FIDELITY
STRATEGIC INCOME
FUND
Please read this prospectus before investing, and keep it on file for
future reference. It contains important information, including how the
fund invests and the services available to shareholders.
To learn more about the fund and its investments, you can obtain a
copy of the fund's Statement of Additional Information (SAI) dated
April 8, 1998. The SAI has been filed with the Securities and Exchange
Commission (SEC) and is available along with other related materials
on the SEC's Internet Web site (http://www.sec.gov). The SAI is
incorporated herein by reference (legally forms a part of the
prospectus). For a free copy, call Fidelity at 1-800-544-8888.
Mutual fund shares are not deposits or obligations of, or guaranteed
by, any depository institution. Shares are not insured by the FDIC,
Federal Reserve Board, or any other agency, and are subject to
investment risks, including possible loss of principal amount
invested.
LIKE ALL MUTUAL FUNDS, THESE
SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
FSN-pro-0498
701540
The fund may invest significantly in lower-quality debt securities,
sometimes called "junk bonds." These securities carry greater risks,
such as the risk of default, than other debt securities.
(fund number 368)
The fund seeks high current income by investing primarily in debt
securities. The fund may also seek capital appreciation.
PROSPECTUS
APRIL 8, 1998(FIDELITY_LOGO_GRAPHIC) 82 DEVONSHIRE STREET, BOSTON, MA
02109
CONTENTS
KEY FACTS 2 THE FUND AT A GLANCE
2 WHO MAY WANT TO INVEST
4 EXPENSES The fund's yearly operating
expenses.
5 PERFORMANCE
THE FUND IN DETAIL 5 CHARTER How the fund is organized.
6 INVESTMENT PRINCIPLES AND RISKS The
fund's overall approach to investing.
8 BREAKDOWN OF EXPENSES How
operating costs are calculated and what
they include.
YOUR ACCOUNT 9 DOING BUSINESS WITH FIDELITY
9 TYPES OF ACCOUNTS Different ways to
set up your account, including
tax-advantaged retirement plans.
11 HOW TO BUY SHARES Opening an
account and making additional
investments.
14 HOW TO SELL SHARES Taking money out
and closing your account.
16 INVESTOR SERVICES Services to help you
manage your account.
SHAREHOLDER AND 17 DIVIDENDS, CAPITAL GAINS,
ACCOUNT POLICIES AND TAXES
18 TRANSACTION DETAILS Share price
calculations and the timing of purchases
and redemptions.
18 EXCHANGE RESTRICTIONS
19 APPENDIX
KEY FACTS
THE FUND AT A GLANCE
GOAL: High current income with the potential for capital appreciation.
As with any mutual fund, there is no assurance that the fund will
achieve its goal.
STRATEGY: Invests primarily in fixed-income securities, allocated
among four general investment categories: high yield securities, U.S.
Government and investment-grade securities, emerging market
securities, and foreign developed market securities.
MANAGEMENT: Fidelity Management & Research Company (FMR) is the
management arm of Fidelity Investments, which was established in 1946
and is now America's largest mutual fund manager. Beginning January 1,
1999, Fidelity Investments Money Management, Inc. (FIMM), a subsidiary
of FMR, will choose certain types of investments for the fund. Foreign
affiliates of FMR may help choose investments for the fund.
WHO MAY WANT TO INVEST
This non-diversified fund may be appropriate for investors who want
high current income with some potential for capital growth from a
portfolio of debt instruments with a focus on lower-quality debt
securities and income-producing equity securities. The fund may be
appropriate for long-term, aggressive investors who understand the
potential risks and rewards of investing in lower-quality debt
securities, including defaulted securities.
The fund may also be appropriate for investors who want to pursue
their investment goals in markets outside of the United States. By
including international investments in your portfolio, you can achieve
additional diversification and participate in growth opportunities
around the world.
The value of the fund's investments and the income they generate will
vary from day to day, and generally reflect interest rates, market
conditions, and other economic and political news both here and
abroad. Investments in foreign securities may involve risks in
addition to those of U.S. investments, including increased political
and economic risk, as well as exposure to currency fluctuations. When
you sell your shares, they may be worth more or less than what you
paid for them. By itself, the fund does not constitute a balanced
investment plan.
THE SPECTRUM OF
FIDELITY FUNDS
BROAD CATEGORIES OF FIDELITY
FUNDS ARE PRESENTED HERE IN
ORDER OF ASCENDING RISK.
GENERALLY, INVESTORS SEEKING TO
MAXIMIZE RETURN MUST ASSUME
GREATER RISK. STRATEGIC INCOME
IS IN THE INCOME CATEGORY.
(SOLID BULLET) MONEY MARKET SEEKS
INCOME AND STABILITY BY
INVESTING IN HIGH-QUALITY,
SHORT-TERM INVESTMENTS.
(RIGHT ARROW) INCOME SEEKS INCOME BY
INVESTING IN BONDS.
(SOLID BULLET) GROWTH AND INCOME SEEKS
LONG-TERM GROWTH AND INCOME
BY INVESTING IN STOCKS AND
BONDS.
(SOLID BULLET) GROWTH SEEKS LONG-TERM
GROWTH BY INVESTING MAINLY IN
STOCKS.
(CHECKMARK)
EXPENSES
SHAREHOLDER TRANSACTION EXPENSES are charges you may pay when you buy
or sell shares of the fund. In addition, you may be charged an annual
account maintenance fee if your account balance falls below $2,500.
See "Transaction Details," page , for an explanation of how and when
these charges apply.
Sales charge on purchases None
and reinvested distributions
Deferred sales charge on redemptions None
Annual account maintenance fee $12.00
(for accounts under $2,500)
ANNUAL FUND OPERATING EXPENSES are paid out of the fund's assets. The
fund pays a management fee to FMR. It also incurs other expenses for
services such as maintaining shareholder records and furnishing
shareholder statements and financial reports. The fund's expenses are
factored into its share price or dividends and are not charged
directly to shareholder accounts (see "Breakdown of Expenses" page ).
The following figures are based on estimated expenses of the fund and
are calculated as a percentage of average net assets of the fund.
Management fee (after reimbursement) 0.00%
12b-1 fee None
Other expenses (after reimbursement) 1.10%
Total fund operating expenses 1.10%
(after reimbursement)
EXAMPLES: Let's say, hypothetically, that the fund's annual return is
5% and that your shareholder transaction expenses and the fund's
annual operating expenses are exactly as just described. For every
$1,000 you invested, here's how much you would pay in total expenses
if you close your account after the number of years indicated:
1 year $ 11
3 years $ 35
These examples illustrate the effect of expenses, but are not meant to
suggest actual or expected expenses or returns, all of which may vary.
FMR has voluntarily agreed to reimburse the fund to the extent that
total operating expenses (excluding interest, taxes, brokerage
commissions and extraordinary expenses) exceed 1.10% of its average
net assets. If this agreement were not in effect, the management fee,
other expenses and total operating expenses, as a percentage of
average net assets, are expected to be 0.59%, 1.32% and 1.91%,
respectively.
UNDERSTANDING
EXPENSES
OPERATING A MUTUAL FUND
INVOLVES A VARIETY OF EXPENSES
FOR PORTFOLIO MANAGEMENT,
SHAREHOLDER STATEMENTS, TAX
REPORTING, AND OTHER SERVICES.
THESE EXPENSES ARE PAID FROM
THE FUND'S ASSETS, AND THEIR
EFFECT IS ALREADY FACTORED INTO
ANY QUOTED SHARE PRICE OR
RETURN. ALSO, AS AN INVESTOR, YOU
MAY PAY CERTAIN EXPENSES
DIRECTLY.
(CHECKMARK)
PERFORMANCE
This section would normally show how the fund has performed over time.
Because the fund was new when this prospectus was printed, its
performance is not included. Twice a year, you will receive a report
detailing the fund's recent strategies, performance, and holdings. For
current performance, call 1-800-544-8888.
TOTAL RETURN is the change in value of an investment over a given
period, assuming reinvestment of any dividends and capital gains. A
CUMULATIVE TOTAL RETURN reflects actual performance over a stated
period of time. An AVERAGE ANNUAL TOTAL RETURN is a hypothetical rate
of return that, if achieved annually, would have produced the same
cumulative total return if performance had been constant over the
entire period. Average annual total returns smooth out variations in
performance; they are not the same as actual year-by-year results.
Average annual total returns covering periods of less than one year
assume that performance will remain constant for the rest of the year.
YIELD refers to the income generated by an investment in the fund over
a given period of time, expressed as an annual percentage rate. Yields
are calculated according to a standard that is required for all stock
and bond funds. Because this differs from other accounting methods,
the quoted yield may not equal the income actually paid to
shareholders. This difference may be significant for funds whose
investments are denominated in foreign currencies. In calculating
yield, the fund may from time to time use a security's coupon rate
instead of its yield to maturity in order to reflect the risk premium
on that security. This practice will have the effect of reducing the
fund's yield.
MERRILL LYNCH HIGH YIELD MASTER INDEX is a market capitalization
weighted index of all domestic and yankee high-yield bonds. Issues
included in the index have maturities of at least one year and have a
credit rating lower than BBB-/Baa3, but are not in default.
Unlike the fund's returns, the total returns of the comparative index
do not include the effect of any brokerage commissions, transaction
fees, or other costs of investing.
TOTAL RETURNS AND YIELDS ARE BASED ON PAST RESULTS AND ARE NOT AN
INDICATION OF FUTURE PERFORMANCE.
UNDERSTANDING
PERFORMANCE
Because this fund invests in
fixed-income securities, its
performance is related to
changes in interest rates. Funds
that hold short-term bonds are
usually less affected by
changes in interest rates than
long-term bond funds. For that
reason, long-term bond funds
typically offer higher yields
and carry more risk than
short-term bond funds.
(checkmark)
THE FUND IN DETAIL
CHARTER
STRATEGIC INCOME IS A MUTUAL FUND: an investment that pools
shareholders' money and invests it toward a specified goal. The fund
is a non-diversified fund of Fidelity School Street Trust, an open-end
management investment company organized as a Massachusetts business
trust on September 10, 1976.
THE FUND IS GOVERNED BY A BOARD OF TRUSTEES which is responsible for
protecting the interests of shareholders. The trustees are experienced
executives who meet periodically throughout the year to oversee the
fund's activities, review contractual arrangements with companies that
provide services to the fund, and review the fund's performance. The
trustees serve as trustees for other Fidelity funds. The majority of
trustees are not otherwise affiliated with Fidelity.
THE FUND MAY HOLD SPECIAL SHAREHOLDER MEETINGS AND MAIL PROXY
MATERIALS. These meetings may be called to elect or remove trustees,
change fundamental policies, approve a management contract, or for
other purposes. Shareholders not attending these meetings are
encouraged to vote by proxy. Fidelity will mail proxy materials in
advance, including a voting card and information about the proposals
to be voted on. The number of votes you are entitled to is based upon
the dollar value of your investment.
FMR AND ITS AFFILIATES
The fund is managed by FMR, which handles its business affairs and,
with the assistance of foreign affiliates, chooses the fund's
investments. Beginning January 1, 1999, FIMM, located in Merrimack,
New Hampshire, will select certain types of investments for the fund.
Affiliates assist FMR with foreign securities:
(small solid bullet) Fidelity Management & Research (U.K.) Inc. (FMR
U.K.), in London, England,
(small solid bullet) Fidelity Management & Research Far East Inc. (FMR
Far East), in Tokyo, Japan,
(small solid bullet) Fidelity International Investment Advisors
(FIIA), in Pembroke, Bermuda,
(small solid bullet) Fidelity International Investment Advisors (U.K.)
Limited (FIIA(U.K.)L), in London, England, and
(small solid bullet) Fidelity Investment Japan Ltd. (FIJ), in Tokyo,
Japan.
John Carlson is Vice President and lead manager of Strategic Income,
which he has managed since inception. He also manages several other
Fidelity funds. Prior to joining Fidelity in 1995, Mr. Carlson was
Executive Director of emerging markets at Lehman Brothers
International from 1992 through 1995.
Margaret Eagle is Vice President and manager of Strategic Income. Ms.
Eagle has managed the high yield investments for Strategic Income
since inception. In addition, she is Senior Vice President of Fidelity
Trust Company. Ms. Eagle joined Fidelity in 1980.
Brian Hogan is manager of Strategic Income's emerging market
securities, which he has managed since inception. Since joining
Fidelity in 1994, Mr. Hogan has worked as a fixed-income analyst,
research analyst, and manager. Previously, he worked as an analyst for
Conseco Capital Management from 1993 to 1994.
Curt Hollingsworth is Vice President and manager of Strategic Income.
Mr. Hollingsworth has managed the domestic investment-grade and U.S.
Government investments for Strategic Income since inception. He also
manages several other Fidelity funds. Since joining Fidelity in 1983,
Mr. Hollingsworth has worked as a fixed-income trader and portfolio
manager.
Ian Spreadbury is manager of Strategic Income's foreign bond
investments, which he has managed since inception. He also co-manages
another Fidelity fund. He is also director of fixed income and a
portfolio manager for Fidelity International Limited (FIL). Prior to
joining Fidelity in 1995, Mr. Spreadbury was a senior manager with
Legal & General, Limited, from 1981 to 1995.
Fidelity investment personnel may invest in securities for their own
accounts pursuant to a code of ethics that establishes procedures for
personal investing and restricts certain transactions.
Fidelity Distributors Corporation (FDC) distributes and markets
Fidelity's funds and services.
Fidelity Service Company, Inc. (FSC) performs transfer agent servicing
functions for the fund.
FMR Corp. is the ultimate parent company of FMR, FIMM, FMR U.K., and
FMR Far East. Members of the Edward C. Johnson 3d family are the
predominant owners of a class of shares of common stock representing
approximately 49% of the voting power of FMR Corp. Under the
Investment Company Act of 1940 (the 1940 Act), control of a company is
presumed where one individual or group of individuals owns more than
25% of the voting stock of that company; therefore, the Johnson family
may be deemed under the 1940 Act to form a controlling group with
respect to FMR Corp.
Fidelity International Limited (FIL), is the parent company of FIIA,
FIJ, and FIIA(U.K.)L. The Johnson family group also owns, directly or
indirectly, more than 25% of the voting common stock of FIL.
FMR may use its broker-dealer affiliates and other firms that sell
fund shares to carry out the fund's transactions, provided that the
fund receives brokerage services and commission rates comparable to
those of other broker-dealers.
INVESTMENT PRINCIPLES AND RISKS
The fund seeks a high level of current income by investing primarily
in debt securities. The fund may also seek capital appreciation.
The fund invests primarily in debt securities, including lower-quality
securities, allocated among four general investment categories: high
yield securities, U.S. Government and investment-grade securities,
emerging market securities, and foreign developed market securities.
The fund's neutral mix, or the benchmark for its combination of
investments in each category over time, is approximately 40% high
yield, 30% U.S. Government and investment-grade, 15% emerging markets
and 15% foreign developed markets. The fund also may invest a portion
of its assets in convertible securities and common and preferred
stocks.
FMR regularly reviews the fund's allocation and makes changes
gradually over time to favor investments that it believes provide the
most favorable outlook for achieving the fund's objective. In normal
market environments, FMR expects the fund's asset allocation to
approximate the neutral mix within a range of plus or minus 10% of
assets per category. There are no absolute limits on the percent of
assets invested in each category, however, and FMR reserves the right
to change the neutral mix from time to time.
The HIGH YIELD category includes high-yielding, lower-quality
securities consisting mainly of U.S. securities. The U.S. GOVERNMENT
AND INVESTMENT-GRADE category includes mortgage securities, U.S.
Government securities, government agency securities and other U.S.
dollar-denominated securities of investment-grade quality. The
EMERGING MARKET category includes corporate and governmental
securities of any quality of issuers located in emerging markets. The
FOREIGN DEVELOPED MARKET category includes corporate and governmental
securities of any quality of issuers located in developed foreign
markets. These investment categories are only general guidelines, and
FMR may use its judgment as to which category an investment falls
within. The fund may also make investments that do not fall within
these categories.
By allocating its investments across different types of fixed-income
securities, the fund attempts to moderate the significant risks of
each investment category through diversification. Diversification,
when successful, can mean higher returns with decreased volatility.
However, each of the fund's four investment categories may experience
periods of volatile returns, and it is possible for all investment
categories to decline at the same time.
The yield and share price of a bond fund change daily based on changes
in interest rates and market conditions, and in response to other
economic, political or financial events. The types and maturities of
the securities a bond fund purchases and the credit quality of their
issuers will impact a bond fund's reaction to these events.
The total return from a bond includes both income and price gains or
losses. While income is the most important component of bond returns
over time, a bond fund's emphasis on income does not mean the fund
invests only in the highest-yielding bonds available, or that it can
avoid losses of principal.
In general, bond prices rise when interest rates fall and fall when
interest rates rise. Longer-term bonds are usually more sensitive to
interest rate changes. In other words, the longer the maturity of a
bond, the greater the impact a change in interest rates is likely to
have on the bond's price. In addition, short-term interest rates and
long-term interest rates do not necessarily move in the same amount or
in the same direction. A short-term bond tends to react to changes in
short-term interest rates and a long-term bond tends to react to
changes in long-term interest rates.
The price of a bond is affected by the credit quality of its issuer.
Changes in the financial condition of an issuer, changes in general
economic conditions, and changes in specific economic conditions that
affect a particular type of issuer can impact the credit quality of an
issuer. Lower quality bonds generally tend to be more sensitive to
these changes than higher quality bonds.
Bonds denominated in foreign currencies are affected by changes in
currency exchange rates. For example, if the value of a foreign
currency declines relative to the U.S. dollar, the value in U.S.
dollars of bonds denominated in that currency will decline even if the
value of the bond in the foreign currency is stable.
Many types of debt securities, including mortgage securities, are
subject to prepayment risk. Prepayment risk occurs when the issuer of
a security can prepay principal prior to the security's maturity.
Securities subject to prepayment risk generally offer less potential
for gains during a declining interest rate environment, and similar or
greater potential for loss in a rising interest rate environment. In
addition, the potential impact of prepayment features on the price of
a debt security may be difficult to predict and result in greater
volatility.
Investments in foreign securities may involve risks in addition to
those of U.S. investments, including increased political and economic
risk, as well as exposure to currency fluctuations.
FMR may use various techniques to hedge a portion of a fund's risks,
but there is no guarantee that these strategies will work as intended.
When you sell your shares of a fund, they may be worth more or less
than what you paid for them.
FMR normally invests the fund's assets according to its investment
strategy. The fund also reserves the right to invest without
limitation in preferred stocks and investment-grade debt instruments
for temporary, defensive purposes.
SECURITIES AND INVESTMENT PRACTICES
The following pages contain more detailed information about types of
instruments in which the fund may invest, strategies FMR may employ in
pursuit of the fund's investment objective, and a summary of related
risks. Any restrictions listed supplement those discussed earlier in
this section. A complete listing of the fund's limitations and more
detailed information about the fund's investments are contained in the
fund's SAI. Policies and limitations are considered at the time of
purchase; the sale of instruments is not required in the event of a
subsequent change in circumstances.
FMR may not buy all of these instruments or use all of these
techniques unless it believes that they are consistent with the fund's
investment objective and policies and that doing so will help the fund
achieve its goal. Fund holdings and recent investment strategies are
detailed in the fund's financial reports, which are sent to
shareholders twice a year. For a free SAI or financial report, call
1-800-544-8888.
DEBT SECURITIES. Bonds and other debt instruments are used by issuers
to borrow money from investors. The issuer generally pays the investor
a fixed, variable, or floating rate of interest, and must repay the
amount borrowed at maturity. Some debt securities, such as zero coupon
bonds, do not pay current interest, but are sold at a discount from
their face values.
DEBT RATINGS
MOODY'S
INVESTORS SERVICE STANDARD & POOR'S
Rating Rating
INVESTMENT GRADE
Highest quality Aaa AAA
High quality Aa AA
Upper-medium grade A A
Medium grade Baa BBB
LOWER QUALITY
Moderately speculative Ba BB
Speculative B B
Highly speculative Caa CCC
Poor quality Ca CC
Lowest quality, no interest C C
In default, in arrears -- D
REFER TO THE APPENDIX FOR A MORE COMPLETE DISCUSSION OF THESE RATINGS.
THE FUND DOES NOT NECESSARILY RELY ON THE RATINGS OF MOODY'S OR S&P TO
DETERMINE COMPLIANCE WITH ITS DEBT QUALITY
POLICY.
Debt securities have varying levels of sensitivity to changes in
interest rates and varying degrees of credit quality. In general, bond
prices rise when interest rates fall, and fall when interest rates
rise. Longer-term bonds and zero coupon bonds are generally more
sensitive to interest rate changes.
Lower-quality debt securities are considered to have speculative
characteristics, and involve greater risk of default or price changes
due to changes in the issuer's creditworthiness, or they may already
be in default. The market prices of these securities may fluctuate
more than higher-quality securities and may decline significantly in
periods of general or regional economic difficulty. Lower-quality
securities may be thinly traded, making them difficult to sell
promptly at an acceptable price. Adverse publicity and changing
investor perceptions may affect the ability to obtain prices for, or
to sell these securities.
The default rate of lower-quality debt securities is likely to be
higher when issuers have difficulty meeting projected goals or
obtaining additional financing. This could occur during economic
recessions or periods of high interest rates. If an issuer defaults,
the fund may try to protect the interests of security holders if it
determines such action to be in the interest of its shareholders.
EQUITY SECURITIES may include common stocks, preferred stocks,
convertible securities, and warrants. Common stocks, the most familiar
type, represent an equity (ownership) interest in a corporation.
Although equity securities have a history of long-term growth in
value, their prices fluctuate based on changes in a company's
financial condition and on overall market and economic conditions.
Smaller companies are especially sensitive to these factors.
U.S. GOVERNMENT SECURITIES are high-quality debt instruments issued or
guaranteed by the U.S. Treasury or by an agency or instrumentality of
the U.S. Government. Not all U.S. Government securities are backed by
the full faith and credit of the United States. For example, U.S.
Government securities such as those issued by Fannie Mae are supported
by the instrumentality's right to borrow money from the U.S. Treasury
under certain circumstances. Other U.S. Government securities such as
those issued by the Federal Farm Credit Banks Funding Corporation are
supported only by the credit of the entity that issued them.
EXPOSURE TO FOREIGN MARKETS. Foreign securities, foreign currencies,
and securities issued by U.S. entities with substantial foreign
operations may involve additional risks and considerations. These
include risks relating to political, economic, or regulatory
conditions in foreign countries; fluctuations in foreign currencies;
withholding or other taxes; trading, settlement, custodial, and other
operational risks; and the potentially less stringent investor
protection and disclosure standards of foreign markets. Additionally,
governmental issuers of foreign debt securities may be unwilling to
pay interest and repay principal when due and may require that the
conditions for payment be renegotiated. All of these factors can make
foreign investments, especially those in emerging markets, more
volatile and potentially less liquid than U.S. investments.
EXPOSURE TO EMERGING MARKETS. Investing in emerging markets involves
risks in addition to and greater than those generally associated with
investing in more developed foreign markets. The extent of economic
development; political stability; market depth, infrastructure, and
capitalization; and regulatory oversight is generally less than in
more developed markets. Emerging market economies may be subject to
greater social, economic, regulatory, and political uncertainties. All
of these factors generally make emerging market securities more
volatile and potentially less liquid than securities issued in more
developed markets.
ASSET-BACKED SECURITIES include interests in pools of debt securities,
commercial or consumer loans, or other receivables. The value of these
securities depends on many factors, including changes in interest
rates, the availability of information concerning the pool and its
structure, the credit quality of the underlying assets, the market's
perception of the servicer of the pool, and any credit enhancement
provided. In addition, these securities may be subject to prepayment
risk.
MORTGAGE SECURITIES include interests in pools of commercial or
residential mortgages, and may include complex instruments such as
collateralized mortgage obligations and stripped mortgage-backed
securities. Mortgage securities may be issued by agencies or
instrumentalities of the U.S. Government or by private entities.
The price of a mortgage security may be significantly affected by
changes in interest rates. Some mortgage securities may have a
structure that makes their reaction to interest rates and other
factors difficult to predict, making their price highly volatile.
Also, mortgage securities, especially stripped mortgage-backed
securities, are subject to prepayment risk. Securities subject to
prepayment risk generally offer less potential for gains during a
declining interest rate environment, and similar or greater potential
for loss in a rising interest rate environment.
STRIPPED SECURITIES are the separate income or principal components of
a debt security. The risks associated with stripped securities are
similar to those of other debt securities, although stripped
securities may be more volatile and the value of certain types of
stripped securities may move in the same direction as interest rates.
U.S. Treasury securities that have been stripped by a Federal Reserve
Bank are obligations issued by the U.S. Treasury.
REPURCHASE AGREEMENTS. In a repurchase agreement, the fund buys a
security at one price and simultaneously agrees to sell it back at a
higher price. Delays or losses could result if the other party to the
agreement defaults or becomes insolvent.
REAL ESTATE-RELATED INSTRUMENTS include real estate investment trusts,
commercial and residential mortgage-backed securities, and real estate
financings. Real estate-related instruments are sensitive to factors
such as changes in real estate values and property taxes, interest
rates, cash flow of underlying real estate assets, overbuilding, and
the management skill and creditworthiness of the issuer. Real
estate-related instruments may also be affected by tax and regulatory
requirements, such as those relating to the environment.
ADJUSTING INVESTMENT EXPOSURE. The fund can use various techniques to
increase or decrease its exposure to changing security prices,
interest rates, commodity prices, currency exchange rates, or other
factors that affect security values. These techniques may involve
derivative transactions such as buying and selling options and futures
contracts, entering into currency exchange contracts or swap
agreements, purchasing indexed securities, and selling securities
short.
FMR can use these practices to adjust the risk and return
characteristics of the fund's portfolio of investments. If FMR judges
market conditions incorrectly or employs a strategy that does not
correlate well with the fund's investments, these techniques could
result in a loss, regardless of whether the intent was to reduce risk
or increase return. These techniques may increase the volatility of
the fund and may involve a small investment of cash relative to the
magnitude of the risk assumed. In addition, these techniques could
result in a loss if the counterparty to the transaction does not
perform as promised.
DIRECT DEBT. Loans and other direct debt instruments are interests in
amounts owed to another party by a company, government, or other
borrower. They have additional risks beyond conventional debt
securities because they may entail less legal protection for a fund,
or there may be a requirement that the fund supply additional cash to
a borrower on demand.
ILLIQUID AND RESTRICTED SECURITIES. Some investments may be determined
by FMR, under the supervision of the Board of Trustees, to be
illiquid, which means that they may be difficult to sell promptly at
an acceptable price. The sale of some illiquid securities, and some
other securities, may be subject to legal restrictions. Difficulty in
selling securities may result in a loss or may be costly to the fund.
RESTRICTIONS: The fund may not purchase a security if, as a result,
more than 15% of its assets would be invested in illiquid securities.
WHEN-ISSUED AND FORWARD PURCHASE OR SALE TRANSACTIONS are trading
practices in which payment and delivery for the security take place at
a later date than is customary for that type of security. The market
value of the security could change during this period.
CASH MANAGEMENT. The fund may invest in money market securities, in
repurchase agreements, and in a money market fund available only to
funds and accounts managed by FMR or its affiliates, whose goal is to
seek a high level of current income while maintaining a stable $1.00
share price. A major change in interest rates or a default on the
money market fund's investments could cause its share price to change.
