Fidelity Select Financial Services Portfolio

Transcription

1 QUARTERLY FUND REVIEW AS OF DECEMBER 31, 2017 Fidelity Select Financial Services Investment Approach Fidelity Select Financial Services is a sector-based, equity-focused strategy that seeks to outperform its benchmark through active management. We believe that stocks of high-quality financial companies exhibiting persistent growth and purchased at reasonable prices can outperform the market over time. Our investment approach relies on fundamental research to uncover differences between expectations and underlying growth potential, presenting an opportunity to generate excess returns. In our search for companies that exhibit potential for sustainable growth, we look for business catalysts such as expanding returns, new markets, product cycles or productivity improvements. Sector strategies could be used by investors as alternatives to individual stocks for either tactical- or strategic-allocation purposes. PERFORMANCE SUMMARY Cumulative 3 Month YTD 1 Year Annualized 3 Year 5 Year 10 Year/ LOF 1 Select Financial Services Gross Expense Ratio: 0.77% % 20.94% 20.94% 11.31% 15.34% 3.39% S&P % 21.83% 21.83% 11.41% 15.79% 8.50% MSCI US IMI Financials 5% Capped Linked 6.87% 18.81% 18.81% 13.86% 17.52% 4.97% Morningstar Fund Financial 5.74% 16.72% 16.72% 11.64% 15.47% 5.27% % Rank in Morningstar Category (1% = Best) % 61% 57% 79% # of Funds in Morningstar Category Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 12/10/ This expense ratio is from the most recent prospectus and generally is based on amounts incurred during the most recent 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. For definitions and other important information, please see the Definitions and Important Information section of this Fund Review. FUND INFORMATION Manager(s): Christopher Lee Trading Symbol: FIDSX Start Date: December 10, 1981 Size (in millions): $1, Morningstar Category: Fund Financial 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 financials industries are subject to extensive government regulation, can be subject to relatively rapid change due to increasingly blurred distinctions between service segments, and can be significantly affected by availability and cost of capital funds, changes in interest rates, the rate of corporate and consumer debt defaults, and price competition. Not FDIC Insured May Lose Value No Bank Guarantee

