Fidelity Select Semiconductors Portfolio

Transcription

1 Fidelity Select Semiconductors Key Takeaways For the semiannual reporting period ending August 31, 2017, the fund gained 9.69%, lagging the 10.82% return of the MSCI U.S. IMI Semiconductors & Semiconductor Equipment 25/50 Index, but well ahead of the 5.65% advance of the broadly based S&P 500 index. Manager Stephen Barwikowski positioned the fund somewhat more defensively the past six months, which dampened fund performance, as favorable cyclical factors pushed certain semiconductor stocks higher and further stretched their valuations. Versus the MSCI industry index, a sizable underweighting in the semiconductor equipment segment hurt performance most, along with non-index exposure to technology distributors and a modest cash position. Conversely, out-of-index allocations to a number of groups aided relative performance, especially electronic manufacturing services. At period end, Steve believes overall growth rates for semiconductor sales are well above historical levels. He thinks growth will remain strong in certain segments of the chip market, but also believes next year could bring industrywide challenges. 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). Additionally, Select Semiconductors will modify its name-test policy to better reflect the fund's investment focus on manufacturers of semiconductors and related products and of semiconductor equipment. 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 Stephen Barwikowski Fund Facts Trading Symbol: Steve Barwikowski Manager FSELX Start Date: July 29, 1985 Size (in millions): $2, Investment Approach Fidelity Select Semiconductors is an industrybased, equity-focused strategy that seeks to outperform its benchmark through active management. We pursue capital appreciation by identifying stocks that we believe are mispriced based on our expectations for long-term earnings and cash-flow growth. The fund aims to deliver more growth per unit of value than the benchmark by owning quality growth companies at attractive prices. Stock selection and idea generation come from fundamental, bottom-up 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 riskadjusted returns. Due to the cyclical nature of the semiconductor industry, the fund's positioning tends to be influenced by the economic environment, and we look to take advantage of dislocations where our view of the cyclical backdrop differs from that of the market. Sector and industry strategies could be used by investors as alternatives to individual stocks for either tactical- or strategic-allocation purposes. Q: Steve, how did the fund perform for the six months ending August 31, 2017 The fund gained 9.69%, lagging the 10.82% return of the MSCI U.S. IMI Semiconductors & Semiconductor Equipment 25/50 Index, but well ahead of the 5.65% advance of the broadly based S&P 500. The fund also trailed an exceptionally strong peer group average that tracks the broader information technology sector. Looking back on the past 12 months, the fund rose about 28% but nevertheless lagged both the MSCI industry index and the peer average. It handily beat the S&P 500, however. Q: From your perspective, what was noteworthy about the industry the past six months An improving global economy, stable demand for PCs and strong anticipated sales of Apple's iphone 8 device, scheduled for release just after the end of this reporting period, all contributed to solid performance for semiconductor stocks. Healthy demand for chips in the automotive and data-center markets also played a positive role. Overall industry revenue rose at a healthy clip after several years of fairly lackluster growth. My method of identifying mispriced securities based on my analysis of expected long-term growth in earnings and cash flow worked reasonably well this period, but I encountered a few challenges. Q: Would you elaborate on these challenges From a subindustry perspective, the biggest negative versus the MSCI index was the fund's sizable underweighting in the semiconductor-equipment group, which outperformed. Non-index exposure to technology distributors and a modest cash position were other noteworthy negatives. In my view, cyclical risks in the chip-equipment space appeared acute, given very high levels of spending in the memory, logic and display segments, relative to history. I consequently favored semiconductors over equipment stocks this period. As a result, I missed out on a number of 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

