Fidelity® Health Care Portfolio

  • Symbol: FSPHX
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Summary

Morningstar® Snapshot*

AS OF 08/31/2014; MORNINGSTAR CATEGORY: Health
Returns 4 out of 5, Above Average Returns
LOWAVGHIGH
Expenses 1 out of 5, Low Fees
LOWAVGHIGH
Risk of this Category Category Risk Rating:7, where 1 is Lower and 10 is Higher
LOWERHIGHER

*All data provided by Morningstar. Please click on each indicator above to learn more about comparison groups and methodology.

Performance

 2 More Information
AS OF 8/31/2014
Average Annual Returns
YTD (Daily)* 1 Yr 3 Yr 5 Yr 10 Yr
YTD (Daily)* +24.42% 1 Yr +46.09% 3 Yr +33.96% 5 Yr +26.47% 10 Yr +14.54%
*AS OF 9/19/2014; Value is cumulative

Hypothetical Growth of $10,000

 3, 4 More Information
AS OF 08/31/2014; MORNINGSTAR CATEGORY: Health
Shows growth of hypothetical $10,000 investment in Fidelity® Health Care Portfolio compared to S&P 500,MSCI IMI Hlth Ca 25/50,Health over the selected time period
Fidelity® Health Care Portfolio
Health

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The performance data featured represents past performance, which 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 data quoted.

Fund Manager(s)

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Eddie Yoon since 10/1/2008

Fund Overview

Objective

Seeks capital appreciation.

Strategy

Investing primarily in companies engaged in the design, manufacture, or sale of products or services used for or in connection with health care or medicine. Normally investing at least 80% of assets in securities of companies principally engaged in these activities. Normally investing primarily in common stocks.

Risk

The value of the fund's domestic and foreign investments will vary from day to day in response to many factors. Stock values fluctuate in response to issuer, political, regulatory, market, or economic developments. You may have a gain or loss when you sell your shares. Investments in foreign securities, especially those in emerging markets, involve risks in addition to those of U.S. investments, including increased political and economic risk, as well as exposure to currency fluctuations. Because FMR concentrates the fund's investments in a particular industry, the fund's performance could depend heavily on the performance of that industry and could be more volatile than the performance of less concentrated funds and the market as a whole. The fund is considered non-diversified and can invest a greater portion of assets in securities of individual issuers than a diversified fund; thus changes in the market value of a single investment could cause greater fluctuations in share price than would occur in a more diversified fund. The health care industries are subject to government regulation and reimbursement rates, as well as government approval of products and services, which could have a significant effect on price and availability, and can be significantly affected by rapid obsolescence and patent expirations.

Additional Disclosures

A mutual fund registered under Fidelity Select Portfolios, and managed by Fidelity SelectCo, LLC. This description is only intended to provide a brief overview of the fund. Read the fund's prospectus for more detailed information about the fund.

Details

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Morningstar Category Health
Fund Inception 7/14/1981
NAV
9/19/2014
$221.81
Glossary definition opens in new window.Exp Ratio (Gross)
4/29/2014
0.77%
($7.70 per $1000)
Glossary definition opens in new window.Exp Ratio (Net)
4/29/2014
0.77%
($7.70 per $1000)
Redemption Fee 0.75%
Redemption Period 30 days
Minimum to Invest 5 $2,500.00
Turnover Rate
2/28/2014
99%
Glossary definition opens in new window.Portfolio Net Assets ($M)
8/31/2014
$7,064.11
12 Month Low-High
8/31/2014
$174.10 - $220.27

Top 10 Holdings

 6 More Information
AS OF 6/30/2014
Top 10 Holdings
ACTAVIS PLC
COVIDIEN PLC
MCKESSON CORP
SHIRE PLC SPON ADR
BIOGEN IDEC INC
ALEXION PHARMACEUTICALS INC
ILLUMINA INC
BOSTON SCIENTIFIC CORP
AGILENT TECHNOLOGIES INC
TEVA PHARMACEUTICAL IND ADR
% of Total Portfolio 40.35%
Total # of holdings: 102 as of 6/30/2014
Total # of issuers: 101 as of 6/30/2014

Quarter-End Average Annual Total Returns

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AS OF 6/30/2014; FUND INCEPTION 7/14/1981 Glossary definition opens in new window.

