Fidelity Select Biotechnology Portfolio

PORTFOLIO MANAGER Q&A | AS OF FEBRUARY 28, 2023

Fidelity? Select Biotechnology Portfolio

Key Takeaways

? For the fiscal year ending February 28, 2023, the fund gained 1.14%,

considerably lagging the 10.57% advance of the MSCI U.S. IMI Biotechnology 25/50 Index, but well ahead of the -7.69% return of the broadly based S&P 500? index.

? According to Portfolio Manager Rajiv Kaul, the past 12 months

biotechnology stocks ? especially in the larger market-capitalization tiers ? appeared to make progress toward returning to a normal datadriven environment, following a boom-and-bust cycle that played out during the early-to-middle stages of the pandemic.

? Given widespread concern about a possible recession, biotech shares

benefited to some extent from investors' interest in areas of the stock market that tend to be less correlated with broader economic trends.

? With that said, the fund's performance compared with the MSCI

biotechnology index suffered from Rajiv's focus on the lagging midand small-cap segments of the biotech market.

? The strongest gains in the MSCI biotech index were concentrated in

the large-cap and upper-mid-cap segments. A risk-off mentality steered investors away from companies that were not yet profitable, even with promising products in the pipeline.

? Also, higher interest rates and concern about a softening economy

made it more difficult for these firms to gain access to the equity and credit markets to fund research and development.

? Virtually all of the fund's underperformance occurred in the second

half of the 12-month reporting period.

? As of February 28, Rajiv believes that recent concerns about inflation,

Fed rate hikes and economic slowing have created attractive valuations in biotech stocks, especially in the small- and mid-cap areas. He says he continues to find companies with what he considers compelling prospects based on their products or pipelines.

Not FDIC Insured ? May Lose Value ? No Bank Guarantee

MARKET RECAP

U.S. equities returned -7.69% for the 12 months ending February 28, 2023, according to the S&P 500? index. The new year began with an encouraging upturn in January (+6.28%), but stocks lost momentum in February (-2.44%) amid higher-than-expected inflation and strong jobs data. Investors took these as signs that the economy continued to run hot, even after a year of historic policy adjustment by the Federal Reserve aimed at cooling economic growth. Record inflation in 2022 prompted the Fed to aggressively tighten monetary policy, and market interest rates eclipsed their highest level in a decade, stoking recession fears and sending stocks into bear market territory. Since March 2022, the central bank has hiked its benchmark rate eight times, by 4.5 percentage points ? the fastest-ever pace of monetary tightening ? while also shrinking its massive asset portfolio. The latest bump came on February 2, along with a signal that the Fed plans to lift rates in March while it considers whether and when to pause increases. Against this dynamic backdrop, stocks struggled to gain traction until a strong rally ignited heading into the summer. But in September, the index returned -9.21%, one of its worst monthly results ever, before advancing 7.56% in Q4, as risky assets regained favor. For the full 12 months, value stocks handily outpaced growth. The headwind for the latter was most pronounced in the growth-oriented communication services (-25%) and consumer discretionary (-18%) sectors. In sharp contrast, energy gained 24%.

PORTFOLIO MANAGER Q&A | AS OF FEBRUARY 28, 2023

Q&A

Rajiv Kaul Portfolio Manager

Fund Facts

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

FBIOX December 16, 1985 $4,971.34

Investment Approach

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

? Fundamental, bottom-up research leveraging our experienced global health care team is the primary source of idea generation. Our analysis is driven by a data and statistical approach that emphasizes valuation through free cash flow and risk-adjusted net present value of future earnings, the latter being the standard valuation method in the drug-development industry.

? Our investment approach includes evaluating a company's drug pipeline, the size of its market opportunity and its relative valuation. We position the fund around four major themes: long-term winners with strong product pipelines ? our primary focus ? turnaround situations, breakthrough innovations and early-stage firms with promising science.

? 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 Rajiv Kaul

Q: Rajiv, how did the fund perform for the fiscal year ending February 28, 2023

The fund gained 1.14% the past 12 months, considerably lagging the 10.57% advance of the MSCI U.S. IMI Biotechnology 25/50 Index, but well ahead of the -7.69% return of the broadly based S&P 500? index. The fund's result compared favorably with its peer group average, which tracks the entire health care sector.

Q: What was the market environment like for biotech stocks the past 12 months

Biotechnology stocks ? especially in the larger marketcapitalization tiers ? appeared to make progress toward returning to a normal data-driven environment, following a boom-and-bust cycle that played out during the early-tomiddle stages of the COVID-19 pandemic.

