Will Pharma Funds Prove to be the Antidote for Your Mutual Fund Portfolio?

Apr 13, 2020

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The Nifty 50 Index -- a diversified 50 stock index accounting for more than 13 sectors of the economy -- has rallied +20% since its March 2020 lows. The Nifty Pharma Index, on the other hand, has skyrocketed +37% outperforming the broader markets quite remarkably.

With the world grappling with the Coronavirus or COVID19 pandemic, the spotlights are clearly on healthcare. Numerous companies in this sector are burning the midnight oil to develop a vaccine to fight the COVID-19 pandemic (and providing other drugs). Researchers and academicians, too, are doing their best.

According to the World Health Organization's (WHO's) draft landscape of COVID-19 vaccines dated April 4, 2020, two types of candidate vaccines (Adenovirus Type 5 Vector and LNP encapsulated mRNA) are in the 'phase 1 of the clinical evaluation stage', while 60 others are in the preclinical evaluation phase.

However, according to many healthcare experts, it could still take several months to develop a COVID-19 vaccine.

That being said, many pharma stocks have hit their 52-week and pushing the Nifty Pharma index upwards.

Graph: Nifty Pharma showing signs of hope amidst despair

Data as on April 9, 2020
(Source: NSE, PersonalFN Research)

So, the BIG question is...

Is Pharma making a comeback and is it the right time to pick up a Pharma/Healthcare Fund?

I believe instead of answering it in 'Yes' or 'No', let us discuss what is causing a rally in pharma/healthcare sector; is it durable and, more importantly, how is the Indian healthcare sector positioned to handle the present situation.

India's preparedness to deal with COVID-19 can be analysed in two stages: One how well-equipped India is to contain the domestic spread and treat patients, and Two can it help the world in any way.

To contain the spread of COVID-19 the government has rightly imposed a 21-day lockdown. States with a high number of cases have already announced an extension at least until April 30, 2020. As far as the preventive and alleviative treatment is concerned, India is well-prepared to comfortably supply medicines for domestic consumption as well as to numerous countries affected by COVID-19. That is one of the reasons why pharma stocks are rallying.

While a definitive vaccine to combat COVID-19 is not ready yet, Hydroxychloroquine (HCQ) an antimalarial drug (in general with an antiviral effect) is currently being used to treat patients. India recently exported a consignment of 35.82 lakh HCQ tablets to the United States, where confirmed cases of COVID-19 have reached an alarmingly high level.

Image source: pixabay.com; photo courtesy: jniittymaa0

Indian pharmaceutical companies such as  Zydus Cadila, Ipca Laboratories, Intas Pharmaceuticals, McW Healthcare, Cipla, Lupin, and Macleods Pharmaceuticals are some of the HCQ manufacturers... and many of them have doubled their production to meet demand. Indian Drug Manufacturers' Association has stated that India can produce 20 crore tablets of HCQ in a month and, thus, self-sufficient in producing the drug as well as the raw materials necessary for it.

Furthermore, India has lifted the ban on exports of 13 Active Pharmaceutical Ingredients (APIs), such as paracetamol, vitamins, common antibiotics, etc. that play a vital role in fighting a virus attack on the human body. This has earned India a status of a saviour across the world, resulting in pharmaceutical stocks to rally.

Currently, in India pharmaceutical companies such as Bharat Biotech, Zydus Cadila, and Serum Institute are working on a vaccine to fight the COVID-19 pandemic. Global peers such as Pfizer, GlaxoSmithKline, Sanofi, and others are also doing their best to come up with the vaccine.

Speaking of masks, testing kits and other medical equipment, India is ill-equipped partially because of its large population and the current limitations of the domestic manufacturing of these goods.

The Indian Council For Medical Research (ICMR)-approved testing kit manufacturers are ramping up the production as India aims to increase the number of tests to 1 lakh a day from the existing daily rate of 12,000. However, the Supreme Court of India's order of providing the tests for free is proving counterproductive.

Healthcare industry professionals fear the unviability of manufacturing testing kits with the ICMR capping the cost per kit and the Supreme Court pronouncing that COVID-19 tests be done free of cost.