EXPENSE RATIO (GROSS):
0.77% AS OF 4/29/2014
1 Yr 3 Yr 5 Yr 10 Yr Life
Glossary definition opens in new window.Before Taxes
Fidelity® Health Care Portfolio 49.80% 27.19% 27.23% 13.41% 16.42%
Glossary definition opens in new window.After Taxes on Distributions
Fidelity® Health Care Portfolio 43.76% 24.02% 25.31% 11.87% --
Glossary definition opens in new window.After taxes on distributions and sale of fund shares
Fidelity® Health Care Portfolio 29.92% 20.93% 22.14% 10.83% --

Read more about after-tax returns.

The "Mutual Funds" area at the top of each page allows access to mutual fund holdings with individual and joint Fidelity non-retirement accounts. Individual stock positions, ETFs and 529 funds are not available through this view. For the full list of your holdings visit Portfolio Summary.

Mutual Funds are priced as of the previous business day's market close when the market is open. Mutual fund positions are priced as of the official market close (typically 4p.m.) and prices are generally available between 5 p.m. and 6p.m.

Watch a brief video to learn about using the new mutual fund library to evaluate funds

2013 Morningstar, Inc. All rights reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or redistributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Fidelity does not review the Morningstar data and, for fund performance, you should check the fund's current prospectus or other product materials for the most up-to-date information concerning applicable loads, fees and expenses.

Performance & Risk

Average Annual Total Returns

 7, 3, 2 More Information
AS OF 8/31/2014; FUND INCEPTION 7/14/1981
1 Yr 3 Yr 5 Yr 10 Yr Life
Fidelity® Health Care Portfolio 46.09% 33.96% 26.47% 14.54% 16.53%
S&P 500 25.25% 20.61% 16.88% 8.38% 11.51%
MSCI IMI Hlth Ca 25/50 31.90% 27.32% 20.68% 11.09% --
Health 34.44% 29.11% 21.48% 12.56% --
Rank in Morningstar Category 1% 23% 13% 25% --
# of Funds in Morningstar Category 126 117 110 90 --

Hypothetical Growth of $10,000

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AS OF 08/31/2014; MORNINGSTAR CATEGORY: Health
Fidelity® Health Care Portfolio
Health
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
This Fund 8.66% 16.88% 4.98% 12.45% -32.44% 32.11% 16.96% 7.82% 21.39% 56.27% 22.67%
Benchmark 10.88% 4.91% 15.79% 5.49% -37.00% 26.46% 15.06% 2.11% 16.00% 32.39% 9.89%
Benchmark-2 4.39% 8.47% 6.85% 7.99% -23.36% 22.24% 5.97% 10.72% 19.24% 42.84% 15.97%
Category 9.84% 9.64% 4.27% 9.27% -23.43% 22.48% 8.38% 7.66% 21.55% 48.17% 17.23%
+/- Benchmark -2.22% 11.97% -10.81% 6.96% 4.56% 5.65% 1.90% 5.71% 5.39% 23.88% 12.78%
+/- Benchmark-2 4.27% 8.41% -1.87% 4.46% -9.08% 9.87% 10.99% -2.90% 2.15% 13.43% 6.70%
+/- Category -1.18% 7.24% 0.71% 3.18% -9.01% 9.63% 8.58% 0.16% -0.16% 8.10% 5.44%

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The performance data featured represents past performance, which 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 data quoted.

Quarter-End Average Annual Total Returns

 3, 2 More Information
AS OF 6/30/2014; FUND INCEPTION 7/14/1981 Glossary definition opens in new window.

EXPENSE RATIO (GROSS):
0.77% AS OF 4/29/2014
1 Yr 3 Yr 5 Yr 10 Yr Life
Glossary definition opens in new window.Before Taxes
Fidelity® Health Care Portfolio 49.80% 27.19% 27.23% 13.41% 16.42%
Glossary definition opens in new window.After Taxes on Distributions
Fidelity® Health Care Portfolio 43.76% 24.02% 25.31% 11.87% --
Glossary definition opens in new window.After taxes on distributions and sale of fund shares
Fidelity® Health Care Portfolio 29.92% 20.93% 22.14% 10.83% --

Read more about after-tax returns.

