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Editors' Note

The editors of Fidelity Interactive Content Services (FICS) selected this content because it offers valuable information for investors.

Growth is in pockets

Stock picking is going to matter more than in the past. Last year, we had massive divergence in performance for the first time in years: The U.S. market was up 30% while the Brazilian market was down 30% in U.S. dollars. I think this dispersion is going to continue, so the case for active management is going to be as robust as ever.

Growth is in pockets, and it’s scarce, so you should be willing to pay more for it.

Three pockets: Europe, Japan, and the U.S.

There are three places I’m investing incremental capital: the U.S., Japan, and certain companies in Europe with big emerging market exposure.

I’ve been surprised by the magnitude of the rerating in Europe. Over the last 18 months, more than 100% of the total return in Europe has been explained by higher multiples. You actually had cuts in earnings estimates while the market posted big gains.

In Europe, I think it has become very difficult to find domestically oriented, high-quality companies at reasonable prices. Investors have bought the banks, and they’ve become expensive. Things are moving in the right direction, but I think the market’s way ahead of itself.

The exceptions are European companies, such as British American Tobacco, that get a lot of revenues from emerging markets. Some of these stocks have been hurt by investors’ worries about emerging markets’ economic problems. But revenues for some of these companies may be resilient, so, with their current valuations, there may be buying opportunities.

In Japan, there is finally inflation and positive economic momentum. It looks as if the next leg of growth there could come from corporate Japan. A lot of Japanese corporations have built up huge cash balances, and now that the yen has weakened, they’re making a lot higher margins. I think we’re going to see the government promote spending by lowering corporate tax rates in exchange for more hiring. If we get reflation, companies that profit from higher prices and increasing assets could benefit. I have invested in leasing company Orix and financial firm Sumitomo Mitsui Trust Co.

We’re in a sweet spot in the United States. The economy’s gradually improving. Corporate profits are at an all-time high, and companies are much more focused on returns on capital—they’re only making investments when they can get valuable returns. And there’s still a lot of slack in the economy, which means economic activity can pick up without causing much inflation.

Opportunities in emerging markets

I’m focusing on emerging markets such as Mexico, which has made some tough economic decisions and put itself in a better place as a result. Mexico also benefits from its close ties to the United States.

Contrast that with Brazil, which is looking somber for the next couple of years. Wages were up 8% per year on average over the past decade, and manufacturing productivity was actually down by about 1% per year. That’s not sustainable. So, in Brazil, I have focused on low-priced staple items including telephones and toothpaste, rather than automobiles or other high-priced discretionary items.

In China, GDP is supposedly growing at 7% or 8%, but it’s not translating into profits. For example, hotels are one of the most economically sensitive sectors, but hotel revenues last year were down, largely due to government cutbacks. Sales of menswear were down as well.

I think the winner is the Chinese consumer. The labor pool is shrinking, which means wages will go up. As the Chinese consumer gets wealthier, they’ll travel more, so I have been looking at airports in Thailand and Sydney. I have also been interested in Internet companies there, such as real estate Internet company SouFun.

I’m also positive on countries in the ASEAN region, particularly the Philippines and Indonesia. These countries tend to have relatively large domestic economies, high savings rates, low loan-to-GDP ratios, real economic growth of 6%, and inflation of 4% or 5%.

Sub-Saharan Africa is another growth area. A lot of South African companies are well run with good corporate governance, have a track record of operating in tough environments, and stand to benefit from growth in that region. I have been looking at companies that include Shoprite and Guaranty Trust Bank.

