Fidelity Small Cap Value Fund

Transcription

1 Fidelity Small Cap Value Fund Key Takeaways Amid strong market conditions for the fiscal year ending July 31, 2017, the fund's Retail class shares gained a solid 14.99% but nevertheless trailed the benchmark Russell 2000 Value Index, which returned 19.21%. The fund's relatively more defensive stance did not help this period. Versus the benchmark, the fund's defensive positioning a reflection of the fund's focus on lower-valuation, higher-quality stocks at the larger-cap end of the small-cap investment universe weighed on performance in a market environment favoring faster-growing, lower-quality small-caps. Stock picking was subpar overall, but especially in the information technology and industrials sectors, although favorable positioning in the real estate category added value. On February 1, 2017, Clint Lawrence became Co-Portfolio Manager of the fund. As the period progressed, Clint, along with Lead Portfolio Manager Derek Janssen, eliminated the fund's exposure to traditional brick-and-mortar retailers, whose serious business challenges left the managers favoring other opportunities. With valuations in the small-cap market very high as of July 31, in their view, the managers are maintaining a low-turnover approach and are keeping the fund defensively positioned. MARKET RECAP The U.S. equity bellwether S&P 500 index gained 16.04% for the year ending July 31, 2017, rising sharply following the November election and continuing to rally through the end of February on optimism for President Trump's pro-business agenda. Equity markets leveled off, however, as the fledgling administration faced the first test of its domestic agenda. Stocks reacted with uncertainty to efforts by Congress in March to repeal and replace the Affordable Care Act, and then reverted upward through July 31. Growth stocks surged ahead of value, while small-caps' advantage over largecaps narrowed. Sector-wise, financials (+36%) fared best, riding an uptick in bond yields and a surge in banks, particularly post-election. Information technology gained 29%, as a handful of major index constituents posted stellar returns. Industrials (+18%) was boosted by a call for increased infrastructure spending. Consumer discretionary (+14%) slightly lagged the broader market because brick-and-mortar retailers continued to suffer from increased online competition. Energy (0%) was hurt by low oil prices. Utilities (+6%), consumer staples (+4%), telecommunication services (-7%) and real estate (-2%) all struggled amid an improved backdrop for riskier assets that curbed demand for dividend-rich sectors, as well as the likelihood of further interest rate hikes later in Not FDIC Insured May Lose Value No Bank Guarantee

2 Q&A Derek Janssen Lead Manager Fund Facts Trading Symbol: FCPVX Clint Lawrence Co-Manager Start Date: November 03, 2004 Size (in millions): $3, Investment Approach Fidelity Small Cap Value Fund takes a value approach to investing, focusing on companies with low implied expectations, typically starting with the cheaper half of the investment universe. We strive to buy the best businesses available among those trading at below-market valuation multiples, though in periods of extremely high dispersion (return variance), we may opportunistically go further down the quality spectrum. Each of our investments is scrutinized for a perceived margin of safety, assessed through rigorous analysis of each firm's income statement and balance sheet. We employ a disciplined portfolio construction approach and manage the portfolio in a concentrated fashion in order to emphasize our best ideas, and to try to have most of the risk and return of the fund driven by stock-specific factors. An interview with Lead Portfolio Manager Derek Janssen and Co- Manager Clint Lawrence Q: Clint, how did the fund perform for the fiscal year ending July 31, 2017 C.L. Small-cap value stocks generally gained ground against a strong performance backdrop. Our typically defensive investment approach, however, detracted from the fund's result versus the benchmark. For the 12-month time frame, the fund's Retail class shares gained 14.99%, lagging the 19.21% increase in the Russell 2000 Value Index. The fund also trailed its peer group average. Our stock picking was unfavorable in several sectors, especially information technology and industrials and, to a lesser extent, energy and consumer discretionary. However, a combination of positive stock selection and a helpful underweighting in the lagging real estate category added to results, as did our below-benchmark weighting in energy, another poor-performing sector. Q: Derek, what made the market environment a poor fit for your collective approach D.J. As Clint suggested, the fund tended to be defensively positioned, which by our definition means we were focused on higher-quality companies at the larger end of our smallcap investment universe. During the past 12 months, this approach was poorly suited to the prevailing market conditions. Nevertheless, I still see ours as a good approach for the long term. And, indeed, the fund has outperformed the benchmark over extended periods, including the three-, five- and ten-year periods ending July 31. Here I'll note that although I've been part of the fund's management team only since 2013, it's been run with a similar investment approach for much longer than that. To remind shareholders of how we invest in all types of market conditions: We look to generate long-term outperformance through individual stock selection while, at the same time, working to manage effects from sector allocation and market timing. We typically avoid big gaps between the fund's largest and smallest relative weightings at the individual stock level. In terms of risk management, our first and most important step, though, is to try to avoid paying too much for a stock 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

