The Covid-19 pandemic has forced healthcare companies into the spotlight, as they rush to produce tests and vaccines that could allow a return to normal life.
The share prices of some stocks have jumped by more than 1,000pc, buoyed by news that they are working on a vaccine.
Since the start of the year the healthcare sector has returned 9.6pc, while markets globally have risen by just 1pc. The Worldwide Healthcare Trust has done even better, returning 11.3pc for investors.
Sven Borho, co-manager of the £2bn investment trust, tells Telegraph Money where he is concerned a bubble may be emerging and how he manages risk when one failed clinical trial can lose you everything.
What is the first thing you look for when picking a stock?
Most of the biggest success stories in healthcare have had one key event that has made their name, such as when a new drug passes through clinical trials.
We look for when these trials are happening and select the companies we think will be successful. It’s risky – you can lose 80pc when things go wrong but when things go right it pays off.
What other selection criteria do you have?
We then judge whether the company’s share price reflects its chances of success. If the drug or therapy is likely to work and that hasn’t been priced in, we’ll invest.
We also like to get exposure to all sub-sectors within healthcare, from small biotechnology firms to the big pharmaceutical companies.
What changes have you made since the Covid-19 outbreak?
We have been reducing our holdings in companies that are working on coronavirus, such as Regeneron Pharmaceuticals and Gilead Sciences. People got excited and their prices leapt, so we sold some of our shares.
We usually have all of our cash invested and often borrow extra to put into stocks, but after selling some winners, we are only 98pc invested.
We expect share prices to fall as the American presidential election nears and plan to use that cash to buy at a good price then.
Are you concerned about a bubble in healthcare?
Yes, very. Prices of companies working on a coronavirus vaccine have shot up and are probably close to their peaks. It’s not the time to invest in a company based on its Covid-19 work. Investors would be better off selling before a vaccine is created.
But outside of that, the healthcare sector is great value at the moment. It is at around a 20pc discount compared with the rest of the market – a historic low. This is partly because investors are worried that the Democrats could win the presidential election and take control of the Senate. They’re concerned about what this would mean for drug prices – although I’m not.
Will picking the company that makes the first Covid-19 vaccine pay off for investors?
It will be a short-term boost, not a long-term one. Five years from now, this will be just a blip in history.
Once everyone is vaccinated, a vaccine won’t be a big source of recurring revenue and there’s likely to be a number of different ones that are used. Any company that makes a vaccine is likely to benefit, not just the first.
About 40pc of the trust is invested in biotech. How do you manage the risks?
We have about 100 researchers – 30 of whom have PhDs. No one else has resources like ours.
Biotech is an inherently risky area, but it’s also where you find the most innovation. It’s given us our biggest winners and our biggest losers. The maximum we would invest in a small biotech company is 3-4pc of the trust to minimise losses. For a big pharma company, we could put in more.
What have been your best and worst investments?
The best would be CanSino Biologics. It has already produced a coronavirus vaccine, although it’s only been approved for the Chinese military so far. Its value has increased 10-fold in a year.
The worst would be Personalis, which makes healthcare tools. We lost 74pc.
How are you paid and do you have money in the trust? I don’t get a base salary. I am a partner of OrbiMed, the company that manages the trust. If it does well, I get paid more. I also have my own money in the trust.