While investing in healthcare mutual funds seems like a better idea rather than investing directly in healthcare related stocks, taking thematic bets too is a risky option
Most of us have paid for costly medicines, diagnostic tests, and hospital bills. Some have also had their medical insurance claims rejected. Healthcare is expensive, we rued. But when you can't beat them, joining them is always an option. While directly buying healthcare related stocks is fraught with concentration risks, buying healthcare mutual funds seems like an appetising option. However, taking thematic bets is a riskier option than investing in a diversified fund. DNA Money spoke to a host of experts to understand on how to look at healthcare funds.
Healthcare means more than pharma
If you thought just pharma is healthcare, you are wrong. Healthcare is a broad secular theme that includes pharmaceuticals, hospitals, diagnostics, insurance, wellness and other allied sectors. Healthcare funds look to invest in stocks of these sectors, with a 40-50 stock portfolio. Investing is mostly about using mispricing opportunities. Pharmaceutical firms, especially those with large US businesses, have faced a de-rating over the last 15-18 months. In that sense, they fit the bill of opportunities which can turn around. The sub-sectors like hospitals, diagnostics, and insurance are not export-oriented and are actually more domestic-oriented.
Th opportunity for profit growth in healthcare is robust. This has set the stage for mutual fund companies to launch healthcare funds. So far, there were four funds - UTI Healthcare Fund, Tata India Pharma & Healthcare, SBI Healthcare Opportunities and Reliance Pharma Fund. The club has grown bigger with Mirae Asset Healthcare Fund and the ongoing new fund offer of ICICI Prudential P.H.D Fund. According to Neelesh Surana, CIO - equities, Mirae Asset Global Investments (India), the healthcare opportunity is secular and large, and valuations are reasonable owing to consolidation in the recent past. As investors, you may get some more.
"We have an approval for a healthcare fund. We may look to launch the healthcare fund. As an and when we feel, we will deliberate and take a decision," said Vinit Sambre, head - equities, DSP BlackRock Mutual Fund. ABSL MF had also filed documents for a pharma and healthcare fund in Mar-17 with Sebi.
Know the financial outlook of sub-sectors
MF investors should understand that when they buy healthcare funds the schemes will buy shares of healthcare related companies. Knowing the financial outlook of the sub-sectors is extremely important. US-based pharma businesses are still not out of woods.
Purvi Shah, pharma analyst, Sharekhan by BNP Paribas, said in the past three years, the pharma industry has faced a double whammy. Domestic and export businesses were hit mainly due to intense pressure on companies to reduce prices (domestically and globally) by way of increased competitive landscape in domestic business and channel consolidation in the US market.
"Adding to this, USFDA inspections leading to stoppage of US sales from Indian plants due to non-compliance has hurt overseas business significantly. "Pricing pressure continues to remain (in range of 8-10%) an overhang on US business for Indian generic manufacturers. Management teams are having a positive outlook for the domestic market, but they remain cautious on US business as most of them have indicated that pricing pressure is here to stay for next four to six quarters," Shah added.
Fund managers also remain cautious on the sector because generic pharma no longer offers a lot of value on a broader perspective. Sonam Udasi, fund manager, Tata Mutual Fund said: "Four years back the pharma that used to function and today the pharma that is there are materially different. Generic pharma does not have the same kind of appeal it did some years ago. We might be much more inclined to go for an emerging company with a great revenue growth prospect, or a diagnostic company or a medical insurance company. Even if there is a large-cap global generic pharma company with a good 15% revenue growth opportunity in next three years, I would consider a domestic business oriented company that does not expose me to overseas compliance related risks."
The actual growth pill for healthcare funds remains in hospitals, diagnostics, insurance and other allied sectors. "India has one of the fastest growing healthcare markets in the world. Currently, about 50% of spending on in-patients beds account for lifestyle diseases. The diagnostic industry is growing in double digits year-on-year, helped by rising awareness of preventive healthcare. Then, there is insurance. Health insurance segment has grown at 25% CAGR between 2007-2016. Protection products of life insurers have picked up pace too," said Anil Rego, CEO, Right Horizons.
Diversification is key
From a healthcare fund investor perspective, there are a few things one must understand. Healthcare funds should truly be diversified in terms of stock portfolio. If it is a healthcare fund, but has 50-60% in pharma, then it is actually more of a pharma fund than a healthcare fund.
"Another important thing is that thematic bets do not work in a straight line. In one period, the chosen theme may not perform at all. So, it is better to allocate no more than 5-10% of your equity MF portfolio to such themes. We have seen how themes like digital/technology, financials or global equities have played out," said Tarun Singh, a financial advisor.
Besides, healthcare related companies may have great growth opportunities in front of them, but too much debt or other issues can spoil the market sentiment. "At the end of the day, what matters is earnings growth and free cash flow. Markets will pay a premium for that. Over the long-term, earnings dictate stock prices and how portfolios look. Patience is of the essence here. Do not buy healthcare funds if you are looking for defensive pockets, if there is huge volatility in and around next Lok Sabha elections. Buy healthcare funds because you are convinced of the opportunity," said a senior analyst with a top fund-house.
THE PRESCRIPTION
- Healthcare funds invest in pharmaceuticals, hospitals, diagnostics, insurance, wellness and allied sectors
- Knowing the financial outlook of the sub-sectors is important
- In one period the chosen theme may not work at all. Do not allocate more than 5-10% of your portfolio to such themes
- Healthcare related companies may have great growth opportunities, but too much debt or other issues can spoil the market sentiment
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