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Volatility of biotech stocks leaving investors queasy

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After watching huge gains in their portfolios disappear along with harrowing drops in the market, investors in biotechnology can be forgiven for feeling more than a little queasy the past several months.

Biotech stocks soared last year in tandem with Internet stocks, only to plunge in the spring with their Net-stock cousins.

From Oct. 8, 1998, to March 6 of this year the American Stock Exchange Biotech index soared 541 percent. Healthy earnings and excitement over progress in mapping the human genome — that is, all the genes in the human body — were catalysts for the run-up. But latecomers got burned as the index subsequently lost half its value.

Biotechnology has had a spectacular flameout before. In 1992 the sector surged on the promise of breakthrough research; but it collapsed when much of that research failed to produce marketable products.

What's different this time is that biotech companies have grown up and are producing more products than ever before. Biotech drugs now in development promise to revolutionize medicine.

But tread carefully. Biotech stocks and funds are a feast-or-famine proposition. Only a small portion of your money belongs in such mercurial offerings.

The following are some interesting biotech mutual funds:

Managers of Dresdner RCM Biotechnology (800-726-7240) believe that investing in biotech is best done not by an MBA but by an M.D. Dr. Faraz Naqvi is head of a four-person team, three of whom are physicians. Dresdner often favors small, risky stocks, giving it high returns but also tremendous volatility.

While not an index fund, Rydex Biotechnology (800-820-0888) puts most of its assets into the stocks of the big biotech companies that dominate the indexes. The minimum initial investment is a steep $25,000, unless you invest through a discount broker.

The granddaddy of biotech funds, Fidelity Select Biotechnology (800-544-8888), has been around since 1985. In keeping with Fidelity's long tradition of using its Select funds as a proving ground, the fund manager changes often. But Fidelity's deep analyst bench makes this only a small problem. The fund owns some big pharmaceutical stocks, as well as biotech. It has a 3 percent sales charge.

Munder Framlington Healthcare (800-438-5789) returned 120 percent over the past 12 months, second only to Dresdner RCM, a pure biotech fund. Although not solely devoted to biotechnology, the fund puts as much as 50 percent of assets in biotech.