Fidelity Select Technology Portfolio

Transcription

1 QUARTERLY FUND REVIEW AS OF SEPTEMBER 30, 2017 Fidelity Select Technology Investment Approach Fidelity Select Technology is a sector-based, equity-focused strategy that seeks to outperform its benchmark through active management. We believe technology stocks can be mispriced when long-term growth is underestimated, turnaround stories are misunderstood or cyclical rebounds have been unanticipated. Through fundamental, bottom-up research, we seek to identify global technology companies whose future earnings power is not accounted for in their current valuations. Predicting the future is particularly challenging in the technology sector given its fast pace of innovation, fierce competition and short product cycles. Investment candidates tend to fall in one of four categories: secular-growth companies; underappreciated earnings compounders; depressed cyclical companies with a catalyst for an upturn; and special situations. Sector strategies could be used by investors as alternatives to individual stocks for either tactical- or strategic-allocation purposes. PERFORMANCE SUMMARY Cumulative 3 Month YTD 1 Year Annualized 3 Year 5 Year 10 Year/ LOF 1 Select Technology Gross Expense Ratio: 0.77% % 40.98% 37.95% 20.11% 19.06% 11.65% S&P % 14.24% 18.61% 10.81% 14.22% 7.44% MSCI US IMI Information Technology 25/ % 26.36% 27.93% 16.90% 17.43% 10.90% Morningstar Fund Technology 8.12% 27.81% 27.03% 16.22% 17.88% 9.64% % Rank in Morningstar Category (1% = Best) % 21% 34% 15% # of Funds in Morningstar Category Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 07/14/ This expense ratio is from the most recent prospectus and generally is based on amounts incurred during the most recent fiscal year. 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. For definitions and other important information, please see the Definitions and Important Information section of this Fund Review. FUND INFORMATION Manager(s): Charlie Chai Trading Symbol: FSPTX Start Date: July 14, 1981 Size (in millions): $6, Morningstar Category: Fund Technology 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 technology industries can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants, and general economic conditions. Not FDIC Insured May Lose Value No Bank Guarantee

2 QUARTERLY FUND REVIEW: Fidelity Select Technology AS OF SEPTEMBER 30, 2017 Market Review For the three months ending September 30, 2017, the information technology sector, as measured by the MSCI U.S. IMI Information Technology 25/50, returned 8.28%, well ahead of the 4.48% gain of the broadly based S&P 500 index. Technology was by far the best-performing sector in the S&P 500 index this quarter, nearly two full percentage points ahead of energy, the next-best performer. Strength in the sector was broadly based, with all of the major industry groups recording healthy gains. For example, semiconductors (+11%) was a key industry that bolstered the sector's performance. Here, Intel (+14%) and Texas Instruments (+17%) were index names that outperformed. Despite greater competition from rival Advanced Micro Devices, in the second quarter Intel grew both revenue and profits by double digits over the previous year, aided by solid results in its core PC operations and its data-center business. Data processing & outsourced services (+11%) also lifted the MSCI index, partly because of strong performance from payment processors Mastercard (+16%) and Visa (+12%). During the second quarter, Mastercard enjoyed healthy growth in both its top and bottom lines, fueled by strong transaction volume, higher cross-border volumes and gains from its Vocalink acquisition. Other industry groups with significant representation in the MSCI index included internet software & services (+8%), technology hardware, storage & peripherals (+7%) and systems software (+7%). According to a report released by financial data-keeper FactSet Research Systems in September, information technology ranked second-best among S&P 500 sectors in both earnings (+15%) and revenue (+9%) growth for the second quarter, surpassed only by energy in both cases. In the third quarter, technology was expected to record the second-highest year-over-year earnings growth (+9%) and third-highest revenue growth (+8%). LARGEST CONTRIBUTORS VS. BENCHMARK Sunny Optical Technology Group Co. Ltd. TAL Education Group ADR GlobalWafers Co. Ltd. Alibaba Group Ltd. sponsored ADR IBM Corp. * 1 basis point = 0.01%. Electronic Components Average Contribution (basis points)* 1.05% 54 Education 0.94% 42 Semiconductor Equipment Internet Software & It Consulting & Other 1.50% % % 34 Performance Review During the third quarter, the fund gained 10.28%, handily outpacing both the MSCI U.S. IMI Information Technology 25/50 and the S&P 500. Versus the MSCI sector index, the fund derived meaningful benefit from both stock selection and industry weightings. In particular, overweighting semiconductor equipment and stock picking in electronic components aided relative performance. The fund's top individual relative contributor was an out-of-index position in Sunny Optical Technology Group, whose shares advanced roughly 77% this quarter. Sunny is mainland China's largest manufacturer of smartphone camera modules and lenses. The firm also supplies lenses for vehicle cameras, another fastgrowing market. In August, the company reported triple-digit earnings growth and about a 70% rise in revenue versus the prior year, which helped keep the stock's upward momentum intact. Our out-of-index stake in China's Alibaba Group gained about 23% for the quarter. This stock's performance was fueled in part by a surge in August after the online retailer posted strong quarterly financial results that beat market expectations. Yearover-year growth in the firm's cloud business nearly doubled, leading many analysts to raise their price targets for the stock. Notably, the company reported that its paying customers exceeded one million. Fundamental improvement in China's economy and the continued shift from brick-and-mortar to e- commerce also benefited the stock the past three months. Conversely, a large non-index stake in electric car manufacturer Tesla returned roughly -6% for the quarter. Consequently, Tesla was by far the fund's largest relative detractor this quarter. In early July, the stock fell after the company announced its secondquarter delivery tally of 22,000 cars, missing expectations. Tesla attributed the shortfall to a "severe" production issue for battery packs. In addition, a major investment bank dropped its price target for the stock on concerns that demand for the older Model S and Model X cars have plateaued and Tesla may have trouble meeting upcoming production goals. LARGEST DETRACTORS VS. BENCHMARK Tesla, Inc. MasterCard, Inc. Class A Automobile Manufacturers Data Processing & Outsourced Average Contribution (basis points)* 4.96% % -18 Intel Corp. Semiconductors -2.95% -16 NetEase, Inc. ADR Applied Materials, Inc. * 1 basis point = 0.01%. Internet Software & Semiconductor Equipment 0.59% % For definitions and other important information, please see Definitions and Important Information section of this Fund Review.

