Fidelity Select Defense and Aerospace Portfolio
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PORTFOLIO MANAGER Q&A | AS OF FEBRUARY 28, 2019
Fidelity® Select Defense and
Aerospace Portfolio
Key Takeaways MARKET RECAP
• For the fiscal year ending February 28, 2019, the fund gained 3.57%, The S&P 500® index gained 4.68% for the
trailing the 6.62% return of the MSCI U.S. IMI Aerospace & Defense 12 months ending February 28, 2019, as
25/50 Index and also falling short of the 4.68% advance of the broadly the U.S. equity bellwether began the new
year on a high note after enduring a final
based S&P 500® index.
quarter of 2018 in which resurgent
volatility upset the aging bull market. In
• Defense spending and demand for commercial aircraft remained October, rising U.S. Treasury yields and
strong this period, although stocks in both categories suffered in the concern about peaking corporate
volatile fourth quarter, when some investors feared an imminent earnings growth sent many investors
recession. fleeing from risk assets as they were still
dealing with lingering uncertainty related
• Portfolio Manager Jonathan Siegmann's focus on companies with to global trade and the U.S. Federal
improving cash flow and attractive capital allocation had mixed results Reserve picking up the pace of interest
this period, as stock selection in the fund's main category of rate hikes. The index returned -6.84% in
aerospace & defense detracted most from performance versus the October, at the time its largest monthly
MSCI index. drop in seven years. But conditions
worsened through Christmas, as jitters
• In particular, several overweighted positions on the defense side were about the economy and another hike in
rates led to a spike in market volatility
disappointing. Out-of-benchmark exposure to Bombardier and an
and a -9.03% result for December.
underweighting in index heavyweight Boeing also weighed on the
Sharply reversing course to begin 2019,
fund's relative result.
the S&P 500® gained 11.48% year-to-
date, its strongest two-month opening
• Conversely, non-index exposure to industrial machinery modestly since 1991, amid upbeat company
bolstered relative performance. earnings/outlooks and signs the Fed may
pause on rates. For the full period, some
• As of February 28, Jonathan continues to believe in the wisdom of economically sensitive sectors fared
overweighting the defense part of the portfolio. He thinks the recent worst, with financials (-6%) and materials
shift in favor of higher military spending has yet to be fully reflected in (-6%) both losing ground. Energy gained
the revenue and earnings of defense companies. 1%, while communication services and
industrials each rose roughly 2%. In
contrast, the defensive utilities (+20%),
real estate (+20%) and health care (+11%)
sectors led the way, while consumer
staples finished near the index.
Information technology and consumer
discretionary were rattled in the late-2018
downturn, but earlier strength
contributed to advances of 9% and
roughly 7%, respectively.
Not FDIC Insured • May Lose Value • No Bank GuaranteePORTFOLIO MANAGER Q&A | AS OF FEBRUARY 28, 2019
Q&A
An interview with Portfolio Manager
Jonathan Siegmann
Jonathan Siegmann Q: Jonathan, how did the fund perform for the
Portfolio Manager fiscal year ending February 28, 2019
The fund gained 3.57% the past 12 months, trailing the
Fund Facts 6.62% return of the MSCI U.S. IMI Aerospace & Defense
Trading Symbol: FSDAX 25/50 Index, and also falling short of the 4.68% advance of
the broadly based S&P 500® index. However, the fund
Start Date: May 08, 1984 finished well ahead of its peer group average, which tracks
the broader industrials sector.
Size (in millions): $2,790.24
Q: What was noteworthy about the investment
backdrop the past 12 months
Fundamentals such as defense spending and demand for
Investment Approach commercial aircraft remained strong this period, enabling
• Fidelity® Select Defense and Aerospace Portfolio is an aerospace and defense stocks, as measured by the MSCI
industry-based, equity-focused strategy that seeks to industry benchmark, to outperform the broader stock
outperform its benchmark through active management. market.
