Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

Regular AAC (Asset Allocation Composite), SAA, and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Friday, March 1, 2024. 

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Investing In Industries With Better Business Models To Outperform Market Indexes

This newsletter further explores the theme of ‘good’ businesses or ‘good’ business sectors by examining ‘good’ industries. We firmly believe that engaging in a ‘good’ industry holds greater significance than being the best in a mediocre industry. We have demonstrated the value of this methodology by a series of newsletters, including previous discussion on ‘good’ S&P sectors (see S&P Good Sectors Review). In this edition, we will employ Fidelity Select mutual funds as proxies for various industries.

Fidelity Select mutual funds as representatives for specific industries

Fidelity select mutual funds such as FSPHX (Fidelity Select Health Care) or FSCSX (Fidelity Select Software & Comp) have long track records. Fidelity Select Health Care started in 1981 while Fidelity Select Software & Comp started in 1985! Fidelity select mutual funds have been used to represent industries and they are popular industry-level investments. Fidelity Select mutual funds are actively managed funds, not index funds. The managers of Fidelity Select funds focus on specific sectors or industries, aiming to select securities that they believe will provide strong returns within those sectors. Unfortunately, we don’t have a lot of data to compare these actively managed industry-level funds with their corresponding index funds because of the lack of such industry-level ETFs. 

A quick comparison between FSPHX (Fidelity Select Health Care)  and XLV (Health Care Select Sector SPDR ETF) reveals that the actively managed FSPHX is comparable to XLV, an index fund. 

FSPHX vs XLV (index fund, as of 2/23/2024):
Fund YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
FSPHX (Fidelity Select Health Care) 7.0% 10.7% 1.9% 9.5% 10.1% 16.3%
XLV (Health Care Select Sector SPDR ETF) 8.4% 16.0% 11.0% 12.0% 11.6% 14.5%

FSPHX has underperformed for the past 10 years but did better for the 15 years. 

MyPlanIQ has consistently maintained a momentum-based Fidelity Select Fund Rotation Portfolio within Advanced Strategies. Since its inception in 1997, this portfolio has significantly outperformed the S&P 500 index fund SPY by a substantial margin, exceeding 7% annually:

Name YTD Return 1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR Since 12/31/96 AR
P Composite Momentum Scoring Fidelity Select Funds 11.3% 38.2% 17.2% 21.4% 15.9% 16.8% 16.8%
VFINX (Vanguard (S&P 500) Index) 6.9% 29.7% 11.3% 14.7% 12.7% 15.8% 9.3%

The portfolio operates on the list of Fidelity Select Funds as follows: 

