Tiny long-short equity mutual fund delivers huge gains

The phones rang a lot more than usual this summer at Biondo Group LLC, the small Pennsylvania investment firm tucked away near the Delaware Water Gap and the foothills of the Pocono Mountains.
That’s what happens when one of your funds starts putting up numbers like these: a 56 percent gain last year and 17 percent so far this year, both in the vicinity of double the performance of the Standard & Poor’s 500 Index. The results make the $35 million Biondo Focus Fund (BFONX) the top performer this year among 104 long-short U.S. equity mutual funds tracked by Bloomberg.
Rather than relying on mutual-fund wholesalers to attract investors, the firm decided to let its performance serve as its marketing, according to Joseph P. Biondo, co-manager of the Focus Fund and the son in the father-son duo that runs the firm.
“It’s like, if you build it they will come,” Mr. Biondo said after answering one more phone call about the fund. “Our job is to perform, and when you perform your business grows and that’s certainly happening and it feels great.”
The Focus Fund only holds about 15 to 20 positions at a time. Much of its success comes from more than tripling its money on Pacira Pharmaceuticals Inc. (PCRX) The maker of a postsurgical pain drug whose stock has surged almost 1,400% since its 2011 initial public offering is the fund’s largest holding. Illumina Inc., Gilead Sciences Inc. and Celgene Corp. are other top holdings and collectively biotechnology and pharmaceutical shares accounted for more than 45% of the fund as of the end of the second quarter, according to data compiled by Bloomberg.

Biotech Bets

While the unprofitable Pacira’s rally is “maybe ahead of itself” in the short-term, Mr. Biondo still thinks it’s a good bet in the long term. And he’s not worried about all the recent hand-wringing over biotech valuations — at least when it comes to his holdings in Gilead and Celgene, which currently trade for about 13 and 25 times forward earnings estimates respectfully, according to data compiled by Bloomberg.
“Relative to the market, I’d have a hard time buying anyone telling me these are bubble-like valuations,” he said.
Another key to the Focus Fund’s success relative to its peers has been avoiding short bets over the last few years. While technically a long-short fund, it has no mandate to allocate some of its picks to short bets, according to Mr. Biondo.

No Shorts

“We’ve given ourselves a lot of flexibility to say, when it’s time, when we find something to short, let’s do it,” he said. “But I don’t have to have shorts on.”
Maintaining a “hot hand” like Mr. Biondo’s is not guaranteed. The top performing diversified mutual fund from Vanguard beat the S&P 500 in the following 12 months for 12 of 20 years studied by CXO Advisory Group, according to a report last year.
And the hands running the Biondo Focus Fund haven’t always been so hot. While it’s going on its third straight year of S&P 500-beating returns, 2011 was rough: a 24% drop when the overall market was flat. Mr. Biondo attributes the bad year to being “way overweight financials” after getting bullish on the group too early. They haven’t abandoned all bets on financials, however. Warrants issued by JPMorgan Chase & Co. during the financial crisis are still its second-biggest holding.
Still, while the Focus Fund is only four-and-a-half years old, the firm has been running a similar strategy in separate accounts since 2006 and it has handily beaten the S&P 500, net of fees, in five of those eight years. (Mr. Biondo, the father, managed separate accounts at Smith Barney before going out on his own in 2004.) The average yearly return for the strategy has been 18% after fees, double the S&P 500’s performance.
All from the sleepy town of Milford, Pennsylvania, where the local attraction is “The Knob,” a plateau above the Delaware River that can be reached after a 45-minute hike.
“Some people in our business think we’re geographically challenged,” said the younger Mr. Biondo.
Nothing challenged about those returns, though.