Fidelity Select Utilities Key Takeaways For the fiscal year ending February 28, 2018, the fund gained 4.99%, strongly outpacing the -1.55% result of the MSCI U.S. IMI Utilities 25/50 Index. The fund lagged the 17.10% return of the broad-based S&P 500 index. Relatively cheaper utility stocks backed by dividend growth and solid business fundamentals a number of which were owned in the fund outperformed the past year, according to Manager Douglas Simmons. Stock selection in electric utilities contributed most to the fund's outperformance of the MSCI utilities index, led by Florida-based NextEra Energy, by far the fund's largest holding. Conversely, an overweighted stake in California-based electric utility PG&E detracted. Stock selection in multi-utilities also held back the fund's relative result. Amid a rising interest-rate environment, Douglas remains focused on companies with superior earnings and dividend growth, many of which are concentrated in the renewable energy segment of the utilities sector. He is also closely looking at firms that stand to benefit from new U.S. tax legislation, passed in December. On December 8, 2017, shareholders approved proposals to eliminate each sector/industry fund's fundamental "invests primarily" policy and to modify the fundamental concentration policy for certain funds. The changes took place on January 1, 2018, and will not impact how the funds are managed. MARKET RECAP U.S. equities gained 17.10% for the 12 months ending February 28, 2018, as the S&P 500 index moved steadily higher throughout 2017 and into 2018 until sharply reversing course in February. The drop was in stark contrast to the low volatility seen throughout 2017, along with consumer sentiment and other market indicators that stayed positive. Investors remained decidedly upbeat as the calendar turned, and the index rose 5.73% in January. February was a decidedly different story, though, as volatility spiked amid fear that rising inflation and the potential for the economy to overheat would prompt the U.S. Federal Reserve to pick up the pace of interest rate hikes. The index returned -3.69% for the month, its first negative result since October 2016. For the full 12 months, growth stocks handily topped value, while large-caps bested smallcaps. By sector, information technology fared best by far, gaining 36% amid strong earnings growth from several major index constituents. Consumer discretionary (+22%) also stood out, driven by retailers. Financials added 20%, riding the uptick in bond yields. Materials and industrials rose about 16% each, boosted by higher demand, especially from China. Conversely, notable laggards included the defensive telecommunication services (-5%) and utilities (-2%) sectors, while rising rates held back real estate (-3%). Not FDIC Insured May Lose Value No Bank Guarantee
Q&A An interview with Manager Douglas Simmons Fund Facts Trading Symbol: Douglas Simmons Manager FSUTX Start Date: December 10, 1981 Size (in millions): $717.10 Investment Approach Fidelity Select Utilities is a sector-based, equity-focused strategy that seeks to outperform the benchmark through active management. Within the utilities sector, we believe buying companies with superior business models that are growing their dividends and trading at discounts can outperform the index over time. We perform bottom-up, fundamental research to form a view on utilities regulation and power prices to complement our stock selection process. Our investment approach focuses on stocks with lower valuations and that have the best total-return potential. This includes utilities stocks that have been overly discounted due to more-volatile and less-predictable earnings streams. We test our price assumptions through collaborations with Fidelity's experienced research team, while leveraging a network of industry contacts. 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 fiscal year ending February 28, 2018 Considering that utilities historically have struggled in a rising interest-rate environment, the fund performed well. The fund gained 4.99%, strongly outpacing the -1.55% result of the MSCI U.S. IMI Utilities 25/50 Index, as well as the peer group average. In comparison, the broad-based S&P 500 index returned 17.10%. Q: What was significant about the investment environment for utilities stocks this period Dividend yield became less of a focus for utilities investors, as market interest rates began to climb. The yield for the 10-year U.S. Treasury note fell to a low of 2.05% in early September and subsequently rose to 2.87% by period end. During this time, investors increasingly moved away from utilities stocks that had become overpriced based solely on their yields. Instead, they gravitated toward less-expensive stocks backed by companies that offered dividend growth, strong business fundamentals and superior cash flows. This trend generally played into my investment strategy. Throughout the period, I sought to emphasize companies that were increasing their dividends faster than the sector average, which I believe led me to companies with improving or better-than-average fundamentals. In my view, these types of companies had a higher likelihood of seeing their valuation multiples increase going forward. In December, the U.S. also passed tax reform legislation. In my view, these changes to the tax code did not benefit utilities broadly. However, lower taxes could give unregulated utilities a direct earnings boost going forward. Q: Given the investment environment, how did you position the fund The fund's focus on profitable deregulated businesses generating dividend growth, including those in natural gas infrastructure and renewable energy, proved advantageous. I believe many of these companies are direct beneficiaries of U.S. tax reform. 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.
