Fidelity Select Health Care Portfolio

Transcription

1 Fidelity Select Health Care Key Takeaways For the fiscal year ending February 28, 2018, the fund gained 15.49%, in line with the 15.48% result of the MSCI U.S. IMI Health Care 25/50 Index, but behind the broader S&P 500. The health care sector lagged the broader market, weighed down in part by performance of pharmaceuticals (-3%), the largest segment in the MSCI sector index, as focus shifted again to drug pricing after President Trump criticized prescription-drug costs. Still, health care firms generally enjoyed solid balance sheets, fair valuations and rising demand for their products and services. Versus the MSCI sector index, our biggest individual contribution came from largely avoiding sizable index component Merck, as large-cap pharmaceuticals firms generally underperformed. Conversely, it hurt most to not own global biotechnology firm and index constituent AbbVie, which was lifted by good news related to its rheumatoid arthritis blockbuster Humira. Despite the potential for policy risk, Manager Eddie Yoon thinks health care companies should remain strong due to solid and continuing secular-demand dynamics. As of February 28, the fund's biggest positions are in stocks Eddie considers strong growers employing robust capital allocation. He's focusing on more-stable companies offering what he considers growth at a reasonable price, such as Becton Dickenson. On December 8, 2017, shareholders approved proposals from the Board of Trustees to eliminate each sector/industry fund's fundamental "invests primarily" policy and to modify the fundamental concentration policy for certain funds. The changes took effect on January 1, 2018, and do not impact how the funds are managed. MARKET RECAP U.S. equities gained 17.10% for the 12 months ending February 28, 2018, as the S&P 500 index moved steadily higher throughout 2017 and into 2018 until sharply reversing course in February. The drop was in stark contrast to the low volatility seen throughout 2017, along with consumer sentiment and other market indicators that stayed positive. Investors remained decidedly upbeat as the calendar turned, and the index rose 5.73% in January. February was a decidedly different story, though, as volatility spiked amid fear that rising inflation and the potential for the economy to overheat would prompt the U.S. Federal Reserve to pick up the pace of interest rate hikes. The index returned -3.69% for the month, its first negative result since October For the full 12 months, growth stocks handily topped value, while large-caps bested smallcaps. By sector, information technology fared best by far, gaining 36% amid strong earnings growth from several major index constituents. Consumer discretionary (+22%) also stood out, driven by retailers. Financials added 20%, riding the uptick in bond yields. Materials and industrials rose about 16% each, boosted by higher demand, especially from China. Conversely, notable laggards included the defensive telecommunication services (-5%) and utilities (-2%) sectors, while rising rates held back real estate (-3%). Not FDIC Insured May Lose Value No Bank Guarantee

2 Q&A An interview with Manager Eddie Yoon Fund Facts Trading Symbol: Eddie Yoon Manager FSPHX Start Date: July 14, 1981 Size (in millions): $6, Investment Approach Fidelity Select Health Care is a sector-based, equity-focused strategy that seeks to outperform its benchmark through active management. Stock picking is the core of our investment process and relies on fundamental, bottom-up research. We look to leverage Fidelity's deep and experienced global health care team in building a diversified portfolio of health care companies, ranging from highquality, stable earnings growers to opportunistic names producing innovative products that disrupt the marketplace. Our fundamental analysis focuses on free cash flow and capital allocation, which we believe are the biggest drivers of long-term shareholder value, and also examines market opportunity, sales growth and margin outlook. We seek to concentrate the portfolio in our best ideas, but carefully manage risk through position sizing. Sector strategies could be used by investors as alternatives to individual stocks for either tactical- or strategic-allocation purposes. Q: Eddie, how did the fund and sector perform for the 12 months ending February 28, 2018 The fund advanced 15.49%, in line with the 15.48% result of the MSCI U.S. IMI Health Care 25/50 Index, but behind the 17.10% return of the S&P 500 broad-market equity index. The fund also modestly underperformed our peer group average. The sector performed well on an absolute basis, as health care companies generally exhibited solid balance sheets, and their stock valuations appeared fair to modestly below average on a historical basis. The sector also was helped by rising demand for health care products and services, partly due to an aging population. In particular, performance of the managed health care industry (+38%) stood out, lifted by better-than-expected earnings. The group also benefited from health care and tax reform, as well as from the completion of several large-scale mergers and acquisitions. Nevertheless, the sector lagged the broader market, weighed down in part by performance in the largest index component, pharmaceuticals (+3%). Pharma companies trailed because focus shifted once again to drug pricing after President Trump made critical remarks about prescription-drug costs. Q: What influenced the fund's result versus the MSCI sector index the past 12 months Typically, fund holdings range from high-quality, stable earnings producers to opportunistic names offering innovative products. The broad mix of companies that make up the sector gives me flexibility to play both offense and defense, depending on my market outlook. This period, positive effects from sub-industry allocations were largely counterbalanced by negative stock picking overall. Still, the fund claimed several significant individual "wins," including our No. 1 contributor, largely avoiding sizable benchmark component Merck (-15%), which we held in the fund for only a few months and sold at a profit. Large-cap, more-defensive names tended to underperform. Merck has been a relatively slow grower and generally does not align with the types of pharma firms I seek for the fund; I prefer stable-to-improving organic (core) growers. 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

