Fidelity's McCarron favours healthcare over financials

Tim McCarron, manager of the £4.4billion Fidelity European Fund, is maintaining an overweight position in healthcare stocks, while remaining underweight in financials.

As the economic outlook for Europe deteriorates, McCarron has taken a more defensive stance, increasing his exposure to the healthcare sector which has traditionally been less sensitive to the ups and downs of the economy. He has reduced his exposure to financial stocks, which are generally highly susceptible to market cycles.

Year-to-date, Fidelity European Fund is in the top decile of performers, ranking 7th out of 103 funds in its peer group. It has beaten the MSCI Europe ex UK Index by over 8 percentage points, returning -4.39% compared with an index return of -12.81. This superior relative performance has been bolstered by McCarron's sector selection.

Tim McCarron, Portfolio Manager, Fidelity European Fund said: "With an unstable back-drop, I have taken a more defensive stance. I have also increased my sector bets with large overweight positions in defensive sectors such as healthcare and utilities, and a large underweight position in financials and especially banks.

"The underperformance of the healthcare sector in the middle of Q2 presented a good opportunity to buy healthcare stocks. While the market has been against healthcare stocks (2011 patent expires/US presidential elections), I believe that these issues have now been priced into shares. If the US$ were to strengthen, this would further boost European healthcare stocks because about 40% of their revenue comes from the US. Moreover, the demand for these types of products is rising globally, yet there are high barriers to entry and a notable lack of substitutes.

"In that context, there are a number of attractive stocks in the healthcare sector, for example, Novartis and Roche. Another interesting opportunity is Grifols, a company which specialises in blood plasma derivative products and is therefore not unduly affected by overriding economic conditions as people who require these plasma products will act independently of the economic cycle.

"Grifols is enjoying rising margins and benefits from strong pricing power, which is even more imperative than usual due to persistent inflationary pressures pushing up input costs. All of these factors mean that Grifols is another company that should grow consistently and continue to find favour with investors. This company has the necessary elements in place for success, and is one of my leading overweight positions.

"Where financials are concerned, until I see positive indications that the economic situation in Europe and the US will improve, I will steer clear of banks and real estate (credit issues and falling house prices), but remain neutral in the insurance sector- which I believe has been unduly punished due to problems in the banking sector.

"I have started to avoid oil consumers, such as autos and airlines, which are directly effected by higher oil prices, as well as consumer discretionary stock including media, travel and leisure as falling residential prices, lack of credit is leading to a fall in consumer spending, and there is an indirect effect in these sectors from higher oil prices."