Analysis - Fidelity biotech fund among worst performers in April sell-off

By Tim McLaughlin

BOSTON (Reuters) - One of the biotechnology sector's worst two-week declines in the past decade has clobbered one of Fidelity Investments' hottest funds.

The $9.4 billion (5.5 billion pounds) Fidelity Select Biotechnology Fund plunged 11.75 percent during the first 14 days of April. That put the fund near the bottom among nearly 3,800 U.S. mutual funds tracked by Lipper Inc. Only six funds performed worse, but they had less than $100 million in assets each.

It's a jarring reversal of fortune for Fidelity portfolio manager Rajiv Kaul, whose three-year return has averaged 31 percent, beating his benchmark by a whopping 21 percentage points over that time.

Kaul has built up an outsize bet on 2:GILD over the past two years. It is the fund's largest holding at 13 percent of assets, but it is down 9 percent in the past month amid a backlash over the high cost of its $84,000 hepatitis C drug. Kaul was not available to comment.

U.S. biotech funds fell an average of 7.25 percent during the first half of April. In comparison, that sector's returns have been better nearly 99 percent of the time on a rolling two-week basis during the past decade, said Jeff Tjornehoj, head of Lipper Americas Research.

Biotech's swift downturn was part of a broader sell off of Internet and software stocks that hobbled some of the U.S. mutual fund industry's best stock pickers. Gold funds beat all comers as the $1.3 billion First Eagle Gold Fund led with a nearly 5 percent gain in the first half of April, according to Lipper.

Fidelity portfolio manager Will Danoff, who runs the behemoth $109 billion Contrafund , also got walloped in recent weeks probably because he had loaded up on shares of 2:NFLX and Workday Inc over the past year.

Contrafund had holdings in these companies at the end of February, and gave no indication of any major changes in his portfolio, according to portfolio commentary released on Wednesday by Fidelity.

Contrafund is down 4 percent over the past two weeks. But Danoff, who has a strong long-term record, has had far worse moments as a portfolio manager.

During a two-week stretch in 2008, at the height of the financial crisis, Contrafund tanked, declining 23 percent, Tjornehoj said. Danoff, who was not available to comment, has beaten 94 percent of his peers over the past decade.

He had more than doubled his bet on NetFlix since June, holding 1.1 million shares at the end of February, according to the latest available fund disclosures. But Netflix shares are off about 23 percent in the past month. His largest holdings included recent losers like Google Inc , Facebook Inc , 2:BIIB and 2:AMZN . On Thursday morning, Google's shares declined after reporting disappointing first-quarter results.

Workday, a darling of the software as a service movement, also likely hurt Danoff and a number of other mid-cap and large-cap managers. Its shares are down 22 percent in the past month, after more than doubling in the 10 months to February. Danoff more than doubled his stake in Workday over a recent eight-month period, fund disclosures show. At the end of February, Contrafund owned about 7 percent of Workday's outstanding shares.

The stock market's two-week revolt against momentum stocks has knocked 2.3 percent off the value of the average U.S. mutual fund, sparing only a handful of money managers who favoured gold and emerging markets over cloud software and biotech.

"We've seen a collapse in the dream stocks," said AllianceBernstein's Gerry Paul, who directly manages $13 billion as chief investment officer of U.S. value funds. To be sure, some of these stocks are coming down from lofty highs - having recorded big gains for their owners last year - and will remain staples in mutual fund portfolios.

Among the worst performers, the $527 million Buffalo Emerging Opportunities Fund was down 10 percent during the first two weeks in April after putting up 42 percent average annual gains since the stock market's nadir in March 2009.

It is the worst performing small-cap fund with at least $500 million in assets, according to Lipper. The average small-cap fund fell 4.35 percent in the two weeks, according to Lipper.

Two of portfolio manager John Bichelmeyer's largest additions to the fund last year, manufacturing software and consulting firm 2:PDFS and cloud software company Proofpoint Inc , continued to sour in April. Proofpoint is down 34 percent in the past month. Bichelmeyer did not return messages seeking comment.

Meanwhile, some managers have found an easier way to sleep.

They prefer companies with free cash flow yields that top 10 percent. Technology behemoth Hewlett-Packard Co and video games retailer 1:GME , for example, meet that criteria and their shares have climbed 12 percent and 5 percent, respectively, in the past month.

The $2.5 billion Cullen High Dividend Equity Fund was off only 0.36 percent in the first two weeks of April. That put it at the top of the heap among large cap funds with at least $500 million in assets, Lipper said. Portfolio manager James Cullen has been rewarded for avoiding tech's high flyers.

AllianceBernstein's Paul said investors are no longer willing to pay what he called a scarcity premium for companies such as Netflix, Amazon and Facebook. These stocks thrived because they had the ability to grow without the assistance of an economy fuelled by the Federal Reserve's easy money policy. But now - as the Fed begins to reduce its stimulus - investors see growth elsewhere and at cheaper values.

(Additional reporting by Svea Herbst, Ross Kerber and David Randall; Editing by Richard Valdmanis and Martin Howell)