3 Our out-of-index stake in Belgium-based Ablynx was another big help. This biopharma firm has been developing a highly coveted experimental drug for a rare blood disorder, making it a "takeout," or acquisition, target. The stock shot up in early January after the company rejected a bid from Denmark's Novo Nordisk, the world's largest insulin maker. Later that month, French drugmaker Sanofi successfully struck a deal to buy Ablynx for a hefty premium. Overall, the fund's shares of Ablynx advanced about 333% the past 12 months. On the flip side, two index stocks in particular weighed considerably on our relative result: AbbVie and Allergan. I completely avoided AbbVie (+94%) a stock I found expensive which hurt most the past 12 months. Its shares made a strong advance in early September after the global biotech scored surprise patent-protection concessions for Humira, its rheumatoid arthritis blockbuster, and logged favorable clinical results. The company also released stellar fourth-quarter financial figures in January, along with strong guidance. Elsewhere, I expected Allergan to benefit from its exposure to high-growth, cash-paying markets, including best-inclass brands like Botox, Juvederm and CoolSculpting, and I also found the stock's valuation attractive. However, shares of Allergan returned -36% amid the firm's legal battle related to the intellectual property for Restasis, a treatment for chronic dry eye. In October, Allergan lost the patent lawsuit, potentially opening the door for early generic competition. Its share price also was hurt after Allergan posted mixed clinical data for a potential treatment for NASH (non-alcoholic steatohepatitis), a liver condition. I reduced the fund's large overweighting in Allergan to a slight underweighting by period end. Q: What other stocks lifted relative results It helped to mostly avoid Celgene, which returned -29% in the index, though our stake was down much less. Celgene shares took an October tumble amid a flurry of negative news, including announcement that the firm would cease trials for its candidate compound to treat Crohn's disease, and downward earnings guidance. These events were followed by worries over other products in Celgene's pipeline and the potential for a reshuffling of executives. I'll also mention our sizable overweighting in Vertex Pharmaceuticals, a large-cap biotech that develops drugs to treat cystic fibrosis (CF). I was optimistic about the company's plan to field a new class of triple-combination CF treatments to potentially serve the largest remaining segment of untreated patients. Vertex shares rose 83%, with notable jumps in March and July following news of positive trial results for its combination therapies. Strong quarterly financials also drove the stock higher in January. While I'm still positive on Vertex, I reduced the fund's position in the stock to take some profit. Vertex remained a large holding and overweighting at period end. Q: And what else disappointed Our overweighting in biotech firm Tesaro hurt. The stock returned -71% the past 12 months amid increased competition for its ovarian-cancer drug Zejula. Despite its troubles this period, I remained optimistic on the firm's longer-term prospects, and took advantage of the stock's depressed share price to double down on the fund's position. A big overweighting in Alexion Pharmaceuticals also dragged on the fund's relative result. Investors fretted over the price of Alexion's Soliris one of the world's most expensive prescription drugs. In addition, the firm had a tough time meeting lofty financial expectations. Amid the turmoil, Alexion named a new CEO, as the drugmaker sought to regain investor confidence following the exit of top management and an internal investigation into sales practices. Unfortunately, that confidence was not regained during the year, and I cut our stake in Alexion substantially, though the fund remains overweighted as of February 28. Q: Eddie, what's your outlook at period end As I've said before, I believe policy risk will always be a factor for the sector. Despite the risk, I think health care companies should remain strong due to solid and continuing secular-demand dynamics. I also believe that the potential for drug-pricing regulation is another issue that likely will continue to loom over the pharmaceuticals and biotechnology industries in Lately, the market appears to have narrowed, so I've maintained a high concentration in the fund's top-10 largest holdings. The fund's biggest positions at period end are in stocks I feel most confident about: very strong growers with what I consider robust capital allocation. I've also become focused on more-stable companies offering growth at a reasonable price, in areas such as medical equipment and large-cap biotechnology. For example, Becton Dickinson was a large fund holding and big contributor this period. The firm makes syringes and other medical staples used by health providers worldwide. As global utilization of health care continues to grow, I expect the company to continue to grow. In my view, few firms in this space will experience improving fundamentals into 2018, but I think Becton Dickinson is one that could. 