Fidelity Telecom and Utilities Fund Key Takeaways For the semiannual reporting period ending July 31, 2017, the fund rose 7.57%, significantly outpacing the 4.50% result of the Russell 3000 Utilities Index. However, the fund fell short of the broad-market S&P 500 index, which returned 9.51%. As interest rates began to rise from historically low levels, investors shifted their focus to utilities with stronger business fundamentals and dividend growth, while telecommunication services businesses struggled amid fierce competition. This market environment supported Manager Douglas Simmons' emphasis on utilities with solid dividend-growth profiles over challenged telecoms, giving the fund an edge over the Russell index. Stock selection in electric utilities, such as NextEra Energy, as well as underweighting integrated telecommunication services, including AT&T, contributed most to the fund's relative result. The fund's biggest individual relative contributor was independent power producer NRG Energy. Conversely, overweighting the poor-performing wireless telecommunication services group (T-Mobile US) held back the fund's relative results. Avoiding regulated electric utility and benchmark component Duke Energy also detracted. Douglas remains committed to staying the course, selecting individual utility and telecom stocks he believes have a combination of fast-growing dividends and attractive valuations that could benefit the fund over the longer term. MARKET RECAP The U.S. equity bellwether S&P 500 index returned 9.51% for the six months ending July 31, 2017, gaining strongly to begin the period 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. In a stark reversal from 2016, growth-oriented stocks handily topped their value counterparts for the period. Among sectors, information technology (+17%) fared best, surging as a handful of major index constituents posted stellar returns. Health care (+14%) also shined, climbing in February and again in the final four months of the period, following the ACA's reprieve. Meanwhile, financials (+8%) lagged because sentiment regarding the potential for reduced regulation and lower taxes faded as the White House turned its attention to other initiatives. Rising interest rates held back real estate (+8%). Materials (+6%) trailed the broader market as optimism regarding increased infrastructure spending appeared to fade. Investors' general preference for risk assets hurt dividend-rich telecommunication services (-3%), as did increased competition. Lastly, lower oil prices sent energy (-7%) to the bottom of the sector performance rankings. Not FDIC Insured May Lose Value No Bank Guarantee
Q&A An interview with Manager Douglas Simmons Fund Facts Trading Symbol: Douglas Simmons Manager FIUIX Start Date: November 27, 1987 Size (in millions): $1,016.58 Investment Approach Fidelity Telecom and Utilities Fund is a sector-based, equity-focused strategy that seeks to outperform the benchmark through active management. The fund is concentrated in the two highest-dividendyielding sectors of the S&P 500. Within utilities, we believe buying companies with superior business models that are growing their dividends and trading at discounted valuations can outperform the sector benchmark over time. We perform bottom-up, fundamental research to form a view on utilities regulation and power prices to complement our stock selection process. Within the telecom sector, we strive to own dividendpaying telecom stocks that are backed by strong cashflow growth. We also look for faster earnings growth, as well as a higher potential for positive earnings revisions. Lastly, we try to take advantage of dislocations in value when the market ignores the fundamental drivers of individual companies. Sector strategies could be used by investors as alternatives to individual stocks for either tactical- or strategic-allocation purposes. Q: Douglas, how did the fund perform for the six months ending July 31, 2017 The fund gained 7.57%, outpacing the 4.50% result of the Russell 3000 Utilities Index. However, the fund lagged the 9.51% return of the broad-market S&P 500 index, as well as its peer group average. Looking slightly longer term, the fund bested the Russell index for the corresponding 12 months but fell short of the S&P 500 and peer group average. Q: What was the investment environment like for telecom and utilities stocks This period, it seems that dividend growth, valuations and business fundamentals all became important to utilities investors once again, and relatively cheaper stocks began to outperform. At the same time, expensive utility stocks bought solely for their dividend yields began to sell off. Telecom stocks, however, struggled for most of the period, finishing as one of the worst-performing sectors in the S&P 500 the past six months. In their efforts to win market share in a fixed pool of subscribers, the nation's four primary competitors Verizon Communications, AT&T, Sprint and T-Mobile continued their pricing wars, pressuring earnings and generally holding back stock results in the sector. Q: Given the investment environment, did the fund perform in line with your expectations Yes, it did. I expected the fund to eventually benefit from a renewed focus on fundamentals in the utilities sector, and that's what happened this period. My investment strategy focuses on mainly investing in companies with a history of increasing their dividends, a group that generally has been trading at cheaper valuations. I believe companies that increase dividends at an above-average rate tend to have improving or betterthan-average fundamentals. Also, I think these types of companies have a higher likelihood of being characterized by increased valuation multiples. From an industry perspective, our overweighting in electric 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.