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*MSCI U.S. Investable Market Health Care 25/50 Index return for 2013. Source: Fidelity.com. The MSCI U.S. IM Health Care 25/50 Index is a modified market capitalization-weight index of stocks designed to measure the performance of health care companies in the MSCI U.S. Investable Market 2500 Index. The MSCI U.S. Investable Market 2500 Index is the aggregation of the MSCI U.S. Large Cap 300, Mid Cap 450, Small Cap 1750 indexes.
Before investing, consider the funds’ investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.
The views and opinions expressed by the speakers are their own and do not necessarily represent the views of Fidelity Investments or its affiliates. Any such views are subject to change at any time based on market or other conditions, and Fidelity disclaims any responsibility to update such views. These views should not be relied on as investment advice, and, because investment decisions are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity product.
Neither Fidelity nor the speakers can be held responsible for any direct or incidental loss incurred by applying any of the information offered. Please consult your tax or financial adviser for additional information concerning your specific situation.
As with all your investments through Fidelity, you must make your own determination as to whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation, and evaluation of the security.
In general, the bond market is volatile, and fixed-income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.
Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes because of potential changes in the credit quality of the issuer.
The stocks mentioned are not necessarily holdings invested in by FMR LLC. References to specific company stocks should not be construed as recommendations or investment advice.
As of January 31, 2014 The Fidelity® International Capital Appreciation Fund held 0.7% of assets in British American Tobacco PLC, 0.346% in Sumimoto Mitsui Trust Holdings, Inc., 0.351% in Orix Corp., 0.261% in SouFun Holdings Ltd. ADR, 0.258% in Shoprite Holdings Ltd., and 0.273% in Guaranty Trust Bank PLC.
As of February 28, 2014, the Nuveen Large Cap Growth Fund held 4.1% of assets in Microsoft, 1.4% in Google Inc., 2.4% in Oracle. The Nuveen Large Cap Value Fund held 3.2% of assets in Pfizer Inc., 1.9% in UnitedHealth Group Inc., and 1.6% in Hewlett-Packard Co.
As of January 31, 2014, the Fidelity Select Health Care Fund held 4.3% of assets in Biogen Idec, Inc. 3.5% in Illumina Inc., 4.3% in Alexion Pharmaceuticals, Inc., 2.275% in Cerner Corp., 0.258% in Castlight Health, Inc. Series D.
As of December 31, 2013, the Putnam Capital Spectrum Fund held 13.46% of assets in Dish Network, 1.34% in Ocwen Financial Corp., 1.13% in Altisource Residential (RESI), and 0.05% in Altisource Portfolio Solutions (ASPS).
Fidelity is not recommending or endorsing any investment by making it available to its customers.
Past performance is no guarantee of future results.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risk, including the possible loss of principal.
Foreign markets can be more volatile than U.S. markets because of increased risks of adverse issuer, political, market, or economic developments, all of which are magnified in emerging markets. These risks are particularly significant for funds that focus on a single country or region.
S&P 500 is a registered service mark of Standard & Poor's Financial Services LLC.
Sector funds can be more volatile because of their narrow concentration in a specific industry.
Certain investment firms whose funds are available through the FundsNetwork® program for Fidelity were offered the opportunity to participate in this event. Fidelity considered a variety of factors when making the final firm selection. Firms may compensate Fidelity for participating in this event, including reimbursement for expenses.
Portfolio Review is an educational tool.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
682330.1.1

Earnings will drive returns

At Goldman Sachs Asset Management, we believe we’re in a phase of the cycle in which returns will come less from multiple expansion and much more from earnings growth. In the United States, certain sectors are predisposed to have superior growth in this kind of environment. We’re overweight in information technology, consumer discretionary, and industrials. At the same time, we are underweight staples, utilities, and telecommunications.

Financials can be a strong indicator of an accelerating economy, and in the fourth quarter of 2013 financials had the best earnings growth by far. That suggests we are seeing the kind of revenue pickup we haven't seen in quite some time.

Look for companies that are increasing their dividends. Dividend growth stocks tend to have roughly 14% earnings growth during an economic expansion, which was about three to four percentage points better than high-dividend payers and the S&P 500® in general.

Overweight foreign developed markets

This concept of earnings driving returns applies to the global markets as well. Our team expects superior earnings growth outside the United States, which argues for bumping up exposure to international developed markets.

I think Japan offers some significant opportunity, largely driven by earnings growth as the country’s economy finally experiences some growth and inflation. Europe had a seven-quarter recession that ended last summer, and it looks as if its GDP is going to go from -4% to 1.4% growth. That’s an impressive rate of change that should lead to stronger earnings.

Emerging markets call for active management

Emerging markets are very idiosyncratic right now, which makes the case for active management. Take Brazil: Half the country’s problems call for raising rates, and half its problems call for lowering rates. That doesn't necessarily mean you should avoid Brazil, but rather that you need to be selective about how to approach.

