Fidelity Real Estate Investment Portfolio

Transcription

1 Fidelity Real Estate Investment Key Takeaways In an up-and-down market for real estate investment trusts (REITs), the fund returned -4.94% for the fiscal year ending July 31, 2017, modestly outperforming the Dow Jones U.S. Select Real Estate Securities Index SM, which returned -5.66%. Versus the Dow Jones real estate index, the fund benefited from favorable sector positioning. The decision to underweight retail REITs and overweight the industrial/office category helped most. In contrast, relative performance was held back by subpar security selection in the retail sector, especially positions in DDR, an operator of retail "power centers," and GGP, the U.S.'s second-largest mall owner. However, underweighting the largest U.S. mall owner, Simon Property Group, aided results. During the period, Manager Steven Buller augmented his bottom-up (stock-by-stock) management approach with a sector-oriented, top-down component that can influence the fund's relative weightings in certain market groups. As of July 31, Steve believes that REITs could continue to struggle on a relative basis as long as broader equities remain strong. That said, REITs could rebound if investor sentiment turns its favor back to income-oriented securities. MARKET RECAP The U.S. equity bellwether S&P 500 index gained 16.04% for the year ending July 31, 2017, rising sharply following the November election and continuing to rally through the end of February on optimism for President Trump's pro-business agenda. Equity markets leveled off, however, as the fledgling administration faced the first test of its domestic agenda. Stocks reacted with uncertainty to efforts by Congress in March to repeal and replace the Affordable Care Act, and then reverted upward through July 31. Growth stocks surged ahead of value, while small-caps' advantage over largecaps narrowed. Sector-wise, financials (+36%) fared best, riding an uptick in bond yields and a surge in banks, particularly post-election. Information technology gained 29%, as a handful of major index constituents posted stellar returns. Industrials (+18%) was boosted by a call for increased infrastructure spending. Consumer discretionary (+14%) slightly lagged the broader market because brick-and-mortar retailers continued to suffer from increased online competition. Energy (0%) was hurt by low oil prices. Utilities (+6%), consumer staples (+4%), telecommunication services (-7%) and real estate (-2%) all struggled amid an improved backdrop for riskier assets that curbed demand for dividend-rich sectors, as well as the likelihood of further interest rate hikes later in Not FDIC Insured May Lose Value No Bank Guarantee

2 Q&A An interview with Manager Steven Buller Fund Facts Trading Symbol: Steve Buller Manager FRESX Start Date: November 17, 1986 Size (in millions): $4, Investment Approach Fidelity Real Estate Investment seeks aboveaverage income and long-term capital growth, consistent with reasonable investment risk, by investing in securities of companies that own and, in most cases, operate commercial real estate properties. Investment in real estate securities has the potential to provide portfolio diversification, consistent income generation, total return and the ability to outpace inflation. We believe real estate investment trusts (REITs) represent a balance between real estate and stocks, and that recognizing attributes of both is key to identifying opportunities to outperform. Through rigorous bottom-up research from both Fidelity's dedicated real estate team and the firm's broader research resources, we strive to add value through security selection within a disciplined risk framework. Our process seeks to determine the relative attractiveness of individual REITs and will try to take advantage of pricing discrepancies in the market. Q: Steve, how did the fund perform for the fiscal year ending July In an up-and-down performance environment, the REIT market finished the 12-month period in negative territory. Although I never like to see the fund lose money in any given time frame, I am nevertheless pleased that we were able to outperform the Dow Jones U.S. Select Real Estate Securities Index SM. During this span, the fund returned %, compared with an index result of -5.66%. The fund lagged its peer group average for the year, though. Another point of comparison: the broad U.S. stock market, as measured by the S&P 500, was up 16.04%. Effective sector positioning overall drove the fund's performance versus the Dow Jones real estate index. Most notably, we benefited from underweighting retail REITs the worst-performing category in the index by far and from overweighting industrial/office REITs. On the negative side, security selection among retail REITs was subpar. Q: Describe for us the year's market backdrop I'd characterize the market backdrop for REIT investors this past year as "fine but unexciting," especially compared with the broader equity market, which was lifted by a narrow slice of growth-oriented companies. Real estate fundamentals meaning the balance between the supply of and demand for commercial properties remained positive, albeit significantly less so than in recent years. Another trend we saw this period was a large gap between the best- and worst-performing real estate categories, especially after the November elections. When investors began to anticipate growth-oriented policies coming out of Washington, D.C., economically sensitive REITs such as hotel operators did particularly well, whereas less sensitive REIT groups, such as health care and retail, fared poorly. Q: In such an environment, how were you managing the fund Against this backdrop, my management approach, as always, was to carefully consider both the similarities and the differences between REITs and their counterparts in 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