DIVERSIFICATION. Diversifying a fund's investment portfolio can reduce
the risks of investing. This may include limiting the amount of money
invested in any one issuer or, on a broader scale, in any one
industry. A fund that is not diversified may be more sensitive to
changes in the market value of a single issuer or industry.
RESTRICTIONS: The fund is considered non-diversified. Generally, to
meet federal tax requirements at the close of each quarter, the fund
does not invest more than 25% of its total assets in any issuer and,
with respect to 50% of total assets, does not invest more than 5% of
its total assets in any issuer. These limitations do not apply to U.S.
Government securities or to securities of other investment companies.
The fund may not invest more than 25% of its total assets in any one
industry. This limitation does not apply to U.S. Government
securities.
BORROWING. The fund may borrow from banks or from other funds advised
by FMR, or through reverse repurchase agreements. If the fund borrows
money, its share price may be subject to greater fluctuation until the
borrowing is paid off. If the fund makes additional investments while
borrowings are outstanding, this may be considered a form of leverage.
RESTRICTIONS: The fund may borrow only for temporary or emergency
purposes, but not in an amount exceeding 331/3% of its total assets.
LENDING securities to broker-dealers and institutions, including
Fidelity Brokerage Services, Inc. (FBSI), an affiliate of FMR, is a
means of earning income. This practice could result in a loss or a
delay in recovering the fund's securities. The fund may also lend
money to other funds advised by FMR.
RESTRICTIONS: Loans, in the aggregate, may not exceed 331/3% of the
fund's total assets.
FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS
Some of the policies and restrictions discussed on the preceding pages
are fundamental, that is, subject to change only by shareholder
approval. The following paragraphs restate all those that are
fundamental. All policies stated throughout this prospectus, other
than those identified in the following paragraphs, can be changed
without shareholder approval.
The fund seeks a high level of current income. The fund may also seek
capital appreciation.
The fund may not invest more than 25% of its total assets in any one
industry. This limitation does not apply to U.S. Government
securities.
The fund may borrow only for temporary or emergency purposes, but not
in an amount exceeding 331/3% of its total assets.
Loans, in the aggregate, may not exceed 331/3% of the fund's total
assets.
BREAKDOWN OF EXPENSES
Like all mutual funds, the fund pays fees related to its daily
operations. Expenses paid out of the fund's assets are reflected in
its share price or dividends; they are neither billed directly to
shareholders nor deducted from shareholder accounts.
The fund pays a MANAGEMENT FEE to FMR for managing its investments and
business affairs. FMR in turn pays fees to affiliates who provide
assistance with these services. The fund also pays OTHER EXPENSES,
which are explained on page .
FMR may, from time to time, agree to reimburse the fund for management
fees and other expenses above a specified limit. FMR retains the
ability to be repaid by the fund if expenses fall below the specified
limit prior to the end of the fiscal year. Reimbursement arrangements,
which may be terminated at any time without notice, can decrease the
fund's expenses and boost its performance.
MANAGEMENT FEE
The management fee is calculated and paid to FMR every month. The fee
is calculated by adding a group fee rate to an individual fund fee
rate, multiplying the result by the fund's monthly average net assets
and dividing by twelve.
The group fee rate is based on the average net assets of all the
mutual funds advised by FMR. This rate cannot rise above 0.37%, and it
drops as total assets under management increase.
For February 1998, the group fee rate was 0.1357%. The individual fund
fee rate is 0.45%.
The total management fee for the fiscal year ending December 31, 1998,
after reimbursement, is estimated to be 0% of the fund's average net
assets.
FMR HAS SUB-ADVISORY AGREEMENTS with four affiliates: FMR U.K., FMR
Far East, FIJ, and FIIA. FIIA in turn has a sub-advisory agreement
with FIIA (U.K.)L. FMR U.K. focuses on issuers based in Europe. FMR
Far East focuses on issuers based in Asia and the Pacific Basin. FIJ
focuses on issuers based in Japan and elsewhere around the world. FIIA
focuses on issuers based in Hong Kong, Australia, New Zealand, and
Southeast Asia (other than Japan). FIIA (U.K.)L focuses on issuers
based in the United Kingdom and Europe.
The sub-advisers are compensated for providing investment research and
advice. FMR pays FMR U.K. and FMR Far East fees equal to 110% and
105%, respectively, of the costs of providing these services. FMR pays
FIJ and FIIA 30% of its management fee associated with investments for
which the sub-adviser provided investment advice. FIIA pays FIIA
(U.K.)L a fee equal to 110% of the cost of providing these services.
The sub-advisers may also provide investment management services. In
return, FMR pays FMR U.K., FMR Far East, FIJ, and FIIA a fee equal to
50% of its management fee rate with respect to the fund's investments
that the sub-adviser manages on a discretionary basis. FIIA pays FIIA
(U.K.)L a fee equal to 110% of the cost of providing these services.
Beginning January 1, 1999, FIMM will select certain investments for
the fund. FMR will pay FIMM a fee equal to 50% of its management fee
(before expense reimbursements) with respect to the fund's investments
that FIMM manages.
UNDERSTANDING THE
MANAGEMENT FEE
THE MANAGEMENT FEE FMR
RECEIVES IS DESIGNED TO BE
RESPONSIVE TO CHANGES IN FMR'S
TOTAL ASSETS UNDER
MANAGEMENT. BUILDING THIS
VARIABLE INTO THE FEE
CALCULATION ASSURES
SHAREHOLDERS THAT THEY WILL PAY
A LOWER RATE AS FMR'S ASSETS
UNDER MANAGEMENT INCREASE.
(CHECKMARK)
OTHER EXPENSES
While the management fee is a significant component of the fund's
annual operating costs, the fund has other expenses as well.
The fund contracts with FSC to perform transfer agency, dividend
disbursing, shareholder servicing, and accounting functions. These
services include processing shareholder transactions, valuing the
fund's investments, handling securities loans, and calculating the
fund's share price and dividends.
The fund also pays other expenses, such as: legal, audit, and
custodian fees; in some instances, proxy solicitation costs; and the
compensation of trustees who are not affiliated with Fidelity. A
broker-dealer may use a portion of the commissions paid by the fund to
reduce the fund's custodian or transfer agent fees.
The fund has adopted a DISTRIBUTION AND SERVICE PLAN. This plan
recognizes that FMR may use its management fee revenues, as well as
its past profits or its resources from any other source, to pay FDC
for expenses incurred in connection with the distribution of fund
shares. FMR directly, or through FDC, may make payments to third
parties, such as banks or broker-dealers, that engage in the sale of,
or provide shareholder support services for, the fund's shares.
Currently, the Board of Trustees has authorized such payments.
The fund's annualized portfolio turnover rate is expected to exceed
100% in the first fiscal period. This rate varies from year to year.
High turnover rates increase transaction costs and may increase
taxable capital gains. FMR considers these effects when evaluating the
anticipated benefits of short-term investing.
YOUR ACCOUNT
DOING BUSINESS WITH FIDELITY
Fidelity Investments was established in 1946 to manage one of
America's first mutual funds. Today, Fidelity is the largest mutual
fund company in the country, and is known as an innovative provider of
high-quality financial services to individuals and institutions.
In addition to its mutual fund business, the company operates one of
America's leading discount brokerage firms, FBSI. Fidelity is also a
leader in providing tax-advantaged retirement plans for individuals
investing on their own or through their employer.
Fidelity is committed to providing investors with practical
information to make investment decisions. Based in Boston, Fidelity
provides customers with complete service 24 hours a day, 365 days a
year, through a network of telephone service centers around the
country.
To reach Fidelity for general information, call these numbers:
(small solid bullet) For mutual funds, 1-800-544-8888
(small solid bullet) For brokerage, 1-800-544-7272
If you would prefer to speak with a representative in person, Fidelity
has over 80 walk-in Investor Centers across the country.
TYPES OF ACCOUNTS
You may set up an account directly in the fund or, if you own or
intend to purchase individual securities as part of your total
investment portfolio, you may consider investing in the fund through a
brokerage account.
You may purchase or sell shares of the fund through an investment
professional, including a broker, who may charge you a transaction fee
for this service. If you invest through FBSI, another financial
institution, or an investment professional, read their program
materials for any special provisions, additional service features or
fees that may apply to your investment in the fund. Certain features
of the fund, such as the minimum initial or subsequent investment
amounts, may be modified.
The different ways to set up (register) your account with Fidelity are
listed in the table that follows.
The account guidelines that follow may not apply to certain retirement
accounts. If you are investing through a retirement account or if your
employer offers the fund through a retirement program, you may be
subject to additional fees. For more information, please refer to your
program materials, contact your employer, or call your retirement
benefits number or Fidelity directly, as appropriate.
FIDELITY FACTS
Fidelity offers the broadest
selection of mutual funds
in the world.
(solid bullet) Number of Fidelity mutual
funds: over 223
(solid bullet) Assets in Fidelity mutual
funds: over $568 billion
(solid bullet) Number of shareholder
accounts: over 36 million
(solid bullet) Number of investment
analysts and portfolio
managers: over 265
(checkmark)
WAYS TO SET UP YOUR ACCOUNT
INDIVIDUAL OR JOINT TENANT
FOR YOUR GENERAL INVESTMENT NEEDS
Individual accounts are owned by one person. Joint accounts can have
two or more owners (tenants).
RETIREMENT
FOR TAX-ADVANTAGED RETIREMENT SAVINGS
Retirement plans provide individuals with tax-advantaged ways to save
for retirement, either with tax-deductible contributions or tax-free
growth. Retirement accounts require special applications and typically
have lower minimums.
(solid bullet) TRADITIONAL INDIVIDUAL RETIREMENT ACCOUNTS (IRAS) allow
individuals under age 70 with compensation to contribute up to $2,000
per tax year. Married couples can contribute up to $4,000 per tax
year, provided no more than $2,000 is contributed on behalf of either
spouse. (These limits are aggregate for Traditional and Roth IRAs.)
Contributions may be tax-deductible, subject to certain income limits.
(solid bullet) ROTH IRAS allow individuals to make non-deductible
contributions of up to $2,000 per tax year. Married couples can
contribute up to $4,000 per tax year, provided no more than $2,000 is
contributed on behalf of either spouse. (These limits are aggregate
for Traditional and Roth IRAs.) Eligibility is subject to certain
income limits. Qualified distributions are tax-free.
(solid bullet) ROTH CONVERSION IRAS allow individuals with assets held
in a Traditional IRA or Rollover IRA to convert those assets to a Roth
Conversion IRA. Eligibility is subject to certain income limits.
Qualified distributions are tax-free.
(solid bullet) ROLLOVER IRAS help retain special tax advantages for
certain eligible rollover distributions from employer-sponsored
retirement plans.
(solid bullet) PROFIT SHARING OR MONEY PURCHASE PENSION PLANS (KEOGHS)
allow self-employed individuals or small business owners to make
tax-deductible contributions for themselves and any eligible
employees.
(solid bullet) SIMPLIFIED EMPLOYEE PENSION PLANS (SEP-IRAS) provide
small business owners or those with self-employment income (and their
eligible employees) with many of the same advantages as a Keogh, but
with fewer administrative requirements.
(solid bullet) SALARY REDUCTION SEP-IRAS (SARSEPS) allow employees of
businesses with 25 or fewer employees to contribute a percentage of
their wages on a tax-deferred basis. These plans must have been
established by the employer prior to January 1, 1997.
(solid bullet) SIMPLE IRAS provide small business owners and those
with self-employment income (and their eligible employees) with many
of the advantages of a 401(k) plan, but with fewer administrative
requirements.
(solid bullet) 403(B) CUSTODIAL ACCOUNTS are available to employees of
501(c)(3) tax-exempt institutions, including schools, hospitals, and
other charitable organizations.
(solid bullet) 401(K) PLANS allow employees of organizations of all
sizes to contribute a percentage of their wages on a tax-deferred
basis. These accounts need to be established by the trustee of the
plan.
(solid bullet) DEFERRED COMPENSATION PLANS (457 PLANS) are available
to employees of most state and local governments and their agencies
and to employees of tax-exempt institutions.
GIFTS OR TRANSFERS TO A MINOR (UGMA, UTMA)
TO INVEST FOR A CHILD'S EDUCATION OR OTHER FUTURE NEEDS
These custodial accounts provide a way to give money to a child and
obtain tax benefits. An individual can give up to $10,000 a year per
child without paying federal gift tax. Depending on state laws, you
can set up a custodial account under the Uniform Gifts to Minors Act
(UGMA) or the Uniform Transfers to Minors Act (UTMA).
TRUST
FOR MONEY BEING INVESTED BY A TRUST
The trust must be established before an account can be opened.
BUSINESS OR ORGANIZATION
FOR INVESTMENT NEEDS OF CORPORATIONS, ASSOCIATIONS, PARTNERSHIPS, OR
OTHER GROUPS
Requires a special application.
HOW TO BUY SHARES
THE PRICE TO BUY ONE SHARE of the fund is the fund's net asset value
per share (NAV). The fund's shares are sold without a sales charge.
Your shares will be purchased at the next NAV calculated after your
investment is received in proper form. The fund's NAV is normally
calculated each business day at 4:00 p.m. Eastern time.
The fund reserves the right to reject any specific purchase order,
including certain purchases by exchange. See "Exchange Restrictions"
on page . Purchase orders may be refused if, in FMR's opinion, they
would disrupt management of the fund.
IF YOU ARE NEW TO FIDELITY, complete and sign an account application
and mail it along with your check. You may also open your account in
person or by wire as described on page . If there is no application
accompanying this prospectus, call 1-800-544-8888.
IF YOU ALREADY HAVE MONEY INVESTED IN A FIDELITY FUND, you can:
(small solid bullet) Mail in an application with a check, or
(small solid bullet) Open your account by exchanging from another
Fidelity fund.
IF YOU ARE INVESTING THROUGH A TAX-ADVANTAGED RETIREMENT PLAN, such as
an IRA, for the first time, you will need a special application.
Retirement investing also involves its own investment procedures. Call
1-800-544-8888 for more information and a retirement application.
If you buy shares by check or Fidelity Money Line(registered
trademark), and then sell those shares by any method other than by
exchange to another Fidelity fund, the payment may be delayed for up
to seven business days to ensure that your previous investment has
cleared.
MINIMUM INVESTMENTS
TO OPEN AN ACCOUNT $2,500
For certain Fidelity retirement accounts(double dagger) $500
TO ADD TO AN ACCOUNT $250
For certain Fidelity retirement accounts(double dagger) $250
Through regular investment plans* $100
MINIMUM BALANCE $2,000
For certain Fidelity retirement accounts(double dagger) $500
(double dagger)THESE LOWER MINIMUMS APPLY TO FIDELITY TRADITIONAL IRA,
ROTH IRA, ROTH CONVERSION IRA, ROLLOVER IRA, SEP-IRA, AND KEOGH
ACCOUNTS.
*FOR MORE INFORMATION ABOUT REGULAR INVESTMENT PLANS, PLEASE REFER TO
"INVESTOR SERVICES," PAGE .
These minimums may vary for investments through Fidelity Portfolio
Advisory Services. There is no minimum account balance or initial or
subsequent investment minimum for certain retirement accounts funded
through salary deduction, or accounts opened with the proceeds of
distributions from Fidelity retirement accounts. Refer to the program
materials for details.
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TO OPEN AN TO ADD TO
ACCOUNT AN
ACCOUNT
PHONE 1-800-544-7777 (PHONE_GRAPHIC) (SMALL SOLID BULLET) EXCHANGE FROM (SMALL SOLID BULLET) EXCHANGE FROM
ANOTHER FIDELITY ANOTHER
FUND ACCOUNT WITH FIDELITY FUND
THE SAME ACCOUNT WITH
REGISTRATION, THE SAME
INCLUDING NAME, REGISTRATION,
ADDRESS, AND INCLUDING
TAXPAYER ID NAME,
NUMBER. ADDRESS, AND
TAXPAYER ID
NUMBER.
(SMALL SOLID BULLET) USE FIDELITY
MONEY LINE TO
TRANSFER FROM
YOUR BANK
ACCOUNT. CALL
BEFORE YOUR
FIRST USE TO
VERIFY THAT THIS
SERVICE IS IN
PLACE ON YOUR
ACCOUNT.
MAXIMUM
MONEY LINE:
UP TO
$100,000.
MAIL (MAIL_GRAPHIC) (SMALL SOLID BULLET) COMPLETE AND (SMALL SOLID BULLET) MAKE YOUR
SIGN THE CHECK PAYABLE
APPLICATION. TO THE COMPLETE
MAKE YOUR CHECK NAME OF THE
PAYABLE TO THE FUND. INDICATE
COMPLETE NAME YOUR FUND
OF THE FUND. MAIL ACCOUNT NUMBER
TO THE ADDRESS ON YOUR CHECK
INDICATED ON THE AND MAIL TO THE
APPLICATION. ADDRESS PRINTED
ON YOUR ACCOUNT
STATEMENT.
(SMALL SOLID BULLET) EXCHANGE BY
MAIL: CALL
1-800-544-666
6 FOR
INSTRUCTIONS.
IN PERSON (HAND_GRAPHIC) (SMALL SOLID BULLET) BRING YOUR (SMALL SOLID BULLET) BRING YOUR
APPLICATION AND CHECK TO A
CHECK TO A FIDELITY INVESTOR
FIDELITY INVESTOR CENTER. CALL
CENTER. CALL 1-800-544-97
1-800-544-979 97 FOR THE
7 FOR THE CENTER CENTER NEAREST
NEAREST YOU. YOU.
WIRE (WIRE_GRAPHIC) (SMALL SOLID BULLET) CALL (SMALL SOLID BULLET) NOT AVAILABLE
1-800-544-777 FOR RETIREMENT
7 TO SET UP YOUR ACCOUNTS.
ACCOUNT AND TO (SMALL SOLID BULLET) WIRE TO:
ARRANGE A WIRE BANKERS TRUST
TRANSACTION. NOT COMPANY,
AVAILABLE FOR BANK ROUTING
RETIREMENT #021001033,
ACCOUNTS. ACCOUNT
(SMALL SOLID BULLET) WIRE WITHIN 24 #00163053.
HOURS TO:
SPECIFY THE
BANKERS TRUST COMPLETE NAME
COMPANY,
OF THE FUND AND
BANK ROUTING INCLUDE YOUR
#021001033,
ACCOUNT
ACCOUNT NUMBER AND
#00163053.
YOUR NAME.
SPECIFY THE
COMPLETE NAME
OF THE FUND AND
INCLUDE YOUR NEW
ACCOUNT NUMBER
AND YOUR NAME.
AUTOMATICALLY (AUTOMATIC_GRAPHIC) (SMALL SOLID BULLET) NOT AVAILABLE. (SMALL SOLID BULLET) USE FIDELITY
AUTOMATIC
ACCOUNT
BUILDER. SIGN
UP FOR THIS
SERVICE WHEN
OPENING YOUR
ACCOUNT, OR
CALL
1-800-544-66
66 TO ADD IT.
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(TDD_GRAPHIC) TDD - SERVICE FOR THE DEAF AND HEARING IMPAIRED: 1-800-544-0118
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HOW TO SELL SHARES
You can arrange to take money out of your fund account at any time by
selling (redeeming) some or all of your shares.
THE PRICE TO SELL ONE SHARE of the fund is the fund's NAV.
Your shares will be sold at the next NAV calculated after your order
is received in proper form. The fund's NAV is normally calculated each
business day at 4:00 p.m. Eastern time.
TO SELL SHARES IN A NON-RETIREMENT ACCOUNT, you may use any of the
methods described on these two pages.
TO SELL SHARES IN A FIDELITY RETIREMENT ACCOUNT, your request must be
made in writing, except for exchanges to other Fidelity funds, which
can be requested by phone or in writing. Call 1-800-544-6666 for a
retirement distribution form.
IF YOU ARE SELLING SOME BUT NOT ALL OF YOUR SHARES, leave at least
$2,000 worth of shares in the account to keep it open ($500 for
retirement accounts).
TO SELL SHARES BY BANK WIRE OR FIDELITY MONEY LINE, you will need to
sign up for these services in advance.
CERTAIN REQUESTS MUST INCLUDE A SIGNATURE GUARANTEE. It is designed to
protect you and Fidelity from fraud. Your request must be made in
writing and include a signature guarantee if any of the following
situations apply:
(small solid bullet) You wish to redeem more than $100,000 worth of
shares,
(small solid bullet) Your account registration has changed within the
last 30 days,
(small solid bullet) The check is being mailed to a different address
than the one on your account (record address),
(small solid bullet) The check is being made payable to someone other
than the account owner, or
(small solid bullet) The redemption proceeds are being transferred to
a Fidelity account with a different registration.
You should be able to obtain a signature guarantee from a bank, broker
(including Fidelity Investor Centers), dealer, credit union (if
authorized under state law), securities exchange or association,
clearing agency, or savings association. A notary public cannot
provide a signature guarantee.
SELLING SHARES IN WRITING
Write a "letter of instruction" with:
(small solid bullet) Your name,
(small solid bullet) The fund's name,
(small solid bullet) Your fund account number,
(small solid bullet) The dollar amount or number of shares to be
redeemed, and
(small solid bullet) Any other applicable requirements listed in the
table that follows.
Unless otherwise instructed, Fidelity will send a check to the record
address. Deliver your letter to a Fidelity Investor Center, or mail it
to:
Fidelity Investments
P.O. Box 660602
Dallas, TX 75266-0602
ACCOUNT TYPE SPECIAL REQUIREMENTS
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PHONE 1-800-544-7777 (PHONE_GRAPHIC) ALL ACCOUNT TYPES (SMALL SOLID BULLET) MAXIMUM
EXCEPT RETIREMENT CHECK REQUEST:
$100,000.
ALL ACCOUNT TYPES (SMALL SOLID BULLET) FOR MONEY LINE
TRANSFERS TO YOUR
BANK ACCOUNT;
MINIMUM: $10;
MAXIMUM: UP TO
$100,000.
(SMALL SOLID BULLET) YOU MAY
EXCHANGE TO
OTHER FIDELITY
FUNDS IF BOTH
ACCOUNTS ARE
REGISTERED WITH
THE SAME
NAME(S),
ADDRESS, AND
TAXPAYER ID
NUMBER.
MAIL OR IN PERSON (MAIL_GRAPHIC)(HAND_GRAPHIC) INDIVIDUAL, JOINT (SMALL SOLID BULLET) THE LETTER OF
TENANT, INSTRUCTION MUST
SOLE PROPRIETORSHIP, BE SIGNED BY ALL
UGMA, UTMA PERSONS REQUIRED
RETIREMENT ACCOUNT TO SIGN FOR
TRANSACTIONS,
EXACTLY AS THEIR
TRUST NAMES APPEAR
ON THE ACCOUNT.
(SMALL SOLID BULLET) THE ACCOUNT
OWNER SHOULD
BUSINESS OR COMPLETE A
ORGANIZATION RETIREMENT
DISTRIBUTION
FORM. CALL
1-800-544-666
6 TO REQUEST
EXECUTOR, ONE.
ADMINISTRATOR, (SMALL SOLID BULLET) THE TRUSTEE MUST
CONSERVATOR, SIGN THE LETTER
GUARDIAN INDICATING
CAPACITY AS
TRUSTEE. IF THE
TRUSTEE'S NAME IS
NOT IN THE
ACCOUNT
REGISTRATION,
PROVIDE A COPY
OF THE TRUST
DOCUMENT
CERTIFIED WITHIN
THE LAST 60 DAYS.
(SMALL SOLID BULLET) AT LEAST ONE
PERSON
AUTHORIZED BY
CORPORATE
RESOLUTION TO ACT
ON THE ACCOUNT
MUST SIGN THE
LETTER.
(SMALL SOLID BULLET) INCLUDE A
CORPORATE
RESOLUTION WITH
CORPORATE SEAL
OR A SIGNATURE
GUARANTEE.
(SMALL SOLID BULLET) CALL
1-800-544-666
6 FOR
INSTRUCTIONS.
WIRE (WIRE_GRAPHIC) ALL ACCOUNT TYPES (SMALL SOLID BULLET) YOU MUST SIGN
EXCEPT RETIREMENT UP FOR THE WIRE
FEATURE BEFORE
USING IT. TO
VERIFY THAT IT IS
IN PLACE, CALL
1-800-544-666
6. MINIMUM
WIRE: $5,000.
(SMALL SOLID BULLET) YOUR WIRE
REDEMPTION
REQUEST MUST BE
RECEIVED IN
PROPER FORM BY
FIDELITY BEFORE
4:00 P.M.
EASTERN TIME FOR
MONEY TO BE
WIRED ON THE
NEXT BUSINESS
DAY.
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(TDD_GRAPHIC) TDD - SERVICE FOR THE DEAF AND HEARING IMPAIRED: 1-800-544-0118
</TABLE>
INVESTOR SERVICES
Fidelity provides a variety of services to help you manage your
account.
INFORMATION SERVICES
FIDELITY'S TELEPHONE REPRESENTATIVES are available 24 hours a day, 365
days a year. Whenever you call, you can speak with someone equipped to
provide the information or service you need.
24-HOUR SERVICE
ACCOUNT ASSISTANCE
1-800-544-6666
ACCOUNT TRANSACTIONS
1-800-544-7777
PRODUCT INFORMATION
1-800-544-8888
RETIREMENT ACCOUNT ASSISTANCE
1-800-544-4774
TOUCHTONE XPRESSSM
1-800-544-5555
AUTOMATED SERVICE
(checkmark)
STATEMENTS AND REPORTS that Fidelity sends to you include the
following:
(small solid bullet) Confirmation statements (after every transaction,
except reinvestments, that affects your account balance or your
account registration)
(small solid bullet) Account statements (quarterly)
(small solid bullet) Financial reports (every six months)
To reduce expenses, only one copy of most financial reports and
prospectuses will be mailed to your household, even if you have more
than one account in the fund. Call 1-800-544-6666 if you need copies
of financial reports, prospectuses, or historical account information.
TRANSACTION SERVICES
EXCHANGE PRIVILEGE. You may sell your fund shares and buy shares of
other Fidelity funds by telephone or in writing.
Note that exchanges out of the fund are limited to four per calendar
year, and that they may have tax consequences for you. For details on
policies and restrictions governing exchanges, including circumstances
under which a shareholder's exchange privilege may be suspended or
revoked, see page .
SYSTEMATIC WITHDRAWAL PLANS let you set up periodic redemptions from
your account.
FIDELITY MONEY LINE(registered trademark) enables you to transfer
money by phone between your bank account and your fund account. Most
transfers are complete within three business days of your call.
REGULAR INVESTMENT PLANS
One easy way to pursue your financial goals is to invest money
regularly. Fidelity offers convenient services that let you transfer
money into your fund account, or between fund accounts, automatically.
While regular investment plans do not guarantee a profit and will not
protect you against loss in a declining market, they can be an
excellent way to invest for retirement, a home, educational expenses,
and other long-term financial goals. Certain restrictions apply for
retirement accounts. Call 1-800-544-6666 for more information.
REGULAR INVESTMENT PLANS
FIDELITY AUTOMATIC ACCOUNT BUILDERSM
TO MOVE MONEY FROM YOUR BANK ACCOUNT TO A FIDELITY FUND
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MINIMUM FREQUENCY SETTING UP OR CHANGING
$100 MONTHLY OR QUARTERLY (SMALL SOLID BULLET) FOR A NEW ACCOUNT, COMPLETE THE APPROPRIATE SECTION ON THE FUND
APPLICATION.
