Fidelity Select Biotechnology Portfolio

Transcription

1 QUARTERLY FUND REVIEW AS OF SEPTEMBER 30, 2017 Fidelity Select Portfolio Investment Approach Fidelity Select Portfolio is an industry-based, equity-focused strategy that seeks to outperform its benchmark through active management. Fundamental, bottom-up research leveraging Fidelity's experienced global health care team is the primary source of idea generation. Our analysis is driven by a data and statistical approach that places an emphasis on valuation through free cash flow and the probability risk-adjusted net present value of future earnings, the standard valuation method in the drug-development industry. Our investment approach includes evaluating a company's drug pipeline, the size of its market opportunity and its relative valuation. We position the fund around four major themes: long-term winners with strong product pipelines our primary focus turnaround situations, breakthrough innovations and early-stage firms with promising science. Sector and industry 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 Portfolio Gross Expense Ratio: 0.75% % 33.74% 21.30% 9.63% 20.25% 15.82% S&P 500 Index 4.48% 14.24% 18.61% 10.81% 14.22% 7.44% MSCI US IMI 25/ % 34.65% 25.26% 12.05% 22.98% 17.71% Morningstar Fund Health 4.44% 23.84% 15.49% 9.35% 16.79% 11.83% % Rank in Morningstar Category (1% = Best) % 46% 9% 8% # of Funds in Morningstar Category Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 12/16/ 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): Rajiv Kaul Trading Symbol: FBIOX Start Date: December 16, 1985 Size (in millions): $9, Morningstar Category: Fund Health 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. Focus funds can be more volatile because of their narrow concentration in a specific industry. The biotechnology industry can be significantly affected by patent considerations, intense competition, rapid technological change and obsolescence, and government regulation. The fund may have additional volatility because it can invest a significant portion of assets in securities of a small number of individual issuers. Not FDIC Insured May Lose Value No Bank Guarantee

2 QUARTERLY FUND REVIEW: Fidelity Select Portfolio AS OF SEPTEMBER 30, 2017 Market Review For the three months ending September 30, 2017, biotechnology stocks, as measured by the industry benchmark, the MSCI U.S. IMI 25/50 Index, returned 12.69%, well ahead of the 4.48% gain of the broadly based S&P 500 index. The broader health care sector gained 3.65% the past three months, finishing as the seventh-best performer among the 11 sectors in the S&P 500. Within health care, however, biotechnology was by far the strongest-performing industry group. In aggregate, biotech stocks saw most of their gain for the quarter in the latter half of August, when the mergers-and-acquisitions (M&A) market heated up. Although M&A had been relatively soft to that point, three deals were finalized in the last week of August. By far, the largest of these was industry heavyweight Gilead Sciences' bid for clinical-stage biopharmaceutical firm Kite Pharma for $11.9 billion. Kite's focus is the development of cancer-immunotherapy drugs, considered one of biotech's hottest areas of research in recent years. The prospect of combining Gilead's financial muscle with Kite's clinical expertise in this area gave the entire biotech group a healthy jolt especially Kite, whose shares rose roughly 73% this quarter. Gilead also fared well, its stock advancing 15%. Other noteworthy standouts in the MSCI biotech index included AbbVie (+24%), Vertex Pharmaceuticals (+18%), Biogen (+15%) and Celgene (+12%). The MSCI index's largest component was Amgen (+9%), which lagged the MSCI index but still managed a healthy gain. Further down the performance scale were index names such as Regeneron Pharmaceuticals (-9%) and Incyte (-7%). LARGEST CONTRIBUTORS VS. BENCHMARK Average Contribution (basis points)* MyoKardia, Inc. Pharmaceuticals 0.43% 38 Alnylam Pharmaceuticals, Inc. 0.67% 25 Spark Therapeutics, Inc. 0.70% 22 Blueprint Medicines Corp. 0.67% 18 Voyager Therapeutics, Inc. * 1 basis point = 0.01%. 0.17% 17 Performance Review For the quarter, the fund returned 10.26%, falling well short of the MSCI U.S. IMI 25/50 Index. Compared with the MSCI index, stock picking in the fund's core area of biotechnology was the biggest detractor by a wide margin, followed by non-index exposure to the pharmaceuticals subindustry. Minimal exposure to index heavyweight AbbVie detracted the most by far versus the MSCI index, given this stock's strong showing this quarter. The company manufactures Humira, a treatment for rheumatoid arthritis that is the world's top-selling drug. The failure of a legal challenge to Humira was the immediate catalyst for the stock this period. Meanwhile, AbbVie continued its efforts to diversify its revenue stream away from Humira with a solid pipeline of late-stage drugs in development. We underweighted Gilead Sciences and sold our modest stake in Kite Pharma in August, and therefore both stocks detracted from our performance versus the MSCI index. Kite was our third-largest relative detractor, while Gilead was the sixth-largest. We'll also note an overweighting in Ultragenyx Pharmaceutical. The stock returned -14% this quarter, weakening after disappointing news on a late-stage study of a medication to treat a genetically inherited muscle-wasting disease. Conversely, the fund's top relative contributor was MyoKardia, an out-of-index position that advanced 220% for the fund the past three months. Investors were pleased when the company announced positive data related to MyoKardia's leading new-drug candidate, mavacamten. The firm said the data indicated the drug was capable of lowering a signal associated with irreparable heart damage. It also helped that MyoKardia said it intends to design its upcoming Explorer trial in a manner that could support a new-drug application. LARGEST DETRACTORS VS. BENCHMARK Average Contribution (basis points)* AbbVie, Inc % -128 Intercept Pharmaceuticals, Inc. 0.68% -51 Kite Pharma, Inc % -41 Regeneron Pharmaceuticals, Inc. 1.39% -30 Radius Health, Inc. 0.87% -28 * 1 basis point = 0.01%. 2 For definitions and other important information, please see Definitions and Important Information section of this Fund Review.

