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Medical fund beats odds
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June 22, 1999: 2:39 p.m. ET
As health sector suffers, one manager at Firsthand Funds delivers top returns
By Staff Writer Martine Costello
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NEW YORK (CNNfn) - Fund manager Ken Kam was hoping Wall Street would notice when Immunex Corp. introduced a revolutionary drug for people with crippling arthritis.
But when the stock fell to as little as $45 in October, he figured it was just another example of "market disconnect" with the biotech sector.
"Biotech companies have had a hard time earning the respect of Wall Street," said Kam, portfolio manager and co-founder of Firsthand Funds. "I have confidence that over the longer term, the market reflects the underlying performance of the company."
While health care funds are among the biggest losers of the year, Kam's Medical Specialists Fund is up about 24 percent year to date as of Monday. He also co-manages Firsthand Technology Value Fund, which invests 35 percent of its portfolio in medical companies and is up about 66 percent in the same period.
Kam's interest in medicine dates back to when he co-founded Novoste Corp. (NOVT) and developed cardiac catheters. The catheters are like tiny snakes that wind through arteries in the heart to check for problems. He said the company was the first to develop a cardiac catheter for infants.
"I think the strongest draw of this industry is the impact you have on people's lives," Kam said. "Developing the pediatric catheter was one of the most gratifying things I've ever done."
Kam said he didn't need to work after he and his partner sold the division he was running in 1992. (Novoste went public four years after the sale). But he loved the field, so he decided the best way to keep that connection alive was to become a money manager.
"If you don't have to make money you can do what you love," Kam said. "That's why I've had so much fun with this."
But Kam acknowledges it has been frustrating watching promising companies get snubbed on Wall Street.
For example, Kam thought Immunex (IMNX) would get rewarded after the Food and Drug Administration last year approved Enbrel to treat people with arthritis.
"People were in a wheelchair with rheumatoid arthritis and they had some shots of this drug and they could walk again," Kam said. "News of that kind of improvement in the quality of life rarely happens."
Wall Street ignored the news, so Kam started buying more of the stock while its price lost another 5 to 10 percent. His investment has since quadrupled in value, and Immunex represents 16.2 percent of the medical fund portfolio.
Boston Scientific (BSX), Cardiothoracic Systems (CTSI), Quadramed Corp (QMDC), and Guidant Corp. (GDT) round out the top five holdings in the fund.
About 4.72 percent of the portfolio is invested in Novoste, although Kam owns a "small interest" in the company of less than 2 percent.
Kam and Steven Witt, a partner at Firsthand Funds, don't see a conflict.
"We've talked about this, whether the funds should own Novoste, and Ken's answer has always been that this company is developing great technology," Witt said.
Kam added, "The feedback I've gotten from shareholders is that I should invest the best way I can."
Kam said Novoste has a new product in development that will solve one of the biggest problems in cardiology -- when blockages in the arteries recur after angioplasty. (Angioplasty is a surgical procedure to open clogged arteries). The product, now available in Europe, reduces the rate of new blockages from 40 percent to 10 percent, he said.
Despite the fund's good returns, however, it has a lot of risks because it is so narrowly focused, said Emily Hall, an analyst at fund-tracker Morningstar.
The medical fund, with just $6 million in assets and only 15 stocks, is tiny by industry standards.
The top three stocks represent a staggering 36 percent of the portfolio, Hall said. On top of that, some of the holdings are small, young companies whose stock can plunge on a piece of bad news.
"It's two layers of risk," she said. "People would be better off in a diversified health care fund."
That said, Kam's strategies have paid off lately, Hall said.
"They know their stuff, and Ken knows a lot about health care," Hall said.
The technology fund, with about $226 million in assets, is ranked four out of five stars for risk-adjusted returns at Morningstar. The technology fund has 38 stocks, including 16 names from the medical sector.
Kam said many of the best values in technology are in small cap stocks. Out of all the stocks in the technology fund, he's been adding most to his position in Quadramed Corp. recently. The company is a health-care information services provider that has been growing 30 percent a year. The stock earned 24 cents per share in the first quarter and is likely to earn $1 per share by the end of 1999, he said.
"You're getting really good growth at a good discount," Kam said.
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