3 the broader equity market. On a long-term basis, my belief is that a REIT's valuation should trend toward the value of its underlying properties. REIT shares also represent an equity stake in a company, so their prices can fluctuate along with changes in the economy or investor sentiment. In my view, the REIT market can be inefficient, which can cause individual names to be temporarily mispriced. From time to time, this can open up opportunities to buy the stocks I like at undeservedly low prices or to sell stocks that begin to trade for more than I think they're worth. Accordingly, my focus tends to be on bottom-up stock picking, meaning I select investments one at a time, relying in part on Fidelity's highly capable team of real estate analysts to identify what I consider reasonably priced REITs of sufficient quality. Of final note, my process involves maintaining a flexible approach as I try to adapt to a constantly changing investment environment. The REIT universe is relatively narrow, so I may adjust my emphasis based on current market conditions or on where I see the market heading. Q: Where were you finding investment ideas and opportunities this period As I mentioned, my approach emphasizes bottom-up stock picking. But given certain challenges and opportunities I was seeing in the marketplace, I started adding a top-down component to my management strategy, meaning I was favoring or reducing fund exposure to certain sectors based on my analysis of the groups as a whole. As the period progressed, for example, I widened the fund's underweighting in retail REITs, especially mall and strip-center operators, because brick-and-mortar tenants continued to face significant long-term business challenges, in my view. Simultaneously, I added substantially to our overweighting in industrial REITs. Many owners of specialized distribution facilities have been among the main beneficiaries of the global shift toward e-commerce. I also added exposure to the residential group in apartments, specifically where I saw a combination of attractive valuations and the potential for a supply decrease in certain markets; the fund finished the period with a sizable overweighting there. had curbed exposure to Simon despite it remaining one of the fund's largest holdings at period end due to its extreme size in the benchmark. Unfortunately, those retail REITs we opted to overweight instead, such as DDR, an operator of so-called retail "power centers" large outdoor shopping malls that typically combine a few "big-box" stores with smaller retailers or restaurants around a shared parking lot and GGP, the country's second-largest mall owner, were poor performers themselves, hampering our results. Meanwhile, among industrial REITs, the fund benefited from overweightings in Prologis, DCT Industrial Trust and Duke Realty, all three of which benefited from increased demand related to the continued growth of e-commerce. Both Prologis and Duke Realty finished the period among the fund's largest holdings, even after I trimmed exposure to Duke this period in light of its strong prior performance. Among residential REITs, the fund was hindered by underweighting apartment operators Equity Residential and AvalonBay Communities. As the period went on, though, I saw improved opportunity in AvalonBay and boosted our stake, bringing it roughly to an index weighting and making it one of our largest holdings by period end. Q: Any closing thoughts, Steve As of July 31, I see a good but not great fundamental environment for the REIT market. From a valuation standpoint, REITs' publicly traded shares are, on average, trading at a price discount to the private-market value of the companies' underlying real estate assets. Accordingly, toward period end we started to see a pickup in REIT merger and acquisition activity as companies sought to take advantage of the valuation gap. This could have a positive effect on REIT pricing, in my view. That said, as long as the broader stock market performs well, investors may continue to be drawn to faster-growing securities over relatively boring, income-oriented investments such as REITs. But if broader equities were to slow down, I'd think we could see some rekindling of investor interest in non-core asset types. Q: Which stocks most influenced the fund's performance relative to the index Among retail REITs, underweighting Simon Property Group, the country's largest mall operator, proved our largest individual contributor, given the stock's roughly -28% return. We saw better opportunities elsewhere, and thus 3 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

