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Fidelity’s health care sector fund has several long-term trends working in its favor, writes Jim Lowell of Fidelity Investor.

We own a healthy dose of Fidelity Select Health Care Fund (FSPHX) in each portfolio. Of course, health care (representing nearly 16% of our gross domestic product) is unlike any other sector in the Standard & Poor’s. It is so diversified and global, so interrelated to technology, manufacturing, and R&D, so dependent upon delivering real goods and services for consumer consumption, that it is almost an economy unto itself.

The cons:

• Political pressures may appear to be on the wane; but they’re as likely to inflame
• Cost-control efforts continue to cut into the profit margins on many medications even as an unprecedented level of patent expirations vie against generic and potentially even government product competition
• Pipelines of new, significant (“blockbuster”) drugs make less and less of an impact on the earnings growth of the major pharmaceutical conglomerates
• Legal liabilities
• Market momentum in favor of growth stocks tends to discount health-care stocks

The pros:

• Relatively stable earnings growth and dividend yields
• Broadening of biotechnology businesses and proven applications such as technological, nanotechnological and genome mapping advances
• Demographic factors
• Emerging market consumers’ growing demand for more and better health care goods and services
• Politicians and health plan administrators cognizant that even expensive drugs are less invasive and hence cheaper than surgery, long-term psychotherapy, or complications from chronic illness.
• Manufacturing efficiencies can lead to cost savings
• Government stimulus could be less permanent than government production
• Innovation leads to capital appreciation

My diagnosis:

Health care remains a reliable cure for overall market volatility with organic and strategic upside growth potential.

[The fund is up 5.7% year-to-date, modestly outpacing the market. Top performers in 2011 include Pfizer (NYSE: PFE) (up 10%) and McKesson (NYSE: MCK), a drug wholesaler that’s risen 12% since the year began. Another top holding was recently recommended by Louis Navellier. Josh Peters prefers another maker of medical equipment and drugs—Editor].

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