Fidelity Select Health Care Services Portfolio

Transcription

1 Fidelity Select Health Care Services Key Takeaways For the semiannual reporting period ending August 31, 2017, the fund gained 7.17%, lagging the 8.03% result of the MSCI U.S. IMI Health Care Providers & Services 25/50 Index, but landing ahead of the broad-market S&P 500 index. The managed health care segment, by far the index's largest area of investment, propelled the industry with a strong gain. Companies from this group generally benefited from expanding gross margins and better-than-expected earnings, proposed health care and tax reforms, and industry consolidation. Versus the MSCI industry benchmark, security selection overall detracted, as some of our largest holdings suffered from idiosyncratic setbacks. Such was the case with Universal Health Services (-14%), the fund's biggest relative detractor this period. Manager Justin Segalini expects the U.S. health care delivery network to continue to consolidate, with a focus on value-based care. He's currently investing in firms reducing health care costs and those poised to benefit from the needs of an aging population, among other themes. On May 1, 2017, Justin Segalini became sole Manager of the fund, after having served as Co-Manager with Eddie Yoon since January 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 Justin Segalini Fund Facts Trading Symbol: Justin Segalini Manager FSHCX Start Date: June 30, 1986 Size (in millions): $ Investment Approach Fidelity Select Health Care Services is an industry-based, equity-focused strategy that seeks to outperform its benchmark through active management. Stock picking is at the core of our investment process and relies on in-depth, fundamental research that leverages Fidelity's deep and experienced global health care team. Our investment approach gravitates towards high ROIC (return on invested capital), cash-generative businesses run by high-quality management teams. Specifically, we look for stocks where the long-term earnings trajectory is mispriced on an NPV (net present value) basis, and is supported by competitive barriers to entry. Additionally, we seek cheap companies that are cheap as a result of a transitory issue, where there is a clear path towards resolution and eventual resumption of growth and/or multiple expansion. Sector and industry strategies could be used by investors as alternatives to individual stocks for either tactical- or strategic-allocation purposes. Q: How did the fund perform for the six months ending August 31, 2017 The fund gained 7.17%, modestly lagging the 8.03% result of the MSCI U.S. IMI Health Care Providers & Services 25/50 Index, but landing ahead of the broad-market S&P 500. During the same time frame, the fund underperformed its peer group average. The managed health care segment by far the index's largest area of investment was boosted by number of positive factors. First, the underlying utilization of health care services in the U.S. was abnormally weak, leading to expanding gross margins and better-than-expected earnings for health care insurance companies. The political backdrop also worked in our favor, as managed care providers benefited from proposed health care and tax reforms, even though neither materialized this period. Lastly, the resolutions of pending large-scale mergers & acquisitions removed an overhang for the industry. The fund produced an even stronger gain for the trailing 12-month period, up 19.78%. That result slightly outpaced the industry benchmark and also outperformed the broad equity market and our peer group average. Q: What was behind the fund's performance versus the MSCI industry index the past six months My investment strategy rests on two philosophical pillars. First, our research shows that high-quality companies those with above-average return on invested capital and some competitive advantages can outperform over the long run, and exhibit lower volatility and higher riskadjusted returns versus the market average. I also employ detailed, bottom-up analysis to uncover underappreciated, company-specific growth opportunities. Unfortunately for the fund, security selection overall detracted, as some of our largest holdings suffered from idiosyncratic setbacks. Such was the case with Universal Health Services (-14%), the fund's biggest relative detractor and a large fund position. Universal is one of the country's largest hospital management companies, and it faced a number of company-specific challenges, including 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

