Fidelity Select Insurance Portfolio

Transcription

1 Fidelity Select Key Takeaways The fund gained 3.57% for the semiannual reporting period ending August 31, 2017, roughly in line with the 3.49% return of the MSCI U.S. IMI 25/50 Index but behind the 5.65% advance of the broad-based S&P 500 index. Pricing pressures and low interest rates hindered returns on capital (a measure of profitability) for many industry constituents. Manager Peter Deutsch remained focused on insurers with what he views as financially sound businesses, competitive advantages and the ability to compound capital. Versus the MSCI industry index, the biggest gain came from positioning in the reinsurance group; by contrast, positioning in the insurance brokers and property & casualty segments and a small cash position detracted. Going forward, Peter is cautiously optimistic about prospects for insurance stocks. Although returns may be lower than they have been historically, he expects the industry's consistent and stable performance and reasonable valuations to remain attractive. The Board of Trustees has agreed to present a proposal to shareholders to eliminate each sector/industry fund's fundamental "invests primarily" policy and to modify the fundamental concentration policy for certain funds. If the proposals are approved, expected in the fourth quarter, the changes will take place on or about January 1, 2018 (or the first day of the month following shareholder approval), and will not impact how the funds are managed. MARKET RECAP The U.S. equity bellwether S&P 500 index returned 5.65% for the six months ending August 31, Following a strong start to 2017, equity markets leveled off in March amid fading optimism for President Trump's pro-business agenda and stalled efforts by Congress to repeal and replace the Affordable Care Act (ACA). Upward momentum soon returned and continued until the index cooled off in August, when geopolitical tension escalated and uncertainty grew regarding the future of health care, tax reform and the debt ceiling. In a stark reversal from 2016, growth-oriented stocks handily topped their value counterparts. Among sectors, information technology (+15%) was a standout, surging as a handful of major index constituents posted strong returns. Health care (+9%) also topped the broader market, climbing from April to period end following renewed efforts to reconsider the ACA. Conversely, financials (+1%) lagged because sentiment regarding the potential for reduced regulation and lower taxes faded as the White House turned its attention to other initiatives. Rising interest rates held back real estate (+4%). Investors' general preference for risk assets, coupled with increased competition, hampered consumer staples (+1%) and telecommunication services (-5%). Lastly, lower oil prices sent energy (-10%) to the bottom of the sector performance rankings. Not FDIC Insured May Lose Value No Bank Guarantee

2 Q&A An interview with Manager Peter Deutsch Fund Facts Trading Symbol: Peter Deutsch Manager FSPCX Start Date: December 16, 1985 Size (in millions): $ Investment Approach Fidelity Select is an industry-based, equity-focused strategy that seeks to outperform its benchmark through active management. Our investment philosophy is centered on the belief that price performance of insurance stocks is driven by book value growth over time. There are four contributing factors to superior book value growth: return on equity (ROE), reinvestment opportunities, valuation and avoiding downside risk. We use bottom-up, fundamental research, supported by Fidelity's deep and experienced global financials team, to find high-roe stocks with sustainable returns given unique underwriting, distribution and scale advantages. We also seek to emphasize companies with strong organic reinvestment opportunities that can drive faster earningsper-share growth or with the ability to deploy capital on attractive terms. We believe asymmetric risk in financial stocks is often skewed to the downside, and superior returns can be generated by avoiding companies that may permanently impair capital. Sector and industry strategies could be used by investors as alternatives to individual stocks for either tactical- or strategic-allocation purposes. Q: Peter, how did the fund perform for the six months ending August 31, 2017 The fund returned 3.57% for this semiannual period, keeping pace with the 3.49% return of the MSCI U.S. IMI 25/50 Index. We beat the 0.72% return of the Morningstar Financial peer group average but lagged the 5.65% advance of the broad-based S&P 500. Going back a full year, the fund gained 18.11%, versus 19.16% for the MSCI industry index, 21.66% for the peer group average and 16.23% for the S&P 500. My belief remains that the best way to make money in the insurance industry is to avoid the "losers." To that end, the fund tends to emphasize higher-quality insurers that I think can compound value over time. In more challenging periods, such as the past six months, I would expect our quality bias to help the fund at least track the industry index. However, when the rising tide is lifting all boats, as it was the past 12 months, the fund likely will lag. Over time, I believe this approach may help drive outperformance. Q: Why were the past six months challenging for the insurance industry Pricing and interest rates were headwinds this period. Specifically, pricing for the property & casualty (P&C) insurers was relatively flat, which kept a lid on their returns. The reinsurance group faced even more pricing pressure, partly due to losses related to Hurricane Harvey. Lower longer-term interest rates were an added hindrance, especially for life & health insurance companies, which rely on interest income to help fund payments to policyholders. The one bright spot was the insurance brokers group. This corner of the industry doesn't incur losses related to catastrophes. In fact, reinsurers can benefit when higher losses push their customers to buy more protection, which in turn can help pricing. Improved results at one of the five brokers in the index also helped this period. Q: How did this backdrop affect your strategy The strategy doesn't change. The fund is built on bottomup security selection that focuses on insurers that I believe 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