The big question marks for global growth are coming from China. At GSAM, we have been underweighting emerging market countries that have higher linkages of trade to China, and overweighting countries such as Mexico that have higher linkage to the United States and other developed markets.

Expect more volatility

The U.S. equity market started the year with a little more than a 6% loss in January, which made some people nervous. But a month like January was due. In a given year, it’s statistically normal to have three 5% corrections, and there’s a 57% chance of a 10% drawdown. The anomaly was 2012 and 2013, when we didn’t have any meaningful drawdowns and volatility ran well below long-term averages. So it would not be a surprise to see volatility come back up a little bit.

Incredibly low duration

Within fixed income, GSAM subscribes to the view that we are in a multiyear period of interest rate normalization. So you may still want high-quality fixed income for the hedging that it provides an equity portfolio, but I think you want to consider cash flow from fixed income that has less of a duration signature to it.

Shortening duration works, but it’s important to understand the risks at each part of the curve. A jump in inflation could increase the speed of the Fed’s taper, which would make the two- to three-year part of the curve vulnerable. These markets may call for a fund that has the flexibility to buy securities with attractive yields, but go incredibly short on duration.

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*MSCI U.S. Investable Market Health Care 25/50 Index return for 2013. Source: Fidelity.com. The MSCI U.S. IM Health Care 25/50 Index is a modified market capitalization-weight index of stocks designed to measure the performance of health care companies in the MSCI U.S. Investable Market 2500 Index. The MSCI U.S. Investable Market 2500 Index is the aggregation of the MSCI U.S. Large Cap 300, Mid Cap 450, Small Cap 1750 indexes.
Before investing, consider the funds’ investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.
The views and opinions expressed by the speakers are their own and do not necessarily represent the views of Fidelity Investments or its affiliates. Any such views are subject to change at any time based on market or other conditions, and Fidelity disclaims any responsibility to update such views. These views should not be relied on as investment advice, and, because investment decisions are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity product.
Neither Fidelity nor the speakers can be held responsible for any direct or incidental loss incurred by applying any of the information offered. Please consult your tax or financial adviser for additional information concerning your specific situation.
As with all your investments through Fidelity, you must make your own determination as to whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation, and evaluation of the security.
In general, the bond market is volatile, and fixed-income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.
Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes because of potential changes in the credit quality of the issuer.
The stocks mentioned are not necessarily holdings invested in by FMR LLC. References to specific company stocks should not be construed as recommendations or investment advice.
As of January 31, 2014 The Fidelity® International Capital Appreciation Fund held 0.7% of assets in British American Tobacco PLC, 0.346% in Sumimoto Mitsui Trust Holdings, Inc., 0.351% in Orix Corp., 0.261% in SouFun Holdings Ltd. ADR, 0.258% in Shoprite Holdings Ltd., and 0.273% in Guaranty Trust Bank PLC.
As of February 28, 2014, the Nuveen Large Cap Growth Fund held 4.1% of assets in Microsoft, 1.4% in Google Inc., 2.4% in Oracle. The Nuveen Large Cap Value Fund held 3.2% of assets in Pfizer Inc., 1.9% in UnitedHealth Group Inc., and 1.6% in Hewlett-Packard Co.
As of January 31, 2014, the Fidelity Select Health Care Fund held 4.3% of assets in Biogen Idec, Inc. 3.5% in Illumina Inc., 4.3% in Alexion Pharmaceuticals, Inc., 2.275% in Cerner Corp., 0.258% in Castlight Health, Inc. Series D.
As of December 31, 2013, the Putnam Capital Spectrum Fund held 13.46% of assets in Dish Network, 1.34% in Ocwen Financial Corp., 1.13% in Altisource Residential (RESI), and 0.05% in Altisource Portfolio Solutions (ASPS).
Fidelity is not recommending or endorsing any investment by making it available to its customers.
Past performance is no guarantee of future results.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risk, including the possible loss of principal.
Foreign markets can be more volatile than U.S. markets because of increased risks of adverse issuer, political, market, or economic developments, all of which are magnified in emerging markets. These risks are particularly significant for funds that focus on a single country or region.
S&P 500 is a registered service mark of Standard & Poor's Financial Services LLC.
Sector funds can be more volatile because of their narrow concentration in a specific industry.
Certain investment firms whose funds are available through the FundsNetwork® program for Fidelity were offered the opportunity to participate in this event. Fidelity considered a variety of factors when making the final firm selection. Firms may compensate Fidelity for participating in this event, including reimbursement for expenses.
Portfolio Review is an educational tool.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
682330.1.1

