Fidelity Select IT Key Takeaways For the semiannual reporting period ending August 31, 2017, the fund gained 12.75%, comfortably ahead of the 8.24% return of the MSCI U.S. IMI IT 25/50 Index and more than double the 5.65% gain of the broadly based S&P 500 index. After weak relative performance for much of 2016, information technology (IT) services stocks rebounded nicely in 2017, including the past six months, aided by improving prospects for banks and other financials, which represent a large percentage of revenues for IT services companies. Against this backdrop, Manager Daniel Sherwood's focus on businesses with sustainable revenue growth, durable margins, efficient capital allocation and reasonable valuations paid off. Versus the MSCI index, fund performance was particularly aided by stock picking in IT consulting & other services and, to a lesser extent, in data processing & outsourced services, the two main categories in the fund's investment universe. At period end, Dan believes that IT services stocks are attractively valued compared with the overall market, and he looks for accelerating earnings in the group if cyclical pressures on important end markets such as financial services continue to abate. The Board of Trustees has agreed to present a proposal to shareholders to eliminate each sector/industry fund's fundamental "invests primarily" policy and to modify the fundamental concentration policy for certain funds. If the proposals are approved, expected in the fourth quarter, the changes will take place on or about January 1, 2018 (or the first day of the month following shareholder approval), and will not impact how the funds are managed. MARKET RECAP The U.S. equity bellwether S&P 500 index returned 5.65% for the six months ending August 31, 2017. Following a strong start to 2017, equity markets leveled off in March amid fading optimism for President Trump's pro-business agenda and stalled efforts by Congress to repeal and replace the Affordable Care Act (ACA). Upward momentum soon returned and continued until the index cooled off in August, when geopolitical tension escalated and uncertainty grew regarding the future of health care, tax reform and the debt ceiling. In a stark reversal from 2016, growth-oriented stocks handily topped their value counterparts. Among sectors, information technology (+15%) was a standout, surging as a handful of major index constituents posted strong returns. Health care (+9%) also topped the broader market, climbing from April to period end following renewed efforts to reconsider the ACA. Conversely, financials (+1%) 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 (+4%). Investors' general preference for risk assets, coupled with increased competition, hampered consumer staples (+1%) and telecommunication services (-5%). Lastly, lower oil prices sent energy (-10%) to the bottom of the sector performance rankings. Not FDIC Insured May Lose Value No Bank Guarantee
Q&A An interview with Manager Daniel Sherwood Fund Facts Trading Symbol: Daniel Sherwood Manager FBSOX Start Date: February 04, 1998 Size (in millions): $1,821.92 Investment Approach Fidelity Select IT is an industry-based, equity-focused strategy that seeks to outperform its benchmark through active management. The fund focuses on companies that can sustainably grow earnings and have a competitive advantage due to favorable industry characteristics such as high barriers to entry and pricing power. We look for companies that can grow earnings at a faster rate than what is reflected in the stock price. This approach leads us to firms with five key characteristics: good business model; revenue growth and resilience; stable or improving margins; strong capital allocation; and reasonable valuation. Wherever possible, we try to own stocks that are priced attractively on current earnings and have the potential to become more attractive with stronger growth or better capital allocation. Stock selection and idea generation come from fundamental, bottom-up research that leverages Fidelity's deep and experienced global technology team. We consider attractive technology stocks outside of the benchmark that offer the potential for favorable riskadjusted returns. Sector and industry strategies could be used by investors as alternatives to individual stocks for either tactical- or strategic-allocation purposes. Q: Dan, how did the fund perform for the six months ending August 31, 2017 The fund gained 12.75%, comfortably ahead of the 8.24% return of the MSCI U.S. IMI IT 25/50 Index and more than double the 5.65% gain of the broadly based S&P 500 index. However, the fund trailed a peer group average that tracks the broader information technology sector. Looking back a full 12 months, the fund almost doubled its six-month result, topping the MSCI index and the S&P 500, but lagging the peer average. Q: What was significant for the industry the past six months After weak relative performance for much of 2016, IT services stocks rebounded nicely in 2017, including the six months through August 31, aided by improving prospects for banks and other financials, which represent a large percentage of revenues for IT services companies. Much of the negative sentiment around financials had been due to extremely low longer-term interest rates. However, the U.S. presidential election, which occurred shortly before this reporting period began, resulted in a sizable spike higher in interest rates, as investors anticipated faster economic growth and higher inflation under President Trump. Higher rates allowed the net interest spreads that partly determine bank profitability to expand, which set the stage for stronger IT services spending in that key industry. Against this backdrop, my focus on businesses with sustainable revenue growth, durable margins, efficient capital allocation and reasonable valuations paid off. Versus the MSCI index, fund performance was particularly aided by stock picking in IT consulting & other services and, to a lesser extent, in data processing & outsourced services, the two main categories in our investment universe. Q: Specifically, which stocks contributed most versus the MSCI index A large underweighting in IBM, which represented about 15% of the MSCI index, on average, this period, was by far 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.
