Edelweiss's healthcare fund offers benefit of international diversification

With the healthcare index having run up a lot already this year, it could witness an impact in the event of a market correction
Edelweiss Mutual Fund (AMC) has launched the Edelweiss MSCI India Domestic & World Healthcare 45 Index Fund. This is an open-end passive fund that will give Indian investors exposure to both domestic and global healthcare stocks. While many active funds focused on the pharma and healthcare segment are available in India, they invest in domestic stocks only.

The offering

This fund will have 70 per cent exposure to the domestic and 30 per cent to the international healthcare segment. In the domestic component, it will include the top 25 stocks based on market cap, covering sectors such as pharma, hospitals, diagnostics, life science and biotechnology.

On the global side, it will include 20 companies listed in the US belonging to four sub- sectors: pharma, healthcare, biotech and life sciences. "The fund provides investors with exposure to two themes that are not correlated with each other. The domestic component is a consumption growth story, while the international component is a research and innovation story. When you combine these two ideas together, you get a superior risk profile than you would from a pure domestic healthcare index," says Radhika Gupta, chief executive officer, Edelweiss Mutual Fund.

On the domestic side, the fund will give investors exposure to players in the domestic Indian pharma market (including subsidiaries of multinational companies focused on the Indian market). These players sell branded generic products in India, which gives this segment the characteristics of a consumer-oriented play. Two, investors will get exposure to large Indian pharma companies that are major players in the US and other developed markets, whether they have made a mark selling generics. Three, investors will get exposure to API (active pharmaceutical ingredients) manufacturers who supply to both Indian and global companies. And four, they will get exposure to hospitals and diagnostics centres.

In the global part of the portfolio, the fund will give Indian investors exposure to four themes. The first is medical device manufacturers. The second is traditional pharma giants engaged in research and development (R&D) to develop new molecules. Investors will also get exposure to life science and biotech companies. In the construction of the global side of the index, healthcare services companies have been deliberately excluded, since Indian players in this segment (to whom the fund does give exposure) are growing at a faster pace.

While healthcare stocks have already run up a great deal during this calendar year, the fund house believes that after the massive underperformance of the healthcare index in 2017, 2018, and 2019 vis-a-vis the diversified market (see table), these stocks still have a lot of steam left and could continue to outperform over the next three-five years. The reason: the headwinds inhibiting their performance – massive price competition within the US generic market and aggressive inspection by the US Food and Drug Administration (UDFDA) – have abated.

Since this is a passive offering, it comes with a low-cost advantage compared to active funds in the healthcare space—its regular plan will have an expense ratio of 1 per cent while the direct plan will have an expense ratio of 40 basis points (0.4 per cent). Since the fund has 70 per cent exposure to domestic equities, it will receive the more favourable tax treatment given to equity funds.

Pros and cons of this fund

The fund’s key attraction, according to experts, is that it gives exposure to both domestic and international healthcare stocks. "The 30 per cent international exposure will give Indian investors exposure to a set of stocks not available within the Indian healthcare sector," says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisers.

The combination of domestic and international stocks is also likely to reduce portfolio volatility. "Bringing together two asset types that have a low correlation with each other should bring the portfolio volatility down," says Deepesh Raghaw, founder, PersonalFinancePlan, a Securities and Exchange Board of India-registered investment advisor.

Investors must, however, bear in mind that this is a thematic offering. "Unlike a diversified fund, a thematic fund, because of its very nature, cannot be expected to perform consistently all the time," says Pankaj Mathpal, founder and managing director, Optima Money Managers. Raghaw adds that since it is a thematic offering, it should not be a part of a retail investor’s core portfolio. Investors should only add it to their satellite portfolio – the portion where higher risk is taken in anticipation of higher returns.

Furthermore, the fund has been launched on the basis of back-tested data. It remains to be seen how it will perform in actual market conditions.

With the healthcare index having run up a lot already this year, it could witness an impact in the event of a market correction.

Should you invest?

Retail investors who are convinced that the healthcare sector will do well in the future – their conviction may have arisen because they work within the sector or have done a lot of research on it – may invest in it.

Investors keen to have an added allocation to a defensive (non-cyclical) sector like healthcare, which has the potential to offer them protection against the ups and downs of the economic cycle, may also invest in this fund. Those looking for geographic diversification within the healthcare segment may also opt for it.

Experts, however, offer many caveats. "The key is not to over-invest in this kind of a thematic offering," says Raghaw. In his view, investment in a thematic fund such as this should not exceed 5 per cent of the equity portfolio. Mathpal, too, holds the view that only mature investors, who already have adequate exposure to diversified-equity funds, should take an exposure to such thematic offerings.

Dhawan believes investors should get into this fund only with a 7-10 year horizon, and not take a tactical exposure to it because of the Covid pandemic and the widespread belief that the healthcare sector will do well in the near future. They should also take the SIP or STP route. Many investors tend to enter thematic funds for the short-term, believing they can time their entry and exit. This is usually harder to pull off than most think and should ideally be avoided.

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