Fidelity VIP Disciplined Small Cap Portfolio

Transcription

1 Fidelity VIP Disciplined Small Cap Portfolio Key Takeaways The fund's share classes rose about 7% in calendar year 2017, meaningfully trailing the 14.65% gain of the benchmark Russell 2000 Index. Stocks with high earnings and sales growth tended to lead the market, while stocks characterized by valuation and quality factors recommended by our investment models throughout the year hampered relative performance. More specifically, weak security selection in the consumer discretionary, information technology and industrials sectors weighed on relative performance, although picks in financials modestly added value. Senior Portfolio Manager Maximilian Kaufmann and his team employ an investment model intended to identify companies with strong fundamental characteristics they believe are correlated with long-term outperformance. The team maintains a data-driven approach, aimed at managing emotional biases and generating a more objective process. At year-end, the team believes that sticking to their approach over a full market cycle is the best strategy for creating favorable long-term results. MARKET RECAP U.S. equities gained 21.83% in 2017, as the S&P 500 index rose steadily and closed the year just shy of an alltime high after a particularly strong three-month finish. Early on, equities rallied on optimism for President Trump's pro-business agenda but leveled off in March amid fading optimism and stalled efforts by Congress to repeal and replace the Affordable Care Act. Upward momentum soon returned and continued through year-end with consumer sentiment and other market indicators staying positive. The lone exception was a brief cooldown in August, when geopolitical tension escalated and uncertainty grew regarding the future of health care, tax reform and the debt ceiling. Sectorwise, information technology fared best by a wide margin, rising 39% amid strong earnings growth from several major index constituents. A 24% gain in materials was spurred by increased demand, especially from China. Consumer discretionary gained 23%, despite many brick-and-mortar retailers suffering from online competition, and financials edged the broader market on an uptick in bond yields. Conversely, the defensive energy and telecom services sectors returned about -1% each. Rising interest rates held back real estate (+11%), while consumer staples (+13%) and utilities (+12%) struggled due to investors' general preference for risk assets. Not FDIC Insured May Lose Value No Bank Guarantee

2 Q&A Fund Facts Maximilian Kaufmann Portfolio Manager Start Date: December 27, 2005 Size (in millions): $ Investment Approach Fidelity VIP Disciplined Small Cap Portfolio is a diversified domestic equity strategy with a small-cap core orientation. The fund seeks to outperform its benchmark through a quantitative investment process that balances both risk and return. Our approach involves building multifactor statistical models to help us select companies with desirable fundamental characteristics. We generally favor companies with improving fundamentals and that are also trading at reasonable valuations. Our systematic investment process accounts for both topdown market indicators and bottom-up fundamental insights, using a dynamic factor allocation that allows the fund to adapt to changing market conditions in a riskaware manner. An interview with Maximilian Kaufmann, Senior Portfolio Manager of the Geode Capital Management, LLC, investment management team Q: Max, how did the fund perform for the year ending December 31, 2017 The fund's share classes rose about 7% in calendar year 2017, well behind the 14.65% gain of the benchmark Russell 2000 Index. Security selection in the consumer discretionary, information technology and industrials sectors significantly hurt relative results, while picks in financials added modest value. Q: What market trends did you encounter, and how did they affect the fund's performance Stocks of all types gained ground in an environment of robust global economic growth. But for the vast majority of the year, investors preferred growth stocks to their valueoriented counterparts. As an example, the Russell 2000 Growth Index outpaced the Russell 2000 Value Index by more than 14 percentage points in It was against this backdrop that the fund significantly lagged its benchmark this period. As a result of our quantitative investment process, the fund had significant exposure to stocks with value characteristics