Fidelity Select Energy Portfolio

Transcription

1 Fidelity Select Energy Key Takeaways For the semiannual reporting period ending August 31, 2017, the fund returned %, underperforming the % return of the MSCI U.S. IMI Energy 25/50 Index, as well as the 5.65% gain of the broad-market S&P 500 index. Falling prices for crude oil and natural gas cast a pall over the energy sector the past six months, hindering profitability for many companies and causing the sector's return to lag the S&P 500 by a wide margin. Manager John Dowd's strategy of favoring U.S.-based exploration & production (E&P) companies was out of favor this period. The fund's overweighting and stock picks within this group held back performance versus the sector index. Underweighting integrated oil & gas companies, which held up well relative other industry groups, also detracted. A significant underweighting in integrated oil & gas giant Exxon Mobil was the fund's biggest individual relative detractor, while overweighting U.S. E&P Pioneer Natural Resources also proved to be a disappointment. Conversely, favorable security selection in the oil & gas drilling group contributed to the fund's relative performance. The Board of Trustees has agreed to present a proposal to shareholders to eliminate each sector/industry fund's fundamental "invests primarily" policy and to modify the fundamental concentration policy for certain funds. If the proposals are approved, expected in the fourth quarter, the changes will take place on or about January 1, 2018 (or the first day of the month following shareholder approval), and will not impact how the funds are managed. MARKET RECAP The U.S. equity bellwether S&P 500 index returned 5.65% for the six months ending August 31, Following a strong start to 2017, equity markets leveled off in March amid fading optimism for President Trump's pro-business agenda and stalled efforts by Congress to repeal and replace the Affordable Care Act (ACA). Upward momentum soon returned and continued until the index cooled off in August, when geopolitical tension escalated and uncertainty grew regarding the future of health care, tax reform and the debt ceiling. In a stark reversal from 2016, growth-oriented stocks handily topped their value counterparts. Among sectors, information technology (+15%) was a standout, surging as a handful of major index constituents posted strong returns. Health care (+9%) also topped the broader market, climbing from April to period end following renewed efforts to reconsider the ACA. Conversely, financials (+1%) lagged because sentiment regarding the potential for reduced regulation and lower taxes faded as the White House turned its attention to other initiatives. Rising interest rates held back real estate (+4%). Investors' general preference for risk assets, coupled with increased competition, hampered consumer staples (+1%) and telecommunication services (-5%). Lastly, lower oil prices sent energy (-10%) to the bottom of the sector performance rankings. Not FDIC Insured May Lose Value No Bank Guarantee

2 Q&A An interview with Manager John Dowd Fund Facts Trading Symbol: John Dowd Manager FSENX Start Date: July 14, 1981 Size (in millions): $1, Investment Approach Fidelity Select Energy is a sector-based, equityfocused strategy that seeks to outperform its benchmark through active management. We believe that energy stocks can become mispriced relative to their long-term intrinsic value due to either overemphasis on short-term commodity price swings, underappreciation of changes in technology or cost structures, or geopolitical events. Supported by in-depth fundamental research, we seek to uncover investment opportunities by analyzing the drivers of supply and demand for energy commodities, in combination with valuations and growth potential for energy stocks. Our process is grounded in the belief that earnings growth drives stock performance, and those companies with differentiated technologies, business models, cost positions or restructuring opportunities are bestpositioned to deliver superior earnings. Sector strategies could be used by investors as alternatives to individual stocks for either tactical- or strategic-allocation purposes. Q: John, how did the fund perform for the six months ending August 31, 2017 In a difficult environment for energy stocks, the fund returned %, trailing the % return of the MSCI energy sector index, and lagging the broad-market S&P 500 index by a wide margin. The fund held up slightly better than its peer group average. Looking out a bit longer term, relative performance was similar for the past 12 months, with the fund's % return trailing the -7.50% result of the MSCI sector index, and again widely lagging the broader equity market. We finished behind the peer group average. Q: What hurt the fund's performance versus the MSCI sector index the past six months The primary factor that worked against us was my focus on U.S. oil & gas exploration & production (E&P) companies a strategy that has generally worked well the past few years but wasn't rewarded this particular period. After rallying in 2016, the price of crude oil declined as much as 20% from its recent peak, which was surprising given production curtailments established by the Organization of the Petroleum Exporting Countries (OPEC). This decline occurred largely because global oil inventories didn't fall as quickly as investors anticipated, and because U.S. production growth accelerated quicker than expected. These dynamics led to a wave of bearish sentiment and significant selling pressure on E&P stocks, which generally didn't hold up as well as they had versus other industries during prior periods of declining oil prices. Thus, the fund's overweighting of E&Ps was the primary reason for its underperformance relative to the MSCI sector index. Q: Was there anything you did differently in terms of portfolio positioning I did not shift my overall approach, but I did make a few modest adjustments. Going into 2017, I was optimistic about support for higher crude oil prices. OPEC had just pledged to curb global oil production for the first time in eight years. Russia and other non-opec nations followed. As a result, early in the period I increased the fund's 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

