Fidelity VIP Equity-Income℠ Portfolio

PORTFOLIO MANAGER Q&A | AS OF JUNE 30, 2020

Fidelity? VIP Equity-Income Portfolio

Key Takeaways

? For the semiannual reporting period ending June 30, 2020, the fund's

share classes returned about -12%, topping the -16.74% result of the benchmark Russell 3000? Value Index.

? Portfolio Manager Ramona Persaud says her focus on risk-adjusted

return helped the fund outperform its benchmark the past six months, as the outbreak and spread of the coronavirus and the resulting containment efforts caused extreme volatility and dislocation in financial markets, particularly in late February through March.

? Security selection contributed most, led by Ramona's stock choices in

the information technology and health care sectors.

? The fund's cash position of 5% of assets, on average, was another

positive amid the market's decline.

? Sizable non-benchmark positions in software maker Microsoft and

consumer electronics giant Apple were the top individual contributors.

? Conversely, an overweighting in Wells Fargo, a large consumer bank,

and not owning benchmark component and chipmaker Intel hurt relative performance most.

? As of June 30, Ramona thinks recessionary economic conditions,

structural headwinds to value efficacy and/or duration, and government policy against globalization all portend increased uncertainty and a significant role for active investing.

? Looking ahead, she plans to continue to look for large price/value

disconnects in quality companies in order to meet her three goals: investment return, low downside capture and yield.

Not FDIC Insured ? May Lose Value ? No Bank Guarantee

MARKET RECAP

The S&P 500? index returned -3.08% for the six months ending June 30, 2020, in what was a bumpy ride for U.S. equity investors, marked by a steep but brief decline due to the early-2020 outbreak and spread of the coronavirus, followed by a historic rebound. Declared a pandemic on March 11, the COVID-19 crisis and containment efforts caused broad contraction in economic activity, along with extreme uncertainty, volatility and dislocation in financial markets. By mid-March, U.S. stocks entered bearmarket territory less than a month after hitting an all-time high and extending the longest-running bull market in American history. Stocks slid in late February, after a surge in COVID-19 cases outside China. The sudden downtrend continued in March (-12%), capping the index's worst quarter since 2008. A historically rapid and expansive U.S. monetary/fiscalpolicy response provided a partial offset to the economic disruption and fueled a sharp uptrend. Aggressive support for financial markets by the U.S. Federal Reserve, plans for reopening the economy and improving infection data boosted stocks in April (+13%) and May (+5%). In June, the index gained 2% amid progress on potential treatments and signs of an early recovery in economic activity. By sector, energy (-35%) fell hard along with crude-oil prices, while financials (-24%) struggled due to sharply lower interest rates. Industrials (-15%) also notably lagged. In contrast, only information technology (+15%) and consumer discretionary (+7%) gained.

PORTFOLIO MANAGER Q&A | AS OF JUNE 30, 2020

Q&A

Ramona Persaud Portfolio Manager

Fund Facts

Start Date: Size (in millions):

October 09, 1986 $4,583.90

Investment Approach

? Fidelity? VIP Equity-Income Portfolio is a diversified domestic equity strategy that seeks reasonable income. In pursuing this objective, the fund also will consider the potential for capital appreciation.

? The fund seeks a yield for its shareholders that exceeds the yield on the securities comprising the S&P 500? index.

? We believe in mean reversion, a value-drive philosophy and investment duration as a competitive advantage.

? In our bottom-up investment process, we focus on higher-quality firms, which helps minimize downside capture over time.

An interview with Portfolio Manager Ramona Persaud

Q: Ramona, how did the fund perform for the six months ending June 30, 2020

The fund's share classes returned about -12%, outperforming the -16.74% result of the benchmark Russell 3000? Value Index. The fund also topped the Morningstar peer average and the Lipper equity income peer average, the latter of which we consider a more relevant group of similar funds.

In managing the fund, I aim to provide income by taking a conservative approach to capital appreciation, with a focus on generating favorable risk-adjusted returns over full market cycles. This means that in very robust market conditions, the fund will typically have positive absolute performance, but not necessarily keep up with its benchmark. That being said, I expect the fund to more than make up for this shortfall in down markets.

Given these goals, the fund performed largely as I expected the past six months. It held up particularly well versus the benchmark in late February through March, as the outbreak and spread of the coronavirus led to COVID-19 containment efforts that caused broad contraction in economic activity, along with extreme uncertainty, volatility and dislocation in financial markets. In the callout portion of this review, I'll have more to say about the strength of our research team and the role it played in helping me manage through the pandemic.