our largest relative contributor. Particularly from April onward, investors seemed to lose patience with IBM's attempted transformation from a one-stop computing shop to a boutique provider of cloud computing and dataanalytics services. In the second quarter of 2017, all five of IBM's primary business segments reported declining sales. The firm did report growth in cloud computing and some other strategic initiatives, but I thought the company had a long way to go in its efforts to reinvent itself. A quartet of resurgent IT outsourcing stocks also lifted the fund's relative result. This group included Cognizant Technology Solutions, Paris-based Capgemini, India's WNS Holdings and Virtusa. Cognizant and Virtusa were overweightings, whereas Capgemini and WNS were nonindex holdings. All four have significant legacy operations dependent to some extent on the financial services industry, and all of these stocks had a solid return the past six months. With Cognizant the fund's third-largest position there also had been concern following the election about immigration reform that might prevent the company from importing skilled labor from India and elsewhere. Investors had also been skittish about an internal investigation that revealed Cognizant might have made payments in India that violated the U.S. Foreign Corrupt Practices Act. During the period, however, these concerns faded, and Cognizant shares rose 20%. Meanwhile, we continued to underweight payroll services provider Paychex to good effect, as this stock declined 6%. I thought Paychex was expensive to start the period, but as it became less so, I decreased our underweighting by adding to the position. environment for retailers and rising short-term interest rates, were a headwind for the stock. I trimmed our position here but maintained an overweighting, as I thought earnings growth might be set to accelerate in 2018. Also hampering the fund's relative performance was Endurance International Group Holdings, a longtime nonindex holding for the fund. This has been a frustrating stock, as the company continued to generate healthy free cash flow but also encountered what I considered to be avoidable operating challenges. I reduced the position a bit but Endurance remained in the portfolio at period end. I plan to monitor this situation carefully. Q: Dan, what is your outlook as of August 31 IT services stocks have enjoyed a healthy rally, and valuations here, as in the broader market, are near the upper bound of their historical range. Yet, the average valuation for our segment of the market is more attractive than that of the S&P 500. What's more, I expect that, if the U.S. Federal Reserve continues to normalize short-term interest rates, conditions for banks and other financials firms should continue to improve. That should lay the groundwork for more-robust spending on IT services from that sector. At the same time, I'll be watching the migration toward cloud computing and other key trends in technology. As these trends progress, I'm confident there will be 'winners' and 'losers,' and I'll remain alert for opportunities to invest in the companies I believe are positioned best to benefit from them. Q: What about detractors A non-index stake in software engineering provider Luxoft Holding worked against us and was the fund's largest relative detractor. The stock was holding its own until mid- August, after the firm released fiscal first-quarter financial results that disappointed the market. Although revenue climbed by double digits, adjusted net income fell sharply, as the firm's two largest customers, European banks UBS and Deutsche Bank, continued to experience operational challenges. Another overweighting, Alliance Data Systems, proved untimely this period. The company provides private-label card services for retailers. I believe the problem here was that the market valued the shares strictly as a consumer financial stock and ignored the value inherent in its digital marketing operations. This, coupled with a difficult overall 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 Dan Sherwood on the important link between IT services and the financials sector: "As noted earlier, banks and other financials firms are key end-markets for IT services vendors, generally representing up to 60% of their total revenue. The financials sector was one of the first to embrace IT outsourcing, and, therefore, we find quite a few mature businesses in this area. "Particularly in the first half of 2016, revenue in the financials sector was under pressure from lower interest rates, tepid loan growth and regulatory hurdles. Consequently, banks and related firms were looking to cut costs, which hurt many IT services vendors, especially those doing commoditized work. "The past six months, though, we saw an improving backdrop for the financials sector. Rates had risen shortly before the period began, which aided profitability. Moreover, banks' progress on the Fed's June stress tests was encouraging. "At the same time, traditional financial institutions have been under an increasing assault from newwave ʻfin tech' firms that offer competing services accessible via the cloud and mobile devices. These companies provide online loans and other services that directly compete with banks. "One result of this new competition is that conventional brick-and-mortar banks are scrambling to reduce costs and improve efficiency so they can free up dollars to compete with these next-generation threats. In my opinion, IT services firms