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Pure Pharma Exposure

Lalit Nambiar explains what makes UTI Pharma & Healthcare fund the best option in its space…

UTI Pharma & Healthcare fell the least amongst its peers in 2008 and was the best performer in 2010. However, in 2009 it found itself at the bottom of the ladder. Here, Lalit Nambiar, fund manager, explains how he designs his portfolio and why he believes it the best option for an investor who wants a pure exposure to the Indian pharma space.

When one looks at the composition of your portfolio, it is apparent that stocks such as Piramal Life Sciences, Jubilant Industries, Monsanto India, Fortis Healthcare and Zydus Wellness have never featured. Why is that so?
Commenting on individual stocks would be difficult but I would like to explain my investment style where this fund is concerned. Of prime consideration in this fund is style purity. Our mandate demands that we restrict investments to pharmaceutical and healthcare companies only.
In our interpretation, consumer companies which aid life-style modifications are not strictly healthcare nor even ‘nutraceutical’ players as they do not address medical or health improvement needs. Similarly we cannot look at taking exposure in an agro-chemical company. Sticking to our mandate provides investors the comfort that they can rely on us for pure exposure to the sector when they diversify or plan their investments. There will always be short-term temptations to augment returns by deviating from the investment mandate. However we prefer to avoid those in the long-term interest of the investor.

Is that why in 2009, UTI Pharma and Healthcare underperformed its four peers in the ‘Equity: Pharma’ category as well as the BSE Healthcare?
There are different benchmarks used for the four funds in this category including the BSE Healthcare and ET Pharma. UTI Pharma & Healthcare is benchmarked against the S&P CNX Pharma. The latter is an index that is different from CNX Pharma and has been constructed by India Index Services & Products Limited, a joint venture between CRISIL and NSE. Our benchmark index returned 73 per cent in 2009 versus 67 per cent by the fund. Now if we have to track our benchmark reasonably, there will be numerous factors which will differentiate our performance. So to have a blanket comparison with the peers may not be appropriate.
The BSE Healthcare index has 18 constituents while the S&P CNX Pharma has 35, all of which are pure pharmaceutical and healthcare companies. We broadly follow our benchmark for two reasons. One is that we are bound by mandate to follow the investment universe and second is that my performance is benchmarked against the index.
The pharmaceutical sector is not a homogenous one. It can be broken into many sub-sectors/clusters. Exposure to these clusters will determine the investment universe. We are not interested in a portfolio where we can buy anything and everything and somehow justify the presence.
So when performance is compared, we would urge such comparison to consider extent of attribution to pharmaceutical and healthcare companies.

So does this mean that you follow your benchmark very closely?
We do follow our benchmark reasonably closely if it helps style purity. Based on our analysis and valuation we take active calls. However due to SEBI investment limits we cannot go overweight in benchmark stocks having a weight of 10 per cent or more. Thus the alpha is generated at times by ‘active-underweight’ calls in these stocks and by stock-picking within the healthcare space.

Your fund has a large-cap tilt. Is that your deliberate strategy?
Currently it does have a large-cap tilt, but it’s just the result of the stock selection. The theme selection is top-down with a basket approach to various underlying themes, within the basket, stock selection is bottom up and valuation-based.
In the pharmaceutical space, there are companies focused on custom research, others on the Indian market and still others are exposed to the global market. One has to decide on the exposure to each of these clusters based on the risk-return profile. In the high risk pure R&D space, we would not like to take heavy bets because these bets have only binary outcomes, incidentally they also happen to be small-caps.
We have a basket of MNCs to play the domestic pharma growth story and are mainly small caps. Further, we hold a bouquet of predominantly US generic plays, which happen to be large cap and are set to gain from the US patent expiry cycle. The last two baskets provide downside protection given the less volatile nature of their businesses.
Ironically, MNC Pharma stocks are the only ones which provide pure exposure to Indian pharma sales. Thus, Glaxo India will sell only in India, not in the US. Ditto in the case of Pfizer India. But Dr. Reddy gets part of its sales in markets abroad.
I would like to point out that we have, in the past one year or so, almost altogether avoided CRAMs plays due to what we thought was a deteriorating risk-reward profile and these happened to be, in most cases, small caps. In retrospect, this call helped us even more than was originally envisaged.
We look at companies which will grow at a reasonable pace but at the same time have strong earnings visibility. Hence we have limited our exposure to pure research entities. This cluster is the most risky portion of our portfolio. A larger exposure to them would perhaps be more befitting to a venture fund. On the conservative side, the brand building franchises of the MNCs and some large Indian companies may have steep valuations but have tremendous value going forward because of their reach, doctor-recognition, product pipeline and many other inherent strengths.
Each cluster has separate attributes in terms of investment-horizon, risk and return. The market capitalization profile of the fund is thus a result of this strategy and not wholly intentional even while it is influenced by the composition of the benchmark and our internal as well as SEBI’s risk norms.

In 2010 your fund was the best performer amongst its peers. What led to such good numbers? Was it your bets on Lupin, Cadila and Sun Pharmaceuticals?
Yes, these stocks, especially Cadila did very well and are illustrative of the benefits of style purity over a longer period. Outperformance in the period was also helped by the steady return of the MNC pack where we were ‘active-overweights’ and the fall in CRAMs plays where we were ‘active-underweights’ within the risk limits permissible under our internal as well as SEBI norms.

SEBI: Securities & Exchange Board of India / MNC: Multi National Corporation / R&D: Research & Development / CRAM: Contract Research and Manufacturing / NSE: National Stock Exchange / CRISIL: Credit Rating Information Services of India Ltd