3 have financially sound businesses, competitive advantages and the ability to compound capital at 10% or more per year. I try to buy these types of companies when their stocks are "on sale" and then wait for other investors to recognize their full intrinsic value. I concentrate on companies that I think have sound underwriting disciplines and are not taking excessive risks, which means they tend not to be hurt disproportionately when bad things happen. When loss activity is low, all insurers look the same; or, to quote Warren Buffet, the chairman of Berkshire Hathaway, "You only find out who is swimming naked when the tide goes out." Q: Which segments and stocks helped the fund's relative result the past six months We picked up the most ground in the reinsurance group, the weakest performer in the MSCI industry index and an underweighting in the fund. I believed this segment to be in the midst of a secular change that could permanently reduce the amplitude of its pricing cycle. Our biggest individual contributors, however, came from a variety of other segments. Underweighting life & health insurer Prudential Financial turned out to be the right call. I thought continued low interest rates and assumptions about customer behavior translated into balance-sheet risk for Prudential. Indeed, the firm's underestimation of the number of policyholders who would use its guarantees led to losses this period, which resulted in the stock's decline. We also benefited from being underexposed to Alleghany, a reinsurance holding company that was eliminated from the portfolio in May. I thought its valuation seemed high and saw better opportunities elsewhere. Quarterly earnings misses resulted in the stock's -13% return within the industry index over the past six months. Q: Which other stocks stood out Non-index investments in Berkshire Hathaway and alternative asset manager Apollo Global Management helped, as both stocks rallied. Berkshire is well-regarded as a high-quality company with a broad investment portfolio that generates steady growth and generally higher returns than P&C insurers. It owns a number of insurance companies, including GEICO and General Re (Gen Re). Plus, Berkshire sits on roughly $100 million in cash, so it can take advantage of market dislocations, in my view. I greatly boosted our stake, making it one of the fund's largest positions at period end. Meanwhile, Apollo has a controlling interest in life insurer Athene Holding, an industry index component that gained 9% this period (but was not in the fund). I liked what I saw in terms of Apollo's strong and differentiated earningsgrowth opportunities and minimal debt. Apollo's share price rose 35% this period, helped by a rising equity market and asset growth at Athene. Q: How about detractors Stock picks in the insurance brokers group and positioning in the P&C segment nicked relative performance. In the former, our underweighting in AON, the largest reinsurance broker, cost us. I thought its valuation seemed high; however, the stock rose 21% this period, buoyed by expectations the company would see more transactions in the wake of Hurricane Harvey. In the P&C group, investments in auto insurers Progressive and Travelers hurt. The fund was underweight Progressive because I thought the market was pricing in overly aggressive growth expectations for the firm's autoinsurance policies. The company proved me wrong, though, helping drive a 19% share-price gain in the index. Conversely, we carried an overweighting in Travelers, which checked every box in terms of having excellent risk management, consistent returns, differentiated distribution and an attractive valuation. However, rapid growth in its auto-policy book led to higher-than-average loss rates, which pressured near-term profit margins, resulting in the stock's flattish result this period. Our overweighting in multi-line insurance giant American International Group (AIG) also disappointed. Brian Duperreault, an industry veteran with an impressive record of turnarounds, was hired last spring as AIG's new CEO. The stock surged on the news, but then languished as investors received little subsequent guidance on the company's financial outlook or strategic plans. Plus, there was concern about its hurricane-related loss exposure. AIG and Travelers were among the fund's top holdings at period end. A small cash position was another headwind. Q: Can you tell us more about your outlook for the industry as of August 31 Going forward, I expect insurance stocks to generate consistent and stable returns that may be below what we've seen historically, especially if interest rates remain low. Nevertheless, I think valuations in the group generally look reasonable, particularly relative to some other parts of the market. I took advantage of buying opportunities this period, boosting stakes in certain names while reducing the total number of fund holdings around 50 names. 