Four Funds for the Recovery

11/09/2010 12:00 pm EST

Focus: FUNDS

Jim Lowell

Partner & Chief Investment Officer, Adviser Investments

Jim Lowell, editor of Fidelity Investor, says the economy is turning around, and he recommends four Fidelity funds that should do well as growth expands.

Two signposts point in the same direction: economic growth.

The first signpost: an oversubscribed $10-billion Treasury auction of five-year Treasury Inflation Protected Securities (TIPs).

The demand was so high that prices rose to where a yield of -0.55% resulted, the first time the yield on the maturity has come in below zero.

First, I was puzzled at how anything can have a “negative yield,” and second, why would anyone want to purchase it? The answer: TIPs function best in a rising rate (inflationary) environment wherein their yield protection rises in relative measure to the rate of inflation.

Purchasing TIPs at current prices suggests that investors expect the pattern of inflation to heat up inside the next five years dramatically enough to offset today’s bleak yield picture. In a sense, then, the demand being so strong as to “buy” a negative yield today is a bullish bid for growth.

The second signpost: Barclays Capital noted towards the end of this month that in 2010 planes, trains, automobiles, and power generators are using the equivalent rate of one supertanker load every 33 minutes. That’s a 2% increase from last year—reflected in the increase in the price of crude from last year and indicative of growth in demand. Growth in demand is a recovery, not a recessionary sign.

[Here are some Fidelity sector funds that will profit from economic growth]:

Fidelity Select Air Transportation (FSAIX)—Buy. [Manager] Sean Gavin invests in companies involved in manufacturing aircraft, as well as the movement of passengers, mail, and freight via aircraft. When the economy here and globally is on the upswing, this fund takes off.  Foreign investments make up 10.1% of the holdings, a lower- risk way to traffic in global growth.

Fidelity Select Biotechnology (FBIOX)—Buy. Health care remains a marked market overweight in our fundamental portfolios. Rajiv Kaul, manager since October 2005, invests in companies involved in the research, development, and manufacture of biotechnology products and services. Foreign investments make up 1.6% of the holdings—[it’s] the least exposed to foreign market risks while one of the best positioned to profit from foreign markets.

Fidelity Select Communications Equipment (FSDCX)—Buy. Technology has been both the leader and arbiter of real recovery and consumer durability [even though] pessimism drowned out much good news and kept many erstwhile investors on the beach. Manager Charlie Chai invests in communication equipment providers, as well as those that provide products such as LANs (local area networks), WANs (wide area networks), routers, phones, switchboards, and exchanges. Foreign investments make up 20.2% of the holdings.

Fidelity Select IT Services (FBSOX)—Buy. Manager Kyle Weaver buys stock in companies that provide business-related services to other companies, as well as those that are involved in consulting, data processing, and outsourced services. Foreign investments make up 15.7% of the holdings.

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