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PERFORMANCE SUMMARY
|
Cumulative |
Annualized |
|||||
|
3 Month |
YTD |
1 Year |
3 Year |
5 Year |
10 Year/ LOF 1 |
|
|
Select Financials Portfolio (MUTF:FIDSX) Gross Expense Ratio: 0.72% 2 |
11.15% |
21.34% |
42.81% |
9.68% |
13.51% |
10.98% |
|
S&P 500 Index |
5.89% |
22.08% |
36.35% |
11.91% |
15.98% |
13.38% |
|
MSCI US IMI Financials 5% Capped Linked Index |
11.15% |
21.03% |
40.66% |
8.68% |
12.19% |
11.42% |
|
Morningstar Fund Financial |
10.76% |
17.57% |
38.34% |
5.26% |
10.01% |
9.27% |
|
% Rank in Morningstar Category (1% = Best) |
— |
— |
26% |
23% |
16% |
35% |
|
# of Funds in Morningstar Category |
— |
— |
98 |
94 |
89 |
74 |
|
1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 12/10/1981. 2 This expense ratio is from the most recent prospectus and generally is based on amounts incurred during the most recent 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. Past performance 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 stated. Performance shown is that of the fund’s Retail Class shares (if multiclass). You may own another share class of the fund with a different expense structure and, thus, have different returns. To learn more or to obtain the most recent month-end or other share-class performance, visit Fidelity Funds | Mutual Funds from Fidelity Investments, Financial Professionals | Fidelity Institutional, or Fidelity NetBenefits | Employee Benefits. Total returns are historical and include change in share value and reinvestment of dividends and capital gains, if any. Cumulative total returns are reported as of the period indicated. For definitions and other important information, please see the Definitions and Important Information section of this Fund Review. Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. The financials industries are subject to extensive government regulation, can be subject to relatively rapid change due to increasingly blurred distinctions between service segments, and can be significantly affected by availability and cost of capital funds, changes in interest rates, the rate of corporate and consumer debt defaults, and price competition. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. The fund may have additional volatility because of its narrow concentration in a specific industry. Non- diversified funds that focus on a relatively small number of stocks tend to be more volatile than diversified funds and the market as a whole. Not FDIC Insured • May Lose Value • No Bank Guarantee |
Market Review
The past three months, the financials sector, as measured by the MSCI U.S. IMI Financials 5% Capped Linked Index, gained 11.15%, while the S&P 500® index (SP500, SPX) advanced 5.89%. Financial stocks outperformed the broader market in July and later in August before giving up some of their relative strength in September, enabling the sector to finish fourth-best among the 11 market sectors in the S&P 500®. A cooling labor market and increasingly contained inflation made it likely that the Fed would reduce its key policy interest rate at the central bank’s September meeting. A reduction was widely expected, but there was no clear consensus about how large it would be. On September 18, the central bank cut its key policy rate by 0.50 percentage points, opting for a bolder start in making its first rate reduction since March 2020.
Lower rates at the short end of the yield curve typically help to reduce an inversion – a situation where short-term yields are higher than long-term yields – and ultimately could normalize the curve. An inverted yield curve for much of the past two years has been one factor leading some observers to expect a recession. However, as time passed and the U.S. economy held strong, the chances for a soft landing – a modest slowdown without a recession – seemingly increased. For bank stocks, avoiding a recession would likely mean dodging significant credit disruption, which should have positive implications for the group.
Against this backdrop, the MSCI index’s largest industry component, diversified banks, advanced 4%, while the rate-sensitive regional banks category rose about 15%. Regional banks tend to be smaller and more dependent on net interest margin – the difference between how much a lender earns on loans and how much it pays on deposits – for their earnings. In contrast, diversified banks often have revenue from activities, such as investment banking and wealth management, that are less dependent on the level and direction of interest rates.
Asset management & custody banks also did well, rising approximately 18%, while property & casualty insurance and financials exchanges & data providers both posted a roughly 15% result. Transaction & payment processing services finished around 11%, close to the MSCI sector index. The only group with a negative return was multi-line insurance, at -0.4%. Investment banking & brokerage (+4%) also underperformed.