and relatively low exposure to growth and momentum stocks. What's more, the growth-versus-value performance differential was especially pronounced in the consumer discretionary and information technology sectors as we mentioned, two of our biggest areas of difficulty in Q: Why was the fund emphasizing valueoriented investments As we always do, we were following our quantitative management approach, which involves identifying companies with a variety of desirable fundamental characteristics that our research has shown to be correlated with long-term outperformance versus the market average. Ultimately, we're seeking to identify good businesses with durable competitive advantages and with stocks selling at prices we consider reasonable. 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

3 To accomplish this objective, my team and I use computeraided analytical models to help us examine and rank individual securities. With these models, we seek to build a portfolio that can outperform the benchmark. These rankings generally are based on valuations, earnings growth and technical indicators, among other factors. We also manage portfolio risk, with the aim of keeping the fund's risk characteristics similar to those of its benchmark. Our models are intended to provide a framework in which we may decide to overweight securities that our analyses indicate have positive characteristics and to underweight or avoid stocks determined to have negative characteristics. The management team and I take into consideration the way the fund's assets are allocated relative to the benchmark in terms of position size, industry and market capitalization. We generally invest at least 80% of the fund's assets in common stocks included in the Russell 2000 Index, allowing the remainder to be invested in outof-benchmark securities. Q: Why do you favor a data-driven approach We believe that financial markets are less than 100% efficient, primarily due to investors' behavioral tendencies. In an attempt to manage human emotion and potentially remove some common investing biases held even by professional investors we apply a systematic investment process grounded in traditional fundamental analysis to make the process more objective. Q: Which stocks detracted the most relative to the benchmark Retailer Big 5 Sporting Goods was our biggest individual detractor this year. Our models recommended this stock for its valuation characteristics throughout the period. Big 5 saw its shares return about -54% for the year, with much of the decline coming on a single day in August, after the company reported weaker-than-expected quarterly results. Dean Foods also detracted. This dairy producer received high marks from our models for its valuation characteristics, which was why we owned it throughout the year. Unfortunately, the company's stock returned -45% in 2017, reflecting Dean Foods' disappointing financial results and increased competitive pressure. Our position in health care logistics company Owens & Minor (-44%) also hurt. The company's shares fell especially sharply in early November, after management reported quarterly earnings well below analysts' expectations and issued a weaker profit forecast for the full year. Our models remained optimistic about the stock, however, due primarily to its valuation and quality characteristics. We took advantage of price weakness late in the period to add to the fund's stake. Other notable positions that hurt the relative return included Argan (-35%), a service provider to powergeneration and renewable-energy companies; Cleveland- Cliffs (-30%), a mining and natural resources company; and Hawaiian Holdings (-29%), a Hawaii-based airtransportation provider. Q: Which stocks contributed Shares of chemical manufacturer Chemours gained 78% for the fund in 2017, more than any other individual position, as some of the company's legal liabilities weighing on the stock were resolved. Although our models continued to find Chemours attractive from an earnings-momentum perspective, its valuation became less so. We ultimately sold the name in pursuit of other opportunities our models concluded offered better upside. Another contributor was Tivity Health, a provider of fitness solutions for seniors. Tivity's shares gained sharply for much of the period, particularly on quarterly earnings reported in April. In October, we sold the fund's position in this stock, only to buy the benchmark component back again the following month. Our purchase reflected a big drop in the stock price, after Tivity's largest customer announced plans for a competing offering. Thus, the fund benefited from good timing by missing Tivity's sharp decline in November and then subsequently capturing its gains when the stock drifted upward to close out the year. Q: Any closing thoughts, Max Although we are disappointed in the fund's results this past year, we remain committed to our long-term approach and philosophy. Thus, based on the recommendations of our models, we are maintaining the fund's current value-centric exposure, as we believe that over a full business cycle, a focus on value-oriented companies may lead to relative outperformance. 