Growth, but not much

Growth should pick up a bit in 2014, but still won’t be abundant. I’m thinking U.S. GDP is going to be closer to 3% than 2%. That doesn’t sound like much, but the difference is huge for corporate America’s ability to increase revenues and maintain or enhance profit margins.

Growth in the market has got to come from better earnings. P/E expansion may not be over, but it’s certainly in the late innings. A lot depends on the inflation rate. There’s a high inverse correlation between P/Es and inflation; part of the reason P/Es have gone up is because inflation has come down. Can we get more declines in inflation? Unlikely.

Focus on free cash flow

I’m a big believer that in this environment focusing on free cash flow makes a lot of sense. That cash gives companies flexibility, and that’s pretty important in a slow-growth world. Do they want to hire a worker, expand their capacity, buy back their stock, raise their dividend, buy the company down the street? Companies that don’t have free cash flow have one hand tied behind their back because growing the top line is very tough.

I point to aerospace and defense. These stocks have done great over the last 12 months, not because they’re growing the top line, but because they are increasing free cash flow and are using it intelligently for the benefit of shareholders.

Soft cyclicals: industrials and tech

Cyclically oriented companies probably stand a better chance to see some growth than the more defensive stocks. I like some of the softer cyclicals, including industrials and technology, and not necessarily the deeper cyclicals that require pricing power—energy and materials.

Industrial stocks are likely to benefit if capital expenditures pick up. I’m not looking for a boom in capital expenditures, but levels are so low right now that with a little more confidence, and all the cash companies have, we’ll see some increase.

I use a barbell strategy in tech. One end of the barbell has higher growth and higher multiples—sometimes you have to hold your nose and pay for the growth. Google would be a good example in that category.

Then there’s a collection of what I call yesterday’s technology companies—Microsoft, Oracle and even HP—that need to figure out what they’re going to be in the next phase of their adult life. Many of them are growing, just not by a lot. They are very cheap, in my view, with great balance sheets, positive free cash flow profiles, and dividend growth that’s in the double digits—in some cases over 20%.

Health care changing for the better

Health care is the only noncyclical sector in which I’m overweight. I think the free cash flow characteristics that come from that sector are very appealing.

A lot of the big pharma companies have restructured. Pfizer’s in the early innings, and I think there are some interesting things happening there that can improve its ability to grow and get investors to value the company a little bit differently.

I like UnitedHealthcare in the health care services group. The overwhelming story is very simple: If you have X customers today and tomorrow you have X plus a lot more, chances are that’s good news for your company. The Affordable Health Care Act does that for UnitedHealthcare.