In addition, I had positioned the fund in anticipation of rising interest rates and higher commodity prices. Several of the individual utility investments I thought would benefit from these trends, including independent power producers & energy traders NRG Energy, AES and Vistra Energy, added value this period, as rates rose steadily and commodity prices generally advanced. NRG Energy, in fact, was the fund's second biggest contributor. 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 structure, pay down debt and sell off assets. NRG's stock rose on this news and continued to rise in subsequent months. For calendar year 2017, NRG Energy was among the top-performing stocks in the S&P 500 and the stock returned about 58% for the fund this fiscal year. Q: What other factors helped the fund outperform the MSCI index the past year Stock selection was the biggest driver of the fund's relative performance this period. Led by Florida-based NextEra Energy, the fund's largest holding and a sizable overweight versus the sector index, our choices in electric utilities made a significant contribution. NextEra's solid regulated business is complemented by its significant renewable energy investments. The company is one of the biggest investors in wind and solar projects in North America, as well as the largest renewable energy supplier in the U.S., with roughly 40% of its electric capacity coming from wind and solar power generation. As of February 28, NextEra represented about 16% of the fund's assets, on average, this period, and the stock returned about 19%. Stock picking in the renewable electricity segment also boosted the fund's relative result. Here, our overweighted stake in NextEra's subsidiary, NextEra Energy Partners, helped boost our return versus the MSCI index. Our stake in NextEra Energy Partners returned about 33%. This company purchases, owns and operates renewable power projects, namely wind and solar, in North America. As the country continues to shift away from coal to renewable power, early market leaders such as NextEra Energy Partners and NextEra Energy have been able to increase their earnings and dividends at a higher rate than most other utilities and have better growth potential, so they squarely fit my investment strategy. This period, both companies executed well, posting solid earnings. Their stocks rallied, particularly after the U.S. tax reform bill passed in December, as the reduction in the federal corporate tax rate increased the companies' contribution to earnings. Additionally, renewable energy tax credits did not change, which relieved investor concerns. Q: Which stocks detracted An overweighting in California-based electric utility PG&E detracted from our relative result more than any other individual position. I liked this firm for its above-average dividend growth and solid balance sheet, as well as the stock's valuation, which I viewed as trading at a discount. In California, however, electric companies can be held liable for wildfires, and as fire swept across PG&E's primary service area of northern California, the stock dropped about 25% over a three-day period in October. In December, the company announced it was suspending its dividend due to uncertainty about its fire liability. The investigation into these wildfires could take up to a year. While I ended up trimming this position by more than half, I still have confidence in PG&E's longer-term outlook, given the company's strong underlying business fundamentals. Elsewhere, stock picking among multi-utilities, including our holdings in Black Hills and Dominion Energy, held back relative performance. Our stake in regulated electric and natural gas utility SCANA returned about -36% for the fund and was the most significant detractor from this segment. The company ran into numerous issues in building its nuclear projects, including abandoning one in South Carolina due to ballooning construction costs. By period end, I'd sold all of the fund's position in Black Hills, nearly all of our stake in SCANA, and reduced exposure to Dominion. Q: How is the fund positioned at period end Given the increase in market interest rates, there has been a dislocation in the price paid for many utilities stocks that pay dividends. What I'm finding is that a lot of the names with better long-term earnings power are still cheap. As such, I'm looking for companies with superior earnings and dividend growth, especially if I look a few years out. Many companies are achieving this faster growth by adopting or building out renewable energy at a rapid rate. I'm also focused on companies that can benefit from tax reform again, mainly the unregulated businesses. Here, I'll continue to look closely at firms that are levered to natural gas infrastructure and deregulated power. 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 broadband as a 21 st -century utility: "With the widespread adoption of smartphones in the internet age, data usage continues to tick higher, and broadband has become one of the most important utilities in consumer households. "You'll hear industry analysts refer to broadband as the 'railroad of the digital age,' as it can deliver virtually everything that consumers want. "From my perspective, broadband companies have many of the same defensive characteristics of electric utilities, such as stable business models, solid dividend yields, dependable cash flows, strong balance sheets, and high visibility. "While I think all electric utilities are likely to increase rates in 2018 amid a strong economy, I believe broadband providers can raise their prices to a greater degree as well, due to very strong and increasing consumer demand. "For this reason, I've taken a closer look at companies in the cable & satellite segment, which isn't included