• In an industry characterized by lengthy business cycles, In particular, commercial aerospace was one of the stock
we focus on investing with a long-term time horizon, market's best-performing groups following the December 24
across a spectrum of companies that are positioned for low. I think this was partly due to the group's sensitivity to
growth. prospects for economic activity, which seemed to improve in
• We particularly favor firms with strong business models, early January after the U.S. Federal Reserve backpedaled
balanced capital allocation and high recurring free cash from its intention to raise short-term interest rates multiple
flow and that are trading at reasonable valuations. times in 2019.
• Stock selection and idea generation come from rigorous Also, the shares of index heavyweight and commercial jet
bottom-up research that leverages Fidelity's deep and manufacturer Boeing performed especially well in January
experienced global cyclicals team. and February. The company topped fourth-quarter estimates
for both revenue and earnings, as aircraft orders were
• Sector and industry strategies could be used by investors
as alternatives to individual stocks for either tactical- or stronger than many analysts – including me – anticipated.
strategic-allocation purposes. In fact, the company said it planned to increase the
production rates on both its 737 and 787 aircraft. Just after
the reporting period ended, Boeing shares tumbled in the
wake of questions about the safety of the company's 737
Max 8 jet following a second crash involving that model.
However, Boeing stock strongly outperformed during the 12
months under review.
Defense stocks lagged their commercial aerospace
counterparts, partly due to rich valuations to start the period,
uncertainty created by the early departure of Defense
Secretary James Mattis, and a tweet by President Trump that
prompted questions about his commitment to defense
spending.
2 | For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.PORTFOLIO MANAGER Q&A | AS OF FEBRUARY 28, 2019
Q: Versus the MSCI index, what factors hurt Q: What about contributors
fund performance the most Non-index exposure to industrial machinery modestly
Stock selection in the fund's main category of aerospace & bolstered relative performance. Among individual holdings,
defense detracted most from performance versus the MSCI the fund's top relative contributor was major defense
index. In particular, several overweighted positions on the contractor Lockheed Martin (-10%), which helped because I
defense side were disappointing. These included Northrop underweighted it.
Grumman, the fund's largest individual relative detractor and Three aerospace components makers also were among the
our second-largest holding during the period, General fund's notable relative contributors: Heico, TransDigm Group
Dynamics and Huntington Ingalls Industries, a shipbuilder. and Teledyne Technologies, all large overweightings that
Of the major defense contractors, I liked Northrop Grumman performed well. These stocks – which returned 39%, 51%
best because of its management, valuation and product mix. and 27%, respectively, for the fund – are key components of
However, most key defense stocks struggled this period. Part my overall strategy for the aerospace part of the fund, which
of the explanation for this might have been that defense consists of focusing on components makers rather than
stocks were simply consolidating the strong gains they had aircraft manufacturers.
recorded during the several years leading up to the first At this point in the aerospace cycle, I'm more confident in
quarter of 2018. the durability of demand for components. On the other
That's when the Bipartisan Budget Act of 2018 was hand, I'm concerned that Boeing's order book might be
approved, providing a framework for defense spending for vulnerable this late in the cycle, although we haven't actually
fiscal 2018 and 2019. The framework included significant seen signs of that yet.
increases for equipment procurement and R&D (research
and development), the two most important drivers of Q: What's your outlook as of February 28,
revenue for defense contractors, following several decades Jonathan
in which spending increases for procurement and R&D were
hard to come by. One lesson reinforced in 2018 was how quickly things can
change. After beginning the year with a consensus view that
I think there was considerable buying of defense shares in we were experiencing "synchronized global growth," the
advance of this legislation and a letdown thereafter – a environment shifted and global economic growth slowed
classic "buy the rumor, sell the news" response. throughout the year. By the time the fourth quarter rolled
around, some investors were concerned that a recession was
Q: What else hurt imminent.