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 Peter Deutsch on Hurricane Harvey's impact: "In the wake of the recent hurricanes, there has been some debate about whether P&C insurers will be able to raise prices to offset losses as they have in the past; I think it's unlikely. "First, I think losses for the insurance industry will be relatively small. Total economic losses from Hurricane Harvey are estimated to exceed $80 billion, but insured losses are probably only about $25 billion to $30 billion. Harvey was a flooddominated event, and the federal government the primary source of homeowners' flood insurance is likely to cover $8 billion of that subtotal. However, estimates are that roughly half a million cars will be total losses, boosting claims under comprehensive auto insurance policies. All told, though, insurers likely will end up covering only about 22% of total losses, compared with the more typical figure for past events of about 50%. "Second, I believe we're in the midst of a secular shift within the P&C and reinsurance groups that could permanently reduce the amplitude of the pricing cycle. Historically when insurers sustained large losses, the supply of capital would go down, and insurers would raise prices to cover losses. "Now we have standardized, third-party models that help insurers agree on the level of risk. These models have allowed the capital markets to create new vehicles, including 'catastrophe bonds' and insurance-linked securities, which means insurers have record levels of capital on hand. These instruments currently make up almost 25% of the industry's capital base and continue to grow. "In my view, the commoditization of underwriting and the reduction in barriers to entry for capital means there's unlikely to be a major pricing response to any large losses, including the recent hurricanes. As a consequence, I think the industry's return on equity will be permanently lower and less cyclical." Holding Prudential Financial, Inc. Berkshire Hathaway, Inc. Class B Apollo Global Management LLC Class A Market Segment Life & Health Average Relative Relative Contribution (basis points)* -2.27% 24 Multi-Sector Holdings 3.37% 24 Asset Management & Custody Banks 0.66% 18 Alleghany Corp. Reinsurance -1.04% 18 XL Group Ltd. * 1 basis point = 0.01%. Property & Casualty LARGEST DETRACTORS VS. BENCHMARK Holding Progressive Corp. Market Segment Property & Casualty -0.27% 13 Average Relative Relative Contribution (basis points)* -2.51% -34 Aon PLC Brokers -1.21% -18 American International Group, Inc. The Travelers Companies, Inc. Sony Financial Holdings, Inc. * 1 basis point = 0.01%. Multi-Line 1.77% -17 Property & Casualty Life & Health 2.50% % 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 Chubb Ltd. Property & Casualty 13.00% 9.97% American International Group, Inc. Multi-Line 10.45% 9.95% The Travelers Companies, Inc. Property & Casualty 7.80% 5.94% MetLife, Inc. Life & Health 5.33% 6.53% Berkshire Hathaway, Inc. Class B Multi-Sector Holdings 5.25% 2.59% Marsh & McLennan Companies, Inc. Brokers 5.23% 5.32% Reinsurance Group of America, Inc. Reinsurance 4.56% 1.88% Principal Financial Group, Inc. Life & Health 3.19% 3.91% Allstate Corp. Property & Casualty 3.04% 4.22% AFLAC, Inc. Life & Health 2.89% 4.52% 10 Largest Holdings as a % of Net Assets 60.74% 59.59% 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 Property & Casualty 31.95% 32.99% Life & Health 21.99% 27.15% Multi-Line 14.68% 13.63% Brokers 13.59% 14.12% Reinsurance 5.56% 4.37% Multi-Sector Holdings 5.25% 2.59% Asset Management & Custody Banks 1.92% 1.21% Other 1.83% 0.39% Consumer Finance 0.17% 0.14% Regional Banks 0.00% 0.27% Other 0.00% 0.00% ASSET ALLOCATION Asset Class Six Months Ago Domestic Equities 93.73% 93.56% International Equities 3.21% 3.33% Developed Markets 3.21% 3.33% Emerging Markets 0.00% 0.00% Tax-Advantaged Domiciles 0.00% 0.00% Bonds 0.00% 0.00% Cash & Net Other Assets 3.06% 3.11% 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 Gross Expense Ratio: 0.80% % 7.63% 18.11% 11.37% 17.11% 5.99% S&P 500 Index 5.65% 11.93% 16.23% 9.54% 14.34% 7.61% MSCI US IMI 25/ % 7.86% 19.16% 12.06% 17.62% 5.00% Morningstar Fund Financial 0.72% 4.97% 21.66% 9.02% 14.67% 3.43% % Rank in Morningstar Category (1% = Best) % 30% 18% 24% # of Funds in Morningstar Category Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 12/16/ 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 insurance industry is subject to extensive government regulation and can be significantly affected by interest rates, general economic conditions, and price and marketing competition. Different segments of the industry can be significantly affected by natural disasters, mortality and morbidity rates, and environmental clean-up. 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. 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 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 25/50 Index is a modified marketcapitalization-weighted index of stocks designed to measure the performance of 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. 7

8 Manager Facts Peter Deutsch 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 this role, he is responsible for covering U.S. insurance companies (life and property & casualty) and for managing Fidelity Select (since 2013). Prior to assuming his current position in June 2013, Mr. Deutsch was an equity research analyst covering regional banks from 2010 to Before joining Fidelity in 2010, he worked as a high yield and distressed debt analyst at Oaktree Capital Management from 2006 to 2008, and as an investment banking analyst covering technology and media telecom at Goldman, Sachs & Co. from 2004 to He has been in the investments industry since Mr. Deutsch earned his bachelor of arts degree in economics, magna cum laude with honors, from Williams College, and his master of business administration degree from the Stanford Graduate School of Business. 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 Gross Expense Ratio: 0.80% % 12.16% 17.39% 6.98% 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 12/16/ 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.