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Pharma stocks, which were market darlings until 2015, have been on a slippery path the past three years. Headwinds in the critical US markets, such as regulatory tightening and severe pricing pressure due to competition, have had a negative impact on the performance of Indian pharma companies. Since the October 2015 high, the BSE Healthcare Index has lost over 30 per cent till date. Just in the last six months, the index has shed about 9 per cent.
After the steep correction, is it now time to buy into pharma as a theme? Well, many mutual fund houses think so. There have been four funds launched over the past year. The latest one is Aditya Birla Sun Life Pharma & Healthcare Fund, which will be open for subscription till July 4.
The fund will be managed by Dhaval Shah, and its performance will be benchmarked to the S&P BSE Healthcare TRI Index. The scheme aims to capitalise on the multi-billion generic opportunity in complex generics as several large patent expiries are expected to unfold in the next four years. Also, increasing healthcare penetration, investment in hospital infrastructure and expected increase in spend towards diagnostics services are the other opportunities the fund seeks to ride on.
Differentiating factor
The fund has a broader investment theme compared with its peers. Unlike most of the existing funds which predominantly invest in healthcare-related themes such as pharmaceutical companies, hospitals, diagnostics services providers, contract research and manufacturing services, ABSL Pharma & Healthcare intends to also explore investment opportunities in the wellness and speciality chemicals segments.
In terms of capital allocation, the scheme will invest 50-70 per cent of its assets in Indian pharma companies, 5-15 per cent in hospitals and diagnostics, and 5-10 per cent in contract research, manufacturing, and wellness and speciality chemicals.
Besides investing in India-listed companies in the areas mentioned above, the fund is also looking to capitalise on opportunities outside India. For instance, it has the flexibility to identify and invest in interesting and unique business models globally such as speciality instruments or businesses that focus on intellectual property and innovation. About 0-10 per cent of the scheme’s assets has been earmarked for overseas equity.
The fund plans to focus on large and mid-sized companies with a proven business model, steady revenue and profits. About 60-80 per cent of the scheme’s assets will be invested in large and mid-sized companies. The balance will be deployed in small-sized companies. This can help keep the portfolio risk under check, as large companies with a bigger balance sheet and financial muscle may be better poised to handle regulatory and competitive pressure better. Also, pharma being an innovation-driven business, large companies may be better equipped to invest in research and innovation.
Strategy
In terms of investment strategy, the fund will look at high-growth companies that are priced reasonably and have the potential to sustain or achieve accelerated growth. The scheme will hold not more than 25 stocks at any given point, which can add to the concentration risk.
Sector funds such as this one may be suitable only for those who understand the space, can time their entry and exit well, and have an appetite for high risk.
The writer is an independent financial consultant
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