Fidelity Select Defense and Aerospace Key Takeaways For the semiannual reporting period ending August 31, 2017, the fund advanced 12.54%, lagging the 15.51% gain of the MSCI U.S. IMI Aerospace & Defense 25/50 Index but well ahead of the 5.65% return of the broadly based S&P 500. Aerospace and defense were two of the market's strongerperforming categories this period, aided by accelerating air traffic and an improving outlook for U.S. defense spending. Against this backdrop, Manager Jonathan Siegmann's emphasis on firms with improving cash flow and attractive capital allocation fared well in absolute terms but lagged the MSCI industry index. Compared with the MSCI index, overweighting defense and underweighting aerospace the stronger of the two groups detracted from the fund's result. Stock picking within segments was another drawback, with a large underweighting in Boeing having by far the largest negative impact in relative terms. Jonathan sees many positive factors potentially aiding the fund's universe in the short term, although he thinks the production of commercial aircraft might overtake demand in the longer term. 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 Jonathan Siegmann Fund Facts Trading Symbol: Jonathan Siegmann Manager FSDAX Start Date: May 08, 1984 Size (in millions): $2,121.73 Investment Approach Fidelity Select Defense and Aerospace is an industry-based, equity-focused strategy that seeks to outperform its benchmark through active management. In an industry characterized by lengthy business cycles, we focus on investing with a long-term time horizon, across a spectrum of companies that are positioned for growth. We particularly favor firms with strong business models, balanced capital allocation and high recurring free cash flow and that are trading at reasonable valuations. Stock selection and idea generation come from rigorous bottom-up research that leverages Fidelity's deep and experienced global cyclicals team. Sector and industry strategies could be used by investors as alternatives to individual stocks for either tactical- or strategic-allocation purposes. Q: Jonathan, how did the fund perform for the six months ending August 31, 2017 For this semiannual reporting period, the fund advanced 12.54%, lagging the 15.51% gain of the MSCI U.S. IMI Aerospace & Defense 25/50 Index but handily outpacing the 5.65% return of the broadly based S&P 500. The fund also finished well ahead of the average return associated with a peer group that tracks the broader industrials sector. Looking back a full year, the fund more than doubled its six-month result but again fell short of the MSCI industry index while outstripping the S&P 500 and peer average. Q: What was notable about aerospace and defense stocks the past six months Aerospace and defense were two of the market's strongerperforming categories this period, aided by accelerating air traffic and an improving outlook for U.S. defense spending, respectively. Defense companies also benefited from robust export markets and ongoing geopolitical tensions. The strong performance on the defense side was not a surprise, as I'd overweighted that category since before the U.S. presidential election last November on expectation of an improving federal defense budget overall. Post-election, President Trump seemed intent on building up the military, so that was an additional reason to overweight the group. What did surprise me, though, was the strength in commercial aerospace shares, which I underweighted to the fund's detriment, as aerospace performed even better than defense this period. That went counter to consensus expectations, which I shared, that commercial aerospace stocks might not keep up with defense stocks in 2017, given the late stage of the aerospace cycle and the possibility of waning aircraft demand. Within the aerospace group, my decision to invest mainly in suppliers rather than major aircraft manufacturers like Boeing also worked against us. The fund was positioned with a large underweighting in Boeing, which represented about 19% of the total weighting in our MSCI benchmark, on average. The stock delivered a 35% gain this period, and underweighting it was responsible for more than 2 percentage points of underperformance. 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.