2 Market Review Financials stocks delivered strong performance for the fourth quarter, with the MSCI U.S. IMI Financials 5% Capped Linked up 6.87%. This result beat the S&P 500 return of 6.64%, making financials one of the better-performing sectors in the index this quarter. A major overhaul to the U.S. tax code, which was passed into law in December, significantly lowered U.S. corporate tax rates, bolstering earnings expectations and lifting returns in the sector. In addition, the U.S. economy made solid progress, with the release of third quarter data that showed an annualized growth rate of over 3%. Against this favorable backdrop, the Federal Reserve edged its short-term interest target higher in December, a boost to financial companies that make money on the difference between deposit and lending rates. Within the MSCI sector index, consumer finance stocks (+14%) posted the strongest gain. Many companies in the segment are U.S.-focused, which meant they stood to benefit the most from tax reform. Better-than-expected credit conditions, driven by 4.1% unemployment in the quarter, also helped. Investment banking & brokerage stocks (+11%) did well, as a rising stock market attracted investors. Diversified banks (+ 9%), the largest component of the sector index, also were strong performers, helped by a better economic backdrop, higher interest rates and expectations around tax reform. Asset management & custody banks (+8.7%) gained, as the stock market rally bolstered the value of assets under management and, in turn, fee income. By contrast, more-defensive segments were laggards. Within the sector index, property & casualty (P&C) insurance stocks returned 5%; insurance brokers (-3%) had a modest decline; and the reinsurance (+1%) and multi-line insurance groups (+2%) edged higher. Elsewhere, regional banks (+4%) were held back by concern that a flattening yield curve which occurs as the difference between yields on short- and long-term Treasuries compresses would narrow the difference between the rates at which they borrow and lend, hurting profits. LARGEST CONTRIBUTORS VS. BENCHMARK Capital One Financial Corp. Average Contribution (basis points)* Consumer Finance 3.98% 40 Synchrony Financial Consumer Finance 2.09% 36 WEX, Inc. E*TRADE Financial Corp. CBOE s, Inc. * 1 basis point = 0.01%. Data Processing & Outsourced Services Investment Banking & Financial Exchanges & Data 1.67% % % 18 Performance Review The fund's Retail Class shares returned 8.68% this quarter, which beat the MSCI U.S. IMI Financials 5% Capped Linked. Both the fund and sector index outperformed the 6.64% return of the broad-based S&P 500 index. Security selection gave the biggest boost to the fund's performance relative to the sector index. Versus the MSCI sector index, stock picks in consumer finance and P&C insurance helped most. In consumer finance, standout fund performers included Capital One Financial and Synchrony Financial. Capital One's shares rose 18% for the quarter, driven partly by expectations that future earnings for the issuer of credit could benefit from higher policy interest rates. In October, the company reported better-than-expected earnings, rising net interest margin and growth in its domestic credit-card loan balances. The firm's provision for credit-card losses rose only modestly. In December, Capital One said U.S. tax reform would result in a one-time charge against earnings related to a writedown of deferred tax assets and un-repatriated foreign earnings. Synchrony Financial's shares advanced 25% this quarter, partly due to better-than-expected quarterly earnings and revenue tied to its private-label credit-card and payment-solutions businesses. The company's net interest income for the third quarter of 2017 rose 11% from the year-ago period. However, its provision for bad loans rose 33% from the same period in 2016, driven largely by higher loan receivables. Conversely, picks in the investment banking & brokerage group hurt relative performance. Our decision not to own U.S. discount broker and index component Charles Schwab detracted. We thought the valuation looked expensive, but rising asset prices, tax reform and higher interest rates helped the stock rally 18% in the quarter. An overweighting in MetLife (-2%) within the life & health insurance segment also hindered our relative result. We viewed the stock as cheap and expected the company to benefit from spinning off its most volatile business. However, reduced earnings guidance hurt the stock's return. LARGEST DETRACTORS VS. BENCHMARK Charles Schwab Corp. MetLife, Inc. Investment Banking & Life & Health Insurance Average Contribution (basis points)* -1.43% % -14 First Republic Bank Regional Banks 0.46% -13 Hartford Financial Services Group, Inc. Investment Technology Group, Inc. * 1 basis point = 0.01%. Multi-Line Insurance 2.40% -11 Investment Banking & 0.50% For definitions and other important information, please see Definitions and Important Information section of this Fund Review.

3 Outlook and Positioning We remain optimistic about prospects for the financials sector, given expectations for continued economic growth, higher interest rates and benefits from tax reform. We also expect to see deregulation help financial firms. Personnel often drive policy, and we think we could see a looser interpretation of regulations even if legislative changes stall. Proposed Federal Reserve chairman, Jerome Powell, for example, has a background on Wall Street and could bring a pro-business view to the role. As we start the new year, financials valuations relative to earnings are trading near their long-term historical averages. In the past, even elevated valuations have not caused the sector to underperform. When valuations have been near or above their current levels, whether earnings growth has been accelerating or slowing has often meant the difference between financials outperforming or underperforming the broader market. We think the outlook for above-average earnings growth in the sector is favorable. In addition to the tailwinds already mentioned, we're encouraged because corporate profits are often a leading indicator for loan growth, which in turn is an important driver of earnings in the sector. The sharp profit recovery we saw in 2017 likely bodes well for a pickup in loan growth in Bank and capital markets stocks, in particular, have historically benefited from a backdrop of strong loan growth amid rising interest rates and equity prices. In addition, we're encouraged because many banks have strong balance sheets, with capital levels near multi-decade highs, and relatively stable credit losses. Higher market volatility, which could occur as central banks shift their policies and start raising interest rates, could benefit tradingdriven businesses, such as investment banks and financial exchanges. We believe the economy is in the middle of an extended recovery, which could be further prolonged by recent tax legislation. Given this backdrop, the fund has maintained a modestly pro-cyclical (or economically sensitive) bias. The fund's biggest overweighting (about 12% of assets) at yearend is in the economically sensitive investment banking & brokerage group, which we believe stands to gain from higher interest rates and industry consolidation. We're also interested in financials that have upside exposure to deregulation and tax reform. During the quarter, we kept a modest underweighting, but 17% stake, in regional banks. While we remain cautious about the inherent risks associated with the geographic concentrations of regional banks, we think certain ones could benefit if regulators were to lift the SIFI (Systematically Important Financial Institution) threshold from $50 billion in assets to $250 billion. This change would potentially encourage more mergers and acquisitions (M&A). Many banks have been discouraged from purchases and sales because significant asset growth could push them to become a SIFI with all the attendant regulations. We've focused on regional banks that meet our quality and valuation criteria but that we think have some optionality related to M&A. During the quarter, we boosted our holdings in consumer finance to about 9.5% of assets, which represented the fund's thirdlargest industry overweight at period end. In addition to being beneficiaries of tax reform, these lending businesses stand to gain from a better employment backdrop and higher interest rates. In addition, valuations look attractive. Going forward, we plan to maintain the fund's quality bias, with a bottom-up focus on what we view as reasonably priced stocks offering above-average earnings growth prospects. 3 For definitions and other important information, please see Definitions and Important Information section of this Fund Review.

