Pharma funds yield negative returns

The mutual fund schemes which are focussed on pharmaceutical and healthcare stocks have done badly due to the less-than-average performance by these sectors in recent times.

Almost all the pharma funds posted negative returns last month even as diversified equity funds were seen paring their holdings in pharmaceutical stocks as pricing pressures and rupee appreciation hit the bottomline of these stocks, according to analysts.

There are currently five dedicated pharmaceutical funds "� Franklin Pharma Fund, JM Healthcare Sector, SBI Magnum Pharma, Reliance Pharma, UTI Pharma and Healthcare. Moreover, Kotak MNC and Tata Life Sciences have a significant portfolio of pharmaceutical stocks.

Out of 118 open-ended diversified equity funds which have invested in pharmaceutical stocks, 77 have reduced their exposure in 36 pharmaceutical stocks between June 30, 2007 and July 31, 2007.

BSE's Healthcare Index, which tracks the movement of 23 stocks in the sector including Ranbaxy Lab, Cipla, Dr Reddy's Lab, Sun Pharmaceutical, GlaxoSmithkline and Glenmark, went down by 6.4 per cent in the year. In contrast, the benchmark BSE Sensex gained by nearly 10 per cent in January-August this year.

According to a data from fund-tracking firm, Value Research, all the funds in this segment have given negative returns in the last one month. The one-year returns of these funds have not been impressive either. Franklin's Pharma Fund has give negative return of 6.61 per cent in the last one month. Similarly, JM's Healthcare Sector dipped by 8.45 per cent, SBI Magnum Pharma was down by 6.34 per cent and UTI Pharma and Healthcare fell by 6.90 per cent.

Sanjay Ramadas Dongre, fund manager, UTI Pharma and Healthcare Fund said, "Pharmaceuticals as a sector has not been performing well. There are certain things which are not in favour of this industry, such as pricing pressures and rupee appreciation. I don't see the sector doing extraordinarily well in the next few months".

According to Lipper's Equity India Average, which covers 290 equity funds from all fund houses, equity funds have given returns of 28.34 per cent in the last one year. The average one-year returns of dedicated pharma funds have been only 5.9 per cent during the same period.

"This is an export oriented sector. So rupee appreciation is having a serious impact. Moreover, excessive competition has led to the shrinking of margins in this sector. The big companies are also not performing well. Competition is so intense that 5-10 companies are waiting to launch the same product. I think valuation will come down further in the next six months", said a fund manager who manages one of the pharma-specific funds.

Analysts are also not very bullish on pharma funds. Dhirendra Kumar, CEO of Value Research said, "Investors should generally keep away from sectoral funds. As these funds are not adequately diversified, there is always a risk of negative returns on your portfolio."