How SBI Healthcare Opportunities Fund can be a good investment in the current conditions

The equity market has been highly volatile since the outbreak of Coronavirus pandemic. Though Sensex has recovered handsomely in the last 3 months, it is still almost flat on a trailing twelve month basis. Almost all industry sectors have been badly affected by the COVID-19 pandemic with one exception – healthcare, a sector which was underperforming in the recent years. The S&P BSE Healthcare TRI is already up 27% on a year to date basis.

The chart below shows the performance of S&P BSE Healthcare TRI versus S&P BSE 100 TRI over various trailing periods in the last 1 year (ending 12^th May 2020).

Source: Advisorkhoj Research

Turnaround for the Pharma sector

The stunning outperformance of Healthcare sector is all the more remarkable because healthcare, especially pharmaceuticals had been a laggard for several years (see the chart below). Over the last 5 years, the industry faced a lot of headwinds particularly in the area of export revenues due to regulatory challenges in the US. The industry also saw slowdown in domestic revenues.

However, in the last one year the sector has seen a turnaround in export sales growth (especially US exports) to around 8% and double digit (12%) domestic sales growth. Also the unfortunate outbreak of COVID-19 across the world has improved the future outlook of this sector considerably as overall spending on healthcare is likely to increase substantially for countries to be better prepared from a medical response and healthcare infrastructure perspective for future pandemics, and also as Pharma companies look to diversify away from China with India being the major beneficiary.

Source: Advisorkhoj Research

Where SBI Healthcare Opportunities Fund can invest?

According to Mr. Tanmaya Desai, Fund Manager, “the fund looks to invest in pharmaceutical stocks which have presence in India or in some of the regulated markets such as US, Europe, Brazil, Russia, South Africa just to name a few of them. In the men time we look to invest in healthcare services company which encompasses hospitals as well as diagnostic companies. Finally, the fund also has the endeavour to invest in contract manufacturing companies which ties up with innovator companies or big pharma companies. We can invest upto 35% of our fund into international securities. We have in fact outlined certain areas in which to invest in international securities which could be the devices company simply because there are no listed medical device company in India. It could also be the health care tech company or the complex product speciality kind of a company which are available across US Europe and other geographies.

Performance of SBI Healthcare Opportunities Fund

Lump Sum and SIP Returns

The chart below shows the growth of Rs 1 lakh lump sum investment in SBI Healthcare Opportunities Fund over the last 5 years (as on 12^th August 2020). You can see that the fund despite underperforming for a long time due to industry specific issues would have turned in an overall profit in just the last 3 – 4 months.

Source: Advisorkhoj Research

The chart below shows the growth of Rs 10,000 monthly SIP in the scheme over the last 5 years. You can see that with a cumulative investment of Rs 6 lakhs over the last 5 years you could have accumulated a corpus of more than Rs 8 lakhs (as on 12^th August 2020). The fund gave around 11.73% XIRR returns

Source: Advisorkhoj Research

Why invest in SBI Healthcare Opportunities Fund?

• Healthcare is the brightest sector in the current economic environment. Healthcare and Pharma has outperformed the large cap and the broader market in the last 1 year. The sector has largely been successful in resolving the US FDA related regulatory issues.


• According to Mr. Desai, “the near term outlook of the sector is positive particularly due to the COVID-19 pandemic. Basically even prior to COVID, there was progress in the India Pharma piece simply because the valuations have become far more reasonable and the growth was looking better in the domestic geography. This is also supported by incentive government has provided on the API (Active pharmaceutical ingredients). The API parks that have been announced, some of the companies could possibly take benefit of that. Hence, we believe these investments are in the right direction and the growth on the API business definitely seems to be a bit more structural in nature” This will have a positive impact on their earnings not just in the short term but long term as well.


• The pandemic has brought into focus lacunae in the healthcare infrastructure of India, as well as other countries. We expect countries to increase their spending on healthcare as a percentage of GDP in the future. According to Mr. Desai, "what has also happened is that dependence of the globe on the key starting material as well as intermediates is on China and clearly geographies want to de-risk away from China but at the expense of wanting security of supply and Indian companies have beautifully captured this opportunity.Companies here are investing more heavily into their areas of strength to grow much faster on the API side which along with pricing being far more forward is allowing the profitability in this sector to look better.This will be beneficial for the healthcare sector not only for their domestic business but also exports".


• India is one of the largest Pharma exporters in the world and will be a likely beneficiary as Pharma supply chain diversifies from China. “shift of business from china to india might be a bit more gradual in nature but whatever is the shift is probably a significant opportunity and a sustainable opportunity for Indian companies to capitalize on..” Says Mr. Desai


• Pharma is a defensive sector. Defensive sectors are less impacted by economic cycles (e.g. growth, slowdown, recession etc.). Having allocation to defensive sectors in your portfolio will add stability.


• SBI Mutual Fund is one of the largest Asset Management companies in India with a strong fund management team. SBI Mutual Fund schemes are among the top performers in several mutual fund categories.

Summary

In this post, we have reviewed SBI Healthcare Opportunities Fund. We think that you need to have minimum 3 to 5 year investment horizon for this scheme. You can invest in this scheme either in lump sum or SIP depending on your financial situation. If you are looking to invest in this scheme through the SIP mode, you should longer investment tenures (more than 5 years).

Healthcare and Pharma is a great turnaround story in India. This investment theme had been a great wealth creator in the past and the future looks brighter. However, Pharma/Healthcare funds being sectoral funds, investors should not allocate more than 5-10% of their portfolio into this fund, according to Mr. Desai, the fund manager. You should consult with your financial advisor if SBI Healthcare Opportunities Fund is suitable for your investment needs.