“I’ve been able to deliver a lower standard error of returns over time versus my peers because I’ve constructed a portfolio with stable growth characteristics at the top of the portfolio, and have had a high batting average in the innovative part of the portfolio,” Yoon says. “That adds to returns, but because they’re in the middle to bottom part of the portfolio, it takes some of the volatility out of the return streams.”
Active Share
According to Morningstar, the Fidelity Select Health Care Portfolio fund has delivered higher alpha (the ability to provide higher returns than the market), as well as less beta and a lower standard deviation (two measures of volatility) than its healthcare category peers for the past 10 years. At the same time, the fund sported higher beta and standard deviation numbers than the index during this period. (Note: Morningstar and Fidelity use different benchmark indexes for this fund.)
That speaks to the fund’s active share, which measures the difference between a portfolio’s holdings and its appropriate benchmark index.
“If you look at the active share of the fund,” Yoon says, “over time it has been in the high 60s/low 70s [it recently was 71%], and we try to put every dollar to work very thoughtfully and purposefully. I don’t want to own big benchmark weights; I want our capital to be active all of the time.”
That’s why Pfizer Inc. and Merck & Co. Inc., two of the world’s largest pharmaceutical companies, aren’t part of Yoon’s fund. “We haven’t owned a lot of the large-cap, mega-cap pharma companies because they tend to be exposed to some of the bigger headwinds in the space,” he says, citing the pressures these companies face on their pricing and their regulatory burdens.
Pfizer is the third-largest constituent in the MSCI U.S. IMI Health Care 25/50 Index. And, of course, it has garnered a lot of ink thanks to its successful Covid-19 vaccine. But that doesn’t impress Yoon, who says he’d rather invest in other companies positioned to benefit from some of the pandemic’s tailwinds.
“We strive to create a portfolio that capitalizes on the macro trends that I believe in and avoid some of those macro headwinds that I’m concerned about,” he says. “Healthcare reimbursement and drug pricing will be in the headlines for a long time, and some of that will show up in lower drug price inflation going forward.”
Yoon also manages several other Fidelity funds and is the global sector leader of the company’s healthcare research team.
“We spend a lot of time researching industries and companies—profitable and nonprofitable companies, private companies, large-cap companies—and put this into a framework of what we think are the best risk-adjusted returns within these industry groups,” he says. “And then I put these building blocks into my portfolios.”
In the case of the Fidelity Select Health Care Portfolio fund, it has been a winning approach.