3 a labor shortage within some of its markets that impacted the firm's ability to take new patients. The firm also received negative publicity from select news outlets related to its patient treatment. Despite the stock's decline this period, I increased the fund's position in Universal to take advantage of what I believe are temporary headwinds for the company in an industry with otherwise favorable secular growth prospects. Q: Which other individual stocks influenced relative performance most The fund's positioning in some of the biggest managed care providers yielded mixed results. I underweighted Aetna (+23%) and Centene (+26%) because I thought they had the least-attractive growth trajectories and valuations. Both stocks landed among the fund's biggest relative detractors. Meanwhile, it helped to overweight competitors Humana (+22%), Cigna (+22%), UnitedHealth Group (+21%) and Anthem (+20%), where I found better prospects at more-attractive prices. Elsewhere, the weak utilization trends that supported health care services stocks this period led to disappointing earnings for select health care providers (hospitals, etc.) held in the fund. One such stock was Surgery Partners, an operator of surgical services and a position I established during the period. With U.S. health care spending escalating at what I view as an unsustainable pace over the past several years, I've been focused on locating companies like Surgery Partners, which are geared toward lowering costs. However, the fund's shares returned -53% this period on disappointing earnings. The firm was disproportionately impacted relative to other global health care providers in the industry given Surgery Partners' outsized financial debt-to-equity ratio. Disappointing results aside, I remained optimistic about the firm, which is the only publicly traded ambulatory surgical center company in the country a cost saver to the health care delivery system with intrinsic scarcity value. Thus, I continued to add to our position this period on share price weakness. Q: Aside from the managed care stocks you mentioned, which stocks contributed Express Scripts was both among the fund's largest underweights and top relative contributor this period. Shares of the pharmacy benefit manager (PBM) returned - 11%, due in large part to an April slide after Express Scripts revealed that Anthem its biggest customer, and significant contributor to earnings did not intend to renew a services contact with the company when it expires at the end of 2019, after a long pricing dispute. The financial implications of the fallout caused investors to cast doubts on whether Express Scripts could retain its position as the industry's largest pure-play PBM. I, too, grew more bearish on the stock and significantly reduced our position this period. Elsewhere, Teladoc is one way I've chosen to invest in the rise in telemedicine another cost-savings play, as it enables patients to engage in clinical interaction via the phone, video chat or alternative web application. The stock rose by roughly half, propelled by much-stronger-thananticipated quarterly financial results released in May. The company reported first-quarter revenue up 60% year-overyear, and a 34% increase in new memberships over that same time frame. Teladoc also gave second-quarter revenue guidance that exceeded consensus analyst estimates. These positives and my optimism for the company's longer-term prospects led me to increase our exposure to Teladoc. Q: Please describe your outlook period end. My outlook for the industry hasn't changed in the past year: I expect the U.S. health care delivery network to become increasingly consolidated and focused on value-based care over time. While most of the related productivity enhancements are likely to be offset by reimbursement pressure, companies driving these changes could be great investments, in our view. I'm keeping my eye on companies exposed to several longterm themes, including those who can create value by reducing waste in the system and increase the efficiency of existing assets. Conversely, I'm largely avoiding companies earning outsized profit relative to the value added to the system. I'm also paying particular attention to providers in the lower/lowest cost-of-care settings, as hospital inpatient/emergency-room days represent the highest cost of care. Moving volume to urgent care or ambulatory surgery centers not only dramatically lowers total cost but also reduces the risk of hospital-related complications. Changing demographics is another theme I'm following. Every day in the U.S. about 10,000 people turn 65. Because health care utilization rises with age, this generates a persistent tailwind. Lastly, U.S. health care is moving to a patient-centric model. While this will not happen overnight and many of the firms in this space are nascent, the long-term trend is definitive, in my view. 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 Justin Segalini on the state of health care utilization: "Following a surge in volumes during 2014 and 2015 fueled by the implementation of the Affordable Care Act (ACA) and increased access to health insurance, demand for facility-based health care has been surprisingly weak. This trend has been a key force driving relative industry performance; benefiting the payers (managed care) and hurting the providers. "There are various unprovable hypotheses to explain why this is occurring, including the effectiveness of HMOs in appropriately managing care; the increase of consumer cost-sharing as employers reduce benefits; the penetration of managed care within government programs (Medicare/Medicaid); the prevalence of highdeductible health plans; the existence of an ACA hangover (i.e., a population that previously used the ER as their primary access point now has appropriate care and is experiencing fewer acute episodes); and confusion tied to the highly publicized repeal/replace debate. Most of these hypotheses reflect the growing consumerism and shifting of incentive structures across the industry, which is slowly changing how the population interacts with and utilizes health care delivery systems in the United States. Holding Express Scripts Holding Co. Market Segment Average Relative Relative Contribution (basis points)* Health Care Services -2.73% 61 Teladoc, Inc. Health Care Services 1.52% 59 Cardinal Health, Inc. AmerisourceBergen Corp. Health Care Distributors Health Care Distributors -1.57% % 35 Humana, Inc. Managed Health Care 2.63% 34 * 1 basis point = 0.01%. LARGEST DETRACTORS VS. BENCHMARK Holding Universal Health Services, Inc. Class B American Renal Associates Holdings, Inc. Envision Healthcare Corp. Market Segment Average Relative Relative Contribution (basis points)* Health Care Facilities 2.45% -59 Health Care Services 1.11% -58 Health Care Services 0.95% -49 Aetna, Inc. Managed Health Care -3.05% -46 Surgery Partners, Inc. Health Care Facilities -0.01% -35 * 1 basis point = 0.01%. "Given the majority of these headwinds are secular in nature, a return to robust unit demand is unlikely to occur, in my opinion. This evolution of health care delivery will create 'winners' and 'losers,' with high-cost inpatient settings most at risk, and innovative cost savers benefiting over the long term. I think it's important to highlight, though, that reimbursement structures and deeply ingrained economic incentives within the health care system continue to favor volume over value. Thus, behavior patterns and incumbent business models still tied to 'fee for service' should limit the pace of change. With this in mind, I'll focus on firms that can benefit from reducing waste and unnecessary utilization, while taking advantage of any shorter-term dislocations that may occur across the continuum of health care services." 4 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

