Biotech Fans Could Have a Hangover

Scientific breakthroughs can boost stock prices, but they can't immunize them from sell-offs. That's worth keeping in mind as biotech and pharmaceutical stocks, spurred on by the promise of innovations in genetic therapy, continue to boom. When markets go south, valuations matter, and with the all-cap Nasdaq Biotechnology Index (roughly split 80/20 between biotech and pharma) recently trading at a trailing 12-month average price/earnings ratio near 30, versus the Russell 3000 Growth Index's 22, this corner of the market could be poised to fall further than others. The Nasdaq Biotechnology Index's 18.2% plunge from early March to mid-April of 2014 was nearly 15 percentage points worse than the Russell index's. As biotech has enjoyed a remarkable rally, we sought some funds with at least a fifth of their portfolios in biotech and pharma combined.

Among funds in the Morningstar 500 without a health-care mandate,

Moving down the market-cap spectrum, mid-growth fund

World-stock fund Oppenheimer Global Opportunities OPGIX also has a 23% combined stake in biotech and pharma, as of March 2015, 15 percentage points more than the MSCI All-Country World Index. Nearly half of the fund's exposure is in top holding Nektar Therapeutics NKTR, a domestic small-cap firm. Big sector bets and a preference for smaller-cap firms are nothing new for longtime manager Frank Jennings. Still, the fund's position in Nektar is larger than usual, which is a concern. It suggests that Jennings' prior attempts to reduce the fund's volatility, consistently among the category's highest, have come to an end. That, along with succession risk, recently led to a downgrade in the fund's Morningstar Analyst Rating to Neutral from Bronze.