3 exposure to several more value-oriented stocks companies that were trading at material valuation discounts to the group because of their above-average debt. I felt these companies would benefit from a higher oil-price environment and an improved profit outlook. But this move didn't work out; as oil prices declined, investors generally ran away from stocks of the more financially leveraged companies in favor of those perceived as having bulletproof balance sheets. Over the latter half of the period, I reined in this strategy, refocusing primarily on higher-quality E&P companies with little debt. I felt they would continue growing U.S. oil production amid lower commodity prices levels that put the profitability of many international energy producers at risk. Elsewhere, I repositioned the fund's exposure to integrated oil & gas companies, increasing or adding to positions in companies I had more conviction in, such as Suncor Energy and Occidental Petroleum, and reducing our stake in less-favored names, such as Exxon Mobil. Q: Which individual stocks disappointed Our sizable stake in Texas-based E&P Pioneer Natural Resources was one of the fund's biggest disappointments. This company has rights to a significant percentage of acreage in the Permian Basin in Texas, one of the most productive oil fields in the country. The stock returned about 30% this period, primarily due to concerns about an increasing percentage of natural gas (relative to crude oil) from some of the company's drilling wells. Rising gas levels in active wells can indicate potentially depleting crude levels. However, I believe the company's production quality in the Permian reservoir is better than the market thinks, and I increased our holdings in the company. Elsewhere, significant underweightings in large integrated oil & gas companies Exxon and Chevron were among the fund's biggest relative detractors. These stocks likely held up relatively well amid declining commodity prices because the companies were perceived by the market as being defensive businesses given their diversified operations. Several E&P stocks also worked against us. For example, our position in Continental Resources returned -25%, in large part because of the amount of financial leverage on the firm's balance sheet. Although I reduced the fund's exposure to many E&Ps with higher debt levels, I increased our investment in Continental this period. It has significant holdings in the attractive Bakken shale formation area of North Dakota and Montana, remained on pace to beat its 2017 production target, and improved its net cash position. Q: What were the bright spots The top contributor was our overweighting in Rice Energy, a U.S. E&P natural gas producer with quality acreage in the Utica and Marcellus shale regions. Our holdings in Rice Energy gained 27%, largely due to EQT Corp.'s agreement to acquire the company in June. Elsewhere, underweighting energy services giant Schlumberger lifted the fund's relative return. The company didn't have any operational disappointments, but I suspect the stock was punished because a sizable portion of its business is in offshore drilling, where there has been less activity than in U.S. shale regions. Good stock picking in the oil & gas refining & marketing group also helped, including an overweighting in Delek US Holdings and a non-index stake in India's Reliance Industries. Q: John, what's your outlook for energy stocks Profitability within the sector remains challenged as of August 31, yet the ability of U.S. E&P companies to grow oil production at half the commodity price of just a few years ago remains a competitive advantage. Many of these companies continue to benefit from strategic land ownership near fertile basins, improving well efficiency and productivity, and by maintaining little or no debt. These are advantages in an environment of low commodity prices. In addition, at period end, the market was valuing E&P companies as if commodity prices will remain low perpetually, and also as if they will not achieve production growth going forward. I see that as an opportunity. The U.S. E&P companies owned in the fund have increased production, even amid lower commodity prices. Companies operating in the Permian (Texas) basin, for example, have the ability to boost production at 20% per year for the foreseeable future, based on our estimates. There also may be some crude-oil price support should inventories decline, as some industry observers expect. OPEC is forecasting that the global crude oil inventory imbalance could rectify by the end of 2017 or early in 2018, assuming the combination of OPEC's supply cuts and decreased investment by non-opec producers continues. Historically, inventory reductions have led to a rise in oil prices. Given these dynamics, I believe it's important to be patient. I continue to focus on companies that have embraced disruptive technology to improve productivity relative to peers. The portfolio has roughly the same valuation as the MSCI sector benchmark at period end, but our holdings are more capital efficient and are growing production faster, on average, than the companies in the index. 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 John Dowd elaborates on the competitive advantages of U.S. E&P companies: "Two deflationary forces within the energy sector have hampered commodity prices and made U.S.- based E&P companies attractive. "First, the ease with which U.S. energy companies have been able to raise capital has led to increased production capacity within the sector, and lower global crude oil prices. "Second, improved well productivity via new shalefracturing technology has allowed U.S. E&Ps to increase production growth and achieve profits even as crude oil prices have declined. U.S. shale production represents only 5% of the world's supply of crude oil, but that rate of production, if altered, can influence the commodity price given the tight balance of global supply and demand. "Conversely, the growth of U.S. oil production and the corresponding decline in crude oil prices has put considerable pressure on the profitability of foreign E&P producers. Many of these companies cannot produce oil profitably when it is priced at $40 a barrel or less. OPEC annual net export revenues have fallen from a peak of $1.18 billion in 2012 to $433 billion in I am not optimistic that crude oil prices will recover to historic peaks. "Because of these disruptive dynamics, I have been allocating capital to the U.S. E&P stocks with better cost positions, production growth and return prospects than their foreign peers. This strategy didn't support the fund's performance the past six months, but I maintain my conviction in this approach." Holding Rice Energy, Inc. Schlumberger Ltd. LyondellBasell Industries NV Class A Apache Corp. Delek U.S. Holdings, Inc. * 1 basis point = 0.01%. Market Segment Oil & Gas Equipment & Services Average Relative Relative Contribution (basis points)* 0.88% % 33 Commodity Chemicals 1.32% 18 Oil & Gas Refining & Marketing LARGEST DETRACTORS VS. BENCHMARK Holding Market Segment -1.27% % 18 Average Relative Relative Contribution (basis points)* Exxon Mobil Corp. Integrated Oil & Gas % -104 Pioneer Natural Resources Co. 2.98% -71 Chevron Corp. Integrated Oil & Gas -6.49% -59 PDC Energy, Inc. Anadarko Petroleum Corp. * 1 basis point = 0.01%. 1.17% % For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