That said, Indian labs are presently working on manufacturing low-cost testing kits, which are in the evaluation stage. Testing labs are losing as much as 60% of their regular business and some of them are listed entities.

What's true about kits is also true about masks and hand sanitisers. A majority of manufacturers are operating at skeletal staff, working 24x7 amid the lockdown, and aiming to serve maximum demand. There have been reports that suggest Indian automobile manufacturers are also producing ventilators at their factories to fight COVID-19.

The Centre and State governments are currently utilizing their contingency funds to make the country well-equipped to handle the situation, but they too have financial constraints.

How have Pharma Funds (also known as Healthcare Funds) fared?

The present rally in the Indian pharmaceutical sector has generated wealth for investors, particularly those with exposure to healthcare companies and the ones actively working to fight COVID-19 pandemic. The panic buying is likely to show up in higher sales volumes and, thus, certain well-established pharma companies are expected to report higher earnings in the coming quarters.

Table: Report Card of Pharma Funds

Scheme Name 3 Months (%) 6 Months (%) 9 Months (%) 1 Year (%) 3 Years (%) 5 Years (%)
IDBI Healthcare Fund 13.5 26.5 25.7 22.0 - -
DSP Healthcare Fund 12.0 27.7 27.9 20.7 - -
Mirae Asset Healthcare Fund 13.4 28.8 27.9 19.8 - -
Tata India Pharma & Healthcare Fund 14.7 24.1 24.1 18.1 6.8 -
ICICI Pru Pharma Healthcare & Diagnostics (P.H.D) Fund 11.8 26.3 22.8 15.7 - -
Nippon India Pharma Fund 12.9 24.9 22.8 13.6 9.0 4.4
UTI Healthcare Fund 11.8 27.2 23.0 12.7 3.5 -0.7
SBI Healthcare Opp Fund 11.9 26.6 25.0 12.2 0.5 -0.9
Aditya Birla SL Pharma & Healthcare Fund 10.6 21.8 - -
NIFTY 500 - TRI -24.9 -18.5 -20.5 -22.1 -1.3 1.8
S&P BSE 500 - TRI -24.8 -18.4 -20.3 -21.9 -1.2 1.9
Data as on April 9, 2020
Returns for periods up to 1 year are expressed in absolute terms, while for periods over 1 year are compounded annualized.
(Source: ACE MF, PersonalFN Research)

As exhibited in the table above, many Pharma/Healthcare Funds have posted handsome double-digit returns over the last one; generated wealth for investors.

Should investors invest in Pharma/ Healthcare Funds?

Pharma/healthcare and FMCG are defensive sector/themes. People will continue to consume essentials goods & services (non-discretionary ones), medicines, even in these testing times. Healthcare will be the focus. Many companies in the sectors are doing their best in the given bandwidth.

If your overall equity mutual fund portfolio already has decent exposure to healthcare as a sector, it may not be necessary to add a pharma fund. Going by the portfolios of diversified equity funds, large-cap oriented portfolios have a moderate 2%-5% exposure on an average to pharma/healthcare sector, but multicap and mid-cap funds have higher exposure to pharma/ healthcare.

[Read: Coronavirus Has No Antidote. Your Bad Investments Could Have]

If your existing mutual fund portfolio does not have exposure to pharma/healthcare, then a small portion (around 5%) may be invested in a Pharma/healthcare fund, provided you are willing to assume the extra risk of a sector/thematic fund and have an investment time horizon of at least 7-8 years.

Final words...

Everyone is doing their bit and making an extra effort on humanitarian grounds to fight COVID-19. I'm sure the efforts made will go well-appreciated by the world and we shall overcome.

To fight COVID-19, the best remedy is prevention. Take good care to build immunity, eat healthy food, exercise moderately, stay home, and stay safe.


Warm Regards,
Rounaq Neroy
Editor, Daily Wealth Letter


PS: The last few years have not been among the best for equity mutual funds. While most funds have underperformed or are struggling to match the returns of the benchmark, there are few funds that have the potential to constantly generate alpha for its investors. We have identified five such high alpha generating funds, in our latest report 'The Alpha Funds Report 2020'. Click here to get access to the report.

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