Fidelity Select Construction and Housing Portfolio

Transcription

1 Fidelity Select Construction and Housing Portfolio Key Takeaways For the semiannual reporting period ending August 31, 2018, the fund gained 8.05%, compared with 8.56% for the MSCI U.S. IMI Construction & Housing 25/50 Index and 7.96% for the broadly based S&P 500 index. The past six months, improved economic growth and record-low unemployment spurred spending on home repairs and remodels, especially aiding the home improvement retail segment within the MSCI industry index. Residential real estate investment trusts (REITs) also posted a sizable gain. However, inflationary pressure eroded profit margins elsewhere, notably building products stocks. The construction materials segment, however, posted the biggest decline within the industry index, as bad weather delayed projects. Portfolio Manager Neil Nabar believes his focus on companies with above-average predictability in their cash flows, relatively low debt and attractive valuations hampered the fund's performance versus the MSCI industry index, as cheaper stocks lagged more-expensive ones. Neil's stock picks in home furnishings and building products detracted most from relative performance. Individual disappointments included an untimely non-index stake in carpet company Mohawk Industries. By contrast, positioning in the home improvement retail segment aided relative performance. Of note was the fund's sizable overweighting in Lowe's, which benefited from new management following the involvement of an activist investor. As of August 31, Neil remains optimistic that an undersupply of singlefamily houses in the U.S. will aid home values, in turn benefiting many companies in the industry. He especially likes businesses that he thinks can sustain prices in an inflationary environment. MARKET RECAP The S&P 500 index gained 7.96% for the six months ending August 31, 2018, as the U.S. equity bellwether overcame resurgent volatility to achieve a record close in late August. The index's previous high occurred on January 26, just before stocks began a sharp retreat amid concern that rising inflation would prompt the U.S. Federal Reserve to pick up the pace of interest rate hikes, as well as fear of a global trade war. The market stabilized in April and turned upward through mid-june, when escalating trade tension between the U.S. and China soured investor sentiment. The resulting uncertainty lingered into July, but strong corporate earnings helped the S&P 500 rise 7.10% in the final two months of the period. For the full six months, growth stocks handily topped value, while smallcaps bested large-caps. By sector, real estate gained 14% to lead the way after surging from May through the end of August. Energy (+13%) was close behind, moving higher alongside oil prices. Consumer discretionary also gained 13%, driven by a roughly 23% advance for retailers. Information technology rose about 12%, lifted by strong earnings growth from several major index constituents. Notable laggards included two defensive sectors that struggled amid rising interest rates and a general preference for risk: consumer staples (+2%) and telecommunication services (+3%). Financials (-1%) was the only group to lose ground, while materials (+1%) and industrials (+1%) also trailed the broader market. Not FDIC Insured May Lose Value No Bank Guarantee

2 Q&A An interview with Portfolio Manager Neil Nabar Fund Facts Trading Symbol: Neil Nabar Portfolio Manager FSHOX Start Date: September 29, 1986 Size (in millions): $ Investment Approach Fidelity Select Construction and Housing Portfolio is an industry-based, equity-focused strategy that seeks to outperform its benchmark through active management. Our investment approach seeks to capitalize on behavioral biases within the market and focuses on identifying companies that present anomalies between valuation and Fidelity's expectations. We favor businesses with franchise value, recurring revenues and above-average free-cash-flow conversion, while investing within a disciplined risk framework. Sector and industry strategies could be used by investors as alternatives to individual stocks for either tactical- or strategic-allocation purposes. Q: Neil, how did the fund perform for the six months ending August 31, 2018 It returned 8.05%, compared with 8.56% for the MSCI U.S. IMI Construction & Housing 25/50 Index and 7.96% for the broad-based S&P 500 index. Looking a bit longer term, the fund rose 15.63% for the trailing year, lagging the 17.19% advance of the MSCI industry index and the 19.66% return of the S&P 500. Q: What factors influenced construction and housing stocks the past six months The industry's performance typically has a lot to do with the economy and employment picture. And these indicators were largely favorable this period, with the economy growing at an annual rate of 4.2% in the second quarter, the strongest in nearly four years, and unemployment hitting near-record lows. Against this backdrop, growing consumer confidence bolstered home purchases and spending on home remodels and repairs. With the economy at close-tofull employment, though, inflationary pressure picked up, which in some cases eroded profit margins. The mixed effects of better economic growth led to wide dispersion within the MSCI industry index. At one end were residential real estate investment trusts (REITs) and home improvement retail, up 19% and 15%, respectively. At the other end were construction materials and homebuilding, which returned -8% and -4%, respectively. In general, the best performers had the ability to raise prices to keep pace with higher input costs. Plus, REITs benefited from betterthan-expected demand. The weakest performers were those hardest hit by rising freight costs, energy prices and labor costs. In addition, construction materials firms were pressured by weather-related project delays, while homebuilders had to digest higher interest rates. Q: Why did the fund trail the industry index I maintained my bottom-up focus on higher-quality businesses that I thought had above-average predictability in their cash flows, relatively low debt and attractive stock valuations. However, companies with cheap stock prices generally underperformed this period. That's because many investors thought we might be in the later stages of both the economic and housing cycles, which meant they favored 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

