Fidelity VIP Real Estate Portfolio

[Pages:11]PORTFOLIO MANAGER Q&A | AS OF DECEMBER 31, 2021

Fidelity? VIP Real Estate Portfolio

Key Takeaways

? For the year ending December 31, 2021, the fund's share classes

gained about 39%, trailing the 40.56% increase in the MSCI U.S. IMI Real Estate 25/50 Linked IndexSM.

? Throughout 2021, Portfolio Manager Sam Wald maintained his

bottom-up ? stock-by-stock ? approach to portfolio management, collaborating with Fidelity's research team to find high-quality, attractively priced REITs that he believes offer the best chance to outperform in the long term.

? As the period progressed, Sam was incrementally favoring property

types characterized by shorter lease durations, which he believed were better positioned to benefit in the near term from rising inflation.

? The largest detractor from the fund's performance relative to the

benchmark the past year was a significant underweighting in retail real estate investment trusts (REITs), especially malls, about whose longterm business fundamentals Sam had significant concerns.

? Security selection in the retail, industrial, and hotel & resort REIT

categories also detracted from relative performance.

? In contrast, investment choices among real estate services firms had

the biggest positive impact on the portfolio's relative result, while an overweighting in the strong-performing industrial REIT segment also contributed.

? As of year-end, Sam notes the uncertainty in the macroeconomic

environment and, as such, is redoubling his commitment to focusing on individual security selection and seeking to generate favorable riskadjusted performance for the fund.

Not FDIC Insured ? May Lose Value ? No Bank Guarantee

MARKET RECAP

The S&P 500? index gained 28.71% in 2021, with U.S. equities rising on improving economic growth, strong corporate earnings, widespread COVID19 vaccination, and accommodative fiscal and monetary stimulus. In the first quarter, the index gained 6.17%. Investors were buoyed by the rollout of vaccines, the U.S. Federal Reserve's pledge to hold short-term interest rates near zero until the economy recovered, and the federal government's deployment of trillions of dollars to boost the economy. A flattish May reflected concerns about inflation and jobs, but the rally resumed through August amid strong earnings. In September, the index returned -4.65% as sentiment turned broadly negative due to a host of factors. These included inflationary pressure from surging commodity prices, rising bond yields, supply constraints and disruption, and the fast-spreading delta variant of the coronavirus. The Fed also signaled it could soon begin to taper the bond purchases it has made since the onset of the pandemic. The index sharply reversed course with a 7.01% gain in October, driven by strength in earnings. Then in November, the index stalled again, returning -0.69% amid the emergence of a new, more-highly transmissible variant, omicron, and rising inflation, which breached a 40-year high. The index rose 4.48% in December, after studies suggested omicron resulted in fewer severe COVID-19 cases. All sectors had a double-digit return, led by energy (+55%) and real estate (+46%), whereas utilities (-18%) notably lagged.

PORTFOLIO MANAGER Q&A | AS OF DECEMBER 31, 2021

Q&A

Samuel Wald Portfolio Manager

Fund Facts

Start Date: Size (in millions):

November 06, 2002 $502.01

Investment Approach

? Fidelity? VIP Real Estate Portfolio seeks above-average income and long-term capital growth, consistent with reasonable investment risk, by investing in securities of companies that own and, in most cases, operate commercial real estate properties.

? Investment in real estate securities has the potential to provide portfolio diversification, consistent income generation and the ability to outpace inflation.

? We believe real estate investment trusts (REITs) represent a balance between real estate and stocks, and that recognizing attributes of both is key to identifying opportunities to outperform.

? Through rigorous bottom-up research from both Fidelity' s dedicated real estate team and the firm's broader research resources, we strive to add value through security selection within a disciplined risk framework. Our process seeks to determine the relative attractiveness of individual REITs and will try to take advantage of pricing discrepancies in the market.

An interview with Portfolio Manager Samuel Wald

Q: Sam, how did the fund perform for the year ending December 31, 2021

In a very strong market environment, the fund's share classes gained about 39%, trailing the 40.56% increase in the MSCI U.S. IMI Real Estate 25/50 Linked Index. The fund also underperformed the peer group average, though it surpassed the 28.71% advance of the broader equity market, as measured by the S&P 500? index.