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 Eddie Yoon on tech-enabled health care: "Looking further ahead into 2018 and beyond, one of the biggest trends I'm seeing in health care is the emergence of new technologies being used by health care companies to offer a more consumerfriendly approach to services. "We're already seeing the adoption of tech-enabled services to meet consumer demand in a number of new ways. For example, companies are beginning to use mobile apps to help consumers better understand and use their benefits, interact with care teams and aggregate their clinical information. This should increase a consumer's 'health IQ' and help them navigate a very complex, yet highly personal area of their lives. "Elsewhere, innovative technologies in the form of medical devices are not only bringing down the cost of health care for businesses and consumers but also making procedures more reproducible and improving clinical outcomes. For instance, devices that continuously monitor diabetics' blood sugar can reduce or eliminate the need for finger pricking, which can help patients more effectively manage a potentially costly chronic condition. "Telemedicine business models also are on the rise. Patients can engage in clinical interaction over the phone, via a video chat or through an alternative web application instead of trekking to the doctor's office. "Going forward, I expect the ways in which consumers interact with the health care system will continue to evolve, with demand for tech-enabled services increasing along with the sector's focus on consumer value. Shifting to some of these newer services may take time for many people, but adoption is already taking place. I'll continue to keep my eye on companies that I think can help consumers make more-informed health care decisions and help drive down costs." Holding Market Segment Average Relative Relative Contribution (basis points)* Merck & Co., Inc. Pharmaceuticals -4.59% 163 Ablynx NV sponsored ADR Biotechnology 0.63% 161 Celgene Corp. Biotechnology -2.57% 131 Vertex Pharmaceuticals, Inc. Intuitive Surgical, Inc. * 1 basis point = 0.01%. Biotechnology 1.42% 121 Health Care Equipment LARGEST DETRACTORS VS. BENCHMARK Holding Market Segment 2.01% 95 Average Relative Relative Contribution (basis points)* AbbVie, Inc. Biotechnology -3.70% -231 Allergan PLC Pharmaceuticals 3.41% -204 TESARO, Inc. Biotechnology 1.01% -141 Alexion Pharmaceuticals, Inc. DexCom, Inc. * 1 basis point = 0.01%. Biotechnology 1.30% -96 Health Care Equipment 1.04% 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 8.63% 7.58% Becton, Dickinson & Co. Health Care Equipment 6.41% 4.59% Amgen, Inc. Biotechnology 5.92% 9.46% Boston Scientific Corp. Health Care Equipment 5.11% 5.31% Humana, Inc. Managed Health Care 4.71% 2.59% Cigna Corp. Managed Health Care 3.62% 3.35% AstraZeneca PLC (United Kingdom) Pharmaceuticals 2.84% 0.34% Biogen, Inc. Biotechnology 2.61% 1.55% Vertex Pharmaceuticals, Inc. Biotechnology 2.55% 1.72% Roche Holding AG (participation certificate) Pharmaceuticals 2.40% Largest Holdings as a % of Net Assets 44.81% 48.41% 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 Biotechnology 32.31% 28.97% Health Care Equipment 23.99% 22.93% Managed Health Care 16.96% 15.84% Pharmaceuticals 15.88% 17.09% Health Care Technology 3.87% 3.39% Drug Retail 1.39% 2.22% Health Care Facilities 1.26% 2.25% Health Care Services 1.20% 2.37% Health Care Distributors 0.84% 0.88% Internet Software & Services 0.63% 0.79% Other 0.85% 1.49% ASSET ALLOCATION Asset Class Six Months Ago Domestic Equities 85.40% 90.36% International Equities 13.78% 8.27% Developed Markets 11.49% 7.36% Emerging Markets 2.29% 0.91% Tax-Advantaged Domiciles 0.00% 0.00% Bonds 0.00% 0.00% Cash & Net Other Assets 0.82% 1.37% 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 February 28, Month Cumulative YTD 1 3 Annualized 5 10 / LOF 1 Select Health Care Gross Expense Ratio: 0.74% % 5.27% 15.49% 4.60% 19.13% 14.53% S&P 500 Index 10.84% 1.83% 17.10% 11.14% 14.73% 9.73% MSCI US IMI Health Care 25/ % 2.35% 15.48% 7.18% 16.62% 12.75% Morningstar Fund Health 5.18% 3.23% 15.92% 4.53% 15.99% 13.01% % Rank in Morningstar Category (1% = Best) % 50% 22% 26% # of Funds in Morningstar Category Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 07/14/ 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. 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 health care industries are subject to government regulation and reimbursement rates, as well as government approval of products and services, which could have a significant effect on price and availability, and can be significantly affected by rapid obsolescence and patent expirations. 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. At a shareholder meeting on 12/8/17, a proposal was approved to combine the oversight of Fidelity's sector funds with Fidelity's broader equity and high income funds under a single Board of Trustees. The unified Board will be effective on 3/1/18. 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 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 US IMI Health Care 25/50 Index is a modified marketcapitalization-weighted index of stocks designed to measure the performance of Health Care 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. 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. MARKET-SEGMENT WEIGHTS 7

8 Manager Facts Eddie Yoon is a sector leader 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. Yoon is responsible for the coverage of health care equipment and supplies stocks, and serves as the health care sector leader. Additionally, he manages various Fidelity funds. Prior to joining Fidelity in 2006, Mr. Yoon held multiple positions at JPMorgan Asset Management, including analyst and coportfolio manager. He has been in the investments industry since Mr. Yoon earned his bachelor of arts degree in business economics from Brown University. 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 March 31, Annualized 5 10 / LOF 1 Select Health Care Gross Expense Ratio: 0.74% % 3.59% 17.62% 15.34% 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 07/14/ 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