3 QUARTERLY FUND REVIEW: Fidelity Select Technology AS OF SEPTEMBER 30, 2017 Outlook and Positioning Looking ahead, we're positive about where we are in the larger technology cycle. Although there were concerns in the second quarter about rich valuations in technology stocks, we see fairly average valuations relative to the overall market and relative to longer-term historical averages for the tech sector. In terms of important product cycles, we think many of them are in the early innings. Through the balance of 2017 and beyond, we will be closely watching Apple iphone sales, given the importance of this product for the rest of the technology food chain. Although some have been disappointed with sales of the iphone 8 so far, we think it's too soon to know for sure until we see more data, and especially until the iphone X hits the market. Scheduled for an early November launch, there have been reports that this product might be delayed, so we'll be watching to see how that plays out. At any rate, we prefer to play the iphone primarily through certain Apple suppliers and maintain underweighted exposure to Apple itself. On September 30, Apple was the fund's largest holding and its second-largest underweighting. Within the semiconductor equipment industry group, Taiwanbased GlobalWafers, Lam Research and Hong Kong's ASM Pacific Technology were significant holdings at period end. Among internet software & services, major positions included Alphabet, Facebook and Alibaba Group. Several of these were out-of-index positions. Tesla was the fund's largest non-index position. We continue to think Tesla can disrupt the auto market in much the same way Apple did the smartphone market roughly a decade ago. Having said that, we believe Tesla still has much to prove in terms of its ability to ramp production to meet demand, especially with respect to the Model 3, a model for which the company has the ambitious production goal of 5,000 vehicles a week by the end of this year. Autodesk remained a significant overweighting at quarter end. The firm makes design software for engineering and architectural firms. The company has been transitioning to a subscription business model, which involves lower upfront payments but offers the advantage of recurring revenue. Solid subscription growth helped the company beat financial estimates in recent quarters. Systems software and data processing & outsourced services were two large industry underweightings for the fund during the quarter. In the former group, much of the shortfall was because of software giant Microsoft, our largest individual underweighting at quarter end. Given Microsoft's recent success with cloud computing, we are less negative about it than we were a year ago. However, we believe the stock is close to full valuation and plan to wait for lower prices before considering an increase in the fund's position. Within the data processing & outsourced services industry, we had no exposure to larger index holdings such as Visa, Mastercard and Automatic Data Processing. We tend to favor smaller companies with what we consider more-dynamic earnings-growth prospects. 10 LARGEST HOLDINGS Apple, Inc. Facebook, Inc. Class A Tesla, Inc. Alphabet, Inc. Class C Microsoft Corp. Alphabet, Inc. Class A Autodesk, Inc. Alibaba Group Ltd. sponsored ADR NVIDIA Corp. Cognizant Technology Solutions Corp. Class A 10 Largest s as a % of Net Assets Technology Hardware, Storage & Peripherals Automobile Manufacturers Systems Software Application Software Semiconductors It Consulting & Other 44.01% Total Number of s 149 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. s do not include money market investments. CHARACTERISTICS Valuation Price/Earnings Trailing 37.2x 25.3x Price/Earnings (IBES 1-Year Forecast) 23.7x 18.9x Price/Book 5.2x 5.0x Price/Cash Flow 20.8x 15.8x Return on Equity (5-Year Trailing) 10.7% 18.8% Growth Sales/Share Growth 1-Year (Trailing) 16.8% 12.7% Earnings/Share Growth 1-Year (Trailing) 16.2% 16.2% Earnings/Share Growth 1-Year (IBES Forecast) 47.3% 29.9% Earnings/Share Growth 5-Year (Trailing) 22.3% 14.7% Size ed Average Market Cap ($ Billions) ed Median Market Cap ($ Billions) Median Market Cap ($ Billions) For definitions and other important information, please see Definitions and Important Information section of this Fund Review.