4 10 LARGEST HOLDINGS Bank of America Corp. Capital One Financial Corp. Citigroup, Inc. Berkshire Hathaway, Inc. Class B Huntington Bancshares, Inc. TD Ameritrade Corp. E*TRADE Financial Corp. The Travelers Companies, Inc. Wells Fargo & Co. PNC Financial Services Group, Inc. 10 Largest s as a % of Net Assets Total Number of s 50 Diversified Banks Consumer Finance Diversified Banks Multi-Sector s Regional Banks Property & Casualty Insurance Diversified Banks Regional Banks 44.79% 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. s do not include money market investments. CHARACTERISTICS Valuation Price/Earnings Trailing 18.2x 18.1x Price/Earnings (IBES 1-Year Forecast) 14.7x 14.8x Price/Book 1.6x 1.6x Price/Cash Flow 11.2x 12.6x Return on Equity (5-Year Trailing) 9.5% 8.8% Growth Sales/Share Growth 1-Year (Trailing) 7.5% 6.6% Earnings/Share Growth 1-Year (Trailing) 0.2% 1.6% Earnings/Share Growth 1-Year (IBES Forecast) 23.4% 17.5% Earnings/Share Growth 5-Year (Trailing) 14.4% 13.7% Size ed Average Market Cap ($ Billions) ed Median Market Cap ($ Billions) Median Market Cap ($ Billions) For definitions and other important information, please see Definitions and Important Information section of this Fund Review.

5 LARGEST OVERWEIGHTS BY MARKET SEGMENT Change From Prior Quarter 12.09% 7.57% 4.52% -0.18% Data Processing & Outsourced Services 3.12% % 0.49% Consumer Finance 9.53% 6.51% 3.02% 0.95% Multi-Line Insurance 4.13% 3.45% 0.68% 1.30% Property & Casualty Insurance 9.75% 9.17% 0.57% -0.47% LARGEST UNDERWEIGHTS BY MARKET SEGMENT Change From Prior Quarter Diversified Banks 17.63% 21.00% -3.37% 0.20% Insurance Brokers % -3.08% -1.06% Life & Health Insurance 4.65% 6.37% -1.72% -0.04% Mortgage REITs % -1.54% 0.10% Regional Banks 17.14% 18.51% -1.37% -0.21% LARGEST OVERWEIGHTS BY HOLDING Huntington Bancshares, Inc. Regional Banks 4.52% TD Ameritrade Corp. 3.95% Capital One Financial Corp. Consumer Finance 3.72% E*TRADE Financial Corp. Property & Casualty The Travelers Companies, Inc. Insurance 3.64% 2.72% LARGEST UNDERWEIGHTS BY HOLDING U.S. Bancorp Diversified Banks -2.38% American Express Co. Consumer Finance -2.13% Morgan Stanley Bank of New York Mellon Corp. Charles Schwab Corp. Asset Management & Custody Banks -1.85% -1.54% -1.52% ASSET ALLOCATION Asset Class Change From Prior Quarter Domestic Equities 97.89% 99.36% -1.47% 0.79% International Equities 0.84% 0.64% 0.20% -0.76% Developed Markets 0.00% 0.51% -0.51% -0.81% Emerging Markets 0.84% 0.13% 0.71% 0.05% Tax-Advantaged Domiciles 0.00% 0.00% 0.00% 0.00% Bonds 0.00% 0.00% 0.00% 0.00% Cash & Net Other Assets 1.27% 0.00% 1.27% -0.03% 3-YEAR RISK/RETURN STATISTICS Beta Standard Deviation 14.05% 14.59% Sharpe Ratio Tracking Error 2.77% -- Information Ratio R-Squared 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 and other important information, please see Definitions and Important Information section of this Fund Review.

