A fear of missing out on investing in the firm that develops the first Covid-19 vaccine has led pockets of the healthcare sector to trade on "eye-watering [valuations] reminiscent of the TMT bubble", fund managers have warned.
The current health crisis has shone a light on the healthcare and biotechnology sectors, with more than 1,000 clinical trials, including over 100 potential vaccines, having been registered in the space of three months, according to Dr Trevor Polischuk, co-portfolio manager of Worldwide Healthcare Trust.
The Nasdaq-listed share price of Moderna Therapeutics jumped almost two-thirds on news it was the first to reach clinical trials, though it has retraced all those gains since.
Appetite from investors to access the sector had already begun to spike before 2020 as political noise surrounding the November US Presidential election begun to abate.
That was compounded by healthcare's defensive qualities, which offered investors protection during the coronavirus market sell-off.
The MSCI ACWI Health Care sector is up 0.5% year to date, compared with the wider market's 9.4% loss, data from Refinitiv shows. Between 19 February and 23 March, those respective indices were down 26.7% and 33.6%.
Many funds in the Investment Association's equity sectors have upped their weightings to healthcare over the past 12 months. Terry Smith's Fundsmith Equity, for instance, has a quarter of its portfolio in the sector.
The Comgest Growth World fund also has 25% of its assets in healthcare firms. Manager Laure Negiar said some of the fund's "long-time favourite names" such as Eli Lilly and Becton Dickinson "were trading at very attractive valuations" during 2018 and 2019, amid pricing worries.
Similarly, retail investors have caught the healthcare bug, with investment platform interactive investor telling Investment Week it had seen an uptick in purchases of healthcare stocks.
Anglo-French diagnostics firm Novacyt, which has been selling Covid-19 testing kits to consumers in more than 100 countries, went from a little-known AIM-quoted stock to interactive's sixth best-seller in Q1. Its share price surged 655% between late-February and mid-April.
"The healthcare sector is unlikely to return to the niches of investments after the current pandemic but is likely to remain popular for years to come," said fund analyst at interactive investor Teodor Dilov.
Overall, investors have pumped €6.5bn into European healthcare open-ended and exchange-traded funds since Q1 2018, according to Morningstar data. Q1 2020 alone saw €2.4bn of inflows, the second-highest quarterly level seen in the past five years.
In the biotechnology sector, after four successive quarters of net outflows totalling €1.3bn, Q1 2020 saw a reverse, taking in €140.7m.
Indeed, February, at €114.5m, was the best month for biotech flows since October 2018.
"Companies engaged in the discovery and manufacture of a vaccine for Covid-19 have proved to be some of the biggest winners in Q1," said Morningstar's senior analyst, manager research, passive strategies Kenneth Lamont.