Fidelity Select Environmental’s net asset value reached its highest point since 2000 last week, driven by the 52-week or multiyear highs of several of its major holdings, primarily in the waste management industry.
Thursday’s most active stocks included: Time Warner ( NYSE: TMX ), Lucent Technologies ( NYSE: LU ), General Electric ( NYSE: GE ), Pfizer ( NYSE: PFE ), iShare Russell 2000 Index ( AMEX: IWM ), Energy Select SPDR ( AMEX: XLE ), and iShares Japan Index Fund ( AMEX: EWJ ).
Investors flocked to the sector after key players demonstrated what appeared to be real, potentially long-standing price increases in the fourth quarter of 2005. Those results also pointed to the potential for stronger margins due to cost-cutting and asset reallocation across the sector.
The result? A nice ride for FSLEX shareholders. Through Feb. 16, FSLEX’s four-week 6.0% gain beat the S&P 500 by 5.8 percentage points and placed the fund in the top percentile of Morningstar’s Mid-Cap Growth category.
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The fund has also outperformed over longer periods. Its 10.0% year-to-date return (versus 4.4% for the S&P) also bettered 99% of the category, while its one-year gain of 24.0% was stronger than 89% of the category. Even over five years, FSLEX’s annualized return of 5.8% was 4.3 percentage points better than the index and in the category’s 19th percentile.
The fund shot up the Sector Momentum Table by 25 slots in four weeks to reach sixth place on Feb. 10, and joined the SMT portfolio on Feb. 13, a day before the fund’s No. 2 holding Waste Management Inc. hit $33.94 a share, its highest mark since July of 1999.
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Fidelity started the fund in 1989, when many investors believed that the U.S. was on the verge of a solid-waste capacity shortage. When a garbage barge from New York was rejected by two southern states, its return to New York drew a media frenzy and investors’ interest. Others hoped to profit from the country’s push toward environmental consciousness.
For much of the 1990s, FSLEX struggled. Early on, a recession cut waste production, and the capacity crunch never materialized. Later, the sector and the fund fell out of favor as investors chased high-flying technology stocks. In 1999, despite hitting an all-time high, the fund trailed the S&P 500 by 46.9%.
Starting in 2000, however, the fund picked up steam, helped by the strength of mid-caps and its defensive nature in bear markets. Because garbage collection remains relatively stable in tough times, investors see the industry as recession-proof. (In fact, as the early 1990s proved, it’s recession-resistant.) Select Environmental carries a low r-squared score of 60 with the S&P, meaning that the fund can be a diversification tool: witness its 34.5% return in 2000, nearly 44 percentage points stronger than the S&P.
The fund’s latest run-up stems partly from the waste management industry’s gain, with major players posting strong results, promising continued cost-cutting, and focusing on high-margin core businesses. But the portfolio is broader than that.
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In the past, manager Douglas Simmons has made big bets on niche, environmental plays, notably Whole Foods Market, a top 10 holding in 2004 and early 2005 that paid off handsomely. Whole Foods and its competitor, Wild Oats Markets, still made up 3.6% of FSLEX’s portfolio in late 2005, but Simmons has recently focused on the fund’s core areas.
At the end of 2005, FSLEX held just 38 stocks, with 62% of assets invested in the top 10 names: three waste disposal firms; three filtration companies; two water treatment firms; a cleaning and maintenance product company; and Headwaters, a clean-coal energy provider.
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Waste Management, Allied Waste Industries, and Republic Services all enjoyed 52-week highs last week, and averaged a 17.5% gain over the past year (as of Feb. 16). But some of Simmons’ best picks came from other industries.
Stock in Millipore, a filtration firm focused on the pharmaceutical and biotech industries, posted the biggest gain (52.9%), thanks to high demand for its products from drug companies eager to replace pharmaceuticals that have expiring patents, and the strength of the biotech sector. High energy prices helped the fund’s other filtration stocks because most sell to the oil processing industry.
Paris-based Veolia Environnement stock, the recent No. 1 holding, posted a 38.8% gain over the period. The world’s largest water utility (and a European giant in waste management) posted a 12% sales gain in 2005, fueled by the company’s water-treatment division. Clean water is in high demand globally, particularly in the growing Chinese market, where Veolia is strong. The stock hit its all-time high (since its 2000 IPO) on Feb. 3.
While the fund’s concentration and idiosyncrasies mean that it shouldn’t make up a large slice of your portfolio, it’s hard to argue with recent results. Plus, its long-term history shows it can be a diversification tool as a niche holding.
See a sample of the Fidelity Independent Adviser Sector Momentum Tracker
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Performance
| |
Year Total Return (%) |
+/- vs. Category Avg.* |
| YTD** |
10.0 |
3.8 |
| 2005 |
9.4 |
-0.3 |
| 2004 |
7.4 |
-6.0 |
| 2003 |
29.0 |
-7.3 |
| 2002 |
16.4 |
+10.2 |