3 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

4 10 LARGEST HOLDINGS Holding MKS Instruments, Inc. EMCOR Group, Inc. Chemed Corp. Wintrust Financial Corp. Curtiss-Wright Corp. Umpqua Holdings Corp. Evercore, Inc. Class A HealthSouth Corp. Tech Data Corp. Molina Healthcare, Inc. 10 Largest Holdings as a % of Net Assets Market Segment Information Technology Industrials Health Care Financials Industrials Financials Financials Health Care Information Technology Health Care 6.96% Total Number of Holdings 487 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. ASSET ALLOCATION Asset Class Portfolio Weight Portfolio Weight Six Months Ago Domestic Equities 96.92% 96.25% International Equities 3.12% 3.51% Developed Markets 0.66% 0.69% Emerging Markets 2.44% 2.80% Tax-Advantaged Domiciles 0.02% 0.02% Bonds 0.00% 0.00% Cash & Net Other Assets -0.04% 0.24% 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. MARKET-SEGMENT DIVERSIFICATION Market Segment Portfolio Weight Portfolio Weight Six Months Ago Information Technology 17.84% 17.73% Industrials 16.43% 12.78% Health Care 15.91% 15.56% Financials 15.43% 16.45% Consumer Discretionary 11.45% 13.89% Materials 5.37% 3.55% Real Estate 5.32% 7.41% Consumer Staples 4.31% 4.36% Multi Sector 3.72% 3.71% Utilities 2.15% 2.29% Energy 2.06% 1.66% Telecommunication Services 0.06% 0.37% Other 0.00% 0.00% 4 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

5 PERFORMANCE SUMMARY Variable annuity contracts are issued by insurance companies through separate accounts that are part of the insurer. The value of a variable annuity contract depends on the values of units of subaccounts of the separate account. Each subaccount purchases shares of a corresponding mutual fund. Subaccount investment performance is based on the performance of the mutual fund in which it invests, less insurance company charges made against the assets of the separate account. A subaccount is not a mutual fund. The information provided in this Performance Summary contains performance information for the fund, or class, and each variable subaccount, with comparisons over different time periods to the fund's relevant benchmarks including an appropriate index as well as a group of similar funds whose average returns are compiled and monitored by an independent mutual fund research company. Figures for more than one year assume a steady compounded rate of return and are not a class' year-by-year results, which fluctuated over the periods shown. Fund performance numbers are net of all underlying fund operating expenses, but do not include any insurance charges imposed by your insurance company's separate account. If fund performance information included the effect of these additional charges, the total returns would have been lower. The performance table also contains performance information for certain insurance company subaccounts that invest in the fund. Each variable subaccount's performance, as shown, is net of all fees and expenses, including those charges imposed by your insurance company. Seeing the returns over different time periods can help you assess the performance against relevant measurements and across multiple market environments. The performance information includes average annual total returns and cumulative total returns and is further explained in this section.