Q: What influenced the fund's result versus the MSCI sector index the past 12 months

The biggest negative factor was my decision to significantly underweight retail real estate investment trusts (REITs) ? and completely avoid malls, whose fundamental long-term challenges I believe made the group unappealing. Unfortunately, retail REITs were some of the market's strongest performers in 2021. Security selection within the group further detracted, as did my picks among industrial and hotel & resort REITs.

In contrast, security selection in the real estate services category lifted the portfolio's relative performance. The fund also benefited from underweighting office REITs. Since the pandemic began, I've been concerned about this group due to serious long-term uncertainty about future demand for office space. Overweighting the market-leading industrial REIT category also added value the past year.

This performance came as I followed the same basic investment approach I use in all market environments. Specifically, I begin with the recognition that REITs are a balance of stocks and real estate, behaving more like the former in the short term, and more like the latter over longer time periods. REITs are like stocks in that value can often be added by correctly predicting earnings surprises, which correlate to short-term moves in the stocks' prices. Long term, returns can typically be boosted by focusing on the value of a REIT's underlying assets and comparing it to where the stock might be currently trading on any given day. This focus on the underlying assets provides an anchor point for my colleagues and me, as we determine how REITs should be valued, allowing us to avoid getting sidetracked by dayto-day news.

Second, my process involves in-depth research. With Fidelity's highly capable team of analysts, we determine the

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 DECEMBER 31, 2021

relative appeal of individual REITs and will often take advantage of significant pricing discrepancies in the market. Lastly, I believe that security selection can provide the best opportunity for the fund to outperform over time. When we do have over or underweightings in the portfolio, they tend to result from bottom-up stock picking, rather than a topdown assessment of market conditions. Stock picking historically has been where I've had the most success during my career as both a portfolio manager and analyst.

Q: What about risk management

I consider it a vital part of the investment process. I think it's important to monitor risk every day, and not simply react to unexpected events as they occur. I regularly review the portfolio's risk parameters to help establish and maintain appropriate position sizes and industry weightings, as security selection is intended to be the primary performance driver. I also try to limit unexpected sources of risk, such as geographic or market-cap concentration, to try to reduce unintended outcomes. Of final note, I participate in quarterly meetings at Fidelity to review what went right in the portfolio and how we might replicate it, along with what went wrong and how best to strive to avoid it in the future.

Q: Versus the MSCI real estate index, which investments detracted the most

In 2021, hotel REITs ? including RLJ Lodging Trust (-1%), an overweight position and the fund's biggest relative detractor ? faced a difficult operating environment. Hotel owners began the year with optimism, as the development of safe, effective vaccines for COVID-19 appeared to clear the way for travel to resume. Then, in the summer and fall, came the fast-spreading delta variant of the coronavirus, followed late in 2021 by the even-faster-spreading omicron variant. With these waves came more questions about what a recovery in travel spending will even look like. I favored the company because I liked its balance sheet better than competitors', plus I believe the firm has a unique opportunity to add value for shareholders by repositioning its portfolio.

Another notable relative detractor was an outsized stake in Four Corners Property Trust (+3%). This owner of triple-net properties ? meaning tenants pay such common expenses as maintenance and taxes ? is considered a highly defensive stock, and it lagged as REIT investors began looking for opportunities offering faster near-term growth prospects. As of December 31, I think the market is undervaluing this company, so I remained invested here, even as my overall exposure to this name declined a bit.

My decision to avoid mall REIT and index component Simon Property Group (+96%) also hurt the portfolio's relative performance. As customers returned to malls this past year, industry leader Simon was a notable beneficiary. As I mentioned, I remained concerned about malls' significant

long-term business challenges, so I avoided the stock, as well as other mall REITs, in favor of areas of the REIT market I believed offered more opportunity.

Also detracting versus the sector index was an overweighting in Ventas, one of my largest holdings on December 31. Shares of this operator of senior housing properties gained 8% in 2021, performing well short of the benchmark. The senior housing industry's relatively high operating expenses, combined with challenges to its business amid the spread of omicron, delayed the recovery in this market. As I see it, however, senior housing still offered good medium-term growth potential. Consequently, I added to the fund's Ventas stake this period at what I felt as an attractive valuation.

