Fidelity Select Energy Service Portfolio

Transcription

1 Fidelity Select Energy Service Key Takeaways For the semiannual reporting period ending August 31, 2017, the fund returned %, notably outperforming the % result of the MSCI U.S. IMI Energy Equipment 25/50 Index. The fund significantly trailed the 5.65% advance of the broad-based S&P 500 index. A delay in the reduction of OPEC oil exports and the failure of global crude oil inventories to decline as rapidly as expected led to weaker-than-expected sentiment for energy service stocks the past six months, which performed poorly as a group. The fund outperformed the MSCI industry index due largely to favorable security selection within the oil and gas drilling industry. Among the top relative contributors in this group were two sizable non-index positions: Odfjell Drilling and Borr Drilling. Conversely, the fund's biggest relative detractors were overweighted positions in diversified services provider Tetra Technologies and sand producer Smart Sand. Manager Ben Shuleva believes the outlook for energy service stocks and crude oil prices is likely to improve over the next 12 months, though he doesn't expect it to be a tide that lifts all boats. 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 Ben Shuleva Fund Facts Trading Symbol: Ben Shuleva Manager FSESX Start Date: December 16, 1985 Size (in millions): $ Investment Approach Fidelity Select Energy Service is an industrybased, equity-focused strategy that seeks to outperform its benchmark through active management. The fund targets and invests in companies with two primary characteristics: high-quality businesses with compelling growth prospects and stocks that are cheap relative to our benchmark. We believe this combination can lead to outperformance in the long run, as firms with more-defensible business models tend to compound value over time. Stock selection and idea generation come from in-depth research that leverages Fidelity's deep and experienced global energy team. We start with detailed industry analysis that helps identify trends among various companies and sub-segments. We then look for firms that are well-positioned and have high barriers to entry, attractive business models, positive secular (long-term) growth drivers and strong underlying fundamentals. Sector and industry strategies could be used by investors as alternatives to individual stocks for either tactical- or strategic-allocation purposes. Q: Ben, how did the fund perform for the sixmonth period ending Aug. 31, 2017 The fund returned % for the period, materially outperforming the % result of the MSCI U.S. IMI Energy Equipment 25/50 Index, but significantly trailing the 5.65% advance of the broad-based S&P 500 index and lagging its peer group. Looking slightly longer term, the fund returned -8.02% for the trailing 12 months, handily outperforming the % return for the MSCI industry benchmark, but significantly lagging the 16.23% advance of the S&P 500 index, while slightly topping its peer average. Q: What factors caused energy services stocks to perform poorly the past six months Going into 2017, there was a lot of optimism that crude oil prices would move higher. In late 2016, the Organization of the Petroleum Exporting Countries (OPEC) said it would pare oil production, removing supply from the markets. In addition, I expected global inventory levels for crude oil to move lower. These factors would have been supportive of higher crude oil prices, which typically result in higher earnings for services companies. However, in the early part of the period, global inventory levels didn't fall as aggressively as I expected. And although OPEC cut production, it didn't dramatically reduce crude exports. At the same time, some OPEC countries Libya and Nigeria unexpectedly increased production. As a result of these factors, the per-barrel price of U.S. crude (West Texas Intermediate) fell about 12% this period, and global oil prices (Brent North Sea) fell about 6%. During the last couple of months of the period, inventories did decline more significantly, and OPEC cuts began to resonate. However, the delayed timing of these drivers led to weak sentiment for energy service stocks. Q: What drove the fund's outperformance relative to the MSCI industry benchmark Even though I expected the market climate for energy service stocks to improve in 2017, I still felt there would be 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