Performance Review
For the three months ending September 30, 2024, the fund gained 11.15%, matching the MSCI U.S. IMI Financials 5% Capped Linked Index and significantly outpacing the broadly based S&P 500® index.
Stock selection in investment banking & brokerage shares meaningfully contributed to the fund’s performance versus the MSCI sector index this quarter. Picks in insurance brokers and transaction & payment processing services also helped.
A sizable overweight in Baldwin Insurance Group (BWIN, +40%) was the top individual relative contributor for the quarter. The stock became oversold in late 2023, as the company was affected by higher interest rates, which led to higher net interest costs and negative earnings revisions. There were also some delays in profit-margin improvement due to operational issues, the timing of investments and other factors. However, a recovery in the stock that began in December 2023 carried over into 2024 to date, as investors recognized its significant discount versus peers, and the company’s earnings outlook stabilized while maintaining a solid growth profile. We trimmed our stake in the stock.
Avoiding Visa (V, +5%) – a stalwart in the payment processing area and an index component –helped relative performance. We liked Mastercard (MA, +12%) better for its greater exposure to lucrative cross- border transactions and made it the top holding, a decision that worked out well. We are watching a slowing trend in consumer spending, uncertainty about the global economic environment and fairly rich valuations, which could impact both stocks.
Conversely, stock picking and an underweight position in asset management & custody banks detracted from the fund’s relative result. Positioning in diversified banks was another negative.
Overweighting Wells Fargo & Company (WFC, -4%) was the largest individual relative detractor. The diversified bank has businesses in consumer and commercial banking, as well as investment banking and wealth management. In August, the stock fell due to concerns about weak U.S. employment and broader market volatility. It then stumbled in September, after the Office of the Comptroller of the Currency, the top U.S. banking regulator, issued an enforcement action against the lender due to deficiencies in its risk-management practices. We trimmed the position but held a sizable overweight.
Outlook and Positioning
We think the Fed’s large rate cut in September gets the central bank off to a good start on what will probably be a series of rate cuts in 2024 and perhaps 2025. A resurgence of inflation could upend this scenario, but for now the path to more rate cuts seems clear.
The federal unemployment rate remains near a historical low, at only 4.1% in September, where it was in June. The rate pushed up to 4.3% in July but then fell the following two months. A resilient labor market is additional evidence that a soft landing could still be in the cards for the U.S. economy. At any rate, in the current uncertain environment, we anticipate an equity market that should lend itself to stock picking using our careful, bottom-up fundamental analysis.
As of September 30, the fund’s largest industry overweight was regional banks. Within this group, M&T Bank (MTB) and Popular (BPOP) were key individual overweights. In all cases, we are focusing on regional banks with what we consider solid deposit franchises and good growth potential.
Diversified financial services was also a noteworthy overweight, and a group we added to this quarter. There was no real unifying theme here, other than that we saw favorable buying opportunities in several stocks in the group, especially Voya Financial (VOYA) and Apollo Global Management (APO).
Diversified banks was another noteworthy overweight, with meaningfully heavier-than-index positions in Wells Fargo & Company, Citigroup (C) and Bank of America (BAC).
Elsewhere, the fund maintained a significant overweight in transaction & payment processing services. Aside from top overweight Mastercard, Corpay (CPAY) was a noteworthy out-of-index holding in this segment.
On the other hand, the fund’s biggest industry underweight at quarter end was financial exchanges & data. Individual underweights of note in this group were S&P Global (SPGI), Intercontinental Exchange (ICE) and CME Group (CME), none of which were in the portfolio during the quarter. Companies in this category tend to be somewhat defensive, and we thought there were better opportunities in other groups.
Additionally, we continued to carry a sizable underweight in multi- sector holdings as of September 30 by virtue of avoiding Berkshire Hathaway (BRK.A, BRK.B), which seemed expensive to us.
As always, we thank you for your confidence in our stewardship of the fund, and in Fidelity’s investment-management capabilities.
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