(SMALL SOLID BULLET) FOR EXISTING ACCOUNTS, CALL 1-800-544-6666 FOR AN APPLICATION.
(SMALL SOLID BULLET) TO CHANGE THE AMOUNT OR FREQUENCY OF YOUR INVESTMENT, CALL
1-800-544-6666 AT LEAST THREE BUSINESS DAYS PRIOR TO YOUR NEXT
SCHEDULED INVESTMENT DATE.
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DIRECT DEPOSIT
TO SEND ALL OR A PORTION OF YOUR PAYCHECK OR GOVERNMENT CHECK TO A
FIDELITY FUNDA
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MINIMUM FREQUENCY SETTING UP OR CHANGING
$100 EVERY PAY PERIOD (SMALL SOLID BULLET) CHECK THE APPROPRIATE BOX ON THE FUND APPLICATION, OR CALL
1-800-544-6666 FOR AN AUTHORIZATION FORM.
(SMALL SOLID BULLET) CHANGES REQUIRE A NEW AUTHORIZATION FORM.
</TABLE>
FIDELITY AUTOMATIC EXCHANGE SERVICE
TO MOVE MONEY FROM A FIDELITY MONEY MARKET FUND TO ANOTHER FIDELITY
FUND
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MINIMUM FREQUENCY SETTING UP OR CHANGING
$100 Monthly, bimonthly, (small solid bullet) To establish, call 1-800-544-6666 after both accounts are
quarterly, or annually opened.
(small solid bullet) To change the amount or frequency of your investment, call
1-800-544-6666.
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A BECAUSE ITS SHARE PRICE FLUCTUATES, THE FUND MAY NOT BE AN
APPROPRIATE CHOICE FOR DIRECT DEPOSIT OF YOUR ENTIRE CHECK.
SHAREHOLDER AND ACCOUNT POLICIES
DIVIDENDS, CAPITAL GAINS, AND TAXES
The fund distributes substantially all of its net investment income
and capital gains to shareholders each year. Income dividends are
declared daily and paid monthly. Capital gains are normally
distributed in December and February.
DISTRIBUTION OPTIONS
When you open an account, specify on your application how you want to
receive your distributions. If the option you prefer is not listed on
the application, call 1-800-544-6666 for instructions. The fund offers
four options:
1. REINVESTMENT OPTION. Your dividend and capital gain distributions
will be automatically reinvested in additional shares of the fund. If
you do not indicate a choice on your application, you will be assigned
this option.
2. INCOME-EARNED OPTION. Your capital gain distributions will be
automatically reinvested, but you will be sent a check for each
dividend distribution.
3. CASH OPTION. You will be sent a check for your dividend and capital
gain distributions.
4. DIRECTED DIVIDENDS(registered trademark) OPTION. Your dividend and
capital gain distributions will be automatically invested in another
identically registered Fidelity fund.
Dividends will be reinvested at the fund's NAV on the last day of the
month. Capital gain distributions will be reinvested at the NAV as of
the date the fund deducts the distribution from its NAV. The mailing
of distribution checks will begin within seven days, or longer for a
December ex-dividend date.
TAXES
UNDERSTANDING
DISTRIBUTIONS
As a fund shareholder, you are
entitled to your share of the
fund's net income and gains
on its investments. The fund
passes its earnings along to its
investors as DISTRIBUTIONS.
The fund earns interest from its
investments. These are passed
along as DIVIDEND
DISTRIBUTIONS. The fund may
realize capital gains if it sells
securities for a higher price
than it paid for them. These
are passed along as CAPITAL
GAIN DISTRIBUTIONS.
(checkmark)
As with any investment, you should consider how your investment in the
fund will be taxed. If your account is not a tax-advantaged retirement
account, you should be aware of these tax implications.
TAXES ON DISTRIBUTIONS. Distributions are subject to federal income
tax, and may also be subject to state or local taxes. If you live
outside the United States, your distributions could also be taxed by
the country in which you reside. Your distributions are taxable when
they are paid, whether you take them in cash or reinvest them.
However, distributions declared in December and paid in January are
taxable as if they were paid on December 31.
For federal tax purposes, the fund's income and short-term capital
gains are distributed as dividends and taxed as ordinary income;
capital gain distributions are taxed as long-term capital gains. Every
January, Fidelity will send you and the IRS a statement showing the
tax characterization of distributions paid to you in the previous
year.
TAXES ON TRANSACTIONS. Your redemptions - including exchanges to other
Fidelity funds - are subject to capital gains tax. A capital gain or
loss is the difference between the cost of your shares and the price
you receive when you sell them.
Whenever you sell shares of the fund, Fidelity will send you a
confirmation statement showing how many shares you sold and at what
price. You will also receive a consolidated transaction statement
every January. However, it is up to you or your tax preparer to
determine whether this sale resulted in a capital gain and, if so, the
amount of tax to be paid. Be sure to keep your regular account
statements; the information they contain will be essential in
calculating the amount of your capital gains.
"BUYING A DIVIDEND." If you buy shares when the fund has realized but
not yet distributed capital gains, you will pay the full price for the
shares and then receive a portion of the price back in the form of a
taxable distribution.
CURRENCY CONSIDERATIONS. If the fund's dividends exceed its taxable
income in any year, which is sometimes the result of currency-related
losses, all or a portion of the fund's dividends may be treated as a
return of capital to shareholders for tax purposes. To minimize the
risk of a return of capital, the fund may adjust its dividends to take
currency fluctuations into account, which may cause the dividends to
vary. Any return of capital will reduce the cost basis of your shares,
which will result in a higher reported capital gain or a lower
reported capital loss when you sell your shares. The statement you
receive in January will specify if any distributions included a return
of capital.
EFFECT OF FOREIGN TAXES. Foreign governments may impose taxes on the
fund and its investments, and these taxes generally will reduce the
fund's distributions. However, if you meet certain holding period
requirements with respect to your fund shares, an offsetting tax
credit may be available to you. If you do not meet such holding period
requirements, you may still be entitled to a deduction for certain
foreign taxes. In either case, your tax statement will show more
taxable income or capital gains than were actually distributed by the
fund, but will also show the amount of the available offsetting credit
or deduction.
There are tax requirements that all funds must follow in order to
avoid federal taxation. In its effort to adhere to these requirements,
the fund may have to limit its investment activity in some types of
instruments.
TRANSACTION DETAILS
THE FUND IS OPEN FOR BUSINESS each day the New York Stock Exchange
(NYSE) is open. FSC normally calculates the fund's NAV as of the close
of business of the NYSE, normally 4:00 p.m. Eastern time.
THE FUND'S NAV is the value of a single share. The NAV is computed by
adding the value of the fund's investments, cash, and other assets,
subtracting its liabilities, and then dividing the result by the
number of shares outstanding.
The fund's assets are valued on the basis of information furnished by
a pricing service or market quotations, if available, or by another
method that the Board of Trustees believes accurately reflects fair
value. Short-term securities with remaining maturities of sixty days
or less for which quotations and information furnished by a pricing
service are not readily available are valued on the basis of amortized
cost. This method minimizes the effect of changes in a security's
market value. Foreign securities are valued on the basis of quotations
from the primary market in which they are traded, and are translated
from the local currency into U.S. dollars using current exchange
rates. If the values have been materially affected by events occurring
after the closing of a foreign market, assets may be valued by another
method that the Board of Trustees believes accurately reflects fair
value.
WHEN YOU SIGN YOUR ACCOUNT APPLICATION, you will be asked to certify
that your social security or taxpayer identification number is correct
and that you are not subject to 31% backup withholding for failing to
report income to the IRS. If you violate IRS regulations, the IRS can
require the fund to withhold 31% of your taxable distributions and
redemptions.
YOU MAY INITIATE MANY TRANSACTIONS BY TELEPHONE OR ELECTRONICALLY.
Fidelity will not be responsible for any losses resulting from
unauthorized transactions if it follows reasonable security procedures
designed to verify the identity of the investor. Fidelity will request
personalized security codes or other information, and may also record
calls. For transactions conducted through the Internet, Fidelity
recommends the use of an Internet browser with 128-bit encryption. You
should verify the accuracy of your confirmation statements immediately
after you receive them. If you do not want the ability to redeem and
exchange by telephone, call Fidelity for instructions.
IF YOU ARE UNABLE TO REACH FIDELITY BY PHONE (for example, during
periods of unusual market activity), consider placing your order by
mail or by visiting a Fidelity Investor Center.
THE FUND RESERVES THE RIGHT to suspend the offering of shares for a
period of time.
WHEN YOU PLACE AN ORDER TO BUY SHARES, your shares will be purchased
at the next NAV calculated after your investment is received in proper
form. Note the following:
(small solid bullet) All of your purchases must be made in U.S.
dollars and checks must be drawn on U.S. banks.
(small solid bullet) Fidelity does not accept cash.
(small solid bullet) When making a purchase with more than one check,
each check must have a value of at least $50.
(small solid bullet) The fund reserves the right to limit the number
of checks processed at one time.
(small solid bullet) If your check does not clear, your purchase will
be canceled and you could be liable for any losses or fees the fund or
its transfer agent has incurred.
(small solid bullet) Shares begin to earn dividends on the first
business day following the day of purchase.
TO AVOID THE COLLECTION PERIOD associated with check and Money Line
purchases, consider buying shares by bank wire, U.S. Postal money
order, U.S. Treasury check, Federal Reserve check, or direct deposit
instead.
CERTAIN FINANCIAL INSTITUTIONS that have entered into sales agreements
with FDC may enter confirmed purchase orders on behalf of customers by
phone, with payment to follow no later than the time when the fund is
priced on the following business day. If payment is not received by
that time, the financial institution could be held liable for
resulting fees or losses.
WHEN YOU PLACE AN ORDER TO SELL SHARES, your shares will be sold at
the next NAV calculated after your order is received in proper form.
Note the following:
(small solid bullet) Normally, redemption proceeds will be mailed to
you on the next business day, but if making immediate payment could
adversely affect the fund, it may take up to seven days to pay you.
(small solid bullet) Shares earn dividends through the day of
redemption; however, shares redeemed on a Friday or prior to a holiday
continue to earn dividends until the next business day.
(small solid bullet) Fidelity Money Line redemptions generally will be
credited to your bank account on the second or third business day
after your phone call.
(small solid bullet) The fund may hold payment on redemptions until it
is reasonably satisfied that investments made by check or Fidelity
Money Line have been collected, which can take up to seven business
days.
(small solid bullet) Redemptions may be suspended or payment dates
postponed when the NYSE is closed (other than weekends or holidays),
when trading on the NYSE is restricted, or as permitted by the SEC.
FIDELITY RESERVES THE RIGHT TO DEDUCT AN ANNUAL MAINTENANCE FEE of
$12.00 from accounts with a value of less than $2,500, subject to an
annual maximum charge of $24.00 per shareholder. It is expected that
accounts will be valued on the second Friday in November of each year.
Accounts opened after September 30 will not be subject to the fee for
that year. The fee, which is payable to the transfer agent, is
designed to offset in part the relatively higher costs of servicing
smaller accounts. This fee will not be deducted from Fidelity
brokerage accounts, retirement accounts (except non-prototype
retirement accounts), accounts using regular investment plans, or if
total assets with Fidelity exceed $30,000. Eligibility for the $30,000
waiver is determined by aggregating Fidelity accounts maintained by
FSC or FBSI which are registered under the same social security number
or which list the same social security number for the custodian of a
Uniform Gifts/Transfers to Minors Act account.
IF YOUR ACCOUNT BALANCE FALLS BELOW $2,000, you will be given 30 days'
notice to reestablish the minimum balance. If you do not increase your
balance, Fidelity reserves the right to close your account and send
the proceeds to you. Your shares will be redeemed at the NAV on the
day your account is closed.
FIDELITY MAY CHARGE A FEE FOR SPECIAL SERVICES, such as providing
historical account documents, that are beyond the normal scope of its
services.
FDC may, at its own expense, provide promotional incentives to
qualified recipients who support the sale of shares of the fund
without reimbursement from the fund. Qualified recipients are
securities dealers who have sold fund shares or others, including
banks and other financial institutions, under special arrangements in
connection with FDC's sales activities. In some instances, these
incentives may be offered only to certain institutions whose
representatives provide services in connection with the sale or
expected sale of significant amounts of shares.
EXCHANGE RESTRICTIONS
As a shareholder, you have the privilege of exchanging shares of the
fund for shares of other Fidelity funds. However, you should note the
following:
(small solid bullet) The fund you are exchanging into must be
available for sale in your state.
(small solid bullet) You may only exchange between accounts that are
registered in the same name, address, and taxpayer identification
number.
(small solid bullet) Before exchanging into a fund, read its
prospectus.
(small solid bullet) If you exchange into a fund with a sales charge,
you pay the percentage-point difference between that fund's sales
charge and any sales charge you have previously paid in connection
with the shares you are exchanging. For example, if you had already
paid a sales charge of 2% on your shares and you exchange them into a
fund with a 3% sales charge, you would pay an additional 1% sales
charge.
(small solid bullet) Exchanges may have tax consequences for you.
(small solid bullet) Because excessive trading can hurt fund
performance and shareholders, the fund reserves the right to
temporarily or permanently terminate the exchange privilege of any
investor who makes more than four exchanges out of the fund per
calendar year. Accounts under common ownership or control, including
accounts with the same taxpayer identification number, will be counted
together for purposes of the four exchange limit.
(small solid bullet) The exchange limit may be modified for accounts
in certain institutional retirement plans to conform to plan exchange
limits and Department of Labor regulations. See your plan materials
for further information.
(small solid bullet) The fund reserves the right to refuse exchange
purchases by any person or group if, in FMR's judgment, the fund would
be unable to invest the money effectively in accordance with its
investment objective and policies, or would otherwise potentially be
adversely affected.
(small solid bullet) Your exchanges may be restricted or refused if
the fund receives or anticipates simultaneous orders affecting
significant portions of the fund's assets. In particular, a pattern of
exchanges that coincides with a "market timing" strategy may be
disruptive to the fund.
Although the fund will attempt to give you prior notice whenever it is
reasonably able to do so, it may impose these restrictions at any
time. The fund reserves the right to terminate or modify the exchange
privilege in the future.
OTHER FUNDS MAY HAVE DIFFERENT EXCHANGE RESTRICTIONS, and may impose
administrative fees of up to 1.00% and trading fees of up to 3.00% of
the amount exchanged. Check each fund's prospectus for details.
APPENDIX
DESCRIPTION OF MOODY'S INVESTORS SERVICE RATINGS OF CORPORATE BONDS
Moody's ratings for obligations with an original remaining maturity in
excess of one year fall within nine categories. They range from Aaa
(highest quality) to C (lowest quality). Moody applies numerical
modifiers of 1, 2, or 3 to each generic rating classification from Aa
through B. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks
on the lower end of its generic rating category.
AAA - Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high-grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than the Aaa securities.
A - Bonds that are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations.
Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future.
BAA - Bonds that are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
BA - Bonds that are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B - Bonds that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
CAA - Bonds that are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect
to principal or interest.
CA - Bonds that are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked short-comings.
C - Bonds that are rated C are the lowest-rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
DESCRIPTION OF STANDARD & POOR'S RATINGS OF CORPORATE BONDS
Debt issues may be designated by Standard & Poor's as either
investment grade ("AAA" through "BBB") or speculative grade ("BB"
through "D"). While speculative grade debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major exposures to adverse conditions. Ratings from
AA to CCC may be modified by the addition of a plus sign (+) or minus
sign (-) to show relative standing within the major rating categories.
AAA - Debt rated AAA has the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay
principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher-rated issues only in small
degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in
higher-rated categories.
BB - Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions which could lead to inadequate capacity to meet timely
interest and principal payments. The BB rating category is also used
for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.
B - Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The B
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied BB or BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and
economic conditions to meet timely payment of interest and repayment
of principal. In the event of adverse business, financial, or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal. The CCC rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied B or
B- rating.
CC - Debt rated CC is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC debt rating.
C - The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C
rating may be used to cover a situation where a bankruptcy petition
has been filed but debt service payments are continued.
CI - The rating CI is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The
D rating will also be used upon the filing of a bankruptcy petition if
debt service payments are jeopardized.
This prospectus is printed on recycled paper using soy-based inks.
FIDELITY STRATEGIC INCOME FUND
A FUND OF FIDELITY SCHOOL STREET TRUST
STATEMENT OF ADDITIONAL INFORMATION
APRIL 8, 1998
This Statement of Additional Information (SAI) is not a prospectus but
should be read in conjunction with the fund's current Prospectus
(dated April 8, 1998). Please retain this document for future
reference. To obtain a free additional copy of the Prospectus, please
call Fidelity at 1-800-544-8888.
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<CAPTION>
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TABLE OF CONTENTS PAGE
INVESTMENT POLICIES AND LIMITATIONS 27
SPECIAL CONSIDERATIONS REGARDING AFRICA 32
SPECIAL CONSIDERATIONS REGARDING CANADA 33
SPECIAL CONSIDERATIONS REGARDING EUROPE 33
SPECIAL CONSIDERATIONS REGARDING JAPAN, THE PACIFIC BASIN, AND SOUTHEAST ASIA 34
SPECIAL CONSIDERATIONS REGARDING LATIN AMERICA 37
PORTFOLIO TRANSACTIONS 39
VALUATION 39
PERFORMANCE 40
ADDITIONAL PURCHASE, EXCHANGE AND REDEMPTION INFORMATION 43
DISTRIBUTIONS AND TAXES 43
FMR 44
TRUSTEES AND OFFICERS 44
MANAGEMENT CONTRACT 46
DISTRIBUTION AND SERVICE PLAN 48
CONTRACTS WITH FMR AFFILIATES 48
DESCRIPTION OF THE TRUST 49
APPENDIX
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INVESTMENT ADVISER
Fidelity Management & Research Company (FMR)
INVESTMENT SUB-ADVISERS
Fidelity Management & Research (U.K.) Inc. (FMR U.K.)
Fidelity Management & Research (Far East) Inc. (FMR Far East)
Fidelity International Investment Advisors (FIIA)
Fidelity International Investment Advisors (U.K.) Limited
(FIIA(U.K.)L)
Fidelity Investments Japan Ltd. (FIJ)
DISTRIBUTOR
Fidelity Distributors Corporation (FDC)
TRANSFER AGENT
Fidelity Service Company, Inc. (FSC)
FSN-ptb-0498
701940
INVESTMENT POLICIES AND LIMITATIONS
The following policies and limitations supplement those set forth in
the Prospectus. Unless otherwise noted, whenever an investment policy
or limitation states a maximum percentage of the fund's assets that
may be invested in any security or other asset, or sets forth a policy
regarding quality standards, such standard or percentage limitation
will be determined immediately after and as a result of the fund's
acquisition of such security or other asset. Accordingly, any
subsequent change in values, net assets, or other circumstances will
not be considered when determining whether the investment complies
with the fund's investment policies and limitations.
The fund's fundamental investment policies and limitations cannot be
changed without approval by a "majority of the outstanding voting
securities" (as defined in the Investment Company Act of 1940 (the
1940 Act)) of the fund. However, except for the fundamental investment
limitations listed below, the investment policies and limitations
described in this SAI are not fundamental and may be changed without
shareholder approval.
THE FOLLOWING ARE THE FUND'S FUNDAMENTAL INVESTMENT LIMITATIONS SET
FORTH IN THEIR ENTIRETY. THE FUND MAY NOT:
(1) issue senior securities, except as permitted under the Investment
Company Act of 1940;
(2) borrow money, except that the fund may borrow money for temporary
or emergency purposes (not for leveraging or investment) in an amount
not exceeding 33 1/3% of its total assets (including the amount
borrowed) less liabilities (other than borrowings). Any borrowings
that come to exceed this amount will be reduced within three days (not
including Sundays and holidays) to the extent necessary to comply with
the 33 1/3% limitation;
(3) underwrite securities issued by others, except to the extent that
the fund may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities;
(4) purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities) if, as a result, more than 25% of the fund's total
assets would be invested in the securities of companies whose
principal business activities are in the same industry;
(5) purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not
prevent the fund from investing in securities or other instruments
backed by real estate or securities of companies engaged in the real
estate business);
(6) purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall not
prevent the fund from purchasing or selling options and futures
contracts or from investing in securities or other instruments backed
by physical commodities); or
(7) lend any security or make any other loan if, as a result, more
than 33 1/3% of its total assets would be lent to other parties, but
this limitation does not apply to purchases of debt securities or to
repurchase agreements.
(8) The fund may, notwithstanding any other fundamental investment
policy or limitation, invest all of its assets in the securities of a
single open-end management investment company managed by Fidelity
Management & Research Company or an affiliate or successor with
substantially the same fundamental investment objective, policies, and
limitations as the fund.
THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL AND MAY BE
CHANGED WITHOUT SHAREHOLDER APPROVAL:
(i) In order to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended, the
fund currently intends to comply with certain diversification limits
imposed by Subchapter M.
(ii) The fund does not currently intend to sell securities short,
unless it owns or has the right to obtain securities equivalent in
kind and amount to the securities sold short, and provided that
transactions in futures contracts and options are not deemed to
constitute selling securities short.
(iii) The fund does not currently intend to purchase securities on
margin, except that the fund may obtain such short-term credits as are
necessary for the clearance of transactions, and provided that margin
payments in connection with futures contracts and options on futures
contracts shall not constitute purchasing securities on margin.
(iv) The fund may borrow money only (a) from a bank or from a
registered investment company or portfolio for which FMR or an
affiliate serves as investment adviser or (b) by engaging in reverse
repurchase agreements with any party (reverse repurchase agreements
are treated as borrowings for purposes of fundamental investment
limitation (2)). The fund will not borrow from other funds advised by
FMR or its affiliates if total outstanding borrowings immediately
after such borrowing would exceed 15% of the fund's total assets.
(v) The fund does not currently intend to purchase any security if, as
a result, more than 15% of its net assets would be invested in
securities that are deemed to be illiquid because they are subject to
legal or contractual restrictions on resale or because they cannot be
sold or disposed of in the ordinary course of business at
approximately the prices at which they are valued.
(vi) The fund does not currently intend to lend assets other than
securities to other parties, except by (a) lending money (up to 7.5%
of the fund's net assets) to a registered investment company or
portfolio for which FMR or an affiliate serves as investment adviser
or (b) acquiring loans, loan participations, or other forms of direct
debt instruments and, in connection therewith, assuming any associated
unfunded commitments of the sellers. (This limitation does not apply
to purchases of debt securities or to repurchase agreements.)
(vii) The fund does not currently intend to invest all of its assets
in the securities of a single open-end management investment company
managed by Fidelity Management & Research Company or an affiliate or
successor with substantially the same fundamental investment
objective, policies, and limitations as the fund.
For purposes of limitation (i), Subchapter M generally requires the
fund to invest no more that 25% of its total assets in securities of
any one issuer and to invest at least 50% of its total assets so that
no more than 5% of the fund's total assets are invested in securities
of any one issuer. However, Subchapter M allows unlimited investments
in cash, cash items, government securities (as defined in Subchapter
M) and securities of other investment companies. These tax
requirements are generally applied at the end of each quarter of the
fund's taxable year.
With respect to limitation (v), if through a change in values, net
assets, or other circumstances, the fund were in a position where more
than 15% of its net assets was invested in illiquid securities, it
would consider appropriate steps to protect liquidity.
For the fund's limitations on futures and options transactions, see
the section entitled "Limitations on Futures and Options Transactions"
on page .
The following pages contain more detailed information about types of
instruments in which the fund may invest, strategies FMR may employ in
pursuit of the fund's investment objective, and a summary of related
risks. FMR may not buy all of these instruments or use all of these
techniques unless it believes doing so will help the fund achieve its
goal.
AFFILIATED BANK TRANSACTIONS. A fund may engage in transactions with
financial institutions that are, or may be considered to be,
"affiliated persons" of the fund under the 1940 Act. These
transactions may involve repurchase agreements with custodian banks;
short-term obligations of, and repurchase agreements with, the 50
largest U.S. banks (measured by deposits); municipal securities; U.S.
Government securities with affiliated financial institutions that are
primary dealers in these securities; short-term currency transactions;
and short-term borrowings. In accordance with exemptive orders issued
by the Securities and Exchange Commission (SEC), the Board of Trustees
has established and periodically reviews procedures applicable to
transactions involving affiliated financial institutions.
ASSET-BACKED SECURITIES represent interests in pools of mortgages,
loans, receivables or other assets. Payment of interest and repayment
of principal may be largely dependent upon the cash flows generated by
the assets backing the securities and, in certain cases, supported by
letters of credit, security bonds, or other credit enhancements.
Asset-backed security values may also be affected by the
creditworthiness of the servicing agent for the pool, the originator
of the loans or receivables, or the entities providing the credit
enhancement. In addition, these securities may be subject to
prepayment risk.
CLOSED-END INVESTMENT COMPANIES are investment companies that issue a
fixed number of shares which trade on a stock exchange or
over-the-counter. Closed-end investment companies are professionally
managed and may invest in any type of security. Shares of closed-end
investment companies may trade at a premium or a discount to their net
asset value. A fund may purchase shares of closed-end investment
companies to facilitate investment in certain foreign countries.
CONVERTIBLE SECURITIES are bonds, debentures, notes, preferred stocks
or other securities that may be converted or exchanged (by the holder
or by the issuer) into shares of the underlying common stock (or cash
or securities of equivalent value) at a stated exchange ratio. A
convertible security may also be called for redemption or conversion
by the issuer after a particular date and under certain circumstances
(including a specified price) established upon issue. If a convertible
security held by a fund is called for redemption or conversion, the
fund could be required to tender it for redemption, convert it into
the underlying common stock, or sell it to a third party.
Convertible securities generally have less potential for gain or loss
than common stocks. Convertible securities generally provide yields
higher than the underlying common stocks, but generally lower than
comparable non-convertible securities. Because of this higher yield,
convertible securities generally sell at prices above their
"conversion value," which is the current market value of the stock to
be received upon conversion. The difference between this conversion
value and the price of convertible securities will vary over time
depending on changes in the value of the underlying common stocks and
interest rates. When the underlying common stocks decline in value,
convertible securities will tend not to decline to the same extent
because of the interest or dividend payments and the repayment of
principal at maturity for certain types of convertible securities.
However, securities that are convertible other than at the option of
the holder generally do not limit the potential for loss to the same
extent as securities convertible at the option of the holder. When the
underlying common stocks rise in value, the value of convertible
securities may also be expected to increase. At the same time,
however, the difference between the market value of convertible
securities and their conversion value will narrow, which means that
the value of convertible securities will generally not increase to the
same extent as the value of the underlying common stocks. Because
convertible securities may also be interest-rate sensitive, their
value may increase as interest rates fall and decrease as interest
rates rise. Convertible securities are also subject to credit risk,
and are often lower-quality securities.
COUNTRIES NOT CONSIDERED TO HAVE EMERGING MARKETS. As of February 28,
1998, the following countries are not considered to have emerging
markets: Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand,
Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom, and
the United States.