4 Steve Buller on newer growth opportunities among REITs: "Historically, the REIT market was made up of three main sectors: office, retail and apartments. One big change in recent years, however, has been the arrival of newer, niche sectors in the benchmark. Now we can invest in various other real estate types, such as industrial/logistics facilities, data centers, hotels, self-storage facilities and even single-family housing. "One reason such niches have been quickly accepted by the market is they provide added growth opportunity for investors. Consider that the retail sector has been experiencing negative growth in recent years, while growth in the office sector has been only average (apartments have seen the best growth of the three core categories). "This greater variety of investable real estate sectors has been one factor behind our decision to begin adding a top-down component to our management strategy. With many more groups to choose from than in the past, and with a wider range of performance among sectors, we believe we have greater opportunity to add value for our shareholders by reviewing the portfolio through this additional lens." LARGEST CONTRIBUTORS VS. BENCHMARK Holding Simon Property Group, Inc. Market Segment Average Relative Relative Contribution (basis points)* Retail -2.86% 73 Prologis, Inc. Industrial/Office 1.72% 36 UDR, Inc. Residential 2.52% 34 DCT Industrial Trust, Inc. Industrial/Office 1.58% 32 Duke Realty Corp. Industrial/Office 3.41% 31 * 1 basis point = 0.01%. LARGEST DETRACTORS VS. BENCHMARK Holding Market Segment Average Relative Relative Contribution (basis points)* DDR Corp. Retail 0.93% -41 General Growth Properties, Inc. Retail 1.01% -24 Equity Residential (SBI) Residential -1.79% -23 Kite Realty Group Trust Retail 0.69% -22 AvalonBay Communities, Inc. * 1 basis point = 0.01%. Residential -1.52% 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 Prologis, Inc. Industrial/Office 6.91% 5.86% Simon Property Group, Inc. Retail 5.77% 5.94% Ventas, Inc. Healthcare 5.39% 4.55% Public Storage Self Storage 4.88% 6.94% Duke Realty Corp. Industrial/Office 4.68% 4.57% UDR, Inc. Residential 4.67% 3.92% Welltower, Inc. Healthcare 4.56% 3.46% Boston Properties, Inc. Industrial/Office 4.33% 4.45% AvalonBay Communities, Inc. Residential 3.96% 1.55% Digital Realty Trust, Inc. Industrial/Office 3.69% 3.53% 10 Largest Holdings as a % of Net Assets 48.85% 46.58% 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 Industrial/Office 31.66% 29.72% Residential 24.69% 20.60% Retail 18.28% 21.33% Health Care 9.95% 8.01% Self Storage 7.38% 9.27% Hotels 4.15% 5.38% Diversified 0.92% 1.56% Commercial 0.43% 1.05% Hybrid REIT 0.00% 0.00% Real-Estate Related 0.00% 0.00% Other 2.54% 3.08% ASSET ALLOCATION Asset Class Six Months Ago Domestic Equities 97.61% 96.90% International Equities 0.00% 0.00% Developed Markets 0.00% 0.00% Emerging Markets 0.00% 0.00% Tax-Advantaged Domiciles 0.00% 0.00% Bonds 0.00% 0.00% Cash & Net Other Assets 2.39% 3.10% 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. 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 July 31, Month Cumulative YTD 1 3 Annualized 5 10 / LOF 1 Fidelity Real Estate Investment Gross Expense Ratio: 0.78% % 3.39% -4.94% 9.16% 9.46% 6.95% S&P 500 Index 9.51% 11.59% 16.04% 10.87% 14.78% 7.74% Dow Jones U.S. Select Real Estate Securities Index 3.18% 2.29% -5.66% 8.28% 8.78% 6.28% Morningstar Fund Real Estate 4.19% 3.99% -3.40% 7.67% 8.32% 6.15% % Rank in Morningstar Category (1% = Best) % 11% 11% 25% # of Funds in Morningstar Category Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 11/17/ 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, advisor.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 FUND RISKS Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. Real Estate is a cyclical industry that is sensitive to interest rates, economic conditions (both nationally and locally), property tax rates, and other factors. The fund may have additional volatility because it can invest a significant portion of assets in securities of a small number of individual issuers. reinvested dividends and capital gains, if any, and exclude sales charges. 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. 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. 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. Dow Jones U.S. Select Real Estate Securities Index is a floatadjusted market-capitalization-weighted index of publicly traded real estate securities such as real estate investment trusts (REITs) and real estate operating companies (REOCs). 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 7

8 Manager Facts Steve Buller is a 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 manages Fidelity Real Estate Investment (since 1998) and Fidelity Advisor Global Real Estate Fund (since 2016). Prior to assuming his current management responsibilities, Mr. Buller managed Fidelity and Fidelity Advisor International Real Estate Fund and VIP Real Estate. Previously, he worked as an analyst covering real estate investment trusts and the environmental industry in FMRCo's equity group from 1997 to 1998, and a fixed income analyst at Fidelity International Limited's (FIL) London office from 1995 to Mr. Buller was also a distressed securities analyst and a high yield analyst in FMRCo's high income group from 1992 to He has been in the investments industry since joining Fidelity in Mr. Buller earned his bachelor of arts degree in finance and German literature, as well as his master of science degree in finance from the University of Wisconsin-Madison. 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 June 30, Annualized 5 10 / LOF 1 Fidelity Real Estate Investment Gross Expense Ratio: 0.78% % 8.95% 9.58% 6.01% 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 11/17/ 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, advisor.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.