* Investing in a variable annuity involves risk of loss investment returns, contract value, and, for variable income annuities, payment amounts are not guaranteed and will fluctuate. Withdrawals of taxable amounts from an annuity are subject to ordinary income tax, and, if taken before age 59 1/2, may be subject to a 10% IRS penalty. Current performance may be higher or lower than the performance data quoted below. An investor's shares, when redeemed, may be worth more or less than their original cost. For month-end performance figures, please visit or call Fidelity. The performance data featured represents past performance, which is no guarantee of future results. Fiscal periods ending December 31, 2017 Cumulative Annualized Total Returns for the Fund 6 Month YTD / LOF 1 VIP Disciplined Small Cap Portfolio - Initial Class Gross Expense Ratio: 0.61% % 7.02% 7.02% 8.77% 13.39% 8.39% VIP Disciplined Small Cap Portfolio - Investor Class Gross Expense Ratio: 0.69% % 6.91% 6.91% 8.68% 13.28% 8.30% Russell 2000 Index 9.20% 14.65% 14.65% 9.96% 14.12% 8.71% Morningstar Insurance Small Blend 9.12% 13.04% 13.04% 9.43% 13.97% 8.45% 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 12/27/ 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. Performance and disclosure information continued on next page. 5 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

6 PERFORMANCE SUMMARY (continued): Fiscal periods ending December 31, 2017 Total Returns for the Variable Subaccount** Annualized Cumulative Annualized New York Only: 10 /Life of Subaccount 6 Month YTD /Life of Subaccount Fidelity Retirement Reserves A 7.52% 6.23% 6.16% 6.16% 7.90% 12.48% 7.52% Fidelity Income Advantage B 7.30% 6.12% 5.95% 5.95% 7.68% 12.26% 7.30% Fidelity Personal Retirement Annuity C (for contracts purchased prior to 1/1/09 and on or after 9/7/10) Fidelity Personal Retirement Annuity C (for contracts purchased between 1/1/09 and 9/6/10) Fidelity Personal Retirement Annuity C (for contracts purchased on or after 9/7/10 with an initial purchase payment of $1M+) 8.02% 6.41% 6.64% 6.64% 8.41% 13.00% 8.02% 8.00% 6.41% 6.64% 6.64% 8.41% 13.00% 8.00% 8.20% 6.49% 6.80% 6.80% 8.58% 13.17% 8.20% Fidelity Retirement Reserves - Subaccount Inception: May 01, 2006; New York Only Inception: May 01, Fidelity Income Advantage - Subaccount Inception: May 01, 2006; New York Only Inception: May 01, Fidelity Personal Retirement Annuity - Subaccount Inception: May 01, 2006; New York Only Inception: May 01, Fidelity Retirement Reserves' underlying fund options are Initial Class fund offerings. Fidelity Income Advantage's underlying fund options are Initial Class fund offerings. Fidelity Personal Retirement Annuity's underlying fund options are Investor Class fund offerings. A In NY, Retirement Reserves B In NY, Income Advantage C In NY, Personal Retirement Annuity * Total returns are historical and include changes in share price (for the fund) and unit price (for the variable subaccount) and reinvestment of dividends and capital gains, if any. ** Returns for Fidelity Retirement Reserves include the 0.80% annual annuity charge. For Fidelity Retirement Reserves contracts, returns do not reflect the annual $30 maintenance fee which applies to contracts where purchase payments less any withdrawals are less than $25,000. Returns for Fidelity Income Advantage include the 1.00% annual annuity charge. Returns for Fidelity Personal Retirement Annuity ("FPRA") include the 0.25% annual annuity charge for contracts purchased prior to 1/1/2009, and on or after 9/7/2010. For FPRA contracts purchased between 1/1/2009 and 9/6/2010, returns include a 0.35% annual annuity charge prior to 9/7/2010 and 0.25% thereafter. For FPRA contracts purchased on or after 9/7/2010 with an initial purchase payment of $1,000,000 or more, returns include a 0.10% annual annuity charge. Life of subaccount returns are from the subaccount inception, the date the portfolio was first available in the insurance company's variable product. Please see the last page(s) of this Q&A document for most-recent calendar-quarter 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. Fidelity Income Advantage (policy form nos. FVIA-92100, et al. and FVIA-99100, et al.), Fidelity Retirement Reserves (policy form no. NRR-96100, et al.), Fidelity Personal Retirement Annuity (policy form no. DVA-2005, et al.), Fidelity Freedom Lifetime Income (policy form nos. FFLI-Q-2005, et al. and FFLI-NQ-2005, et al.), and Fidelity Growth and Guaranteed Income (policy form no. DVA-GWB- 2007, et al.) are issued by Fidelity Investments Life Insurance Company, 100 Salem Street, Smithfield, RI 02917, and for NY residents, Income Advantage (policy form nos. EFVIA-92100, et al. and EFVIA-99100, et al.), Retirement Reserves (policy form no. EVA-91100, et al.), Personal Retirement Annuity (policy form no. EDVA-2005, et al.), Fidelity Freedom Lifetime Income (policy form nos. EFLI-Q-2005, et al. and EFLI-NQ-2005, et al.), and Growth and Guaranteed Income (policy form no. EDVA-GWB-2007, et al.) are issued by Empire Fidelity Investments Life Insurance Company, New York, NY. Annuities are distributed by Fidelity Brokerage Services (Member NYSE, SIPC) and Fidelity Insurance Agency, Inc. Index companies with higher price-to-book ratios and higher forecasted growth rates. 