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Why One Biotech Fund Is a Better Buy Than Its Almost Identical Sister Fund

Investors must not see that H&Q Healthcare and H&Q Life Sciences have almost identical portfolios.

One of the constants in this column for the past dozen years has been David Tepper. He's a money manager in San Francisco (

Tepper Capital

) who specializes in closed-end funds. His comments are usually buried in one of the small "short positions" near the bottom of my column. Whenever he weighs in I listen because his instincts, as far as this column is concerned, have been excellent.

A year ago, for example, he

mentioned the

Hambrecht & Quist Healthcare Investors

(HQH) - Get Tekla Healthcare Investors Report

and

Hambrecht & Quist Life Sciences Investors

(HQL) - Get Tekla Life Sciences Investors Report

funds, which are both run by the same veteran manager (Alan Carr) and both have large biotech holdings. At the time they were both trading at discounts in the 25% range to their net asset values. "If small-caps ever come back in favor, these two funds could move big time," he said.

By September, when I last

checked with him, both stocks had posted decent gains and the discounts had narrowed. Still, Tepper was bullish, based on merger activity among the biotechs.

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Great call, but get this: Historically, Hambrecht & Quist Life Sciences has been more of a pure biotech fund than Hambrecht & Quist Healthcare, which in the past has included the likes of service companies, managed care and hospitals.

At least that's what Wall Street has been thinking, and you can see it in the current discounts of both funds (this is the good part of the story, folks): While the stocks of both funds have done quite well this year -- both rising more than 64% -- H&Q Healthcare currently trades at an 18% discount, while Hambrecht & Quist Life Sciences trades at a 4% discount.

Why such a big spread? According to a fund official, it's simply because the Life Sciences fund has received a bigger boost from Wall Street. It's been a favorite, in fact, of Michael Murphy, who publishes the

California Technology Stock Letter

. Murphy told me late yesterday the only reason he has pushed Life Sciences over Healthcare is that Life Sciences historically has been more of a pure-play biotech fund.

Which

was

true. But as he found when he compared the two portfolios while he was on the phone with me yesterday, the two portfolios have converged. "Right now they're basically holding the same names, with just different proportions in one than in the other," a fund official said.

Which brings us back to the spread: What should an investor do? Murphy would only dollar cost average (or buy a specific amount on a certain date) into Life Sciences at this small a discount. Tepper, who owns both funds, isn't sure he would buy the fund outright at this skimpy a discount, either. But he still believes Healthcare is a buy, "assuming the market holds together."

He notes that during the last big biotech boom, in the late '80s and early '90s, Healthcare traded at a discount wider than 20%. "I was buying it for 7 or 8 bucks, when the NAV was 10 (its NAV is now 41 3/4). By the time the NAV got to the mid-to-high teens, the fund actually started selling at a premium. At that point I started to sell. But the momentum of the NAV was so strong that the NAV went to the high 20s and the fund basically sold at or above the NAV all the way up.

"Now, biotechs have been out of favor for so long, and they're institutionally underowned. The trump card yet to be played is that we could see six to 24 months of biotech IPOs, and anywhere from 15% to 25% of the holdings in these portfolios involve private placements in companies that haven't yet gone public. So, the NAVs on these funds could run."

So says Tepper. Who, when it comes to closed-ends, has not let this column down.

Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

herb@thestreet.com. Greenberg also writes a monthly column for Fortune.

Mark Martinez assisted with the reporting of this column.