Although getting Boeing wrong was frustrating, I thought the improvement in investor sentiment regarding the commercial aerospace cycle might prove temporary. I held to the belief that projected demand growth for commercial jets was insufficient to support expected longer-term production growth. Consequently, although I added to our investment in Boeing during the period, the fund maintained a substantial underweighting here, and I continued to focus on suppliers with improving cash flow and attractive capital allocation. Q: Aside from Boeing, which stocks detracted most versus the MSCI industry index Overweighting Astronics, a supplier of DC (direct current) power outlets for aircraft seats, proved untimely for us. Although the company operates as a near-monopoly, allowing it considerable pricing power, slowing growth in demand resulted in a double-digit decline for the stock. I maintained the position, as I considered slack demand to be a temporary situation. Two shipbuilders where we had overweighted exposure, General Dynamics and Huntington Ingalls Industries, lagged the MSCI index and detracted from the fund's relative result. In both cases, I believe the disappointing performance was more due to the stocks "taking a breather" after previous strong gains, as their fundamentals remained relatively favorable, in my view. As of period end, I remain positive on these two stocks, given the planned increases for shipbuilding already in the defense budget and President Trump's support for even further increases. Northrop Grumman, a major defense contractor and the fund's largest overweighting at period end, also detracted. The stock advanced about 11% this period, but it lagged our MSCI benchmark. I continued to like the company's investments aimed at lowering costs and driving growth, which I think should help in the long run. A cash position averaging 3% for the period also held back fund performance against the strong market backdrop. A large underweighting in United Technologies, the aforementioned late-summer bidder for Rockwell Collins, also proved helpful. I thought various operational headwinds, including start-up costs related to United Technologies' next-generation Pratt & Whitney GTF (geared-turbofan) jet engine, would slow earnings growth over the near term. Our overweighting in Heico also bolstered relative performance. This company manufactures high-margin replacement parts for jet engines and other aircraft components. During the period, the company saw healthy demand for its products. The market also liked the firm's announcement in August of plans to buy AeroAntenna Technology for about $317 million in cash, which closed in September. I added to this position during the period. Q: What is your outlook as of period end I remain positive on the defense industry, although I'm somewhat cautious about valuations. As mentioned earlier, I think defense companies have several potential tailwinds forming at the moment. I plan to continue looking for companies that I believe are best-positioned to benefit in this environment. The aerospace cycle has been aided by a number of events since the presidential election; however, I still believe we are late in the cycle, and I prefer to play it through component makers rather than via aircraft manufacturers themselves. Although this positioning was not so fruitful during the reporting period just ended, I still believe it's the best way to proceed for now. Q: How about positives The fund benefited most from a sizable overweighting in Rockwell Collins. Shares of the aviation-equipment supplier surged in early August after rumors that the company might be purchased by conglomerate United Technologies. I thought Rockwell's valuation was attractive at the beginning of the period, as the market appeared to me to be overly negative on the company's plans to buy B/E Aerospace, a maker of aircraft interiors. Consequently, I added significantly to the position well in advance of the stock's late-period surge to the fund's benefit. 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 Jonathan Siegmann on the M&A trend in commercial aerospace: "Leading commercial aerospace companies have undergone considerable consolidation in the last year or so. For example, in October 2016, after two years of looking to expand, Rockwell Collins announced plans to purchase aircraft-interior maker B/E Aerospace, with the deal closing the following April. "In January 2017, Paris-based aircraft-engine maker Safran agreed to buy plane-seat supplier Zodiac in a deal expected to unite two of France's biggest aerospace firms. Shareholders approved the merger in July, although as of September 30, the transaction has yet to be finalized. "In the summer of 2017, we heard rumors of the biggest deal of the three, confirmed shortly after period end: United Technologies will acquire Rockwell for an estimated $30 billion. "What's driving all this consolidation For one thing, it's late in the economic recovery generally and particularly late in the commercial aerospace cycle. And the later it gets in the cycle, the harder it tends to be to generate organic (in-house) growth. When internal