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. MORNINGSTAR 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. FUND RISKS Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. The securities of smaller, less well-known companies can be more volatile than those of larger issuers. IMPORTANT FUND INFORMATION Relative positioning data presented in this commentary is based on the fund's primary benchmark (index) unless a secondary benchmark is provided to assess performance. VIP refers to Variable Insurance Products 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. Russell 2000 Index is a market-capitalization-weighted index designed to measure the performance of the small-cap segment of the U.S. equity market. It includes approximately 2,000 of the smallest securities in the Russell 3000 Index. 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. Russell 2000 Value Index is a market capitalization-weighted index designed to measure the performance of the small-cap value segment of the U.S. equity market. It includes those Russell 2000 Index companies with lower price-to-book ratios and lower forecasted growth rates. Russell 2000 Growth Index is a market capitalization-weighted index designed to measure the performance of the small-cap growth segment of the U.S. equity market. It includes those Russell

8 Manager Facts Maximilian Kaufmann is a senior portfolio manager on the equity portfolio team at Geode Capital Management. In this role Max is responsible for the management of the Quantitative Active Equity strategies, as well as portfolio construction, optimization, and continuous development of Geode's Quantitative Active Equity capabilities. He is the lead manager of the Fidelity Enhanced Index Funds, which Geode has sub-advised since Prior to joining Geode in 2009, Max worked as a portfolio manager of Active Quantitative Equities at Lazard Asset Management, LLC where he was responsible for developing the firm's quantitative long/short and long-only equity capabilities. In this role, he oversaw the investment process including analysis, trading and obtaining new investment mandates in active quantitative equity strategies. Prior to that, Max worked as lead portfolio manager of the Global Equity team at PanAgora Asset Management, Inc., where he was responsible for global equity research and investment process. Preceding that, he was a quantitative research analyst at Putnam Investments and CitiGroup Asset Management. Max earned his bachelor of science degree in economics from State University of New York at Binghamton and his master of arts degree in statistics from Columbia 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, 2018 Total Returns for the Variable Subaccount New York Only: 10 /Life of Subaccount 1 Annualized /Life of Subaccount Fidelity Retirement Reserves 8.65% 5.87% 5.49% 9.92% 8.65% Fidelity Income Advantage 8.43% 5.66% 5.27% 9.69% 8.43% Fidelity Personal Retirement Annuity (for contracts purchased prior to 1/1/09 and on or after 9/7/10) Fidelity Personal Retirement Annuity (for contracts purchased between 1/1/09 and 9/6/10) Fidelity Personal Retirement Annuity (for contracts purchased on or after 9/7/10 with an initial purchase payment of $1M+) 9.16% 6.34% 5.98% 10.45% 9.16% 9.13% 6.34% 5.98% 10.45% 9.13% 9.32% 6.50% 6.14% 10.61% 9.32% Current performance may be higher or lower than the performance data quoted above. For month-end performance figures, please visit or call Fidelity. The performance data featured represents past performance, which is no guarantee of future results. Investing in a variable annuity involves risk of loss investment returns, contract value, and, for variable income annuities, payment amounts are not guaranteed and will fluctuate. Withdrawals of taxable amounts from an annuity are subject to ordinary income tax, and, if taken before age 59 1/2, may be subject to a 10% IRS penalty. Please see the Fiscal Performance Summary section of this Q&A document for performance footnotes and additional information. Before investing, please carefully consider the investment objectives, risks, charges, and expenses of the fund or annuity and its investment options. 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.