Cumulative Total Returns

 2 More Information
AS OF 8/31/2014
YTD (Daily)* YTD (Monthly) 1 Month 3 Months 6 Months
Fidelity® Health Care Portfolio 24.42% 22.67% 5.90% 11.32% 6.62%
Fidelity® Health Care Portfolio  (Load Adjusted) -- -- 5.10% -- --
S&P 500 -- 9.89% 4.00% 4.69% 8.84%
MSCI IMI Hlth Ca 25/50 -- 15.97% 5.29% 8.01% 7.41%
Health -- 17.23% 6.44% 10.69% 4.66%
*AS OF 9/19/2014

Fund Risk and Return

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AS OF 8/31/2014; MORNINGSTAR CATEGORY: Health
Risk of this Category Category Risk Rating:7, where 1 is Lower and 10 is Higher
LOWERHIGHER

Risk

The value of the fund's domestic and foreign investments will vary from day to day in response to many factors. Stock values fluctuate in response to issuer, political, regulatory, market, or economic developments. You may have a gain or loss when you sell your shares. Investments in foreign securities, especially those in emerging markets, involve risks in addition to those of U.S. investments, including increased political and economic risk, as well as exposure to currency fluctuations. Because FMR concentrates the fund's investments in a particular industry, the fund's performance could depend heavily on the performance of that industry and could be more volatile than the performance of less concentrated funds and the market as a whole. The fund is considered non-diversified and can invest a greater portion of assets in securities of individual issuers than a diversified fund; thus changes in the market value of a single investment could cause greater fluctuations in share price than would occur in a more diversified fund. The health care industries are subject to government regulation and reimbursement rates, as well as government approval of products and services, which could have a significant effect on price and availability, and can be significantly affected by rapid obsolescence and patent expirations.

Volatility Measures

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Beta 0.82
AS OF 8/31/2014

A measure of a portfolio's sensitivity to market movements (as represented by a benchmark index). The benchmark index, such as the S&P 500 or EAFE index, has a beta of 1.0. A beta of more (less) than 1.0 indicates that a fund's historical returns have fluctuated more (less) than the benchmark index. Beta is a more reliable measure of volatility when used in combination with a high R2 which indicates a high correlation between the movements in a fund's returns and movements in a benchmark index.

R2 0.50
AS OF 8/31/2014

A measurement of how closely the portfolio's performance correlates with the performance of a benchmark index, such as the S&P 500. R2 is a proportion which ranges between 0.00 and 1.00. An R2 of 1.00 indicates perfect correlation to the benchmark index, that is, all of the portfolio's fluctuations are explained by performance fluctuations of the index, while an R2 of 0.00 indicates no correlation. Therefore, the lower the R2, the more the fund's performance is affected by factors other than the market as measured by that benchmark index. An R2 value of less than 0.5 indicates that the Annualized Alpha and Beta are not reliable performance statistics.

Sharpe Ratio 2.26
AS OF 8/31/2014

The Sharpe ratio is a measure of historical adjusted performance calculated by dividing the fund's excess returns (fund's average monthly returns minus the average monthly return of the Salomon Smith Barney 3-Month T-Bill Index) by the standard deviation of those returns. The higher the ratio, the better the fund's return per unit of risk.

Standard Deviation 13.47
AS OF 8/31/2014

Statistical measure of how much a return varies over an extended period of time. The more variable the returns, the larger the standard deviation. Investors may examine historical standard deviation in conjunction with historical returns to decide whether an investment's volatility would have been acceptable given the returns it would have produced. A higher standard deviation indicates a wider dispersion of past returns and thus greater historical volatility. Standard deviation does not indicate how an investment actually performed, but it does indicate the volatility of its returns over time. Standard deviation is annualized. The returns used for this calculation are not load-adjusted.

Volatility measures are based on the variability of historical returns of the portfolio. In the case of annuity funds, this is before the effect of annuity charges. Relative Volatility, Beta, and R2 compare a portfolio's total return to those of a relevant market, represented by the benchmark index. Standard Deviation is calculated independent of an index.