DELAYED-DELIVERY TRANSACTIONS. Securities may be bought and sold on a
delayed-delivery or when-issued basis. These transactions involve a
commitment to purchase or sell specific securities at a predetermined
price or yield, with payment and delivery taking place after the
customary settlement period for that type of security. Typically, no
interest accrues to the purchaser until the security is delivered. The
fund may receive fees or price concessions for entering into
delayed-delivery transactions.
When purchasing securities on a delayed-delivery basis, the purchaser
assumes the rights and risks of ownership, including the risks of
price and yield fluctuations and the risk that the security will not
be issued as anticipated. Because payment for the securities is not
required until the delivery date, these risks are in addition to the
risks associated with a fund's investments. If a fund remains
substantially fully invested at a time when delayed-delivery purchases
are outstanding, the delayed-delivery purchases may result in a form
of leverage. When delayed-delivery purchases are outstanding, a fund
will set aside appropriate liquid assets in a segregated custodial
account to cover the purchase obligations. When a fund has sold a
security on a delayed-delivery basis, the fund does not participate in
further gains or losses with respect to the security. If the other
party to a delayed-delivery transaction fails to deliver or pay for
the securities, a fund could miss a favorable price or yield
opportunity or suffer a loss.
A fund may renegotiate a delayed delivery transaction and may sell the
underlying securities before delivery, which may result in capital
gains or losses for the fund.
EXPOSURE TO FOREIGN MARKETS. Foreign securities, foreign currencies,
and securities issued by U.S. entities with substantial foreign
operations may involve significant risks in addition to the risks
inherent in U.S. investments.
Foreign investments involve risks relating to local political,
economic, regulatory, or social instability, military action or
unrest, or adverse diplomatic developments, and may be affected by
actions of foreign governments adverse to the interests of U.S.
investors. Such actions may include expropriation or nationalization
of assets, confiscatory taxation, restrictions on U.S. investment or
on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There is no assurance that
FMR will be able to anticipate these potential events or counter their
effects. In addition, the value of securities denominated in foreign
currencies and of dividends and interest paid with respect to such
securities will fluctuate based on the relative strength of the U.S.
dollar.
It is anticipated that in most cases the best available market for
foreign securities will be on an exchange or in over-the-counter (OTC)
markets located outside of the United States. Foreign stock markets,
while growing in volume and sophistication, are generally not as
developed as those in the United States, and securities of some
foreign issuers may be less liquid and more volatile than securities
of comparable U.S. issuers. Foreign security trading, settlement and
custodial practices (including those involving securities settlement
where fund assets may be released prior to receipt of payment) are
often less developed than those in U.S. markets, and may result in
increased risk or substantial delays in the event of a failed trade or
the insolvency of, or breach of duty by, a foreign broker-dealer,
securities depository or foreign subcustodian. In addition, the costs
associated with foreign investments, including withholding taxes,
brokerage commissions and custodial costs, are generally higher than
with U.S. investments.
Foreign markets may offer less protection to investors than U.S.
markets. Foreign issuers are generally not bound by uniform
accounting, auditing, and financial reporting requirements and
standards of practice comparable to those applicable to U.S. issuers.
Adequate public information on foreign issuers may not be available,
and it may be difficult to secure dividends and information regarding
corporate actions on a timely basis. In general, there is less overall
governmental supervision and regulation of securities exchanges,
brokers, and listed companies than in the United States. OTC markets
tend to be less regulated than stock exchange markets and, in certain
countries, may be totally unregulated. Regulatory enforcement may be
influenced by economic or political concerns, and investors may have
difficulty enforcing their legal rights in foreign countries.
Some foreign securities impose restrictions on transfer within the
United States or to U.S. persons. Although securities subject to such
transfer restrictions may be marketable abroad, they may be less
liquid than foreign securities of the same class that are not subject
to such restrictions.
American Depositary Receipts (ADRs) as well as other "hybrid" forms of
ADRs, including European Depositary Receipts (EDRs) and Global
Depositary Receipts (GDRs), are certificates evidencing ownership of
shares of a foreign issuer. These certificates are issued by
depository banks and generally trade on an established market in the
United States or elsewhere. The underlying shares are held in trust by
a custodian bank or similar financial institution in the issuer's home
country. The depository bank may not have physical custody of the
underlying securities at all times and may charge fees for various
services, including forwarding dividends and interest and corporate
actions. ADRs are alternatives to directly purchasing the underlying
foreign securities in their national markets and currencies. However,
ADRs continue to be subject to many of the risks associated with
investing directly in foreign securities. These risks include foreign
exchange risk as well as the political and economic risks of the
underlying issuer's country.
The risks of foreign investing may be magnified for investments in
emerging markets. Security prices in emerging markets can be
significantly more volatile than those in more developed markets,
reflecting the greater uncertainties of investing in less established
markets and economies. In particular, countries with emerging markets
may have relatively unstable governments, may present the risks of
nationalization of businesses, restrictions on foreign ownership and
prohibitions on the repatriation of assets, and may have less
protection of property rights than more developed countries. The
economies of countries with emerging markets may be based on only a
few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt
burdens or inflation rates. Local securities markets may trade a small
number of securities and may be unable to respond effectively to
increases in trading volume, potentially making prompt liquidation of
holdings difficult or impossible at times.
FOREIGN CURRENCY TRANSACTIONS. A fund may conduct foreign currency
transactions on a spot (i.e., cash) or forward basis (i.e., by
entering into forward contracts to purchase or sell foreign
currencies). Although foreign exchange dealers generally do not charge
a fee for such conversions, they do realize a profit based on the
difference between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign
currency at one rate, while offering a lesser rate of exchange should
the counterparty desire to resell that currency to the dealer. Forward
contracts are customized transactions that require a specific amount
of a currency to be delivered at a specific exchange rate on a
specific date or range of dates in the future. Forward contracts are
generally traded in an interbank market directly between currency
traders (usually large commercial banks) and their customers. The
parties to a forward contract may agree to offset or terminate the
contract before its maturity, or may hold the contract to maturity and
complete the contemplated currency exchange. A fund may use currency
forward contracts for any purpose consistent with its investment
objective.
The following discussion summarizes the principal currency management
strategies involving forward contracts that could be used by a fund. A
fund may also use swap agreements, indexed securities, and options and
futures contracts relating to foreign currencies for the same
purposes.
A "settlement hedge" or "transaction hedge" is designed to protect a
fund against an adverse change in foreign currency values between the
date a security is purchased or sold and the date on which payment is
made or received. Entering into a forward contract for the purchase or
sale of the amount of foreign currency involved in an underlying
security transaction for a fixed amount of U.S. dollars "locks in" the
U.S. dollar price of the security. Forward contracts to purchase or
sell a foreign currency may also be used by a fund in anticipation of
future purchases or sales of securities denominated in foreign
currency, even if the specific investments have not yet been selected
by FMR.
A fund may also use forward contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. For
example, if a fund owned securities denominated in pounds sterling, it
could enter into a forward contract to sell pounds sterling in return
for U.S. dollars to hedge against possible declines in the pound's
value. Such a hedge, sometimes referred to as a "position hedge,"
would tend to offset both positive and negative currency fluctuations,
but would not offset changes in security values caused by other
factors. A fund could also hedge the position by selling another
currency expected to perform similarly to the pound sterling. This
type of hedge, sometimes referred to as a "proxy hedge," could offer
advantages in terms of cost, yield, or efficiency, but generally would
not hedge currency exposure as effectively as a direct hedge into U.S.
dollars. Proxy hedges may result in losses if the currency used to
hedge does not perform similarly to the currency in which the hedged
securities are denominated.
A fund may enter into forward contracts to shift its investment
exposure from one currency into another. This may include shifting
exposure from U.S. dollars to a foreign currency, or from one foreign
currency to another foreign currency. This type of strategy, sometimes
known as a "cross-hedge," will tend to reduce or eliminate exposure to
the currency that is sold, and increase exposure to the currency that
is purchased, much as if a fund had sold a security denominated in one
currency and purchased an equivalent security denominated in another.
Cross-hedges protect against losses resulting from a decline in the
hedged currency, but will cause a fund to assume the risk of
fluctuations in the value of the currency it purchases.
Under certain conditions, SEC guidelines require mutual funds to set
aside appropriate liquid assets in a segregated custodial account to
cover currency forward contracts. As required by SEC guidelines, a
fund will segregate assets to cover currency forward contracts, if
any, whose purpose is essentially speculative. A fund will not
segregate assets to cover forward contracts entered into for hedging
purposes, including settlement hedges, position hedges, and proxy
hedges.
Successful use of currency management strategies will depend on FMR's
skill in analyzing currency values. Currency management strategies may
substantially change a fund's investment exposure to changes in
currency exchange rates and could result in losses to a fund if
currencies do not perform as FMR anticipates. For example, if a
currency's value rose at a time when FMR had hedged a fund by selling
that currency in exchange for dollars, a fund would not participate in
the currency's appreciation. If FMR hedges currency exposure through
proxy hedges, a fund could realize currency losses from both the hedge
and the security position if the two currencies do not move in tandem.
Similarly, if FMR increases a fund's exposure to a foreign currency
and that currency's value declines, a fund will realize a loss. There
is no assurance that FMR's use of currency management strategies will
be advantageous to a fund or that it will hedge at appropriate times.
FUND'S RIGHTS AS A SHAREHOLDER. The fund does not intend to direct or
administer the day-to-day operations of any company. A fund, however,
may exercise its rights as a shareholder and may communicate its views
on important matters of policy to management, the Board of Directors,
and shareholders of a company when FMR determines that such matters
could have a significant effect on the value of the fund's investment
in the company. The activities in which a fund may engage, either
individually or in conjunction with others, may include, among others,
supporting or opposing proposed changes in a company's corporate
structure or business activities; seeking changes in a company's
directors or management; seeking changes in a company's direction or
policies; seeking the sale or reorganization of the company or a
portion of its assets; or supporting or opposing third-party takeover
efforts. This area of corporate activity is increasingly prone to
litigation and it is possible that a fund could be involved in
lawsuits related to such activities. FMR will monitor such activities
with a view to mitigating, to the extent possible, the risk of
litigation against a fund and the risk of actual liability if a fund
is involved in litigation. No guarantee can be made, however, that
litigation against a fund will not be undertaken or liabilities
incurred.
FUTURES AND OPTIONS. The following paragraphs pertain to futures and
options: Asset Coverage for Futures and Options Positions, Combined
Positions, Correlation of Price Changes, Futures Contracts, Futures
Margin Payments, Limitations on Futures and Options Transactions,
Liquidity of Options and Futures Contracts, Options and Futures
Relating to Foreign Currencies, OTC Options, Purchasing Put and Call
Options, and Writing Put and Call Options.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The fund will comply
with guidelines established by the SEC with respect to coverage of
options and futures strategies by mutual funds and, if the guidelines
so require, will set aside appropriate liquid assets in a segregated
custodial account in the amount prescribed. Securities held in a
segregated account cannot be sold while the futures or option strategy
is outstanding, unless they are replaced with other suitable assets.
As a result, there is a possibility that segregation of a large
percentage of the fund's assets could impede portfolio management or
the fund's ability to meet redemption requests or other current
obligations.
COMBINED POSITIONS involve purchasing and writing options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the
overall position. For example, purchasing a put option and writing a
call option on the same underlying instrument would construct a
combined position whose risk and return characteristics are similar to
selling a futures contract. Another possible combined position would
involve writing a call option at one strike price and buying a call
option at a lower price, to reduce the risk of the written call option
in the event of a substantial price increase. Because combined options
positions involve multiple trades, they result in higher transaction
costs and may be more difficult to open and close out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of
types of exchange-traded options and futures contracts, it is likely
that the standardized contracts available will not match a fund's
current or anticipated investments exactly. A fund may invest in
options and futures contracts based on securities with different
issuers, maturities, or other characteristics from the securities in
which the fund typically invests, which involves a risk that the
options or futures position will not track the performance of the
fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match a
fund's investments well. Options and futures prices are affected by
such factors as current and anticipated short-term interest rates,
changes in volatility of the underlying instrument, and the time
remaining until expiration of the contract, which may not affect
security prices the same way. Imperfect correlation may also result
from differing levels of demand in the options and futures markets and
the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. A fund may purchase or sell
options and futures contracts with a greater or lesser value than the
securities it wishes to hedge or intends to purchase in order to
attempt to compensate for differences in volatility between the
contract and the securities, although this may not be successful in
all cases. If price changes in a fund's options or futures positions
are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not
offset by gains in other investments.
FUTURES CONTRACTS. In purchasing a futures contract, the buyer agrees
to purchase a specified underlying instrument at a specified future
date. In selling a futures contract, the seller agrees to sell a
specified underlying instrument at a specified future date. The price
at which the purchase and sale will take place is fixed when the buyer
and seller enter into the contract. Futures can be held until their
delivery dates, or can be closed out before then if a liquid secondary
market is available.
The value of a futures contract tends to increase and decrease in
tandem with the value of its underlying instrument. Therefore,
purchasing futures contracts will tend to increase a fund's exposure
to positive and negative price fluctuations in the underlying
instrument, much as if it had purchased the underlying instrument
directly. When a fund sells a futures contract, by contrast, the value
of its futures position will tend to move in a direction contrary to
the market. Selling futures contracts, therefore, will tend to offset
both positive and negative market price changes, much as if the
underlying instrument had been sold.
FUTURES MARGIN PAYMENTS. The purchaser or seller of a futures contract
is not required to deliver or pay for the underlying instrument unless
the contract is held until the delivery date. However, both the
purchaser and seller are required to deposit "initial margin" with a
futures broker, known as a futures commission merchant (FCM), when the
contract is entered into. Initial margin deposits are typically equal
to a percentage of the contract's value. If the value of either
party's position declines, that party will be required to make
additional "variation margin" payments to settle the change in value
on a daily basis. The party that has a gain may be entitled to receive
all or a portion of this amount. Initial and variation margin payments
do not constitute purchasing securities on margin for purposes of a
fund's investment limitations. In the event of the bankruptcy of an
FCM that holds margin on behalf of a fund, the fund may be entitled to
return of margin owed to it only in proportion to the amount received
by the FCM's other customers, potentially resulting in losses to the
fund.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS. The fund intends to
file a notice of eligibility for exclusion from the definition of the
term "commodity pool operator" with the Commodity Futures Trading
Commission (CFTC) and the National Futures Association, which regulate
trading in the futures markets, before engaging in any purchases or
sales of futures contracts or options on futures contracts. The fund
intends to comply with Rule 4.5 under the Commodity Exchange Act,
which limits the extent to which the fund can commit assets to initial
margin deposits and option premiums.
In addition, the fund will not: (a) sell futures contracts, purchase
put options, or write call options if, as a result, more than 25% of
the fund's total assets would be hedged with futures and options under
normal conditions; (b) purchase futures contracts or write put options
if, as a result, the fund's total obligations upon settlement or
exercise of purchased futures contracts and written put options would
exceed 25% of its total assets; or (c) purchase call options if, as a
result, the current value of option premiums for call options
purchased by the fund would exceed 5% of the fund's total assets.
These limitations do not apply to options attached to or acquired or
traded together with their underlying securities, and do not apply to
securities that incorporate features similar to options.
The above limitations on the fund's investments in futures contracts
and options, and the fund's policies regarding futures contracts and
options discussed elsewhere in this SAI, may be changed as regulatory
agencies permit.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a
liquid secondary market will exist for any particular options or
futures contract at any particular time. Options may have relatively
low trading volume and liquidity if their strike prices are not close
to the underlying instrument's current price. In addition, exchanges
may establish daily price fluctuation limits for options and futures
contracts, and may halt trading if a contract's price moves upward or
downward more than the limit in a given day. On volatile trading days
when the price fluctuation limit is reached or a trading halt is
imposed, it may be impossible to enter into new positions or close out
existing positions. If the secondary market for a contract is not
liquid because of price fluctuation limits or otherwise, it could
prevent prompt liquidation of unfavorable positions, and potentially
could require a fund to continue to hold a position until delivery or
expiration regardless of changes in its value. As a result, a fund's
access to other assets held to cover its options or futures positions
could also be impaired.
OPTIONS AND FUTURES RELATING TO FOREIGN CURRENCIES. Currency futures
contracts are similar to forward currency exchange contracts, except
that they are traded on exchanges (and have margin requirements) and
are standardized as to contract size and delivery date. Most currency
futures contracts call for payment or delivery in U.S. dollars. The
underlying instrument of a currency option may be a foreign currency,
which generally is purchased or delivered in exchange for U.S.
dollars, or may be a futures contract. The purchaser of a currency
call obtains the right to purchase the underlying currency, and the
purchaser of a currency put obtains the right to sell the underlying
currency.
The uses and risks of currency options and futures are similar to
options and futures relating to securities or indices, as discussed
above. A fund may purchase and sell currency futures and may purchase
and write currency options to increase or decrease its exposure to
different foreign currencies. Currency options may also be purchased
or written in conjunction with each other or with currency futures or
forward contracts. Currency futures and options values can be expected
to correlate with exchange rates, but may not reflect other factors
that affect the value of a fund's investments. A currency hedge, for
example, should protect a Yen-denominated security from a decline in
the Yen, but will not protect a fund against a price decline resulting
from deterioration in the issuer's creditworthiness. Because the value
of a fund's foreign-denominated investments changes in response to
many factors other than exchange rates, it may not be possible to
match the amount of currency options and futures to the value of the
fund's investments exactly over time.
OTC OPTIONS. Unlike exchange-traded options, which are standardized
with respect to the underlying instrument, expiration date, contract
size, and strike price, the terms of over-the-counter (OTC) options
(options not traded on exchanges) generally are established through
negotiation with the other party to the option contract. While this
type of arrangement allows the purchaser or writer greater flexibility
to tailor an option to its needs, OTC options generally involve
greater credit risk than exchange-traded options, which are guaranteed
by the clearing organization of the exchanges where they are traded.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the
purchaser obtains the right (but not the obligation) to sell the
option's underlying instrument at a fixed strike price. In return for
this right, the purchaser pays the current market price for the option
(known as the option premium). Options have various types of
underlying instruments, including specific securities, indices of
securities prices, and futures contracts. The purchaser may terminate
its position in a put option by allowing it to expire or by exercising
the option. If the option is allowed to expire, the purchaser will
lose the entire premium. If the option is exercised, the purchaser
completes the sale of the underlying instrument at the strike price. A
purchaser may also terminate a put option position by closing it out
in the secondary market at its current price, if a liquid secondary
market exists.
The buyer of a typical put option can expect to realize a gain if
security prices fall substantially. However, if the underlying
instrument's price does not fall enough to offset the cost of
purchasing the option, a put buyer can expect to suffer a loss
(limited to the amount of the premium, plus related transaction
costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right
to purchase, rather than sell, the underlying instrument at the
option's strike price. A call buyer typically attempts to participate
in potential price increases of the underlying instrument with risk
limited to the cost of the option if security prices fall. At the same
time, the buyer can expect to suffer a loss if security prices do not
rise sufficiently to offset the cost of the option.
WRITING PUT AND CALL OPTIONS. The writer of a put or call option takes
the opposite side of the transaction from the option's purchaser. In
return for receipt of the premium, the writer assumes the obligation
to pay the strike price for the option's underlying instrument if the
other party to the option chooses to exercise it. The writer may seek
to terminate a position in a put option before exercise by closing out
the option in the secondary market at its current price. If the
secondary market is not liquid for a put option, however, the writer
must continue to be prepared to pay the strike price while the option
is outstanding, regardless of price changes, and must continue to set
aside assets to cover its position. When writing an option on a
futures contract, a fund will be required to make margin payments to
an FCM as described above for futures contracts.
If security prices rise, a put writer would generally expect to
profit, although its gain would be limited to the amount of the
premium it received. If security prices remain the same over time, it
is likely that the writer will also profit, because it should be able
to close out the option at a lower price. If security prices fall, the
put writer would expect to suffer a loss. This loss should be less
than the loss from purchasing the underlying instrument directly,
however, because the premium received for writing the option should
mitigate the effects of the decline.
Writing a call option obligates the writer to sell or deliver the
option's underlying instrument, in return for the strike price, upon
exercise of the option. The characteristics of writing call options
are similar to those of writing put options, except that writing calls
generally is a profitable strategy if prices remain the same or fall.
Through receipt of the option premium, a call writer mitigates the
effects of a price decline. At the same time, because a call writer
must be prepared to deliver the underlying instrument in return for
the strike price, even if its current value is greater, a call writer
gives up some ability to participate in security price increases.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed
of in the ordinary course of business at approximately the prices at
which they are valued. Under the supervision of the Board of Trustees,
FMR determines the liquidity of a fund's investments and, through
reports from FMR, the Board monitors investments in illiquid
instruments. In determining the liquidity of a fund's investments, FMR
may consider various factors, including (1) the frequency of trades
and quotations, (2) the number of dealers and prospective purchasers
in the marketplace, (3) dealer undertakings to make a market, (4) the
nature of the security (including any demand or tender features), and
(5) the nature of the marketplace for trades (including the ability to
assign or offset the fund's rights and obligations relating to the
investment).
Investments currently considered by FMR to be illiquid include
repurchase agreements not entitling the holder to repayment of
principal and payment of interest within seven days, non-government
stripped fixed-rate mortgage-backed securities, and over-the-counter
options. Also, FMR may determine some restricted securities,
government-stripped fixed-rate mortgage-backed securities, loans and
other direct debt instruments, emerging market securities, and swap
agreements to be illiquid. However, with respect to over-the-counter
options a fund writes, all or a portion of the value of the underlying
instrument may be illiquid depending on the assets held to cover the
option and the nature and terms of any agreement the fund may have to
close out the option before expiration.
In the absence of market quotations, illiquid investments are priced
at fair value as determined in good faith by a committee appointed by
the Board of Trustees.
INDEXED SECURITIES are instruments whose prices are indexed to the
prices of other securities, securities indices, currencies, precious
metals or other commodities, or other financial indicators. Indexed
securities typically, but not always, are debt securities or deposits
whose value at maturity or coupon rate is determined by reference to a
specific instrument or statistic.
Gold-indexed securities typically provide for a maturity value that
depends on the price of gold, resulting in a security whose price
tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt
securities whose maturity values or interest rates are determined by
reference to the values of one or more specified foreign currencies,
and may offer higher yields than U.S. dollar-denominated securities.
Currency-indexed securities may be positively or negatively indexed;
that is, their maturity value may increase when the specified currency
value increases, resulting in a security that performs similarly to a
foreign-denominated instrument, or their maturity value may decline
when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the
values of a number of different foreign currencies relative to each
other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which
they are indexed, and may also be influenced by interest rate changes
in the United States and abroad. Indexed securities may be more
volatile than the underlying instruments. Indexed securities are also
subject to the credit risks associated with the issuer of the
security, and their values may decline substantially if the issuer's
creditworthiness deteriorates. Recent issuers of indexed securities
have included banks, corporations, and certain U.S. Government
agencies.
INTERFUND BORROWING AND LENDING PROGRAM. Pursuant to an exemptive
order issued by the SEC, a fund may lend money to, and borrow money
from, other funds advised by FMR or its affiliates. A fund will lend
through the program only when the returns are higher than those
available from an investment in repurchase agreements, and will borrow
through the program only when the costs are equal to or lower than the
cost of bank loans. Interfund loans and borrowings normally extend
overnight, but can have a maximum duration of seven days. Loans may be
called on one day's notice. A fund may have to borrow from a bank at a
higher interest rate if an interfund loan is called or not renewed.
Any delay in repayment to a lending fund could result in a lost
investment opportunity or additional borrowing costs.
ISSUER LOCATION. FMR determines where an issuer is located by looking
at such factors as the issuer's country of organization, the primary
trading market for the issuer's securities, and the location of the
issuer's assets, personnel, sales, and earnings. The issuer of a
security is considered to be located in a particular country if (1)
the security is issued or guaranteed by the government of the country
or any of its agencies, political subdivisions, or instrumentalities;
(2) the security has its primary trading market in that country; or
(3) the issuer is organized under the laws of that country, derives at
least 50% of its revenues or profits from goods sold, investments
made, or services performed in the country, or has at least 50% of its
assets located in the country.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS. Direct debt instruments are
interests in amounts owed by a corporate, governmental, or other
borrower to lenders or lending syndicates (loans and loan
participations), to suppliers of goods or services (trade claims or
other receivables), or to other parties. Direct debt instruments are
subject to a fund's policies regarding the quality of debt securities.
Purchasers of loans and other forms of direct indebtedness depend
primarily upon the creditworthiness of the borrower for payment of
interest and repayment of principal. Direct debt instruments may not
be rated by any nationally recognized statistical rating service. If
scheduled interest or principal payments are not made, the value of
the instrument may be adversely affected. Loans that are fully secured
provide more protections than an unsecured loan in the event of
failure to make scheduled interest or principal payments. However,
there is no assurance that the liquidation of collateral from a
secured loan would satisfy the borrower's obligation, or that the
collateral could be liquidated. Indebtedness of borrowers whose
creditworthiness is poor involves substantially greater risks and may
be highly speculative. Borrowers that are in bankruptcy or
restructuring may never pay off their indebtedness, or may pay only a
small fraction of the amount owed. Direct indebtedness of developing
countries also involves a risk that the governmental entities
responsible for the repayment of the debt may be unable, or unwilling,
to pay interest and repay principal when due.
Investments in loans through direct assignment of a financial
institution's interests with respect to a loan may involve additional
risks. For example, if a loan is foreclosed, the purchaser could
become part owner of any collateral, and would bear the costs and
liabilities associated with owning and disposing of the collateral. In
addition, it is conceivable that under emerging legal theories of
lender liability, a purchaser could be held liable as a co-lender.
Direct debt instruments may also involve a risk of insolvency of the
lending bank or other intermediary. Direct debt instruments that are
not in the form of securities may offer less legal protection to the
purchaser in the event of fraud or misrepresentation. In the absence
of definitive regulatory guidance, FMR uses its research to attempt to
avoid situations where fraud or misrepresentation could adversely
affect a fund.
A loan is often administered by a bank or other financial institution
that acts as agent for all holders. The agent administers the terms of
the loan, as specified in the loan agreement. Unless, under the terms
of the loan or other indebtedness, the purchaser has direct recourse
against the borrower, the purchaser may have to rely on the agent to
apply appropriate credit remedies against a borrower. If assets held
by the agent for the benefit of a purchaser were determined to be
subject to the claims of the agent's general creditors, the purchaser
might incur certain costs and delays in realizing payment on the loan
or loan participation and could suffer a loss of principal or
interest.
Direct indebtedness may include letters of credit, revolving credit
facilities, or other standby financing commitments that obligate
purchasers to make additional cash payments on demand. These
commitments may have the effect of requiring a purchaser to increase
its investment in a borrower at a time when it would not otherwise
have done so, even if the borrower's condition makes it unlikely that
the amount will ever be repaid. A fund will set aside appropriate
liquid assets in a segregated custodial account to cover its potential
obligations under standby financing commitments.
The fund limits the amount of total assets that it will invest in any
one issuer or in issuers within the same industry (see the fund's
investment limitations). For purposes of these limitations, a fund
generally will treat the borrower as the "issuer" of indebtedness held
by the fund. In the case of loan participations where a bank or other
lending institution serves as financial intermediary between a fund
and the borrower, if the participation does not shift to the fund the
direct debtor-creditor relationship with the borrower, SEC
interpretations require a fund, in appropriate circumstances, to treat
both the lending bank or other lending institution and the borrower as
"issuers" for these purposes. Treating a financial intermediary as an
issuer of indebtedness may restrict a fund's ability to invest in
indebtedness related to a single financial intermediary, or a group of
intermediaries engaged in the same industry, even if the underlying
borrowers represent many different companies and industries.