Related funds

Learn more

*MSCI U.S. Investable Market Health Care 25/50 Index return for 2013. Source: Fidelity.com. The MSCI U.S. IM Health Care 25/50 Index is a modified market capitalization-weight index of stocks designed to measure the performance of health care companies in the MSCI U.S. Investable Market 2500 Index. The MSCI U.S. Investable Market 2500 Index is the aggregation of the MSCI U.S. Large Cap 300, Mid Cap 450, Small Cap 1750 indexes.
Before investing, consider the funds’ investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.
The views and opinions expressed by the speakers are their own and do not necessarily represent the views of Fidelity Investments or its affiliates. Any such views are subject to change at any time based on market or other conditions, and Fidelity disclaims any responsibility to update such views. These views should not be relied on as investment advice, and, because investment decisions are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity product.
Neither Fidelity nor the speakers can be held responsible for any direct or incidental loss incurred by applying any of the information offered. Please consult your tax or financial adviser for additional information concerning your specific situation.
As with all your investments through Fidelity, you must make your own determination as to whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation, and evaluation of the security.
In general, the bond market is volatile, and fixed-income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.
Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes because of potential changes in the credit quality of the issuer.
The stocks mentioned are not necessarily holdings invested in by FMR LLC. References to specific company stocks should not be construed as recommendations or investment advice.
As of January 31, 2014 The Fidelity® International Capital Appreciation Fund held 0.7% of assets in British American Tobacco PLC, 0.346% in Sumimoto Mitsui Trust Holdings, Inc., 0.351% in Orix Corp., 0.261% in SouFun Holdings Ltd. ADR, 0.258% in Shoprite Holdings Ltd., and 0.273% in Guaranty Trust Bank PLC.
As of February 28, 2014, the Nuveen Large Cap Growth Fund held 4.1% of assets in Microsoft, 1.4% in Google Inc., 2.4% in Oracle. The Nuveen Large Cap Value Fund held 3.2% of assets in Pfizer Inc., 1.9% in UnitedHealth Group Inc., and 1.6% in Hewlett-Packard Co.
As of January 31, 2014, the Fidelity Select Health Care Fund held 4.3% of assets in Biogen Idec, Inc. 3.5% in Illumina Inc., 4.3% in Alexion Pharmaceuticals, Inc., 2.275% in Cerner Corp., 0.258% in Castlight Health, Inc. Series D.
As of December 31, 2013, the Putnam Capital Spectrum Fund held 13.46% of assets in Dish Network, 1.34% in Ocwen Financial Corp., 1.13% in Altisource Residential (RESI), and 0.05% in Altisource Portfolio Solutions (ASPS).
Fidelity is not recommending or endorsing any investment by making it available to its customers.
Past performance is no guarantee of future results.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risk, including the possible loss of principal.
Foreign markets can be more volatile than U.S. markets because of increased risks of adverse issuer, political, market, or economic developments, all of which are magnified in emerging markets. These risks are particularly significant for funds that focus on a single country or region.
S&P 500 is a registered service mark of Standard & Poor's Financial Services LLC.
Sector funds can be more volatile because of their narrow concentration in a specific industry.
Certain investment firms whose funds are available through the FundsNetwork® program for Fidelity were offered the opportunity to participate in this event. Fidelity considered a variety of factors when making the final firm selection. Firms may compensate Fidelity for participating in this event, including reimbursement for expenses.
Portfolio Review is an educational tool.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
682330.1.1

Still opportunities in health care

Health care was a leadership group in 2013, delivering a tremendous 43% return.* We saw a lot of multiple expansion, but that doesn’t mean all stocks in the sector are now overpriced. At the start of 2013, health care valuations were in the lowest 20% of their long-term range. Even after last year’s incredible performance, the sector entered 2014 with valuations below the long-term average. I still think there’s tremendous opportunity for shareholders.

As an investor, it's important to understand that where health care dollars are spent is very different from where health care investors can invest. Today, over two-thirds of domestic health care spending goes to the delivery network. This includes: doctors, hospitals, labs, and nursing homes. The majority of this infrastructure is owned by private enterprises and are non-profit institutions, thus a public market investor can not invest in these organizations. On the other hand, the majority of publicly traded companies are global pharmaceutical companies, biotech innovators, device manufacturers, and other multi-national enterprises. Some of these companies have been delivering very high rates of growth and innovations that could drive productivity and efficiency through our delivery networks. The innovations represent mega trends in the health care sector.

A world-class product cycle

The product cycle for a newly approved biotech drug is among the best in the world from an investor’s perspective. Companies come to the market with innovative drugs, and, when they do, they have monopolies for 10 to 15 years or longer, and almost all their costs on those drugs are behind them. So the companies and their shareholders can benefit from that earnings power.

The biotech industry is seeing that innovation now as companies cure diseases that were previously incurable. I have been interested in Biogen Idec, which has a new oral treatment for multiple sclerosis. The fund has also invested in Alexion, which creates drugs that allow people with certain enzyme deficiencies that otherwise would be fatal to live full and fruitful lives.

Once these drugs are invented here in the United States, they are sold to European and Asian countries, and the commercial market opportunity starts to expand.

Changes in health care IT

The Affordable Care Act is a catalyst driving private-sector innovation that is changing the health care marketplace. For example, we’re in the early innings of a mega investment cycle in digitizing the health care world.