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
FSELX (Fidelity Select Electronics) 18.2% 77.2% 28.9% 35.7% 27.0% 27.3%
FSPTX (Fidelity Select Technology) 9.2% 49.9% 8.7% 23.8% 19.1% 23.0%
FSCSX (Fidelity Select Software & Comp) 4.5% 57.7% 11.9% 20.6% 18.1% 22.2%
FSRPX (Fidelity Select Retailing) 9.6% 41.2% 5.6% 15.4% 15.5% 21.0%
FSAVX (Fidelity Select Automotive) 1.7% 18.1% 1.4% 15.8% 9.3% 19.9%
FSHOX (Fidelity Select Construction & Housing) 5.3% 30.2% 15.8% 20.9% 15.2% 19.6%
FBMPX (Fidelity Select Multimedia) 8.4% 49.5% 3.9% 14.4% 10.8% 18.8%
FDCPX (Fidelity Select Computers) 3.7% 28.0% 4.6% 17.2% 13.6% 18.5%
FBSOX (Fidelity Select IT Services) 7.4% 29.8% -0.4% 9.5% 12.9% 18.5%
FSCPX (Fidelity Select Consumer Discretionary) 3.9% 32.4% 3.4% 12.2% 11.5% 17.0%
FSPCX (Fidelity Select Insurance) 11.4% 30.9% 20.0% 16.8% 13.2% 17.0%
FSRFX (Fidelity Select Transportation) 5.6% 20.0% 12.3% 11.4% 11.1% 17.0%
FDLSX (Fidelity Select Leisure) 4.6% 23.9% 10.4% 13.8% 12.0% 16.8%
FSPHX (Fidelity Select Health Care) 7.0% 10.7% 1.9% 9.5% 10.1% 16.3%
FSHCX (Fidelity Select Medical Delivery Port) 2.5% 7.2% 8.0% 10.7% 12.6% 16.3%
FCYIX (Fidelity Select Industrials) 9.8% 36.4% 14.0% 12.7% 10.2% 16.2%
FSDAX (Fidelity Select Defense & Aerospace) -1.2% 17.5% 10.2% 6.7% 10.3% 15.4%
FSMEX (Fidelity Select Medical Equip & Systems) 7.0% 5.8% -1.1% 8.6% 13.4% 15.4%
FPHAX (Fidelity Select Pharmaceuticals) 14.7% 36.8% 14.3% 15.5% 10.2% 15.3%
FSLBX (Fidelity Select Brokerage & Invmt Mgmt) 4.1% 24.5% 13.5% 17.7% 11.3% 15.2%
FSCHX (Fidelity Select Chemicals) -0.4% 14.2% 8.9% 8.7% 7.6% 15.1%
FBIOX (Fidelity Select Biotechnology) 6.3% 19.3% -5.2% 7.4% 5.9% 14.2%
FIDSX (Fidelity Select Financial Services) 4.2% 13.9% 9.5% 12.3% 10.2% 13.7%
FSRBX (Fidelity Select Banking) -1.9% 2.4% 3.1% 5.8% 7.4% 13.6%
FWRLX (Fidelity Select Wireless) 0.7% 19.2% 1.9% 12.5% 9.6% 13.5%
FSDPX (Fidelity Select Materials) 2.1% 7.1% 7.0% 9.5% 5.9% 12.8%
FSVLX (Fidelity Select Consumer Finance) 6.3% 22.1% 1.1% 5.9% 7.8% 12.1%
FSLEX (Fidelity Select Envir and Alt Energy) 3.7% 23.7% 6.9% 11.0% 9.5% 11.8%
FDFAX (Fidelity Select Consumer Staples) 1.3% 8.9% 8.1% 10.0% 8.0% 11.4%
FSUTX (Fidelity Select Utilities Portfolio) -2.1% 3.7% 7.1% 6.9% 8.3% 11.4%
FSTCX (Fidelity Select Telecommunications) -3.4% -1.5% -5.6% 2.5% 4.2% 9.3%
FSENX (Fidelity Select Energy) 3.0% 8.0% 28.6% 11.6% 3.2% 8.5%
FNARX (Fidelity Select Natural Resources) 2.6% 8.7% 23.4% 12.4% 3.3% 8.2%
FSAGX (Fidelity Select Gold) -13.2% -9.5% -9.5% 1.2% -0.5% -1.7%

It’s also very telling that the Fidelity Select portfolio achieved a 16.8% annualized return since 12/31/2022 while none of the candidate funds in the list matched this return. 

‘Good’ industries

In the following section, we selectively choose the following ‘good’ industries. Our criteria include ensuring that these two industries possess intuitive and historically robust business models, with their total returns demonstrating reasonable performance. This criterion aligns well with the first principle, in a long term such as  spanning a substantial period of at least 20 years.

Fidelity Select Funds for ‘Good’ Industries:
Fund/Industry Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
FSCSX (Fidelity Select Software & Comp) 4.5% 57.7% 11.9% 20.6% 18.1% 22.2%
FSMEX (Fidelity Select Medical Equip & Systems) 7.0% 5.8% -1.1% 8.6% 13.4% 15.4%
FSPHX (Fidelity Select Health Care) 7.0% 10.7% 1.9% 9.5% 10.1% 16.3%
FBMPX (Fidelity Select Multimedia) 8.4% 49.5% 3.9% 14.4% 10.8% 18.8%
FSCHX (Fidelity Select Chemicals) -0.4% 14.2% 8.9% 8.7% 7.6% 15.1%
FSRFX (Fidelity Select Transportation) 5.6% 20.0% 12.3% 11.4% 11.1% 17.0%
FSUTX (Fidelity Select Utilities Portfolio) -2.1% 3.7% 7.1% 6.9% 8.3% 11.4%
FSELX (Fidelity Select Electronics) 18.2% 77.2% 28.9% 35.7% 27.0% 27.3%

Let’s review these industries:

