Fidelity Select Semiconductors Portfolio

PORTFOLIO MANAGER Q&A | AS OF AUGUST 31, 2023

Fidelity? Select Semiconductors Portfolio

Key Takeaways

? For the semiannual reporting period ending August 31, 2023, the fund gained 32.94%, trailing the 38.67% advance of the MSCI U.S. IMI Semiconductors & Semiconductor Equipment 25/50 Index, but more than doubling the 14.50% result of the broad-based S&P 500? index.

? The past six months, semiconductors was the best-performing

industry group within the information technology sector, which itself was one of the top performers among the 11 equity sectors in the S&P 500? index.

? Although a number of trends drove the outstanding performance of

chip stocks this period, by far the most impactful was excitement for generative artificial intelligence, spurred by the November 2022 introduction of OpenAI's AI-powered ChatGPT chatbot.

? Stock selection in the fund's core semiconductors group had, by far,

the biggest negative impact on the fund's performance versus the MSCI industry index. Investment choices in the semiconductor materials & equipment segment also detracted.

? On the positive side, an underweight in semiconductor materials &

equipment, which was the weaker of the two industry groups in the MSCI index, partly offset some of the damage from stock picking in the group. Overweighting semiconductors helped a bit as well.

? Looking ahead, although Portfolio Manager Adam Benjamin would

not be surprised to see further near-term choppiness in the stock market, the fourth quarter is frequently a good one for the technology sector and stocks in general.

? Longer term, Adam remains quite bullish on the prospects for

semiconductor-related investments because of the group's status as a core technology for so many key products and services in the modern global economy.

MARKET RECAP

U.S. equities gained 14.50% for the six months ending August 31, 2023, according to the S&P 500? index, as continued global economic expansion, falling commodity prices and a slowing in the pace of inflation provided a favorable backdrop for higher-risk assets. Large-cap stocks spearheaded the rally, which was driven by the shares of a narrow set of mega-cap companies in the information technology and communication services sectors, largely due to exuberance related to generative artificial intelligence. Aggressive monetary tightening by the U.S. Federal Reserve continued amid consistent pressure on core inflation, a measure that excludes food and energy. Since March 2022, the Fed has hiked its benchmark interest rate 11 times. The latest bump came in late July, a fourth consecutive raise of a stepped-down 25 basis points. The S&P 500? gained 3.21% in July but snapped a five-month rally in August (-1.59%), held back by softness in manufacturing and jobs. Still, U.S. stocks ended August up 18.73% year to date. For the full six months, growth (+20%) handily topped value (+9%) within the index. By sector, information technology and communication services (+33% each) led, whereas utilities (-2%) lagged most, as climbing yields offered investors better returns elsewhere. Real estate returned -1%, hampered by high borrowing costs and low home inventory.

Not FDIC Insured ? May Lose Value ? No Bank Guarantee

PORTFOLIO MANAGER Q&A | AS OF AUGUST 31, 2023

Q&A

Adam Benjamin Portfolio Manager

Fund Facts

Trading Symbol: Start Date: Size (in millions):

FSELX July 29, 1985 $11,473.51

Investment Approach

? Fidelity? Select Semiconductors Portfolio is an industrybased, equity-focused strategy that seeks to outperform its benchmark through active management.

? We believe the value of technology stocks is in large part determined by the companies' future potential to generate earnings and cash flow. Our investment framework also focuses on identifying themes that impact the largest end markets, determining potential winners/losers, and how certain companies that are technology disruptors can impact incumbents.

? The semiconductor industry is a very specialized part of the market, and our experience allows for proficiency in a particular domain, aiding in recognizing investment opportunities that arise.

? Through bottom-up research, including discussions with industry experts, technologists, suppliers and competitors, we develop a differentiated view on the fundamentals in seeking to identify companies with compelling risk/reward profiles.

? We leverage the depth and breadth of Fidelity's global research organization, which can provide a competitive edge given the global nature of the semiconductor and electronics supply chain.

? Sector and industry strategies could be used by investors as alternatives to individual stocks for either tactical- or strategic-allocation purposes.

An interview with Portfolio Manager Adam Benjamin

Q: Adam, how did the fund perform for the six months ending August 31, 2023

The fund gained 32.94%, trailing the 38.67% advance of the MSCI U.S. IMI Semiconductors & Semiconductor Equipment 25/50 Index, but more than doubling the 14.50% result of the broad-based S&P 500? index. The fund finished well ahead of its peer group average, which tracks the entire information technology sector.

Looking slightly longer term, the fund was up 60.11% for the trailing 12 months, a bit short of the MSCI index but far ahead of both the S&P 500? and the peer group average.

