Fidelity Select Software and IT Services Portfolio

Transcription

1 Fidelity Select Software and IT Services Key Takeaways For the semiannual reporting period ending August 31, 2017, the fund gained 15.25%, about in line with the 15.88% result of the MSCI U.S. IMI Software & Services 25/50 Index and handily outpacing the 5.65% advance of the broad-market S&P 500. The software and IT services segment started the period on a strong note, having recovered from the group's modest pullback following the November U.S. presidential election. Throughout the six months, as investors rewarded companies with strong fundamentals, these stocks continued to gain momentum. Stock selection in internet software & services had by far the biggest negative impact on performance versus the MSCI industry index. Here, a sizable position in Akamai Technologies was the fund's biggest individual detractor by a wide margin. Conversely, a large underweighting in the weak IT consulting & other services category was a notable contributor. Stock selection here also helped, led by the fund's underexposure to IBM. Looking ahead, Manager Ali Khan plans to remain focused on firms he believes are well-positioned to capitalize on themes such as cloud computing, artificial intelligence (AI) and machine learning, aiming to buy them at attractive valuations and then hold them for the longer term. 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 Ali Khan Fund Facts Trading Symbol: Ali Khan Manager FSCSX Start Date: July 29, 1985 Size (in millions): $4, Investment Approach Fidelity Select Software and IT Services is an industry-based, equity-focused strategy that seeks to outperform its benchmark through active management. The fund's investment process is predicated on finding above-average businesses with above-average growth rates and that trade at below-average valuations, in an effort to generate strong risk-adjusted portfolio returns for the long term. Our preference is to purchase good businesses at the right prices. The portfolio is constructed stock by stock from the bottom up, seeking capital appreciation from both earnings growth and valuation expansion over the long run. The fund favors self-funding business models with significant barriers to entry and strong management teams especially if the stocks can be purchased at a favorable price. Stock selection and idea generation come from fundamental research that leverages Fidelity's deep and experienced global technology team. We consider attractive technology stocks outside of the benchmark that offer the potential for favorable risk-adjusted returns. Sector and industry strategies could be used by investors as alternatives to individual stocks for either tactical- or strategic-allocation purposes. Q: Ali, how did the fund perform for the six months ending August 31, 2017 The fund gained 15.25%, about in line with the 15.88% result of the MSCI U.S. IMI Software & Services 25/50 Index and well ahead of the broad-market S&P 500. The fund's return roughly matched the peer group average. Looking slightly longer term, the fund's 26% 12-month gain modestly trailed the MSCI industry index, topped the S&P 500 by a wide margin and lagged the peer average. Q: How was the investment environment for software and IT services the past six months Software and IT services stocks started the period on a strong note, having recovered from the group's modest pullback after the November U.S. election. Investors turned their focus to companies with strong fundamentals, rewarding many software and related companies, which have been on track to demonstrate solid growth. As the period progressed, these stocks gained momentum and finished the six-month time frame as some of the best performers within the S&P 500. Even with this heady showing, though, we saw some volatility a few dips and rallies in certain stocks within the segment. Nonetheless, the general trend was certainly up. Q: Given this backdrop, how did your approach to managing the fund evolve Consistent with my process, I generally took advantage of pullbacks in certain stocks to increase our stakes in names I thought offered the best long-term prospects for the fund. I look for what I consider good software and internet-related businesses at the right prices. I usually seek to buy their shares when I think an investment story is controversial or when I think the market, in the short term, is undervaluing long-term earnings potential. I seek companies that I believe are best-positioned to benefit from what I see as the most important long-term trends in the segment. Specifically, I try to identify business models with aboveaverage revenue-growth potential over the long term and a 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

3 sustainable competitive advantage. Lastly, I seek firms that have durable cash flow and a strong management team. Q: What hampered the fund's relative result Versus the industry index, stock picks in internet software & services had by far the biggest negative impact. Here, a sizable position in Akamai Technologies was our biggest individual detractor by a wide margin. Initially, I bought Akamai shares partly on my view that the firm is a market leader in content delivery, an area I believe is poised to benefit from growth in online traffic from streaming video and enterprise applications delivered over the internet. The past six months, however, the company faced numerous challenges, including competitive pressure and the fact that some of its biggest clients are moving off the Akamai platform. Additionally, in May, the stock fell dramatically after the firm released lackluster first-quarter earnings. I took this opportunity to add to our position, making it one of the fund's largest holdings as of August 31. I remain confident in Akamai's longer-term prospects. Also in internet software & services, we were hurt by our stake in Shutterstock, a digital marketplace for stock images, music and video. I established the position in March, so our