Fidelity Select Natural Resources Portfolio

Transcription

1 Fidelity Select Natural Resources Key Takeaways For the semiannual reporting period ending August 31, 2017, the fund returned %, trailing the -8.04% return of the S&P North American Natural Resources Sector Index, and well behind the 5.65% return of the broad-market S&P 500 Index. Crude oil prices declined the past six months, hindering returns for energy stocks, while rising prices for metals including gold, copper and aluminum boosted stocks tied to these industries. Manager John Dowd's strategy of favoring U.S.-based exploration & production (E&P) companies was the primary reason for the fund's underperformance versus the industry benchmark this period, as this was one of the worst-performing groups. Stock selection within the oil & gas storage & transportation industry also hurt. Overweightings in U.S. E&Ps Pioneer Natural Resources and Continental Resources were among the fund's biggest relative detractors, whereas timely ownership of Rice Energy and an overweighting in Rangold Resources were key contributors. As of August 31, Mr. Dowd continued to believe the outlook for E&P stocks was favorable, owed to improving drivers he expects to play out in the intermediate 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. These changes will not impact how the funds are managed. Additionally, the Board has agreed to present a proposal to shareholders to reclassify Select Natural Resources as a non-diversified 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 John Dowd Fund Facts Trading Symbol: John Dowd Manager FNARX Start Date: March 03, 1997 Size (in millions): $ Investment Approach Fidelity Select Natural Resources is a sectorbased, equity-focused strategy that seeks to outperform its benchmark through active management. We believe that natural resources stocks can become mispriced relative to their long-term intrinsic value due to either overemphasis on short-term commodity price swings, underappreciation of changes in technology or cost structures, or geopolitical events. Supported by in-depth fundamental research, we seek to uncover investment opportunities by analyzing the drivers of supply and demand for natural resource commodities, in combination with valuations and growth potential for stocks in the sector. Our process is grounded in the belief that earnings growth drives stock performance, and those companies with differentiated technologies, business models, cost positions or restructuring opportunities are bestpositioned to deliver superior earnings. Sector strategies could be used by investors as alternatives to individual stocks for either tactical- or strategic-allocation purposes. Q: John, how did the fund perform for the six months ending August 31, 2017 The fund returned %, underperforming the -8.04% return of the S&P North American Natural Resources Sector Index, as well as the 5.65% gain of the broadmarket S&P 500 Index. However, we beat the energy peer group average. Looking out a bit longer term, fund returned % for the trailing year, lagging the -3.50% return of the industry benchmark and the 16.23% advance of the S&P 500, as well as the peer average. Q: What caused the fund to underperform its industry benchmark the past six months Crude oil prices declined, which caused energy stocks to perform poorly relative to the industry benchmark. The perbarrel price of West Texas Intermediate crude fell about 12%, and Brent North Sea crude declined roughly 6%. This weakness in energy was punitive to the fund, given our overweighting in the sector. Specifically, our larger-thanindex stake in U.S. oil & gas exploration & production (E&P) companies a strategy that has generally worked well the past few years wasn't helpful this particular period. After rallying in 2016, the price of crude oil declined as much as 20% from its recent peak during the summer of 2017, which was surprising given production curtailments announced by the Organization of the Petroleum Exporting Countries (OPEC). During the past six months, the commodity price decline occurred largely because there was an expectation of accelerating U.S. production growth, even as inventories dropped rapidly. The U.S. land rig count rose to 923 at period end, from 482 a year earlier, which raised fear that increased U.S. production growth would eventually swamp the market. These dynamics led to a wave of bearish sentiment and significant selling pressure on E&P stocks. Elsewhere, stock selection within the oil & gas storage & transportation industry hindered the fund's relative result. We also gave up some ground to the index by avoiding or underweighting certain metals industries. For example, the fund had a smaller average stake in gold stocks, which as a 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

