Two Funds With the Best of Both Worlds

05/12/2009 11:53 am EST

Focus: FUNDS

Jim Lowell

Senior Partner & Chief Investment Strategist, Adviser Investments

Jim Lowell, editor of Jim Lowell’s Fidelity Investor, recommends two funds that should do well in either an economic recovery or a continuing recession.

Toward the end of March and throughout April, we saw the broader market averages regain measurable ground. And while the rally was something we thought we’d get, we also know the difficulty of sustaining it until we see fundamental evidence that we haven’t simply turned from the worst of times but are beginning to turn toward better ones. We’re not there yet.

Several [Fidelity sector] funds are now poised to benefit from the rebound. March delivered the best monthly gain since October 2002. That wasn’t just welcome news in itself; I think it’s a tell since that date marked the starting line of our last bull market run.

But a starting line, as any marathoner will tell you, is a far cry from finishing the race, let alone winning it. A diversified approach remains prudent, since for all the reasons we know (including the ongoing global credit crisis, joblessness, and populist economics), odds favor several potholes en route to the rebound that I believe has already begun.

In the first four months of the 1990s recession, the Standard & Poor’s 500 lost 13.8%. Several Fidelity Select funds, which I like to call “recession ready” funds, used their defensive skills and lost less than the market. In the 12-month period after the market drop, the S&P 500 gained 33.5%.

The majority of Fidelity’s Select funds at the time experienced impressive recoveries, shattering the S&P’s gain. These “rebound ready” funds include the resilient funds from the past recession, as well a few funds which didn’t fare too well in the 1990s, but which I think will prove to be strong contenders in the forthcoming market recovery.

I divided the above two camps into their top-five performers; I expect little divergence from them this time around. The fact that some sectors can offer the best of both bear market worlds does make them a bit more attractive.

Fidelity Select Biotechnology (FBIOX): Manager Rajiv Kaul, invests in companies involved in the research and production of biotechnological products and companies that benefit from advances in biotechnology. This sector is already benefitting from the fact that the new administration is aiming to fund new advances in medical research. The top five holdings (Amgen, Gilead Sciences, Biogen Idec, Genzyme, Celgene) are well positioned to advance on that news alone.

Fidelity Select Energy (FSENX): Energy stocks make Jello look like bedrock. But, as a near-term play on stabilization, and a longer-term investment in global growth, it has a role to play in most portfolios. The energy weightings in our diversified portfolios is a function of our managers’ stock picking as opposed to our market timing. Here manager John Dowd invests in companies in the energy field including traditional forms of energy such as oil, gas, electricity, and coal, as well as newer areas such as nuclear, oil shale, geothermal, and solar. The top ten holdings [include] Southwestern Energy, Occidental Petroleum, Range Resources, Hess, and Transocean.

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