overweighting hurt as the company suffered from growing pains resulting from numerous required incremental investments. These squeezed Shutterstock's margins, as did challenges from rivals such as Adobe Systems, which was looking to add stock photos to its own offerings. I'll have more to say about Adobe later on. I am keeping a close eye on Shutterstock, and I believe I have a good understanding of the hurdles the company faces. As of August 31, I am confident Shutterstock is a solid company that I bought at a reasonable price and that it has potential for good long-term growth. Q: What else detracted The fund's investment in gas-card payment provider FleetCor Technologies disappointed. From my perspective, the firm has done well in growing organically and through acquisitions. Recently, though, some questions arose about FleetCor's accounting obfuscating its organic growth, and the stock fell. As with Akamai, I used the dip to buy more of FleetCor. These recent challenges have not changed my view that the company can grow revenue and profits over the long term. Further, its valuation seemed reasonable to me, given my conviction in FleetCor's long-term outlook. index, along with security selection here. Stock choices in application software also contributed. My long-term view is that application-software companies are better positioned than their infrastructure-software counterparts, and cloud computing is accelerating that trend. The fund's top two relative contributors this period illustrate my conviction in this thesis. I chose to underweight IBM, given my belief the company will continue to face challenges as cloud computing becomes more mainstream. IBM has been one of the leaders in infrastructure software and services, with a strong business over the long term. However, partly due to competition resulting from developments made by Amazon Web Services and other cloud-computing providers, IBM's revenue has declined for five consecutive years. Shares of IBM returned -19% this period. I ended up adding to the fund's stake in IBM, though, in a move largely related to the stock's valuation which I saw as very cheap and reflective of the challenges ahead for Big Blue. On the application-software side, holding a larger-thanindex position in Adobe Systems proved beneficial. Among our largest holdings, Adobe is a market leader in digital media and marketing software. Both of Adobe's primary products, Creative Cloud and Marketing Cloud, have been growing consistently, gaining market share and increasing the company's profitability. Shares of Adobe rose 31% for the six-month period, boosting our relative result. Q: What are you closely following at period end The broad secular themes that have driven the market since early in 2017 are still very much in play. Cloud computing remains one of the fund's most important themes; I am also watching other trends that may offer new opportunities, such as big data, AI and machine learning. While many of the industry's biggest players Microsoft, Alphabet (Google) and Facebook are already investing in these areas, several others are also focusing on capitalizing on these trends. As a result, I will be watching for companies focusing on these trends, but also watching for companies experiencing a strong run so I can take money off the table to invest in others that fall in line with my investment parameters and offer reasonable valuations with solid long-term growth prospects. Q: What helped A substantial underweighting in the weak IT consulting & other services group helped most versus the MSCI industry 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 Ali Khan on cloud computing and big data: "As noted in the past, I consider cloud computing the most important trend I follow. Simply put, the cloud essentially consists of applications and infrastructure hosted and delivered over the internet rather than on a customer's physical premises. I think we are still in the initial innings here as cloud computing transitions from early adopters to a mainstream technology. "So-called big data and machine learning are other trends I've been spending more time analyzing. Most companies have mass quantities of data both structured and unstructured and we finally have the tools necessary to analyze and create 'use cases' for that data. "On the consumer front, we have several examples of how big data is being used. Vendors are offering tools that can help retailers track delivery data, or that can track data from every server and network port in a company to monitor for security vulnerabilities before a breach even occurs. "For the everyday consumer, the use of big data is ever-present. We have Amazon.com predicting what we may want to buy, Google predicting what we are going to search for and Facebook figuring out which parts of our newsfeed we'd like to see. "When developers are looking to create enterpriselevel tools, they are directly inspired by what has succeeded in the consumer internet arena. "With all of this in mind, I'm considering how the fund is positioned for these emerging trends. We've long owned Alphabet (Google) the fund's largest holding as of August 31 (combining its Class A and Class C shares). While Google has been an early adopter, I believe we will be seeing more firms with the ability to leverage more data more efficiently over time. I seek to buy such companies when the rest of the market may not be fully appreciating their potential, establishing positions at what I consider reasonable prices." Holding IBM Corp. Market Segment It Consulting & Other Services Average Relative Relative Contribution (basis points)* -2.40% 113 Adobe Systems, Inc. Application Software 1.89% 26 Workday, Inc. Class A Application Software 1.42% 22 Accenture PLC Class A PayPal Holdings, Inc. * 1 basis point = 0.01%. It Consulting & Other Services Data Processing & Outsourced Services LARGEST DETRACTORS VS. BENCHMARK Holding Akamai Technologies, Inc. FleetCor Technologies, Inc. Market Segment Internet Software & Services Data Processing & Outsourced Services -1.95% % 19 Average Relative Relative Contribution (basis points)* 2.24% % -35 Qualcomm, Inc. Semiconductors 1.28% -28 Shutterstock, Inc. Internet Software & Services 0.43% -23 Aimia, Inc. Advertising 0.09% -19 * 1 basis point = 0.01%. 