Historical Fund Performance

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Current year's data as of: 8/31/2014
Year Total Returns Capital Gains Dividends Glossary definition opens in new window.Share Class Net Assets ($M)
2014 22.67% $10.417 -- $7,064.11
2013 56.27% $19.532 $0.034 $4,882.75
2012 21.39% $13.67 $0.44 $2,482.68
2011 7.82% $11.718 -- $2,000.60
2010 16.96% $0.005 $0.17 $1,806.67
2009 32.11% $0.005 $0.245 $1,622.90
2008 -32.44% $4.66 $0.37 $1,321.89
2007 12.45% $14.17 $0.39 $2,115.18
2006 4.98% $16.99 $0.2 $2,099.95
2005 16.88% $13.75 $0.04 $2,332.87

The "Mutual Funds" area at the top of each page allows access to mutual fund holdings with individual and joint Fidelity non-retirement accounts. Individual stock positions, ETFs and 529 funds are not available through this view. For the full list of your holdings visit Portfolio Summary.

Mutual Funds are priced as of the previous business day's market close when the market is open. Mutual fund positions are priced as of the official market close (typically 4p.m.) and prices are generally available between 5 p.m. and 6p.m.

The performance data featured represents past performance, which 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 data quoted.

Fund Characteristics and Attribution

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2013 Morningstar, Inc. All rights reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or redistributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Fidelity does not review the Morningstar data and, for fund performance, you should check the fund's current prospectus or other product materials for the most up-to-date information concerning applicable loads, fees and expenses.

Ratings

Morningstar Ratings

AS OF 08/31/2014; MORNINGSTAR CATEGORY: Health
Overall
4 out of 5 stars
Out of 117 funds
3 Yr
4 out of 5 stars
Out of 117 funds
5 Yr
5 out of 5 stars
Out of 110 funds
10 Yr
4 out of 5 stars
Out of 90 funds

An overall rating for a fund is derived from a weighted average of the performance figures associated with its 3-, 5- and 10-year (if applicable) Morningstar Metrics as of the date stated. The number of funds in the Health category tracked by Morningstar was 117 for the 3 year period and Overall Ranking; 110 for the 5 year period; and 90 for the 10 year period. Please click on the question mark above for additional Morningstar information.

Past performance is no guarantee of future results.

Lipper Ranking

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AS OF 8/31/2014; LIPPER PEER GROUP: Health/Biotech
1 Yr
#3 out of 86 funds
5 Yr
#15 out of 69 funds
10 Yr
#19 out of 53 funds

The fund is ranked based on total return. Each fund is ranked within a universe of funds with similar investment objectives. Rankings include the reinvestment of dividends and capital gains but exclude the effect of a fund's sales load, if applicable. Lipper Inc. is a nationally recognized organization that ranks the performance of mutual funds.

Past performance is no guarantee of future results.

Watch a brief video to learn about using the new mutual fund library to evaluate funds

The "Mutual Funds" area at the top of each page allows access to mutual fund holdings with individual and joint Fidelity non-retirement accounts. Individual stock positions, ETFs and 529 funds are not available through this view. For the full list of your holdings visit Portfolio Summary.

Mutual Funds are priced as of the previous business day's market close when the market is open. Mutual fund positions are priced as of the official market close (typically 4p.m.) and prices are generally available between 5 p.m. and 6p.m.

2013 Morningstar, Inc. All rights reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or redistributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Fidelity does not review the Morningstar data and, for fund performance, you should check the fund's current prospectus or other product materials for the most up-to-date information concerning applicable loads, fees and expenses.

Composition

Major Market Sectors for Equities

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AS OF 7/31/2014
Portfolio Weight S&P 500
Health Care 95.08% 13.50%
Industrials 2.48% 10.22%
Consumer Discretionary 0.21% 11.85%
Energy 0.00% 10.64%
Materials 0.00% 3.51%
Consumer Staples 0.00% 9.32%
Financials 0.00% 16.10%
Information Technology 0.00% 19.38%
Telecommunication Services 0.00% 2.50%
Utilities 0.00% 2.98%
Other 0.00% 0.00%

Asset Allocation

 6 More Information
AS OF 7/31/2014
Fund
Domestic Equities 72.99%
International Equities 24.78%
Developed Markets 24.78%
Emerging Markets 0.00%
Tax Advantaged Domiciles 0.00%
Bonds 0.00%
Cash & Net Other Assets 2.23%

"Tax-Advantaged Domiciles" represent countries whose tax policies may be favorable for company incorporation.

