Chasing performance is not an investment approach we recommend. However, there are certain times when macro events present an opportunity to invest in a particular segment of the market that has the potential to be quite rewarding. During this time of uncertainty as it relates to the COVID-19 pandemic, we feel there is an opportunity to capitalize on an industry that not only serves an immediate purpose in benefiting humanity, but also offers an additional source of diversification for investors who are seeking alpha in their portfolios.
The biotechnology industry is an intriguing area of investment. It is dependent on advanced technologies, in much the same way the “FAANG” stocks are, but unlike technology stocks the technologies used in biotech companies are not widely used, and thus, biotech companies do not receive the same level of attention. Nevertheless, biotech stocks have generally outperformed Information Technology stocks over the last ten years, returning approximately 18.5% versus 17% annualized over the 2010s. (Source: Koyfin)
Another remarkable characteristic of the biotech industry is its generally low correlation to the performance of the broader market. Biotech stock performance is contingent primarily on the outcomes of research and development efforts, rather than the state of the economy. These two characteristics, long-term out performance and low correlation, make biotech a great addition to a well-diversified equity portfolio.
Biotech Stocks’ Role in Today’s Market
Given the current concerns and widespread societal disruption over COVID-19, biotech is likely to be top of mind for many—for years to come. A cure, if we are to find one, will likely come from this industry. Whether from private investors or government grants, the amount of capital devoted to this industry is likely to increase. Following the 1918 Spanish Flu, efforts to understand flu viruses intensified and laid much of the groundwork for that field of virology. And the 1957 Asian Flu outbreak led to the widespread adoption of flu vaccinations in the United States. If history is any indication, the virus we are dealing with today will spur another round of efforts to understand and thwart similar outbreaks in the future.
How We’re Approaching Biotech
At Orion Portfolio Solutions, we have developed a biotech strategy of around 30 stocks— the Orion Portfolio Solutions Biotechnology Portfolio. The strategy, which is available as a stock model or actively managed direct indexing strategy, focuses on selecting companies that are developing cutting edge treatments and vaccines for diseases, and which are actively engaged in the COVID-19 fight. This strategy gives our clients the opportunity to participate in the returns of the biotech industry while allocating their capital towards treatments that could benefit millions of people. Because of the great degree of uncertainty around which companies eventually develop effective therapeutics, the strategy is equally weighted. Further, the strategy will continue to focus on pressing research and development issues beyond the COVID-19 crisis.
The new biotech strategy is currently available through the Orion Portfolio Solutions advisor portal. To learn more, reach out to your Regional Sales Team at 800.379.2513, option 1.
Why Now is The Time To Consider Biotech Exposure - Advisor Webinar
Is biotech a trend for today, or long-term portfolio growth and diversification opportunity? Join Orion Senior Quantitative Portfolio Manager, Horacio Carias, CFA, for an in-depth overview of biotech’s history, current and future opportunities, and how Orion is addressing those opportunities with our new biotechnology stock and direct indexing portfolios.
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