Sources of return
Performance insight

Once in awhile a fund's performance really turns heads. Often times, it's very difficult to get the true story on what's behind some stellar performances. On a year-to-date basis (to the end of August) one fund caught my eye, which prompted me to dig a little deeper. Popping the hood on big performers often yields interesting insights. CI Global Health Sciences Sector is the subject of my most recent curiosity.

Performance

For the first eight months of this year, CI Global Health Sciences Sector posted a total return of 30.8 percent. That's good enough to earn it the top spot among all health care funds and to rank it among the top one percent of all funds during that period. Impressive.

Compared to the Dow Jones U.S. Health Care Index, it has tracked its benchmark pretty closely in down markets but has nicely outperformed during better times for health care stocks. Overall, the fund has beaten this index by roughly eight percentage points annually since the current manager, Andrew Waight, took charge of the fund for CI in June 2000.

Most of that outperformance was accumulated in the past eight months, prior to which the fund had pretty much tracked the index in both up and down markets.

The source

The fund has been on a recent tear thanks in large part to a big stake in ImClone Systems - the high profile biopharmaceutical company at the heart of the Martha Stewart investigation and the recent imprisonment of its former CEO Sam Waksal.

This fund started buying ImClone in the first half of 2002 and bought more through the year and in early 2003. In total, it accumulated more than 700,000 shares paying an average price of about $27 Canadian (or about US$17 - US$18 per share). The fund started this year with a 4.5 percent weighting in ImClone, when the shares were trading at C$16.70 (or US$10.62).

As of the end of August, the shares were trading above US$42. Taking currency into effect, ImClone has gained an impressive 250 percent during the first eight months of this year.

We can crudely infer given ImCone's year-end weighting of 4.5 percent and the fund's net redemptions of about $16 million that the move in ImClone stock alone accounts for close to half of this fund's year-to-date gain of 30.8 percent. Further, we can conclude that the rest of this portfolio performed at a level that still compares favourably with other health care funds.

Sustainability

Stock markets have posted healthy gains over the past several months. Those stocks that have benefited most are those that suffered deep losses in the bear market. So, to some extent this fund's performance is no surprise given general market activity. I don't have an official opinion on the fund - mainly because I've yet to speak with Mr. Waight in depth about his approach and investment process.

However, while its top ranking this year is due mainly to a big bet on one volatile stock, its success seems to be more than just a one-hit wonder.

While a small portion of the ImClone stake was sold in May, the key will be how risk is controlled now that the stock makes up nearly 13 percent of this fund's assets. Only then will we be able to have better insight into this fund. Only time will tell.