might be crawling around on the floor looking for your teeth.

Recent fund flow numbers aren't yet available, but it appears many fund investors bought shares just in time for the selloff, which began about two weeks ago.

In January, health funds took in $2.4 billion more than they lost to redemptions, compared to a $1.4 billion in net inflows for all of 1999, according to Boston fund consultant

Financial Research

. These funds were in net outflows for each of the last four months of last year.

Given January's sudden and steep inflows, there's plenty of reason to believe the biotech buying frenzy continued into February and March. That points to a potentially large group of biotech latecomers.

Biotech stocks heated up in a hurry last year, battling technology and Internet stocks for top position in a frothy, momentum market. Investors got excited about the

Human Genome Project

-- a public-private effort to map the human genetic makeup that could make it easier for biotech firms to pinpoint and attack disease.

How excited were investors? The

American Stock Exchange Biotechnology Index

is up 161% over the past year.

But many pros say uninformed and momentum investors who piled into biotechs are responsible for a recent selloff that has little rhyme or

reason. For example, the catalyst for the selloff appears to have been a statement by

President Clinton

and

British Prime Minister Tony Blair

last week that the genome project's data should be free. Pros say it was old news, but it triggered selling anyway.

Industry experts

say the sector could be in for a bumpy ride as the market separates the wheat from the chaff.

"These businesses are very complicated, and some people who bought them in a momentum run-up don't understand them at all," says Robert Burgoyne, chief technology strategist with

Monument Funds

, who works on the

(MFMAX)

Monument Medical Sciences fund.

Only two health funds,

(FSHCX) - Get Report

Fidelity Select Medical Delivery and

(RYHIX) - Get Report

Rydex Health Care, are in the red since Jan.1, according to

Lipper

. But many are down more than 15% over the past month, same as the

Amex Biotech Index

.

"Things go to extremes with biotech and now we've seen it both ways," says Rob Hallisey, co-manager of

(JHGRX)

John Hancock Health Sciences, a diversified health care fund that's down 6.7% over the past month but still up for the year.

"The guy who bought in on Feb. 28 is sitting on a pretty big loss," says Tom Tyson, an analyst with Financial Research.

He and others speculate that recent health fund buyers might be tech-oriented investors looking for the next new thing (not that fat biotech returns are exactly

new). But those who recently piled in hoping they're on the ground floor have probably discovered they're living in a cold-water, sub-basement studio.

The $4.9 billion

(JAGLX) - Get Report

Janus Global Life Sciences fund, for example, lost more than 8% on Monday alone. The fund had about 28% of its assets bet on biotech stocks at the end of last month, according to the company's Web site.

The fund might also be having a hard time because of its stake in online concern

Healtheon/WebMD

(HLTH)

. Janus bought 15 million shares of the company at 62 in a private deal in January. Wednesday afternoon it closed at 31 15/16. It's not yet clear how many of those shares went to Global Life Sciences, but the stock was among the fund's top-10 holdings as of Feb. 29.

What's ahead for biotech? Pros say it could be a continuation of Wednesday's rally, in which the Amex biotech index gained 8%.

"I wouldn't be surprised by a strong recovery later this year," says Robert Burgoyne. He says the modest market caps of many biotech stocks can work in their favor since it doesn't take much money to send them up. Of course, they can drop in a hurry for the same reason.

Hallisey says the sector may follow the lead of a bellwether like

Amgen

(AMGN) - Get Report

. Next month, Amgen will square off in a Boston courtroom against

Transkaryotic Therapies

(TKTX)

in a patent battle over anemia-drug

Epogen

. Hallisey, who owns Amgen shares in his fund, thinks a loss could hit Amgen and the sector hard.

Of course, if you bought a health fund anytime in the past few weeks you might be wondering how much harder it gets.