3 in the first place. We do this by comparing a company's current valuation with our assessment of its earnings power over a full business cycle. Second, we look for stocks with what we see as a sufficient "margin of safety," meaning that, even if conditions fail to materialize according to plan, the securities' downside risk is more limited. Another way to put it is that we want to own resilient companies with the financial capacity to manage difficult conditions. Of final note, we also conduct quantitative research to uncover high-quality small-caps that meet our valuation criteria, even if they're outside of the fund's benchmark. Q: Compared with the benchmark, which stocks hampered results the most D.J. The fund's biggest individual detractor was out-ofbenchmark Store Capital (-21%). This "triple net" real estate investment trust (REIT), which owns freestanding, single-tenant properties, was hurt by a few factors this period. First, triple nets where tenants pay the property taxes, insurance premiums, maintenance costs and other expenses often handled by landlords were hurt this period by generally rising interest rates. Second, some of Store Capital's tenants are retailers, and this exposure worried investors in light of increasingly difficult business conditions in the industry. Still, we continued to feel good about our investment, one of the fund's largest holdings at period end. Although we share the market's general concern about brick-and-mortar retailers, we'd note that most of Store Capital's tenants are operators of movie theaters, restaurants and other providers of experiences not especially vulnerable to online competition. And yet the market appears to be valuing Store Capital as if the company's entire tenant base is likely to go out of business. That's highly improbable, in our opinion and apparently in the opinion of billionaire investor Warren Buffett as well, as the company he runs, Berkshire Hathaway, bought a roughly 10% stake in Store Capital in June, causing the stock to pare its earlier losses. Another relative detractor this period was fuel distributor World Fuel Services, an out-of-benchmark stock we sold from the portfolio in June. Although World Fuel had previously met our criteria, our perspective changed over time, given the company's unfavorable earnings trends and increased pressure on the company's core business. benefited from a very cheap valuation coming into the period, as well as from the company's recent effectiveness at cutting costs and from very strong earnings from Aaron's Progressive Leasing division. Another top contributor and the fund's largest holding at period end was U.S.-listed but U.K.-headquartered medical-device manufacturer LivaNova. We bought this stock in late 2016, taking advantage of a significant price drop after the company announced worse-than-expected earnings and the resignation of its CEO. Despite these difficulties, we liked LivaNova more the more we looked into it. We saw a very attractively valued company with strong core operations that was receiving insufficient recognition from the market perhaps because of the complexity of the firm's business structure. In fact, our purchase proved very well timed, as the fund's stake in LivaNova subsequently gained 35% through period end. Q: Gentlemen, closing thoughts as of July 31 D.J. One notable shift in the portfolio this period was our elimination of the fund's exposure to traditional brick-andmortar retailers. In our view, the competitive headwinds facing companies such as department-store operator Dillard's