Looking a bit longer term, the fund's share classes returned about -4% for the trailing 12 months, again outpacing the benchmark and the Morningstar and Lipper peer averages.

Q: What helped the fund outperform the benchmark the past six months

The market was narrow this period, and our top individual contributors versus the benchmark were concentrated in the information technology and health care sectors. Tech stocks returned -5% but outpaced the benchmark this period, benefiting as many companies here looked to capitalize on the trend of globalization. Strong growth in free-cash-flow (FCF) margins has been driven by structurally lower capital intensity over time. Thus, it has been helpful to own strong FCF generators in the tech sector, and I increased exposure to them at times of improved valuations this period.

Our top individual relative contributors were sizable nonbenchmark positions in software maker Microsoft and

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 JUNE 30, 2020

consumer electronics giant Apple. I thought both stocks offered very good income and risk-adjusted return relative to the rest of the high-beta tech sector, and also provided good starting valuations to help me achieve a good return.

Our shares of Microsoft advanced about 30%, boosted by the company's transition to cloud-computing services to help clients store and manage data, as well as rapid adoption of its cloud-based Office? products.

Meanwhile, our position in Apple gained roughly 25%, as the company benefited from surprisingly strong growth for subscription services such as Apple Music and iCloud from its installed base ? consumers who already own iPhone? devices ? and its fast-growing wearables business, including AirPods? and Beats headphones, and the Apple Watch? wrist wearable device.

Q: What was the story within health care

I thought the sector offered some pockets of reasonable value both during the period and for the past 12 to 18 months, as the market at times became fearful of perceived sector-unfriendly U.S. election outcomes. Health care is the fund's largest sector allocation, representing about 16% of assets at period end, and a notable overweight. I believe the presumptive Democratic nominee is not as unfriendly to health care as other contenders. In addition, valuations for health care stocks look reasonable to me, with a good combination of growth and income.

Several biotechnology and pharmaceuticals names contributed to relative performance the past six months. Included was Swiss drugmaker Roche Holding, a nonbenchmark position. Our holdings in the stock advanced 10%, boosted by the firm's 2019 financial results and increased guidance for 2020, based on strong demand for new drugs. In addition, in mid-March the U.S. Food and Drug Administration (FDA) issued emergency use authorization for Roche's commercial testing kit to detect COVID-19.

Also within health care, AstraZeneca was another notable contributor, as the fund's non-benchmark stake gained about 6%, rising on the strength of the firm's cancer drugs. Meanwhile, our shares of Amgen returned about -1%, outpacing the benchmark amid an increase in the firm's firstquarter 2020 dividend, the FDA's approval of its fourth biosimilar and the company's partnership with Adaptive Biotechnologies to research antiviral treatments for COVID19.

Q: What else helped

The fund's cash position of 5%, on average, was a significant positive amid the volatile market backdrop.

Overweighted stakes in BJs Wholesale Club (+61%) and TMobile (+33%) also added to relative performance. BJ's, a purveyor of food and other staples, benefited from being an

essential retailer, which allowed its warehouse stores to remain open during stay-at-home orders. Meanwhile, wireless services provider T-Mobile benefited from favorable news related to the cellular network operator's planned merger with Sprint. After a long wait, the two companies merged in April.

Q: Turning to the negative, what hurt

Wells Fargo was the fund's biggest individual detractor, as the stock of the consumer bank returned -51%. I'm partial to select financial companies, including Wells Fargo, that look undervalued due to low inflation expectations. However, shares of Wells Fargo declined this period because investors feared potential loan defaults would hurt the firm.

I reduced the fund's exposure to the financials sector the past six months, amid peaking economic indicators. However, with likely recessionary conditions prevailing at period end, the sector looks more attractive to me.

Elsewhere, I avoided benchmark component Intel because I found its valuation unattractive. That decision hurt this period because shares of the chipmaker gained 1%, outpacing the benchmark.

An overweighting in ConocoPhillips (-33%), a large international oil and natural gas producer, detracted amid declining oil prices during the first quarter of 2020.