Q: What boosted the fund's relative result

By far, our biggest contributor was a sizable overweighting in self-storage REIT CubeSmart (+75%), one of our biggest holdings at year-end. After a difficult 2020, self-storage operators were among the market's top performers in 2021, benefiting from investors' previously diminished expectations, alongside robust demand for storage space. Additionally, because self-storage leases tend to be relatively short in duration, both CubeSmart and its competitors can quickly respond to inflationary conditions by raising rents ? a positive attribute for investors this period.

A larger-than-index fund holding, Mid-America Apartment Communities (+86%), added further value. This owner of apartment properties has substantial exposure to the Sunbelt region, which during the pandemic has enjoyed particularly strong demand. As of period end, I continued to see an attractive risk/reward trade-off here.

Lastly, another key relative contributor was outsized exposure to industrial REIT Prologis (+72%), our largest holding at the end of 2021. Besides benefiting from the global growth in e-commerce, the firm has been aided by the economic recovery and supply-chain weakness, highlighting the need for businesses to carry more inventory.

Q: Any closing thoughts for shareholders, Sam

Looking ahead, I expect pandemic-related trends in the REIT market to become less pronounced over time. Meanwhile, as inflation becomes more top-of-mind for investors, I'm focusing a bit more on shorter-duration property types such as hotel and senior-housing operators, whose more-limited lease durations should give them enhanced flexibility to respond to economic conditions more nimbly.

Given considerable uncertainty in the macroeconomic environment as of December 31, I'm going to continue prioritizing the variables within my control. This means maintaining focus on individual security selection and seeking to generate the best risk-adjusted performance I can for the fund.

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 DECEMBER 31, 2021

Sam Wald on REITs and the potential impact of higher inflation:

"Interest rates have been rising, and, with inflation at a 40-year high, the Federal Reserve has made it clear that more rate increases are on the way.

"When rates go up due to a fast-growing economy and higher inflation, it can be a positive factor for REITs by driving up their revenue growth ? potentially even more so than you'd see in higheryielding equity sectors such as consumer staples or utilities. When inflation rises, REITs are often wellpositioned because of the nature of their income stream. As leases expire, they can raise rents to reflect the new, prevailing pricing environment.

"Shorter-duration property types ? meaning those characterized by relatively short lease lengths ? are the first to be able to raise rents. Hotels, which rent their rooms on a nightly basis, are the shortestduration property type, while self-storage, apartment REITs and manufactured housing are other such examples. As the year progressed, I was looking a bit more closely at these sorts of shorterduration property types to try to add more nearterm growth potential to the fund.

"Although shorter-duration REITs will see the benefits from inflation more quickly, even longerduration REITs can be expected to capture the upside, too, even if it takes longer to realize it.

"A second way that inflation can lift the REIT industry is by influencing the supply of properties. Too much supply, often due to overbuilding amid favorable market conditions, is what can bring an end to the real estate cycle. Inflation, however, increases the cost of new construction or replacing existing properties. In turn, this can delay the development of new supply and generate a more favorable fundamental backdrop for REITs ? a longterm positive for the asset class."

LARGEST CONTRIBUTORS VS. BENCHMARK

Holding

Market Segment

CubeSmart

Equity Self Storage

Mid-America Apartment Communities, Inc.

Equity Apartments

Prologis (REIT), Inc. Equity Industrial

CBRE Group, Inc.

Equity Diversified

Equinix, Inc.

Equity Data Centers

* 1 basis point = 0.01%.

Average Relative Relative Contribution Weight (basis points)*

6.49%

194

3.26%

128

4.19%

122

3.17%

110

-4.72%

105

LARGEST DETRACTORS VS. BENCHMARK

Holding

Market Segment

Average Relative Relative Contribution Weight (basis points)*

RLJ Lodging Trust

Equity Lodging Resorts

3.42%

-162

Four Corners Property Trust, Inc.

Equity Free Standing

3.37%

-161

Simon Property Group, Inc.

Equity Regional Malls -2.87%

-125

Ventas, Inc.

Equity Health Care 3.28%

-121

Americold Realty Trust Equity Industrial

1.74%

-105

* 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.