3 group rallied 7% this period due to rising geopolitical tension between the U.S. and North Korea, and the industry's improving supply-demand profile, among other factors. Though small components of the index, aluminum and copper stocks appreciated roughly 27% and 16%, respectively, benefiting from an uptick in global demand for these industrial metals, particularly from China. Q: Did you alter the fund's positioning I did not materially shift the portfolio's positioning, choosing to maintain a focus on the stocks of E&P companies because I continue to maintain conviction that this group offered the best combination of value and growth potential across the gamut of natural resources industries over the intermediate term. I believe these companies stood to benefit from a higher oil-price environment and an improved profit outlook. In addition, I maintained a large underweighting in integrated oil & gas companies the second-largest index component this period because I felt these companies' growth prospects generally were less attractive than other areas. Q: Which individual stocks disappointed Our sizable stake in Texas-based E&P Pioneer Natural Resources was the fund's biggest detractor. This company has rights to prime acreage in the Permian Basin in Texas, one of the most productive oil fields in the country. The stock returned -30% this period, primarily due to the perception that productivity may be degrading in the Permian Basin, meaning there has been an increasing percentage of natural gas (relative to crude oil) from some drilling wells. Rising gas levels in active wells can indicate potentially depleting crude levels. However, I believe Pioneer's production quality in the Permian reservoir is better than the market thinks, and I increased our holdings in the company. Among other detractors was our position in Continental Resources, which returned -25%. Continental has some debt on its balance sheet, and consequently got punished during a period of falling oil prices as investors questioned the company's profit outlook. However, I increased our stake in Continental because it has significant assets in the attractive Bakken shale formation area of North Dakota and Montana, remained on pace to beat its 2017 production target, and improved its net cash position. Elsewhere, our non-index position in Plains All American Pipeline returned about 20%. The company announced it would cut its dividend amid competitive pressure. Lastly, energy-services firm Halliburton, an overweighting, returned -27%, as the market grew wary about the sustainability of oil prices. Q: What were the bright spots The top relative contributor was timely ownership of Rice Energy, a U.S. E&P natural gas producer with quality acreage in the Utica and the Marcellus shale regions. Our holdings in Rice gained about 27% this period, largely due to EQT Corp.'s agreement to acquire the company in June. Elsewhere, underweighting energy-services giant Schlumberger helped lift the fund's relative return. The company didn't have any operational missteps, but I suspect the stock was punished primarily because a sizable portion of its business is in offshore drilling, where there has been less activity than in U.S. shale regions. A non-index position in gold producer Randgold Resources, another top contributor, rose 13% amid the market's penchant for more-established, well-run gold companies. Meanwhile, good stock picking in the oil & gas refining & marketing group also helped; specifically, nonindex stakes in Delek US Holdings and India's Reliance Industries proved helpful. Q: John, what's your outlook as of August 31 Although profitability within the energy sector remains challenged, the ability of U.S. E&P companies to grow oil production at half the commodity price of just a few years ago remains a competitive advantage. Many of these companies continue to benefit from strategic land ownership near fertile basins, improving well efficiency and productivity, and by maintaining little or no debt. These are advantages in an environment of low commodity prices. In addition, the market is valuing E&P companies as if commodity prices will remain low perpetually, and also as if they will not achieve production growth going forward. I see that as an opportunity. The U.S. E&P companies owned in the fund have increased production, even amid lower commodity prices. Companies operating in the Permian (Texas) basin, for example, have the ability to boost production at 20% per year for the foreseeable future, based on our estimates. There also may be some crude-oil price support should inventories decline further, as some industry observers expect. OPEC is forecasting that the global crude oil inventory imbalance could rectify by the end of 2017 or early in Historically, inventory reductions have led to higher oil prices. Additionally, global demand so far in 2017 has been stronger than expected. Given these dynamics, I believe it's important to be patient. I continue to focus on companies that have embraced disruptive technology to improve productivity relative to peers. 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 John Dowd elaborates on the competitive advantages of U.S. E&P companies: "Two deflationary forces within the energy sector have hampered commodity prices and made U.S.- based E&P companies attractive. "First, the ease with which U.S. energy companies have been able to raise capital has led to increased production capacity within the sector, and lower global crude oil prices. "Second, improved well productivity via new shalefracturing technology has allowed U.S. E&Ps to increase production growth and achieve profits even as crude oil prices have declined. U.S. shale production represents only 5% of the world's supply of crude oil, but that rate of production, if altered, can influence the commodity price given the tight balance of global supply and demand. "Conversely, the growth of U.S. oil production and the corresponding decline in crude oil prices has put considerable pressure on the profitability of foreign E&P producers. Many of these companies cannot produce oil profitably when it is priced at $40 a barrel or less. OPEC annual net export revenues have fallen