LOWER-QUALITY DEBT SECURITIES. Lower-quality debt securities have poor
protection with respect to the payment of interest and repayment of
principal, or may be in default. These securities are often considered
to be speculative and involve greater risk of loss or price changes
due to changes in the issuer's capacity to pay. The market prices of
lower-quality debt securities may fluctuate more than those of
higher-quality debt securities and may decline significantly in
periods of general economic difficulty, which may follow periods of
rising interest rates.
While the market for high-yield corporate debt securities has been in
existence for many years and has weathered previous economic
downturns, the 1980s brought a dramatic increase in the use of such
securities to fund highly leveraged corporate acquisitions and
restructurings. Past experience may not provide an accurate indication
of the future performance of the high-yield bond market, especially
during periods of economic recession.
The market for lower-quality debt securities may be thinner and less
active than that for higher-quality debt securities, which can
adversely affect the prices at which the former are sold. If market
quotations are not available, lower-quality debt securities will be
valued in accordance with procedures established by the Board of
Trustees, including the use of outside pricing services. Judgment
plays a greater role in valuing high-yield debt securities than is the
case for securities for which more external sources for quotations and
last-sale information are available. Adverse publicity and changing
investor perceptions may affect the liquidity of lower-quality debt
securities and the ability of outside pricing services to value
lower-quality debt securities.
Since the risk of default is higher for lower-quality debt securities,
FMR's research and credit analysis are an especially important part of
managing securities of this type. FMR will attempt to identify those
issuers of high-yielding securities whose financial condition is
adequate to meet future obligations, has improved, or is expected to
improve in the future. FMR's analysis focuses on relative values based
on such factors as interest or dividend coverage, asset coverage,
earnings prospects, and the experience and managerial strength of the
issuer.
A fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise to exercise its rights as a security
holder to seek to protect the interests of security holders if it
determines this to be in the best interest of the fund's shareholders.
MORTGAGE-BACKED SECURITIES are issued by government and non-government
entities such as banks, mortgage lenders, or other institutions. A
mortgage-backed security is an obligation of the issuer backed by a
mortgage or pool of mortgages or a direct interest in an underlying
pool of mortgages. Some mortgage-backed securities, such as
collateralized mortgage obligations (or "CMOs"), make payments of both
principal and interest at a range of specified intervals; others make
semiannual interest payments at a predetermined rate and repay
principal at maturity (like a typical bond). Mortgage-backed
securities are based on different types of mortgages, including those
on commercial real estate or residential properties. Stripped
mortgage-backed securities are created when the interest and principal
components of a mortgage-backed security are separated and sold as
individual securities. In the case of a stripped mortgage-backed
security, the holder of the "principal-only" security (PO) receives
the principal payments made by the underlying mortgage, while the
holder of the "interest-only" security (IO) receives interest payments
from the same underlying mortgage.
The value of mortgage-backed securities may change due to shifts in
the market's perception of issuers and changes in interest rates. In
addition, regulatory or tax changes may adversely affect the
mortgage-backed securities market as a whole. Non-government
mortgage-backed securities may offer higher yields than those issued
by government entities, but also may be subject to greater price
changes than government issues. Mortgage-backed securities are subject
to prepayment risk. Prepayment occurs when unscheduled or early
payments are made on the underlying mortgages, usually in response to
a reduction in interest rates. Mortgage-backed security values may
also be adversely affected when prepayments on underlying mortgages do
not occur. The prices of stripped mortgage-backed securities tend to
be more volatile in response to changes in interest rates than those
of non-stripped mortgage-backed securities.
REPURCHASE AGREEMENTS. In a repurchase agreement, a fund purchases a
security and simultaneously commits to sell that security back to the
original seller at an agreed-upon price. The resale price reflects the
purchase price plus an agreed-upon incremental amount which is
unrelated to the coupon rate or maturity of the purchased security. As
protection against the risk that the original seller will not fulfill
its obligation, the securities are held in a separate account at a
bank, marked-to-market daily, and maintained at a value at least equal
to the sale price plus the accrued incremental amount. While it does
not presently appear possible to eliminate all risks from these
transactions (particularly the possibility that the value of the
underlying security will be less than the resale price, as well as
delays and costs to a fund in connection with bankruptcy proceedings),
the fund will engage in repurchase agreement transactions with parties
whose creditworthiness has been reviewed and found satisfactory by
FMR.
RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the
Securities Act of 1933, or in a registered public offering. Where
registration is required, a fund may be obligated to pay all or part
of the registration expense and a considerable period may elapse
between the time it decides to seek registration and the time it may
be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to
develop, a fund might obtain a less favorable price than prevailed
when it decided to seek registration of the security.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a
fund sells a security to another party, such as a bank or
broker-dealer, in return for cash and agrees to repurchase that
security at an agreed-upon price and time. While a reverse repurchase
agreement is outstanding, a fund will maintain appropriate liquid
assets in a segregated custodial account to cover its obligation under
the agreement. The fund will enter into reverse repurchase agreements
with parties whose creditworthiness has been reviewed and found
satisfactory by FMR. Such transactions may increase fluctuations in
the market value of fund assets and may be viewed as a form of
leverage.
SECURITIES LENDING. A fund may lend securities to parties such as
broker-dealers or institutional investors, including Fidelity
Brokerage Services, Inc. (FBSI). FBSI is a member of the New York
Stock Exchange and a subsidiary of FMR Corp.
Securities lending allows a fund to retain ownership of the securities
loaned and, at the same time, to earn additional income. Since there
may be delays in the recovery of loaned securities, or even a loss of
rights in collateral supplied should the borrower fail financially,
loans will be made only to parties deemed by FMR to be of good
standing. Furthermore, they will only be made if, in FMR's judgment,
the consideration to be earned from such loans would justify the risk.
FMR understands that it is the current view of the SEC Staff that a
fund may engage in loan transactions only under the following
conditions: (1) the fund must receive 100% collateral in the form of
cash or cash equivalents (e.g., U.S. Treasury bills or notes) from the
borrower; (2) the borrower must increase the collateral whenever the
market value of the securities loaned (determined on a daily basis)
rises above the value of the collateral; (3) after giving notice, the
fund must be able to terminate the loan at any time; (4) the fund must
receive reasonable interest on the loan or a flat fee from the
borrower, as well as amounts equivalent to any dividends, interest, or
other distributions on the securities loaned and to any increase in
market value; (5) the fund may pay only reasonable custodian fees in
connection with the loan; and (6) the Board of Trustees must be able
to vote proxies on the securities loaned, either by terminating the
loan or by entering into an alternative arrangement with the borrower.
Cash received through loan transactions may be invested in other
eligible securities. Investing this cash subjects that investment, as
well as the security loaned, to market forces (i.e., capital
appreciation or depreciation).
SHORT SALES. A fund may enter into short sales with respect to stocks
underlying its convertible security holdings. For example, if FMR
anticipates a decline in the price of the stock underlying a
convertible security a fund holds, it may sell the stock short. If the
stock price subsequently declines, the proceeds of the short sale
could be expected to offset all or a portion of the effect of the
stock's decline on the value of the convertible security. The fund
currently intends to hedge no more than 15% of its total assets with
short sales on equity securities underlying its convertible security
holdings under normal circumstances.
When a fund enters into a short sale, it will be required to set aside
securities equivalent in kind and amount to those sold short (or
securities convertible or exchangeable into such securities) and will
be required to hold them aside while the short sale is outstanding. A
fund will incur transaction costs, including interest expenses, in
connection with opening, maintaining, and closing short sales.
SOURCES OF CREDIT OR LIQUIDITY SUPPORT. FMR may rely on its evaluation
of the credit of a bank or other entity in determining whether to
purchase a security supported by a letter of credit guarantee, put or
demand feature, insurance or other source of credit or liquidity. In
evaluating the credit of a foreign bank or other foreign entities, FMR
will consider whether adequate public information about the entity is
available and whether the entity may be subject to unfavorable
political or economic developments, currency controls, or other
government restrictions that might affect its ability to honor its
commitment.
SOVEREIGN DEBT OBLIGATIONS are issued or guaranteed by foreign
governments or their agencies, including debt of Latin American
nations or other developing countries. Sovereign debt may be in the
form of conventional securities or other types of debt instruments
such as loans or loan participations. Sovereign debt of developing
countries may involve a high degree of risk, and may be in default or
present the risk of default. Governmental entities responsible for
repayment of the debt may be unable or unwilling to repay principal
and pay interest when due, and may require renegotiation or
rescheduling of debt payments. In addition, prospects for repayment of
principal and payment of interest may depend on political as well as
economic factors. Although some sovereign debt, such as Brady Bonds,
is collateralized by U.S. Government securities, repayment of
principal and payment of interest is not guaranteed by the U.S.
Government.
STRIPPED GOVERNMENT SECURITIES. Stripped Government Securities are
created by separating the income and principal components of a U.S.
Government Security and selling them separately. STRIPS (Separate
Trading of Registered Interest and Principal of Securities) are
created when the coupon payments and the principal payment are
stripped from an outstanding U.S. Treasury security by a Federal
Reserve Bank.
Privately stripped government securities are created when a dealer
deposits a U.S. Treasury security or other U.S. Government security
with a custodian for safekeeping. The custodian issues separate
receipts for the coupon payments and the principal payment, which the
dealer then sells.
SWAP AGREEMENTS can be individually negotiated and structured to
include exposure to a variety of different types of investments or
market factors. Depending on their structure, swap agreements may
increase or decrease a fund's exposure to long- or short-term interest
rates (in the United States or abroad), foreign currency values,
mortgage securities, corporate borrowing rates, or other factors such
as security prices or inflation rates. Swap agreements can take many
different forms and are known by a variety of names.
In a typical cap or floor agreement, one party agrees to make payments
only under specified circumstances, usually in return for payment of a
fee by the other party. For example, the buyer of an interest rate cap
obtains the right to receive payments to the extent that a specified
interest rate exceeds an agreed-upon level, while the seller of an
interest rate floor is obligated to make payments to the extent that a
specified interest rate falls below an agreed-upon level. An interest
rate collar combines elements of buying a cap and selling a floor.
Swap agreements will tend to shift a fund's investment exposure from
one type of investment to another. For example, if the fund agreed to
exchange payments in dollars for payments in foreign currency, the
swap agreement would tend to decrease the fund's exposure to U.S.
interest rates and increase its exposure to foreign currency and
interest rates. Caps and floors have an effect similar to buying or
writing options. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of a fund's investments
and its share price and yield.
The most significant factor in the performance of swap agreements is
the change in the specific interest rate, currency, or other factors
that determine the amounts of payments due to and from a fund. If a
swap agreement calls for payments by the fund, the fund must be
prepared to make such payments when due. In addition, if the
counterparty's creditworthiness declined, the value of a swap
agreement would be likely to decline, potentially resulting in losses.
A fund may be able to eliminate its exposure under a swap agreement
either by assignment or other disposition, or by entering into an
offsetting swap agreement with the same party or a similarly
creditworthy party.
A fund will maintain appropriate liquid assets in a segregated
custodial account to cover its current obligations under swap
agreements. If a fund enters into a swap agreement on a net basis, it
will segregate assets with a daily value at least equal to the excess,
if any, of the fund's accrued obligations under the swap agreement
over the accrued amount the fund is entitled to receive under the
agreement. If a fund enters into a swap agreement on other than a net
basis, it will segregate assets with a value equal to the full amount
of the fund's accrued obligations under the agreement.
VARIABLE AND FLOATING RATE SECURITIES provide for periodic adjustments
in the interest rate paid on the security. Variable rate securities
provide for a specified periodic adjustment in the interest rate,
while floating rate securities have interest rates that change
whenever there is a change in a designated benchmark rate. Some
variable or floating rate securities are structured with put features
that permit holders to demand payment of the unpaid principal balance
plus accrued interest from the issuers or certain financial
intermediaries.
WARRANTS. Warrants are instruments which entitle the holder to buy an
equity security at a specified price for a specific period of time.
Changes in the value of a warrant to not necessarily correspond to
changes in the value of its underlying security. The price of a
warrant may be more volatile than the price of its underlying
security, and a warrant may offer greater potential for capital
appreciation as well as capital loss.
Warrants do not entitle a holder to dividends or voting rights with
respect to the underlying security and do not represent any rights in
the assets of the issuing company. A warrant ceases to have value if
it is not exercised prior to its expiration date. These factors can
make warrants more speculative than other types of investments.
ZERO COUPON BONDS do not make interest payments; instead, they are
sold at a discount from their face value and are redeemed at face
value when they mature. Because zero coupon bonds do not pay current
income, their prices can be more volatile than other types of
fixed-income securities when interest rates change. In calculating a
fund's dividend, a portion of the difference between a zero coupon
bond's purchase price and its face value is considered income.
SPECIAL CONSIDERATIONS REGARDING AFRICA
Africa is a highly diverse and politically unstable continent of over
50 countries and 720 million people. Much of this region has been
beset by civil wars, coups and even genocidal warfare in recent years.
Nevertheless, it is home to an abundance of natural resources,
including natural gas, aluminum, crude oil, copper, iron, bauxite,
cotton, diamonds and timber. Wealthier countries generally have strong
connections to European partners, and evidence of these relationships
is seen in the growing market capitalization and foreign investment.
Economic performance is closely tied to world commodity markets,
particularly oil, and also to agricultural conditions, such as
drought.
Five African countries are among the 20 fastest growing in the world
(Uganda, Ivory Coast, Botswana, Angola and Zimbabwe), with 1996 GDP
growth rates ranging from 5.0% to 6.2%.
Several African countries in the north have substantial oil reserves
and accordingly their economies react strongly to world oil prices.
They share a regional and sometimes religious identification with the
oil producing nations of the Middle East and can be strongly affected
by political and economic developments in those countries. As in the
south, weather conditions also have a strong impact on many of their
natural resources, and, as was the case in 1995, severe drought can
adversely effect economic growth.
Ten African countries have active equity markets (Botswana, Egypt,
Ghana, Kenya, Morocco, Nigeria, South Africa, Tunisia, Zambia,
Zimbabwe). The oldest market, in Egypt, was established in 1883, while
the youngest, in Zambia, was established in 1994. Four additional
markets have been established since 1989, and the mean age for all
equity markets is 40 years old. A total of 1,697 firms are listed on
the respective exchanges. Total market capitalization for these
countries in 1996 was 280 billion, an average increase of 63% over
1995 levels.
SPECIAL CONSIDERATIONS REGARDING CANADA
Canada is one of the richest nations in the world in terms of natural
resources. Within this sector particularly strong commodities are
forest products, mining and metals products, and agricultural products
such as grains. Additionally, energy related products such as oil, gas
and hydroelectricity are important components of their economy.
Accordingly, the Canadian stock market is strongly represented by such
basic materials stocks, and movements in the supply and demand of
industrial materials, agriculture, and energy, both domestically and
internationally, can have a strong effect on market performance.
Canada is a confederation of 10 provinces with a parliamentary system
of government. The area, the world's second largest nation by
landmass, is inhabited by 30.2 million people, most of whom are
decedents of France, the United Kingdom and indigenous peoples. The
country has a work force of over 15 million, spread out over a variety
of industries from trade, manufacturing, and mining to finance,
construction and government. While the country has many institutions
which closely parallel the US, such as a transparent stock market and
similar accounting practices, it differs from the US in that it has an
extensive social welfare system, much more akin to European welfare
states.
The confederated structures combined with recent financial pressure on
the federal government have pushed some provinces, Quebec in
particular, to call for a reevaluation of the legal and financial
relationships between the federal government in Ottawa and the
provinces. This issue came to a head in 1995 with a referendum on
Quebec sovereignty, which was ultimately won by Ottawa
(50.56%-49.44%). The very narrow defeat of the referendum and the
return of Bloc Quebecois to parliament with a lower but still
substantial number of seats indicate that the issue is far from
resolved. Accordingly, a large amount of the government's energy is
spent considering new constitutional arrangements. In the meantime,
markets react to the periodic escalations of separatist calls with
caution.
The current government of the Liberal party was reelected in June 1997
with a clear majority of 155 of the 301 parliamentary seats. This is a
drop in majority status during their previous government, during which
they held 60% of the seats. Opposition is currently divided amongst 4
parties, none of which occupies more than 60 seats. The historical
opposition to the Liberals, the Conservatives, has had to fight back
onto the political stage after being marginalized in the 1993
elections. Reclaiming enough seats in 1997 to be restored to official
status, the Conservatives currently hold 20 seats.
Economically, GDP growth in Canada was 1.5% in 1996, down from 2.3% in
1995. Driving growth was optimism in the government's stability and
fiscal health following the Quebec referendum and the achievement of a
current account surplus (which was subsequently lost, then regained in
early 1997). Particularly strong market performers were financial
services, real estate, utilities and merchandising. Consumer demand
was strong in 1996, financed by borrowing.
The Bank of Canada is fairly independent from the government and has
the latitude to manipulate interest rates to keep inflation within its
self imposed target of less than 3%. The Canadian dollar has benefited
from internal fiscal successes, specifically the balancing of the
current account. Despite the strong link to the US dollar, the Bank of
Canada won't automatically raise rates in response to US hikes.
The US is Canada's biggest trading partner, representing over 75% of
total trade. Strong export industries are energy, mining and forest
products. Canada is the largest energy supplier to the US. Main
imports are industrial machinery and chemicals. The US is also
Canada's largest foreign investor, responsible for 71% of all FDI in
Canada (worth approximately $87 billion). Main targets for investment
are metals and mining industries, energy, and finance.
Recently the Finance Ministry has kept demands for spending on social
programs at bay in the name of eradicating the budget deficit. Once
they feel this is firmly behind them, social spending could possibly
resume.
Privatization programs, meeting gathering opposition from trade
unions, interest groups and the general public, are slowly shrinking,
with many large-scale services remaining public.
There are four primary securities exchanges in Canada: Toronto,
Montreal, Vancouver, and Alberta. The Toronto and Montreal exchanges
list the older, larger, more established firms. Combined, these two
exchanges accounted for 95.2% of the total trading value in 1996. The
Vancouver and Alberta exchanges list smaller, younger start up firms
which tend to represent the natural resource sectors. In 1996 these
two exchanges accounted for 4.8% of the total value of equity trading.
SPECIAL CONSIDERATIONS REGARDING EUROPE
Europe can be divided into 2 categories of market development: the
developed economies of Western Europe1<F4>, and the transition
economies of Eastern Europe2<F3>. As a whole, Europe witnessed a
slowdown in growth in 1996, down to 1.7% from its 1995 level of 2.5%.
Inflation decreased to 4.6%, down from 5.1% in 1995. The weak growth
performance in Germany had an effect on the region as a whole, largely
due to the role Germany plays as a primary trading partner to most
European countries.
In the west, GDP growth averaged 2.5%, unemployment 9.2% and inflation
6.8%3<F2>. Twelve of the countries enjoy both positive trade balances
and positive current accounts balances, while seven do not. Likewise,
in the east growth averaged 3.1%, while inflation averaged 26%4<F1>.
All countries save Bulgaria saw trade and current accounts deficits.
<F1>4. This average inflation rate includes the exceptionally high
rate in Bulgaria (125.0%). Without this outlier, inflation across the
region averaged 17.0%.
<F2>3. This average inflation rate includes the exceptionally high
rate in Turkey (86.0%). Without this outlier, inflation across the
region averaged 2.4%.
<F3>2. Albania, Bulgaria, Croatia, Czech Republic, Estonia, Hungary,
Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia.
<F4>1. Austria, Belgium, Denmark, Finland, France, Germany, Greece,
Iceland, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal,
Spain, Sweden, Switzerland, Turkey, United Kingdom.
Stock market performance in the western countries was strong. Over
9100 firms, both foreign and domestic, are listed on the exchanges
throughout the region. Total market capitalization in the west was
over $9 trillion in 1996. Market capitalization totals grew over their
1995 levels on an average of 31%, with notable performances by Turkey
and Greece, both growing by almost 50%. Trading value turnover
increased in all countries save Austria and Ireland, and the average
increase across the region was 29%.
The European Union (EU) consists of 15 countries of western Europe:
Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland,
Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden and the UK.
The 6 founding countries first formed an economic community in the
1950's to bring down trade barriers such as taxes and quotas, to
eliminate technical restrictions such as special standards and
regulations for foreigners, and coordinate various industrial
policies, such as agriculture. The group has admitted new members in
the 1970's and most recently in 1995 when Austria, Finland and Sweden
joined. By that time the community had changed its legal status to the
European Union (EU) and reaffirmed their goal of creating a single,
unified market that would, at 372.6 million people, be the largest in
the developed world. The notion is to create a union through which
goods, people, and capital could move freely. A second component of
the EU is the creation of a single currency to replace each of the
member countries' domestic currencies. In preparation for the creation
of this currency, to be called the Euro, the Exchange Rate Mechanism
(ERM) was established to keep the various national currencies with a
pre-specified value relative to each other. In 1999 there is planned
the establishment of the Economic and Monetary Union (EMU), as set
forth by the Maastricht Treaty. At this point the Euro will be
introduced and those countries which both qualify and desire to join
will join. Beyond 1999 there will be opportunities for new countries
to join the EMU.
The year 1997 is significant for members of the EU as it is the
initial reference year for evaluating debt levels and deficits within
the criteria set forth by the Maastricht treaty. Specifically, the
Maastricht criteria includes, amongst other indicators, an inflation
rate below 3.3%, a public debt below 60% of GDP, and a deficit of 3%
or less of GDP. Failure to meet the Maastricht levels could delay the
realization of EMU by 1999. Many political battles are currently being
waged over the issue of how much debt and deficit reducing policies
should be undertaken. Pressure to increase fiscal spending is strong,
particularly given the slow growth and high unemployment. Indeed,
unemployment rates, which range from 3.2% in Luxembourg to 22% in
Spain and which average 9.9%, are currently seen as the biggest
threats to EMU.
In 1996, the EU averaged a 6.85% inflation rate, a 75.98% government
debt, and a 3.62% budget deficit. Only three countries meet the
necessary debt levels, four countries meet the required deficit
levels, and only 1 meets both (Luxembourg). Broadly speaking, the
success of left of center parties in recent elections in various
countries is a signal that citizens and at least some politicians are
now more hesitant to move rapidly toward EMU.
Many foreign and domestic firms are establishing themselves or
increasing their activity in Europe in anticipation of the unified
single market. Clear, confident signals of what a diverse,
multi-industrial, unified market under a single currency could look
like have been the impetus for increases in market activity, corporate
development and mergers and acquisitions. A successful EMU could prove
be an engine for sustained growth.
Nevertheless, much discussion of liberalizing the Maastricht criteria
is coming about as 1999 approaches and the prospects of achieving a
successful implementation of the EMU is seen by many as slim. Should
this happen, the political ramifications and the strength of the EMU
would become unpredictable, as many politicians have staked their
credibility on meeting the EMU deadline.
In the meantime, the expansion of the EU to include other countries in
western and Eastern Europe serves as a strong political impetus for
many governments to employ tight fiscal and monetary policies.
Particularly for the eastern European countries, aspirations to join
the EU are likely to push governments to act decisively. At the same
time, there could become an increasingly obvious gap between rich and
poor both within the aspiring countries and also between those
countries who are close to meeting membership criteria and those who
are not. Realigning traditional alliances could result in altering
trading relationships and potentially provoking divisive
socio-economic splits.
The economies of the east are embarking on the transition from
communism at different paces with appropriately different
characteristics. War torn Croatia's economy crossed firmly into
positive growth levels for the first time since it split from
Yugoslavia while the rapidly developing Polish and Czech economies
continued their strong advance, responded to rising levels of
investment, domestic consumption, exchange rate stability, and export
growth. To be sure, one country's recipe for success is unique from
all other countries. Inflation and unemployment levels differ widely,
and the search for a `transition strategy' remains confined to the
dictates of local conditions.
In some countries, such as Albania and Romania, political events and
policy failures severely hindered economic recovery. In others, such
as Serbia, extreme political events prevent the gathering of accurate
macroeconomic data. Politically, what separates these countries from
the rest is not that they have relied on the leadership of former
communists, but that these politicians have continued to reject the
libertarian economic principles that their counterparts in other
eastern countries have been implementing. Part of this rejection
includes the failure to establish an effective and legitimate legal
infrastructure. This position isolates these countries from both the
west and their multinational organizations.
For the more developed eastern economies, partnership with western
institutions such as the EU and NATO serve as incentives to balance
the demands of the citizens with fiscal austerity. As relationships
develop and confidence rises, investment in these economies increases.
In the east established stock markets now exist in Bulgaria, Croatia,
Czech Republic, Hungary, Poland, Slovenia and Slovakia. Over 330 firms
are listed on the various exchanges, and in 1996 total market
capitalization was $38.3 billion. This represents an average increase
of 193% over 1995. Trading value turnover in 1996 went up 287% on
average.
Strong sectors for these economies are mostly industrial such as
automotives and machinery. Also strong are manufacturing sectors,
chemicals and pharmaceuticals. Service industries are not extensively
developed, but financial services are increasing. Natural resources,
particularly oil and minerals, are weak.
As this region continues to develop, it is possible that the massive
drops in output that followed the collapse of the Soviet Union are
well behind and that for many economies a significant corner has been
turned toward positive growth. Economies, which work to tie their
future to an integrated, global economy, are likely to continue to
receive the aid and investment from the west that has helped bring
them along so far. Still, the key component of a successful transition
for all of these countries is political commitment to support the
civil institutions that will ultimately replace the monolithic welfare
state. With 113 million people, diverse industry and an well-educated
work force, Eastern Europe is a promising market.
SPECIAL CONSIDERATIONS REGARDING JAPAN, THE PACIFIC BASIN, AND
SOUTHEAST ASIA
Asia has undergone an impressive economic transformation in the past
decade. Many developing economies, utilizing massive foreign
investments, established themselves as inexpensive producers of
manufactured and re-manufactured consumer goods for export. As
household incomes rose, birth was given to rising middle classes,
stimulating domestic consumption. More recently, large projects in
infrastructure and energy resource development have been undertaken,
again utilizing cheap labor, foreign investment, and a business
friendly regulatory environment. During the course of development,
governments, which are democratic, at least in a formal sense, fought
to maintain the stability and control necessary to attract investment
and provide labor. Subsequently, Asian countries today are coming
under increasing, if inconsistent, pressure from western governments
regarding human rights practices.
GDP growth in Asia increased in 1996 to 4.9% over its 1995 level of
3.2%. It is the fastest growing region of the world, with China
leading the way at 9.1%. Of the 20 fastest growing economies in the
world, half of them are in Asia. Inflation in 1996 was reduced to
2.6%, down from 3.0% the previous year. Nevertheless it is a
significant concern given the areas high levels of domestic
consumption and capital inflows.
Manufacturing exports declined significantly in 1996, due to drops in
demand, increased competition, and also strong US dollar performance.
This is particularly true of electronics, a critical industry for
several Asian economies. Declines in exports reveal how much of the
recent growth in these countries is dependent on their trading
partners. Many Asian exports are priced in dollars, while the majority
of its imports are paid for in local currencies. A stable exchange
rate between the dollar and other Asian currencies is important to
Asian trade balances.
