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Fidelity Select Health Care Portfolio Has a Promising Prognosis

This fund seeks a healthy balance between risk and return.

Health care stocks have climbed steadily over the past decade, even accounting for a pause in 2016, when the sector got entangled in election-year issues. There are reasons to expect the robust returns will continue. Spending on health care around the world is rising, thanks to an aging population in need of specialized care in advanced nations, and a growing middle class in emerging countries seeking better care. What's more, health care spending doesn't wither in the face of rising inflation or interest rates, says Eddie Yoon, manager of Fidelity Select Health Care Portfolio (FSPHX). "Demand is constant," he says.

Yoon typically holds 90 to 100 stocks in Select Health Care, balancing outsize positions in well-established firms with tiny bets in small biotechnology companies that have yet to make their mark. The fund's top holdings, such as insurer and care provider UnitedHealth Group (UNH), are fortress-like stocks that are growing steadily and are run by managers who spend cash wisely. They give the fund stability, says Yoon. The fund's smallest holdings each account for 0.4% or less of assets. These stocks tend to be volatile but have the potential to rise five to 10 times in price, he adds. One holding, biotech firm AC Immune (ACIU), is currently testing treatments for Alzheimer's.

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Yoon picks stocks a company at a time. He focuses on free cash flow—the cash that's left over after paying necessary expenses to maintain a business. Price matters. Yoon buys when shares trade at bargain levels based on his forecast of free cash flow per share over the next three to five years.

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Select Health Care Portfolio is diversified, but Yoon tilts the fund toward specific areas of the sector that he finds attractive. Shares in health care equipment firms and biotech companies together currently make up 56% of the fund's assets. And he doesn't own stock in Merck or Pfizer these days because he says the big pharmaceutical manufacturers are vulnerable to potential changes in drug-pricing regulations. "Every stock we own is purposeful, and the size in which we own it is purposeful," Yoon says. Since he took over almost 10 years ago, the fund has returned an annualized 17.5%, which beats the MSCI US IMI/Health Care 25-50 index.

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