Sector Rotation and Strategic Allocation Drive Fidelity Select Health Care Portfolio's Q3 2025 Outperformance

The Fidelity Select Health Care Portfolio (FSPHX) delivered a robust 6.77% return in Q3 2025, significantly outperforming the MSCI U.S. IMI Health Care 25/50 Index's 4.99% gain. This performance underscores the fund's disciplined approach to sector rotation and active stock selection, particularly within innovation-driven sub-sectors like biotechnology. By contrast, the Fidelity Select Health Care Services Portfolio (FSHCX) underperformed sharply, returning -9.66% over its semiannual reporting period, highlighting the divergent strategies and outcomes within Fidelity's healthcare-focused offerings according to Fidelity commentary.

Strategic Allocation to Biotechnology and Innovation-Driven Sub-Sectors

A key driver of FSPHX's outperformance was its concentrated exposure to biotechnology, which accounted for 37.85% of its assets as of November 30, 2025. This allocation positioned the fund to capitalize on a rebound in the biopharma sector, marked by increased venture funding and a surge in mergers and acquisitions (M&A) activity. Major pharmaceutical companies aggressively acquired innovative biotech firms to replenish pipelines, a trend that likely benefited FSPHX's holdings. Additionally, the fund's emphasis on U.S.-listed healthcare equities (87.57% of assets) allowed it to leverage domestic innovation and regulatory clarity, contrasting with the broader sector's struggles with global policy uncertainties.

The fund's active management approach further amplified returns. For instance, Boston Scientific, a key holding representing 7.5% of the portfolio, likely contributed to gains through its leadership in medical devices and procedural innovations. Such strategic tilts toward high-conviction names reflect FSPHX's non-diversified structure, which prioritizes deep sector expertise over broad market exposure.

Thematic Shifts: Policy, Demographics, and Valuation Opportunities

Beyond sub-sector rotations, FSPHX's success was bolstered by thematic shifts in the healthcare landscape. Analysts note that 2025 brought renewed optimism for managed care companies and biotech innovators, driven by policy developments that eased regulatory headwinds and improved reimbursement frameworks. Additionally, the sector's post-pandemic recovery-marked by normalized surgical volumes and diagnostic testing- restored demand fundamentals, creating a tailwind for companies in equipment and pharmaceuticals.

The fund's focus on long-term fundamentals also positioned it to benefit from undervalued healthcare equities. After years of underperformance relative to broader markets, healthcare stocks entered 2025 with attractive valuations, offering compelling entry points for investors with a focus on aging demographics and medical advancements.

Contrasting Strategies: FSPHX vs. FSHCX

The stark divergence in performance between FSPHX and FSHCX illustrates the importance of sub-sector specialization. While FSPHX thrived in biotechnology and equipment, FSHCX, which focuses on hospitals and health maintenance organizations, faltered amid rising operational costs and regulatory pressures. This -9.66% return over six months, compared to the MSCI index's -5.68%, highlights the risks of overexposure to capital-intensive, low-margin segments of healthcare.

Outlook and Implications for Investors

FSPHX's Q3 2025 results demonstrate the value of active sector rotation and thematic investing in healthcare. As biotechnology continues to consolidate and policy clarity emerges, funds with agile, research-driven strategies are well-positioned to outperform. However, investors must remain cautious about sub-sector concentration risks, particularly in volatile areas like small-cap biotech.

For those seeking exposure to healthcare's growth drivers, FSPHX offers a compelling case study in how strategic allocation and active management can navigate sector-specific challenges. As the industry evolves, the ability to pivot between innovation-driven sub-sectors and defensive plays will remain critical to capturing returns.