Fidelity International Real Estate Fund

Transcription

1 Fidelity International Real Estate Fund Key Takeaways For the fiscal year ending July 31, 2017, the fund's Retail Class shares gained 9.74%, handily outpacing the 3.34% gain of the benchmark FTSE EPRA SM /NAREIT Developed Ex North America Index. After declining during the first half of the period, the real estate asset class rallied, resulting in a gain for the full 12 months. Portfolio Manager Guillermo de las Casas's focus on companies seeking long-term sustainable cash-flow growth and capital appreciation helped the fund to outperform. Successful stock selection fueled the fund's outperformance of its benchmark, particularly in Japan, Australia, France and the United Kingdom. Our relative weightings in these countries also turned up positive. Two of the fund's top individual contributors were Singaporebased property names: UOL Group and Wing Tai Holdings, an out-of-benchmark position. There were few notable detractors this period; however, the fund was dinged by underexposure to the strong-performing Hong Kong market, including a zero-weighting in Wharf Holdings, the fund's biggest relative detractor. Given his mixed outlook as of July 31, Guillermo is focusing on real estate investments with lower sensitivity to a rising-rate environment and areas with what he considers higher seculargrowth potential. He also continues to favor investor/developers over passive REITs across the globe, and he is actively seeking alternatives to names he believes to be overrepresented in passively managed ETFs (exchange-traded funds). MARKET RECAP The fundamental backdrop for global real estate securities meaning the balance of supply and demand for commercial property remained positive for the 12 months ending July 31, 2017, even if the market's rate of improvement this period trailed that of previous years. Nevertheless, the FTSE EPRA SM /NAREIT Developed Index a proxy for global real estate securities returned -1.93%. Though negative, this result meaningfully outpaced the market decline of U.S. real estate investment trusts (REITs) as measured by the Dow Jones U.S. Select Real Estate Securities Index SM whose -5.66% return was shaped most notably by weakness among retail-property owners struggling to manage difficult business conditions for tenants. Throughout the period, we saw a large gap between the bestand worst-performing global real estate sectors, with the offices (-4%) and diversified (-7%) groups joining retail (-22%) as the biggest laggards. Meanwhile, the hotels (+5%) and industrial segments (+7%) were strong performers, with the latter benefiting from a global shift in favor of e-commerce and increased demand for specialized distribution facilities. Regionally, only Asia Pacific ex Japan (+2%), Europe (+1%) and the U.K. (+1%) notched gains. Not FDIC Insured May Lose Value No Bank Guarantee

2 Q&A An interview with Portfolio Manager Guillermo de las Casas Fund Facts Trading Symbol: Guillermo de las Casas Portfolio Manager FIREX Start Date: September 08, 2004 Size (in millions): $ Investment Approach Fidelity International Real Estate Fund seeks capital appreciation through investments in securities of companies principally engaged in the real estate industry. The fund invests primarily in non-u.s. securities. Our philosophy is that owning stocks where the market is not pricing in the companies' long-term growth potential can lead to outperformance. Given the cyclicality and short-term nature that typically characterizes international real estate investing, we look for stocks that are less reliant on short-term factors and more driven by seculargrowth business models. These qualities can often be underpriced by the market. We seek these stocks using a bottom-up approach with a long-term value bias, which is based on a blend of cash-flow and net-asset-value models. We believe that strong risk management is as important as stock selection, and therefore seek to limit foreign exchange risk, country risk, leverage risk and active sector exposure. The fund favors stocks with lower valuation multiples, lower leverage and higher long-term growth versus the benchmark. Q: How did the fund and asset class perform for the fiscal year ending July 31, 2017 The fund's Retail Class shares gained 9.74% the past year, well ahead of the 3.34% return of the benchmark FTSE EPRA SM /NAREIT Developed Ex North America Index. The fund fell short of the 18.01% result of the MSCI EAFE Index, a more-general gauge of foreign developed-markets stocks, but significantly outpaced its global peer group average. Although international real estate securities gained the past 12 months, the path to get there was volatile. The asset class declined during the first half of the year amid concerns about rising interest rates and potential inflation. In addition, currency headwinds weighed on international real estate stocks. However, momentum turned upward for the asset class in Asia ex Japan markets rallied, led by Hong Kong and Singapore, both beneficiaries of governmental policy changes. In addition, the parliamentary victory of French President Emmanuel Macron a staunch supporter of the European Union ignited a broad rally for European equities in the second quarter of Improving growth, a strengthening euro against the U.S. dollar and bond-yield speculation also supported the region. Despite a positive result for the asset class overall, Japan, the benchmark's largest component, returned -5% the past year. Japanese REITs (JREITs) were hurt by several factors, most recently when the Financial Services Agency (FSA) indicated that several dividend-yield-focused funds were warned on over-distribution of dividends. This prompted a sell-down in JREITs and other income-focused categories. Q: How did your strategy influence the fund's performance this period Given the historical cyclicality of the real estate sector, many investors rely on market timing; I, however, look for stocks with business models more dependent on seculargrowth characteristics. Specifically, I look to invest in companies seeking long-term sustainable cash-flow growth and capital appreciation. These attributes can be difficult to forecast and often may be underpriced by the market, but I believe they should pay off over time. 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