utilities lifted the fund's relative result most. Despite strong fundamentals and dividend growth, the names we owned in this segment had been beaten down during last year's yield frenzy and recovered strongly during this six-month period. In the telecom sector, where I saw limited opportunities for dividend growth, I chose to significantly underweight the poor-performing integrated telecom services group, providing the fund an edge over the Russell index. This segment, which includes Verizon and AT&T, among other companies that I believe are structurally challenged, comprises about a third of the index. Q: Which specific holdings helped the fund's relative result The fund's stake in independent power producer NRG Energy proved beneficial. Propelled by activist hedge fund investors, NRG Energy's management team rolled out a transformational business plan in mid-july to simplify the company's business, pay down its debt, and sell off assets to add value. NRG's stock popped on the news, and our stake rose 48% for the full six-month period. In electric utilities, shares of Florida-based electric utility NextEra Energy, one of the fund's top contributors and among largest positions at period end, rose 20%. In addition to its regulated business, NextEra is one of the largest investors in wind and solar projects in North America. Roughly 40% of its electric capacity comes from wind and solar power generation, making the company the largest renewable energy supplier in the U.S. As of July 31, our NextEra holding comprised 10% of the fund's assets. Given the secular shift in the power fleet toward renewable energy and away from coal, NextEra has established itself as a market leader in renewable power generation. Also, the company has increased its earnings and dividends at higher rates than most other utilities, so it squarely fits my investment strategy. This period, NextEra benefited from investors' rotation back to companies with strong business fundamentals and attractive dividend growth. posted solid gains throughout the period, rising 31% for the full six months. Lastly, I'd like to mention the fund's positioning in AT&T. The fund has traditionally underweighted this large index component, as fierce competition has resulted in deteriorating fundamentals. During the period, I trimmed even more of the fund's stake, as I thought the market was not fully appreciating how challenged the investment environment had become, which helped the fund. Q: What detracted from the fund's relative results Overweighting the wireless telecommunication services group, which lagged the Russell index by a significant margin, held back our results for the period. Here, an outsized stake in national wireless provider T-Mobile US disappointed. I thought T-Mobile was the best-positioned of the four national wireless competitors. The company continued to expand its network and grow its subscriber base. However, in early June, Sprint began offering a free year of unlimited service, which threatened to put a damper on T-Mobile's recruitment of new customers. Additionally, expectations of a merger between these two companies began to wane. By the end of the period, T-Mobile returned about -1%. Avoiding index component Duke Energy, a regulated electric utility, also detracted. I chose to take advantage of other opportunities, as Duke has limited dividend growth and I expected its multiples to contract. However, investors rewarded Duke's solid execution the past six months, sending the stock higher. Q: What is your outlook I am committed to staying the course with regards to my investment process, as I believe the market is only beginning to reward stocks with better fundamentals at cheaper valuations. I intend to position the fund to take advantage of a rebound in dividend growth as a driver of outperformance. Q: What else contributed The fund's out-of-index position in wireless tower infrastructure provider SBA Communications also helped. As large telecom companies have continued to spend to expand and support their broadband coverage, especially after last year's spectrum auction, tower companies, including SBA, have benefited. With strong dividend growth at what I viewed as a cheap valuation relative to its competitors, SBA fit my investment parameters. The stock 3 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.
LARGEST CONTRIBUTORS VS. BENCHMARK Douglas Simmons on his investment in independent power producers & energy traders: "I significantly increased the fund's allocation to independent power producers & energy traders this period. Companies in this segment are the antithesis of the yield trade that drove utility stocks higher for much of 2016: They do not currently pay a dividend. Consequently, I think many stocks in this segment have been trading significantly below their intrinsic (fair) values. "Take fund holding NRG. I believe its business fundamentals are solid. At period end, the company's free cash flow remains very high, and it continues to pay down debt. And as is the case for others in the segment, NRG is now what I consider a deep-value investment. Part of the reason is that I think fundamentals in the power market are unsustainably weak. Our research indicates that prices should recover over the next few years, given the continued reduction in supply as moneylosing coal plants are closed. "As coal and nuclear plants remain under pressure due to higher demand for other energy resources, I think the independent power producers with solid balance sheets are positioned to exhibit long-term dividend growth and strong free-cash-flow generation. "As such, as of July 31, I believe NRG Energy and certain other independent power producers still represent strong value for investors with longerterm time horizons." Holding NRG Energy, Inc. Market Segment Independent Power Producers & Energy Traders Average Relative Relative Contribution (basis points)* 1.81% 77 NextEra Energy, Inc. Electric Utilities 4.60% 67 SBA Communications Corp. Class A AT&T, Inc. Verizon Communications, Inc. * 1 basis point = 0.01%. Specialized REITs 2.50% 57 Integrated Telecommunicatio n Services Integrated Telecommunicatio n Services LARGEST DETRACTORS VS. BENCHMARK Holding Market Segment -7.97% 52-8.07% 51 Average Relative Relative Contribution (basis points)* Duke Energy Corp. Electric Utilities -4.39% -26 T-Mobile U.S., Inc. Telephone & Data Systems, Inc. Wireless Telecommunicatio n Services Wireless Telecommunicatio n Services 4.11% -23 1.68% -20 Xcel Energy, Inc. Electric Utilities -1.75% -20 American Electric Power Co., Inc. * 1 basis point = 0.01%. Electric Utilities -2.57% -19 4 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.
