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#BQMutualFundShow: Thematic Funds Are ‘Suited For Informed Investors’

Sector funds invest in businesses that operate in a sector or two, while thematic funds invest in industries or companies that are united by a theme.

"Thematic funds are up the ladder in risk profile or the risk meter,” Swarup Mohanty, the chief executive officer of Mirae Asset Global Investments (India) Pvt. Ltd., said on BloombergQuint’s weekly series The Mutual Fund Show.

Gajendra Kothari, managing director and chief executive officer of Etica Wealth Management Private Ltd., concurred. “Thematic funds aren’t ideal for retail investors. They’re suited for informed investors who can dedicate 10-12 percent of their portfolio to it.”

“No-Brainer”

The critical role pharmaceuticals play in the lives of millions of Indians prompted Mirae to launch a healthcare fund, said Mohanty. “The idea was a no-brainer.” The Mirae Asset Healthcare Fund, launched on June 11, will remain open for subscription till June 25.

Mohanty added that healthcare is a secular investment theme and not a short-term idea. “Investors with higher time-frame and risk appetite must allocate a portion of their portfolio to such funds.”

Here are edited excerpts from the conversation:

What gave you the idea of starting a pharma fund? Was it because you thought that the cycle might be turning and therefore investors will be better off if they invest in a set of companies that are set for growth, but the valuations are in your favor?

We’re not new to investing in pharma as a fund house. It’s a part of our portfolio for the last 10 years. We’ve seen the good side of pharma and in the last three years we have seen its negative side as well. We’re always in tune to stock picking in pharma.

When you asked at the beginning of the year of which theme to look for to invest, I said pharma. It's beginning to play out. The beauty of this sector or segment is, there is nothing to talk about. Everybody knows about the sector and impact on our lives. It's not very technical. All of us know that it's a part and parcel of our lives with the changing environment, food habits.

The necessity of the growth of pharma within our lives is well known. When it comes to selecting a theme or a sector, this was a no-brainer. We have been working on it for a long time. We don’t launch a fund at Mirae Asset overnight. We have been thinking about it for almost two years.

We have run portfolios at the back-end. The analysts who have been managing this sector for a long time are now going to manage this fund. It's not something which will play out for one-two years. We look at it as a secular theme going forward.

What’s the difference between thematic and sectoral funds? And what kind of investors should think of investing in them?

There is a difference between sectoral funds and thematic funds. Sectoral funds pick up one or two sectors and build a portfolio based on it, like technology, pharma, FMCG. Thematic funds are more broad-based, and ancillaries are included.

Seven years ago, when we launched or identified the consumption theme, people asked what is consumption? Today, there’s no doubt on diversity of consumption asset as a theme. The NAV (net asset value) has gone up 3.5 times.

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Today, pharma is said to be a broader theme as it has two parts. One is, when you fall ill that is the pharma part and the other is, when you do everything not to fall ill. If you combine them, it's broader than just being one sector.

The second part is who should invest. Thematic funds are up the ladder in risk profile or the risk meter. People who are invested in equity, who form their core portfolio around the diversified equity funds, can consider thematic funds. These are not strategic allocation funds; these are very long-term and secular allocation funds.

People who can take a slightly higher time frame for investing and slightly higher risk should allocate some money to this fund. This is a compelling allocation, but it’s not for new investors.

All the thematic funds don’t necessarily tend to start outperforming in year one itself. Give it some time and then it does. What explains this?

As an investor, you can take a strategic call on a specific sector looking at the near-term outlook. But when it’s a broad-based theme, it is a secular run. The common denominator of such examples is five years. There’s nothing wrong in the sector beyond that.

The slide in pharma is dramatic because the three-year returns are negative. The ten-year returns outperform all other themes. It's probably the best time to start buying. The 10-year return is absolutely intact. That’s why the sector makes for a compelling buy.

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Is it the case that we may not necessarily see outsized returns from the next couple of years from the equity markets, but beaten-down pockets like pharma could?

We have not timed the fund and we didn’t know that this could happen. But when you see a theme playing out in the negative side for three years, and when you know its fundamentals are intact, then you say that probably this is the bottom of the theme.

When you look at the upside and the basic simplicity of the theme, it becomes a powerful theme for the 10-15-year investor and there’s no rocket science in coming to that conclusion.

Let’s say you are enthused by the idea of investing in thematic or sectoral funds. What percentage of the portfolio will you allocate to such funds?

Overall, your equity-debt is divided, and the rule of thumb is your age. If I am 48, then the 48 gets to debt part and balance goes to equity. I am a little aggressive, so I will take 60-40. Out of it maximum of 65-70 percent, I’ll allocate to core funds like large cap diversified, mid cap diversified. May be multi cap will replace the large cap in next three-four years. The balance 30 percent, I would divide it into two-three themes and that is how I will play it. We will look at themes which has played out in last 4-5 years like consumption, technology, banking has to play out for India to grow and pharma has to play put for India to be a better place to live in.

Let’s look at people who have taken medical insurance. Big policies would be in the range of Rs 5-10 lakh. You go to any hospital, you know they will take exactly the number of beds that are there. The biggest upside will come in diagnostic centers.

There's a huge role for the centres to become organised. It's around us like fitness. People will want to become fit overnight very soon. Because of this the average lifespan of India is still low compared to other countries.

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For the preventive theme, will it be that easy to play the broad healthcare theme?

Yes. If you’re carrying a local diagnostic center report, then big hospitals say this will not work. The institutionalisation is already happening. Earlier people would just ask for one-two tablets and not bother about the expiry date. Today, we’d ask them to produce the entire strip to examine it because we have grown more conscious.

An institutionalisation is beginning to happen. Most of the projections that people talk about in the pharma or healthcare sectors are in the 7-10 years time range. The changes are happening in front of our eyes. And it is has begun.

Watch the conversation here:

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