Fidelity Select Banking Portfolio

Transcription

1 Fidelity Select Banking Key Takeaways For the semiannual reporting period ending August 31, 2017, the fund returned -5.72%, slightly lagging the -5.62% return of the MSCI U.S. IMI Banks 5% Capped Linked Index, and significantly trailing the 5.65% gain of the broadly based S&P 500 index. Following a huge rally in bank stocks after the U.S. presidential election, the group peaked around the beginning of the period and consolidated thereafter. Against this backdrop, the managers' emphasis on high-quality banks with diversified revenue streams produced a negative return just slightly below that of the industry benchmark. Out-of-index exposure to consumer finance names hurt most versus the MSCI index. Conversely, non-index stakes in property & casualty insurance and in asset management & custody banks bolstered relative performance. On April 3, 2017, Matthew Reed became sole Manager of the fund, after having served as Co-Manager with John Sheehy since September 1, 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. These changes will not impact how the funds are managed. Additionally, the Board has agreed to present a proposal to shareholders to reclassify Select Banking as a nondiversified fund, which would allow it to focus its investments more heavily in securities of fewer issuers. 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). 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 Matthew Reed Fund Facts Trading Symbol: Matthew Reed Manager FSRBX Start Date: June 30, 1986 Size (in millions): $ Investment Approach Fidelity Select Banking is an industry-based, equity-focused strategy that seeks to outperform its benchmark through active management. The fund focuses on higher-quality companies, as measured by return on equity, which we believe can drive robust growth and create more-attractive risk-adjusted returns for shareholders. Additionally, the fund targets improving businesses where such improvement is underappreciated by the market and allows the company to transition to a more profitable franchise in the future. We look for firms with attractive valuations relative to the index, and believe combining high quality and low valuation should compound returns over time with lower risk of multiple compression, as well as less downside capture. Stock selection and idea generation come from fundamental, bottom-up research that leverages Fidelity's deep and experienced global financials team. We consider attractive financial stocks outside of the benchmark that offer the potential for favorable riskadjusted returns. Sector and industry strategies could be used by investors as alternatives to individual stocks for either tactical- or strategic-allocation purposes. Q: Matt, how did the fund perform for the six months ending August 31, 2017 The fund returned -5.72%, slightly lagging the -5.62% return of the MSCI U.S. IMI Banks 5% Capped Linked Index, and significantly trailing the 5.65% gain of the S&P 500 index. The fund also trailed its peer group average, which tracks the broader financials sector. Looking back a full 12 months, the fund did much better on an absolute basis, modestly lagging the MSCI index but outpacing both the S&P 500 and the peer average. Q: What was significant about the performance of banking stocks the past six months Following a huge rally after the U.S. presidential election, banking stocks peaked around the beginning of the period and consolidated thereafter. It's not uncommon for stocks to take a "breather" after large gains, and although economic activity was relatively healthy, slower loan growth and a flattening yield curve reflecting the yields at different maturities of securities of comparable quality weighed on bank shares and expectations. Additionally, there was more uncertainty around the timing, pace and potential outcome of things like regulatory and tax reform. Such uncertainty was a headwind for share prices in the industry. I think the flattening yield curve caused by higher shortterm rates and lower longer-term rates captured the market's uncertainty best. Longer-term rates worked lower, as the U.S. economy continued to provide mixed signals on the outlooks for growth and inflation. The compression in longer-term yields represented a modest drag on bank earnings. Just as important, I believe it signaled the possibility of fewer Fed rate hikes in the future. Against this backdrop, our emphasis on high-quality banks with diversified revenue streams produced a negative return just slightly below that of the industry benchmark. Despite the industry's lackluster performance, we saw improved profitability versus numbers a year earlier, as well as some progress on the regulatory side this period. The primary regulatory development occurred in June, when 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