4 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 Microsoft Corp. Systems Software 14.13% 12.66% Facebook, Inc. Class A Internet Software & Services 12.38% 11.60% Alphabet, Inc. Class C Internet Software & Services 10.79% 10.34% Alphabet, Inc. Class A Internet Software & Services 8.44% 9.07% Visa, Inc. Class A Data Processing & Outsourced Services 4.88% 5.75% Adobe Systems, Inc. Application Software 4.27% 3.68% Salesforce.com, Inc. Application Software 3.60% 3.02% MasterCard, Inc. Class A Data Processing & Outsourced Services 3.11% 3.86% Akamai Technologies, Inc. Internet Software & Services 2.68% 2.02% PayPal Holdings, Inc. Data Processing & Outsourced Services 2.66% 2.15% 10 Largest Holdings as a % of Net Assets 66.95% 64.61% 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 Internet Software & Services 37.92% 37.05% Data Processing & Outsourced Services 17.72% 19.09% Systems Software 17.08% 17.01% Application Software 13.64% 13.20% It Consulting & Other Services 5.82% 3.19% Internet & Direct Marketing Retail 1.52% 2.38% Home Entertainment Software 1.25% 2.16% Semiconductors 1.22% 1.15% Communications Equipment 0.66% -- Health Care Technology 0.20% 0.26% Other 0.00% 0.00% ASSET ALLOCATION Asset Class Six Months Ago Domestic Equities 96.62% 95.02% International Equities 0.40% 0.66% Developed Markets 0.00% 0.19% Emerging Markets 0.40% 0.47% Tax-Advantaged Domiciles 0.00% 0.00% Bonds 0.00% 0.00% Cash & Net Other Assets 2.98% 4.32% 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 Software and IT Services Gross Expense Ratio: 0.76% % 26.04% 25.92% 17.49% 20.31% 14.64% S&P 500 Index 5.65% 11.93% 16.23% 9.54% 14.34% 7.61% MSCI US IMI Software & Services 25/ % 25.80% 26.37% 17.41% 19.11% 12.91% Morningstar Fund Technology 15.03% 25.16% 28.35% 14.46% 17.65% 9.95% % Rank in Morningstar Category (1% = Best) % 26% 19% 4% # of Funds in Morningstar Category Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 07/29/ 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. 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 software and computer services industry can be significantly affected by intense competition, aggressive pricing, technological innovations, and product obsolescence Morningstar, Inc. All rights reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or redistributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Fidelity does not review the Morningstar data and, for mutual fund performance, you should check the fund's current prospectus for the most up-to-date information concerning applicable loads, fees and expenses. % Rank in Morningstar Category is the fund's total-return percentile rank relative to all funds that have the same Morningstar Category. The highest (or most favorable) percentile rank is 1 and the lowest (or least favorable) percentile rank is 100. The top-performing fund in a category will always receive a rank of 1%. % Rank in Morningstar Category is based on total returns which include reinvested dividends and capital gains, if any, and exclude sales charges. Multiple share classes of a fund have a common portfolio but impose different expense structures. RELATIVE WEIGHTS Relative weights represents the % of fund assets in a particular market segment, asset class or credit quality relative to the benchmark. A positive number represents an overweight, and a negative number is an underweight. The fund's benchmark is listed immediately under the fund name in the Performance Summary. IMPORTANT FUND INFORMATION Relative positioning data presented in this commentary is based on the fund's primary benchmark (index) unless a secondary benchmark is provided to assess performance. The Board of Trustees unanimously approved a proposal to shareholders for trustee election that would combine oversight of Fidelity's sector funds with Fidelity's broader equity and high income funds under a single Board of Trustees. If approved, the unified Board would be effective on or about 3/1/18. INDICES It is not possible to invest directly in an index. All indices represented are unmanaged. All indices include reinvestment of dividends and interest income unless otherwise noted. 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 Software & Services 25/50 Index is a modified market-capitalization-weighted index of stocks designed to measure the performance of Software & Services 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. RANKING INFORMATION 7

8 Manager Facts Ali Khan is a research analyst 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. Khan is responsible for the coverage of the software industry including Apple, Microsoft, Oracle, Adobe, and Salesforce.com. Additionally, he manages Fidelity Select Software and IT Services. Prior to assuming his current responsibilities, Mr. Khan was responsible for covering enterprise networking, telecommunications equipment, and internet infrastructure. He also managed Fidelity Select Communications Equipment and Fidelity Advisor Communications Equipment Fund. Previously, he was an equity research associate responsible for providing research and stock recommendations to portfolio managers for the semiconductor, hard disk drive, and LED industries. Before joining Fidelity full time in 2008, Mr. Khan worked as a summer intern in Fidelity's Equity division. He has been in the financial industry since Mr. Khan earned his bachelor of arts degree in economics and political science from Amherst College. 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 Software and IT Services Gross Expense Ratio: 0.76% % 17.97% 19.64% 14.01% 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 07/29/ 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. 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.