PORTFOLIO MANAGER Q&A | AS OF FEBRUARY 28, 2021 Fidelity Advisor® Telecommunications Fund Key Takeaways MARKET RECAP ® • For the fiscal year ending February 28, 2021, the fund's Class I shares The S&P 500 index gained 31.29% for gained 19.13%, handily outpacing the 11.82% advance of the MSCI the 12 months ending February 28, 2021, U.S. IMI Telecommunication Services 25/50 Index and lagging the a volatile but productive period for U.S. risk assets. The early-2020 outbreak and 31.29% result of the broadly based S&P 500® index. spread of COVID-19 resulted in stocks • suffering one of the quickest declines on Telecommunication services stocks posted a strong absolute gain the record, through March 23, followed by a past 12 months, overcoming volatility in March 2020 due to the historic rebound that included the index outbreak and spread of COVID-19, which resulted in severe economic closing 2020 at an all-time high and contraction in the United States. gaining modest ground in the first two months of the new year. The crisis and • Stock selection drove the fund's outperformance of the industry index. containment efforts caused broad Stock picking in the integrated telecommunication services segment contraction in economic activity, along contributed notably. with extreme uncertainty and dislocation in financial markets. A rapid and • Underweighting industry index component AT&T (-15%) and holding a expansive U.S. monetary/fiscal-policy non-index stake in industrial conglomerate Reliance Industries response partially offset the economic (+105%) also added considerable value. disruption and fueled the market surge, as did resilient corporate earnings. The • Conversely, underweighting alternative carrier Bandwidth.com rally slowed in September, when stocks detracted, as did avoiding index component Gogo, an in-flight began a two-month retreat amid Congress's inability to reach a deal on internet broadband provider. additional fiscal stimulus, as well as concerns about election uncertainty, • On April 1, 2020, Nicole Abernethy became sole portfolio manager of indications the U.S. economic recovery the fund after having served as co-manager with Matt Drukker since could be slowing and a new wave of August 2020. COVID-19 cases. A shift in momentum began in October and accelerated • As of February 28, Nicole is watching how consumers embrace new following the U.S. elections, with the 5G handsets, and how competitive intensity impacts the three approval of three breakthrough COVID- dominant U.S. wireless providers, each of which is held in the fund: 19 vaccines and prospects for additional AT&T, Verizon Communications and T-Mobile. government stimulus fueling the "reflation trade" through February 28. By sector for the full 12 months, information technology (+50%) and consumer discretionary (+43%) led all gainers. Materials (+42%) and communication services (+37%) also stood out. In contrast, the defensive utilities (-3%) and real estate sectors (+5%) notably lagged. Not FDIC Insured • May Lose Value • No Bank Guarantee PORTFOLIO MANAGER Q&A | AS OF FEBRUARY 28, 2021 Q&A An interview with Portfolio Manager Nicole Abernethy and Co-Portfolio Manager Matthew Drukker Matthew Drukker Nicole Abernethy Co-Manager Portfolio Manager Q: Matt, how did the fund perform for the fiscal year ending February 28, 2021฀ Fund Facts M.D. The fund's Class I shares gained 19.13% the past 12 Trading Symbol: FTUIX months, handily outpacing the 11.82% advance of the MSCI U.S. IMI Telecommunication Services 25/50 Index. The fund Start Date: July 29, 1985 widely lagged its peer group average, which tracks a broader Size (in millions): $350.52 group of communications stocks, and the 31.29% result of the broad-based S&P 500® index. Q: How would you describe the investment Investment Approach environment for telecom stocks฀ M.D. Telecommunication services stocks trailed the S&P 500 • ® Fidelity Advisor Telecommunications Fund is an in a volatile March as the outbreak and spread of COVID-19 industry-based, equity-focused strategy that seeks to resulted in severe economic contraction. outperform its benchmark through active management. Many governments effectively shut down parts of their • We use a bottom-up, stock-by-stock approach to economies and ordered people to stay home to control the capitalize on our view that both earnings revisions and earnings growth drive telecommunications stocks. As spread of the virus. This triggered investor fears of a such, the fund tends to emphasize companies with prolonged contraction that ended the longest bull market for sustainable growth that is likely to beat expectations, as U.S. equities on record, with communications stocks taking a well as secular growers that can drive consistent excess slightly bigger hit than the market at-large. returns. Unprecedented government stimulus to encourage investors • Due to the capital intensity of the telecom