Despite the impressive economic growth experienced by Asia's emerging
economies, currency and economic concerns have recently roiled these
markets. Over the summer of 1997, a plunge in Thailand's currency set
off a wave of currency depreciations throughout South and Southeast
Asia. The Thai crisis was brought on by the country's failure to take
steps to curb its current-account deficit, reduce short-term foreign
borrowing and strengthen its troubled banking industry, which was
burdened by speculative property loans. Most of the area's stock
markets tumbled in reaction to these events. Investors were heavy
sellers as they became increasingly concerned that other countries in
the region, faced with similar problems, would have to allow their
currencies to weaken further or take steps that would choke off
economic growth and erode company profits. For U.S. investors, the
impact of the market declines were further exacerbated by the effect
of the decline in the value of their local currencies versus the U.S.
dollar.
The same kinds of concerns that affected Thailand and other Southeast
Asian countries subsequently spread to North Asia. To widely varying
degrees, Taiwan, South Korea, and Hong Kong all faced related currency
and/or equity market declines. Of these, the South Korean situation
was the most severe. Revelations of this country's poor lending
practices and high levels of corporate indebtedness led to steep,
extended declines in the value of the won, high interest rates, and
tumbling equity markets. Due to continued weakness in the Japanese
economy combined with the reliance of Asian economies on intra-Asian
trade and capital flows, many experts believed that the entire
region's economic growth would slow in the near term.
JAPAN. A country of 126 million with a labor force of 64 million
people, Japan is renowned as the preeminent economic miracle of the
post war era. Fueled by public investment, protectionist trade
policies, and innovative management styles, the Japanese economy has
transformed itself since the war into the world's second largest
economy. An island nation with limited natural resources, Japan has
developed a strong heavy industrial sector and is highly dependent on
international trade. Strong domestic industries are automotive,
electronics, and metals. Needed imports revolve around raw materials
such as oil, forest products, and iron ore. Subsequently, Japan is
sensitive to fluctuations in commodity prices. With only 19% of its
land suitable for cultivation, the agricultural industry is small and
largely protected. While the U.S. is Japan's largest single trading
partner, close to half of Japan's trade is conducted with developing
nations, almost all of which are in southeast Asia. Investment
patterns generally mirror these trade relationships. Japan has over
$100 billion of direct investment in the United States.
The Tokyo Stock Exchange (TSE) is the largest of eight exchanges in
Japan. The exchanges divide the market for domestic stocks into two
sections, with larger companies assigned to the first section and
newly listed or smaller companies assigned to the second. In 1996,
1,833 firms were listed on the TSE, 96% of which were domestic. Some
believe that the TSE has a tendency to be strongly influenced by the
performance of a small circle of large cap firms that dominate the
market. The two key indexes are the Tokyo Stock Price Index (TOPIX)
and the Nikkei. In 1996, TSE performance was lackluster, with the
TOPIX down about 7%.
CHINA AND HONG KONG. China is one of the world's last remaining
communist systems, and the only one that appears poised to endure due
to its measured embrace of capitalist institutions. It is the world's
most populous nation, with 1.3 billion people creating a work force of
630 million. Today's Chinese economy, roughly separated between the
largely agricultural interior provinces and the more industrialized
coastal and southern provinces, has its roots in the reforms of the
recently deceased communist leader Deng Xiaoping. Originally an
orthodox communist system, China undertook economic reforms in 1978 by
providing broad autonomy to certain industries and establishing
special economic zones (SEZ's) to attract foreign investment (FDI).
Attracted to low labor costs and favorable government policies,
investment flowed from many sources, with Hong Kong, Taiwan, and the
United States leading the way. Most of the investment, totaling $37
billion by the end of 1995, has located in the southern provinces,
establishing manufacturing facilities to process goods for re-export.
The result has been a steadily high level of real GDP growth,
averaging 11.35% per year so far this decade. With this growth has
come a doubling of total consumption, a tripling of real incomes for
many workers, and a reduction in the number of people living in
absolute poverty from 270 to 100 million. Today there is a market of
more that 80 million who are now able to afford middle class western
goods.
China has two stock exchanges that are set up to accommodate foreign
investment, in Shenzhen and in Shanghai. In both cases, foreign
trading is limited to a special class of shares (Class B) which was
created for that purpose. Only foreign investors may own Class B
shares, but the government must approve sales of Class B shares among
foreign investors. As of December 1996, there were 42 companies with
Class B shares on the two exchanges, for a total Class B market
capitalization of U.S. $4.7 billion.
AUSTRALIA. Australia is a 3 million sq. mile continent (about the size
of the 48 continental United States) with a predominantly European
ethnic population of 18.2 million people. A member of the British
Commonwealth, its government is a democratic, federal-state system.
The country has a western style capitalist economy with a work force
of 9.2 million that is concentrated in services, mining, and
agriculture. Australia's natural resources are bauxite, coal, iron
ore, copper, tin, silver, uranium, nickel, tungsten, mineral sands,
lead, zinc, diamonds, natural gas, and oil. Primary trading partners
are the US, Japan, South Korea, New Zealand, UK and Germany. Imports
revolve around machinery and high technology equipment, while exports
are heavy in the agricultural and mineral products, making them
sensitive to world commodity prices.
Historically, Australia's strong points were its agricultural and
mining sectors. While this is still true to a large extent, the
government managed to boost its manufacturing sector by undertaking
protective measures in the 1970's and early 1980's. These have
subsequently been liberalized in an effort to kindle growth in the
industrial sector. Today's economy is more diverse, as manufactures'
share of total exports is increasing. Part of the government's effort
to make manufacturing more competitive was a floating of the
Australian dollar in 1984, precipitating an initial depreciation, and
a campaign to reduce taxes. Such reforms have attracted foreign
investment, particularly in the transport and manufacturing sectors.
Restrictions do exist on investment in certain areas as media, mining
and some real estate. In 1995, cumulative US investment in Australia
totaled more than $65 billion and accounted for 21% of total foreign
investment.
GDP growth reached 3.6% in 1996; a steady increase over the days of
the early 1990's which saw a recession. The recession was followed in
1992 by a jump in growth (from 0.4-2.8%), but this initial boost seems
to have leveled off. The election of a new Liberal/National coalition
government after 13 years of Labor rule has brought with it new
efforts to cut public spending and eliminate the projected $6 billion.
budget deficit. This step, coupled with a steady unemployment rate
(8%), could slow down the recent ascent in growth.
Australia is fully integrated into the world economy, participating in
GATT and also more regional trade associations such as the Asia and
the Pacific Economic Cooperation (APEC) forum. Future growth could
result from their movement towards regional economic liberalization,
but a countervailing force is the reality that some export markets in
Europe could be lost to continued European economic integration.
INDONESIA. Indonesia is a country that encompasses over 17,000 islands
on which live 195 million people. It is a mixed economy that balances
free enterprise with significant government intervention. Deregulation
policies, diversification of strong domestic sectors, and investment
in infrastructure projects have all contributed to high levels of
growth since the late 1980's. Indonesia's economy grew at 7.1% in
1996, the exact average if its performance for the current decade.
Growth in the 1990's has been fairly steady, hovering between 6.5-7.5%
for the most part, peaking at 8.1% in 1995. Moderate growth in
investment, including public investment, and also in import growth,
helped to slowdown GDP growth. Growth has been accompanied by
moderately high levels of inflation, ranging from the recent high of
9.7% in 1993 to a low of 7.1%, as witnessed last year.
Indonesia is currently undergoing a diversification of the core of its
economy. No longer strictly revolving around oil and textiles, it now
gaining strength in high technology manufactures, such as electronics.
Indonesia consistently runs a positive trade balance. Strong export
performers are oil, gas, and textiles and apparel. Oil, once
responsible for 80% of export revenues, now accounts for only 25%, an
indication of how far other (mostly manufacturing and apparel) sectors
have developed. Main imports are raw materials and capital goods.
In 1994 the country underwent deregulation measures which further
boosted investment. By 1996, FDI levels dropped from the record high
in 1995, and the trend was away from large projects including
infrastructure to smaller more manageable projects. Many consider this
a reflection of a desire to avoid the notoriously nepotism ridden
bureaucracy.
The Indonesian government is strongly authoritarian. Treatment of
political opponents, workers and ethnic minorities has put Indonesia
in the world spotlight with criticism of its human rights practices.
One source of outspoken popular discontent is the glaring discrepancy
in income distribution, particularly across ethnic lines. World
attention to the problems in Indonesia has given support to the
various causes, but it does not seem to have had much impact on the
government. Efforts to impose sanctions on the country by both federal
and state level politicians in the US have so far proven unsuccessful,
but are likely to continue to persist.
Politically, the ruling party, Golkar, faces frequent challenges from
unofficially sanctioned opposition parties, but these efforts are
effectively marginalized. The key political question in Indonesia is
who will replace the aging ruler, President Suharto who, at 76, has
been the county's only leader for over 30 years. His long tenure and
the country's nascent democratic institutions leave the question of
proper succession open. During his career he has amassed support from
a directly appointed insider bureaucracy of political and business
elites which features immediate members of his family. As well, he has
relied strongly upon the army to provide the force necessary to
contain social unrest. Which amongst these two institutions will
emerge to replace Suharto is far from clear, and the surrounding
intrigue could lead to some instability. As economic policies have
been crafted to benefit Suharto's supporters in the business
community, any deviation from Suharto's position would likely impact
the economy. Additionally, a key ingredient to Indonesia's success has
been their ability to contain social unrest. Maintaining this control,
especially in the face of recently escalated tensions and political
uncertainty, is an important anchor for economic performance. Proof of
this is the Jakarta Stock Exchange's volatile reaction to riots in
July 1995.
MALAYSIA. 1996 saw Malaysia's GDP growth slow to 8.3%, down from over
9% in 1994 and 1995. Inflation has been kept relatively low at 3.8%.
Performance in 1996 avoided the economy's potential overheating as
export growth, investment, and consumption all slowed. This helped to
bring the current account deficit down by $1.7 billion to settle at
approximately 6.0% of GDP.
A large part of Malaysia's recent growth is due to its manufacturing
industries, particularly electronics and especially semiconductors.
This has led to an increased reliance on imports; thus the economy is
sensitive to shifts in foreign production and demand. This is
particularly true regarding its main trading partners: the US, Japan,
and Singapore. Such shifts were partly responsible for the slowdown in
1996. In addition, monetary policies to stem the threat of overheating
were evident, but the country still needs massive public and private
investment to finance several large infrastructure projects.
Government industrial policy seeks investment to create more value
added high technology manufacturing and service sectors in order to
decrease the emphasis on low skilled manufacturing. Already US
investors have invested over $9 billion, and most of this is in
electronics and energy projects.
Unemployment remains extremely low (2.6%) and labor for completing the
various projects is becoming costly, especially as industry has to go
abroad to search for higher skilled workers. Wages have soared so high
that Malaysia no longer qualifies for the special trading benefits
that the US and the EU bestow upon developing nations. This could hurt
exports. A further catch is that rapidly increasing wages could cause
inflationary pressures, yet a shortage of labor could threaten
development.
The political situation in Malaysia is stable and could possibly
remain so up to and including the next election in the year 2000.
SINGAPORE. Since achieving independence from the British in 1965,
Singapore has repeatedly elected the People's Action Party (PAP) as
their government. It is a party that is so consistent it has only
offered up two prime ministers in this 32-year period. Elections in
January 1997 returned the PAP to power, signaling satisfaction with
their policy of close coordination with the private sector to
stimulate investment. Typical policies include selective tax
incentives, subsidies for R&D, and joint ventures with private firms.
While the combination of consistent leadership and interventionist
policies is sometimes seen as impeding civil liberties and
laissez-faire economics, it has produced an attractive investment
environment.
The Singapore economy is almost devoid of agriculture and natural
resources, not surprising given the island nation's geographic size.
Its strongest sector is manufacturing, particularly of electronics,
machinery and petroleum and chemical products. They produce 45% of the
world's computer disk drives. Major trading partners are Japan,
Malaysia and the US.
The economic situation in Singapore registered a passable year in
1996. The regional trend toward slowed electronics exports made clear
the country's strong reliance on this sector. GDP growth dropped from
8.8% to 6.5%, while inflation remained low (1.4%) and the current
account balance maintained its large surplus. Property values have
gone up recently, partially in response to uncertainty surrounding
Hong Kong. Interest rates are consistently low, and wages high,
leaving some at a loss to explain the repeatedly low inflation rate.
SOUTH ASIA. Although India's economy has grown at an average rate of
7% over the past three years, growth has slowed to about 6% during
1997. Economic growth, which had been fueled by strong industrial and
export sectors, slowed along with growth in these sectors. It is
uncertain whether India will be able to sustain the high growth rates
it experienced through 1996. Subsidies amount to almost 15% of GDP,
while agriculture accounts for about 25%. In 1997, annual inflation
has been approximately 3.8% down from about 6.6% the previous year.
During 1997, the current account deficit has been roughly 1.2% of GDP,
down from 1.5% in 1996. The exchange rate has been gradually devalued
in the 1980's and 1990's, and could be devalued further. Beginning in
1992, industry, financial markets, and the country's trade have been
gradually liberalized. Fifty-five percent of India's population is
illiterate, roughly half live in poverty, and unemployment remains
high.
Since the dissolution of the Narasimha Rao government in early 1996,
India has experienced several weak, coalition governments that have
been unable to consolidate their position for an extended period.
Partially as a result, economic reforms have proceeded slowly through
gradually. Future changes in government could weaken or set back the
reform process.
India does not enjoy trouble-free relations with its neighbors. India
and Pakistan have fought two wars since their independence in 1947 and
have yet to resolve a continuing dispute over the status of the
norther Indian state of Kashmir. Various Kashmiri separatist groups,
Indian, and Pakistani military have been involved in armed conflict
within the state. Neither India nor Pakistan have signed the
Comprehensive Nuclear Test Ban Treaty, which prohibits nuclear weapons
testing. A border dispute with China and questions over the
involvement of elements within India in the internal affairs of Sri
Lanka also affect India's relations with these countries.
The other, smaller South Asian countries of Pakistan, Bangladesh, and
Sri Lanka share with India the challenges of reducing poverty and
illiteracy and improving infrastructure and economic growth. While
each of these countries has taken steps to liberalize their economies,
their economies are far from mature, as are their legal and regulatory
systems. In addition, because they have small and relatively less
diversified economies and public markets, they are susceptible to
external economic shocks, which may result in currency declines. Sri
Lanka has been plagued by internal challenges to its security, while
Pakistan has faced significant political infighting and instability.
Bangladesh's largely agricultural economy is heavily dependent on the
severity of the monsoons.
SOUTH KOREA. South Korea is one of the more spectacular economic
stories of the post war period. Coming out of a civil war in the
mid-1950's the country found itself with a destroyed economy and
boundaries that excluded most of the peninsula's mineral and
industrial resources. It proceeded over the next 40 years to create a
society that includes a highly skilled and educated labor force and an
economy that exploited the large amounts of foreign aid given to it by
the US and other countries. Exports of labor intensive products such
as textile initially drove the economy, to be replaced later by heavy
industries such as automobiles.
Hostile relations with North Korea dictate large expenditures on the
military, and political uncertainty and potential famine in the north
has put the south on high alert. Any kind of significant military
effort could have multiple effects, both positive and negative, on the
economy. South Korea's lack of natural resources put a premium on
imported energy products, making the economy very sensitive to oil
prices.
Since 1991, GDP growth has fluctuated widely between 5% and 9%,
settling down at 6.8% last year. Currently the labor market is in need
of restructuring, and its rigidity has hurt performance. Relations
between labor and the large conglomerates, or Chaebols, could prove to
be a significant influence on future growth. Inflation in the same
period has been consistently dropping, save a brief rise in 1994, and
finished the year at 4.5%. The country consistently runs trade
deficits, and the current account deficit widened sharply in 1996,
more than doubling to $19.3 billion. South Korea's strong domestic
sectors are electronics, textiles and industrial machinery. Exports
revolve around electronics, textiles, automobiles, steel and footwear,
while imports focus on oil, food, chemicals and metals.
The stock market (Korea Stock Exchange) is currently undergoing
liberalization to include more foreign participation, which was only
first allowed in 1992, but the bond market remains off limits until
1999. Liberalization is in response to the KSE 1996 performance, which
was down 18%. While the number of listed companies increased by 39 in
1996, total market capitalization fell 24% from its 1995 level.
THAILAND. The political situation in Thailand is tenuous. Democracy
has a short history in the country, and power is alternatively
obtained by the military, a non-elected bureaucratic elite, and
democratically elected officials. The frequent transfers of power have
generally gone without divisive, bloody conflicts, but there are
bitter differences between the military and the political parties.
Free elections in 1992 and again in 1995 have produced non-military
democratic leaders from different parties, a healthy sign of party
competition. While democratic institutions are stabilizing, the
current government is under increasing pressure due to recent poor
economic performance.
The Thai economy has witnessed a fundamental transition in recent
years. Traditionally it was a strong producer of textiles, minerals
and agricultural products, but more recently it has tried to build
high tech export industries. This proved particularly fortuitous in
the mid 1990's when flooding wiped out much of their traditional
exports, but the newer industries remained strong, keeping the growth
rate above 8%. (This level had been achieved through the 1990's,
giving the economy a name as one of the fastest growing in the
region.) The government has also taken steps toward reducing the
influence of central planning, opening its market to foreigners and
abandoning five-year plans. This restructuring is still underway, and
the change can cause difficulty at times.
GDP growth slowed a bit last year to 7.2%, down from 8.6% in 1995. The
current account deficit was 7.9% of GDP, and inflation was 5.8%, both
considered high but steady and controllable results in line with
recent years' performance. One cause for the slowdown was a decline in
export growth as its manufacturing industry faces stiff competition
from low priced competitors and its agriculture suffers drops in
production. In 1996, Thailand's currency, the baht, was linked to a US
dollar dominated basket, and monetary policy had remained tight to
keep that link strong and avoid inflationary pressures.
The situation changed in early 1997, however, with the revelation of
many bad bank loans and a bubbling of property prices due to
over-investment. Many companies, faced with slowing exports, stopped
servicing their debts. Many other firms have stayed alive only with
infusions of public cash, and the government has been slow to let many
property laden financial firms fail. The stock market has reacted
strongly, dropping to new lows for the decade. Reluctant to float the
baht, indeed promising that it wouldn't, the government relented in
early July hoping to revive export and stock market growth. The
subsequent devaluation (approximately 20% against the dollar in the
first month) led to the need for a $16 billion loan coordinated by the
IMF to shore up foreign reserves. Most of the loan came from
neighboring countries led by Japan, indicating their desire to both
protect their own investments in Thailand, and also mitigate the
effect of the devaluation on their home currencies.
The total impact of the entire situation is negative, particularly on
inflation, unemployment and foreign debt. Significant turnover and a
major gamble on the currency has put the government in a precarious
position, especially given the fact that it is a six party coalition.
Dissatisfaction amongst the military, always a political factor, is
high.
EMERGING MARKETS: ASIA
MARKET CAPITALIZATION IN U.S. DOLLARS
DECEMBER 1996
$ BILLIONS
INDIA 132.97
INDONESIA 91.00
KOREA 138.91
MALAYSIA 322.00
PAKISTAN 11.75
PHILIPPINES 80.69
SINGAPORE 182.00
TAIWAN 274.00
THAILAND 95.92
Source: The Economist. The LGT Guide to World Equity Markets 1997.
REAL GDP ANNUAL RATE OF GROWTH
(ANNUAL % CHANGE)
1996
CHINA 9.1%
HONG KONG 4.3%
INDIA 5.7%
INDONESIA 7.1%
JAPAN 3.9%
KOREA 6.8%
MALAYSIA 8.3%
PHILIPPINES 5.5%
SINGAPORE 6.5%
TAIWAN 5.8%
THAILAND 7.2%
Source: The Economist. The LGT Guide to World Equity Markets 1997.
For national stock market index performance, please see the section on
Performance beginning on page .
SPECIAL CONSIDERATIONS REGARDING LATIN AMERICA
Latin America represents one of the world's more advanced emerging
markets. With a total population of 427 million and its abundant
natural resources, the area is a prime trading partner for the US and
Canada. In Latin America exports represent, on average, 16.6% of GDP.
Strong export sectors are petroleum, manufactured goods, agricultural
commodities such as coffee and beef, and metals and mining products.
GDP growth in Latin America as a region was 3.4% in 1996, up from 0.1%
in 1995. Recognizing the important role of international trade as a
component of GDP, the countries of Latin America have formed strong
regional trade organizations, notably MERCOSUR. Talk of extending
NAFTA down through Latin America indicates some desire to tie the
economies even closer to those of the north.
Politically, Latin American countries generally have strong
presidential systems closely modeled on the US. Their transition to
democracy, largely complete in most countries, nevertheless allows for
a considerable military influence, reflecting the strong authoritarian
leanings of a large portion of the population. The countries all enjoy
good relations with the United States, with whom they cooperate on a
range of non-economic matters, such as preservation of the environment
and drug control. Monetarist minded governments were responsible for
the successful staving off of contagion from the recent currency
crisis in Mexico, increasing their stature in the eyes of most capital
market participants.
ARGENTINA. Prior to 1989, Argentine politics were characterized by
populist leaders, sometimes democratically elected and sometimes not,
who ruled with the overt support of the military. Coups and outright
military rule were not uncommon. Economic polices were highly
protectionist, with significant barriers and restrictions on foreign
trade and investment. Markets were highly regulated and the state was
heavily involved in many industries. Inflation was routinely high and
growth stagnant.
President Carlos Menem was first elected to office in 1989 and
undertook a program of deregulation, liberalization and macroeconomic
reform. The results have been positive. Growth in 1996 was 4.4%, up
from -4.4% in 1995. Argentina's growth, averaging over 7% from 1991 to
1994, has been driven primarily by domestic consumption. In the wake
of the Mexican currency crisis, however, banking liquidity has been
restrained. While deposits have increased in reaction to peso
stabilization, lending has not, putting downward pressure on consumer
spending. The positive effect is that inflation, well over 150% at the
beginning of the decade, was 0.4% in 1996. Still troublesome for
Argentina is unemployment, quite high at 17%. Menem's economic
liberalization policies have succeeded in attracting foreign
investment. From the US alone, approximately $10 billion was invested
by 1996. Investors have been most attracted to the telecommunications,
finance, and energy sectors.
Argentina enjoys a positive trade balance. The export economy is
heavily weighted toward agriculture, which represents 60% of the total
value of all Argentine exports. Primary products are livestock,
oilseeds, and grain. Argentina's single biggest trading partner is
Brazil, and the US is the second. Primary imports are machinery,
vehicles and chemicals.
The resignation of Economy Minister Domingo Cavallo in July 1996 was
initially greeted with skepticism from the markets. Cavallo was widely
recognized as the man responsible for ensuring the convertibility of
the peso by pegging it to the dollar, a move which saved Argentina
from the hyperinflation and continuous drops in output which could
have followed from the Mexican crisis in 1994. Confidence was quickly
restored, however, with the appointment of Roque Fernandez, who
promptly reaffirmed commitment to Cavallo's plan and introduced
further measures for fiscal stability.
The central bank's main priority is maintaining convertibility against
the dollar. It is very active in the foreign exchange market and even
assists local firms with liquidity problems.
Legislative elections to be held in October, 1997 could prove to be
critical for Menem, who still has an extensive economic reform agenda
which includes further privatizations, labor market reforms and a
revamped tax policy. Failure to retain a friendly majority in the
Lower House of congress could deprive Menem of the support he needs to
pass such reforms.
The next presidential election is due in 1999. In accordance with the
constitution, Menem, a member of the Peronist party, can not seek a
third consecutive term. The next election is likely to present a third
candidate to the voters beyond the traditional contestants from the
Peronist and Radical parties. Frepaso, a center-left alliance, first
emerged in the 1995 elections and by 1999 could build itself up enough
to promote a viable alternative to the older parties. It is uncertain
how policies would be effected by the systemic change from a
predominantly two party system to a three way game.
BRAZIL. Brazil is the largest country in South America and is home to
vast amounts of natural resources. Its 155 million people are
descendants from indigenous tribes and European immigrants. They live
in diverse socio-economic conditions, from the urban cities of Sao
Paolo to the undeveloped trading posts of the distant regions.
Industrial development has been concentrated in specific areas. The
disenfranchised population is quite large and is a source of many of
Brazil's social problems.
The Brazilian economy is currently undergoing extensive reforms,
stemming from a 1994 effort to stabilize the currency called the Real
Plan. With the aim of curbing inflation, a new currency, the Real, was
introduced and supported via a floating exchange band. The plan has
stabilized the exchange rate and controlled inflation, which was
reeling out of control in 1994 at 2,700%. Inflation in 1995 dropped to
81%, and fell even further in 1996, settling at 18.7%. At the same
time, however, the Real Plan has sent the trade and current account
balances into a deficit. The current account soared from $1 billion to
$18 billion, and increased further in 1996 to $27 billion.
Other objectives of the administration of the current President,
Fernando Henrique Cardoso, are trade liberalization and privatization,
but these efforts are sporadic and often stalled by special interests
in the legislature. Some privatization efforts are performing well,
particularly in the utilities sector. Utilities and telecommunications
have been key draws for foreign investment, and foreign direct
investment (FDI) is coming in at record levels. In 1996 the country
received over $9.5 billion, with $2.4 billion coming from the US.
Still, there are restrictions against investments in certain
industries, such as metals and mining.
Similarly with trade liberalization, the government increased import
restrictions in an effort to shrink the trade deficit and slow the
growth of import consumption. This consumption was a main contributor
to GDP growth in 1996, though growth was down 1% to 3.2%.
Traditionally a primarily agricultural economy, a strong industrial
sector has developed which produces metals, chemical, and manufactured
consumer goods. Agriculture still plays a significant role, however,
representing 11% of the GDP, 40% of exports and employing over 35% of
the work force. Primary agricultural products are grains, coffee, and
cattle. Regarding energy and utilities, the country is a leading
producer of hydroelectric power, but they are dependent on imports for
oil.
Presidential elections will be held in 1998. President Cardoso hopes
to stand for re-election but currently is unable to, given a
constitutional provision on term limits. Efforts to gather
congressional support for constitutional reform, allowing Cardoso to
stand, could result in a great deal of special interest concessions,
translating into more public spending and horse-trading over fiscal
reforms.
CHILE. Chile is a transition economy which has recently made great
strides toward putting its authoritarian, statist, past behind itself.
In all of Latin America, it is the country with the highest rates of
growth. Averaging 7.3% so far this decade, GDP grew at 6.7% in 1996,
down from 8.5% the previous year. Inflation has been steadily
declining and is down over 15% in the last five years. Inflation in
1996 was 7.4%, a 0.8% drop over 1995. Unemployment in 1996 was 6.6%,
particularly low for the Latin American region. Despite the fact that
market capitalization fell $8 billion in 1996 to $64 billion, Chile is
still considered to have one of the best performing stock markets in
the region.
Chile has a strong, interventionist central bank which focuses more on
the investment community than it does on the government. Active steps
are taken to control demand and inflation. One example is the practice
of restricting short-term flows of foreign capital through the
country.
Interest rate hikes in 1996 are said to have restrained growth, but
other factors include unfavorable weather conditions that hurt
agricultural and hydroelectric power production. Mining and metals
were strong performers in 1996. Of particular note was the strong
showing of the country's copper industry.