from a peak of $1.18 billion in 2012 to $433 million in I am not optimistic that crude oil prices will recover to historic peaks. "Because of these disruptive dynamics, I have been allocating capital to the U.S. E&P stocks with better cost positions, production growth and return prospects than their foreign peers. This strategy didn't support the fund's performance the past six months, but I maintain my conviction in this approach over an extended period." Holding Rice Energy, Inc. Schlumberger Ltd. Randgold Resources Ltd. sponsored ADR Market Segment Oil & Gas Exploration & Production Oil & Gas Equipment & Services Average Relative Relative Contribution (basis points)* 0.94% % 33 Gold 1.45% 28 New Gold, Inc. Gold 0.72% 24 Packaging Corp. of America * 1 basis point = 0.01%. Paper Packaging 0.85% 22 LARGEST DETRACTORS VS. BENCHMARK Holding Pioneer Natural Resources Co. Transcanada Corp (US) Halliburton Co. Continental Resources, Inc. PDC Energy, Inc. * 1 basis point = 0.01%. Market Segment Oil & Gas Exploration & Production Oil & Gas Storage & Transportation Oil & Gas Equipment & Services Oil & Gas Exploration & Production Oil & Gas Exploration & Production Average Relative Relative Contribution (basis points)* 2.34% % % % % 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 EOG Resources, Inc. Oil & Gas Exploration & Production 7.18% 6.04% Diamondback Energy, Inc. Oil & Gas Exploration & Production 5.24% 3.47% Halliburton Co. Oil & Gas Equipment & Services 4.46% 3.80% Pioneer Natural Resources Co. Oil & Gas Exploration & Production 4.23% 3.54% Chevron Corp. Integrated Oil & Gas 4.02% 3.42% Phillips 66 Co. Oil & Gas Refining & Marketing 3.44% 1.89% The Williams Companies, Inc. Oil & Gas Storage & Transportation 3.28% 1.29% Parsley Energy, Inc. Class A Oil & Gas Exploration & Production 2.80% 1.81% RSP Permian, Inc. Oil & Gas Exploration & Production 2.58% 1.78% Schlumberger Ltd. Oil & Gas Equipment & Services 2.56% 3.71% 10 Largest Holdings as a % of Net Assets 39.81% 37.54% 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 Oil & Gas Exploration & Production 45.27% 48.01% Oil & Gas Equipment & Services 12.85% 18.29% Oil & Gas Storage & Transportation 8.70% 7.93% Oil & Gas Refining & Marketing 8.06% 7.47% Integrated Oil & Gas 8.02% 5.31% Paper Packaging 4.04% 3.22% Gold 3.85% 3.44% Commodity Chemicals 2.23% 1.16% Metal & Glass Containers 2.20% 1.79% Silver 1.48% 1.21% Other 2.03% 1.32% ASSET ALLOCATION Asset Class Six Months Ago Domestic Equities 83.86% 87.24% International Equities 14.88% 12.14% Developed Markets 11.11% 10.89% Emerging Markets 3.77% 1.25% Tax-Advantaged Domiciles 0.00% 0.00% Bonds 0.00% 0.00% Cash & Net Other Assets 1.26% 0.62% 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 Natural Resources Gross Expense Ratio: 0.84% % % % % -2.36% -1.34% S&P 500 Index 5.65% 11.93% 16.23% 9.54% 14.34% 7.61% S&P North American Natural Resources Sector Index -8.04% % -3.50% % -1.41% -0.29% Morningstar Fund Equity Energy % % -9.69% % -6.31% -3.15% % Rank in Morningstar Category (1% = Best) % 30% 30% 40% # of Funds in Morningstar Category Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 03/03/ 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 natural resources industries can be significantly affected by events relating to international political and economic developments, energy conservation, the success of exploration projects, commodity prices, and tax and other government regulations. 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. 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. S&P North American Natural Resources Sector Index is a modified capitalization-weighted index of the U.S. traded stocks designed to measure the performance of companies in the natural resources sector. 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 John Dowd is a 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, Mr. Dowd manages Fidelity Select Energy, Fidelity Select Natural Resources, Fidelity Advisor Energy Fund, and VIP Energy. Additionally, he co-manages Fidelity Series Broad Market Opportunities Fund, Fidelity Stock Selector All Cap Fund, and Fidelity Advisor Stock Selector All Cap Fund. Prior to assuming his current responsibilities, Mr. Dowd managed Select Energy Service and previously served as an equity research analyst. Before joining Fidelity in 2005, Mr. Dowd was a senior research analyst covering oil service companies at Sanford C. Bernstein & Co. Previously, he followed energy companies and developed risk management tools for Lawhill Capital Partners, LLC, an energyfocused investment management firm. Mr. Dowd also worked as an analyst and as a junior analyst at Sanford C. Bernstein & Co. following oil refinery, oil service, and integrated oil companies. He has been in the investments industry since joining Value Line as an equity analyst in Mr. Dowd earned his bachelor of science degree in mechanical engineering from Carnegie Mellon University. He has also served as an expert witness on energy and has testified before Congress, the House Subcommittee on International Terrorism and Non- Proliferation, and the Senate Committee on Energy and Natural Resources. 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 Natural Resources Gross Expense Ratio: 0.84% % 0.65% 0.99% -1.31% 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 03/03/ 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. Diversification does not ensure a profit or guarantee against a loss. 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