and sporting-goods retailer Hibbett Sports two of the fund's largest relative detractors this period were not likely to resolve themselves anytime soon. C.L. As has been the case for some time now, stockmarket valuations appear very high to us, and we don't think investors are being sufficiently compensated for taking on risk. In this environment, we're continuing to restrict turnover in the portfolio. We're also keeping the fund defensively positioned, with a focus on attractively valued, higher-quality stocks at the larger end of our smallcap investment universe positioning that we think will be to the fund's long-term benefit, especially if the market were to experience a significant correction. Q: Which stocks contributed D.J. Our longtime position in Aaron's, a provider of rent-toown home furnishings, was a strong performer, with the stock nearly doubling in value this period. Aaron's shares 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 Clint Lawrence discusses his transition onto the fund: "Since joining Derek as Co-Manager in January, I've been steadily ramping up my role, including gaining familiarity with the fund's holdings. Early on, I focused on reviewing positions one by one and providing Derek with recommendations about those I saw as good candidates for liquidation. For example, I think Derek would agree that I helped him clarify his thinking about some longtime brickand-mortar retail holdings that we ultimately sold in search of opportunities offering what I thought was better long-term potential. "More recently, my focus has shifted to finding new investment ideas. Given how expensive the small-cap market has grown, in my view, it's been relatively challenging to find names that meet both our valuation and our quality criteria. One new investment idea that came out of my work was Linn Energy, an exploration & production firm that ended up adding to the fund's result this period. "Although we don't typically find many opportunities in the energy sector that meet our investment criteria, I found much to like with Linn as it exited from bankruptcy in For example, the company had net cash on its balance sheet; it's been doing a good job of generating free cash flow, a rare trait for an energy company; and it has been using that free cash to buy back shares. In addition, Linn has been aggressively selling noncore assets from its portfolio and turning the proceeds over to shareholders. "Working with one of Fidelity's energy analysts, in June we concluded the market was valuing Linn's shares based on the company's current energyproducing assets and assigning no value at all to assets that have not yet been drilled. We saw a lot more upside than downside here and, so far, the position has worked out for the fund." Holding LivaNova PLC First American Financial Corp. Moog, Inc. Class A Tech Data Corp. ProAssurance Corp. CVB Financial Corp. Silgan Holdings, Inc. Cullen/Frost Bankers, Inc. Store Capital Corp. CalAtlantic Group, Inc. 10 Largest Holdings as a % of Net Assets Total Number of Holdings 59 Market Segment Health Care Financials Industrials Information Technology Financials Financials Materials Financials Real Estate Consumer Discretionary 29.56% 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 89.03% 91.32% International Equities 8.95% 6.96% Developed Markets 8.60% 6.74% Emerging Markets 0.35% 0.22% Tax-Advantaged Domiciles 0.00% 0.00% Bonds 0.31% 0.00% Cash & Net Other Assets 1.71% 1.72% 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. 4 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

