BackShould you invest in healthcare or pharma funds?
The covid-19 panic has once again set pharma stocks on fire and many investors ask if this is the start of a second major bull runDespite the correlation between the covid-19 crisis and pharma returns, investing in sector funds is highly risky business
PremiumIn its previous bull run from 2009 to 2016, the S&P BSE Healthcare Index jumped almost six times in seven years. That’s a compound annual growth rate (CAGR) of almost 30%. The story turned sour in the four years that followed with the index losing around a third of its value in absolute terms. The 11-year CAGR of the index stands at a still respectable 14% but investors have endured a stomach churning roller coaster ride.
The covid-19 panic has once again set pharma stocks on fire and many investors ask themselves if this is the start of a second major bull run.
A presentation put out by DSP Mutual Fund explains that the twin engines of the sector were firing at full blast from FY 2009 to FY 2015 - exports to the US and sales in India’s domestic market. Both these engines slowed down between FY2015 and FY 2019. The sector is presently at the bottom both in terms of valuations and business cycle. However, there has been a pick up in domestic sales and exports in the last three-four quarters, it noted.
Aditya Khemka, fund manager, DSP Healthcare Fund dismissed concerns about protectionism affecting returns in this sector. “Countries at present are halting exports of essential drugs, but this is only temporary. In the long term, the risk from protectionism on India's low cost exports model is countered by its sheer price competitiveness. Export markets like the US need cheap drugs," he added.
Vrijesh Kasera, fund manager of Mirae Asset Healthcare Fund, focused on the impetus that the covid-19 crisis gives to future healthcare spending. “The healthcare and pharma sector broadly was in revival mode even before covid-19, both in the US and domestic Indian market. After this pandemic there could be significantly higher spending both by the government and private sector on healthcare. There are supply side challenges but the overall outlook is positive, he said.
Khemka also rejected the notion that the recent rally in pharma stocks has wiped out further potential for investors in this sector. "The recent rally in pharma stocks has pushed the sector a little below its long-term average premium of around 40% to the Nifty, from the discount it was trading at. However, this is by no means peak valuations where premiums of up to 135% were common. Also, even if there is no further ratings expansion, returns can come from earnings growth," he said.
Shyam Sekhar, founder and chief ideator, iThought Advisory asked investors to be cautious despite his overall bullishness on the sector. "I have been advising clients to invest in pharma funds for the last two years. The time to buy a sector is when it is out of favour. Pharma companies are better placed than many other sectors to weather the covid-19 storm but these stocks have also rallied by around 20% over the past few weeks. I'm not saying you should avoid this sector. Rather, you should stagger your purchases in pharma funds over 6-12 months," he said.
Despite the seemingly attractive correlation between the covid-19 crisis and pharma or healthcare returns, investing in sector funds is highly risky business. The giddy up and down cycle in this very sector shows how investors can be caught off guard. All but the most sophisticated investors should stay well away from sector funds. If you are really confident about the sector, proceed in a staggered manner and do not invest more than 10% of your portfolio in such funds.
Note that your diversified equity funds will also have some weightage to pharma (it is 2.7% in the Nifty) and you should adjust any sector fund allocation keeping this in mind. In addition, remember that sector funds are tactical bets - taking advantage of sectors moving in and out of fashion. Do not view them in the same manner as you would view a diversified equity fund that sits at the core of your portfolio.
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