3 This strategy worked well against the turbulent real estate backdrop, as successful stock selection fueled the fund's outperformance of its benchmark, particularly in Japan, Australia, France and the United Kingdom. Our relative weightings in these countries also turned up positive. Q: What else added to relative results From a country standpoint, security selection and an overweighting in Singapore was another plus for the fund. Two of our top individual contributors were based there: our No. 1 contributor, UOL Group (+38%), and out-ofbenchmark Wing Tai Holdings (+20%). Both stocks outperformed on the perceived bottoming-out of home prices and sales volumes in Singapore. In general, real estate here rallied in March following the government's surprise announcement that it would reduce the stamp duty imposed on property sellers and ease certain mortgage restrictions. These actions represented an effort to prop up the market after a three-year decline in prices had made homes there more affordable. The fund also was helped by two Australian shopping-mall developers that I avoided or underweighted: Scentre Group (-14%), operating under the Westfield name in Australia and New Zealand, and Westfield Group (-22%), which operates in the U.S., the U.K. and Europe. I tend to avoid malls, which I don't think have appropriately priced in online retail risk. Indeed, brick-and-mortar retailers came under increasing pressure from internet rivals particularly in June after e-commerce giant Amazon.com purchased grocer Whole Foods. So, having little to no exposure to these names proved the right call. Elsewhere, a non-benchmark stake in Hong Kong-based Tai Cheung Holdings, which focuses on the development of office towers and industrial and residential buildings, advanced 38% this period. Hong Kong's office sector remained resilient, with its skyscraper office rents among the highest in the world. Q: What else influenced relative performance As I mentioned, picks in France were a plus, including outof-benchmark stakes in shopping-center developer Altarea and Fonciere Lyonnaise, which rents out office and retail properties in Paris. Our holdings in Altarea and Fonciere gained 24% and 22%, respectively. Both names surged with the market amid France's post-election rally. It also helped to avoid France-based index component Unibail- Rodamco, the largest "bond proxy" name in continental Europe. The stock lagged along with other yield-focused stocks, which generally lagged those of developers. There were few detractors this period; however, underexposure to the strong-performing Hong Kong market dinged relative performance. I remained skeptical of Hong Kong REITs after a strong rally related to a revival in residential and retail sales. The risk of an economic "hard landing" in China, combined with a potential rise in interest rates, led me to believe that Hong Kong housing prices were unsustainable. But property stocks there rallied this period, propelled by a perceived recovery in China as well as a rebound in Hong Kong residential sales volumes and southbound capital flows from mainland China. As a result, it hurt us to have largely avoided certain Hong Kong names, including Wharf Holdings, the fund's biggest individual detractor. Shares of Wharf, the owner of such properties as Times Square Hong Kong, jumped 28% the past year. Similarly, underweighting Link Real Estate Investment Trust, Asia's largest REIT in terms of market capitalization, and Sun Hung Kai Properties, an investment holding company that specializes in residential projects, shopping centers, office, industrial properties and more, also proved detrimental. Both stocks returned about 13%. Q: Guillermo, what's your outlook as of July 31 I think that if Trump-administration initiatives such as corporate tax reform are enacted, we may see greater inflation, a tightening U.S. monetary policy and a sell-off in global real estate. While I don't think real interest rates should expand substantially, I must consider the likelihood that investors could rotate out of real estate into lesslevered asset classes. Countering this trend, though, could be continued political uncertainty and the risk of global protectionism and the subsequent risk of eroding the purchasing power of economies across the world. Given my outlook, I'm focusing on stocks with lower sensitivity to a rising-rate environment, and I continue to invest in names with what I consider higher secular-growth potential, adjusting for the risks of rising financing costs and "stagflation." In addition, I think a company's ability to generate internal and external growth is now more important than ever, as many firms are finding it harder to deploy debt and equity to buy assets. As has been the case for a while now, I continue to favor investor/developers over passive REITs across the globe on valuation measures. I also continue to own secular-growth sectors like Asian health care and European storage, which I see as underpenetrated and less dependent on quantitative easing. 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 Guillermo de las Casas discusses ETFs their impact on the asset class and how they influence the fund's positioning: "In recent years we've seen increased flows into ETFs focused on international real estate. I think these ETFs are becoming very large and are potentially overexposed to specific names in a sector where prolonged negative flows, given poor liquidity, could become a significant risk. "For example, in Japan, passively managed funds (together with the Bank of Japan) make up a fair amount of some major JREITs. This concentration in certain names from passive funds could present additional opportunity for active management, as I believe passive-yield vehicles have become overvalued after a prolonged period of inflows. "As a result, I have been monitoring the fund's exposure to names with concentrations in ETFs and income-focused funds. I continue to look for under-owned, underappreciated real estate stocks I think offer better value and lower risk. "One major fund characteristic has been a belowbenchmark dividend yield. This is due to my belief that lower-dividend payers not only have been undervalued relative to high-dividend names but also generally have better balance sheets and better longer-term growth prospects. Another aspect worth highlighting is that these stocks generally have lower exposure in yield-seeking investment instruments and ETFs. "Over time, I have found relative opportunities among small-cap names. In my experience, many small-caps can be relatively undervalued, given the lack of supporting flows from income-focused funds and ETFs. "Many also have demonstrated that, when wellmanaged, they can outperform larger-cap names if provided adequate and competitive capital." Holding Country Average Relative Relative Contribution (basis points)* UOL Group Ltd. Singapore 2.30% 69 Scentre Management Ltd. A/S Trustee South Carolina unit Australia -2.87% 58 Tai Cheung Holdings Ltd. Hong Kong 1.90% 55 Altarea SCA France 2.28% 54 Wing Tai Holdings Ltd. Singapore 2.51% 45 * 1 basis point = 0.01%. LARGEST DETRACTORS VS. BENCHMARK Holding Country Average Relative Relative Contribution (basis points)* Wharf Holdings Ltd. Hong Kong -1.58% -34 Link (REIT) Hong Kong -2.66% -27 Sun Hung Kai Properties Ltd. Hong Kong -3.19% -26 Segro PLC United Kingdom -0.87% -21 Comforia Residential REIT, Inc. * 1 basis point = 0.01%. ASSET ALLOCATION Asset Class Japan 1.12% -20 Portfolio Portfolio Six Months Ago International Equities 94.66% 93.84% Developed Markets 93.23% 93.49% Emerging Markets 1.43% 0.35% Tax-Advantaged Domiciles 0.00% 0.00% Domestic Equities 0.78% 0.00% Bonds 0.00% 0.00% Cash & Net Other Assets 4.56% 6.16% 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. 4 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

