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Kudos to an innovative new biotech fund

Friday, 28-November-2014

There is going to be an innovative new exchange-traded biotech fund coming out next month that caught my eye, and I think this is worthy of some attention because it could represent the first of many of its kind.  It is the Poliwogg Regenerative Medicine Fund, Inc., and it will trade under the ticker symbol: PRMF.  The fund currently is in the middle of an IPO roadshow and the portfolio manager, Brock Reeve, told me they hope to have it launched and trading by Christmas.  You can learn more by checking out this webpage that has been set up for the IPO.


First, for full disclosure, I want to say that I do not have any financial ties to this product.  I am not writing this to endorse it specifically as an investment, nor am I necessarily a regenerative medicine person.  However, what I do think is very interesting about it is 1) the way the fund specifically targets a subsector of biotech and 2) the way it is structured as an exchange-traded product.  Both of those factors I think represent big unmet needs in our industry, and I have a feeling other investment vehicles like it will follow over time.  It could represent a new wave in biotech finance so I would put it on your radar.


I am sure everyone is aware of the explosion of exchange-traded funds that have hit investing over the last decade.  According to the Investment Company Institute, as of July, there are over 1,375 ETFs in the United States, and combined they have about $1.8 trillion assets under management.  For comparison, this is roughly equal to 12% of total net assets managed by long-term mutual funds.  While these impressive numbers are a testament to the appeal of this type of investing, frankly, I think it has reached the point of overkill.  Most good ideas have already been tried, and many new funds are just marketing gimmicks than do not fulfill an actual need.


However, the one glaring exception to this saturated ETF rule is in the biotechnology sector.  That is ironic because I actually think biotech is the one area of the stock market that needs this type of product the most.  Right now, there are only two main biotech ETF products.  They are the iShares Nasdaq Biotechnology ETF (Nasdaq: IBB), which is overweight large biotech stocks, and the S&P Spider Biotech ETF (NYSE: XBI), which is more of a balanced midcap fund.  There are a handful of others that are not as popular, and of course most mutual fund families offer open-ended funds that do not trade on an exchange, but none of those differentiate themselves very much from the two main ETFs in my opinion.


What is missing from the biotech ETF equation are funds that target interesting subsectors.  There is a big unmet need for this.  For example, there should be funds that offer a basket of rare disease stocks, or immuno-oncology, and others.  Poliwogg has already hit on regenerative medicine.  These are emerging themes that many people know about and want to invest in, but might not have the time or skillset to do on their own.  It is not just the specificity of the theme that makes this type of product attractive, but also the diversification that is so critical to investing in biotech.  We all know that immuno-oncology, for example, has a bright future and is worth investing in, but picking individual stocks exposes you to potential blow-ups.  That is why a product like this that offers instant diversification could be very useful to many investors, especially generalist funds and non-professionals.


I think generalist funds (professionally-managed mutual funds and hedge funds that invest across all sectors of the stock market) in particular might flock to them.   Biotech has been THE hottest sector of the market during the last four or five years, yet many generalists have missed the boat and underperformed because they do not have the expertise required to invest in individual biotech stocks.  While many will pick a few to invest in here or there, the vast majority typically defer to investing in the two main biotech ETFs when making larger bets on the sector.  That is a shame because many generalists are sophisticated enough to know about the big interesting themes, but they do not have the manpower or risk tolerance to pick the stocks that will provide the right exposure to them.


Non-professional, retail type investors could benefit a lot from this too.  Just look at how popular the ice bucket challenge was in raising money for ALS, for example.  Imagine if there were exchange-traded products where you could invest in and support specific disease areas that might be special to you.  There could be a cancer fund, a Parkinson’s disease fund, and many others that support issues that people really care about.  I think something like that would be popular with the investing public, and is also a good thing for society as a whole because it would benefit scientific research.  There is obviously a fine line that should be avoided where something like that could potentially cross into exploitation, but when done appropriately, this could inject much needed capital into some important areas of research.


The Poliwogg Regenerative Medicine Fund is not actually being set up as what you would think of as a traditional ETF, it is instead a close-ended fund.  The “close-ended” term is basically a fancy way of describing a fund that trades on the stock exchange.  There are a couple advantages that come along with doing it this way.  First, a close-end fund provides a constant pool of money that the fund manager knows will be stable.  This allows them to invest for the long term because they do not have to worry about things like redemptions.  If an investor wants to exit the fund, he or she simply sells their shares on the stock exchange to someone else, just as they would any stock.  Therefore, the assets under management do not fluctuate up and down like they do for an ETF or traditional mutual fund.


Also, unlike an ETF, closed-ended funds do not have to mimic an equity index.  Therefore, they can invest in a lot of things.  In the case of The Regenerative Medicine Fund, the prospectus says that Poliwogg will invest the proceeds not only in equities of regenerative medicine companies, but also smaller late-stage private companies.  I think that is a cool aspect because it gives the general public exposure to small companies that ordinarily would be out of their reach.  It is a good thing for the target companies too because it opens them up to a wider base of potential investment dollars.  Think of this as having a diversified avenue into the venture capital world, which most people do not have the chance to invest in on their own.


Brock Reeve, the portfolio manager of the Regenerative Medicine Fund, told me Poliwogg is likely to launch similar funds in the future for other subsectors, so kudos to them and watch out for that.  However, they are not the only investors getting into the game.  According to media reports, highly respected UK biotech investor Neil Woodford plans to launch a close-ended fund early next year that will focus on smaller private biotech companies.  Also, outside of biotech, other fund managers are coming around to the benefits of the close-ended structure as well.  Bill Ackman just launched his own fund in Amsterdam that raised over $3 billion.  Here is a video interview he did with Bloomberg talking about the benefits of the fund.


The bottom line is that I expect you will see a lot more of these exchange-traded products in the future, and I hope they come to biotech because there is a big unmet need for them in our industry.  I will be watching closely how Poliwogg’s Regenerative Medicine Fund does next month, and I hope it succeeds and spurs others to launch similar ideas.  This is something that definitely has the potential to be a big innovation in biotech finance.


Oh, and one last thing…I want to thank Lee Buckler (@celltherapy) for bringing this news to my attention.  His experience in the cell therapy world, and knowledge of what new things are happening, makes him a must follow on Twitter.  He was the first to tweet about this a couple of weeks ago, so thanks a lot Lee!

Who Am I?
Brad Loncar

I'm an individual investor from Kansas City.  My focus is on biotech stocks, but I enjoy investing in all industries. I'm an old-school, buy and hold investor who believes the best way to outperform and grow capital is to own innovative companies with good management teams over the long-term. more>>

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