5 10 LARGEST HOLDINGS Holding Market Segment Six Months Ago Chevron Corp. Integrated Oil & Gas 7.66% 6.30% EOG Resources, Inc. 7.05% 5.77% Pioneer Natural Resources Co. 5.47% 4.36% Diamondback Energy, Inc. 5.43% 3.40% Exxon Mobil Corp. Integrated Oil & Gas 4.64% 6.86% Halliburton Co. Oil & Gas Equipment & Services 4.24% 3.57% Phillips 66 Co. Oil & Gas Refining & Marketing 3.13% 1.89% The Williams Companies, Inc. Oil & Gas Storage & Transportation 3.13% 1.26% Parsley Energy, Inc. Class A 3.07% 1.83% RSP Permian, Inc. 2.86% 1.85% 10 Largest Holdings as a % of Net Assets 46.68% 45.53% 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. MARKET-SEGMENT DIVERSIFICATION Market Segment Six Months Ago 50.99% 50.89% Integrated Oil & Gas 14.96% 13.37% Oil & Gas Equipment & Services 12.92% 18.18% Oil & Gas Storage & Transportation 8.11% 7.37% Oil & Gas Refining & Marketing 7.78% 6.59% Commodity Chemicals 1.93% 0.67% Oil & Gas Drilling 1.67% 0.65% Gas Utilities 0.47% 0.30% Renewable Electricity 0.11% 0.49% ASSET ALLOCATION Asset Class Six Months Ago Domestic Equities 90.12% 92.65% International Equities 8.81% 6.17% Developed Markets 4.31% 4.76% Emerging Markets 4.50% 1.41% Tax-Advantaged Domiciles 0.00% 0.00% Bonds 0.00% 0.00% Cash & Net Other Assets 1.07% 1.18% 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. 5 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

6 FISCAL PERFORMANCE SUMMARY: Periods ending August 31, Month Cumulative YTD 1 3 Annualized 5 10 / LOF 1 Select Energy Gross Expense Ratio: 0.79% % % % % -1.35% -1.34% S&P 500 Index 5.65% 11.93% 16.23% 9.54% 14.34% 7.61% MSCI US IMI Energy 25/ % % -7.50% % -1.06% 0.38% Morningstar Fund Equity Energy % % -9.69% % -6.31% -3.15% % Rank in Morningstar Category (1% = Best) % 22% 15% 37% # 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 prospectus in effect as of the date shown above and generally is based on amounts incurred during that 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. 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 energy industries can be significantly affected by fluctuations in energy prices and supply and demand of energy fuels, energy conservation, the success of exploration projects, and tax and other government regulations 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 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. 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. 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 Energy 25/50 Index is a modified marketcapitalization-weighted index of stocks designed to measure the performance of Energy 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. 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 7

8 Manager Facts John Dowd is a portfolio manager at Fidelity Management & Research Company (FMR Co.), 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, Mr. Dowd manages Fidelity Select Energy, Fidelity Select Natural Resources, Fidelity Advisor Energy Fund, and VIP Energy. Additionally, he co-manages Fidelity Series Broad Market Opportunities Fund, Fidelity Stock Selector All Cap Fund, and Fidelity Advisor Stock Selector All Cap Fund. Prior to assuming his current responsibilities, Mr. Dowd managed Select Energy Service and previously served as an equity research analyst. Before joining Fidelity in 2005, Mr. Dowd was a senior research analyst covering oil service companies at Sanford C. Bernstein & Co. Previously, he followed energy companies and developed risk management tools for Lawhill Capital Partners, LLC, an energyfocused investment management firm. Mr. Dowd also worked as an analyst and as a junior analyst at Sanford C. Bernstein & Co. following oil refinery, oil service, and integrated oil companies. He has been in the investments industry since joining Value Line as an equity analyst in Mr. Dowd earned his bachelor of science degree in mechanical engineering from Carnegie Mellon University. He has also served as an expert witness on energy and has testified before Congress, the House Subcommittee on International Terrorism and Non- Proliferation, and the Senate Committee on Energy and Natural Resources. 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 Energy Gross Expense Ratio: 0.79% % -7.57% 0.00% -1.12% 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 07/14/ 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. 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. Diversification does not ensure a profit or guarantee against a loss. 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