The Mutual Fund Show: How To Add Healthcare Exposure To Portfolio During Pandemic
A medical assistant wears a stethoscope. (Photographer: Andrew Harrer/Bloomberg)

The Mutual Fund Show: How To Add Healthcare Exposure To Portfolio During Pandemic

Axis Mutual Fund has launched an exchange traded fund focusing on healthcare, at a time when the sector is receiving renewed interest amid a second wave of Covid-19 infections in India.

The Axis Healthcare Exchange Traded Fund, a passive investment offering, will cover the broader healthcare sector—including hospitals, diagnostics centres, drugmakers, and research and development firms.

It’s an open-ended equity scheme that seeks to replicate or track the Nifty Healthcare Index—which comprises 20 of largest companies by market value in this sector. However, unlike mutual funds, ETF units will be listed on the exchanges and can then be traded.

“There are companies in India in segments like diagnostics hospitals, clinical research and even our pharma firms that have significant opportunities to grow as they look to meet the burgeoning demand in India,” Ashwin Patni, head products and alternatives of Axis AMC, explained on BloombergQuint’s weekly series The Mutual Fund Show.

Patni said these companies can drive efficiencies by offering globally competitive services just like they have done in the export market. “The underpenetrated and unorganised nature of the healthcare system offers significant room for growth at scale for organised players to flourish.”

Tarun Birani, founder and director of TBNG Capital Advisors, however, advised against buying into a new ETF, saying people would be better off buying healthcare mutual funds with a 10-year track record.

He said investors seeking sectoral exposure can opt for healthcare funds from Nippon AMC that have a proven track record, with a three-year annualised growth rate of 23% and delivering 21% annualised returns since its inception in May 2004.

Birani urged investors to add global funds to their portfolio, with some of the best companies located outside India. One can look at diversifying to the extent of 70% in developed markets and 30% in emerging markets outside India, he said.

Watch the full interview here:

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Here are the edited excerpts from the interview:

Ashwin, what is the nature of this healthcare ETF?

ASHWIN PATNI: So, as you said there are two-three important things to highlight in this. The first is that it seeks to capture a very specific segment of the market which is the healthcare segment. We’re very conscious of the word healthcare because typically in India, we’ve had a very large, what we used to call the pharma space, basically the pharmaceutical space, which is the drug manufacturers. But this is a space that is getting broader in the recent years as we’ve got other types of players within the broader healthcare space and the easiest example is diagnostics chains, hospitals, and such who have also come into this space. So, to recognise that this is now a much broader space, NSE came up with this new index, which captures the healthcare segment as a whole and essentially has the top 20 companies of the healthcare index into this. So, what we are offering really is a passive exchange traded fund that will replicate this index and give people and investors a chance to capture the entire healthcare space using a very simple and an easy to understand, single product.

I’m guessing open-ended people can come in and get out the way they want and I’m guessing the expense ratios will be very less because it’s an ETF?

ASHWIN PATNI: Yes, the expense ratio absolutely. In terms of the open-ended nature the nuance of an ETF, of course needs to be understood. So, unlike normal mutual funds, where you can put in an inflow or a redemption with the fund house exchange traded funds as the name suggests trade on the exchange, the liquidity comes because of the fact that these units can be easily bought or sold on the exchange. But yes, from a practical perspective, they are pretty liquid, and their liquidity works in an open-ended manner in that sense.

I’m guessing the taxation rules are similar?

ASHWIN PATNI: Yes, it’s, it’s an equity fund. So the only thing that is different is the structure which is the exchange traded structure of it, as I was mentioning, but in all other respects the way for example the daily NAV gets calculated, the way portfolio gets constructed, taxation, all other aspects it works exactly like an equity fund except that the nature of the investment operation, you have to buy and sell on the exchange. In the NFO period of course we take applications directly but post that it will start getting listed and traded on the exchange and once that happens, investors can directly buy and sell on the exchange.

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Why the timing, at the current point of time? Does it in any way contrast or cannibalise any of your existing offerings? I’m just trying to see if somebody wants to invest in the Axis AMC house, is there another suit of products or a product which is dedicated to healthcare and therefore, would this give me contrasting choices?

ASHWIN PATNI: Sure, so let me answer the second part which is very easy because we don’t really offer sector funds, traditionally in Axis Mutual Fund. The equity funds that we have are all broad-based, diversified products and that was a very conscious choice because active management requires a certain amount of elbow room, you need to be able to allocate across a large number of different sectors and different opportunities to create a portfolio that can work for the investor. But at the same time, we also recognise that in the market investors need more sharply defined products. There is need for special investors who want to take specific exposure to themes and sectors that are very tightly defined. So, in recognition of that, over the last year we have started consciously doing a number of passive ETFs—we did one for banking, we did one for technology and this is the third in that series where we have chosen the healthcare space to do it. The idea is very simple as it allows investors a very sharply defined product and because it’s a very tightly defined product, a passive fund can reasonably replicate the space and there is not really much value that an active manager can really add in terms of stock selecting or something.

