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Are Pharma Funds The Next BIG Bet For You? Know Here…

As we grow older, we tend to spend more on the healthcare!

Over this decade, the average age of the global population is likely to go significantly up.

According to the World Bank, population above 65 years of age as a percentage of the nation’s total population has been over 20% in some countries.

In 2016, nearly 6% of India’s population was over 65. And in years to come, more Indians are expected to join the senior citizen club.

Naturally, as the healthcare expenses around the world go up, pharmaceutical companies, diagnostic centres, and hospitals will benefit.

Ironically, many Indian pharmaceutical companies, especially those selling drugs in the U.S., have been unwell. They have faced disciplinary actions from the market regulators for non-compliance.

Since drug affordability is a critical issue globally, governments across the world have tried to control the inflation in medicine, thereby affecting the pricing power of pharmaceutical companies.

The stock market performance of many pharmaceutical companies in India has been poor for the last 3-4 years. The stocks of Indian companies selling off-patented products in the regulated markets such as the U.S. and Europe have become cheaper with many of them losing over 50% of value from their peak.

But it looks like the tide is turning now.

At least, mutual funds believe so.

A few of them such as ICICI Prudential Mutual Fund and Mirae Asset India Mutual Fund have recently launched Pharma sector funds.

Though, about a couple of years ago tech stocks fell out of favour, in recent times they have made a strong come back.

Can you expect the pharmaceutical sector to go the IT (Information Technology) way?

Can beaten down pharmaceutical companies generate attractive returns in the foreseeable future?

And, can mutual fund schemes focused on them inject new life into the bleeding portfolios of investors?

Let’s first see what mutual funds have to say about their launching pharma sector funds at this juncture.

Mr Sankaran Naren, Executive Director and CIO of ICICI Prudential Mutual Fund recently explained the thought-process of his fund houses behind launching a sector fund:

“When we launch sectoral funds, what we try to do is look at opportunities where a sector hasn’t done well. The second requirement when we are trying to launch a sectoral fund is the fact that the outlook for the sector in the long term and the medium term should be good.”

To a question on why his AMC (Asset Management Company) has launched the pharma sector fund now, Mr Naren replied:

“Simply because the sector hasn’t delivered returns for the last three years. Primarily because of stock specific issues due to various regulatory approvals required for different factories in the pharmaceutical space. Along with that there have been drop in prices of many of the products in the pharmaceutical space. Due to this, there has been meaningful underperformance of the sector. On the other hand, the long-term outlook for medicines, as we all know, in pharmaceutical, healthcare and diagnostics is good.”

Is Pharma really a turnaround story?

Pharma as a sector being defensive in nature, companies in the healthcare space have always remained the investors’ preferred choice.

Over the last 10 years, S&P BSE Health Care Index has outperformed S&P BSE 200. However, its performance in the last three years has been inferior.

S&P BSE Healthcare— In good health?

Data as of June 28, 2018

(Source: ACE MF, PersonalFN Research)

How have the existing pharma funds done so far?

Over last 3 years, the category of pharma funds has generated -2.9% CAGR (Compounded Annualised Growth Rate) returns while S&P BSE 200-TRI has generated 10.5% CAGR returns.

Over 5 years as well, pharma funds have collectively generated 12.4% returns at a time when S&P BSE-TRI has yielded 15.9% returns.

Historically, the healthcare companies have enjoyed premium valuations. But, it’s noteworthy that the sector isn’t a homogeneous mix of companies.

On the one hand, there are companies focused on the export of generics (non-patented drugs), while there are companies focused on the institutional business (supplying to government programmes and hospitals). Some companies sell drugs predominantly in the domestic markets.

The factors driving their stock prices and valuations aren’t exactly the same.

Valuations of Multi-National Corporations (MNCs) doing business in India and those of diagnostic centres and hospitals aren’t cheap by any parameter as of now.

However, as compared to their historical valuations, many companies in the healthcare segment are trading at discounted valuations, but as compared to the broader markets they are still expensive.

Therefore, there’s no one answer to whether or not the pharma is a turnaround story. But, it looks like many subsectors of the pharma are likely to do well in future.

Factors that may potentially drive the pharma market...

(Source: annual reports of various healthcare companies)

Should you invest in pharma funds now?

Although pharma is a reasonably diversified sector and factors driving the subsectors are also different to an extent, they are as risky as other sector and thematic funds.

While it’s true that the spending on healthcare is going to rise, that won’t necessarily translate into a successful performance of pharma funds, especially because valuations aren’t cheap in some subsectors of pharma.

This makes pharma sector funds suitable only for those who have a very high-risk appetite. PersonalFNdoesn’t recommend investing in any sector and thematic fund; as is the case this time too.

[Read: Why Thematic Funds Are Not Solid Long-Term Investment Bets]

Those who want to benefit from the potential rise in the healthcare stocks would be better off if they invest in diversified opportunities funds. Nothing stops a fund manager of a diversified equity fund from investing in healthcare stocks.

To get the best result, you should invest in schemes that have a proven track record of performance across timeframes and market phases. Their risk-adjusted returns should align with your risk appetite and the return expectations.

Starting a few SIPs (Systematic Investment Plans) in diversified equity funds would be a good starting point in your journey of wealth creation.

[Read: All You Need To Know About Equity Mutual Funds]

Do you face a difficulty in shortlisting mutual fund schemes for your portfolio?

Don’t worry!

PersonalFN’s Money Simplified Guide - 10 Steps to Select Winning Mutual Funds is an extremely valuable resource.

In this guide you will find…

✔ Why is it necessary to hold winning mutual funds

✔ How to compare performance of mutual fund schemes

✔ What to look for in a fund’s portfolio

✔ How to judge the competence of the fund house

✔ How to analyse fund managers skills

✔ Steps to build a solid mutual fund portfolio

Many of you might not have the time, expertise, or both to select mutual fund schemes on your own. If you are one of them, don’t lose heart, because PersonalFN’unbiased mutual fund research is here to your service.

If you are willing to take “Moderate Risk" for “High Rewards”, consider PersonalFN’s premium report: The Strategic Funds Portfolio For 2025 (2018 Edition).

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