in our utilities sector benchmark. Throughout the period, I increased the fund's exposure to this segment, investing in companies I believed could grow their market share and command pricing power over certain competitors, such as broadband providers Comcast and Time Warner. "Additionally, many of the companies within the cable segment may be among the beneficiaries of recent U.S. tax reform, as they pay a high rate of cash taxes, which are now set to be reduced." Holding Market Segment Average Relative Relative Contribution (basis points)* NextEra Energy, Inc. Electric Utilities 8.89% 166 NRG Energy, Inc. NextEra Energy Partners LP Independent Power Producers & Energy Traders 3.25% 150 Renewable Electricity 2.68% 81 Southern Co. Electric Utilities -4.81% 74 The AES Corp. * 1 basis point = 0.01%. Independent Power Producers & Energy Traders LARGEST DETRACTORS VS. BENCHMARK Holding Market Segment 0.87% 71 Average Relative Relative Contribution (basis points)* PG&E Corp. Electric Utilities 3.26% -128 SCANA Corp. Multi-Utilities 1.26% -68 Eversource Energy Electric Utilities -1.88% -21 OGE Energy Corp. Electric Utilities 0.99% -15 American Electric Power Co., Inc. * 1 basis point = 0.01%. Electric Utilities -4.30% -13 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 NextEra Energy, Inc. Electric Utilities 15.96% 17.58% Exelon Corp. Electric Utilities 10.96% 4.77% Sempra Energy Multi-Utilities 10.03% 12.31% NRG Energy, Inc. Independent Power Producers & Energy Traders 6.97% 3.99% The AES Corp. Independent Power Producers & Energy Traders 4.91% 0.83% FirstEnergy Corp. Electric Utilities 4.84% 3.93% Eversource Energy Electric Utilities 4.61% -- Comcast Corp. Class A Cable & Satellite 4.46% -- Public Service Enterprise Group, Inc. Multi-Utilities 4.40% 0.98% Avangrid, Inc. Electric Utilities 3.89% 4.87% 10 Largest Holdings as a % of Net Assets 71.05% 68.46% Total Number of Holdings 25 29 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 48.82% 49.45% Multi-Utilities 21.27% 30.49% Independent Power Producers & Energy Traders 16.40% 10.35% Cable & Satellite 4.46% -- Renewable Electricity 3.10% 3.08% Oil & Gas Storage & Transportation 2.78% 2.04% Movies & Entertainment 2.00% -- Gas Utilities 0.36% 0.99% Specialized Reits 0.21% 0.28% ASSET ALLOCATION Asset Class Six Months Ago Domestic Equities 99.40% 96.68% 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 0.60% 3.32% 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 February 28, 2018 6 Month Cumulative YTD 1 3 Annualized 5 10 / LOF 1 Select Utilities Gross Expense Ratio: 0.79% 2-5.17% -3.79% 4.99% 5.94% 9.44% 6.47% S&P 500 Index 10.84% 1.83% 17.10% 11.14% 14.73% 9.73% MSCI US IMI Utilities 25/50-8.87% -7.11% -1.55% 6.81% 9.75% 7.24% Morningstar Fund Utilities -8.32% -6.52% -0.90% 4.80% 8.37% 5.97% % Rank in Morningstar Category (1% = Best) -- -- 11% 32% 15% 49% # of Funds in Morningstar Category -- -- 62 58 55 51 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 12/10/1981. 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 utilities industries can be significantly affected by government regulation, financing difficulties, supply and demand of services or fuel, and natural resource conservation. 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. Prior to 10/1/06, Select Utilities operated under certain different investment policies and compared its performance to a different secondary benchmark. This fund's historical performance may not represent its current investment policy. 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. At a shareholder meeting on 12/8/17, a proposal was approved to combine the oversight of Fidelity's sector funds with Fidelity's broader equity and high income funds under a single Board of Trustees. The unified Board will be effective on 3/1/18. 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 2018 Morningstar, Inc. All rights reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or redistributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Fidelity does not review the Morningstar data and, for mutual fund performance, you should check the fund's current prospectus for the most up-to-date information concerning applicable loads, fees and expenses. % 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. MSCI US IMI Utilities 25/50 Index is a modified marketcapitalization-weighted index of stocks designed to measure the performance of Utilities 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. S&P 500 is a market-capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group 7
Manager Facts Douglas Simmons is a 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. Simmons manages Fidelity Telecom and Utilities Fund, Fidelity Select Utilities, Fidelity VIP Utilities, and the Fidelity Advisor Utilities Fund. As a member of Fidelity's Stock Selector Large Cap Group, he is also responsible for managing the telecom and utilities sleeves for various diversified sector-based portfolios. Prior to assuming his current responsibilities in September 2005, Mr. Simmons served as a utilities analyst covering the electric and gas utility stocks. Before joining Fidelity in 2003, Mr. Simmons worked as a financial analyst at the private equity firm Hicks, Muse, Tate & Furst. Previously, Mr. Simmons was an investment banking analyst at Morgan Stanley. 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, where he graduated 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 March 31, 2018 1 3 Annualized 5 10 / LOF 1 Select Utilities Gross Expense Ratio: 0.79% 2 10.58% 7.73% 9.30% 6.99% 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 12/10/1981. 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. 2018 FMR LLC. All rights reserved. Not NCUA or NCUSIF insured. May lose value. No credit union guarantee. 718515.7.0