I mean it’s a passive fund but if you have somebody out here, what’s the view that Axis AMC has on the space? I mean, is the timing right from a healthcare perspective? Do you have some thoughts here?

ASHWIN PATNI: Broadly speaking, healthcare is a one of the large material sectors in the market and over the years, it’s been represented by the pharma companies in a big way. Pharma companies continue to be a very big part of this space but we’re also seeing the emergence of new spaces like diagnostics, hospitals, etc. If you see this space, it’s obviously gone through its share of ups and downs for the last few years especially in 2016, 2017-18. Those two three years we had a very tough period for especially the pharma companies where they had a number of challenges which affected their numbers. These are all well discussed so I won’t spend too much time there. What is happening interestingly in the last two years is that, there’s been a pretty strong rebound backed by two-three things. One of course is, I think the companies have also pulled up their act and wherever they needed to improve processes etc., I think that has come through but more importantly also, there are two forces at work. One is the fact that if you see it from a global context, there is a certain amount of diversification to China that needs to happen and when it comes to the export markets, I think there is recognition that India can be a very meaningful diversifier away from China and that is giving rise to a lot of opportunities for companies which is there. The second part is of course the domestic market, and which is again, we are seeing much more opportunities getting thrown up. Here I’m talking about some of the other unorganised spaces like diagnostics where again, things were maybe a little bit more informal and there are formal chains that are able to capture and benefit from moving into a more organised space. Also, there is a recognition that there is need to step up on the R&D side and new research side. Historically again the industry has been more focused on generics etc., and we are seeing that value addition coming in terms of the research spends and research focus that is coming in. The final point is, last year we’ve seen a potential game changer in the form of the production-linked incentives that the government has brought in, which do encourage the large manufacturing plants in India and again for this sector we believe that is potentially quite a big story. So, all in all, it’s a few things which are coming together of course in the near term there can always be timing wise the ups and downs, but we think that in the medium-to-long-term, the future of this space is very bright.

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What’s your sense Tarun, I know you don’t usually prefer thematic funds as a practice but if somebody wants an exposure to the healthcare space, have you tried to look at this ETF? It’s a simple product, how do you like it, why don’t you like it, if you don’t? Can you tell us a bit about it?

TARUN BIRANI: As we talk, this is one of the biggest ‘Black Swan’ events that we all are going through. Since the last one year we have seen this pandemic testing mankind at a different level and as we speak, India from a healthcare point of view, this space is completely a space wherein the medical and when I talk of it, I talk about the medi-claim, availability of hospital beds, availability of hospital infrastructure and that’s at a very abysmal level. From that point of view, if I look at this healthcare as a space, there are definitely a lot of opportunities in the diagnostic side and in the manufacturing side as India is considered to be a research and development hub. So, there are definitely a lot of good companies available. If I look at it from a 10-year structural point of view, this category has delivered great returns. So, there are a lot of existing funds available in the market which has delivered upwards of 15-16% CAGR from a 10-year point of view, and the average returns of the healthcare funds available in the markets have been 11-13% which is way higher compared to the Nifty level. So, from that end and looking at it from 5-10-year point of view, the awareness around healthcare is much higher. So, this as a theme, definitely looks as a very structural theme from a decade point of view. Anybody who has a risk appetite and is able to look at sector funds on a regular basis, can look at it. This is basically for sophisticated investors who has access to a lot of information and who have been tracking the stocks indexes on a regular basis. So, from that point of view, one can definitely look at having some exposure in that healthcare fund, but I definitely like diversified funds better because there the fund managers have access to buy healthcare or any other stock which he likes. So that anyway gives the investor the access to this sector but specifically talking about the ETF that you speak of, I see from a 10-year, five-year data point of view, the information asymmetry is in favour of active funds in this space because from a 5-10-year point of view, the active funds—the pharma, healthcare active funds have done much better than the index fund but yes from the last one year point of view active and as well as the index funds are more or less at the same level. So, that is where we have started to see a lot of index funds getting into the markets but healthcare as a space, there is definitely much more research required on the stocks. I think the information asymmetry is there and active funds can be preferred.

So, you say that instead of buying the Axis ETF, it is better to choose an actively managed healthcare fund?

TARUN BIRANI: Yes, that’s what I can see from the data point of view. That will giving you much more confidence to look at active fund if anybody wants to look at the healthcare space.

Are there any good options that you would have had your clients buy in the last 6 to 12 to 18 to 24 months, actively managed health care funds?

TARUN BIRANI: We don’t advise sector funds because we definitely like the fund manager to look at diversified funds and they take the calls on the sectors but there are funds like SBI Healthcare, Nippon Healthcare which has a track record of 10-year plus and they have given very good returns compared to the benchmark, these are both active funds.

Tarun, there is lot of opinion needed for people who have money and that they want to park some of the money safely with the best returns possible with the time horizon between 12 to 18 months ideally, about a year or slightly over a year. Now my question is, on the non-equity side, what would the best category be for that time period and what are the kind of returns that should be anticipated and what are the funds that you believe are the best options in that category?