  • FSCSX (Software & IT Services): This industry stands out as one of our favorites, given that businesses in this sector entail ultra-low capital expenditure. The development and sale of software, for instance, do not require significant physical equipment. Additionally, these businesses exhibit high-profit margins and a robust moat, making it challenging for consumers to switch once they are engaged with their products and services. In our perspective, this industry is arguably one of the ‘best’ due to the inherent nature of its businesses. It also falls within the information technology sector, a sector we previously identified as a ‘good’ sector in our newsletter.
  • FSMEX (Medical Equipments & Systems): The medical equipment sector boasts a strong business moat, attributed to the highly selective and regulated nature of these equipment and systems. The industry also possesses robust pricing power, given the high demand for new and innovative medical devices. As people increasingly prioritize their health, the demand for such equipment continues to rise and their profit margins can stay elevated.
  • FSPHX (Health Care): This sector, in fact, stands out as the best among the ‘good’ S&P sectors we previously identified.
  • FBMPX (Multimedia): Despite its somewhat outdated name, this fund essentially operates as a communication or media fund, with holdings including Meta (Facebook), Google, Amazon, Netflix, Disney, AT&T, etc. While traditional telecommunication companies like AT&T, T-Mobile, and Charter Communication operate in internet communication hardware businesses with significant capital expenditure and intense competition, modern media companies like Meta and Google primarily function as online properties, enjoying widespread connectivity (and a strong sticky factor) and high-profit margins similar to software companies.
  • FSCHX (Chemicals): This is a unique industrial industry with strong pricing power, leading to higher profit margins due to its specialization in producing various chemicals. Moreover, being highly regulated, businesses in this industry face high entry barriers.
  • Transportation, and Utilities: Businesses in these two industries encounter high entry barriers owing to extensive regulation. While they may not experience the same high growth rates as technology or healthcare industries, they offer stability, serving as anchors.
  • FSELX (Electronics, now renamed to semiconductors): Semiconductor businesses, while cyclical and capital-intensive (excluding fabless design companies like Nvidia and Marvel Semiconductors), are in a secular strong uptrend due to rapid technological advancements (such as PC, internet, mobile, and now AI). The industry benefits from high demand, and the substantial investments required to enter this field create formidable entry barriers.

In summary, numerous industries pose challenges for operational success and profitability, with the airline business serving as a notable example. Employing a first-level filter based on fundamental business metrics can be very beneficial for many investment decisions.

Outperforming S&P 500 index

We construct an equally weighted portfolio using the eight industries in the above. The following shows how it compares with S&P 500 and the ‘good’ S&P sector portfolio: 

Portfolio Performance Comparison (as of 2/23/2024):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
P Good Fidelity Industries Equal Weight 6.1% 24.9% 8.7% 14.4% 13.5% 18.1%
P SP Good Sector Equal Weight 4.1% 18.5% 9.5% 12.7% 12.1% 15.3%
SPY (SPDR S&P 500 ETF) 6.8% 29.2% 11.2% 14.7% 12.8% 15.9%

The return chart since 2000: 

P Good Fidelity Industries Equal Weight holdings: 

Software FSCSX 12.5%
Medical Equipment FSMEX 12.5%
Healthcare FSPHX 12.5%
Multimedia FBMPX 12.5%
Chemical FSCHX 12.5%
Transportation FSRFX 12.5%
Utilities FSUTX 12.5%
Electronics FSELX 12.5%

Both ‘good’ portfolios have surpassed the performance of the S&P 500 (SPY). Remarkably, these two portfolios are straightforward equal-weight portfolios. The Good Fidelity Industries portfolio has, in fact, doubled its final value compared to SPY since the year 2000. This underscores the significance of prioritizing business fundamentals, even for investors engaged in fund and asset allocation strategies.

Market Overview

As of December 31, according to FactSet, analysts were anticipating a 1.6% year-over-year earnings growth rate for the S&P 500 in Q4 2023. As of February 16, 2024 (FactSet did not provide a report on 2/23/2024), with 79% of S&P 500 companies having reported actual results, the blended earnings growth rate stands at 3.2%. This surpasses the originally expected growth rate.

Additionally, the job market continues to thrive, maintaining a low unemployment rate of 3.7% last month. Inflation, once again, exhibits its persistence by remaining relatively high. It’s noteworthy that retail sales started to decline year over year in January, though whether this signals a more widespread slowdown is yet to be determined.

As always, we claim no crystal ball and we call for staying the course which is guided by the well defined and sound strategic and tactical strategies:

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as we have emphasized numerous times when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years, preferably much longer, given the current high valuation. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later and preferably many more years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
  • For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially during this time. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This is true time and time again.

Stock valuation has dropped, and now valuation is becoming less hostile. However, it is still not cheap by historical standards. For the moment, we believe it’s prudent to be extra cautious. However, how serious a correction might be, we have confidence in the US economy in the long term and thus in the stocks in aggregate. We just need to manage through interim losses carefully.

We again would like to emphasize that for any new investor and new money, the best way to step into this kind of market is through dollar cost average (DCA), i.e., invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

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