PORTFOLIO MANAGER Q&A | AS OF DECEMBER 31, 2021

ASSET ALLOCATION

Asset Class

Portfolio Weight Index Weight

Relative Weight

Relative Change From Six Months

Ago

Domestic Equities

98.33%

100.00%

-1.67%

-1.11%

International Equities

0.00%

0.00%

0.00%

0.00%

Developed Markets

0.00%

0.00%

0.00%

0.00%

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

1.67%

0.00%

1.67%

1.11%

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 Infrastructure Industrial Apartments Data Centers Self Storage Health Care Specialty Diversified Office Free Standing Other

Portfolio Weight 16.71% 14.32% 10.46% 8.55% 7.29% 6.82% 6.68% 5.48% 4.77% 4.01% 13.22%

Index Weight 15.69% 12.79% 10.47% 7.98% 6.92% 7.33% 4.20% 4.44% 6.22% 4.44% 19.52%

Relative Weight 1.02% 1.53% -0.01% 0.57% 0.37% -0.51% 2.48% 1.04% -1.45% -0.43% -6.30%

Relative Change From Six Months

Ago -0.28% -0.90% -0.20% -0.16% -0.72% 0.52% -0.86% -0.21% 1.41% -0.94% 1.20%

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 DECEMBER 31, 2021

10 LARGEST HOLDINGS

Holding

Market Segment

Portfolio Weight

Portfolio Weight Six Months Ago

Prologis (REIT), Inc.

Equity Industrial

12.04%

10.00%

American Tower Corp.

Infrastructure REITs

12.00%

13.93%

Digital Realty Trust, Inc.

Equity Data Centers

7.73%

9.49%

CubeSmart

Equity Self Storage

7.29%

7.17%

CBRE Group, Inc.

Equity Diversified

4.73%

4.80%

Crown Castle International Corp.

Infrastructure REITs

4.71%

--

Essex Property Trust, Inc.

Equity Apartments

4.60%

4.63%

Mid-America Apartment Communities, Inc.

Equity Apartments

4.50%

4.89%

Ventas, Inc.

Equity Health Care

4.11%

4.61%

Equity Lifestyle Properties, Inc.

Equity Manufactured Homes

3.34%

2.91%

10 Largest Holdings as a % of Net Assets

65.06%

66.98%

Total Number of Holdings

34

28

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.

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 DECEMBER 31, 2021

PERFORMANCE SUMMARY

Variable annuity contracts are issued by insurance companies through separate accounts that are part of the insurer. The value of a variable annuity contract depends on the values of units of subaccounts of the separate account. Each subaccount purchases shares of a corresponding mutual fund. Subaccount investment performance is based on the performance of the mutual fund in which it invests, less insurance company charges made against the assets of the separate account. A subaccount is not a mutual fund.

The information provided in this Performance Summary contains performance information for the fund, or class, and each variable subaccount, with comparisons over different time periods to the fund's relevant benchmarks ? including an appropriate index as well as a group of similar funds whose average returns are compiled and monitored by an independent mutual fund research company. Figures for more than one year assume a steady compounded rate of return and are not a class' year-by-year results, which fluctuated over the periods shown. Fund performance numbers are net of all underlying fund operating expenses, but do not include any insurance charges imposed by your insurance company's separate account. If fund performance information included the effect of these additional charges, the total returns would have been lower. The performance table also contains performance information for certain insurance company subaccounts that invest in the fund. Each variable subaccount's performance, as shown, is net of all fees and expenses, including those charges imposed by your insurance company. Seeing the returns over different time periods can help you assess the performance against relevant measurements and across multiple market environments. The performance information includes average annual total returns and cumulative total returns and is further explained in this section.*

Investing in a variable annuity involves risk of loss ? investment returns, contract value, and, for variable income annuities, payment amounts are not guaranteed and will fluctuate. Withdrawals of taxable amounts from an annuity are subject to ordinary income tax, and, if taken before age 59 1/2, may be subject to a 10% IRS penalty.

Current performance may be higher or lower than the performance data quoted below. An investor's shares, when redeemed, may be worth more or less than their original cost. For month-end performance figures, please visit fidelity. com/annuityperformance or call Fidelity. The performance data featured represents past performance, which is no guarantee of future results.

