Breast cancer. Diabetes. Alzheimer's. Almost everyone knows of someone suffering from one of these diseases. But does it make sense to put your money into an investment built around companies searching for treatments?
That's the question raised by five new unit investment trusts that target Alzheimer's, breast and ovarian cancer, diabetes, prostate cancer, and rheumatoid arthritis. Developed last year by WellSpring BioCapital Partners in Philadelphia, VIOLTs, short for Vertical Investments of Life Sciences Trusts, hold shares of companies developing or marketing treatments for these diseases. Their creator's pitch is they provide an easy-to-understand way to invest in health care.
Others call the investments a gimmicky appeal to investors' hearts rather than their heads. "It seems to be an idea that exists because it can be sold to people rather than because it's a good investment," says Christopher Davis, an analyst at fund researcher Morningstar. "If you really care about prostate cancer, diabetes, or Alzheimer's, you're better off contributing to an organization that specializes in disease research," he adds.
Each trust contains 12 to 23 stocks, compared to about 70 in the average health-care mutual fund. While household names such as Eli Lilly (LLY ), Johnson & Johnson (JNJ ), and Bayer (BAY ) are part of the mix, so are small outfits like Axonyx (AXYX ), a biotech developing Alzheimer's drugs. It lost $19.8 million through its third quarter, which ended on Sept. 30. Another investment, Cell Genesys (CEGE ), which is working on a prostate cancer vaccine, lost $97.5 million in 2004.
An investor should first weigh the pros and cons of betting on a unit trust vs. a mutual fund. A trust is a static investment. Unlike a fund, its stocks are chosen at the outset and do not change. That should make a trust more tax-efficient than a managed mutual fund in which stocks are bought and sold. Also, you'll know exactly what your unit trust holds. Finding out the current holdings of a mutual fund is virtually impossible.
On the other hand, a lot can happen to a health-care portfolio during the life of a unit trust (in this case, five years). Without a manager to cull weakening stocks, your only option would be to liquidate the VIOLTs and receive the underlying net asset value (NAV) -- the value of the holdings minus any fees or loads due. (On Jan. 24 the NAVs of all five trusts were below the $10 initial price of Sept. 15, 2004, according to www.ftportfolios.com, a Web site for First Trust Portfolios, which underwrites and distributes unit investment trusts and is the sponsor of the VIOLTs.)
HIGH PRICE OF ADMISSION
Steep expenses are another issue. In the first year you'll pay 4.95% in loads, plus a one-time "organization charge" of 0.29%, as well as an annual fee expected to run 0.25% to 0.32%. Compare that with the 1.93% in annual fees Morningstar says is collected by the average health-care fund. A fund probably will charge more over five years but not as much at the outset, leaving more to invest and appreciate.
WellSpring CEO Sam Katz calls such criticisms the investment community's reaction to a product it didn't invent, adding that VIOLTs are a way to enrich investors while supporting treatments that could make their own lives better -- "a double bottom line," he says. Perhaps. But a rational investor may decide that the bottom lines most likely to benefit are those of the folks selling VIOLTs.
By Carol Marie Cropper