Fidelity Select Environment and Alternative Energy Portfolio

Transcription

1 Fidelity Select Environment and Alternative Energy Key Takeaways The fund gained 5.84% for the semiannual reporting period ending August 31, 2017, lagging the 9.90% return of the FTSE Environmental Opportunities & Alternative Energy Index but slightly ahead of the 5.65% return of the broader S&P 500. Manager Kevin Walenta's focus on valuation and underlying business quality hindered relative performance, as investors willingly paid up for companies they thought could generate the strongest earnings growth, regardless of quality. The lion's share of underperformance versus the FTSE industry index came from stock picks in the energy-efficiency category; the fund also lost ground from unfavorable selection in the pollution control and renewable & alternative energy groups. Investment choices in the environmental support services segment aided performance versus the industry index. Looking ahead, Kevin expects relatively stable albeit low oil prices to give some predictability to payback periods for energyefficiency investments, which could help boost corporate spending on these types of products and services. 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. These changes will not impact how the funds are managed. 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 Kevin Walenta Fund Facts Trading Symbol: Kevin Walenta Manager FSLEX Start Date: June 29, 1989 Size (in millions): $ Investment Approach Fidelity Select Environment and Alternative Energy is an industry-based, equity-focused strategy that seeks to outperform its benchmark through active management. Our investment philosophy is based on the reasonable premise that human beings cannot predict the future. This leads us to rely on statistics over stories in our quest to own better businesses with stronger balance sheets at cheaper prices and lower expectations relative to the benchmark. We focus on estimating underlying intrinsic business value and comparing such value to the price being paid for that company in the marketplace. If the margin of safety is large enough to compensate for the risks inherent in the underlying business, relative to other opportunities, we are likely to purchase shares of that company for the fund's shareholders. We believe that intensive fundamental, bottom-up research, supported by Fidelity's deep and experienced global cyclicals and energy teams, is key to identifying these disconnects between price and value. Sector and industry strategies could be used by investors as alternatives to individual stocks for either tactical- or strategic-allocation purposes. Q: Kevin, how did the fund perform for the six months ending August 31, 2017 This was not a great time to be focused on valuation and underlying business quality. In fact, Fidelity research indicates quality was the worst-performing metric this period and, unfortunately, valuation was not much better. Our bias toward both factors meant the fund finished well behind the 9.90% gain of the FTSE Environmental Opportunities & Alternative Energy Index. Our 5.84% return beat the peer group's average 4.44% result, though, and modestly outperformed the broader S&P 500 index as well. For the full year, the fund gained 20.46%, outpacing the FTSE industry index, which returned 19.03%, as well as the peer average and the S&P 500. Q: What factors drove the industry index's relatively strong six-month gain Oil prices were fairly stable, with the price of West Texas Intermediate crude oil hovering mostly between $45 and $52 per barrel. As a result, an increasing number of companies grew more comfortable with the predictability of the payback periods for energy-efficiency and renewableenergy investments. In addition, growth investing roared back into style. When stocks with strong expected earnings- and revenue-growth prospects are performing well, the FTSE industry index typically benefits. Investors were especially interested in cutting-edge (and largely unproven) companies within the renewable & alternative energy group, the top-performing index segment. The industry index's three largest groups posted six-month gains ranging from about 9% to 15%. Q: What challenges did your investment approach encounter this period I believe in buying strong franchises with what I view as enduring competitive advantages, quality balance sheets and businesses that are relatively easy to understand. I try to purchase firms with these characteristics when the stock price is below what I think the business is worth and investor expectations are low. In other words, I look for stocks that are out of favor for transitory reasons. 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

3 Focusing on business quality and valuation has driven superior returns over the long term. However, investors can't expect long-term outperformance if they change their approach whenever this style temporarily goes out of favor. That said, there's no law that mandates this strategy will work over any given one-, six- or even 12-month period. This was one of those times when my strategy didn't work. During the past six months, investors moved away from firms with a consistently higher return on equity (ROE) a measure of profitability and generally rewarded those with riskier underlying businesses that appeared to have higher near-term return prospects. By contrast, I prefer to manage unnecessary investment risk and focus on companies that I think may prove long-term "winners." Q: Which investment choices detracted Security selection did most of the damage to index-relative performance, particularly in the energy-efficiency group. We lost ground