Today's Daily Interview checks in with Samuel D. Isaly, the portfolio manager for the
Eaton Vance Worldwide Health Sciences fund, the top-performing health care fund over the last 10 years, according to
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Isaly has managed the fund since 1989 and over the 10 years ending in April, the fund has returned an annualized gain of 22.2%, compared to 15.2% for the
over the same period. In 2000, the fund delivered a stellar return of 81.6%, outperforming its peers by more than 26 percentage points.
This year, Isaly's fund is down slightly after a strong run so far in May. Here, he explains his bullish long-term view for the health sciences industry, which he believes will come to dominate the market over the next decade just as tech stocks did in the 1990's.
TSC: What are your investing style and focus that have made your fund perform so well?
We have broad principles and good execution of those principles. On the execution side, we have more research throw-weight than any other firm to my knowledge. We currently have 48 names in our portfolio and we have 12 analysts.
With respect to the theory, we believe that investing should be according to sectors, worldwide. We further believe that in our sector you should invest from the point of discovery all the way to distribution. By that, I mean looking at companies that do early laboratory work, all the way to the major companies that distribute products to customers, like
. That is our general principle, to invest all along the continuum of the industry.
So worldwide and continuum would summarize our principle. Research intensity would summarize our execution.
TSC: How do you both increase and decrease the universe at the same time? Biotech is a notoriously sharp-moving industry.
We pick from 500 companies in our industry universe. And we do a daily comb but not a daily trade. Our turnover is rather low, about 30%. Our average holding period is more than three years.
TSC: What would you say is the average time span from discovery to distribution that you mentioned?
Five to 10 years.
TSC: Could you give us the picture of the investing landscape for biotech this year, as opposed to 1999 and 2000?
1999 was not an
easy year, but the year 2000 was like shooting fish in a barrel. In 2000, big caps worldwide moved up by about 25%. And that happened in all the major geographies -- Japan, Europe and the U.S. Our choice of big caps rose about 50%, so our stock selection was strong. Biotech moved up 50% or more and our selections moved up 100%. So the combination of half of the portfolio being up 50% and the other half up 100% would suggest a 75% return, to simplify it a bit. In fact, I think we did 82%. The underlying or background environment was positive. In 1999, it was more of a focus on big caps. But we're not so much of a big-cap fund.
In 2000, the developments in the stocks were fully supported by fundamental advances. Even so, the strong environment took place in a context where technology, which represented 30% of the market in December 1999, fell 50% in 2000.
With such a big sector under stress, it caught up to us in 2001. And so we also fell along with other health and biotech funds. But it was a result of what we believe was a sector rotation, not any deterioration in fundamentals. So we see powerful fundamentals continuing in 2001. I have sometimes said that if the decade of the 90's belonged to tech, the first decade of 2000 will belong to health sciences.
Because of powerful scientific advances, which are a very positive thing for the discovery companies that account for the half of our portfolio. It's also very positive for the distribution companies, because discovery companies will go to the distribution companies to get their products marketed around the world.
TSC: Are you happy with earnings that came out in the last quarter for the companies you own?
Profits were marvelous and they were accompanied by a rise in stock prices. I contend that earnings-per-share advance in our portfolio will be 20% in 2001, without a doubt.
TSC: Which sectors do you like and which companies do you like within those sectors?
We call our fund a health sciences fund, concentrating on biotech and pharmaceuticals, so we are not active in devices and services. Right now, we're about 70% in the U.S and 30% international.
We recently took new positions in
. I'd rather not go beyond that except to say we have taken new positions. Our largest positions are Novartis,
. I am proud that two out of the five here you have probably never heard of. But these are spectacular companies that you'll one day discover at a far higher price.
TSC: Bristol-Myers Squibb (BMY) - Get Bristol-Myers Squibb Company Report was in the news recently for its efforts to win diabetic patients over to their drug before generics hit the shelves. As an investor, how does one plan for such eventualities? How do you assess the risks and rewards of a company with a pipeline of untested but promising drugs and a deteriorating old product lineup?
Analytic intensity helps us get inside the company's present and past performance. Half of our research team has a scientific background while the other half has a financial background. We need both skills coming to conclusions in our stock selections.
How do we look at untested new drugs? I've sometimes used the analogy of a bathtub: The water is running from the tap, but the drain is open. The exit hole is patent expiration, while the water from the tap represents new patent candidates. We do our best to determine if the tub is filling or emptying. So we balance these two factors, incoming and outgoing.
TSC: And Bristol-Myers?
It's rapidly emptying.
TSC: How does an individual investor cope with the notoriously fast-moving biotech sector?
Isaly: The world's stock market capitalization is $30 trillion. Drugs and biotech are $3 trillion. Fifteen companies account for 60% of that $3 trillion. Investors could buy any one of those 15 and do at least satisfactorily over the next decade. But if investors were to move to smaller companies, they'd very much increase their risk. Individual investors should not waste their efforts trying to do this. They should look to professionals.
TSC: Does it warrant concern that drug companies are deeply discounting the AIDS drugs they provide to Africa, raising the specter of pricing power erosion?
The discounts in Africa do not imply discounts in the developed world. Consumers, politicians and voters understand that the developed world is subsidizing the less developed world. And provided that there'll be a free market, this will continue, and pricing in the developed world will not be at risk.