Do Pharma Funds Make Sense Now?
Dalal Street Investment Journal|July 19, 2021
With the pandemic now being on the wane driven by the intensity of the vaccination drive, will the sector once again fade into oblivion? To answer this question, the article takes you back a little into history and places the current performance in a different perspective

Over the last 15 months the entire equity market has been performing exceptionally well. Barring the FMCG index all the other equity indices have been up by more than 50 per cent in the given period. Among these, the performance of the pharmaceutical sector has been the theme of the last year. In the first six months after the deep cut in the equity market in March 2020, there was a strong rush among investors to own pharmaceutical stocks, which pushed up their prices. Between March 23, 2020, and September 2020, the Nifty Healthcare index was up by almost 73 per cent compared to the Nifty 500, which was up by 49 per cent in the same period. Such a move in pharmaceutical stocks attracted lot of investors towards the funds dedicated to this sector.

Pharmaceutical-dedicated funds have attracted huge inflows in last six quarters. The cumulative asset under management (AUM) of these funds has increased from `6,000 crore at the end of December 2019 to `14,000 crore at the end of June 2021, increasing by almost two and a half times. Such a rise in AUM is contributed by both rise in the mark to market gains and net inflows.

Nevertheless, the momentum has slowed down after that for the Nifty Healthcare index. In the first six months of 2021, Nifty Healthcare has been up by 15 per cent compared to the 18 per cent growth seen in Nifty 500. Such underperformance was also observed in the change in weightage of pharmaceutical companies in the overall equity holdings of mutual funds schemes. Analyzing the overall weight of healthcare companies in equity-dedicated mutual funds, we see that after touching a high in the month of September 2020, their weightage has declined.

For the months of March and April this year the weightage increased but once again declined in the month of May. At the end of May, the weight of pharmaceutical stocks stands at 7.4 per cent, which is much higher than 5.24 per cent weight that the pharmaceutical companies command in the Nifty 500 index. The chart below shows the movement of weightage of pharmaceutical companies in domestic equity mutual funds, which clearly shows that they peaked in the month of September 2020.

Does it mean that the spurt of performance in the pharmaceutical sector was momentary and primarily driven by the pandemic? With the pandemic now being on the wane driven by the intensity of the vaccination drive, will the sector once again fade into oblivion? To answer this question we will go back a little into the history and place the current performance in a different perspective.

Long Lull Before Spurt

The current rally in the pharmaceutical sector should be looked at against the background of its huge underperformance which the sector had posted before the current rally started. Nifty Healthcare touched its peak on April 2015 and after that, it fell by 45 per cent in the next five years. In fact, Nifty Healthcare generated negative returns for four consecutive years between 2016 and 2019. It was only in 2020 when the healthcare index generated positive returns after 2015.

The table above indicates Nifty Healthcare’s worst five drawdowns from 2005. The last one is clearly the longest and the deepest one. Hence, the current surge is not just related to the pandemic. One needs to understand that since the sector was languishing for so long, the time was ripe now for it to come out of deep slumber. The pandemic simply accelerated the process. The graph above (Weight of Healthcare Companies in Equity MF Schemes) clearly shows that mutual funds started raising their weightage in pharmaceutical companies in December 2019, almost three months before the world took notice of the corona virus.

Structural Change

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