The Fidelity Select Biotechnology Portfolio Is Vulnerable In This Bear Market

| About: Fidelity® Select (FBIOX)
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The fund's above-average return and below-average expense ratio compared to their benchmarks has made this fund very attractive in recent years, but not this year.

The fund has 69% concentration in riskier mid-cap, small-cap and micro-cap stocks. Thus, this illustrates a lot of inherent downside risk within the fund.

This inherent downside risk has caused the fund's negative YTD return performance to be much lower than its benchmark and Morningstar category average.

There is no question that the Fidelity Select Biotechnology Portfolio No Load (MUTF:FBIOX) has significantly outperformed the benchmark and its Morningstar category over the past few years. As a result, the fund has been ranked in the Top 4 in its Morningstar category.

Even though the fund's return took a significant dip from 2014, it was still a cut above the benchmark and its category. The fund's consistent outperformance can be seen in the chart below.

In addition, the attractiveness of this fund coming into this year could also be seen in the fund's expense ratio. Over the past five years, the fund's expense ratio has declined by 0.12%. The Fidelity Select Biotechnology Portfolio's fund is 0.64% points lower than the Morningstar Category Average and 0.37% lower the Fee Level Membership Group Median.

There's no doubt that the attractiveness has loomed large over the years. 2016 has been a different story. This fund has taken a beating similar to the one that the Seattle Seahawks endured in the first half of the divisional playoff game against the Carolina Panthers.

The Seattle Seahawks woke up in the second half of the game, but time was not on their side. On the other hand, there is plenty of time for the Fidelity Select Biotechnology Fund to recover from this bad start.

The fund has managed to outpace in terms of performance despite the fact the fund has both high risk and return according to its 3-year risk and ratings ratio.

Given the current bear market, it appears that the fund's high risk could carry the day for this fund. The risk can be seen in the portfolio weight in terms of market capitalization within the chart below.

The risk has a sparse amount of giant-cap and large-cap % as opposed to its benchmark and category average. Yet, the fund greatly outweighs in terms of mid-cap stocks, small-cap stocks and especially micro-cap stocks. Overall, over 69% of the fund is concentrated in riskier mid-cap, small-cap and micro-cap stocks.

This is 55% more than the benchmark concentration and 34% greater than the category average. While this may not have been an issue for the last few years, it may become a bigger and bigger issue if this bear market continues.

So far this year, the fund has seemed to pay a heavy price in terms of performance for its inherent downside risk. This can be clearly seen in the chart below.


Even though the fund is concentrated in a defensive sector such as health care, this fund does not appear to be set up defensively if this bear market continues. It will be interesting to see the moves of the fund manager if this bear market extends for the next few weeks.

I would suggest addressing the high concentration in riskier mid-cap stocks, small-cap and micro-cap stocks. The downside risk in this fund is quite clear.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.