3 the U.S. Federal Reserve conducted its annual bank stress tests. The biggest banks all passed the test, clearing the way for them to return more capital to shareholders. Later in this report, I discuss the state of banks' capital in more detail. Q: Specifically, which factors detracted most versus the MSCI index Out-of-index exposure to consumer finance names detracted most on a relative basis. Within this group, Capital One Financial, Synchrony Financial and Discover Financial Services all were fund holdings that recorded disappointing results. Despite a fairly benign credit environment, investors grew uneasy about higher rates of consumer delinquencies and defaults. I think what many investors failed to take into account, however, was the fairly low rate of delinquencies and defaults on a historical basis, which stemmed from tight credit conditions in the aftermath of the Great Recession. In that light, what we've seen lately wasn't concerning, at least from my point of view. Q: Outside of the consumer finance group, what else hurt Bank of the Ozarks was the fund's largest individual relative detractor this period. Shares of the Arkansas-based regional lender, which has considerable expertise in financing commercial construction projects, tumbled near the end of July after it announced that Dan Thomas had resigned as vice chairman and president of its real estate specialties group. This group represented about two-thirds of the bank's originated loans, as well as more than half of its loan growth, in the past 12 months. That said, the bank has other talented people in this group, and I thought the market overreacted to this news. Consequently, I maintained an overweighting here. I'll also mention Wells Fargo, the fund's largest holding this period. Although the stock rallied with the rest of the banking group following the election, it returned -11% this period. The company continues to work through the salespractice issue that came to light in September 2016 and that resulted in the creation of millions of unauthorized accounts. Additionally, it is providing increased disclosure on other issues as the company seeks to repair its reputation with consumers and move past its difficulties. Although the corporate culture at Wells rewarded inappropriate behavior in the past, more recently, I've seen management proactively addressing challenges and displaying an admirable degree of transparency. Therefore, I'm hopeful that the worst days at Wells are behind it. Q: How about contributors Non-index stakes in property & casualty insurance and in asset management & custody banks bolstered relative performance. At the stock level, our largest relative contributor was a sizable overweighting in CIT Group, a provider of financing and leasing, primarily to mid-sized companies. The big development here was securing approval for and completing the sale of CIT's aircraftleasing business. This enabled the company to buy back shares, reducing its market capitalization by about 30%. Also timely: I reduced our share count here by roughly half in early August, thereby buffering the fund from the stock's decline that month. Out-of-index positions in two providers of title insurance, First American Financial and FNF Group, also lifted the fund's relative result, returning 28% and 27%, respectively. A flattening yield curve, although bad for banks, tends to drive sales of title insurance, so these two names were a good complement to the fund's core bank holdings. Lastly, Citigroup was a good example of a major bank that cleaned up its balance sheet and, as a result, was rewarded with a green light from the Fed to return capital to shareholders in excess of expected earnings for the following year. Our overweighted stake here returned about 14% this period. Q: What is your outlook as of period end Assuming the U.S. economic recovery remains on track, I think banks should do well. As a group, they've done a good job of reducing risk since the Great Recession, and I believe they should be positioned to reap some rewards from that restructuring. If banks can follow through on the promise of the recent stress tests and return larger amounts of capital to shareholders through buybacks and dividends, I think their desirability as investments should increase. The one "fly in the ointment" here might be the age of the U.S. economic recovery. At period end, though, I'm seeing few signs of stress in the system and the credit backdrop looks fairly good. That could change if there's some kind of unforeseen event, but for now, I'm optimistic. 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 Matt Reed on banks' improving capital return: "Since the Great Recession, the U.S. banking industry has been hard at work to improve its capital reserves. This has been a long and arduous process for many of them, with a lot of uncertainty, highlighted by some banks failing the Fed's annual stress tests. "For the largest banks, regulators overseeing these tests look for two key pieces of information. One is whether banks have enough capital to survive economic turmoil in the financial system. 