here largely from our overweightings in Apogee Enterprises and Innospec. Apogee (-23%) makes value-added glass products used in commercial and institutional buildings to improve energy efficiency. The stock was hurt by an earnings report that fell short of estimates partly due to costs related to two recent acquisitions and by anticipation that the pace of growth in U.S. commercial construction would slow. I boosted our stake because the share price implied low expectations for future earnings growth, and I had confidence in management's track record of improving operations and profitability. Innospec is a small-cap company that makes chemical additives to enhance fuel efficiency, as well as non-sulfate products that go into personal-care products. The firm, in my view, had a strong management team and desirable market positions for many of its products. However, investors bailed out of the stock after the company announced downtime for one of its recently acquired manufacturing facilities, resulting in a roughly -14% return this period. I held on because, in my opinion, the valuation didn't reflect the strength of the underlying franchise or the potential upside from recently acquired assets. Q: Which other stocks hampered performance versus the industry index Avoiding electric vehicle maker and index component Tesla another name grouped within energy efficiency hurt as the stock soared 42% the past six months. I chose not to own Tesla because it didn't offer the "margin of safety" I look for. (See the Q&A's associated callout for more on margin of safety.) Although the Tesla brand is strong today, I question whether its business is sustainable. Plus, the company will need to raise more equity to fund its massive capital needs. Lastly, it takes very rosy predictions to come close to an underlying intrinsic business value equal to Tesla's stock price at period end. In the renewable & alternative energy group, not owning Italy-based electric utility Enel cost us. Enel began simplifying its business by consolidating certain assets while divesting others. Investors reacted favorably, driving the stock's 43% gain. I stayed on the sidelines, though, because I didn't think the valuation reflected the weak demand in Enel's core European markets. Q: Which choices helped Versus the FTSE industry index, stock picks in the environmental support services group provided a modest boost. In addition, our foreign holdings contributed overall, aided in part by a weaker U.S. dollar. In terms of individual contributors, not owning Irelandbased Johnson Controls International in the renewable & alternative energy group helped most. Johnson makes HVAC (heating, ventilation and air conditioning) equipment that assists in reducing energy costs and emissions for buildings. But the stock didn't offer the margin of safety I like to see, partly because the company is going through a sizable transformation that involves splitting the business into two separate entities. The CEO also announced his imminent departure. I was concerned the company might lose market share during this transition. A standout in the energy-efficiency category was Owens Corning, a building products company that makes insulation, shingles and composites. The stock a sizable overweighting in the fund gained 28% this period, thanks to better-than-anticipated earnings growth. Driving the earnings beat were signs of a turnaround in the insulation business, which had been the weakest part of the operation. More broadly, the stock benefited from the ongoing recovery in U.S. construction markets. Q: What's your outlook as of August 31, Kevin If oil prices stay range bound, I think it would be a plus for energy-efficiency investments. But regardless of what happens with macroeconomic factors, I believe buying strong franchises when their stocks seem mispriced can help drive outperformance over the long term. 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 Kevin Walenta on his investment approach: "The past six months have been rough on value investors focused on high-quality franchises. Membership in our club has been in decline, and invitations to our dinner parties go unanswered. In fact, quantitative analysis has shown that, broadly speaking, valuation and quality were two of the worst-performing factors this period. What investors wanted was 'excitement.' Stocks were being bid up because of expected earnings-growth momentum and positive investor sentiment. "To make matters worse, quantitative analysis also shows that the 'persistency' of value stocks has been the highest in 30 years. In other words, cheap stocks have stayed cheap longer than for any other stretch during the past 30 years. That means if you're focused on the time-tested combination of value and quality, as we are, you have to have a lot of patience. "While it may not win me any popularity contests, my investment philosophy remains rooted in the concept of 'margin of safety,' or what I deem a sufficient difference between a stock's 'true' value and its market price. "I look for a margin of safety by targeting companies with competitive advantages, little debt on their balance sheets and attractive share prices. If I don't see a margin of safety in all three areas as is the case for many cutting-edge but cash-flownegative, high-expectation tech firms in our industry I move on to other investments that do meet all three criteria. "I believe stock prices in the long run reflect the underlying intrinsic value (or true worth) of a business. Underlying business value, in turn, depends on the quality of a company's operations, management team and balance sheet. I think our ongoing focus on both value