I believe some of the best opportunities are in companies that make clinical software solutions for hospital payments. Hospitals have to change from a system that pays for the units of services they provide to one that pays for the value they bring the population, and they’re going to need their payment technology to adapt. Cerner and Epic are currently big players, but they represent less than half of the overall marketplace, so there could be a ton of market share to gain.

Increased consumer focus

The Affordable Care Act may also help drive a shift toward more of a consumer model of health care. Companies are increasingly trying to move the risk of health care expenses from their balance sheets to their employees through consumer-directed high-deductible health care plans.

The shift to making employees more conscious consumers of health care services could take many years, and I think companies that can capitalize on that trend could see significant growth. Investors may be able to tap into this trend with companies that facilitate the transition for employers. One possibility is Castlight Health. Castlight provides large employers with a technology solution that delivers education and creates a health care shopping experience.

Advances in personalized medicine

The thousand-dollar genome will have truly phenomenal effects on our understanding of human biology and long-term impacts of personalized medicine. In this space, I have invested in Illumina, which manufactures systems that enable genome sequencing.

This technology is already replacing amniocentesis. But the possibilities are endless. There are roughly nine million people in the United States living with cancer. In the future, they will get sequenced multiple times. And Illumina’s technology applies to everything that has DNA—people, animals, and plants. The possibilities are so widespread that it’s just a matter of finding the right price points that enable new markets, which is why the growth opportunity is so open-ended.

Related funds

Learn more

*MSCI U.S. Investable Market Health Care 25/50 Index return for 2013. Source: Fidelity.com. The MSCI U.S. IM Health Care 25/50 Index is a modified market capitalization-weight index of stocks designed to measure the performance of health care companies in the MSCI U.S. Investable Market 2500 Index. The MSCI U.S. Investable Market 2500 Index is the aggregation of the MSCI U.S. Large Cap 300, Mid Cap 450, Small Cap 1750 indexes.
Before investing, consider the funds’ investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.
The views and opinions expressed by the speakers are their own and do not necessarily represent the views of Fidelity Investments or its affiliates. Any such views are subject to change at any time based on market or other conditions, and Fidelity disclaims any responsibility to update such views. These views should not be relied on as investment advice, and, because investment decisions are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity product.
Neither Fidelity nor the speakers can be held responsible for any direct or incidental loss incurred by applying any of the information offered. Please consult your tax or financial adviser for additional information concerning your specific situation.
As with all your investments through Fidelity, you must make your own determination as to whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation, and evaluation of the security.
In general, the bond market is volatile, and fixed-income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.
Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes because of potential changes in the credit quality of the issuer.
The stocks mentioned are not necessarily holdings invested in by FMR LLC. References to specific company stocks should not be construed as recommendations or investment advice.
As of January 31, 2014 The Fidelity® International Capital Appreciation Fund held 0.7% of assets in British American Tobacco PLC, 0.346% in Sumimoto Mitsui Trust Holdings, Inc., 0.351% in Orix Corp., 0.261% in SouFun Holdings Ltd. ADR, 0.258% in Shoprite Holdings Ltd., and 0.273% in Guaranty Trust Bank PLC.
As of February 28, 2014, the Nuveen Large Cap Growth Fund held 4.1% of assets in Microsoft, 1.4% in Google Inc., 2.4% in Oracle. The Nuveen Large Cap Value Fund held 3.2% of assets in Pfizer Inc., 1.9% in UnitedHealth Group Inc., and 1.6% in Hewlett-Packard Co.
As of January 31, 2014, the Fidelity Select Health Care Fund held 4.3% of assets in Biogen Idec, Inc. 3.5% in Illumina Inc., 4.3% in Alexion Pharmaceuticals, Inc., 2.275% in Cerner Corp., 0.258% in Castlight Health, Inc. Series D.
As of December 31, 2013, the Putnam Capital Spectrum Fund held 13.46% of assets in Dish Network, 1.34% in Ocwen Financial Corp., 1.13% in Altisource Residential (RESI), and 0.05% in Altisource Portfolio Solutions (ASPS).
Fidelity is not recommending or endorsing any investment by making it available to its customers.
Past performance is no guarantee of future results.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risk, including the possible loss of principal.
Foreign markets can be more volatile than U.S. markets because of increased risks of adverse issuer, political, market, or economic developments, all of which are magnified in emerging markets. These risks are particularly significant for funds that focus on a single country or region.
S&P 500 is a registered service mark of Standard & Poor's Financial Services LLC.
Sector funds can be more volatile because of their narrow concentration in a specific industry.
Certain investment firms whose funds are available through the FundsNetwork® program for Fidelity were offered the opportunity to participate in this event. Fidelity considered a variety of factors when making the final firm selection. Firms may compensate Fidelity for participating in this event, including reimbursement for expenses.
Portfolio Review is an educational tool.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
682330.1.1

