Fidelity Biotech Fund: Better than the Index?

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Of all the Fidelity mutual funds, its healthcare-focused funds have some of the best records. The Fidelity Select Biotechnology Portfolio (NASDAQMUTFUND: FBIOX) is no outlier on performance, putting up returns that top many actively managed funds over multi-year periods.

Source: Fidelity

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But there may be more to its performance than meets the eye. The fund seems to have benefited more from a rising tide in biotech stocks rather than stock selection.

1. How the Select Biotechnology fund picks stocks

Rather loosely defined, to Fidelity, a biotech company can be any that benefits "significantly from scientific and technological advances in biotechnology."

The fund focuses on four major themes: strong product pipelines, turnarounds, breakthroughs, and early stage companies that have attractive futures. The fund is diverse, frequently holding investments in more than 200 companies.

In an interview published by Fidelity, fund manager Rajiv Kaul said that "historically we have held between 65 and 70 percent of assets in shares of larger, more established firms, with the balance of the fund's assets trying to capture greater upside from the newer, more innovative names."

2. What it costs

Biotech funds remain relatively expensive to invest in, as popular index fund favorites like iShares Nasdaq Biotechnology ETF (NASDAQ: IBB), SPDR S&P Biotech ETF (NYSEMKT: XBI), and the First Trust NYSE Arca Biotechnology Index Fund (NYSEMKT: FBT) ETFs carry expense ratios that, while being less expensive, aren't substantially less expensive than actively managed funds.

Source: Fund sponsors

This actively-managed fund is less expensive than other active funds, costing just 0.73% per year compared to an industry average of 0.84%. That said, investors can find less-expensive biotech index funds with feesthat range from 0.35% to 0.60% of assets each year.

Despite a lower-than-average fee for active funds, investors should keep in mind the construction of its portfolio. With more than 200 stocks, and a majority of assets invested in larger, more established companies, it may be more difficult for the fund to outperform its benchmark, even with a smaller fund fee standing in the way.

3. Historical performance

At the end of the day, it's performance that matters most. When compared to biotech index funds over the last 3-, 5-, and 10-year periods, one finds that its performance has been middle of the pack at best, even after adjusting for volatility.

Annualized returns for Fidelity Select Biotechnology and comparable index funds are below.

Source: Morningstar

Riding a rising tide

Fidelity's biotech fund ranked among the best-performing healthcare funds for years, but its performance has been simply average relative to biotech-specific funds. The fund's vast diversification (200+ stocks) and focus on more established companies leave just a minority of assets invested in the kinds of smaller companies where active management can theoretically earn the biggest edge for funds.

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Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.