should play a key role in this quest for greater efficiency and cost savings. "All in all, then, I think the outlook for IT services firms remains constructive, especially given the recent improvements in bank fundamentals I mentioned earlier and the opportunities to assist banks with staying competitive." Holding IBM Corp. Cognizant Technology Solutions Corp. Class A Capgemini SA Paychex, Inc. WNS Holdings Ltd. sponsored ADR * 1 basis point = 0.01%. Market Segment Data Processing & Outsourced Data Processing & Outsourced Average Relative LARGEST DETRACTORS VS. BENCHMARK Holding Luxoft Holding, Inc. Alliance Data Systems Corp. Square, Inc. Endurance International Group Holdings, Inc. Booz Allen Hamilton Holding Corp. Class A * 1 basis point = 0.01%. Market Segment Data Processing & Outsourced Data Processing & Outsourced Internet Software & Relative Contribution (basis points)* -9.25% 289 3.70% 43 1.49% 32-2.04% 31 2.06% 30 Average Relative Relative Contribution (basis points)* 2.26% -47 2.18% -26-0.52% -19 0.79% -15 1.15% -14 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 Visa, Inc. Class A Data Processing & Outsourced 18.89% 17.52% MasterCard, Inc. Class A Data Processing & Outsourced 11.76% 10.90% Cognizant Technology Solutions Corp. Class A 8.44% 7.22% PayPal Holdings, Inc. Data Processing & Outsourced 6.80% 4.33% Accenture PLC Class A 5.02% 5.43% IBM Corp. 4.84% 5.02% Fidelity National Information, Inc. Data Processing & Outsourced 4.09% 3.77% EPAM Systems, Inc. 3.16% 3.92% Alliance Data Systems Corp. Data Processing & Outsourced 2.90% 4.66% FleetCor Technologies, Inc. Data Processing & Outsourced 2.74% 1.95% 10 Largest Holdings as a % of Net Assets 68.63% 65.61% Total Number of Holdings 51 66 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 Data Processing & Outsourced 61.96% 63.71% 31.81% 32.71% Internet Software & 3.52% 2.52% Application Software 1.30% 0.30% Research & Consulting 0.36% 0.00% ASSET ALLOCATION Asset Class Six Months Ago Domestic Equities 94.58% 94.75% International Equities 4.38% 4.50% Developed Markets 2.26% 2.15% Emerging Markets 2.12% 2.35% Tax-Advantaged Domiciles 0.00% 0.00% Bonds 0.00% 0.00% Cash & Net Other Assets 1.04% 0.75% 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 August 31, 2017 6 Month Cumulative YTD 1 3 Annualized 5 10 / LOF 1 Select IT Gross Expense Ratio: 0.79% 2 12.75% 20.63% 23.25% 16.69% 19.59% 14.26% S&P 500 Index 5.65% 11.93% 16.23% 9.54% 14.34% 7.61% MSCI US IMI IT 25/50 8.24% 15.96% 19.72% 13.62% 15.76% 12.13% Morningstar Fund Technology 15.03% 25.16% 28.35% 14.46% 17.65% 9.95% % Rank in Morningstar Category (1% = Best) -- -- 80% 35% 29% 5% # of Funds in Morningstar Category -- -- 198 183 175 141 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 02/04/1998. 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. 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 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 IT services industry can be significantly affected by competitive pressures, such as technological developments, fixed-rate pricing, and the ability to attract and retain skilled employees, and the success of companies in the industry is subject to continued demand for IT services. 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. 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 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. S&P 500 is a market-capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. MSCI US IMI IT 25/50 Index is a modified marketcapitalization-weighted index of stocks designed to measure the performance of IT 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. 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. 7
Manager Facts Daniel Sherwood is a research analyst and portfolio manager 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. Sherwood is responsible for the research coverage of IT and Software stocks. Additionally, he is responsible for managing Fidelity Select IT, which he previously co-managed. Prior to assuming his current responsibilities, Mr. Sherwood was a member of Fidelity's technology research team within FMR Co., covering a variety of software and IT services companies. Previously, he worked as a research analyst on the Real Estate team. In this capacity, he covered various real estate investment trusts (REITs) and other real estate related companies. Before joining Fidelity in 2008, Mr. Sherwood was a vice president at Merrill Lynch Institutional Equity Trading, and an analyst for Merrill Lynch Institutional Equity Sales. He has been in the investments industry since 1998. Mr. Sherwood earned his bachelor of arts degree in American studies from Yale University and his master of business administration degree in finance from The Wharton School of the University of Pennsylvania. 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 December 31, 2017 1 3 Annualized 5 10 / LOF 1 Select IT Gross Expense Ratio: 0.79% 2 34.25% 16.90% 21.05% 14.94% 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 02/04/1998. 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. 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 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 LLC, Member NYSE, SIPC., 900 Salem Street, Smithfield, RI 02917. Fidelity Investments Institutional Company, Inc., 500 Salem Street, Smithfield, RI 02917. 2018 FMR LLC. All rights reserved. Not NCUA or NCUSIF insured. May lose value. No credit union guarantee. 737051.5.1 Diversification does not ensure a profit or guarantee against a loss.