TARUN BIRANI: As we talk currently, we are going through an environment of softer interest rates and globally with a $15 trillion of fiscal stimulus given by most of the central banks and the Indian central bank is no different. We are seeing the stance towards softer interest rates. So, the yields in the space which you are talking about 12-15 months are currently ranging between nothing less than a 4-4.5% kind of a yield and if I look at a debt fund from a one-to-two-year with the taxation point of view the returns are nothing less than 2.5-3%. So the returns doesn’t look very attractive from a post-tax point of view. In this current environment, a category called Arbitrage Fund is looking better because since the last two, three expiries, we are seeing that the spreads available are more than 5% and 5.5%. The spreads are available in the arbitrage category. So, somebody with a 1-1.5-year view can look at an arbitrage fund because there you have the taxation benefit, long-term capital gains are at 10% and short-term capital gains are at 15%. The the post-tax returns are much more efficient in that space. Otherwise, apart from arbitrage one can look at a short-term fund with a two-year kind of a maturity and there the yields are closer to around 4.5-5%. So, that is the kind of expectation of YTMs which are available in the market and one can look at them.

So, in the 12-15-month horizon as well, a two-year duration fund should be looked at?

TARUN BIRANI: I feel that a combination of an arbitrage fund and a short-term fund can be taken with that kind of a horizon maybe 50-50% in both categories.

And arbitrage funds you said might return about 6.5-7%, if I’m not wrong. Did you say that?

TARUN BIRANI: No. Every month, on the last day of the expiry you get the spreads available in the market. So, based on the last rollover which has happened, the spreads are close to 5-5.5%. So, that looks much attractive compared to any other liquid or ultra-short-term options.

Any arbitrage one would be worth its salt or are there some really good ones out there?

TARUN BIRANI: One can look at funds available from most of the bigger fund houses like Kotak, ICICI, IDFC—they all are doing well, so I don’t see the spreads being much different between each of them.

Tarun, here’s where we leave the floor open to the adviser. I’m not leaving restrictions about timeframe, I’m not giving you restrictions for the category but just a category and a fund within that category, which you believe is looking really interesting right now? It could be for any reason please spell out the category, and also spell out the reason for what kind of people should opt for that.

TARUN BIRANI: One category, which I feel is completely unused by investors in India is the global investing category. We Indians have been overly focused around the Indian markets. Most of our investment if I look at my personal investment also, a year back or two years ago, I think all our equity exposure used to be in the Indian markets but largely if you look at the problem, one is diversification. You are focused only on the one market, then second, you see a constant rupee depreciation happening from the last 10 years, if I look at 4% is the rupee depreciation which has happened. Apart from that the best of the better managed companies are not available in India. So, from that point of view, I feel one should look at diversifying outside India and as I’m doing much more research around the global investing piece and as a part of the client portfolio, I spoke to a lot of advisors out in the U.S. also and they’ve looked outside the U.S. market for almost 20 to 25% of the portfolio. That gives a meaningful diversification to the investors. I feel in the Indian scenario too, if you look at the world GDP composition, U.S., Europe, Asia, all these geographies take over the entire GDP composition, but my money is only in India. So, when investors are also looking at it, they need to divide their money into the developed market as well as the emerging market. Then, to start with, I feel 15-20% of your portfolio and I am making a bigger bet because one needs to start meaningfully looking at global investing and maybe 15-20% of your portfolio, you can look at this category. In that also 70% could be in the developed market and 30% could be in the emerging market. What do you mean by a developed market? Economies which are much better regulated, much more developed markets like the U.S. and Europe. These could be looked at and in the emerging market you have markets like China, Korea, Russia, Brazil and India. All these come under that. The good part is, in India we have a lot of global investing fund options available and most of the fund houses have one or the other global investing funds available. As we speak, we have almost 20,000 crore plus of asset under management in these global funds. So, if I have to look at it from a developed market point of view funds like Franklin Feeder Fund, funds like PGIM Global Opportunities, funds like Edelweiss, ICICI—all these funds are great options available. One can choose one of them as part of their developed market allocation. In the emerging market allocation one can look at, again, Edelweiss has an emerging market fund and a China Fund too. So, all these funds could be looked at from an emerging market allocation point of view. The good part is, the correlation with the Indian markets is less so it will help you diversify in the periods and the correlation study works out to be 0.6 compared to the Indian markets. So that gives you a meaningful diversification because in India, let’s say a Bengal election happens and the market falls. It will not happen with the Korean market or the Chinese market. So, that way your portfolio is much more balanced and over a long period of time the risk adjusted return on your portfolio will be much better. So, my strong suggestion to everyone is again, this space is a little sophisticated because there are a lot of currency plays also comes into that one needs to make a very informed decision, needs to study these funds in detail and about their track record over a long period of time. So maybe you need to sit with your adviser to understand how much exposure you can look at from the timeframe that you have available. Again, from your kid’s future point of view also we all require funds to be available in dollars. So, this could be an attractive option and I see a lot of need for this global category in a portfolio.

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