3 companies with less exposure to the economy. Stocks issued by less-economically sensitive companies tended to be more expensive. I think we're in the middle innings of the housing cycle, so I continued to favor cheaper stocks with the higherquality characteristics I mentioned earlier. Breaking it down, the fund lost ground relative to the industry index due to my stock picks in the building products and home furnishings groups, as well as positioning in the homebuilding category. Q: Which individual stocks notably detracted It hurt most to have untimely non-index exposure to Mohawk Industries, from the home furnishings category. Mohawk is a U.S.-based carpet and tile company with a well-respected management team, a long track record and good inside ownership of its stock. The firm has historically dominated the categories it competes in, and seemed well-positioned to grow. At the time of purchase, Mohawk was in my sweet spot, with high free-cash-flow conversion, predictable revenue and good capital allocation. However, recent operational missteps, inflationary pressure, cheaper foreign imports and a shift in consumer preferences away from carpet caused the company to miss its earnings guidance for two consecutive quarters. I thought Mohawk could be facing longer-term headwinds, and decided to sell our stake in August, resulting in a -23% return for our holdings. In building products, a lot of the companies we owned missed earnings guidance because they couldn't raise prices fast enough to keep up with inflation costs. Our biggest disappointment here was Owens Corning, a leading provider of insulation and asphalt shingles. I like the company's high free-cash-flow yield, stable outlook for demand which is tied to new home construction and well-regarded management team with a history of good capital allocation. However, rising oil prices meant higher input costs for its shingles business, with similar issues on the insulation side. The result was a -30% return for the stock this period. I reduced our stake, but remain encouraged by the company's steady price hikes to offset cost inflation. Q: What was the story in homebuilding This period, we lost ground versus the index from having a modest overweighting here, as higher interest rates and deceleration in the second quarter stoked fears that home buying had softened. Our biggest individual disappointment within the category was an overweighting in Lennar. I think Lennar's management team is one of the best capital allocators out there. I also view the stock as undervalued, especially given the opportunity the company has to divest some of its noncore businesses. However, our position in Lennar's stock among the fund's largest holdings returned roughly -8% this period, brought down by concern that higher interest rates would dampen home buying, and companies exclusively focused on entry-level buyers would fare best. Q: What helped relative performance My stock picks and an overweighting in home improvement retail gave the biggest boost, with an added gain from stock picks in construction materials. The biggest individual contributor was an overweighting in home improvement retailer Lowe's, our second-largest holding, which gained about 22% this period. Shares were helped by an activist investor's involvement, the addition of three independent directors to the board and the hiring of a new CEO in July. These changes and recent operational improvement gave me reason to believe Lowe's is on the road to better execution that can help it close the valuation gap with its rival, Home Depot, the fund's biggest holding. It also helped to largely avoid Fortune Brands Home & Security, which focuses on residential repair and remodel products such as kitchen cabinets. This index stock declined because inflation boosted input costs. I eliminated our small stake early in the period because I thought other building products suppliers might be more insulated from inflation and competitive pressure. Lastly, my decision to not own homebuilder Toll Brothers helped, as the stock returned -17% in the industry index. Toll has some of the highest average selling prices in the business. I thought the valuation seemed high, and was concerned that a lot of the price gains for higher-priced homes might be in the rear view mirror. Q: What's your outlook for the construction and housing industry as of August 31, Neil I'm optimistic that, as long as we continue to see decent job and wage growth, we should see gains in home prices and household formation that will benefit the industry. I expect housing demand that exceeds supply to be a key driver of returns, outweighing concern around higher interest rates or the new tax law. I'm focused on companies that can benefit from or sustain prices in an inflationary environment. Home improvement retailers and some building products companies notably ones with a lot of exposure to steel profit because of their ability to raise prices quickly. Accordingly, I boosted our allocation to home improvement retail to roughly 39% of assets at period end. By contrast, the fund remains underweighted residential REITs because I don't expect rent growth to be great, and valuations are a lot higher than a year ago. 3 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