growth begins to tail off, companies often look to purchase it through acquisitions. "The other important driver is Boeing's evolving business model. Late in 2016, the company established the goal of tripling its service revenue to $50 billion within the next decade. Toward this end, it created a dedicated Global Services business unit. As Boeing takes more servicing inhouse, it is renegotiating supplier contracts potentially to the detriment of those suppliers. "This potential downward shift in the share of profits from servicing Boeing planes is driving suppliers to look for new profits via acquisitions. This trend undoubtedly will be one factor influencing which firms I invest in going forward." Holding Market Segment Average Relative Relative Contribution (basis points)* Rockwell Collins, Inc. Aerospace & Defense 3.89% 83 United Technologies Corp. Aerospace & Defense -6.52% 49 Arconic, Inc. Aerospace & Defense -1.69% 48 HEICO Corp. Class A Aerospace & Defense 2.51% 32 Wesco Aircraft Holdings, Inc. * 1 basis point = 0.01%. Aerospace & Defense -0.56% 30 LARGEST DETRACTORS VS. BENCHMARK Holding Market Segment Average Relative Relative Contribution (basis points)* The Boeing Co. Aerospace & Defense -11.76% -223 Astronics Corp. Aerospace & Defense 1.01% -49 General Dynamics Corp. Kratos Defense & Security Solutions, Inc. Aerospace & Defense 5.00% -42 Aerospace & Defense -0.91% -38 AeroVironment, Inc. Aerospace & Defense -0.53% -35 * 1 basis point = 0.01%. 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 Northrop Grumman Corp. Aerospace & Defense 10.48% 10.73% The Boeing Co. Aerospace & Defense 10.45% 6.68% Rockwell Collins, Inc. Aerospace & Defense 9.33% 5.28% General Dynamics Corp. Aerospace & Defense 8.65% 9.82% TransDigm Group, Inc. Aerospace & Defense 5.24% 5.09% Huntington Ingalls Industries, Inc. Aerospace & Defense 4.93% 4.61% Teledyne Technologies, Inc. Aerospace & Defense 4.88% 3.29% Raytheon Co. Aerospace & Defense 4.82% 4.46% United Technologies Corp. Aerospace & Defense 4.77% 9.50% Orbital ATK, Inc. Aerospace & Defense 3.44% 3.38% 10 Largest Holdings as a % of Net Assets 67.00% 63.23% Total Number of Holdings 39 43 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 Aerospace & Defense 93.44% 92.93% It Consulting & Other Services 2.19% 1.57% Trading Companies & Distributors 0.63% 0.64% Construction & Engineering 0.22% 0.16% Alternative Carriers 0.17% 0.17% Steel 0.08% -- ASSET ALLOCATION Asset Class Six Months Ago Domestic Equities 91.08% 91.57% International Equities 5.65% 4.76% Developed Markets 4.63% 4.29% Emerging Markets 1.02% 0.47% Tax-Advantaged Domiciles 0.00% 0.00% Bonds 0.00% 0.00% Cash & Net Other Assets 3.27% 3.67% 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 Defense and Aerospace Gross Expense Ratio: 0.79% 2 12.54% 20.56% 31.06% 15.50% 19.11% 9.80% S&P 500 Index 5.65% 11.93% 16.23% 9.54% 14.34% 7.61% MSCI US IMI Aerospace & Defense 25/50 Linked Index 15.51% 25.17% 37.12% 18.78% 23.83% 12.26% Morningstar Fund Industrials 4.44% 9.49% 19.00% 8.18% 15.40% 7.73% % Rank in Morningstar Category (1% = Best) -- -- 4% 11% 20% 15% # of Funds in Morningstar Category -- -- 45 43 40 28 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 05/08/1984. 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 defense and aerospace industry can be significantly affected by government defense and aerospace regulation and spending policies. 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 Aerospace & Defense 25/50 Index is a modified market-capitalization-weighted index of stocks designed to measure the performance of Aerospace & Defense 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. Index returns shown prior to January 1, 2010 are returns of the MSCI US Investable Market Aerospace & Defense 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. 7
Manager Facts Jonathan Siegmann is a research analyst 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 covering the aerospace and defense industry and for managing Select Defense and Aerospace (since 2015). Prior to assuming his current position in February 2012, Mr. Siegmann was a senior sector specialist in equity research at FMRCo from 2007 to 2012. Previously, he held various commercial and operations roles at BASF Corporation from 1998 to 2007, most recently working as a product manager of electronic chemicals. He has been in the investments industry since 2007. Mr. Siegmann earned his bachelor of science degree in chemical engineering from Rensselaer Polytechnic Institute and his master of business administration degree from New York University's Stern School of Business. He is also a Chartered Financial Analyst (CFA) charterholder. 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 Defense and Aerospace Gross Expense Ratio: 0.79% 2 34.21% 17.91% 20.10% 10.74% 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 05/08/1984. 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 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. 2018 FMR LLC. All rights reserved. Not NCUA or NCUSIF insured. May lose value. No credit union guarantee. 739279.5.0 Diversification does not ensure a profit or guarantee against a loss.