5 MARKET-SEGMENT DIVERSIFICATION Market Segment Portfolio Weight Portfolio Weight Six Months Ago Financials 29.92% 29.53% Industrials 13.74% 15.31% Information Technology 13.41% 12.08% Consumer Discretionary 12.88% 11.50% Real Estate 7.18% 8.48% Health Care 6.66% 6.35% Materials 4.51% 4.60% Utilities 4.15% 3.75% Energy 3.69% 4.43% Consumer Staples 1.84% 2.26% Telecommunication Services 0.00% 0.00% Other 0.00% 0.00% FISCAL PERFORMANCE SUMMARY: Periods ending July 31, Month Cumulative YTD 1 3 Annualized 5 10 / LOF 1 Fidelity Small Cap Value Fund Gross Expense Ratio: 1.22% % 3.19% 14.99% 10.37% 14.97% 9.30% Russell 2000 Value Index 1.90% 1.18% 19.21% 9.50% 13.76% 6.94% Morningstar Fund Small Value 1.24% 1.12% 16.21% 7.27% 12.83% 6.82% % Rank in Morningstar Category (1% = Best) % 13% 12% 2% # of Funds in Morningstar Category Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 11/03/ 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 1.50% for shares held less than 90 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, advisor.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. 5 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

6 Definitions and Important Information 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 companies. Value stocks can perform differently than other types of stocks and can continue to be undervalued by the market for long periods of time. 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. 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. 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 2/1/17, Clint Lawrence became co-portfolio manager of the fund, and Derek Janssen transitioned to lead portfolio manager. 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. 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 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. 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 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 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 6

7 Manager Facts Derek Janssen is a portfolio manager at Fidelity Management & Research Company (FMRCo), the investment advisor for Fidelity's family of mutual funds. Fidelity Investments is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing and other financial products and services to more than 20 million individuals, institutions and financial intermediaries. In this role, Mr. Janssen is co-portfolio manager of Fidelity Small Cap Discovery Fund and Fidelity Series Small Cap Discovery Fund (since 2016). He also manages Fidelity Small Cap Value Fund and Fidelity Advisor Small Cap Value Fund (since 2015), and was previously co-manager of these funds from 2013 to Prior to assuming his current responsibilities, Mr. Janssen covered small-cap U.S. technology companies starting in Previously, he served as a small-cap research analyst in the FMR Tokyo office from 2008 to 2010, and worked on Fidelity's Small Cap Team in the Equity Research department starting in Before joining Fidelity in 2007, Mr. Janssen worked at Skystone Capital Management, a small-cap, value-oriented hedge fund, from 2005 to 2007, and at Citadel LLC starting in He has been in the investments industry since Mr. Janssen earned his bachelor of arts degree in economics from Stanford University and his master's degree in statistics from Harvard University. Clint Lawrence 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. Lawrence is a member of the Equities Small Cap team, responsible for covering small-cap financials. Additionally, he co-manages Fidelity Small Cap Value Fund and Fidelity Advisor Small Cap Value Fund. Prior to assuming his current responsibilities, Mr. Lawrence was an associate at Fenway Partners, where he was responsible for executing private equity transactions. Previously, Mr. Lawrence acted as a management consultant for the Monitor Group, responsible for advising Fortune 500 companies on corporate strategy. During this time, Mr. Lawrence also acted as a private equity analyst for Monitor Clipper Partners. He has been in the investments industry since Mr. Lawrence earned his bachelor of science degree in finance and chemical engineering from the University of Pennsylvania and his master of business administration degree from Harvard Business School. He also currently serves as the board chair of the Dudley Street Neighborhood Charter School. 7 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

8 PERFORMANCE SUMMARY: Quarter ending September 30, Annualized 5 10 / LOF 1 Fidelity Small Cap Value Fund Gross Expense Ratio: 0.99% % 11.96% 14.43% 9.40% 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 11/03/ 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 1.50% for shares held less than 90 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. Before investing in any mutual fund, please carefully consider the investment objectives, risks, charges, and expenses. For this and other information, call or write Fidelity for a free prospectus or, if available, a summary prospectus. Read it carefully before you invest. Past performance is no guarantee of future results. Views expressed are through the end of the period stated and do not necessarily represent the views of Fidelity. Views are subject to change at any time based upon market or other conditions and Fidelity disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Fidelity fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity fund. The securities mentioned are not necessarily holdings invested in by the portfolio manager(s) or FMR LLC. References to specific company securities should not be construed as recommendations or investment advice. Information included on this page is as of the most recent calendar quarter. S&P 500 is a registered service mark of Standard & Poor's Financial Services LLC. Other third-party marks appearing herein are the property of their respective owners. All other marks appearing herein are registered or unregistered trademarks or service marks of FMR LLC or an affiliated company. Fidelity Brokerage Services LLC, Member NYSE, SIPC., 900 Salem Street, Smithfield, RI Fidelity Investments Institutional Services Company, Inc., 500 Salem Street, Smithfield, RI FMR LLC. All rights reserved. Not NCUA or NCUSIF insured. May lose value. No credit union guarantee Diversification does not ensure a profit or guarantee against a loss.