'Turmoil,' in the latest test, included a 10% unemployment rate, a sharp decline in housing prices and a severe recession in the eurozone. "Second, the Fed examines whether firms were good at identifying and measuring risk when they crafted their plans to pay dividends or buy back shares. The Fed can reject a bank's capitaldistribution plan for either reason. "Last June, we continued to see the benefits of the work banks have done in this area, as 34 large lenders passed the test and were permitted to return increasing amounts of capital to shareholders in some cases, in excess of expected earnings. "This progress is indicative of the group's muchimproved financial condition and offers hope that the excess capital that banks currently retain may be able to be returned, as well. The ability to release some of that capital should improve return on tangible equity and make banks a more attractive area of the market to investors. "It increasingly feels to me as though banks have more certainty about the regulatory environment, which I think should help them plan and manage their businesses." Holding Market Segment Average Relative Relative Contribution (basis points)* CIT Group, Inc. Regional Banks 1.48% 23 First American Financial Corp. FNF Group Northern Trust Corp. Property & Casualty Insurance Property & Casualty Insurance Asset Management & Custody Banks 0.61% % % 15 BB&T Corp. Regional Banks 0.21% 14 * 1 basis point = 0.01%. LARGEST DETRACTORS VS. BENCHMARK Holding Bank of the Ozarks, Inc. Capital One Financial Corp. Market Segment Average Relative Relative Contribution (basis points)* Regional Banks 3.19% -53 Consumer Finance 3.08% -30 Signature Bank Regional Banks 1.55% -23 Hope Bancorp, Inc. Regional Banks 1.02% -20 Huntington Bancshares, Inc. * 1 basis point = 0.01%. Regional Banks 4.22% 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 Wells Fargo & Co. Diversified Banks 6.83% 5.77% Bank of America Corp. Diversified Banks 6.50% 5.10% Huntington Bancshares, Inc. Regional Banks 5.78% 5.08% Citigroup, Inc. Diversified Banks 5.35% 4.94% U.S. Bancorp Diversified Banks 5.34% 4.86% PNC Financial Services Group, Inc. Regional Banks 5.29% 5.01% JPMorgan Chase & Co. Diversified Banks 4.00% 4.95% Bank of the Ozarks, Inc. Regional Banks 3.59% 4.32% SunTrust Banks, Inc. Regional Banks 3.21% 3.18% Capital One Financial Corp. Consumer Finance 2.96% 3.50% 10 Largest Holdings as a % of Net Assets 48.87% 47.48% 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 Regional Banks 54.92% 54.77% Diversified Banks 29.04% 27.66% Consumer Finance 4.92% 6.69% Thrifts & Mortgage Finance 4.28% 3.25% Asset Management & Custody Banks 3.21% 2.28% Property & Casualty Insurance 1.34% 1.19% Investment Banking & Brokerage 0.76% 1.25% Trading Companies & Distributors 0.67% 0.70% ASSET ALLOCATION Asset Class Six Months Ago Domestic Equities 95.79% 95.29% International Equities 3.35% 2.58% Developed Markets 1.20% 0.77% Emerging Markets 1.14% 0.80% Tax-Advantaged Domiciles 1.01% 1.01% Bonds 0.00% 0.00% Cash & Net Other Assets 0.86% 2.13% 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 Banking Gross Expense Ratio: 0.79% % -1.53% 22.50% 9.72% 13.84% 2.95% S&P 500 Index 5.65% 11.93% 16.23% 9.54% 14.34% 7.61% MSCI US IMI Banks 5% Capped Linked Index -5.62% -3.12% 23.53% 12.63% 15.93% 0.88% Morningstar Fund Financial 0.72% 4.97% 21.66% 9.02% 14.67% 3.43% % Rank in Morningstar Category (1% = Best) % 56% 63% 56% # of Funds in Morningstar Category Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 06/30/ 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 banking industry can be significantly affected by legislation that has reduced the separation between commercial and investment banking businesses, changed the laws governing capitalization requirements and the savings and loan industry, and increased competition. In addition, the banking industry can be significantly affected by changes in general economic conditions and interest rates. 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. Effective 4/3/17, John Sheehy transitioned off the fund. 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 Banks 5% Capped Linked Index represents the performance of the MSCI US IMI Banks 5% Capped Index since 9/1/2016, and the MSCI US IM Banks 25/50 Index prior to that date. 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 7

8 Manager Facts Matthew Reed is a research analyst and portfolio manager at Fidelity Management & Research Company (FMRCo), the investment advisor for Fidelity's family of mutual funds. Fidelity Investments is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing and other financial products and services to more than 20 million individuals, institutions and financial intermediaries. In this role, Mr. Reed is responsible for research and analysis of the banking sector. He also co-manages Fidelity Select Banking (since 2016). Prior to assuming his current responsibilities in September 2016, Mr. Reed covered a variety of sectors from 2009 to 2016, including banks and diversified financials, global financials, financial services/tech, healthcare, and metals and mining. In this capacity, he was responsible for recommending securities across the capital structure for Fidelity's High Income division. Previously, he was a summer intern in the High Income division in Before joining Fidelity in 2008, Mr. Reed was director of Asia Pacific strategy and planning at MetLife from 2005 to 2007, and director of finance at Travelers Group from 2001 to He has been in the investments industry since Mr. Reed earned his bachelor of arts degree in finance from Bentley College, and his master of business administration degree from Harvard Business School. 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 Banking Gross Expense Ratio: 0.79% % 12.89% 16.62% 6.20% 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 06/30/ 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.