Out-of-benchmark exposure to Bombardier also weighed on We seem to have dodged the recession bullet for now, but
the fund's relative result. Shares of the Canada-based the fact remains, in my view, that we are late in the current
aircraft/train manufacturer began the period on a promising economic recovery, and the U.S. Federal Reserve has been in
note. However, the stock peaked in June and headed lower tightening mode for several years. So, while the fund is not
thereafter. positioned defensively, it's not extremely aggressive either.
In particular, it plunged in November after the company Contrary to the consensus view on aerospace and defense
reported disappointing revenue growth for the third quarter, stocks, I continue to believe in the wisdom of overweighting
as ongoing costs associated with manufacturing the C Series the defense part of the portfolio. Defense is an area of the
narrow-body jet continued to hamper the firm's financial market that is viewed somewhat defensively because it is
results. Given the recent progress in stabilizing the less dependent on the overall level of economic activity. In
company's finances resulting from the investment in the C my view, though, it is more than simply a defensive play,
Series program by Airbus and other signs of progress at the given the outlook for continued healthy spending in the U.S.
company, I increased the fund's stake in Bombardier. defense budget. ■
Underweighting Boeing, which I mentioned earlier in the
discussion of general market conditions, worked well for the
first half of the period, but the stock was one of the market's
strongest-performing large-caps following the December
market bottom. This outperformance hurt the fund. I
continued to prefer certain components suppliers to Boeing
itself, as I thought they had a better growth outlook and less
risk tied to new plane orders.
3 | For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.PORTFOLIO MANAGER Q&A | AS OF FEBRUARY 28, 2019
LARGEST CONTRIBUTORS VS. BENCHMARK
Average Relative
Jonathan Siegmann elaborates on Holding Market Segment
Relative Contribution
Weight (basis points)*
why he still likes defense stocks: Lockheed Martin Corp. Aerospace & Defense -6.21% 104
HEICO Corp. Class A Aerospace & Defense 2.53% 79
"Although aerospace stocks performed much better TransDigm Group, Inc. Aerospace & Defense 2.28% 78
than their defense counterparts this period, I
Teledyne
continue to like defense as a group. Aerospace & Defense 3.40% 72
Technologies, Inc.
"Defense stocks had performed quite well in 2016, Rockwell Collins, Inc. Aerospace & Defense -1.97% 54
2017 and early 2018 – leading up to the beginning * 1 basis point = 0.01%.
of our reporting period – and were probably due for
a breather. However, I don't view the recent
underperformance as worrisome from a longer-term LARGEST DETRACTORS VS. BENCHMARK
perspective.
"There also was some uncertainty on the defense Average Relative
side. In December 2018, Defense Secretary James Relative Contribution
Holding Market Segment Weight (basis points)*
Mattis left the Trump administration earlier than
planned over a disagreement with the President Northrop Grumman
Aerospace & Defense 6.80% -168
Corp.
about troop withdrawals from Syria. Mattis' abrupt
General Dynamics
departure created uncertainty about the status of Aerospace & Defense 4.52% -150
Corp.
defense spending. That uncertainty was amplified
Bombardier, Inc. Class
by one of the President's tweets claiming that the B (sub. vtg.)
Aerospace & Defense 2.59% -118
U.S. was in an 'uncontrollable arms race' with Russia
The Boeing Co. Aerospace & Defense -6.93% -116
and China that he termed 'crazy.'
Huntington Ingalls
Aerospace & Defense 3.05% -78
"With that said, I think recent increases in military Industries, Inc.
spending have yet to be fully reflected in the * 1 basis point = 0.01%.
revenue and earnings of defense companies. There
is typically a lag between when these items are
budgeted and when we see the full impact on
corporate financials. Thus, I believe there could be
positive surprises in store for these firms.
"Northrop Grumman is a major defense contractor
in which the fund has a sizable overweighting
because I like its management, valuation and
product mix. Huntington Ingalls Industries is a
shipbuilder that I see as potentially benefiting from
the navy's emphasis on submarines and aircraft
carriers."