industry, we and boost liquidity in some parts of the financial system led believe free-cash-flow yield is the best profitability to strong performance for stocks in the second quarter of indicator to determine earnings power. So, we look for 2020, especially in April and May. companies that generate a lot of cash from strong sales growth and benefit from high barriers to entry, quality Telecom stocks rebounded solidly but lagged the broader franchises, strong management teams and positive U.S. equity market as the period progressed amid a "risk on" market-share trends over multiyear periods. environment, as investors favored other industries with more direct exposure to an economic recovery. • Sector and industry strategies could be used by investors as alternatives to individual stocks for either tactical- or With many consumers staying at home much more than strategic-allocation purposes. usual during the pandemic, companies offering services that kept the country running – namely, those delivering faster broadband and facilitating telecommuting – delivered some of the best returns in the telecom industry for the period. Q: How did you and Nicole manage the fund฀ M.D. We continued to position the fund in stocks of companies with what we considered above-average revenue and earnings-per-share (EPS) growth. In our view, stock prices ultimately follow the earnings and cash flows of the companies they represent, and we sought to invest 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 FEBRUARY 28, 2021 fund's assets in companies with sustainable, above-index software developer designs applications for voice and growth rates for the long term. messaging services that run on its own internet protocol voice network. Due to the fixed-cost nature and high incremental profit margins of telecom services companies, we usually find that While the company is growing solidly, it barely posts positive sales growth drives earnings and cash flow more sustainably earnings and has no free-cash-flow yield. We also found this than cutting costs. Ideally, the fund will own companies with stock to be expensive relative to its earnings quality, so we consistently faster sales growth and cash-flow conversion invested in other opportunities that better aligned with our than the average firm in the industry index. investment criteria. Position sizing in the portfolio is driven by conviction in our Likewise, avoiding index component Gogo, an in-flight differentiated view of an individual company's potential internet broadband provider, hurt the fund's relative result. future cash flows relative to the market's shorter-term In late August, satellite provider Intelsat announced a deal to assessment, as reflected by the stock's current market price. acquire Gogo's commercial aviation business in a $400 million cash buyout. As a result, the fund missed out on Overall, we invested the fund in segments of the telecom Gogo's swift stock surge. industry we believed could benefit from the increasing necessity of broadband connectivity. This strategy played out well for the 12 months, as stock selection largely drove the Q: Any final thoughts for shareholders as of fund's outperformance of the industry index. February 28, Nicole฀ N.A. The first real 5G network handset cycle began in the fall Q: Nicole, which investments helped relative to of 2020, when consumer tech giant Apple rolled out its first the industry index฀ 5G iPhone® device. As of February 28, we're closely monitoring the rate at which consumers upgrade their N.A. Stock picking and an underweighting in the integrated handsets. There's a strong marketing push for 5G, although telecommunication services segment contributed strongly the recent trend is for consumers to hold on to their existing for the period. phones for longer periods of time. Looking at individual stocks, the fund's non-index stake in Device upgrades often lead consumers to evaluate their Reliance Industries (+105%) added considerable value. wireless plans. This presents the potential for market-share Reliance maintains a diversified business across several shifts among the three major providers: AT&T, Verizon areas, such as energy, chemicals, natural resources and Communications and T-Mobile. retail. Yet it's also emerged as a dominant wireless network service provider in India. Reliance shares surged partly due I will be watching how the shift to 5G impacts competitive to investments by Facebook and Google in the company's intensity, and in turn, industry pricing. Jio wireless platform this period. We are still in the very early days of the 5G rollout, which I Given this stock's strong run, we reduced the fund's position think could result in the emergence of new blockbuster in Reliance by February 28 to take profits. consumer applications over time. ■ Underweighting AT&T (-15%), a large component in the telecom index, also helped the fund's relative return.