3 Sector Funds Worth Considering

Sector-specific funds often act as the tactical seasoning in an investor’s recipe for success. These funds limit their investable universes on the theory that their sector specialist managers should be able to produce better returns in their areas of expertise than diversified portfolio managers could. There are often subtleties to be aware of, though. Funds within the same sector can often have much wider or narrower mandates than peers, and management and process quality varies significantly.

Below are three sector-specific funds that had a rough 2022 but still have compelling long-term prospects.

Vanguard Energy VGENX has a very different opportunity set from its equity energy Morningstar Category peers. For investors who look for traditional oil and gas exposure, this fund may not be the ideal choice. In late 2020, Vanguard widened the fund’s scope to invest in utilities companies to capture the impact of the energy transition away from traditional fossil fuels. Wellington’s Tom Levering manages the fund, and his background as a utilities and energy analyst serves it well.

Vanguard Energy, which has a Morningstar Analyst Rating of Silver, initially split its portfolio roughly 50/50 between energy and utilities companies after the process change. As of October 2022, though, about a third of its assets sat in utilities as rallying energy stocks consumed more of the portfolio. The strategic shift made sense, but it also made performance more difficult to gauge. The fund’s 2022 results looked poor relative to pure energy alternatives, as its investor shares returned 24%, far less than the Morningstar US Energy Index’s 63% gain. The fund, however, beat the 14% gain of a custom benchmark that’s split 50/50 between the MSCI ACWI Energy and MSCI ACWI Utilities indexes

BlackRock Technology Opportunities BGSIX felt the sting of the 2022 technology selloff more than most of its technology category peers. Its investor shares lost 43% in 2022, far more than the 32% decline of the Morningstar US Technology Index, placing it in the bottom quartile of category peers for the year.

Manager Tony Kim uses a unique approach to manage this fund, which has ratings of Gold or Silver, depending on the share class. He picks stocks from his own database of technology-related companies rather than limiting himself to the constituents of a technology-only index as most peers do. This gives him more flexibility than a lot of his competitors, but it can lead to out-of-step performance, as he will often hold a sizable portion of the portfolio in companies that aren’t pure-play tech firms. For instance, Tesla TSLA, an auto manufacturer, was a top-five holding to start 2022. Its more than 65% loss for the year caused much of the fund’s pain. Still, Kim’s distinct process maintains an edge, and the recent addition of comanager Caroline Tall, who managed Fidelity Select Tech Hardware FDCPX prior to joining BlackRock, gives Kim some seasoned support.

The institutional shares of Fidelity Advisor Health Care FHCIX, which has Gold and Silver ratings depending on the share class, lost 13% in 2022, more than double the Morningstar US Health Index’s 5% drop. The results were consistent with manager Eddie Yoon’s style. He prefers the stocks of companies with higher growth potential, so he often owns those with less proven products or businesses, including many young biotechnology firms. This gives the fund a bias toward smaller caps relative to the index, and as of November 2022, over 35% of the portfolio sat in small- and mid-cap companies, far more than the index’s 25%. During 2022, small- and mid-cap healthcare companies lost far more than their larger-cap peers, with small-cap biotechnology firms, which Yoon tends to favor, selling off the most.

Yoon has managed through these cycles before, though, and his fund tends to do very well when the market rebounds and biotech stocks rally. Investors should expect volatility here, but over the long run, Yoon’s experience and access to Fidelity’s deep pool of healthcare experts should prove successful.