Q: What's your outlook as of June 30, Ramona

The pandemic and unprecedented "whatever it takes" response by global central banks and governments suggest interest rate suppression will continue in the absence of significant inflation. Demographic factors suggest global growth has higher odds of slowing than accelerating, supporting the notion of low to no inflation and rate suppression. Since the global financial crisis, we have seen rate suppression accompanied by high correlation and low dispersion in stock prices, which has fueled stability and growth strategies at the expense of traditional value strategies. This may continue structurally, I believe.

While I expect cyclical improvement in value efficacy as the pandemic resolves near-term, I believe structural factors like anemic global growth and accompanying low rates require continued flexibility when considering how to generate strong long-term returns with a value lens.

As I noted earlier, the other long-term trend I am considering is globalization. Globalization of the past several decades created distinct winners and losers. Holders of capital won disproportionately versus developed-market laborers. Real wages for the developed-market middle class have grown very slowly, whereas wealth creation for holders of capital, already the world's wealthiest, has been extraordinary. It's no surprise, then, that we have seen political populism sweep through many developed markets, such as the U.S.,

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 JUNE 30, 2020

the U.K., France, Italy and other parts of continental Europe. Specific to the U.S., policies such as trade and tax seem to focus on a reversal of globalization, again with much of the voter base having lost out during this era, at least in terms of economic security. In my view, recessionary economic conditions, structural headwinds to value efficacy and/or duration, and government policy actively working against globalization ? which will de-optimize supply chains and reduce structural profitability ? all portend increased uncertainty and a significant role for active investing, which excels at differentiating long-term value from short-term swings in price. As of June 30, I am positioning the fund to look through recessionary conditions in anticipation of improved value efficacy for a certain period of time. From there, I will look to continue finding large price/value disconnects in quality companies in order to meet my three goals: investment: return, low downside capture and yield.

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 JUNE 30, 2020

Portfolio Manager Ramona Persaud on investing during the pandemic:

"In my experience, investing during the pandemic has highlighted the power of active management and Fidelity's excellent research team.

"Through proprietary analysis, we developed an investment edge early in the virus' spread by using exceptional research, our experience from the global financial crisis and wide-ranging analysis of very imperfect data. We then analyzed a multitude of information, including vulnerable populations versus hospital capacity and migration from Italy, leading us to pinpoint New York City ? a top contributor to gross domestic product ? as the epicenter of the outbreak in the United States.

"Our health care team, including a former virologist who worked in a lab on the prior health pandemic, gave us crash courses in epidemiology, pandemic mechanics and optimal approaches, and virology. We continue to get our arms around the science and the range of outcomes based on pandemic mechanics.

"When the equity market plunged from late February through March 23, work from our sector strategist showed the statistical odds were in our favor to re-establish exposure to more-cyclical areas of the market. Thereafter, the market surged higher through the end of June.

"At this point, the range of outcomes appears wide relative to what the market is anticipating. One outcome is that we could see the cavalry of science come to the rescue sooner than anticipated, and another hypothetical outcome is a worse-thananticipated impact on children, or the more conventional fear of a second wave upon reopening.

"I am investing against the oscillations of hope and fear ? stocks get expensive and I lighten, stocks get cheap and I add. This is a grinding way to hunt for alpha, but I've found a lot of price/value dislocation using this approach for the past few years of the market oscillating around the Fed and trade.

"In my view, it is important to stay very nimble and be willing to pivot as the data comes in, given the extraordinary circumstances in which we find ourselves. Fund turnover is usually quite low, but it is higher as of June 30, as there are many rolling dislocations in the market."

LARGEST CONTRIBUTORS VS. BENCHMARK

Holding

Market Segment

Microsoft Corp.

Information Technology

Apple, Inc.

Information Technology

BJ's Wholesale Club Holdings, Inc.

Consumer Staples

Roche Holding AG (participation certificate)

Health Care

T-Mobile U.S., Inc.

Communication Services

* 1 basis point = 0.01%.

Average Relative Relative Contribution Weight (basis points)*

1.79%

67

1.38%

49

0.69%

39

1.66%

38

0.92%

37

LARGEST DETRACTORS VS. BENCHMARK

Holding

Market Segment

Wells Fargo & Co.

Financials

Intel Corp.

Information Technology

ConocoPhillips Co. Energy

Procter & Gamble Co. Consumer Staples

Citigroup, Inc.

Financials

* 1 basis point = 0.01%.

Average Relative Relative Contribution Weight (basis points)*

0.93%

-49

-1.96%

-30

0.68%

-25

-2.07%

-23

0.86%

-20

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