10 LARGEST HOLDINGS Holding Market Segment Six Months Ago Verizon Communications, Inc. Integrated Telecommunication Services 11.07% -- NextEra Energy, Inc. Electric Utilities 10.12% 8.30% Sempra Energy Multi-Utilities 7.19% 6.53% Exelon Corp. Electric Utilities 6.83% 6.54% T-Mobile U.S., Inc. Wireless Telecommunication Services 6.18% 5.35% Great Plains Energy, Inc. Electric Utilities 5.14% 2.83% Time Warner, Inc. Movies & Entertainment 4.83% -- PG&E Corp. Electric Utilities 4.74% 5.01% Dominion Resources, Inc. Multi-Utilities 4.34% 4.69% Avangrid, Inc. Electric Utilities 3.67% 3.17% 10 Largest Holdings as a % of Net Assets 64.12% 63.94% Total Number of Holdings 35 34 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 Electric Utilities 34.11% 34.15% Integrated Telecommunication Services 14.36% 21.93% Multi-Utilities 12.69% 12.32% Wireless Telecommunication Services 8.59% 7.44% Specialized Reits 5.99% 5.14% Alternative Carriers 5.77% 6.80% Independent Power Producers & Energy Traders 5.17% 1.50% Movies & Entertainment 4.83% -- Cable & Satellite 3.66% 4.65% Oil & Gas Storage & Transportation 2.49% 2.23% Other 1.82% 2.31% ASSET ALLOCATION Asset Class Six Months Ago Domestic Equities 99.49% 98.46% International Equities 0.00% 0.00% Developed Markets 0.00% 0.00% Emerging Markets 0.00% 0.00% Tax-Advantaged Domiciles 0.00% 0.00% Bonds 0.00% 0.00% Cash & Net Other Assets 0.51% 1.54% 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.
FISCAL PERFORMANCE SUMMARY: Periods ending July 31, 2017 6 Month Cumulative YTD 1 3 Annualized 5 10 / LOF 1 Fidelity Telecom and Utilities Fund Gross Expense Ratio: 0.57% 2 7.57% 10.09% 6.25% 7.83% 10.50% 5.94% S&P 500 Index 9.51% 11.59% 16.04% 10.87% 14.78% 7.74% Russell 3000 Utilities Index 4.50% 4.40% 1.58% 9.72% 9.58% 6.20% Morningstar Fund Utilities 10.17% 12.18% 6.91% 7.67% 9.93% 5.94% % Rank in Morningstar Category (1% = Best) -- -- 57% 50% 40% 63% # of Funds in Morningstar Category -- -- 62 59 56 50 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 11/27/1987. 2 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, 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. 6 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.
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. The utilities industries can be significantly affected by government regulation, financing difficulties, supply and demand of services or fuel, and natural resource conservation. Non-diversified funds that focus on a relatively small number of stocks tend to be more volatile than diversified funds and the market as a whole. 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. 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. 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. 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 3000 Utilities Index is a market-capitalization-weighted index of utility stocks in the Russell 3000 Index. 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 7
Manager Facts Douglas Simmons 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 he is responsible for managing Fidelity Telecom and Utilities Fund (since 2005), Fidelity Select Utilities, Fidelity Advisor Utilities Fund and Fidelity VIP Utilities (all three since 2006). Mr. Simmons is also responsible for managing the telecom and utilities sleeves for various diversified sector-based portfolios as a member of Fidelity's Stock Selector Large Cap Group. Prior to assuming his current role in September 2005, Mr. Simmons served as a utilities analyst covering the electric and gas utility stocks from 2003 to 2005. Before joining Fidelity in 2003, he worked as a financial analyst at the private equity firm Hicks, Muse, Tate & Furst, from 1999 to 2001, and as an investment banking analyst at Morgan Stanley from 1997 to 1999. He has been in the investments industry since 1997. Mr. Simmons earned his bachelor of business administration degree in finance from The University of Texas at Austin, graduating with highest honors, and his master of business administration degree from Harvard Business School. 8 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.
PERFORMANCE SUMMARY: Quarter ending September 30, 2017 1 3 Annualized 5 10 / LOF 1 Fidelity Telecom and Utilities Fund Gross Expense Ratio: 0.57% 2 11.43% 7.29% 10.48% 5.56% 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 11/27/1987. 2 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 02917. Fidelity Investments Institutional Services Company, Inc., 500 Salem Street, Smithfield, RI 02917. 2017 FMR LLC. All rights reserved. Not NCUA or NCUSIF insured. May lose value. No credit union guarantee. 715917.6.0