4 LARGEST CONTRIBUTORS VS. BENCHMARK Neil Nabar on opportunity in the homebuilding group: "Despite concern that higher interest rates or changes to mortgage deductibility under the new tax law could cloud the outlook for homebuilders, I remain optimistic. That's because we're still seeing a significant imbalance between housing supply and demand, which I believe is only increasing as millennials start families and look to buy their first homes. "The data tells the story. According to the U.S. Census Bureau, between 800,000 and 900,000 single-family homes will be built in the U.S. in To keep up with projections for long-term household growth, estimates are that we'll need to build 1.2 million homes per year. The gap between these two numbers proves we're still underbuilding and have a fairly long way to go before demand catches up with supply. "The question is: What will take us from 800,000 or 900,000 new homes per year to the 1.2 million mark Is it going to be higher-end homes, starter homes or a mix I'd argue that much of the new building will come from entry-level and manufactured homes, with a selling price of $250,000 or less. I expect to see more demand for starter homes because lower-wage earners have been some of the last to see income gains in the current economic recovery. Plus, the biggest concentration of undersupply is in the entry-level housing market. "Accordingly, this period I established positions in homebuilders that cater to first-time buyers, notably KB Home and Skyline Champion. KB is a traditional homebuilder that focuses on entry-level buyers in the Southwest and California. The company has the potential to benefit from reducing its debt. Skyline is the second-largest producer of manufactured homes in the country. The company was formed this past June following a merger between Indianabased Skyline and Michigan-based Champion Enterprises Holdings, with cost-savings synergies expected to come from the deal. "To help fund these purchases, I sold our stake in some other homebuilders, including high-end builder Tri Pointe Group." Holding Lowe's Companies, Inc. Fortune Brands Home & Security, Inc. Market Segment Home Improvement Retail Average Relative Weight Relative Contribution (basis points)* 4.46% 60 Building Products -1.16% 27 Toll Brothers, Inc. Homebuilding -0.93% 27 AvalonBay Communities, Inc. Residential REITs 1.92% 24 Equity Residential (SBI) Residential REITs 1.73% 23 * 1 basis point = 0.01%. LARGEST DETRACTORS VS. BENCHMARK Holding Mohawk Industries, Inc. Market Segment Average Relative Weight Relative Contribution (basis points)* Home Furnishings 1.55% -61 Lennar Corp. Class A Homebuilding 2.69% -51 Owens Corning Building Products 0.88% -36 Granite Construction, Inc. Vulcan Materials Co. * 1 basis point = 0.01%. Construction & Engineering Construction Materials 0.61% % For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

5 ASSET ALLOCATION Asset Class Portfolio Weight Index Weight Relative Weight Relative Change From Six Months Ago Domestic Equities 99.49% % -0.51% 0.10% International Equities 0.00% 0.00% 0.00% 0.00% Developed Markets 0.00% 0.00% 0.00% 0.00% Emerging Markets 0.00% 0.00% 0.00% 0.00% Tax-Advantaged Domiciles 0.00% 0.00% 0.00% 0.00% Bonds 0.00% 0.00% 0.00% 0.00% Cash & Net Other Assets 0.51% 0.00% 0.51% -0.10% Net Other Assets can include fund receivables, fund payables, and offsets to other derivative positions, as well as certain assets that do not fall into any of the portfolio composition categories. Depending on the extent to which the fund invests in derivatives and the number of positions that are held for future settlement, Net Other Assets can be a negative number. "Tax-Advantaged Domiciles" represent countries whose tax policies may be favorable for company incorporation. MARKET-SEGMENT DIVERSIFICATION Market Segment Portfolio Weight Index Weight Relative Weight Relative Change From Six Months Ago Home Improvement Retail 38.72% 35.85% 2.87% 5.78% Building Products 16.37% 18.16% -1.79% 0.36% Residential Reits 15.99% 20.06% -4.07% -2.83% Homebuilding 12.88% 11.09% 1.79% 0.13% Construction & Engineering 7.77% 7.99% -0.22% -0.16% Construction Materials 4.81% 4.88% -0.07% -0.83% Specialized Reits 1.99% % 0.89% Environmental & Facilities Services 0.96% % 0.96% 5 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

