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Deceptive Appearances

Franklin Pharma & UTI Pharma might appear similar, but they have very different portfolios…

At first blush, the two funds appear virtually identical. Be it the launch date, the sector focus and the expense ratio. Even their returns last year were similar, 37 per cent. But that’s where the similarity ends.

If one takes a long-term perspective, the track record of Franklin Pharma is better. Over the 10-year period ended January 2011, Franklin Pharma delivered an annualised return of 21 per cent while UTI Pharma followed with a return of 17 per cent, almost equal to that of BSE Healthcare.

Even if one looks at the shorter-term track records, Franklin Pharma has the more impressive numbers. When one looks at the 2-year performance (as on March 7, 2011), Franklin Pharma (69.71%) is streets ahead of UTI Pharma (48.83%). The same story goes for the 3- and 5-year performances.

Interestingly, UTI Pharma has caught up with its peer in recent times. Its 1-year return (March 7) and 2010 calendar year return are pretty much similar.

In 2009, Franklin Pharma put up an absolutely stellar performance delivering 114 per cent that year. BSE Healthcare did not even come close (69%) and UTI Healthcare actually underperformed the index (66.70%). What worked for Franklin Pharma was its mid- and small-cap tilt. Exposure to small-cap stocks went up to 34 per cent (August 2009) in Franklin Pharma while UTI Pharma played it safe by limiting it to a maximum 14 per cent. That year, the average large-cap exposure was around 37 per cent for UTI Pharma but Franklin Pharma had it at just around 19 per cent.

It’s not just 2009. Historically too Franklin Pharma has tilted more towards a mid-cap bent. The flip side is that during market downturns, UTI Pharma turns out to be the more steady offering. Be it 2000, 2001 or 2008, the fund fell less than the BSE Healthcare and Franklin Pharma.

Currently, UTI Pharma has allocated close to 61 per cent of its assets to large caps while in Franklin Pharma they account for 35 per cent. The current weighted average market capitalisation of Franklin Pharma’s portfolio is Rs8,686 crore while that of UTI Pharma is Rs14,000 crore.

However, Nambiar says that UTI Pharma’s market cap is the result of the fund’s strategy. “We have a basket of MNCs (most small caps) to play the domestic pharma story and a bouquet of predominantly US Generic plays (large caps), set to gain from the US patent expiry cycle. We have almost altogether avoided CRAMs plays due to what we think are an adverse risk-reward profile and these happen to be, in most cases, small caps.”

What’s really interesting is the different portfolios that each sport though they managed a neck-and-neck performance in 2010. Not only was the large cap exposure much higher in UTI Pharma, but even the stock selection different. Some stocks were unique to each portfolio and even stocks which were part of both portfolios differed in their respective allocation. For instance, Torrent Pharmace-uticals (Franklin Pharma) and Divi’s Laboratories (UTI Pharma) were exclusive to each portfolio. Ipca Laboratories, to cite an example, was in the top five holdings of Franklin Pharma with an allocation of close to 8 per cent while in UTI Pharma it accounted for just 4 per cent. Sun Pharmaceutical, the top holding of UTI Pharma throughout 2010 with an average exposure of around 14 per cent, cornered just 4 per cent of the assets of Franklin Pharma.

Though Franklin Pharma is the more aggressive fund in terms of market cap exposure, it attempts to mitigate the risk by holding a larger number of stocks. While UTI Pharma invests in around 20 stocks, Franklin Pharma holds 29 and refrains from big positions. UTI Pharma has taken aggressive stock bets in some large caps where allocation to a single stock has gone up to 23 per cent (Sun Pharmaceuticals - April 2009). Ever since 2005, allocation to a single stock has not exceeded 15 per cent in Franklin Pharma.

As a result, the top five holdings of UTI Pharma account for more than half (59%) of its portfolio while in Franklin Pharma the percentage is around 37 per cent.

UTI Pharma does put up a more muted performance in bull runs but manages to fare better in market downturns. It tends to be more aggressive but opts for a more multi-cap approach. Franklin Pharma tilts towards smaller fare in its stock picking and delivered to compensate for the risk taken. It also maintains a broad portfolio.

According to Radhakrishnan, besides the obvious pharma companies in the space, the fund looks at “companies operating in niche areas such as biotech, healthcare infrastructure and agrochemicals.” Hence in the portfolio of Franklin Pharma, it is not surprising to see companies such as Piramal Life Sciences, Jubliant Industries, Fortis Healthcare and Monsanto India, which have never featured in UTI Pharma’s portfolio.