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.

The percent of net assets invested in both domestic and foreign Equities (common stocks, preferred stocks, rights and warrants, convertible preferred stocks and stock index futures and options), Bond (all debt instruments, including investment grade, non-investment grade, non-rated securities and convertible bonds), and Cash & Net Other Assets (cash, repurchase agreements, receivables and payables).

Top 10 Holdings

 6 More Information
AS OF 6/30/2014
ACTAVIS PLC
COVIDIEN PLC
MCKESSON CORP
SHIRE PLC SPON ADR
BIOGEN IDEC INC
ALEXION PHARMACEUTICALS INC
ILLUMINA INC
BOSTON SCIENTIFIC CORP
AGILENT TECHNOLOGIES INC
TEVA PHARMACEUTICAL IND ADR
% of Total Portfolio 40.35%
Total # of holdings: 102 as of 6/30/2014
Total # of issuers: 101 as of 6/30/2014

Equity StyleMap®*

AS OF 7/31/2014
Capitalization
LG current
MD
SM
Value Blend Growth
Style
Current
Historical

Large Growth

Invest in companies with market values greater than $10 billion that fund managers believe are poised for growth. Growth can be based on a variety of factors, such as revenue or earnings growth. Growth funds are typically focused on generating capital gains rather than income.

*94.92%  Fund Assets Covered

Regional Diversification

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AS OF 7/31/2014
United States
75.22%
Europe
21.86%
Asia Pacific ex Japan
2.92%
Canada
0.00%
Japan
0.00%
Emerging Markets
0.00%
Other
0.00%

Country Diversification

 6 More Information
AS OF 7/31/2014
USA
75.24%
Ireland
13.89%
United Kingdom
5.88%
Israel
2.55%

Currency Diversification

 6 More Information
AS OF 7/31/2014
US Dollar
97.57%
European Monetary Unit (Euro)
1.03%
UK Pound
0.59%
Swiss Franc
0.44%
New Zealand Dollar
0.37%

Fund Facts

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Fiscal Year End
February
Fund Inception
7/14/1981
Fund Number
63
Fund Symbol
FSPHX
Order Cutoff Time
04:00 PM EST

The "Mutual Funds" area at the top of each page allows access to mutual fund holdings with individual and joint Fidelity non-retirement accounts. Individual stock positions, ETFs and 529 funds are not available through this view. For the full list of your holdings visit Portfolio Summary.

Mutual Funds are priced as of the previous business day's market close when the market is open. Mutual fund positions are priced as of the official market close (typically 4p.m.) and prices are generally available between 5 p.m. and 6p.m.

Browse Our Proxy Voting Results

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2013 Morningstar, Inc. All rights reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or redistributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Fidelity does not review the Morningstar data and, for fund performance, you should check the fund's current prospectus or other product materials for the most up-to-date information concerning applicable loads, fees and expenses.

Fees and Distributions

Expenses & Fees

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0.77%
($7.70 per $1000)
4/29/2014
Distribution and/or service fee(12b-1) Fees
0.00%
Short-Term Redemption Fee
0.75%
Short-Term Redemption Period
30 Days
Small Balance Fee 8

You can receive a prospectus from Fidelity by mail

See prospectus for more information on Fees, Expenses & Loads.

Minimums

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Initial Investment
$2,500.00
Additional Investment
$0.00
Initial IRA Investment
$2,500.00
Additional IRA Investment
$0.00
Initial Group Retirement Investment 5
$500.00
Additional Group Retirement Investment
$0.00
Required Balance
$2,000.00
Direct Deposit
$0.00

Features

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Retirement Accounts
yes
Check Writing
no
Direct Deposit
yes
Automatic Account Builder
yes
Max Exchange Redemptions in a Year
yes
Simple IRA
yes

Distribution

Dividend History

Date Per Share Amount Reinvestment Price
4/12/13 $0.034 $155.85
12/21/12 $0.44 $134.84
12/10/10 $0.17 $122.01
12/11/09 $0.065 $104.35

