The year 2004 has not been a good year for any equity fund, but Magnum Pharma fund has pulled out a blinder. In the past six months, this fund has gained 6.9 per cent whereas its benchmark BSE Healthcare Index is down 7.1 per cent as on August 17, 2004. The other two funds in the category - Franklin Pharma and UTI Pharma & Healthcare funds are also in the negative territory - down 4.9 per cent and 3.43 per cent respectively. Not only this, Magnum Pharma's performance is even better than most of the equity funds including diversified and sector funds.
You must be wondering what made Magnum Pharma to perform so extraordinarily. The fund's mid-cap orientation and some good stock bets are the key reasons for the same. The fund got a major boost during February-April 2004, when its mid-cap picks like Ipca Laboratories, FDC, Lupin and Wockhardt gained in a big range of 20-35 per cent. The fund had nearly one-quarter of its assets invested in them. Then in the subsequent not so good three months, the fund managed to fall less, as most of its holdings was not severely hit. In fact, few of its picks like Vimta Labs and Aventis Pharma gained during the period. Through 2004, Magnum Pharma also has an average 7.5 per cent investment in one of the chemical stocks, United Phosphorous that has gained 8 per cent this year.
The fund's success story is not only confined to 2004. In 2003 as well, Magnum Pharma was the top performing fund in the category gaining 118 per cent. Moreover, it had beaten two-third of the diversified equity funds that year. The reason is simple. Through 2003 mid-caps were the major gainers and this fund has always been heavily invested in mid- and small-cap pharma stocks. This, however, does not mean that Magnum Pharma has not taken any large-cap exposure. Big company stocks like Ranbaxy and Glaxosmithkline Pharma has always been a part of the fund's portfolio.
Since mid-caps are more susceptible to volatility, Magnum Pharma's standard deviation (a measure of volatility) has been on the higher side in the category. But, still it is much lower than that of the most diversified equity funds.
One major thing that separates this fund from other two pharma funds is that Magnum Pharma has relatively low exposure to MNC pharma stocks. Currently, MNC stocks like Glaxosmithkline, Pfizer, Aventis Pharma and Novartis only account for one-fourth of the portfolio. And as in recent times, the stocks of domestic pharma companies have outperformed the MNC counterpart, Magnum Pharma has ended-up being a winner.
However, the market dynamics may change after 2005, when the pharma sector will have to adhere to product patent regime. While MNC pharma companies will have the advantage of introducing their parent products in the domestic markets, the Indian companies will have to concentrate on R&D to remain competitive. Hence, going ahead, Magnum Pharma fund will have to maintain a balanced portfolio of domestic and MNC pharma stocks.
For now, this fund's performance is unmatched. But before making a call on this fund one should evaluate his overall exposure to pharma stocks. Since Magnum Pharma is a sector fund, a small allocation is desirable. A higher exposure is only advisable to those who understand the sector dynamics well.
This article was originally published on August 18, 2004.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