I shouldn’t say it’s never been better for non-investment-grade companies, but it probably won’t be any better in terms of the combination of cost of and access to capital. These companies can borrow long term, unsecured at 5% to 6%—probably 3% after tax. That’s good for the equities of those companies in the sense that they have access to capital that’s cheap and doesn’t dilute their shareholders. And they can use that money to invest in their business or buy back stock.

I’m bearish on high-yield bonds, though. A 5% before-tax return for an unsecured, non-amortizing, covenant-less piece of paper is not appealing. I’d rather be in the equity.

How to play wireless broadband

There isn't much growth in the economy and the market. But one area where there has been enormous growth is the consumption of wireless broadband—people using their mobile devices for more data-intensive applications. That is one of the few things in the economy that are growing exponentially.

My investment in Dish Network is centered around that idea. Its pay-TV business is conservatively worth $17 billion. But the company owns a huge amount of the wireless spectrum, which at $1.25 a megahertz is probably worth $25 billion. It is adding to those assets, and they’re growing in value. Those add up to $42 billion; take away $4 billion in debt and the company is worth $38 billion, or about $84 a share, in my view. So it’s the ultimate realization of the spectrum values at Dish that I think makes the stock a good investment at $56.

10 million homes for rent

There’s been an enormous housing liquidation following the Great Recession, and it’s led to a nascent industry of single-family homes for rent. A lot of homes that were foreclosed on or in short sales are being bought by groups of institutional investors that have a plan to build REIT businesses around single-family rental properties. Potentially 10 million homes could move from 10 million people to four companies. And I think the companies controlled by Bill Erbey—Ocwen (OCN), Altisource Residential (RESI), and Altisource Portfolio Solutions (ASPS)—are uniquely positioned to take advantage of this trend.

A bunch of Wall Street groups realized two years ago that single-family houses were a good bet, so they started buying them. The companies that I mentioned started buying single-family homes too, but they have been around the non-prime mortgage finance market for 20-plus years, so they have real advantages over the competition. They have boots-on-the-ground competencies to purchase the loans, service them, and ultimately wind up renting the properties. I think that RESI is going to be able to roll up this industry in a way that the other guys can’t.

Shale energy revolution in the United States

Everyone has heard about the shale revolution and it’s clearly great for the U.S. economy. The question now is, what is priced into the stocks and who can really benefit from it? The industries that have really benefited are the people that use the surplus of natural gas and crude that we now have in the United States. Those industries include refineries, or petrochemical manufacturing, fertilizer manufacturing, and all of the people who build assets for those industries.

Preparing for volatility

I believe we are in a transitional phase for the economy. I try to own companies that do well if the economy does well, and won’t have anything really bad happen if the economy stalls and stocks in general fall. If volatility does occur, I don’t view it as a negative. I have around 15% of the portfolio in cash. The cash allows me to take advantage of capital-appreciation opportunities that volatility can present; that’s when I want to seek opportunities.

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*MSCI U.S. Investable Market Health Care 25/50 Index return for 2013. Source: Fidelity.com. The MSCI U.S. IM Health Care 25/50 Index is a modified market capitalization-weight index of stocks designed to measure the performance of health care companies in the MSCI U.S. Investable Market 2500 Index. The MSCI U.S. Investable Market 2500 Index is the aggregation of the MSCI U.S. Large Cap 300, Mid Cap 450, Small Cap 1750 indexes.
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