6 10 LARGEST HOLDINGS Holding Market Segment Portfolio Weight Portfolio Weight Six Months Ago Home Depot, Inc. Home Improvement Retail 22.31% 18.15% Lowe's Companies, Inc. Home Improvement Retail 16.42% 14.54% AvalonBay Communities, Inc. Residential REITs 6.40% 5.43% Essex Property Trust, Inc. Residential REITs 5.04% -- Lennar Corp. Class A Homebuilding 4.55% 4.77% Masco Corp. Building Products 3.47% 3.34% Vulcan Materials Co. Construction Materials 3.47% 3.50% NVR, Inc. Homebuilding 3.20% 2.60% Equity Lifestyle Properties, Inc. Residential REITs 2.30% 1.96% A.O. Smith Corp. Building Products 2.19% 1.81% 10 Largest Holdings as a % of Net Assets 69.37% 61.88% Total Number of Holdings The 10 largest holdings are as of the end of the reporting period, and may not be representative of the fund's current or future investments. Holdings do not include money market investments. FISCAL PERFORMANCE SUMMARY: Periods ending August 31, Month Cumulative YTD 1 3 Annualized 5 10 / LOF 1 Select Construction and Housing Portfolio Gross Expense Ratio: 0.80% % -0.26% 15.63% 10.72% 12.82% 12.06% S&P 500 Index 7.96% 9.94% 19.66% 16.11% 14.52% 10.86% MSCI US IMI Construction & Housing 25/ % 1.03% 17.19% 14.22% 15.79% 12.44% Morningstar Fund Mid-Cap Growth 11.71% 14.18% 24.45% 14.33% 12.99% 10.49% % Rank in Morningstar Category (1% = Best) % 88% 53% 14% # of Funds in Morningstar Category Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 09/29/ This expense ratio is from the prospectus in effect as of the date shown above and generally is based on amounts incurred during that fiscal year. It does not include any fee waivers or reimbursements, which would be reflected in the fund's net expense ratio. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate; therefore, you may have a gain or loss when you sell your shares. Current performance may be higher or lower than the performance stated. Performance shown is that of the fund's Retail Class shares (if multiclass). You may own another share class of the fund with a different expense structure and, thus, have different returns. To learn more or to obtain the most recent month-end or other share-class performance, visit fidelity.com/performance, institutional.fidelity.com, or 401k.com. Total returns are historical and include change in share value and reinvestment of dividends and capital gains, if any. Cumulative total returns are reported as of the period indicated. Please see the last page(s) of this Q&A document for most-recent calendarquarter performance. 6 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

7 Definitions and Important Information Unless otherwise disclosed to you, in providing this information, Fidelity is not undertaking to provide impartial investment advice, act as an impartial adviser, or to give advice in a fiduciary capacity. FUND RISKS The value of the fund's domestic and foreign investments will vary from day to day in response to many factors. Stock values fluctuate in response to issuer, political, regulatory, market, or economic developments. You may have a gain or loss when you sell your shares. Investments in foreign securities, especially those in emerging markets, involve risks in addition to those of U.S. investments, including increased political and economic risk, as well as exposure to currency fluctuations. Because FMR concentrates the fund's investments in a particular industry, the fund's performance could depend heavily on the performance of that industry and could be more volatile than the performance of less concentrated funds and the market as a whole. The fund is considered non-diversified and can invest a greater portion of assets in securities of individual issuers than a diversified fund; thus changes in the market value of a single investment could cause greater fluctuations in share price than would occur in a more diversified fund. The construction and housing industry can be significantly affected by changes in government spending, interest rates, consumer confidence and spending, taxation, demographic patterns, housing starts, and the level of new and existing home sales. and/or its content providers; (2) may not be copied or redistributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Fidelity does not review the Morningstar data and, for mutual fund performance, you should check the fund's current prospectus for the most up-to-date information concerning applicable loads, fees and expenses. % Rank in Morningstar Category is the fund's total-return percentile rank relative to all funds that have the same Morningstar Category. The highest (or most favorable) percentile rank is 1 and the lowest (or least favorable) percentile rank is 100. The topperforming fund in a category will always receive a rank of 1%. % Rank in Morningstar Category is based on total returns which include reinvested dividends and capital gains, if any, and exclude sales charges. Multiple share classes of a fund have a common portfolio but impose different expense structures. RELATIVE WEIGHTS Relative weights represents the % of fund assets in a particular market segment, asset class or credit quality relative to the benchmark. A positive number represents an overweight, and a negative number is an underweight. The fund's benchmark is listed immediately under the fund name in the Performance Summary. IMPORTANT FUND INFORMATION Relative positioning data presented in this commentary is based on the fund's primary benchmark (index) unless a secondary benchmark is provided to assess performance. INDICES It is not possible to invest directly in an index. All indices represented are unmanaged. All indices include reinvestment of dividends and interest income unless otherwise noted. S&P 500 is a market-capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. MSCI US IMI Construction & Housing 25/50 Index is a modified market-capitalization-weighted index of stocks designed to measure the performance of Construction & Housing 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, and Small Cap 1750 Indices. MARKET-SEGMENT WEIGHTS Market-segment weights illustrate examples of sectors or industries in which the fund may invest, and may not be representative of the fund's current or future investments. Should not be construed or used as a recommendation for any sector or industry. RANKING INFORMATION 2018 Morningstar, Inc. All rights reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar 7