Capital Gains History

Date Per Share Amount Reinvestment Price
4/11/14 $10.417 $181.57
12/20/13 $16. $185.24
4/12/13 $3.532 $155.85
12/21/12 $10.127 $134.84

Pricing

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AS OF 8/31/2014
NAV
$221.81
9/19/2014
12 Month Low-High
$174.10 - $220.27
Monthly Low-High
$201.96 - $218.70
On 8/31/2014
$218.70

Price History By Month

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Actual Values: Aug. 2014 to Aug. 2013

Close Low High
Aug $218.70 $201.96 $218.70
Jul $206.52 $201.83 $211.59
Jun $206.67 $196.23 $207.14
May $196.46 $185.38 $197.18
Apr $188.55 $181.57 $210.85
Mar $207.21 $202.68 $220.27
Feb $216.88 $196.24 $219.67
Jan $201.79 $186.54 $205.08
Dec $188.51 $185.24 $200.50
Nov $200.25 $185.70 $200.25
Oct $187.78 $175.64 $189.61
Sep $180.98 $174.10 $183.80
Aug $171.96 $170.20 $177.44

The "Mutual Funds" area at the top of each page allows access to mutual fund holdings with individual and joint Fidelity non-retirement accounts. Individual stock positions, ETFs and 529 funds are not available through this view. For the full list of your holdings visit Portfolio Summary.

Mutual Funds are priced as of the previous business day's market close when the market is open. Mutual fund positions are priced as of the official market close (typically 4p.m.) and prices are generally available between 5 p.m. and 6p.m.

Commentary

Second Quarter 2014 Summary

Strategy Review:

  • Select Health Care Portfolio is a sector-based, equity-focused strategy that seeks to outperform the benchmark through active management.
  • Fundamental, bottom-up research leveraging Fidelity's deep and experienced global health care team is the primary source of idea generation. Our analysis includes normalized free cash flow per share, market opportunity, sales growth, margin outlook and capital deployment to value ideas. The fund's holdings range from highly diversified, stable earnings growers, to innovative companies that produce disruptive products.
  • Our investment approach centers on our belief that stock prices in the long run are a reflection of the underlying free cash flow available to shareholders. How management teams deploy that capital can add or destroy meaningful value over time.
  • Sector strategies could be used by investors as alternatives to individual stocks for either tactical or strategic allocation purposes.
  • While this review mainly outlines drivers for the past quarter, our buy and sell decisions are typically based on the longer-term prospects for stocks and not on short time periods.

Sector Review:

  • For the three months ending June 30, 2014, the health care sector returned 4.39%, as measured by the MSCI U.S. IMI Health Care 25-50 Index, trailing the broadly based S&P 500® Index, which returned 5.23%. Following multiple quarters of strong performance, the health care sector lagged the past three months amid ongoing political discussion about the Affordable Care Act and drug pricing concerns.
  • Despite lagging the broader market during the quarter, favorable demographics, persistent demand and strong fundamentals continued to underpin the sector and attract investors.
  • The biotechnology industry, which made up roughly 20% of the benchmark, hit an air pocket during the quarter, as investor concerns that the group's multiyear rally had possibly reached its peak caused the stocks to sell off. Additionally, Congressional inquiries about drug pricing continued to weigh on the group. Despite these headwinds, biotech outpaced the broader sector, boosted by strong gains among benchmark components. Shares of biotechnology company Celgene rose on news that management would be doubling the size of the company's existing share-repurchase program and authorizing a two-for-one stock split, the fourth in its history as a public company. Prior to these announcements, Celgene's share price had been suffering due to a patent dispute around its premier blood-cancer treatment REVLIMID®, which accounts for 65% of the company's sales.
  • Pharmaceuticals, the largest industry in the index, slightly lagged during the quarter, hurt in part by the likelihood of ongoing increasing government regulation. Additionally, poor performance among some big pharma names weighed on the group overall. For example, shares of Pfizer fell during the second quarter, as the pharmaceuticals giant posted a disappointing drop in revenue and profit for the first quarter, due in part to ongoing competitive pressure from makers of generic drugs. Also weighing on shares during the quarter, Pfizer was unsuccessful in its multiple bids to purchase AstraZeneca, a Britain-based biopharmaceuticals company, in an attempt to relocate its headquarters to London, a move that would have potentially reduced Pfizer's income tax rate.

