Tobias Welo manages Fidelity’s Select Industrials and Select Materials funds. He’s been at Fidelity for seven years. Select Industrials and Select Materials holdings include United Technologies, which owns Carrier Air Conditioning and Otis Elevator; Honeywell, which does a lot in security, energy efficiency and fire safety systems; Cummins, an engine supplier; PPG Industries, makers of paint; and International Paper, which makes the indispensable container board boxes needed to ship all manner of building supplies. Container board boxes are of course used by those moving in and out of new and used homes.
“These are all companies that build the products that allow you to build a home,” Welo says. “Just as important as these plays are, there’s a natural evolution that goes from a housing cycle to a non-residential cycle, which typically occurs nine to 15 months after the residential cycle gets started.
“You go down to Texas or Arizona or Nevada and you experience these big housing developments, you need to put in the strip mall, the school. So I also own a lot of these non-residential construction plays as well,” Welo says.
“I want to anticipate the next trend and be ahead of the curve. I never want to react, and some of the evaluation characteristics of some of these companies look very attractive, so I have both residential and non-residential positioning in this fund,” he says.
“We can make a good case as to why company A will have good growth this year because of housing. We can also make a pretty good case as to why they’ll have good growth next year as non-residential gets added to the housing.”
Wherry at Morningstar says stock in Toll Brothers, Lennar and even carpet maker Mohawk all had a nice run-up last year,“and I think that’s reflected in why FSHOX enjoyed a 38 percent return last year.”
“The problem with some of these select funds is they’re concentrated and have reasonable fees, but it’s so narrowly focused, you’d have to debate what you needed it for in an already diversified portfolio,” he cautions.