8 Manager Facts Neil Nabar is a research analyst and portfolio manager at Fidelity Management & Research Company (FMRCo), the investment advisor for Fidelity's family of mutual funds. Fidelity Investments is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing and other financial products and services to more than 20 million individuals, institutions and financial intermediaries. In this role, he is responsible for covering Real Estate Investment Trusts (REITs) across a variety of property types and managing Fidelity Select Construction and Housing Portfolio (since 2016). Prior to assuming his current position, Mr. Nabar worked as a quantitative analyst at FMRCo from 2009 to 2012, as well as while he was an intern in Previously, he worked as an investment associate at Putnam Investments from 2004 to He has been in the investments industry since Mr. Nabar earned his bachelor of arts degree in economics from Harvard University and his master of business administration from Columbia Business School. He is also a Chartered Financial Analyst (CFA) charterholder. 8 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

9 PERFORMANCE SUMMARY: Quarter ending September 30, Annualized 5 10 / LOF 1 Select Construction and Housing Portfolio Gross Expense Ratio: 0.80% % 11.18% 11.52% 12.98% 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 09/29/ This expense ratio is from the prospectus in effect as of the date shown above and generally is based on amounts incurred during that fiscal year. It does not include any fee waivers or reimbursements, which would be reflected in the fund's net expense ratio. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate; therefore, you may have a gain or loss when you sell your shares. Current performance may be higher or lower than the performance stated. Performance shown is that of the fund's Retail Class shares (if multiclass). You may own another share class of the fund with a different expense structure and, thus, have different returns. To learn more or to obtain the most recent month-end or other share-class performance, visit fidelity.com/performance, institutional.fidelity.com, or 401k.com. Total returns are historical and include change in share value and reinvestment of dividends and capital gains, if any. Cumulative total returns are reported as of the period indicated. Before investing in any mutual fund, please carefully consider the investment objectives, risks, charges, and expenses. For this and other information, call or write Fidelity for a free prospectus or, if available, a summary prospectus. Read it carefully before you invest. Past performance is no guarantee of future results. Views expressed are through the end of the period stated and do not necessarily represent the views of Fidelity. Views are subject to change at any time based upon market or other conditions and Fidelity disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Fidelity fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity fund. The securities mentioned are not necessarily holdings invested in by the portfolio manager(s) or FMR LLC. References to specific company securities should not be construed as recommendations or investment advice. Information included on this page is as of the most recent calendar quarter. S&P 500 is a registered service mark of Standard & Poor's Financial Services LLC. Other third-party marks appearing herein are the property of their respective owners. All other marks appearing herein are registered or unregistered trademarks or service marks of FMR LLC or an affiliated company. Fidelity Brokerage Services LLC, Member NYSE, SIPC., 900 Salem Street, Smithfield, RI Fidelity Investments Institutional Services Company, Inc., 500 Salem Street, Smithfield, RI FMR LLC. All rights reserved. Not NCUA or NCUSIF insured. May lose value. No credit union guarantee Diversification does not ensure a profit or guarantee against a loss.