3 strong-performing chip-equipment stocks in the MSCI index. Below-index exposure to semiconductor-equipment stocks was part of a broader move to position the fund more defensively. I considered industrywide valuations to be somewhat stretched, and revenue growth to be possibly near a peak. In managing the fund, I'm always aware of how cyclical the chip industry tends to be, and I'm sometimes early in my attempt to anticipate what important trends might develop next. Q: Versus the MSCI index, which stocks were key detractors Two holdings particularly hurt: Nvidia and Qualcomm, which together detracted roughly 2 percentage points from relative performance. Without these two negatives, the fund would have outperformed the MSCI index the past six months. Nvidia, which I significantly underweighted, was among the top-performing stocks in the S&P 500 this period, returning about 67%. Shares of the chip designer rose sharply in May after the company reported a 48% increase in revenue for its fiscal first quarter ending April 30. Known initially for its video-game graphics processors, Nvidia chips now are considered a go-to source for satisfying growing demand from AI (artificial intelligence), VR (virtual reality), cloudcomputing and autonomous-automobile applications. I had been cautious about this stock's valuation early in However, as the company's fundamental story continued to improve, I would have preferred owning more Nvidia stock. Unfortunately, internal capacity limits and regulatory considerations constrained my ability to do so. Q: What about Qualcomm I thought wireless-infrastructure provider and chipmaker Qualcomm represented one of the most compelling values in the market this period. Thus, we carried a sizable overweighting here, making Qualcomm the fund's secondlargest position, on average. That said, the shares remained under pressure, due partly to the legal battle with Apple over patent-royalty issues. Qualcomm's reduced revenue guidance in April turned out to be too optimistic, as Apple decided to withhold all royalty payments while the dispute is being negotiated. I continued to think that Qualcomm would emerge from this battle with its business model basically intact. In the short term, though, our overweighting here hurt. The other negative for Qualcomm was a delay in the firm's proposed acquisition of Netherlands-based NXP Semiconductors. Late in June, European Union antitrust regulators "stopped the clock" on their review of the merger because of missing information. A ruling was expected in October. Q: What factors contributed to the fund's relative result Out-of-index allocations to a number of groups aided relative performance, especially electronic manufacturing services, where Jabil was a key contributor. The shares got a nice bump up after the company reported financial results for its fiscal second quarter in March, as both revenue and earnings beat estimates. Also, the company continued with its plans to realign its global capacity and administrative support infrastructure amid a sluggish macroeconomic scenario. Our stake in Jabil returned 24% this period, and I considerably reduced our exposure here because of my concern about the stock's valuation. Overweighting Micron Technology also was timely. Micron and a number of other semiconductor stocks benefited this period, as high-growth businesses such as AI and online gaming created a boom for memory products and processors. Another source of demand was cryptocurrency mining, which involves using computer power to solve complicated math problems involved in generating currencies such as Bitcoin and tallying transactions for them. Micron stock advanced about 36% this period. Avoiding weak-performing index name Advanced Micro Devices also helped. This stock was actually our top relative contributor for the period. AMD produced positive secondquarter earnings, but just barely, and the company hasn't reported a full-year profit since 2011, as it typically struggles to compete with stronger players such as Intel and Nvidia. Q: What is your outlook as of August 31, Steve Most of the key fundamentals for the semiconductor industry remain strong. While that's positive for the short term, I think it raises questions about how things will play out for the rest of 2017 and 2018, particularly if demand and other factors experience a reversion to the historical industry average. I remain sensitive to valuations, which I believe appear somewhat stretched in many cases. Consequently, I'm inclined to take profits where I can. Moreover, I will seek to take advantage of any market dislocations, should they present themselves. 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 Steve Barwikowski on the auto market as a source of semiconductor demand: "Although electric vehicles (EVs) still account for a relatively small portion of the broader semiconductor market, I believe they could be important sources of chip demand in coming years. The semiconductor content for the typical automobile has grown to nearly $400 per car, on average. However, semiconductor content for an EV easily can exceed $2,000, largely due to battery and power-management requirements. "A number of automakers have big plans for expanding their EV lineups. One prime mover here is Tesla, which began rolling out its highly anticipated Model 3 in July. Although initial production numbers have been modest, the company's goal is to produce 500,000 cars annually, beginning in "Meanwhile, German automaker Daimler recently said it expects to bring more than 10 new electric models to market by 2022, accelerating its previously targeted date by three years. What's more, in an effort to move to the forefront of the shift to electrification, Swedish car company Volvo has committed to making 1 million EVs by "Apart from vehicle electrification, car markets are relying on semiconductor technology for enhanced comfort and safety, as