5 COUNTRY DIVERSIFICATION 10 LARGEST HOLDINGS Country Portfolio Portfolio Six Months Ago Japan 19.42% 20.94% United Kingdom 13.41% 11.64% Australia 9.46% 10.56% Hong Kong 8.63% 13.38% Germany 8.23% 8.94% Singapore 7.52% 7.37% United States 6.94% 6.45% Sweden 5.31% 3.79% France 4.59% 3.60% Norway 2.83% 2.66% Other 9.78% 6.68% Holding Country Portfolio Portfolio Six Months Ago Vonovia SE Germany 4.54% 4.80% Mitsui Fudosan Co. Ltd. Japan 4.49% 4.59% Mitsubishi Estate Co. Ltd. Japan 4.21% 6.40% LEG Immobilien AG Germany 3.23% 2.90% UOL Group Ltd. Singapore 2.69% 2.38% Altarea SCA France 2.61% 2.02% Olav Thon Eiendomsselskap A/S Land Securities Group PLC Norway 2.45% 2.31% United Kingdom 2.44% 2.17% Wing Tai Holdings Ltd. Singapore 2.33% 2.80% Parkway Life REIT Singapore 2.27% 2.18% 10 Largest Holdings as a % of Net Assets 31.25% 35.29% 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. FISCAL PERFORMANCE SUMMARY: Periods ending July 31, Month Cumulative YTD 1 3 Annualized 5 10 / LOF 1 Fidelity International Real Estate Fund Gross Expense Ratio: 1.13% % 17.70% 9.74% 4.48% 10.43% 1.44% MSCI EAFE Index (Net Massachusetts tax) 13.97% 17.28% 18.01% 2.97% 9.23% 1.62% FTSE EPRA/NAREIT Developed Ex North America Index (Gross) 11.37% 13.51% 3.34% 2.31% 7.58% 1.15% Morningstar Fund Global Real Estate 8.14% 9.13% 0.18% 3.63% 7.13% 2.27% % Rank in Morningstar Category (1% = Best) % 28% 3% 73% # of Funds in Morningstar Category Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 09/08/ 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 1.50% for shares held less than 90 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, advisor.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. 5 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