Drivers of Fund Performance:

  • For the second quarter ending June 30, 2014, Select Health Care Portfolio returned 5.46%, outperforming the 4.39% advance of its sector benchmark, the MSCIU.S. IMI Health Care 25-50 Index.
  • Stock picking accounted for the fund's solid return, especially in the pharmaceuticals industry. Here, it helped the most to own a non-index stake in Shire, a beneficiary of fevered merger and acquisition activity in the pharmaceutical and biotechnology space, which spurred gains in the shares of several potential takeover targets during the quarter. The Ireland-based biopharmaceutical firm was a rumored takeover target until AbbVie announced an official bid, helping to push Shire's share price up nearly 50% on the quarter. Shire rejected AbbVie's initial offer saying that it undervalued the company. It also was a good decision to avoid benchmark component Pfizer, which underperformed.
  • Security selection in life science tools & services boosted relative performance, an industry where we sought stable firms with open-ended growth opportunities, competitive advantages and strong management teams. A top contributor here was genetic analysis-tool maker Illumina, as we liked the stock's valuation given the firm's improving competitive position and accelerating end markets that we saw as establishing a path to long-term earnings growth. Shares rose more than 20% for the three-month period as investors remained optimistic about the company's commercial growth opportunities. The market leader in next-generation genetic sequencing systems continued to experience strong revenue growth through increased demand for its products.
  • While pharmaceuticals contributed to relative performance overall, it hurt to underweight strong-performing index name Allergan. Shares of Allergan rose in April, as investors anticipated that Valeant Pharmaceuticals International, with hedge fund partner Pershing Square Capital Management, would unveil an offer to buy the Botox® maker. The announcement of a cash and stock deal was made on April 22. Despite Allergan spurning two subsequent offers from Valeant during the quarter, explaining that the deal was not in the best interest of the firm's shareholders, a hostile takeover bid for Allergan was ongoing at quarter end.
  • Choices in biotech weighed on the fund's results, but we still view the industry as a compelling investment given its strong long-term growth potential versus the overall sector's more-defensive qualities. After being the single largest contributor to performance the past quarter, our overweighting in Intercept Pharmaceuticals detracted from results the past three months. Shares of the development-stage biopharmaceutical company languished after the firm conducted a secondary stock offering and investors awaited additional trial data. Intercept Pharmaceuticals' shares have been particularly susceptible to market noise and analyst commentary regarding the approval process of its experimental cirrhosis and hepatitis treatments.

End-Of-Quarter Positioning

  • The fund continued to trim its exposure to small-cap biotechnology stocks due to stretched valuations and decreasing quality, and instead tilted its biotech positioning to large-cap companies with stable free cash flows and encouraging pipelines. We slightly reduced the fund's biotech weighting overall but maintained our large overweighting, as we continued to find undervalued firms with innovative products, rigorous science and attractive drug pipelines.
  • The fund kept its longtime underweighting in pharma, primarily due to more-attractive investment opportunities in other parts of the sector. The fund's pharma exposure was focused on specialty pharma companies with promising growth profiles.
  • We increased our exposure to health care equipment stocks due to steady global demand, including strong emerging-markets sales and favorable valuations. Although we slightly trimmed exposure to life science tools & services, we remain attracted to the industry's innovative technology and the long-term earnings growth potential of many stocks here.
  • At quarter-end, the fund remained positioned to benefit from innovation in the health care technology industry, specifically in the smaller-cap stocks here. We believe advances in health care technology will help to improve care and efficiency as digital medical records can move with patients throughout their lives, while digitization of medical records also should help cut costs out of the health care system associated with maintaining old medical records.
  • We maintained our growth profile and favored names connected to the increasing demand for health care from an emerging middle class in developing countries.
Finally, we remain committed to a disciplined investment process in pursuit of strong long-term results for our shareholders.

 

Fund Manager(s)

More Information
Eddie Yoon since 10/1/2008

Strategy & Objective

Objective

Seeks capital appreciation.

Strategy

Investing primarily in companies engaged in the design, manufacture, or sale of products or services used for or in connection with health care or medicine. Normally investing at least 80% of assets in securities of companies principally engaged in these activities. Normally investing primarily in common stocks.

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