Q: What was noteworthy about the investment backdrop for chip stocks the past six months

Semiconductors was the best-performing industry group within the information technology sector, which itself was one of the top performers among the 11 equity sectors in the S&P 500? index.

Although a number of trends drove the outstanding performance of chip stocks, by far the most impactful was the excitement for generative artificial intelligence. In fact, the arrival of ChatGPT in November 2022 helped spark a meaningful rally in the broader stock market that lasted through the end of the period, although the advance was mostly driven by a few mega-cap stocks in the technology and communication services sectors.

Artificial intelligence, or AI, has been around for a while, but generative AI is a big step forward. ChatGPT, which stands for Chat Generative Pre-Trained Transformer, is a large language model-based chatbot developed by OpenAI and launched on November 30, 2022. It is notable for enabling users to refine and steer a conversation toward a desired length, format, style, level of detail and language used. Summarizing a web page, crafting a coherent email on a specified topic, completing a nuanced internet search and much more are all within the capabilities of ChatGPT.

Although generative AI is still very much in its infancy and products like ChatGPT have some notable bugs to be worked out, its introduction made quite a splash in the global business community and buoyed investors' spirits during the period.

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 AUGUST 31, 2023

Q: Were there any big "winners" in the race to develop generative AI

Nvidia (+112%) is perhaps the premier generative AI play because of its comprehensive approach, including graphics processing units that power the computing-intensive AI algorithms, but also networking solutions for AI applications, as well as libraries of algorithms for training topic-specific AI applications.

Fortunately, the fund had an overweight in Nvidia during the period. As a result, this stock was one of our top contributors versus the MSCI index. With that said, the stock had an average weight in the index of roughly 26% during the period, so I couldn't overweight Nvidia as much as I wanted to for the sake of proper portfolio risk management.

Although Nvidia's share price benefited from the general excitement about generative AI, one catalyst stands out. On May 25, the stock leaped about 24% after the company projected a massive jump in second-quarter sales that far exceeded even the most optimistic analyst estimates. I reduced this position, and it ended August as the fund's largest holding in absolute terms, by far, although not its top overweight versus the industry index.

Q: What was the fund's largest overweight position as of August 31

That honor belonged to NXP Semiconductors, where our position gained "only" about 16% this period and therefore detracted from relative performance. Autos are an example of a market where post-pandemic unit sales are still running below 2019 levels. Earlier in the pandemic, this was due to a shortage of semiconductors, and more recently higher interest rates on car loans have weighed on sales. With that said, the chip shortage has eased, and auto dealers have been rebuilding their inventories. I am optimistic about this market's prospects, especially given the increasing chip content per car, largely driven by electric vehicles and driverassistance applications. Thus, I boosted the fund's share count here.

Onsemi (+27%), formerly ON Semiconductor, was overweighted in the portfolio by roughly the same margin as NXP Semiconductors and also detracted from relative performance. Onsemi provides semiconductors for electric vehicles and for driver-assistance applications, as well as alternative energy and general industrial applications. These markets enjoyed fairly strong demand during the period. I added to this position.

Q: Any other negatives to mention

materials & equipment segment further weighed on our relative result.

Two non-index positions were among the fund's largest relative detractors the past six months. First, a stake in GlobalFoundries (-16%) detracted more than any other holding. I liked this semiconductor foundry because of its status as one of only five pure-play foundries without sites in geopolitically sensitive Taiwan or China. As a result, I thought the company was well-positioned to benefit from the global push for domestic production. However, the stock has been under pressure in recent quarters from excess inventory in some end markets, such as PC manufacturers. I added to this position.

I'll also mention Taiwan Semiconductor Manufacturing (+8%) as a notable relative detractor this period. The stock underperformed, due partly to investors' concern regarding geopolitical risks and the company's heavy exposure to Taiwan, despite its efforts to build manufacturing sites in the U.S., Europe and Japan. With that said, I believe the firm's technology leadership will allow it to remain at the forefront of semiconductor manufacturing for many years to come. I increased the fund's stake.

Q: What about contributors

An underweight in semiconductor materials & equipment, which was the weaker of the two industry groups in the MSCI index, partly offset some of the damage from subpar stock picking. Overweighting semiconductors helped a bit as well.

Three lagging index components represented the fund's top contributors because I underweighted them: Texas Instruments (-10%), Qualcomm (-29%) and Analog Devices (0%). All three suffered from different challenges to their growth and profitability. The first two were not in the portfolio at period end, and I considerably reduced our stake in Analog Devices.

Q: What's your outlook as of August 31, Adam

Although I wouldn't be surprised to see further near-term choppiness in the stock market, the fourth quarter is frequently a good one for the technology sector and stocks in general. We'll have to see whether that holds true in 2023.

