Health Sector a Salve for Volatile Markets

02/10/2011 12:17 pm EST

Focus: FUNDS

Jim Lowell

Senior Partner & Chief Investment Strategist, Adviser Investments

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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