4 QUARTERLY FUND REVIEW: Fidelity Select Technology AS OF SEPTEMBER 30, 2017 LARGEST OVERWEIGHTS BY MARKET SEGMENT Change From Prior Quarter Automobile Manufacturers 4.83% % -0.23% Semiconductor Equipment 6.36% 2.42% 3.94% 0.03% Internet Software & 23.86% 19.96% 3.90% -3.28% Application Software 9.71% 6.22% 3.49% 1.27% Home Entertainment Software 4.69% 1.65% 3.04% 0.04% LARGEST UNDERWEIGHTS BY MARKET SEGMENT Change From Prior Quarter Systems Software 5.78% 14.03% -8.26% -0.04% Data Processing & Outsourced 3.67% 11.58% -7.91% 1.01% Technology Hardware, Storage & Peripherals 9.71% 15.90% -6.19% -0.08% Communications Equipment 0.23% 5.01% -4.78% -0.27% It Consulting & Other 2.72% 5.69% -2.97% 0.86% LARGEST OVERWEIGHTS BY HOLDING Tesla, Inc. Automobile Manufacturers 4.83% Autodesk, Inc. Application Software 3.07% Alibaba Group Ltd. sponsored ADR 2.87% ASM Pacific Technology Ltd. Semiconductor Equipment 1.56% GlobalWafers Co. Ltd. Semiconductor Equipment 1.40% LARGEST UNDERWEIGHTS BY HOLDING Microsoft Corp. Systems Software -4.96% Apple, Inc. Visa, Inc. Class A Technology Hardware, Storage & Peripherals Data Processing & Outsourced -4.06% -3.33% Intel Corp. Semiconductors -3.07% Cisco Systems, Inc. Communications Equipment -2.88% ASSET ALLOCATION Asset Class Change From Prior Quarter Domestic Equities 71.27% 97.96% % 0.02% International Equities 27.56% 2.04% 25.52% -0.60% Developed Markets 11.68% 2.00% 9.68% -2.46% Emerging Markets 15.45% 0.04% 15.41% 1.89% Tax-Advantaged Domiciles 0.43% 0.00% 0.43% -0.03% Bonds 0.00% 0.00% 0.00% 0.00% Cash & Net Other Assets 1.17% 0.00% 1.17% 0.58% 3-YEAR RISK/RETURN STATISTICS Beta Standard Deviation 14.78% 14.04% Sharpe Ratio Tracking Error 4.94% -- Information Ratio R-Squared 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. 4 For definitions and other important information, please see Definitions and Important Information section of this Fund Review.