Longer term, I remain quite bullish on the prospects for semiconductor-related investments because chips are a core technology for so many key products and services in the modern global economy. Specifically, they are needed to support the growth of generative AI and evolving data center architecture, as well as the adoption of electric vehicles and autonomous driving capabilities.

Big picture, stock selection in the fund's core semiconductors group had, by far, the biggest negative impact on the fund's performance. Investment choices in the semiconductor

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 AUGUST 31, 2023

Adam Benjamin on generative AI:

"With the arrival of the chatbot ChatGPT on the scene in November 2022, every company and every boardroom, across virtually every industry, is currently discussing how to embrace large language models, or LLMs, used by generative-AI applications. Expected benefits include increased productivity, personalized customer experiences, accelerated R&D through generative design, and an expanded range of feasible business models.

"There is clearly a lot of discussion, publicity and, at this stage, even hype around generative AI. However, because of its complexities ? which involve identifying uses cases, building and training models ? generative AI will not be an overnight sensation, but rather will likely take many years for most enterprises to implement into their workflow. With that said, generative AI has the potential to be transformative in the long run.

"In terms of investing in this industry, I expect several phases. Although innovation is happening rapidly ? things are changing and evolving almost daily, along with regulatory oversight as a concern ? the current phase of AI is centered around 'picks and shovels,' meaning overall infrastructure, and then will likely move to productivity applications serving different end markets.

"Some of the fund's largest overweights as of August 31 are what I believe will be the most significant beneficiaries of the AI infrastructure buildout: specifically, Nvidia, Marvell Technology, and Taiwan Semiconductor Manufacturing. Nvidia has been investing in AI for more than 10 years, and its full-stack solutions of chips, software and systems have positioned it extremely well as the provider of choice for hyperscalers and enterprises looking to embrace generative AI. Marvell has several key pieces of technology ? namely, its optical interconnects and its ASICs, or application-specific integrated circuits ? to assist hyperscalers in developing custom AI solutions. And lastly, Taiwan Semiconductor's position of leadership in process technology for semiconductor manufacturing has positioned it as the manufacturer of choice for those requiring high-end computing solutions, such as generative AI applications."

LARGEST CONTRIBUTORS VS. BENCHMARK

Holding

Market Segment

Texas Instruments, Inc. Semiconductors

Qualcomm, Inc.

Semiconductors

Analog Devices, Inc. Semiconductors

SolarEdge Technologies, Inc.

Semiconductor Materials & Equipment

NVIDIA Corp.

Semiconductors

* 1 basis point = 0.01%.

Average Relative Relative Contribution Weight (basis points)*

-4.99%

218

-4.04%

190

-2.66%

111

-0.80%

99

1.64%

93

LARGEST DETRACTORS VS. BENCHMARK

Holding

Market Segment

GlobalFoundries, Inc. Semiconductors

NXP Semiconductors NV

Semiconductors

Taiwan Semiconductor Manufacturing Co. Ltd. Semiconductors sponsored ADR

Enphase Energy, Inc.

Semiconductor Materials & Equipment

Broadcom, Inc.

Semiconductors

* 1 basis point = 0.01%.

Average Relative Relative Contribution Weight (basis points)*

4.76%

-311

6.54%

-162

4.94%

-162

1.32% -7.39%

-133 -125

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 AUGUST 31, 2023

ASSET ALLOCATION

Asset Class

Portfolio Weight Index Weight

Relative Weight

Relative Change From Six Months

Ago

Domestic Equities

89.11%

100.00%

-10.89%

-2.91%

International Equities

9.69%

0.00%

9.69%

3.68%

Developed Markets

4.66%

0.00%

4.66%

3.30%

Emerging Markets

5.03%

0.00%

5.03%

0.38%

Tax-Advantaged Domiciles

0.00%

0.00%

0.00%

0.00%

Bonds

0.13%

0.00%

0.13%

-0.06%

Cash & Net Other Assets

1.07%

0.00%

1.07%

-0.71%

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

Market Segment Semiconductors Semiconductor Materials & Equipment Electrical Components & Equipment Precious Metals & Minerals Technology Hardware, Storage & Peripherals Electronic Equipment & Instruments Systems Software Electronic Components

Portfolio Weight 84.84% 13.85% 0.12% 0.06% 0.04% 0.01% 0.01% 0.01%

Index Weight 82.18% 17.82% -------

Relative Weight 2.66% -3.97% 0.12% 0.06% 0.04% 0.01% 0.01% 0.01%

Relative Change From Six Months

Ago -2.15% 3.58% -0.12% -0.03% -0.54% -0.02% 0.00% 0.00%

5 | For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download