3 "winners" and "losers." While the backdrop was worse than I expected, stock picking within the oil & gas drilling industry was the largest contributor by a wide margin. Our holdings in this segment held up much better than those in the index. Elsewhere, non-index exposure to the refining & marketing and storage & transportation industries added value. In addition, the fund's foreign holdings modestly contributed overall, aided in part by a generally weaker U.S. dollar. Q: What characteristics about the fund helped it hold up better than the industry overall I focus on attractively valued higher-quality companies with what I consider unique attributes, and I'm always mindful of companies operating in markets with high barriers to entry, particularly in a challenging environment for energy. Although there are some energy service businesses, such as oil drilling, with low-barrier-to-entry dynamics, there are others that are harder to get into because they have more technology requirements, higher capital requirements, and require extensive scale and expertise. For example, Odfjell Drilling is a Norwegian-centric offshore drilling and well-services company that specializes in "harsh environment" offshore floating rigs; there are only about 20 of these rigs around the world, and Odfjell owns a few of them. Even though the offshore-rig business generally has been very poor due to massive oversupply, falling prices and dramatically lower utilization, Odfjell's pricing and utilization have remained fairly steady due to its unique rig assets and the specialized services it provides. Our sizable non-index position in Odfjell gained about 82% this period, making it our top contributor. Q: What other stocks helped Norway-based Borr Drilling, another large out-of-index holding, gained 2% for the fund. Borr is a newer offshore drilling company with an entrepreneurial management team that I believe knows how to create shareholder value. This period, Borr expanded its fleet by acquiring 17 rigs at low prices and won a contract for drilling off Nigeria. I trimmed our stake but Borr remained a large fund holding at period end. Elsewhere, our large position in oil services firm Baker Hughes held up relatively well, and was a key contributor. The stock got support from its official July merger with General Electric's oil and gas operations, allowing me to reduce the fund's overweighting. Q: What stocks disappointed Our non-index stake in Tetra Technologies was the fund's biggest detractor (-54%). In my view, Tetra is misunderstood, largely because it has a sizable stake in CSI Compressco, another fund holding and a provider of compression services for oil and gas production. Based on its financial reports, Tetra appears to maintain a significant amount of debt, but a majority of it is actually the responsibility of CSI. So Tetra is not as highly leveraged as the market thinks. Further, Tetra has some high-quality businesses with decent barriers to entry, such as its completion-fluids business. It is a sizable holding because I believe the market will realize the value I see in the company going forward. Smart Sand was another overweighting that detracted, as our investment in the stock returned -65%. I was bearish on sand providers but maintained a position in Smart Sand given its solid balance sheet, and the company's highquality sand production, which is in demand. Nonetheless, sand providers fared poorly due to growing concern that new discoveries of sand near the U.S.'s main shale oil production hub, the Permian Basin in Texas, will be cheaper and more accessible to E&P companies operating there. Currently, sand is largely mined in other states, such as Wisconsin, put on a rail car and transported to the Permian. There were other sand providers in the index, such as U.S. Silica Holdings (-46%) and Fairmount Santrol Holdings (-68%), that I avoided or significantly underweighted, and these positions were notable relative contributors this period. Lastly, underweighting index giant Schlumberger (-21%) hurt the fund's relative return, as the stock held up better than the industry index and its peers. A larger percentage of Schlumberger's business is tied to offshore drilling, and I felt there were better opportunities in other companies tied to U.S. shale production. I should note that Schlumberger was the fund's largest holding on an absolute basis, representing 16% of assets as of August 31. Q: Ben, what's your outlook for energy stocks I remain positive on the backdrop for oil prices and service companies in general over the intermediate term, but I don't believe it will be a panacea for the entire industry. It's unlikely that energy service activity levels as depicted by the active U.S. oil rig count will rebound to anywhere near the peak seen in Back then, a significant amount of drilling capacity was built out, and it's hard to see the industry reaching peak capacity-utilization levels in the near term. From an investment standpoint, this type of environment provides opportunities to identify companies in niche businesses with higher utilization, high barriers to entry and pricing power, as well as stocks that are true value opportunities with misunderstood fundamentals. 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 Ben Shuleva elaborates on his investment approach: "Despite the difficult market environment for energy stocks the past six months, my investment approach remains unchanged. I plan to keep focusing on companies that are of higher quality than the average energy service company, those that maintain unique business models with high barriers to entry, and those that are trading at cheaper valuations. I believe the combination of these characteristics can lead to good performance for the fund relative to the industry index over the long term. "During the past six months, there were several holdings reflecting my approach that rewarded shareholders, and other holdings that had yet to pay off. For example, RigNet was a large overweighting that