and quality can boost the probability of the fund's long-term outperformance relative to the index." Holding Johnson Controls International PLC Owens Corning Whole Foods Market, Inc. Emerson Electric Co. Weyerhaeuser Co. * 1 basis point = 0.01%. Market Segment Renewable Energy Devs & Ipps Buildings Energy Sustainable and Efficient Agriculture Industrial Energy Sustainable Forestry and Plantations Average Relative LARGEST DETRACTORS VS. BENCHMARK Holding Enel SpA Apogee Enterprises, Inc. Tesla, Inc. Innospec, Inc. Tenneco, Inc. * 1 basis point = 0.01%. Market Segment Renewable Energy Devs & Ipps Buildings Energy Transport Energy Transport Energy Pollution Control Solutions Relative Contribution (basis points)* -2.62% % % % % 20 Average Relative Relative Contribution (basis points)* -2.67% % % % % 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 3M Co. Dvsfd Environmental 10.91% 10.43% Honeywell International, Inc. Diversified Energy 8.60% 8.10% Danaher Corp. Dvsfd Water Infrastruc & Techs 4.48% 2.44% Ingersoll-Rand PLC Buildings Energy 4.09% 3.54% Iberdrola SA Renewable Energy Devs & Ipps 3.64% 3.40% Deere & Co. Sustainable and Efficient Agriculture 3.32% 4.31% Owens Corning Buildings Energy 3.11% 2.11% Cummins, Inc. Pollution Control Solutions 3.08% 2.53% Andritz AG Other Renewables Equip 3.07% 3.13% TE Connectivity Ltd. Renewable Energy Devs & Ipps 2.62% Largest Holdings as a % of Net Assets 46.91% 42.43% 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 Renewable Energy Developers & Independent Power Producers 18.59% 17.00% Buildings Energy 15.98% 12.77% Diversified Environmental 10.91% 12.72% Diversified Energy 8.60% 8.10% Pollution Control Solutions 5.63% 3.83% Recycling & Value-Added Waste Processing 5.23% 2.44% Diversified Water Infrastructure & Technology 4.48% 2.44% Logistics, Food Safety and Packaging 4.15% 5.23% Industrial Energy 4.00% 5.81% Other - Non-Environmental 3.86% 4.03% Other 17.72% 19.63% ASSET ALLOCATION Asset Class Six Months Ago Domestic Equities 79.23% 79.29% International Equities 19.92% 16.89% Developed Markets 12.43% 10.82% Emerging Markets 7.49% 6.07% Tax-Advantaged Domiciles 0.00% 0.00% Bonds 0.00% 0.00% Cash & Net Other Assets 0.85% 3.82% 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 Environment and Alternative Energy Gross Expense Ratio: 0.94% % 12.13% 20.46% 8.52% 14.03% 5.89% S&P 500 Index 5.65% 11.93% 16.23% 9.54% 14.34% 7.61% FTSE EO & Alternative Energy Index 9.90% 16.57% 19.03% 8.61% 15.47% 3.01% Morningstar Fund Industrials 4.44% 9.49% 19.00% 8.18% 15.40% 7.73% % Rank in Morningstar Category (1% = Best) % 44% 70% 80% # of Funds in Morningstar Category Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 06/29/ 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. This fund has a short term trading fee 0.75% for shares held less than 30 days. 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 Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Sector funds can be more volatile because of their narrow concentration in a specific industry. The environment and alternative energy industries can be significantly affected by government regulations and subsidies, changing supply and demand for traditional energy sources, and availability of funding for remedial cleanup efforts or development of new technologies, and can be subject to risks associated with hazardous materials. Foreign securities are subject to interest-rate, currency-exchange-rate, economic, and political risks. The fund may have additional volatility because it can invest a significant portion of assets in securities of a small number of individual issuers. 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. Prior to 7/1/10, Select Environment and Alternative Energy was named Select Environmental, and compared its performance to a different secondary benchmark. The fund's historical performance may not represent its current investment policy. 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/ 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. 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. FTSE EO & Alternative Energy Index is a modified marketcapitalization-weighted index designed to measure the performance of the equity markets of securities derived from the FTSE Environmental Opportunities USA Index and the largest 50 non-u.s. companies in the FTSE Environmental Opportunities Renewable & Alternative Energy Index. 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 Kevin Walenta 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. Walenta manages Fidelity Select Environment and Alternative Energy. Additionally, he manages Fidelity and Fidelity Advisor Mid Cap Value Fund, and Fidelity Mid Cap Value K6 Fund. Prior to assuming his current responsibilities, Mr. Walenta was an equity research analyst covering the utilities, industrial, and energy sectors. In this capacity, he was responsible for analyzing, valuing, and recommending equity securities. Before joining Fidelity in 2008, Mr. Walenta was an equity research associate at Driehaus Capital Management. He has been in the investments industry since Mr. Walenta earned his bachelor of business administration degree from the University of Wisconsin-Madison and his master of business administration degree from Duke University. He is also a 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 Environment and Alternative Energy Gross Expense Ratio: 0.94% % 11.58% 14.83% 5.61% 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 06/29/ 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. This fund has a short term trading fee 0.75% for shares held less than 30 days. 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.