4 | For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.PORTFOLIO MANAGER Q&A | AS OF FEBRUARY 28, 2019
ASSET ALLOCATION
Relative Change
From Six Months
Asset Class Portfolio Weight Index Weight Relative Weight Ago
Domestic Equities 90.59% 100.00% -9.41% 0.18%
International Equities 8.34% 0.00% 8.34% -0.31%
Developed Markets 8.34% 0.00% 8.34% -0.31%
Emerging Markets 0.00% 0.00% 0.00% 0.00%
Tax-Advantaged Domiciles 0.00% 0.00% 0.00% 0.00%
Bonds 0.00% 0.00% 0.00% 0.00%
Cash & Net Other Assets 1.07% 0.00% 1.07% 0.13%
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.
MARKET-SEGMENT DIVERSIFICATION
Relative Change
From Six Months
Market Segment Portfolio Weight Index Weight Relative Weight Ago
Aerospace & Defense 96.64% 100.00% -3.36% 0.58%
It Consulting & Other Services 1.37% -- 1.37% -0.33%
Industrial Machinery 0.92% -- 0.92% 0.20%
5 | For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.PORTFOLIO MANAGER Q&A | AS OF FEBRUARY 28, 2019
10 LARGEST HOLDINGS
Portfolio Weight
Market Segment Portfolio Weight
Holding Six Months Ago
The Boeing Co. Aerospace & Defense 22.53% 14.91%
Northrop Grumman Corp. Aerospace & Defense 11.21% 10.68%
TransDigm Group, Inc. Aerospace & Defense 8.21% 4.86%
General Dynamics Corp. Aerospace & Defense 6.75% 8.55%
HEICO Corp. Class A Aerospace & Defense 4.96% 5.01%
Spirit AeroSystems Holdings, Inc. Class A Aerospace & Defense 4.84% 4.89%
United Technologies Corp. Aerospace & Defense 4.73% 10.14%
Teledyne Technologies, Inc. Aerospace & Defense 4.62% 5.03%
Huntington Ingalls Industries, Inc. Aerospace & Defense 4.59% 5.48%
Moog, Inc. Class A Aerospace & Defense 4.58% 3.09%
10 Largest Holdings as a % of Net Assets 77.03% 73.99%
Total Number of Holdings 31 33
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.
FISCAL PERFORMANCE SUMMARY: Cumulative Annualized
Periods ending February 28, 2019 6 1 3 5 10 Year/
Month YTD Year Year Year LOF1
Select Defense and Aerospace Portfolio
3.80% 22.74% 3.57% 24.44% 14.03% 20.96%
Gross Expense Ratio: 0.76%2
S&P 500 Index -3.04% 11.48% 4.68% 15.28% 10.67% 16.67%
MSCI US IMI Aerospace & Defense 25/50 Linked Index 5.44% 23.89% 6.62% 28.67% 17.02% 23.26%
Morningstar Fund Industrials -3.68% 16.75% -0.03% 15.15% 7.92% 17.11%
% Rank in Morningstar Category (1% = Best) -- -- 22% 4% 12% 10%
# of Funds in Morningstar Category -- -- 48 42 41 34
1 Lifeof 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. It
does not include any fee waivers or reimbursements, which would be reflected in the fund's net expense ratio.
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 calendar-
quarter performance.
6 | For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.PORTFOLIO MANAGER Q&A | AS OF FEBRUARY 28, 2019
Definitions and Important Information 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
Information provided in this document is for informational and
Aerospace & Defense Index.
educational purposes only. To the extent any investment information
in this material is deemed to be a recommendation, it is not meant to
be impartial investment advice or advice in a fiduciary capacity and is MARKET-SEGMENT WEIGHTS
not intended to be used as a primary basis for you or your client's
Market-segment weights illustrate examples of sectors or
investment decisions. Fidelity, and its representatives may have a
industries in which the fund may invest, and may not be
conflict of interest in the products or services mentioned in this representative of the fund's current or future investments. Should
material because they have a financial interest in, and receive not be construed or used as a recommendation for any sector or
compensation, directly or indirectly, in connection with the industry.
