A Trio of Sector Bets

10/11/2013 10:00 am EST

Focus: FUNDS

Jim Lowell

Senior Partner & Chief Investment Strategist, Adviser Investments

Jim Lowell's newsletter, Fidelity Select Investor, was just ranked the top performer for the past five years; here, the fund expert highlights his current favorite sector funds.

Steve Halpern: We're here today with Jim Lowell, editor of Fidelity Select Investor. How are you doing Jim?

Jim Lowell: I'm doing just fine.

Steve Halpern: First off, the Hulbert Financial Digest, a newsletter organization that monitors the portfolios of financial newsletters, has ranked your Fidelity Select Investor as the top performing newsletter for the past five years. Congratulations on that.

Jim Lowell: Thank you very much.

Steve Halpern: Well, let's look into how you earned that record. First off, could you give our listeners a brief explanation of what sector funds are and how those are different than other mutual funds that you look at.

Jim Lowell: Absolutely, so, most people think of mutual funds as big, diversified buckets of stocks that store stocks and bonds—hundreds of names inside the fold. Sector funds are more narrowly drawn, so, not just looking at things like healthcare, which would be a macro sector, but inside of healthcare, looking at biotechnology, medical equipment, pharmaceuticals.

Same could be said of, say, cyclicals, which is a macro sector, inside of which, you'd find sub-sectors like air transport, automotive, chemicals, industrials, environmental services.

So sectors are more vertical spokes to the overall market's wheel, and, of course, they're difficult to manage wisely and, well, especially over long-term periods of time, because sectors can come in and out of style fairly quickly, either based on raw momentum, market behavior, or fundamentals, and so, a disciplined approach to sector investing is absolutely required in my book if you're going to begin to start to do so.

Steve Halpern: Maybe you can explain a bit about your strategy with these select funds and how you develop portfolios for your readers.

Jim Lowell: So, Fidelity Sector Investor is what I consider to be a satellite to my core Fidelity Investor publication, which has model portfolios that use diversified Fidelity funds. Fidelity Sector Investor drills down, and uses specified universes of Fidelity Select funds.

The Fidelity Select fund universe is the largest universe of actively managed sector funds. There certainly are other firms out there that provide lists of sector ETFs, exchange traded funds, passively managed sector products that are specifically geared to underlying sector indexes.

Fidelity's active managers on their Select Fund Universe have their career basically hinging on them being able to beat the index and the product benchmark, that sector ETFs may or may not provide. So, it's a big enough universe to be able to really get in and build a diversified approach to sector investing.

So, one of the things that I did was to create, in terms of our Market Masters Portfolio, seven different sleeves, so we have consumer, cyclicals, financial services, healthcare, technology, utilities. The seventh sleeve is international, using regional or single-country funds, and the reason for that is, I wanted to make sure that we had a truly global, diversified approach to the sector investing universe.

And then it is a rules based system, so it's not how I feel on any given day about any given sector, it's a rule of base system, clearly delineated for our subscribers, and it is a system that's designed to select optimal investment opportunities from, what I call, risk-adjusted return perspective. So, the system is selecting investments based on the ever-changing potential risk and returns in a variety of domestic and global sectors.

Steve Halpern: So, let's look at a few of the recommended sector funds that you like currently. One of those is Fidelity Select Consumer Finance (FSVLX). Can you tell us a little about that?

Jim Lowell: Well, consumer finance is a very interesting position. It's what the system is telling us to hold, despite the fact that the majority of people are running from the consumer, even as we speak. I like consumer finance. I like the consumer sectors. I'm glad that the trading system is picking up on it.

The fact of the matter is, the US consumer remains relatively strong, and I want to be able to buy those things that enable the consumer to spend, so consumer finance has Capital One, Visa, MasterCard, American Express inside of its fold, and I think it is, at least currently, a contrarian play, but one that I think will bear fruit, especially over the next several months.

Steve Halpern: Another of the sectors that you all like at the current time is biotechnology. Could you tell us about that sector fund?

Jim Lowell: This year, biotechnology would not be called a contrarian pick. It would really be called a momentum pick. It's one of the highest flying sectors in, not just the domestic, but the global market, with a north of a 40% return year-to-date.

Fidelity Select Biotechnology (FBIOX), which is currently the pick inside of our healthcare sector, has a range of positions from Amgen and Biogen to companies you'd never know, BioMarin Pharmaceutical.

All in all, it has about 150-160 positions, with about 60% of the fund's assets in the managers top ten picks, so you get great diversification in a very volatile sub-sleeve of the healthcare sector, without diminishing, either your risk management, or your gross return potential.

Steve Halpern: As you mentioned, you also look at some of the international markets and sectors, and one that you have on your list right now is Fidelity Japan Smaller Companies (FJSCX), and I guess that highlights what you explained about a sector within a sector, because you're not looking just at Japan, but only at smaller companies in that market.

Jim Lowell: That's correct and again, I would call this a contrarian play. It's been a hugely volatile position year long. Up 40, down 20, back up almost over 50% year-to-date, so, it is being managed by Nicholas Price, who's got about 100 positions in the overall portfolio.

His top ten picks account for 50% of assets, so, a lot of bang for the buck and, again, companies that you would never know about—Pigeon Corp., Aon Financial, Takaoka Electric, but in a broadly diversified position, that again, enables me to live up to my principles of diversification, risk management, and, of course, return potential.

Steve Halpern: Well again, congratulations on the top five-year ranking from Hulbert and we appreciate you joining us today.

Jim Lowell: Thank you.

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