6 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. CHARACTERISTICS Earnings-Per-Share Growth measures the growth in reported earnings per share over the specified past time period. Median Market Cap identifies the median market capitalization of the portfolio or benchmark as determined by the underlying security market caps. Price-to-Book (P/B) Ratio is the ratio of a company's current share price to reported accumulated profits and capital. Price/Cash Flow is the ratio of a company's current share price to its trailing 12-months cash flow per share. Price-to-Earnings (P/E) Ratio (IBES 1-Year Forecast) is the ratio of a company's current share price to Wall Street analysts' estimates of earnings. Price-to-Earnings (P/E) Ratio Trailing is the ratio of a company's current share price to its trailing 12-months earnings per share. Return on Equity (ROE) 5-Year Trailing is the ratio of a company's last five years historical profitability to its shareholders' equity. Preferred stock is included as part of each company's net worth. Sales-Per-Share Growth measures the growth in reported sales over the specified past time period. ed Average Market Cap identifies the market capitalization of the average equity holding as determined by the dollars invested in the portfolio or benchmark. ed Median Market Cap identifies the market capitalization of the median equity holding as determined by the dollars invested in the portfolio or benchmark. date. MARKET-SEGMENT WEIGHTS Market-segment weights illustrate examples of sectors or industries in which the fund may invest, and may not be representative of the fund's current or future investments. Should not be construed or used as a recommendation for any sector or industry. RANKING INFORMATION 2018 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 weights represents the % of fund assets in a particular market segment, asset class or credit quality relative to the benchmark. A positive number represents an overweight, and a negative number is an underweight. The fund's benchmark is listed immediately under the fund name in the Performance Summary. IMPORTANT FUND INFORMATION 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. 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 Financials 5% Capped Linked represents the performance of the MSCI US IMI Financials 5% Capped since 9/1/2016, and the MSCI US IM Financials 25/50 prior to that 6

7 3-YEAR RISK/RETURN STATISTICS Beta is a measure of the volatility of a fund relative to its benchmark index. A beta greater (less) than 1 is more (less) volatile than the index. Information Ratio measures a fund's active return (fund's average monthly return minus the benchmark's average monthly return) in relation to the volatility of its active returns. R-Squared measures how a fund's performance correlates with a benchmark index's performance and shows what portion of it can be explained by the performance of the overall market/index. R- Squared ranges from 0, meaning no correlation, to 1, meaning perfect correlation. An R-Squared value of less than 0.5 indicates that annualized alpha and beta are not reliable performance statistics. Sharpe Ratio is a measure of historical risk-adjusted performance. It is calculated by dividing the fund's excess returns (the fund's average annual return for the period minus the 3-month "risk free" return rate) and dividing it by the standard deviation of the fund's returns. The higher the ratio, the better the fund's return per unit of risk. The three month "risk free" rate used is the 90-day Treasury Bill rate. Standard Deviation is a statistical measurement of the dispersion of a fund's return over a specified time period. Fidelity calculates standard deviations by comparing a fund's monthly returns to its average monthly return over a 36-month period, and then annualizes the number. Investors may examine historical standard deviation in conjunction with historical returns to decide whether a fund's volatility would have been acceptable given the returns it would have produced. A higher standard deviation indicates a wider dispersion of past returns and thus greater historical volatility. Standard deviation does not indicate how the fund actually performed, but merely indicates the volatility of its returns over time. Tracking Error is the divergence between the price behavior of a position or a portfolio and the price behavior of a benchmark, creating an unexpected profit or loss. 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. 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 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