held up fairly well. The company provides satellite and data communication services to help exploration & production companies become more efficient in the oil patch. I consider RigNet a high-quality company that doesn't have a lot of competitors, and I remained optimistic about its value proposition and growth outlook. "Conversely, Dril-Quip, a significant fund overweighting, is one of very few companies that provide wellheads and other products for offshore drilling rigs, so I consider it a company with a more defensible business model. Even during the challenging environment this period, the company's pricing held up and its profit margins remained steady relative to other energy industries that saw a massive decline in pricing. Dril-Quip underperformed the past six months. However, I maintained a large position at period end because I have conviction in the company's long-term outlook." Holding Market Segment Average Relative Relative Contribution (basis points)* Odfjell Drilling A/S Oil & Gas Drilling 2.77% 184 Borr Drilling Ltd. Oil & Gas Drilling 3.41% 92 Baker Hughes, Inc. RigNet, Inc. BW Offshore Ltd. * 1 basis point = 0.01%. LARGEST DETRACTORS VS. BENCHMARK Holding TETRA Technologies, Inc. Smart Sand, Inc. Schlumberger Ltd. Tesco Corp. Frank's International NV * 1 basis point = 0.01%. Market Segment 2.46% % % 50 Average Relative Relative Contribution (basis points)* 4.43% % % % % 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 Schlumberger Ltd % 16.90% Halliburton Co % 8.66% Baker Hughes, a GE Co. Class A 5.71% -- Oceaneering International, Inc. 4.97% 3.83% TETRA Technologies, Inc. 4.79% 4.58% Borr Drilling Ltd. Oil & Gas Drilling 3.87% 3.14% RigNet, Inc. 3.77% 3.75% Odfjell Drilling A/S Oil & Gas Drilling 3.65% 1.52% Dril-Quip, Inc. 3.63% 3.98% Tesco Corp. 3.42% 3.10% 10 Largest Holdings as a % of Net Assets 63.48% 65.85% 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 78.42% 84.09% Oil & Gas Drilling 18.80% 12.80% Oil & Gas Storage & Transportation 2.30% 1.98% Construction & Engineering 0.29% 0.18% Marine 0.07% -- ASSET ALLOCATION Asset Class Six Months Ago Domestic Equities 71.24% 74.03% International Equities 28.64% 26.16% Developed Markets 22.20% 22.37% Emerging Markets 6.44% 3.79% Tax-Advantaged Domiciles 0.00% 0.00% Bonds 0.00% 0.00% Cash & Net Other Assets 0.12% -0.19% 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 Service Gross Expense Ratio: 0.85% % % -8.02% % -6.61% -5.88% S&P 500 Index 5.65% 11.93% 16.23% 9.54% 14.34% 7.61% MSCI US IMI Energy Equipment & Service 25/ % % % % -7.70% -5.28% Morningstar Fund Equity Energy % % -9.69% % -6.31% -3.15% % Rank in Morningstar Category (1% = Best) % 68% 63% 80% # 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 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 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 service industry can be significantly affected by the supply of and demand for specific products or services, the supply of and demand for oil and gas, the price of oil and gas, exploration and production spending, government regulation, world events, and economic conditions. 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. RANKING INFORMATION 2017 Morningstar, Inc. All rights reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or redistributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Fidelity does not review the Morningstar data and, for mutual fund performance, you should check the fund's current prospectus for the most up-to-date information concerning applicable loads, fees and expenses. % Rank in Morningstar Category is the fund's total-return percentile rank relative to all funds that have the same Morningstar Category. The highest (or most favorable) percentile rank is 1 and the lowest (or least favorable) percentile rank is 100. The top-performing fund in a category will always receive a rank of 1%. % Rank in Morningstar Category is based on total returns which include reinvested dividends and capital gains, if any, and exclude sales charges. Multiple share classes of a fund have a common portfolio but impose different expense structures. RELATIVE WEIGHTS 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. MSCI US IMI Energy Equipment 25/50 Index is a modified market-capitalization-weighted index of stocks designed to measure the performance of Energy Equipment 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. 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. 7

8 Manager Facts Ben Shuleva is a research analyst and 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, he is responsible for researching energy companies for Fidelity's diversified and energy-specific funds. He also manages the Select Energy Service (since 2013). Prior to assuming his current position in 2011, Mr. Shuleva was an equity research associate at FMR Co. from 2008 to 2011 where he began his career researching stocks. He has been in the financial industry since Mr. Shuleva earned his bachelor degree in finance from Southern Methodist University. 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 Service Gross Expense Ratio: 0.85% % % -4.18% -5.36% 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 12/16/ 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.