Fiscal periods ending December 31, 2021

Cumulative

Annualized

Total Returns for the Fund

6

Month

YTD

1 Year

3 Year

5 Year

10 Year/ LOF1

VIP Real Estate Portfolio - Initial Class Gross Expense Ratio: 0.66%2

15.91%

38.99%

38.99%

16.97%

9.33%

10.41%

VIP Real Estate Portfolio - Investor Class Gross Expense Ratio: 0.74%2

S&P 500 Index

15.91% 11.67%

38.92% 28.71%

38.92% 28.71%

16.90% 26.07%

9.25% 18.47%

10.32% 16.55%

MSCI US IMI Real Estate 25/50 Linked Index

15.75%

40.56%

40.56%

14.14%

8.13%

9.92%

Morningstar Insurance Real Estate

16.93%

41.47%

41.47%

19.55%

11.28%

11.10%

1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 11/06/2002.

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, or estimated amounts for the current fiscal year in the case of a newly launched fund. It does not include any fee waivers or reimbursements, which would be reflected in the fund's net expense ratio.

Performance and disclosure information continued on next page.

7 | 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 DECEMBER 31, 2021

PERFORMANCE SUMMARY (continued):

Fiscal periods ending December 31, 2021

Total Returns for the Variable Subaccount**

Annualized

New York Only: 10 Year/Life

of Subaccount

Cumulative

6

Month

YTD

1 Year

Annualized

3 Year

5 Year

10 Year/Life of

Subaccount

Fidelity Retirement Reserves A

9.53%

15.44%

37.88%

37.88%

16.04%

8.45%

9.53%

Fidelity Income Advantage B

9.31%

15.32%

37.60%

37.60%

15.80%

8.23%

9.31%

Fidelity Personal Retirement Annuity C (for contracts purchased prior to 1/1/09 and on or after 9/7/10)

10.05%

15.76%

38.57%

38.57%

16.61%

8.97%

10.05%

Fidelity Personal Retirement Annuity C (for contracts purchased between 1/1/09 and 9/6/10)

10.05%

15.76%

38.57%

38.57%

16.61%

8.97%

10.05%

Fidelity Personal Retirement Annuity C (for contracts purchased on or after 9/7/10 with an initial purchase payment of $1M+)

10.21%

15.85%

38.78%

38.78%

16.79%

9.14%

10.21%

Fidelity Retirement Reserves - Subaccount Inception: September 26, 2003; New York Only Inception: September 26, 2003. Fidelity Income Advantage - Subaccount Inception: September 26, 2003; New York Only Inception: September 26, 2003. Fidelity Personal Retirement Annuity Subaccount Inception: August 15, 2005; New York Only Inception: October 28, 2005.

Fidelity Retirement Reserves' underlying fund options are Initial Class fund offerings. Fidelity Income Advantage's underlying fund options are Initial Class fund offerings. Fidelity Personal Retirement Annuity's underlying fund options are Investor Class fund offerings.

A In NY, Retirement Reserves B In NY, Income Advantage C In NY, Personal Retirement Annuity

* Total returns are historical and include changes in share price (for the fund) and unit price (for the variable subaccount) and reinvestment of dividends and capital gains, if any.

** Returns for Fidelity Retirement Reserves include the 0.80% annual annuity charge. For Fidelity Retirement Reserves contracts, returns do not reflect the annual $30 maintenance fee which applies to contracts where purchase payments less any withdrawals are less than $25,000. Returns for Fidelity Income Advantage include the 1.00% annual annuity charge. Returns for Fidelity Personal Retirement Annuity ("FPRA") include the 0.25% annual annuity charge for contracts purchased prior to 1/1/2009, and on or after 9/7/2010. For FPRA contracts purchased between 1/1/2009 and 9/6/2010, returns include a 0.35% annual annuity charge prior to 9/7/2010 and 0.25% thereafter. For FPRA contracts purchased on or after 9/7/2010 with an initial purchase payment of $1,000,000 or more, returns include a 0.10% annual annuity charge. Life of subaccount returns are from the subaccount inception, the date the portfolio was first available in the insurance company's variable product. Please see the last page(s) of this Q&A document for most-recent calendar-quarter performance.

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

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