On the one hand, the performance of stocks in the industry was limited by a difficult macroeconomic environment, including rising Treasury yields, aggressive U.S. Federal Reserve monetary tightening aimed at countering elevated inflation and the ongoing conflict in Ukraine. On the other hand, amid widespread concern about a possible recession, biotech stocks benefited from investors' preference for areas of the stock market that tend to be less correlated with broader economic trends.

The strongest gains in the MSCI biotech index were concentrated in the large-cap and upper-mid-cap segments. Investors remained wary of smaller stocks in the biotech universe, as a risk-off mentality steered them away from companies that were not yet profitable, even with promising products in the pipeline. Also, higher interest rates and concern about a softening economy made it more difficult for these firms to gain access to the equity and credit markets to fund research and development.

Q: How did these factors influence the fund's result versus the MSCI industry index

This period, my investment strategy and approach did not work well, given my focus on the lagging mid- and small-cap segments of the biotech market. Virtually all of the fund's underperformance occurred in the second half of the 12month reporting period. The portfolio was roughly in line with the MSCI index at the halfway mark on August 31.

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, 2023

By way of review, the fund typically maintains a tilt toward the small- and mid-cap segments of the market, in keeping with the strategy I have followed since I began managing the fund in 2005.

Experience shows that smaller companies are responsible for most of the truly innovative treatments that come to market. Smaller firms tend to be riskier, and I try to offset some of that risk by keeping position sizes modest and investing in a diversified portfolio of up-and-coming firms. Further, I and my biotech colleagues at Fidelity stay on top of the science behind products in development, and we favor those we believe are near a positive tipping point in the clinical review process.

Over the long term, this approach has worked well, but unfortunately the biotech market's advance mostly left smaller stocks behind this period.

Q: Which stocks stood out as detractors versus the MSCI industry index

Underexposure to Gilead Sciences, a large-cap stock that gained about 39% this period, was the biggest individual relative detractor. The fund had a modest underweight in Gilead to start the period, but I considerably reduced the position by August 31. The stock did especially well at the end of October, when the company released its third-quarter financial results, with November a strong month as well. Gilead management said sales for Q3 were down 5% year over year. However, excluding declining sales of Veklury?, the firm's COVID-19 treatment, sales actually grew by 11%. As a result, Gilead increased its revenue and earnings guidance for the full year. I typically underweight this stock because of my dim growth outlook for the company. In a challenging period where investors looked for relatively "safe" places to invest, though, Gilead strongly outperformed the MSCI biotech index.

Arcus Biosciences (-51%), a clinical-stage biotechnology firm developing novel cancer therapies, also detracted ? in this case because of the fund's notable overweight. The shares dropped sharply in April and May, as the Swiss pharma giant Roche announced disappointing results in a late-stage trial for its treatment of non-small cell lung cancer. The Roche product being studied was similar to a drug under development at Arcus. After recovering some, the shares experienced another setback in December due to disappointing phase 2 data on a jointly developed Arcus? Gilead experimental treatment for the same disease. I saw these as short-term hurdles and maintained the fund's position.

I'll also mention a non-index stake in Arvinas (-50%), a biopharmaceuticals company focused on oncology treatments based on targeted protein degradation. Here, too, the stock had a weak second quarter of 2022 ? in this

case because of an analyst downgrade related to development challenges for its ARV-471 cancer treatment. Larger pharmaceutical companies, such as Sanofi and Roche, have seen failures in their clinical trials for cancer treatments using oral selective estrogen receptor degraders (SERDs), raising investor concerns for Arvinas. I considerably reduced this position by the end of February.

Q: What about noteworthy contributors

Biohaven Pharmaceutical Holding helped most versus the MSCI index, rising 19% in the fund. Early in October, pharma giant Pfizer closed on its acquisition of the company, in the process spinning off Biohaven Ltd. as a new company. Pfizer will concentrate on the commercialization of Biohaven's migraine treatments, while the new company's pipeline now features three promising late-stage programs. The fund maintained a meaningful position here at period end.

Mostly avoiding weak-performing index component Novavax also boosted the fund's relative result, given the stock's -89% showing. Early in the pandemic, the company appeared to have a promising COVID-19 vaccine, but due to a series of manufacturing mishaps and regulatory delays, Novavax essentially missed the boat in that market, not receiving an emergency use authorization until July 2022. At that point, Moderna and Pfizer had staked out dominant positions in the market. On the final day of the period, the company raised doubts about its ability to remain in business and announced plans to slash spending. The fund did not own Novavax at period end.