6 Definitions and Important Information FUND RISKS Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. Changes in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industry. The fund may have additional volatility because it can invest a significant portion of assets in securities of a small number of individual issuers. 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. 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. 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. 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. MSCI EAFE Index (Net MA Tax) is a market-capitalization-weighted index that is designed to measure the investable equity market performance for global investors in developed markets, excluding the U.S. & Canada. Index returns are adjusted for tax withholding rates applicable to U.S. based mutual funds organized as Massachusetts business trusts. FTSE EPRA/NAREIT Developed Ex North America Index is a freefloat-adjusted market-capitalization-weighted index of all eligible developed-market real estate stocks worldwide excluding North America. FTSE EPRA/NAREIT Developed Index is a free-float-adjusted marketcapitalization-weighted index of all eligible developed-market real estate stocks worldwide RANKING INFORMATION 2017 Morningstar, Inc. All rights reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or redistributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Fidelity does not review the Morningstar data and, for mutual fund performance, you should check the fund's current prospectus for the most up-to-date information concerning applicable loads, fees and expenses. % Rank in Morningstar Category is the fund's total-return percentile 6

7 Manager Facts Guillermo de las Casas is a research analyst/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 his dual role within FMRCo, he is responsible for the coverage of international real estate securities, while managing Fidelity International Real Estate Fund (since 2010). Prior to joining Fidelity in 2007, Mr. de Las Casas worked as a vice president and real estate securities analyst at Houlihan Rovers SA (acquired by Cohen & Steers Inc.) from 2000 to He has been in the investments industry since joining Security Capital Group, Inc. as a financial analyst in Mr. de Las Casas earned his bachelor of arts degree in political science and international relations from Williams College. 7 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

8 PERFORMANCE SUMMARY: Quarter ending December 31, Annualized 5 10 / LOF 1 Fidelity International Real Estate Fund Gross Expense Ratio: 1.12% % 8.28% 8.29% 2.54% 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 09/08/ 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