Eduardo Frei is President and is due for reelection in 1999. President
Frei has been trying to decentralize the government but encounters
stiff opposition from the powerful trade unions. Also high on Frei's
agenda is tax reform.
There is a considerable military component to political life in Chile.
In the legislature there is strong representation by parties with
authoritarian views. As part of the negotiated settlement with coup
leader General Augusto Pinochet in 1990, the army chain of command
ends with General Pinochet, not an elected official. Furthermore,
certain seats are reserved in the Senate for appointed officials from
the military. Pinochet must resign in 1998, and shortly thereafter the
reserved Senate seats will fall open to election. There are
constitutional reforms currently in progress further diminishing the
role and influence of the military, and thus the political transition
is still underway. A successful outcome requires that the military
acquiesce as it is stripped of its political powers.
MEXICO. The Mexican economy recovered fairly well in 1996 from the
currency crisis of December 1994 thanks in large part to growth in
exports, peso stabilization, and massive financial assistance from the
United States. Growth rebounded from its negative position of -6.2% in
1995 to reach 5.1% in 1996. The peso devaluation of 1994, prompted by
mounting foreign debt, was effective in reducing the current account
deficit from $30 billion to just over $1 billion, and it also pushed
Mexico into a positive trade balance. The current account deficit
increased in 1996 to $3.7 billion, but the trade surplus was
maintained. Inflation jumped from 7% to over 50% in the year after the
crisis, but was controlled in 1996, registering a drop to 28%.
Inflation is the chief concern of the central bank, which takes active
measures such as the setting of wage ceilings and manipulation of
interest rates to control it. Domestic consumption is sluggish and has
yet to return to pre-1994 levels, also contributing to the containment
inflation.
The Mexican economy is very strong in manufacturing and natural
resources, specifically oil. Manufacturing alone counts for 22% of the
Mexican GDP and 21% of all urban employment. The economy is also very
closely tied to the US, which is responsible for 60% of all foreign
investment and with whom it conducts over 75% of all trade. Trade
pacts such as the North American Free Trade Agreement further
integrate the economies, giving the US strong incentives to provide
assistance in times of crisis. NAFTA also enabled the recent recovery,
given the ease with which it allows increases in exports and
investment. The Mexican stock market listed 193 companies with total
capitalization of $106 billion in 1996, a 17% rise over 1995.
Internally, the various people of the Mexican states have recently
experienced a great deal of dissatisfaction with their relationship to
the federal government. Most notably, in Chiapas there have been armed
uprisings by indigenous groups demanding further autonomy. While the
rebellions have not strongly shaken financial markets, they serve as a
reminder of the diversity of Mexico, of the vast socio-economic gaps
between various peoples, and of the potential for such groups to
demand the attention of both their government and the world.
Politically, the landscape changed fundamentally in July 1997. The
defeat of candidates from the Institutional Revolutionary Party (PRI)
in legislative elections signaled the end of decades of one party
rule. Citizens now have the confidence that their votes count and that
the PRI is no longer invincible. Winning every presidential election
since its founding in 1929, the PRI was the country's monolithic
political machine, maintaining power through rigged elections and
ruling in an environment rife with intrigue and corruption. Internal
pressures including armed rebellion from domestic interest groups,
extensive crises and scandals caused by intra-party rivalries and
corruption, and deteriorating relationships with foreign countries
over financial mismanagement and mutual social problems all
contributed to the establishment of fully free and unfettered
elections. The response from the Mexican people was clear. Though they
took the most votes (39%) for the 500-member Lower House of congress,
the PRI has lost their majority, and the President is now forced to
accommodate the interests of the opposition parties. Market reaction
to the new Mexican political world was positive. The IPC index,
consisting of 35 of the most representative stocks on the Mexican
Stock Exchange, rose 3.25% the day after the election. Further
financial implications of the new landscape are as yet uncertain.
Relevant considerations are the effect of the new configurations on
government consensus and policy making, the demands of newly empowered
groups on economic and other resources, the balance of power between
the executive and the legislature, and the ability of the government
to maintain law and order.
EMERGING MARKETS: LATIN AMERICA
MARKET CAPITALIZATION IN U.S. DOLLARS
DECEMBER 1996
$ BILLIONS:
ARGENTINA 44.7
BRAZIL 429.3
CHILE 65.6
MEXICO 107.0
PERU 13.8
VENEZUELA 10.0
Source: The Economist, The LGT Guide to World Equity Markets, 1997.
For national stock market index performance, please see the section on
Performance beginning on page .
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed
on behalf of the fund by FMR pursuant to authority contained in the
management contract. If FMR grants investment management authority to
the sub-advisers (see the section entitled "Management Contract"), the
sub-advisers are authorized to place orders for the purchase and sale
of portfolio securities, and will do so in accordance with the
policies described below. FMR is also responsible for the placement of
transaction orders for other investment companies and accounts for
which it or its affiliates act as investment adviser. In selecting
broker-dealers, subject to applicable limitations of the federal
securities laws, FMR considers various relevant factors, including,
but not limited to: the size and type of the transaction; the nature
and character of the markets for the security to be purchased or sold;
the execution efficiency, settlement capability, and financial
condition of the broker-dealer firm; the broker-dealer's execution
services rendered on a continuing basis; and the reasonableness of any
commissions. Commissions for investments traded on foreign exchanges
will be higher than for investments traded on U.S. exchanges and may
not be subject to negotiation.
The fund may execute portfolio transactions with broker-dealers who
provide research and execution services to the fund or other accounts
over which FMR or its affiliates exercise investment discretion. Such
services may include advice concerning the value of securities; the
advisability of investing in, purchasing, or selling securities; and
the availability of securities or the purchasers or sellers of
securities. In addition, such broker-dealers may furnish analyses and
reports concerning issuers, industries, securities, economic factors
and trends, portfolio strategy, and performance of accounts; effect
securities transactions, and perform functions incidental thereto
(such as clearance and settlement). The selection of such
broker-dealers generally is made by FMR (to the extent possible
consistent with execution considerations) based upon the quality of
research and execution services provided.
The receipt of research from broker-dealers that execute transactions
on behalf of the fund may be useful to FMR in rendering investment
management services to the fund or its other clients, and conversely,
such research provided by broker-dealers who have executed transaction
orders on behalf of other FMR clients may be useful to FMR in carrying
out its obligations to the fund. The receipt of such research has not
reduced FMR's normal independent research activities; however, it
enables FMR to avoid the additional expenses that could be incurred if
FMR tried to develop comparable information through its own efforts.
Subject to applicable limitations of the federal securities laws,
broker-dealers may receive commissions for agency transactions that
are in excess of the amount of commissions charged by other
broker-dealers in recognition of their research and execution
services. In order to cause the fund to pay such higher commissions,
FMR must determine in good faith that such commissions are reasonable
in relation to the value of the brokerage and research services
provided by such executing broker-dealers, viewed in terms of a
particular transaction or FMR's overall responsibilities to the fund
and its other clients. In reaching this determination, FMR will not
attempt to place a specific dollar value on the brokerage and research
services provided, or to determine what portion of the compensation
should be related to those services.
FMR is authorized to use research services provided by and to place
portfolio transactions with brokerage firms that have provided
assistance in the distribution of shares of the fund or shares of
other Fidelity funds to the extent permitted by law. FMR may use
research services provided by and place agency transactions with
National Financial Services Corporation (NFSC) and Fidelity Brokerage
Services, (Japan), LLC (FBSJ), indirect subsidiaries of FMR Corp., if
the commissions are fair, reasonable, and comparable to commissions
charged by non-affiliated, qualified brokerage firms for similar
services. Prior to December 9, 1997, FMR used research services
provided by and placed agency transactions with Fidelity Brokerage
Services (FBS), an indirect subsidiary of FMR Corp.
Section 11(a) of the Securities Exchange Act of 1934 prohibits members
of national securities exchanges from executing exchange transactions
for accounts which they or their affiliates manage, unless certain
requirements are satisfied. Pursuant to such requirements, the Board
of Trustees has authorized NFSC to execute portfolio transactions on
national securities exchanges in accordance with approved procedures
and applicable SEC rules.
The Trustees periodically review FMR's performance of its
responsibilities in connection with the placement of portfolio
transactions on behalf of the fund and review the commissions paid by
the fund over representative periods of time to determine if they are
reasonable in relation to the benefits to the fund.
The fund's annualized turnover rate for its first fiscal period is not
expected to exceed 400%. Because a high turnover rate increases
transaction costs and may increase taxable gains, FMR carefully weighs
the anticipated benefits of short-term investing against these
consequences.
From time to time the Trustees will review whether the recapture for
the benefit of the fund of some portion of the brokerage commissions
or similar fees paid by the fund on portfolio transactions is legally
permissible and advisable. The fund seeks to recapture soliciting
broker-dealer fees on the tender of portfolio securities, but at
present no other recapture arrangements are in effect. The Trustees
intend to continue to review whether recapture opportunities are
available and are legally permissible and, if so, to determine in the
exercise of their business judgment whether it would be advisable for
the fund to seek such recapture.
Although the Trustees and officers of the fund are substantially the
same as those of other funds managed by FMR, investment decisions for
the fund are made independently from those of other funds managed by
FMR or accounts managed by FMR affiliates. It sometimes happens that
the same security is held in the portfolio of more than one of these
funds or accounts. Simultaneous transactions are inevitable when
several funds and accounts are managed by the same investment adviser,
particularly when the same security is suitable for the investment
objective of more than one fund or account.
When two or more funds are simultaneously engaged in the purchase or
sale of the same security, the prices and amounts are allocated in
accordance with procedures believed to be appropriate and equitable
for each fund. In some cases this system could have a detrimental
effect on the price or value of the security as far as the fund is
concerned. In other cases, however, the ability of the fund to
participate in volume transactions will produce better executions and
prices for the fund. It is the current opinion of the Trustees that
the desirability of retaining FMR as investment adviser to the fund
outweighs any disadvantages that may be said to exist from exposure to
simultaneous transactions.
VALUATION
Fidelity Service Company, Inc. (FSC) normally determines the fund's
net asset value per share (NAV) as of the close of the New York Stock
Exchange (NYSE) (normally 4:00 p.m. Eastern time). The valuation of
portfolio securities is determined as of this time for the purpose of
computing the fund's NAV.
Portfolio securities are valued by various methods depending on the
primary market or exchange on which they trade. Fixed-income
securities and other assets for which market quotations are readily
available may be valued at market values determined by such
securities' most recent bid prices (sales prices if the principal
market is an exchange) in the principal market in which they normally
are traded, as furnished by recognized dealers in such securities or
assets.
Or, fixed-income securities and convertible securities may be valued
on the basis of information furnished by a pricing service that uses a
valuation matrix which incorporates both dealer-supplied valuations
and electronic data processing techniques. Use of pricing services has
been approved by the Board of Trustees. A number of pricing services
are available, and the fund may use various pricing services or
discontinue the use of any pricing service.
Most equity securities for which the primary market is the United
States are valued at last sale price or, if no sale has occurred, at
the closing bid price. Most equity securities for which the primary
market is outside the United States are valued using the official
closing price or the last sale price in the principal market in which
they are traded. If the last sale price (on the local exchange) is
unavailable, the last evaluated quote or last bid price normally is
used.
Futures contracts and options are valued on the basis of market
quotations, if available. Securities of other open-end investment
companies are valued at their respective NAVs.
Foreign securities are valued based on prices furnished by independent
brokers or quotation services which express the value of securities in
their local currency. FSC gathers all exchange rates daily at the
close of the NYSE using the last quoted price on the local currency
and then translates the value of foreign securities from their local
currencies into U.S. dollars. Any changes in the value of forward
contracts due to exchange rate fluctuations and days to maturity are
included in the calculation of NAV. If an extraordinary event that is
expected to materially affect the value of a portfolio security occurs
after the close of an exchange on which that security is traded, then
that security will be valued as determined in good faith by a
committee appointed by the Board of Trustees.
Short-term securities with remaining maturities of sixty days or less
for which market quotations and information furnished by a pricing
service are not readily available are valued either at amortized cost
or at original cost plus accrued interest, both of which approximate
current value. In addition, securities and other assets for which
there is no readily available market value may be valued in good faith
by a committee appointed by the Board of Trustees. The procedures set
forth above need not be used to determine the value of the securities
owned by the fund if, in the opinion of a committee appointed by the
Board of Trustees, some other method would more accurately reflect the
fair market value of such securities.
PERFORMANCE
The fund may quote performance in various ways. All performance
information supplied by the fund in advertising is historical and is
not intended to indicate future returns. The fund's share price,
yield, and total return fluctuate in response to market conditions and
other factors, and the value of fund shares when redeemed may be more
or less than their original cost.
YIELD CALCULATIONS. Yields for the fund are computed by dividing the
fund's interest and dividend income for a given 30-day or one-month
period, net of expenses, by the average number of shares entitled to
receive distributions during the period, dividing this figure by the
fund's net asset value (NAV) at the end of the period, and annualizing
the result (assuming compounding of income) in order to arrive at an
annual percentage rate. Income is calculated for purposes of yield
quotations in accordance with standardized methods applicable to all
stock and bond funds. Dividends from equity investments are treated as
if they were accrued on a daily basis, solely for the purposes of
yield calculations. In general, interest income is reduced with
respect to bonds trading at a premium over their par value by
subtracting a portion of the premium from income on a daily basis, and
is increased with respect to bonds trading at a discount by adding a
portion of the discount to daily income. For the fund's investments
denominated in foreign currencies, income and expenses are calculated
first in their respective currencies, and are then converted to U.S.
dollars, either when they are actually converted or at the end of the
30-day or one month period, whichever is earlier. Capital gains and
losses generally are excluded from the calculation as are gains and
losses from currency exchange rate fluctuations.
Income calculated for the purposes of calculating the fund's yield
differs from income as determined for other accounting purposes.
Because of the different accounting methods used, and because of the
compounding of income assumed in yield calculations, the fund's yield
may not equal its distribution rate, the income paid to your account,
or the income reported in the fund's financial statements.
In calculating the fund's yield, a fund may from time to time use a
portfolio security's coupon rate instead of its yield to maturity in
order to reflect the risk premium on that security. This practice will
have the effect of reducing the fund's yield.
Yield information may be useful in reviewing the fund's performance
and in providing a basis for comparison with other investment
alternatives. However, the fund's yield fluctuates, unlike investments
that pay a fixed interest rate over a stated period of time. When
comparing investment alternatives, investors should also note the
quality and maturity of the portfolio securities of respective
investment companies they have chosen to consider.
Investors should recognize that in periods of declining interest rates
the fund's yield will tend to be somewhat higher than prevailing
market rates, and in periods of rising interest rates the fund's yield
will tend to be somewhat lower. Also, when interest rates are falling,
the inflow of net new money to the fund from the continuous sale of
its shares will likely be invested in instruments producing lower
yields than the balance of the fund's holdings, thereby reducing the
fund's current yield. In periods of rising interest rates, the
opposite can be expected to occur.
TOTAL RETURN CALCULATIONS. Total returns quoted in advertising reflect
all aspects of the fund's return, including the effect of reinvesting
dividends and capital gain distributions, and any change in the fund's
NAV over a stated period. Average annual total returns are calculated
by determining the growth or decline in value of a hypothetical
historical investment in the fund over a stated period, and then
calculating the annually compounded percentage rate that would have
produced the same result if the rate of growth or decline in value had
been constant over the period. For example, a cumulative total return
of 100% over ten years would produce an average annual total return of
7.18%, which is the steady annual rate of return that would equal 100%
growth on a compounded basis in ten years. Average annual total
returns covering periods of less than one year are calculated by
determining the fund's total return for the period, extending that
return for a full year (assuming that return remains constant over the
year), and quoting the result as an annual return. While average
annual total returns are a convenient means of comparing investment
alternatives, investors should realize that the fund's performance is
not constant over time, but changes from year to year, and that
average annual total returns represent averaged figures as opposed to
the actual year-to-year performance of the fund.
In addition to average annual total returns, the fund may quote
unaveraged or cumulative total returns reflecting the simple change in
value of an investment over a stated period. Average annual and
cumulative total returns may be quoted as a percentage or as a dollar
amount, and may be calculated for a single investment, a series of
investments, or a series of redemptions, over any time period. Total
returns may be broken down into their components of income and capital
(including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions
to total return. Total returns may be quoted on a before-tax or
after-tax basis. Total returns, yields, and other performance
information may be quoted numerically or in a table, graph, or similar
illustration.
NET ASSET VALUE. Charts and graphs using the fund's net asset values,
adjusted net asset values, and benchmark indices may be used to
exhibit performance. An adjusted NAV includes any distributions paid
by the fund and reflects all elements of its return. Unless otherwise
indicated, the fund's adjusted NAVs are not adjusted for sales
charges, if any.
The fund may compare its total return to the record of the Standard &
Poor's 500 Index (S&P 500), the Dow Jones Industrial Average (DJIA),
and the cost of living, as measured by the Consumer Price Index (CPI),
over the same period. The S&P 500 and DJIA comparisons would show how
the fund's total return compared to the record of a broad unmanaged
index of common stocks and a narrower set of stocks of major
industrial companies, respectively. Because the fund invests in
fixed-income securities, common stocks represent a different type of
investment from the fund. Common stocks generally offer greater growth
potential than the fund, but generally experience greater price
volatility, which means greater potential for loss. In addition,
common stocks generally provide lower income than a fixed-income
investment such as the fund. The S&P 500 and DJIA returns are based on
the prices of unmanaged groups of stocks and, unlike the fund's
returns, do not include the effect of brokerage commissions or other
costs of investing.
INTERNATIONAL INDICES, MARKET CAPITALIZATION, AND NATIONAL
STOCK MARKET RETURN
The following tables show the total market capitalization of certain
countries according to the Morgan Stanley Capital International
Indices database, the total market capitalization of Latin American
countries according to the International Finance Corporation Emerging
Markets database, and the performance of national stock markets as
measured in U.S. dollars by the Morgan Stanley Capital International
stock market indices for the twelve months ended December 31, 1997. Of
course, these results are not indicative of future stock market
performance or the funds' performance. Market conditions during the
periods measured fluctuated widely. Brokerage commissions and other
fees are not factored into the values of the indices.
MARKET CAPITALIZATION. Companies outside the U.S. now make up nearly
two-thirds of the world's stock market capitalization. According to
Morgan Stanley Capital International, the size of the markets as
measured in U.S. dollars grew from $5,749.5 ($10,078.9 including the
U.S.) billion in 1996 to $6,207.8 ($12,040.3 including the U.S.)
billion in 1997.
The following table measures the total market capitalization of
certain countries according to the Morgan Stanley Capital
International Indices database. The value of the markets are measured
in billions of U.S. dollars as of December, 1997.
TOTAL MARKET CAPITALIZATION
AUSTRALIA $ 164.1 JAPAN $ 1,498.6
AUSTRIA 23.0 NETHERLANDS 337.9
BELGIUM 75.5 NORWAY 31.5
CANADA 305.9 SINGAPORE/MALAYSIA 54.5/49.0
DENMARK 67.7 SPAIN 158.3
FRANCE 474.5 SWEDEN 154.5
GERMANY 584.7 SWITZERLAND 465.6
HONG KONG 167.0 UNITED KINGDOM 1,284.8
ITALY 238.9 UNITED STATES 6,209.9
The following table measures the total market capitalization of Latin
American countries according to the International Finance Corporation
Emerging Markets database. The value of the markets is measured in
billions of U.S. dollars as of December 31, 1997.
TOTAL MARKET CAPITALIZATION - LATIN AMERICA
Argentina $ 38.1
Brazil 136.7
Chile 33.0
Colombia 8.2
Mexico 112.5
Venezuela 13.1
Peru 10.3
Total Latin America $351.9
NATIONAL STOCK MARKET PERFORMANCE. Certain national stock markets have
outperformed the U.S. stock market. The first table below represents
the performance of national stock markets as measured in U.S. dollars
by the Morgan Stanley Capital International stock market indices for
the twelve months ended December 31, 1997. The second table shows the
same performance as measured in local currency. Each table measures
total return based on the period's change in price, dividends paid on
stocks in the index, and the effect of reinvesting dividends net of
any applicable foreign taxes. These are unmanaged indices composed of
a sampling of selected companies representing an approximation of the
market structure of the designated country.
STOCK MARKET PERFORMANCE (CUMULATIVE TOTAL RETURNS)
MEASURED IN U.S. DOLLARS
Australia -10.4% Japan -23.7%
Austria 1.6 Netherlands 23.8
Belgium 13.6 Norway 6.2
Canada 12.8 Singapore/Malaysia -30.0/-68.3
Denmark 34.5 Spain 25.4
France 11.9 Sweden 12.9
Germany 24.6 Switzerland 44.2
Hong Kong 23.3 United Kingdom 22.6
Italy 35.5 United States 33.4
STOCK MARKET PERFORMANCE (CUMULATIVE TOTAL RETURNS)
MEASURED IN LOCAL CURRENCY
Australia 9.2% Japan -14.5%
Austria 18.5 Netherlands 45.1
Belgium 32.4 Norway 22.7
Canada 17.8 Singapore/Malaysia -15.7/-51.1
Denmark 56.1 Spain 46.9
France 29.5 Sweden 31.2
Germany 45.3 Switzerland 56.7
Hong Kong -23.2 United Kingdom 27.5
Italy 57.5 United States 33.4
The following table shows the average annualized stock market returns
measured in U.S. dollars as of December 31, 1997.
STOCK MARKET PERFORMANCE
Five Years Ended Ten Years Ended
December 31, 1997 December 31, 1997
Germany 15.32 39.05
Hong Kong 0.86 107.89
Japan -4.11 -3.22
Spain 26.67 41.73
United Kingdom 17.42 46.60
United States 24.58 63.20
PERFORMANCE COMPARISONS. The fund's performance may be compared to the
performance of other mutual funds in general, or to the performance of
particular types of mutual funds. These comparisons may be expressed
as mutual fund rankings prepared by Lipper Analytical Services, Inc.
(Lipper), an independent service located in Summit, New Jersey that
monitors the performance of mutual funds. Generally, Lipper rankings
are based on total return, assume reinvestment of distributions, do
not take sales charges or trading fees into consideration, and are
prepared without regard to tax consequences. Lipper may also rank
funds based on yield. In addition to the mutual fund rankings, the
fund's performance may be compared to stock, bond, and money market
mutual fund performance indices prepared by Lipper or other
organizations. When comparing these indices, it is important to
remember the risk and return characteristics of each type of
investment. For example, while stock mutual funds may offer higher
potential returns, they also carry the highest degree of share price
volatility. Likewise, money market funds may offer greater stability
of principal, but generally do not offer the higher potential returns
available from stock mutual funds.
From time to time, the fund's performance may also be compared to
other mutual funds tracked by financial or business publications and
periodicals. For example, the fund may quote Morningstar, Inc. in its
advertising materials. Morningstar, Inc. is a mutual fund rating
service that rates mutual funds on the basis of risk-adjusted
performance. Rankings that compare the performance of Fidelity funds
to one another in appropriate categories over specific periods of time
may also be quoted in advertising.
The fund's performance may also be compared to that of a benchmark
index representing the universe of securities in which the fund may
invest. The total return of a benchmark index reflects reinvestment of
all dividends and capital gains paid by securities included in the
index. Unlike the fund's returns, however, the index returns do not
reflect brokerage commissions, transaction fees, or other costs of
investing directly in the securities included in the index.
The fund may compare its performance to that of the Merrill Lynch High
Yield Master Index, a market capitalization weighted index of all
domestic and yankee high-yield bonds with an outstanding par value of
at least $50 million and maturities of at least one year. Issues
included in the index have a credit rating lower than BBB-/Baa3 but
are not in default (DDD1 or lower). Split-rated issues (i.e., rated
investment-grade by one rating agency and high-yield by another) are
included in the index based on the issue's corresponding composite
rating. Structured-note issues, deferred interest bonds, and
pay-in-kind bonds are excluded.
Strategic Income may compare its performance to that of the Fidelity
Strategic Income Composite Benchmark which is a hypothetical
representation of the performance of the fund's general investment
categories according to their respective weighting in the fund's
neutral mix. The Fidelity Strategic Income Composite Benchmark
represents Strategic Income's four general investment categories
according to their respective weighting in the fund's neutral mix (40%
high yield, 30% U.S. Government and investment-grade, 15% emerging
markets and 15% foreign developed markets). The following indices are
used to calculate the Fidelity Strategic Income Composite Benchmark:
high yield - the Merrill Lynch High Yield Master Index (40%), a market
capitalization weighted index of all domestic and yankee high-yield
bonds with an outstanding par value of at least $50 million and
maturities of at least one year; U.S. Government and investment-grade
- - the Lehman Brothers Government Bond Index (30%) is a market value
weighted index of U.S. government and government agency securities
(other than mortgage securities) with maturities of one year or more.
Issues included in the index have a par value of at least $100
million. Issues include all public obligations of the U.S. Treasury
(excluding flower bonds and foreign-targeted issues) and U.S.
Government agencies and quasi-federal corporations, and corporate debt
guaranteed by the U.S. Government; foreign developed markets - the
Salomon Brothers Non-U.S. Dollar World Government Bond Index (15%), is
a market-capitalization weighted index that tracks the performance of
16 world Government bond markets, excluding the United States. Issues
included in the Index have fixed-rate coupons and maturities of at
least one year; emerging markets - the J.P. Morgan Emerging Markets
Bond Index Plus (15%), a markets capitalization weighted total return
index of U.S. dollar-and other external currency-denominated Brady
bonds, loans, Eurobonds, and local market debt instruments traded in
emerging markets.
The fund may be compared in advertising to Certificates of Deposit
(CDs) or other investments issued by banks or other depository
institutions. Mutual funds differ from bank investments in several
respects. For example, the fund may offer greater liquidity or higher
potential returns than CDs, the fund does not guarantee your principal
or your return, and fund shares are not FDIC insured.
Fidelity may provide information designed to help individuals
understand their investment goals and explore various financial
strategies. Such information may include information about current
economic, market, and political conditions; materials that describe
general principles of investing, such as asset allocation,
diversification, risk tolerance, and goal setting; questionnaires
designed to help create a personal financial profile; worksheets used
to project savings needs based on assumed rates of inflation and
hypothetical rates of return; and action plans offering investment
alternatives. Materials may also include discussions of Fidelity's
asset allocation funds and other Fidelity funds, products, and
services.
Ibbotson Associates of Chicago, Illinois (Ibbotson) provides
historical returns of the capital markets in the United States,
including common stocks, small capitalization stocks, long-term
corporate bonds, intermediate-term government bonds, long-term
government bonds, Treasury bills, the U.S. rate of inflation (based on
the CPI), and combinations of various capital markets. The performance
of these capital markets is based on the returns of different indices.
Fidelity funds may use the performance of these capital markets in
order to demonstrate general risk-versus-reward investment scenarios.
Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. The risks associated with
the security types in any capital market may or may not correspond
directly to those of the funds. Ibbotson calculates total returns in
the same method as the funds. The funds may also compare performance
to that of other compilations or indices that may be developed and
made available in the future.
