SBI Pharma Fund: Healthy prospects in the long run

Pharma stocks, which were market darlings until a few months ago, have corrected sharply in the last eight months. While the marketwide correction did have a negative rub-off on the stocks, regulatory tightening by the US drug regulator has led many stocks falling out of favour with investors. While increased regulatory oversight can affect short-term performance, due to possible delay in approval for other products filed from the facilities under scrutiny, in the long run investments in automation and upgradation to ensure regulatory compliance will help Indian companies compete better.

The large generic opportunity in key markets, such as the US, and huge potential in emerging markets, such as India, Russia and the Asia-Pacific region, should help drug makers sustain healthy growth in the medium to long term. Investing in a pharma fund with a good track record can help you cash in on this long-term growth story and also save you the hassle of having to track and interpret regulatory developments.

SBI Pharma Fund tops the list of pharma funds across time periods. On a one-year basis, even as the S&P BSE Healthcare Index lost about 4 per cent, the fund has managed to deliver positive returns of about 3 per cent. The outperformance has also been quite consistent. For instance, in the last five years, the scheme’s annual returns have been better than its benchmark almost 84 per cent of the time.

The fund has also been able to contain the fall in NAV better, compared to its benchmark, during turbulent times. Consider the period between October 2015 and June 2016 — even as the benchmark S&P BSE Healthcare Index lost over 18 per cent, increasing exposure to stocks such as Aurobindo Pharma, Divi’s Laboratories, Sanofi India, Ajanta Pharma and participating in healthcare IPOs – Narayana Hrudayalaya, Thyrocare Technologies and Dr Lal PathLabs — helped the scheme outpace its benchmark. Exiting stocks embroiled in regulatory issues, such as IPCA Laboratories, also helped the fund cap its losses well. The scheme’s expense ratio of 2.68 is in line with the category average. The fund has delivered an average annual return of 18 per cent since its launch in July 1999.

The fund is betting big on the mid-cap space; about half of its assets are currently parked in mid-cap pharma stocks. Its holdings in mid-cap stocks include Bengaluru-based Strides Shasun, Natco Pharma and Dr Lal PathLabs. The fund’s holdings in the large-cap space include Sun Pharma (19.9 per cent), Aurobindo Pharma (10.2 per cent) and Divi’s Laboratories (8.8 per cent).

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