management, distribution and/or servicing of these products or
services including Fidelity funds, certain third-party funds and
products, and certain investment services. RANKING INFORMATION
© 2019 Morningstar, Inc. All rights reserved. The Morningstar
FUND RISKS information contained herein: (1) is proprietary to Morningstar
The value of the fund's domestic and foreign investments will vary and/or its content providers; (2) may not be copied or
from day to day in response to many factors. Stock values fluctuate redistributed; and (3) is not warranted to be accurate, complete or
in response to issuer, political, regulatory, market, or economic timely. Neither Morningstar nor its content providers are
developments. You may have a gain or loss when you sell your responsible for any damages or losses arising from any use of this
shares. Investments in foreign securities, especially those in information. Fidelity does not review the Morningstar data and, for
emerging markets, involve risks in addition to those of U.S. mutual fund performance, you should check the fund's current
investments, including increased political and economic risk, as well prospectus for the most up-to-date information concerning
as exposure to currency fluctuations. Because FMR concentrates the applicable loads, fees and expenses.
fund's investments in a particular industry, the fund's performance
% Rank in Morningstar Category is the fund's total-return
could depend heavily on the performance of that industry and could
percentile rank relative to all funds that have the same Morningstar
be more volatile than the performance of less concentrated funds
Category. The highest (or most favorable) percentile rank is 1 and
and the market as a whole. The fund is considered non-diversified
the lowest (or least favorable) percentile rank is 100. The top-
and can invest a greater portion of assets in securities of individual
performing fund in a category will always receive a rank of 1%. %
issuers than a diversified fund; thus changes in the market value of a
Rank in Morningstar Category is based on total returns which
single investment could cause greater fluctuations in share price
include reinvested dividends and capital gains, if any, and exclude
than would occur in a more diversified fund. The defense and
sales charges. Multiple share classes of a fund have a common
aerospace industry can be significantly affected by government
portfolio but impose different expense structures.
defense and aerospace regulation and spending policies.
RELATIVE WEIGHTS
IMPORTANT FUND INFORMATION
Relative weights represents the % of fund assets in a particular
Relative positioning data presented in this commentary is based on
market segment, asset class or credit quality relative to the
the fund's primary benchmark (index) unless a secondary benchmark
benchmark. A positive number represents an overweight, and a
is provided to assess performance.
negative number is an underweight. The fund's benchmark is listed
As of September 28, 2018, S&P® and MSCI made changes to the immediately under the fund name in the Performance Summary.
Global Industry Classification Standard (GICS) classification
framework. The Telecommunication Services sector was broadened
and renamed Communication Services to include additional
companies previously classified in the Information Technology and
Consumer Discretionary sectors, and the Internet Software &
Services industry/sub-industry was eliminated.
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
7 |PORTFOLIO MANAGER Q&A | AS OF FEBRUARY 28, 2019 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 26 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 Portfolio (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: Annualized
Quarter ending June 30, 2019 1 3 5 10 Year/
Year Year Year LOF1
Select Defense and Aerospace Portfolio
12.48% 21.52% 14.96% 18.50%
Gross Expense Ratio: 0.75%2
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. It
does not include any fee waivers or reimbursements, which would be reflected in the fund's net expense ratio.
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 Information included on this page is as of the most recent calendar
the investment objectives, risks, charges, and expenses. For quarter.
this and other information, call or write Fidelity for a free S&P 500 is a registered service mark of Standard & Poor's Financial
prospectus or, if available, a summary prospectus. Read it Services LLC.
carefully before you invest. Other third-party marks appearing herein are the property of their
respective owners.
Past performance is no guarantee of future results.
All other marks appearing herein are registered or unregistered
Views expressed are through the end of the period stated and do not trademarks or service marks of FMR LLC or an affiliated company.
necessarily represent the views of Fidelity. Views are subject to change at
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LLC. References to specific company securities should not be construed 739279.8.0
as recommendations or investment advice.
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