Q: What's your outlook for the biotech industry as of February 28, Rajiv

If the U.S. economy enters a recession, smaller biotech stocks could be looking at more volatility. However, for investors who take the long view of this segment, I remain confident in our approach to selecting investments in this dynamic industry.

My focus remains on companies with attractive risk-adjusted net present value, and I firmly believe that we at Fidelity have some of the finest biotechnology investment professionals in the business. I continue to find companies with what I consider compelling prospects based on their products or pipelines.

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, 2023

Portfolio Manager Rajiv Kaul on his view of long-term prospects for smaller biotechnology stocks:

"As of February 28, I think we are looking at an extraordinary opportunity to buy shares of highquality, smaller-cap biotech companies.

"Since the group peaked in the first quarter of 2021, it's faced a series of challenges. For most of 2021, the problem was extreme overvaluation that resulted from speculative buying in biotechs during the early stages of the pandemic. That buying was clearly excessive, as were expectations for the many initial public offerings of companies with what I call 'me-too' products.

"By 2022, valuations had come back down from the stratosphere, but at that point the issue had become an inhospitable macroeconomic environment. Much higher Treasury yields and a Fed that was rapidly tightening monetary policy caused many investors to run for the shelter of defensive investments.

"In the biotech universe, this was most evident in the outperformance of stocks with a larger market capitalization, despite mediocre growth prospects for many of them. As of the end of February 2023, we are still living in that world.

"I'm not an economist, and I can't say when investors will be willing to embrace risk once again. If we are headed for a recession, the risk-off environment could be with us a while longer.

"But I firmly believe that high-quality companies with genuine catalysts in the form of favorable clinical test results should be good investments for the next few years.

"The companies that deliver favorable data should get rewarded by either developing the treatments themselves or being bought out by a large competitor looking for new sources of innovation.

"And I believe that we, at Fidelity, have the resources to dig deeply and identify many of the most promising opportunities."

LARGEST CONTRIBUTORS VS. BENCHMARK

Holding

Market Segment

Biohaven Pharmaceutical Holding Co. Ltd.

Biotechnology

Novavax, Inc.

Biotechnology

Roivant Sciences Ltd. Biotechnology

Krystal Biotech, Inc. Biotechnology

ChemoCentryx, Inc. Biotechnology

* 1 basis point = 0.01%.

Average Relative Relative Contribution Weight (basis points)*

0.02%

74

-0.31%

69

0.51%

54

2.72%

50

0.22%

49

LARGEST DETRACTORS VS. BENCHMARK

Holding

Market Segment

Gilead Sciences, Inc. Biotechnology

Arcus Biosciences, Inc. Biotechnology

Horizon Therapeutics PLC

Biotechnology

Arvinas Holding Co. LLC

Pharmaceuticals

Intellia Therapeutics, Inc.

Biotechnology

* 1 basis point = 0.01%.

Average Relative Relative Contribution Weight (basis points)*

-7.33%

-228

1.45%

-131

-0.45%

-95

0.79%

-62

0.51%

-61

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, 2023

ASSET ALLOCATION

Asset Class

Portfolio Weight Index Weight

Relative Weight

Relative Change From Six Months

Ago

Domestic Equities

91.75%

100.00%

-8.25%

1.48%

International Equities

7.93%

0.00%

7.93%

-1.07%

Developed Markets

6.98%

0.00%

6.98%

-0.91%

Emerging Markets

0.95%

0.00%

0.95%

-0.16%

Tax-Advantaged Domiciles

0.00%

0.00%

0.00%

0.00%

Bonds

0.00%

0.00%

0.00%

0.00%

Cash & Net Other Assets

0.32%

0.00%

0.32%

-0.41%

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 Biotechnology Pharmaceuticals Other Health Care Technology Health Care Services Health Care Equipment Life Sciences Tools & Services Drug Retail

Portfolio Weight 92.13% 5.47% 1.61% 0.23% 0.17% 0.04% 0.03% 0.00%

Index Weight 100.00% --------

Relative Weight -7.87% 5.47% 1.61% 0.23% 0.17% 0.04% 0.03% 0.00%

Relative Change From Six Months

Ago 0.90% -0.10% -0.01% 0.03% -0.19% -0.02% -0.17% 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