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Exeter Life Sciences Fund
Interview with: Jeff Herrmann, Brian Lester

Author: Dave Jennings
Last Update: , :
As of June 1, 2003, the Exeter Life Sciences Fund ranked first in its category for three-year performance, handily beating the S&P 500. Jeff Herrmann and Brian Lester, analysts at Rochester, NY-based Manning & Napier, which acts as the fund's advisor, explained their approach to investing in this broad and diverse sector.

Exeter Life Sciences Fund

Lester: We really don't pay attention to managing to a benchmark, so we have flexibility. We basically had our whole fund in healthcare services in 1999 and even though we're more diversified now, we're opportunistic. When we see an opportunity we'll go after it.

Q: The biotechnology indexes I track apparently bottomed out in July then moved sideways throughout the remainder of the year until interest picked up in 2003. Is that interest creating net inflows into the fund?

Herrmann: Most of our existing clients at Manning & Napier are advisory clients. We don't market the fund very heavily through many third parties. We're looking to change that, of course. That is the people we want to reach.

Q: You told us about your research, which is fundamentally based. Do you involve yourselves in quantitative research such as chart work?

Lester: Yes, we have one of those guys in our shop. We would laugh at him if he weren't right so often, so we have to listen to him and take seriously what he has to say.

Herrmann: I grew up doing a lot of chart work. My original position here back in the mid-80s was working on the trading desk. One of my part-time jobs was to keep up with all the charts on our stocks. I'm chart friendly, letís say, as opposed to most fundamental analysts, especially the ones that were trained at some business school. It's takes them a while to get over to looking at that. We don't use it for picking stocks -maybe to throw some ideas our way, charts that have some interesting looking patterns. The things that we're looking for are stocks that have gone down a lot but are building a long base and start to pick up some insider buying. That's a technical analysis type screen that we would use for new ideas. What we mainly are using it for is to tactically time when we get into stocks and we also have used it effectively to change our position sizes basically moving more money into stocks that are doing better on a relative strength basis and out of stocks that are doing less well on a relative strength basis. When we think there is a major turning point in the market like we just recently had, we moved about eight million dollars out of our under performing stocks into our better performing, better looking stocks. We try to look for better ideas all the time.

Q: How do you respond emotionally to the hype that constantly surrounds this sector?

Lester: We've found that technology advancements tend to happen along a linear or exponential track. The public's fascination or the media's coverage or the investment community's appetite and enthusiasm for biotechnology tend to have cycles. Being a value oriented investment firm, you might imagine that we tend to increase our exposure when media coverage is low. We're cognizant that at certain points the excitement takes prices to the point where the valuations are unjustifiable.

Herrmann: We try to take advantage of that. We stay away from a sector when there is a lot of hype about it. At lot of times we think that there is hype that ends up being real. A great example would be the genomics tools companies that we talked about. Human Genome was on the cover of Time magazine. Affymetrix and ABI were trading at 150 dollars a share. Everyone said they're going to change the world. The growth rate sequencing was going to be 30% a year. That wasn't true. But now, you're finding the other extreme. People are saying it's a big fad; sequencing is going to be a big zero. We don't think that is right, either. Yet the stocks are down 85%. We think that if you take a longer horizon, there is definitely going to be a change in the way drugs are discovered and the way clinical trials are done. Genomics is definitely in a direct collision course with drug development. It's going to change dramatically in the next ten years. These are the enabling tools that are going to allow that to happen. We've seen all these big waves in biotech and what seems to happen is when there is a discovery all these companies rush out to raise money. There is that period, three or four years after the hype where you can come in and have some of the sorting out done between the weak and the strong. That is when you want to get involved the technologies that have legs, like monoclonals.

Lester: What happens at this point in the cycle that is coming up in the next year or so is that these companies are going to run into funding issues. A lot of them are going to get money from what must be a more informed buyer than the general public that bought the IPOs at an inflated place. The major pharmaceutical companies will start increasing their investments in these companies. There you have someone who has a much better knowledge of what companies and technologies are going to be long-term survivors. They have a better average than we do, and they certainly have a better batting average than the public that bought the IPO.

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