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A Steady Fund for Shaky Times

08/10/2010 12:00 pm EST

Focus: FUNDS

Jim Lowell

Senior Partner & Chief Investment Strategist, Adviser Investments

Jim Lowell, editor of Jim Lowell’s Fidelity Investor, says Fidelity’s health care fund has consistently outperformed the S&P during down markets.

Rushing to defend against deflation today may look as foolish as having rushed to defend against inflation just two months back.

Instead, I prefer a more disciplined and balanced approach to these unusually uncertain times, wherein deflating expectations for a quick recovery and the emotional toll such a deflation can take on the markets is the risk I’m focused on.

True, volatility and fear are trending to increase. When coupled with low-volume summer trading months, big daily moves can make you feel elated or deflated, but there’s typically a zero-sum gain by the time we reach more sobering September.
The divisiveness that is the basest part of political parcels will be doled out in a frenzy this fall. That frenzy could continue to cloud what the fundamentals are telling us until the aftermath of the elections are done on November 3rd, and we won’t really know what the fundamentals are telling us about 2011’s recovery prospects until we enter the October earnings season.

That’s a long time to wait for an answer, and I’m not waiting. We’re well diversified and balanced for bearish slides without giving up our ability and agility to climb.

Fidelity Select Health Care Portfolio (FSPHX) continues to be a clear market overweight position for our fundamentally driven portfolios. So far this year, manager Eddie Yoon is returning a shade less than the Standard & Poor’s 500 [index,] but I don’t doubt him or my premise for holding him.

Of the 2,515 days in the market as measured by the S&P 500 over the past decade, there were 1,189 down days. During those down days, Select Health Care lost less than the S&P 78.6% of the time. Over the past decade, while the S&P 500 lost 7.3%, this fund gained 19.5%. Since taking over the fund in October 2008, Yoon has returned 5.8% vs. -5.1% for the S&P 500.

Investing in the gamut of health care options makes sense: pharmaceuticals, biotechnology, medical equipment and systems, and [health maintenance organizations]. The trumped-up political crisis that has engendered a rush to “cure” our health care system has done little to dent the fundamental reasons (from earnings growth, demographics, and innovation) for keeping a core holding in health care now and, unless a fountain of youth is found, until the tail end of the boomers have gone on to (hopefully) greener pastures.

There’s a stealthy global market growth story here: Emerging market demand for more and better health care is increasing, while foreign stocks make up 9.7% of the holdings, but the companies that aren’t listed as foreign stocks derive increasingly greater amounts of revenue form the burgeoning global marketplace. Yoon’s top ten holdings [include] Medco Health Solutions (NYSE: MHS), Merck (NYSE: MRK), Express Scripts (Nasdaq: ESRX), Illumina (Nasdaq: ILMN), [and] Pfizer (NYSE: PFE).

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