5 QUARTERLY FUND REVIEW: Fidelity Select Technology AS OF SEPTEMBER 30, 2017 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. CHARACTERISTICS Earnings-Per-Share Growth measures the growth in reported earnings per share over the specified past time period. Median Market Cap identifies the median market capitalization of the portfolio or benchmark as determined by the underlying security market caps. Price-to-Book (P/B) Ratio is the ratio of a company's current share price to reported accumulated profits and capital. Price/Cash Flow is the ratio of a company's current share price to its trailing 12-months cash flow per share. Price-to-Earnings (P/E) Ratio (IBES 1-Year Forecast) is the ratio of a company's current share price to Wall Street analysts' estimates of earnings. Price-to-Earnings (P/E) Ratio Trailing is the ratio of a company's current share price to its trailing 12-months earnings per share. Return on Equity (ROE) 5-Year Trailing is the ratio of a company's last five years historical profitability to its shareholders' equity. Preferred stock is included as part of each company's net worth. Sales-Per-Share Growth measures the growth in reported sales over the specified past time period. ed Average Market Cap identifies the market capitalization of the average equity holding as determined by the dollars invested in the portfolio or benchmark. ed Median Market Cap identifies the market capitalization of the median equity holding as determined by the dollars invested in the portfolio or benchmark. IMPORTANT FUND INFORMATION positioning data presented in this commentary is based on the fund's primary benchmark (index) unless a secondary benchmark is provided to assess performance. The Board of Trustees unanimously approved a proposal to shareholders for trustee election that would combine oversight of Fidelity's sector funds with Fidelity's broader equity and high income funds under a single Board of Trustees. If approved, the unified Board would be effective on or about 3/1/18. 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. 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 2017 Morningstar, Inc. All rights reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar 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 top-performing 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 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. 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. MSCI US IMI Information Technology 25/50 is a modified market-capitalization-weighted index of stocks designed to measure the performance of Information Technology companies in the MSCI U.S. Investable Market The MSCI U.S. Investable Market 2500 is the aggregation of the MSCI U.S. Large Cap 300, Mid Cap 450, and Small Cap 1750 Indices. 5

6 3-YEAR RISK/RETURN STATISTICS Beta is a measure of the volatility of a fund relative to its benchmark index. A beta greater (less) than 1 is more (less) volatile than the index. Information Ratio measures a fund's active return (fund's average monthly return minus the benchmark's average monthly return) in relation to the volatility of its active returns. R-Squared measures how a fund's performance correlates with a benchmark index's performance and shows what portion of it can be explained by the performance of the overall market/index. R- Squared ranges from 0, meaning no correlation, to 1, meaning perfect correlation. An R-Squared value of less than 0.5 indicates that annualized alpha and beta are not reliable performance statistics. Sharpe Ratio is a measure of historical risk-adjusted performance. It is calculated by dividing the fund's excess returns (the fund's average annual return for the period minus the 3-month "risk free" return rate) and dividing it by the standard deviation of the fund's returns. The higher the ratio, the better the fund's return per unit of risk. The three month "risk free" rate used is the 90-day Treasury Bill rate. Standard Deviation is a statistical measurement of the dispersion of a fund's return over a specified time period. Fidelity calculates standard deviations by comparing a fund's monthly returns to its average monthly return over a 36-month period, and then annualizes the number. Investors may examine historical standard deviation in conjunction with historical returns to decide whether a fund's volatility would have been acceptable given the returns it would have produced. A higher standard deviation indicates a wider dispersion of past returns and thus greater historical volatility. Standard deviation does not indicate how the fund actually performed, but merely indicates the volatility of its returns over time. Tracking Error is the divergence between the price behavior of a position or a portfolio and the price behavior of a benchmark, creating an unexpected profit or loss. 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. Diversification does not ensure a profit or guarantee against a loss. S&P 500 is a registered service mark of Standard & Poor's Financial 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 LLC, Member NYSE, SIPC., 900 Salem Street, Smithfield, RI Fidelity Investments Institutional Company, Inc., 500 Salem Street, Smithfield, RI FMR LLC. All rights reserved. Not NCUA or NCUSIF insured. May lose value. No credit union guarantee