3 QUARTERLY FUND REVIEW: Fidelity Select Portfolio AS OF SEPTEMBER 30, 2017 Outlook and Positioning So far in 2017, biotechnology has been the market's bestperforming industry, with the MSCI index returning 34.65% through the first three quarters of the year. In the short term, where the stock market goes from here is anyone's guess, but the longer-term outlook for the biotechnology industry remains bright, in our opinion. Growth in the group remains primarily a function of clinical results and decisions about regulatory approval. This is why we place such strong emphasis on understanding the science behind various drugs and analyzing new clinical data as it becomes available. Doing so helps us to develop realistic calculations of risk-adjusted net present value (NPV) of expected future earnings, which forms the backbone of our stock-picking decisions. The fund's holdings continue to fit primarily into three buckets. First, generally accounting for well over half of the fund's assets this period, we have what we view as long-term, well-capitalized "winners" with strong pipelines. These are a combination of the larger, more-stable, established biotech firms with positive cash flows and a selection of mid-cap companies that we believe are generally at the latter stages of clinical development. Second representing about one-quarter of the fund's assets are clinical-stage companies with drugs that have achieved "breakthrough" status, a special designation designed to allow expedited development and review of drugs for treating serious or life-threatening conditions. During the past few years, the FDA has granted "breakthrough" status to approximately 42 drugs. The firms making these drugs, in our view, have a higher-thanaverage probability of success. Lastly, roughly 10% of the fund's assets are typically invested in early-stage companies with what we believe to be great promise but higher clinical risk. Approximately 80 to 100 new biotech companies are started each year, and rapid advancements in our understanding of human biology and safe drug delivery bode well for the success of at least some of them. At the same time, we must keep in mind that most drugs in development ultimately fail. At the end of September, the fund's largest individual overweighting was Regeneron Pharmaceuticals, followed closely by Alexion Pharmaceuticals. Even in these two cases, the fund was overweighted by only about 1 percentage point, reflecting our approach of trying to limit risk on any single position. Alexion is focused on developing therapies for patients with devastating and rare disorders. The company's lead product is Soliris, a medication for patients with paroxysmal nocturnal hemoglobinuria or hemolytic uremic syndrome. Additionally, Alexion has what we consider an excellent pipeline of drugs in development. In line with our general preference for smaller companies, our three biggest underweightings at the end of the second quarter were all large-caps: AbbVie, Gilead Sciences and Celgene. 10 LARGEST HOLDINGS Amgen, Inc. Celgene Corp. Regeneron Pharmaceuticals, Inc. Alexion Pharmaceuticals, Inc. Biogen, Inc. Vertex Pharmaceuticals, Inc. Alnylam Pharmaceuticals, Inc. Incyte Corp. BioMarin Pharmaceutical, Inc. Gilead Sciences, Inc. 10 Largest s as a % of Net Assets 40.07% Total Number of s 241 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. ASSET ALLOCATION Asset Class Portfolio Index Change From Prior Quarter Domestic Equities 95.11% 99.54% -4.43% 0.14% International Equities 4.62% 0.46% 4.16% 0.21% Developed Markets 4.48% 0.46% 4.02% 0.20% Emerging Markets 0.00% 0.00% 0.00% 0.00% Tax-Advantaged Domiciles 0.14% 0.00% 0.14% 0.01% Bonds 0.00% 0.00% 0.00% 0.00% Cash & Net Other Assets 0.27% 0.00% 0.27% -0.35% 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. 3 For definitions and other important information, please see Definitions and Important Information section of this Fund Review.

4 QUARTERLY FUND REVIEW: Fidelity Select Portfolio AS OF SEPTEMBER 30, 2017 LARGEST OVERWEIGHTS BY HOLDING Regeneron Pharmaceuticals, Inc. 1.04% Alexion Pharmaceuticals, Inc. 0.98% Alnylam Pharmaceuticals, Inc. 0.93% Blueprint Medicines Corp. 0.90% Galapagos Genomics NV sponsored ADR 0.89% LARGEST UNDERWEIGHTS BY HOLDING AbbVie, Inc % Gilead Sciences, Inc % Celgene Corp % Amgen, Inc % Kite Pharma, Inc % 3-YEAR RISK/RETURN STATISTICS Portfolio Index Beta Standard Deviation 28.77% 23.95% Sharpe Ratio Tracking Error 7.99% -- Information Ratio R-Squared For definitions and other important information, please see Definitions and Important Information section of this Fund Review.

5 QUARTERLY FUND REVIEW: Fidelity Select Portfolio 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. 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. 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 25/50 Index is a modified marketcapitalization-weighted index of stocks designed to measure the performance of 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 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. 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 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