Mutual Funds

Pharma funds — in sickness and in health

Nalinakanthi V | Updated on November 22, 2014



Some funds were bang on in stock selection, others missed the bus

It has been a roller-coaster ride for the Indian equity market over the last five years. But pharma stocks have bucked the trend, posting strong gains during this period of volatility. The BSE Healthcare index clocked annual returns in excess of 28 per cent over the last five years, compared with 14 per cent delivered by the Sensex.

Healthy drug sales in key export markets, further bolstered by a weak rupee vis-à-vis the dollar and steady performance in the home market helped Indian pharma companies sustain robust growth.

Even as pharma stocks were on a roll, the performance of pharma funds was a mixed bag. SBI Pharma Fund consistently topped the category, racing ahead of the BSE Healthcare index, its benchmark, and peer funds on a one-, and three-year basis.

Healthy dose

The fund’s one-year performance over the last five years has been better than the benchmark 65 per cent of the time. Though Reliance Pharma fund topped the returns chart on a five-year basis, it scores low on consistency. The one-year return has been higher than the BSE Healthcare Index only 45 per cent of the time.

UTI Pharma and Healthcare Fund ranked last on a three-, and five-year basis, underperforming the CNX Healthcare and peers. Over the last five years, the fund managed to deliver gains higher than the benchmark only 48 per cent of the time.

A systematic investment of ₹1,000 in UTI Pharma and Healthcare Fund would have fetched annual gains of about 20 per cent.

Though this is higher than diversified equity funds, you would have been better off investing in the other two pharma schemes of Reliance and SBI. A similar investment in these two funds would have delivered annual gains in excess of 22 per cent and 24 per cent, respectively.

Though all three funds had allocation to large-cap stocks — Sun Pharma, Dr Reddy’s, Cipla and Lupin — it was the mid-cap stock choices that made the difference. For instance, SBI Pharma sensed the recovery in the fundamentals of the mid-cap pharma company Aurobindo and increased exposure to the stock much ahead of others. This provided a big boost to performance. Likewise, buying into stocks such as Alembic Pharma and Natco Pharma early lifted the fund’s NAV.

But what worked against the UTI Pharma fund was not just its inability to identify such winning ideas early but also locking money into underperforming stocks. Its investment in multinational pharma stocks such as Pfizer, Wyeth and GSK Pharma proved to be a drag on performance, thanks to the pricing policy, which curbed the pricing freedom on essential drugs.

Published on May 18, 2014

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