well as self-driving capabilities. The lowest level of driver assistance, which can add about $100 worth of semiconductors per car, requires full driver attention and includes features such as automated breaking and adaptive cruise control. "At the high end, you have full autonomy and driverless cars, which can add about $500 of semiconductor content per car. The incremental content comes from multiple sensors, cameras and secure wireless connections. Also, the inputs from sensors need to be interpreted and acted on by a sophisticated onboard computer. "I'll continue to monitor this market as it develops and look for attractive opportunities." Holding Advanced Micro Devices, Inc. Micron Technology, Inc. Jabil, Inc. ON Semiconductor Corp. SMART Global Holdings, Inc. * 1 basis point = 0.01%. Market Segment Average Relative Relative Contribution (basis points)* Semiconductors -1.45% 34 Semiconductors 1.10% 30 Electronic Manufacturing Services 1.55% 29 Semiconductors 3.43% 26 Semiconductors 0.20% 25 LARGEST DETRACTORS VS. BENCHMARK Holding Market Segment Average Relative Relative Contribution (basis points)* NVIDIA Corp. Semiconductors -2.99% -133 Qualcomm, Inc. Semiconductors 6.24% -96 Lam Research Corp. Avnet, Inc. Semiconductor Equipment Technology Distributors -2.33% % -39 Intel Corp. Semiconductors 1.66% -22 * 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 Intel Corp. Semiconductors 16.08% 22.24% Qualcomm, Inc. Semiconductors 14.05% 14.29% Broadcom Ltd. Semiconductors 11.16% 8.02% Analog Devices, Inc. Semiconductors 6.16% 4.94% Micron Technology, Inc. Semiconductors 4.88% 4.47% ON Semiconductor Corp. Semiconductors 4.62% 2.99% Maxim Integrated Products, Inc. Semiconductors 3.30% 2.72% NVIDIA Corp. Semiconductors 3.10% 1.71% Cypress Semiconductor Corp. Semiconductors 2.54% 0.35% Marvell Technology Group Ltd. Semiconductors 2.29% 3.36% 10 Largest Holdings as a % of Net Assets 68.18% 70.34% 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 Semiconductors 84.58% 81.54% Electronic Manufacturing Services 2.96% 2.41% Internet Software & Services 2.89% 2.08% Technology Distributors 2.05% 1.39% Communications Equipment 1.90% 0.51% Semiconductor Equipment 1.14% 6.23% Technology Hardware, Storage & Peripherals 0.89% 1.39% It Consulting & Other Services 0.30% -- Systems Software 0.09% -- ASSET ALLOCATION Asset Class Six Months Ago Domestic Equities 82.24% 82.58% International Equities 14.55% 14.33% Developed Markets 13.83% 13.45% Emerging Markets 0.72% 0.88% Tax-Advantaged Domiciles 0.00% 0.00% Bonds 0.00% 0.00% Cash & Net Other Assets 3.21% 3.09% 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 Semiconductors Gross Expense Ratio: 0.77% % 16.25% 27.64% 19.50% 24.17% 11.15% S&P 500 Index 5.65% 11.93% 16.23% 9.54% 14.34% 7.61% MSCI US IMI Semiconductors & Semiconductor Equipment 25/ % 16.65% 28.77% 17.91% 22.45% 9.45% Morningstar Fund Technology 15.03% 25.16% 28.35% 14.46% 17.65% 9.95% % Rank in Morningstar Category (1% = Best) % 8% 5% 32% # 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. 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 electronics industry can be significantly affected by rapid obsolescence, intense competition, and global demand. Prior to 10/1/16, Select Semiconductors was named Select Electronics. 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. 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 Semiconductors & Semiconductor Equipment 25/50 Index is a modified market-capitalization-weighted index of stocks designed to measure the performance of Semiconductors & Semiconductor 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. RANKING INFORMATION 2017 Morningstar, Inc. All rights reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar 7

8 Manager Facts Steve Barwikowski is a portfolio manager and research analyst 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, Mr. Barwikowski is responsible for managing Select Semiconductors and Fidelity Advisor Semiconductors Fund (co-manager from , sole manager since 2013). He also manages the telecommunication services and information technology sleeves of Fidelity Series Stock Selector Large Cap Value Fund (since 2012), Fidelity Advisor Series Stock Selector Large Cap Value Fund (since 2012), Fidelity Stock Selector Large Cap Value Fund (since 2011), Fidelity Value Fund (since 2010), and Fidelity Advisor Value Fund (since 2010). In addition, he covers the large-cap semiconductors industry. Prior to assuming his current responsibilities, Mr. Barwikowski was a research analyst within the High Income division from 2002 to In this role, he was responsible for covering the technology and telecommunications sectors and assisting with Fidelity Leveraged Company Stock Fund, Fidelity Convertible Securities Fund, and Fidelity Advisor High Income Advantage Fund. He has been in the investments industry since joining Fidelity as a research associate in Mr. Barwikowski earned his bachelor of science degree in finance and operations and strategic management from Boston 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 December 31, Annualized 5 10 / LOF 1 Select Semiconductors Gross Expense Ratio: 0.77% % 22.27% 28.62% 13.72% 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.