Pharma funds look a healthy option

INVESTING

A look at the performance of various equity fund categories during the past few months reveals that sectoral funds may be on a good run.

While diversified funds ruled the roost in 2003 and in early 2004, backed by a secular rally in the equity market, the changed scenario after the general elections and declining market returns have forced fund managers to take a relook at the so-called 'insulated' sectors "" information technology and pharmaceuticals "" for generating higher returns.

The report card of equity funds for the last one year reveals that technology and pharma funds were the top two performers among all mutual fund categories.

Technology funds have managed returns of 61.39 per cent in the last one year, while pharma funds have given a return of 57.02 per cent.

For the record, diversified funds have given a return of 54.20 per cent in the period.

What is more, pharma funds have managed to beat their benchmark Bombay Stock Exchange Healthcare index, which managed returns of only 42.10 per cent during the one-year period.

Their performance in the last six months has been even better "" pharma funds were the best among all equity fund categories, returning 1.16 per cent at a time when others were in the negative zone.

So why this interest in pharma funds? In a volatile market that lacks direction, sectors such as information technology and pharmaceuticals are good defensive bets, say fund managers. Therefore, sectoral funds such as those focussed on the are more than likely to do well.

"Looking at the current markets, I think sectoral funds will outperform. The markets appear to be directionless at the moment. I think sectors such as technology, auto and pharma will outperform," says Nandkumar Surti, senior vice president - investments, JM Capital Management.

"The secular rise story is building up in these sectors. They are also good defensive bets in a choppy market," Surti said.

The emerging boom in the global generic markets, higher domestic spending on healthcare and 'compulsory licensing' of patented products from next year under the World Trade Organisation agreement are also factors that have tilted things in the pharmaceutical sector's favour.

There is a huge list of products losing patent protection in the US and Europe.

According to an estimate, by 2008, brands with $84 billion in sales will go off patent. This is the goldmine that Indian generics companies are aggressively targeting.

"W e expect India to become the preferred generic sourcing hub because of its cost effectiveness," says Shahina Mukadam, pharma analyst at HDFC Securities. Currently the market is dominated by companies from the US and Europe.

"We believe large Indian companies have zoomed in on this and should be able to capitalise on the emerging boom in global generics. Most of them also have a substantial presence in the domestic market and stand to gain from higher domestic spending on healthcare and 'compulsory licensing' of patented products post 2005," she adds.