Equity mutual funds regain old highs, thanks to pharma stocks

MUMBAI: Equity mutual funds (MFs) are clawing back their lost ground after a slump in the first three months of this year. The spurt in sensex buoyed by renewed buying by local and foreign investors has boosted the performance of equity funds.
Interestingly its not the big movers of last year ��� like infrastructure and large-cap equity funds ��� that are leading the pack.The top three performers over the past three months have been pharma sector funds. JM Healthcare Sector Fund was the biggest gainer during the period, with returns of 14.83%. UTI Growth Sector Fund ��� Pharma and Healthcare is up 14.49% and Franklin Pharma Fund has seen returns of 13.86%.
A key factor driving the sector could be that the pharma pack did not participate in last year's runaway rally, and hence did not fall as sharply when markets tanked. Given the scenario, pharma stocks are good buys as they are low risk, and not because of the return potential. "FMCG and healthcare, which underperformed the broad market last year, benefited from increased defensive buying in 2008," said Siva Sivasubramanian K N, senior portfolio manager, equity, Franklin Templeton.
When the market tanked in early January, MFs took a severe beating as well. On March 31, they ended their worst quarter since January 2001. At that time the only bright spot for investors were gold ETFs, which invest directly in the yellow metal. Interestingly, the pharma categories did better than mainstream funds in the January-March period, losing an average 18.9%. In comparison, the diversified equity funds category, which has the largest number of funds and the highest investor interest, lost an average of 28.3%.
Based on past three months' and the previous quarter's performance what stands out is the rotation in leaders among sector-specific fund categories. From January to March gold ETFs were up 13% and they were the top performers among MFs. But they don't feature among the top 15 funds for the subsequent three-month period. When you look at the performance of sector funds, they are either at the top or bottom of the list, depending on whether the particular sector has performed favourably during the three month period, said Value Research CEO Dhirendra Kumar.
But over the long-term the gains in this quarter do not make up for opportunity cost of not investing in a diversified equity fund, say experts. Looking at the annual performance of pharma sector funds, they have given average returns of just about 4.5% compared to diverisifed equity funds, which are up by about 23% on an average, said Kumar.
But pharma funds are doing well, at least in the short-term. Indian pharma companies enjoy cost advantages and this is helping them on the global generics and contract manufacturing front. The past three months have also seen some positive news flow for the pharma stocks, which has boosted their performance. The recent patent settlements augur well for Indian generic players, who are aggressively competing with global generic manufacturers, said Sivasubramanian.