5 10 LARGEST HOLDINGS Holding Market Segment Six Months Ago UnitedHealth Group, Inc. Managed Health Care 24.33% 25.23% Anthem, Inc. Managed Health Care 9.52% 8.59% Cigna Corp. Managed Health Care 9.21% 6.60% Humana, Inc. Managed Health Care 6.47% 6.95% McKesson Corp. Health Care Distributors 4.83% 4.63% Universal Health Services, Inc. Class B Health Care Facilities 4.77% 4.24% Aetna, Inc. Managed Health Care 4.23% 4.87% Laboratory Corp. of America Holdings Health Care Services 4.15% 3.77% Teladoc, Inc. Health Care Services 2.14% 0.95% Cardinal Health, Inc. Health Care Distributors 2.02% 2.52% 10 Largest Holdings as a % of Net Assets 71.67% 73.95% 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 Managed Health Care 55.38% 53.18% Health Care Services 16.87% 22.14% Health Care Facilities 13.11% 14.36% Health Care Distributors 8.85% 8.23% Human Resource & Employment Services 0.66% 0.93% Health Care Supplies 0.47% -- Health Care Technology 0.43% -- Health Care Reits 0.26% 0.29% ASSET ALLOCATION Asset Class Six Months Ago Domestic Equities 95.55% 99.62% International Equities 0.47% 0.00% Developed Markets 0.47% 0.00% Emerging Markets 0.00% 0.00% Tax-Advantaged Domiciles 0.00% 0.00% Bonds 0.00% 0.00% Cash & Net Other Assets 3.98% 0.38% 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 Health Care Services Gross Expense Ratio: 0.78% % 16.80% 19.78% 11.11% 16.58% 10.48% S&P 500 Index 5.65% 11.93% 16.23% 9.54% 14.34% 7.61% MSCI US IMI Health Care Providers & Services 25/ % 17.13% 19.58% 12.56% 19.60% 10.89% Morningstar Fund Health 10.09% 21.99% 16.56% 8.53% 17.50% 11.98% % Rank in Morningstar Category (1% = Best) % 21% 66% 73% # 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 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 medical delivery industry is subject to extensive government regulation and can be significantly affected by government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, and an increased emphasis on outpatient services. 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 5/1/17, Justin Segalini became sole portfolio manager of the fund, after having served as co-manager with Eddie Yoon since 1/1/16. 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. 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 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 Health Care Providers & Services 25/50 Index is a modified market-capitalization-weighted index of stocks designed to measure the performance of Health Care Providers & Services 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 7

8 Manager Facts Justin Segalini is a research analyst 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. Segalini is responsible for analyzing and recommending investments within the health care services sector. Additionally, he manages Fidelity Select Health Care Services. Prior to assuming his current responsibilities, Mr. Segalini served as a research analyst, responsible for the coverage of Real Estate Investment Trusts (REITs), and as a sector specialist. Before joining Fidelity in 2007, Mr. Segalini was an associate at V Squared Investments. He has been in the investments industry since Mr. Segalini earned his bachelor of arts degree in art history from Boston College. He is also a CFA charterholder. 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 Health Care Services Gross Expense Ratio: 0.78% % 10.79% 17.87% 10.21% 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. 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