In advertising materials, Fidelity may reference or discuss its
products and services, which may include other Fidelity funds;
retirement investing; brokerage products and services; model
portfolios or allocations; saving for college or other goals; and
charitable giving. In addition, Fidelity may quote or reprint
financial or business publications and periodicals as they relate to
current economic and political conditions, fund management, portfolio
composition, investment philosophy, investment techniques, the
desirability of owning a particular mutual fund, and Fidelity services
and products. Fidelity may also reprint, and use as advertising and
sales literature, articles from Fidelity Focus(Registered trademark),
a quarterly magazine provided free of charge to Fidelity fund
shareholders.
The fund may present its fund number, Quotron(trademark) number, and
CUSIP number, and discuss or quote its current portfolio manager.
VOLATILITY. The fund may quote various measures of volatility and
benchmark correlation in advertising. In addition, the fund may
compare these measures to those of other funds. Measures of volatility
seek to compare the fund's historical share price fluctuations or
total returns to those of a benchmark. Measures of benchmark
correlation indicate how valid a comparative benchmark may be. All
measures of volatility and correlation are calculated using averages
of historical data. In advertising, the fund may also discuss or
illustrate examples of interest rate sensitivity.
MOMENTUM INDICATORS indicate the fund's price movements over specific
periods of time. Each point on the momentum indicator represents the
fund's percentage change in price movements over that period.
The fund may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a
program, an investor invests a fixed dollar amount in a fund at
periodic intervals, thereby purchasing fewer shares when prices are
high and more shares when prices are low. While such a strategy does
not assure a profit or guard against loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers
of shares are purchased at the same intervals. In evaluating such a
plan, investors should consider their ability to continue purchasing
shares during periods of low price levels.
The fund may be available for purchase through retirement plans or
other programs offering deferral of, or exemption from, income taxes,
which may produce superior after-tax returns over time. For example, a
$1,000 investment earning a taxable return of 10% annually would have
an after-tax value of $1,949 after ten years, assuming tax was
deducted from the return each year at a 31% rate. An equivalent
tax-deferred investment would have an after-tax value of $2,100 after
ten years, assuming tax was deducted at a 31% rate from the
tax-deferred earnings at the end of the ten-year period.
As of February 28, 1998, FMR advised over $31 billion in tax-free fund
assets, $102 billion in money market fund assets, $428 billion in
equity fund assets, $75 billion in international fund assets, and $28
billion in Spartan fund assets. The fund may reference the growth and
variety of money market mutual funds and the adviser's innovation and
participation in the industry. The equity funds under management
figure represents the largest amount of equity fund assets under
management by a mutual fund investment adviser in the United States,
making FMR America's leading equity (stock) fund manager. FMR, its
subsidiaries, and affiliates maintain a worldwide information and
communications network for the purpose of researching and managing
investments abroad.
In addition to performance rankings, the fund may compare its total
expense ratio to the average total expense ratio of similar funds
tracked by Lipper. The fund's total expense ratio is a significant
factor in comparing bond and money market investments because of its
effect on yield.
ADDITIONAL PURCHASE, EXCHANGE AND REDEMPTION INFORMATION
The fund is open for business and its net asset value per share (NAV)
is calculated each day the New York Stock Exchange (NYSE) is open for
trading. The NYSE has designated the following holiday closings for
1998: New Year's Day, Martin Luther King's Birthday, Presidents' Day,
Good Friday, Memorial Day, Independence Day (observed), Labor Day,
Thanksgiving Day, and Christmas Day. Although FMR expects the same
holiday schedule to be observed in the future, the NYSE may modify its
holiday schedule at any time. In addition, on days when the Federal
Reserve Wire System is closed, federal funds wires cannot be sent.
FSC normally determines the fund's NAV as of the close of the NYSE
(normally 4:00 p.m. Eastern time). However, NAV may be calculated
earlier if trading on the NYSE is restricted or as permitted by the
SEC. To the extent that portfolio securities are traded in other
markets on days when the NYSE is closed, the fund's NAV may be
affected on days when investors do not have access to the fund to
purchase or redeem shares. In addition, trading in some of a fund's
portfolio securities may not occur on days when the fund is open for
business.
If the Trustees determine that existing conditions make cash payments
undesirable, redemption payments may be made in whole or in part in
securities or other property, valued for this purpose as they are
valued in computing the fund's NAV. Shareholders receiving securities
or other property on redemption may realize a gain or loss for tax
purposes, and will incur any costs of sale, as well as the associated
inconveniences.
Pursuant to Rule 11a-3 under the 1940 Act, the fund is required to
give shareholders at least 60 days' notice prior to terminating or
modifying its exchange privilege. Under the Rule, the 60-day
notification requirement may be waived if (i) the only effect of a
modification would be to reduce or eliminate an administrative fee,
redemption fee, or deferred sales charge ordinarily payable at the
time of an exchange, or (ii) the fund suspends the redemption of the
shares to be exchanged as permitted under the 1940 Act or the rules
and regulations thereunder, or the fund to be acquired suspends the
sale of its shares because it is unable to invest amounts effectively
in accordance with its investment objective and policies.
In the Prospectus, the fund has notified shareholders that it reserves
the right at any time, without prior notice, to refuse exchange
purchases by any person or group if, in FMR's judgment, the fund would
be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely
affected.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS. If you request to have distributions mailed to you and
the U.S. Postal Service cannot deliver your checks, or if your checks
remain uncashed for six months, Fidelity may reinvest your
distributions at the then-current NAV. All subsequent distributions
will then be reinvested until you provide Fidelity with alternate
instructions.
DIVIDENDS. Because the fund invests significantly in foreign
securities, corporate shareholders should not expect fund dividends to
qualify for the dividends-received deduction. Short-term capital gains
are distributed as dividend income, but do not qualify for the
dividends-received deduction. The fund will notify corporate
shareholders annually of the percentage of fund dividends that
qualifies for the dividends-received deduction. Gains (losses)
attributable to foreign currency fluctuations are generally taxable as
ordinary income, and therefore will increase (decrease) dividend
distributions. If the fund's distributions exceed its net investment
company taxable income during a taxable year, all or a portion of the
distributions made in the same taxable year would be recharacterized
as a return of capital to shareholders, thereby reducing each
shareholder's cost basis in the fund. The fund will send each
shareholder a notice in January describing the tax status of dividend
and capital gain distributions for the prior year.
CAPITAL GAIN DISTRIBUTIONS. Long-term capital gains earned by the fund
on the sale of securities and distributed to shareholders are
federally taxable as long-term capital gains, regardless of the length
of time shareholders have held their shares. If a shareholder receives
a capital gain distribution on shares of the fund, and such shares are
held six months or less and are sold at a loss, the portion of the
loss equal to the amount of the capital gain distribution will be
considered a long-term loss for tax purposes. Short-term capital gains
distributed by the fund are taxable to shareholders as dividends, not
as capital gains.
FOREIGN TAXES. Foreign governments may withhold taxes on dividends and
interest paid with respect to foreign securities. Foreign governments
may also impose taxes on other payments or gains with respect to
foreign securities. If, at the close of its fiscal year, more than 50%
of the fund's total assets are invested in securities of foreign
issuers, the fund may elect to pass through foreign taxes paid and
thereby allow shareholders to take a credit or deduction on their
individual tax returns.
TAX STATUS OF THE FUND. The fund intends to qualify each year as a
"regulated investment company" for tax purposes so that it will not be
liable for federal tax on income and capital gains distributed to
shareholders. In order to qualify as a regulated investment company
and avoid being subject to federal income or excise taxes at the fund
level, the fund intends to distribute substantially all of its net
investment income and net realized capital gains within each calendar
year as well as on a fiscal year basis, and intends to comply with
other tax rules applicable to regulated investment companies.
The fund is treated as a separate entity from the other funds of
Fidelity School Street Trust for tax purposes.
If a fund purchases shares in certain foreign investment entities,
defined as passive foreign investment companies (PFICs) in the
Internal Revenue Code, it may be subject to U.S. federal income tax on
a portion of any excess distribution or gain from the disposition of
such shares. Interest charges may also be imposed on the fund with
respect to deferred taxes arising from such distributions or gains.
Generally, the fund will elect to mark-to-market any PFIC shares.
Unrealized gains will be recognized as income for tax purposes and
must be distributed to shareholders as dividends.
OTHER TAX INFORMATION. The information above is only a summary of some
of the tax consequences generally affecting the fund and its
shareholders, and no attempt has been made to discuss individual tax
consequences. In addition to federal income taxes, shareholders may be
subject to state and local taxes on fund distributions, and shares may
be subject to state and local personal property taxes. Investors
should consult their tax advisers to determine whether a fund is
suitable to their particular tax situation.
FMR
All of the stock of FMR is owned by FMR Corp., its parent organized in
1972. The voting common stock of FMR Corp. is divided into two
classes. Class B is held predominantly by members of the Edward C.
Johnson 3d family and is entitled to 49% of the vote on any matter
acted upon by the voting common stock. Class A is held predominantly
by non-Johnson family member employees of FMR Corp. and its affiliates
and is entitled to 51% of the vote on any such matter. The Johnson
family group and all other Class B shareholders have entered into a
shareholders' voting agreement under which all Class B shares will be
voted in accordance with the majority vote of Class B shares. Under
the Investment Company Act of 1940 (1940 Act), control of a company is
presumed where one individual or group of individuals owns more than
25% of the voting stock of that company. Therefore, through their
ownership of voting common stock and the execution of the
shareholders' voting agreement, members of the Johnson family may be
deemed, under the 1940 Act, to form a controlling group with respect
to FMR Corp.
At present, the principal operating activities of FMR Corp. are those
conducted by its division, Fidelity Investments Retail Marketing
Company, which provides marketing services to various companies within
the Fidelity organization.
Fidelity investment personnel may invest in securities for their own
accounts pursuant to a code of ethics that sets forth all employees'
fiduciary responsibilities regarding the funds, establishes procedures
for personal investing and restricts certain transactions. For
example, all personal trades in most securities require pre-clearance,
and participation in initial public offerings is prohibited. In
addition, restrictions on the timing of personal investing in relation
to trades by Fidelity funds and on short-term trading have been
adopted.
TRUSTEES AND OFFICERS
The Trustees, Members of the Advisory Board, and executive officers of
the trust are listed below. Except as indicated, each individual has
held the office shown or other offices in the same company for the
last five years. All persons named as Trustees and Members of the
Advisory Board also serve in similar capacities for other funds
advised by FMR. The business address of each Trustee, Member of the
Advisory Board, and officer who is an "interested person" (as defined
in the Investment Company Act of 1940) is 82 Devonshire Street,
Boston, Massachusetts 02109, which is also the address of FMR. The
business address of all the other Trustees is Fidelity Investments,
P.O. Box 9235, Boston, Massachusetts 02205-9235. Those Trustees who
are "interested persons" by virtue of their affiliation with either
the trust or FMR are indicated by an asterisk (*).
*EDWARD C. JOHNSON 3d (67), Trustee and President, is Chairman, Chief
Executive Officer and a Director of FMR Corp.; a Director and Chairman
of the Board and of the Executive Committee of FMR; Chairman and a
Director of Fidelity Investments Money Management, Inc. (1998),
Fidelity Management & Research (U.K.) Inc., and Fidelity Management &
Research (Far East) Inc.
J. GARY BURKHEAD (56), Member of the Advisory Board (1997), is Vice
Chairman and a Member of the Board of Directors of FMR Corp. (1997)
and President of Fidelity Personal Investments and Brokerage Group
(1997). Previously, Mr. Burkhead served as President of Fidelity
Management & Research Company.
RALPH F. COX (65), Trustee, is President of RABAR Enterprises
(management consulting-engineering industry, 1994). Prior to February
1994, he was President of Greenhill Petroleum Corporation (petroleum
exploration and production). Until March 1990, Mr. Cox was President
and Chief Operating Officer of Union Pacific Resources Company
(exploration and production). He is a Director of USA Waste Services,
Inc. (non-hazardous waste, 1993), CH2M Hill Companies (engineering),
Rio Grande, Inc. (oil and gas production), and Daniel Industries
(petroleum measurement equipment manufacturer). In addition, he is a
member of advisory boards of Texas A&M University and the University
of Texas at Austin.
PHYLLIS BURKE DAVIS (66), Trustee. Prior to her retirement in
September 1991, Mrs. Davis was the Senior Vice President of Corporate
Affairs of Avon Products, Inc. She is currently a Director of
BellSouth Corporation (telecommunications), Eaton Corporation
(manufacturing, 1991), and the TJX Companies, Inc. (retail stores),
and previously served as a Director of Hallmark Cards, Inc.
(1985-1991) and Nabisco Brands, Inc. In addition, she is a member of
the President's Advisory Council of The University of Vermont School
of Business Administration.
ROBERT M. GATES (54), Trustee (1997), is a consultant, author, and
lecturer (1993). Mr. Gates was Director of the Central Intelligence
Agency (CIA) from 1991-1993. From 1989 to 1991, Mr. Gates served as
Assistant to the President of the United States and Deputy National
Security Advisor. Mr. Gates is a Director of LucasVarity PLC
(automotive components and diesel engines), Charles Stark Draper
Laboratory (non-profit), NACCO Industries, Inc. (mining and
manufacturing), and TRW Inc. (original equipment and replacement
products). Mr. Gates also is a Trustee of the Forum for International
Policy and of the Endowment Association of the College of William and
Mary. In addition, he is a member of the National Executive Board of
the Boy Scouts of America.
E. BRADLEY JONES (70), Trustee. Prior to his retirement in 1984, Mr.
Jones was Chairman and Chief Executive Officer of LTV Steel Company.
He is a Director of TRW Inc. (original equipment and replacement
products), Consolidated Rail Corporation, Birmingham Steel
Corporation, and RPM, Inc. (manufacturer of chemical products), and he
previously served as a Director of NACCO Industries, Inc. (mining and
manufacturing, 1985-1995), Hyster-Yale Materials Handling, Inc.
(1985-1995), and Cleveland-Cliffs Inc (mining), and as a Trustee of
First Union Real Estate Investments. In addition, he serves as a
Trustee of the Cleveland Clinic Foundation, where he has also been a
member of the Executive Committee as well as Chairman of the Board and
President, a Trustee and member of the Executive Committee of
University School (Cleveland), and a Trustee of Cleveland Clinic
Florida.
DONALD J. KIRK (65), Trustee, is Executive-in-Residence (1995) at
Columbia University Graduate School of Business and a financial
consultant. From 1987 to January 1995, Mr. Kirk was a Professor at
Columbia University Graduate School of Business. Prior to 1987, he was
Chairman of the Financial Accounting Standards Board. Mr. Kirk is a
Director of General Re Corporation (reinsurance), and he previously
served as a Director of Valuation Research Corp. (appraisals and
valuations, 1993-1995). In addition, he serves as Chairman of the
Board of Directors of the National Arts Stabilization Fund, Chairman
of the Board of Trustees of the Greenwich Hospital Association, a
Member of the Public Oversight Board of the American Institute of
Certified Public Accountants' SEC Practice Section (1995), and as a
Public Governor of the National Association of Securities Dealers,
Inc. (1996).
*PETER S. LYNCH (54), Trustee, is Vice Chairman and Director of FMR.
Prior to May 31, 1990, he was a Director of FMR and Executive Vice
President of FMR (a position he held until March 31, 1991); Vice
President of Fidelity Magellan Fund and FMR Growth Group Leader; and
Managing Director of FMR Corp. Mr. Lynch was also Vice President of
Fidelity Investments Corporate Services (1991-1992). In addition, he
serves as a Trustee of Boston College, Massachusetts Eye & Ear
Infirmary, Historic Deerfield (1989) and Society for the Preservation
of New England Antiquities, and as an Overseer of the Museum of Fine
Arts of Boston.
WILLIAM O. McCOY (64), Trustee (1997), is the Vice President of
Finance for the University of North Carolina (16-school system, 1995).
Prior to his retirement in December 1994, Mr. McCoy was Vice Chairman
of the Board of BellSouth Corporation (telecommunications, 1984) and
President of BellSouth Enterprises (1986). He is currently a Director
of Liberty Corporation (holding company, 1984), Weeks Corporation of
Atlanta (real estate, 1994), Carolina Power and Light Company
(electric utility, 1996), and the Kenan Transport Co. (1996).
Previously, he was a Director of First American Corporation (bank
holding company, 1979-1996). In addition, Mr. McCoy serves as a member
of the Board of Visitors for the University of North Carolina at
Chapel Hill (1994) and for the Kenan-Flager Business School
(University of North Carolina at Chapel Hill, 1988).
GERALD C. McDONOUGH (68), Trustee and Chairman of the non-interested
Trustees, is Chairman of G.M. Management Group (strategic advisory
services). Mr. McDonough is a Director of York International Corp.
(air conditioning and refrigeration), Commercial Intertech Corp.
(hydraulic systems, building systems, and metal products, 1992), CUNO,
Inc. (liquid and gas filtration products, 1996), and Associated
Estates Realty Corporation (a real estate investment trust, 1993). Mr.
McDonough served as a Director of ACME-Cleveland Corp. (metal working,
telecommunications, and electronic products) from 1987-1996 and
Brush-Wellman Inc. (metal refining) from 1983-1997.
MARVIN L. MANN (64), Trustee (1993), is Chairman of the Board,
President, and Chief Executive Officer of Lexmark International, Inc.
(office machines, 1991). Prior to 1991, he held the positions of Vice
President of International Business Machines Corporation ("IBM") and
President and General Manager of various IBM divisions and
subsidiaries. Mr. Mann is a Director of M.A. Hanna Company (chemicals,
1993), Imation Corp. (imaging and information storage, 1997), and
Infomart (marketing services, 1991), a Trammell Crow Co. In addition,
he serves as the Campaign Vice Chairman of the Tri-State United Way
(1993) and is a member of the University of Alabama President's
Cabinet.
*ROBERT C. POZEN (51), Trustee (1997) and Senior Vice President, is
also President and a Director of FMR (1997); and President and a
Director of Fidelity Investments Money Management, Inc. (1998),
Fidelity Management & Research (U.K.) Inc. (1997), and Fidelity
Management & Research (Far East) Inc. (1997). Previously, Mr. Pozen
served as General Counsel, Managing Director, and Senior Vice
President of FMR Corp.
THOMAS R. WILLIAMS (69), Trustee, is President of The Wales Group,
Inc. (management and financial advisory services). Prior to retiring
in 1987, Mr. Williams served as Chairman of the Board of First
Wachovia Corporation (bank holding company), and Chairman and Chief
Executive Officer of The First National Bank of Atlanta and First
Atlanta Corporation (bank holding company). He is currently a Director
of ConAgra, Inc. (agricultural products), Georgia Power Company
(electric utility), National Life Insurance Company of Vermont,
American Software, Inc., and AppleSouth, Inc. (restaurants, 1992).
FRED L. HENNING, JR. (58), is Vice President of Fidelity's
Fixed-Income Group (1995), Senior Vice President of FMR (1995), and
Senior Vice President of FIMM (1998). Before assuming his current
responsibilities, Mr. Henning was head of Fidelity's Money Market
Division.
BART A. GRENIER, (38), is Vice President of certain High-Income Bond
Funds (1997). Mr. Grenier rejoined Fidelity in August 1997 from DDJ
Capital Management, LLC, where he had served as Managing Director
since April 1997. Mr. Grenier originally joined Fidelity in 1991 as a
senior analyst. Mr. Grenier served as a Director of High-Income Group
Research and as Director of U.S. Equity Research from 1994 to March
1996. He later became Group Leader of the Income-Growth and Asset
Allocation-Income Groups in 1996 and Assistant Equity Division Head in
1997.
JOHN CARLSON (47), is Vice President of Strategic Income (1998), and
other funds advised by FMR. Prior to joining Fidelity in 1995, Mr.
Carlson spent three years with Lehman Brothers as executive director
of emerging markets and senior vice president and head trader at
Lehman's Latin American emerging markets fixed-income desk.
MARGARET L. EAGLE (48), is Vice President of Strategic Income (1998).
Prior to her current responsibilities, Ms. Eagle was a fixed-income
analyst and managed a variety of Fidelity funds.
CURTIS HOLLINGSWORTH (40), is Vice President of Strategic Income
(1998). Prior to his current responsibilities, Mr. Hollingsworth has
managed a variety of Fidelity funds.
ERIC D. ROITER (49), Secretary, is Vice President (1998) and General
Counsel of FMR (1998). Mr. Roiter was an Adjunct Member, Faculty of
Law, at Columbia University Law School (1996-1997). Prior to joining
Fidelity, Mr. Roiter was a partner at Debevoise & Plimpton (1981-1997)
and served as an Assistant General Counsel of the U.S. Securities and
Exchange Commission (1979-1981).
RICHARD A. SILVER (50), Treasurer (1997), is Treasurer of the Fidelity
funds and is an employee of FMR (1997). Before joining FMR, Mr. Silver
served as Executive Vice President, Fund Accounting & Administration
at First Data Investor Services Group, Inc. (1996-1997). Prior to
1996, Mr. Silver was Senior Vice President and Chief Financial Officer
at The Colonial Group, Inc. Mr. Silver also served as Chairman of the
Accounting/Treasurer's Committee of the Investment Company Institute
(1987-1993).
JOHN H. COSTELLO (51), Assistant Treasurer, is an employee of FMR.
LEONARD M. RUSH (51), Assistant Treasurer (1994), is an employee of
FMR (1994). Prior to becoming Assistant Treasurer of the Fidelity
funds, Mr. Rush was Chief Compliance Officer of FMR Corp. (1993-1994)
and Chief Financial Officer of Fidelity Brokerage Services, Inc.
(1990-1993).
The following table sets forth information describing the compensation
of each Trustee and Member of the Advisory Board of the fund for his
or her services for the fiscal year ended December 31, 1998, or
calendar year ended December 31, 1997, as applicable.
COMPENSATION TABLE
Trustees Aggregate Total
and Compensation Compensation
Members of the Advisory Board from Strategic from the
IncomeB,+ Fund Complex*A
J. Gary Burkhead** $ 0 $ 0
Ralph F. Cox $ 4 214,500
Phyllis Burke Davis $ 4 210,000
Robert M. Gates*** $ 4 176,000
Edward C. Johnson 3d** $ 0 0
E. Bradley Jones $ 4 211,500
Donald J. Kirk $ 4 211,500
Peter S. Lynch** $ 0 0
William O. McCoy**** $ 4 214,500
Gerald C. McDonough $ 5 264,500
Marvin L. Mann $ 4 214,500
Robert C. Pozen** $ 0 0
Thomas R. Williams $ 4 214,500
* Information is for the calendar year ended December 31, 1997 for 230
funds in the complex.
** Interested Trustees of the fund and Mr. Burkhead are compensated by
FMR.
*** Mr. Gates was appointed to the Board of Trustees effective March
1, 1997.
**** Mr. McCoy was appointed to the Board of Trustees effective
January 1, 1997.
+ Figures presented are estimates for the fund's first fiscal year end
December 31, 1998.
A Compensation figures include cash, amounts required to be deferred,
and may include amounts deferred at the election of Trustees. For the
calendar year ended December 31, 1997, the Trustees accrued required
deferred compensation from the funds as follows: Ralph F. Cox,
$75,000; Phyllis Burke Davis, $75,000; Robert M. Gates, $62,500; E.
Bradley Jones, $75,000; Donald J. Kirk, $75,000; William O. McCoy,
$75,000; Gerald C. McDonough, $87,500; Marvin L. Mann, $75,000; and
Thomas R. Williams, $75,000. Certain of the non-interested Trustees
elected voluntarily to defer a portion of their compensation as
follows: Ralph F. Cox, $53,699; Marvin L. Mann, $53,699; and Thomas R.
Williams, $62,462.
B Compensation figures include cash.
Under a deferred compensation plan adopted in September 1995 and
amended in November 1996 (the Plan), non-interested Trustees must
defer receipt of a portion of, and may elect to defer receipt of an
additional portion of, their annual fees. Amounts deferred under the
Plan are subject to vesting and are treated as though equivalent
dollar amounts had been invested in shares of a cross-section of
Fidelity funds including funds in each major investment discipline and
representing a majority of Fidelity's assets under management (the
Reference Funds). The amounts ultimately received by the Trustees
under the Plan will be directly linked to the investment performance
of the Reference Funds. Deferral of fees in accordance with the Plan
will have a negligible effect on a fund's assets, liabilities, and net
income per share, and will not obligate a fund to retain the services
of any Trustee or to pay any particular level of compensation to the
Trustee. A fund may invest in the Reference Funds under the Plan
without shareholder approval.
As of the public offering of shares of the fund, approximately 100% of
the fund's total outstanding shares was held by FMR and FMR
affiliates. FMR Corp. is the ultimate parent company of FMR and these
FMR affiliates. By virtue of his ownership interest in FMR Corp., as
described in the "FMR" section on page 44, Mr. Edward C. Johnson 3d,
President and Trustee of the fund, may be deemed to be a beneficial
owner of these shares.
MANAGEMENT CONTRACT
FMR is the fund's manager pursuant to a management contract dated
March 19, 1998, which was approved by FMR, as the then sole
shareholder, on April 22, 1998.
MANAGEMENT SERVICES. The fund employs FMR to furnish investment
advisory and other services. Under the terms of its management
contract with the fund, FMR acts as investment adviser and, subject to
the supervision of the Board of Trustees, directs the investments of
the fund in accordance with its investment objective, policies, and
limitations. FMR also provides the fund with all necessary office
facilities and personnel for servicing the fund's investments,
compensates all officers of the fund and all Trustees who are
"interested persons" of the trust or of FMR, and all personnel of the
fund or FMR performing services relating to research, statistical, and
investment activities.
In addition, FMR or its affiliates, subject to the supervision of the
Board of Trustees, provide the management and administrative services
necessary for the operation of the fund. These services include
providing facilities for maintaining the fund's organization;
supervising relations with custodians, transfer and pricing agents,
accountants, underwriters, and other persons dealing with the fund;
preparing all general shareholder communications and conducting
shareholder relations; maintaining the fund's records and the
registration of the fund's shares under federal securities laws and
making necessary filings under state securities laws; developing
management and shareholder services for the fund; and furnishing
reports, evaluations, and analyses on a variety of subjects to the
Trustees.
MANAGEMENT-RELATED EXPENSES. In addition to the management fee payable
to FMR and the fees payable to the transfer, dividend disbursing, and
shareholder servicing agent, pricing and bookkeeping agent, and
securities lending agent, the fund pays all of its expenses that are
not assumed by those parties. The fund pays for the typesetting,
printing, and mailing of its proxy materials to shareholders, legal
expenses, and the fees of the custodian, auditor and non-interested
Trustees. The fund's management contract further provides that the
fund will pay for typesetting, printing, and mailing prospectuses,
statements of additional information, notices, and reports to
shareholders; however, under the terms of the fund's transfer agent
agreement, the transfer agent bears the costs of providing these
services to existing shareholders. Other expenses paid by the fund
include interest, taxes, brokerage commissions, the fund's
proportionate share of insurance premiums and Investment Company
Institute dues, and the costs of registering shares under federal
securities laws and making necessary filings under state securities
laws. The fund is also liable for such non-recurring expenses as may
arise, including costs of any litigation to which the fund may be a
party, and any obligation it may have to indemnify its officers and
Trustees with respect to litigation.
MANAGEMENT FEE. For the services of FMR under the management contract,
the fund pays FMR a monthly management fee which has two components: a
group fee rate and an individual fund fee rate.
The group fee rate is based on the monthly average net assets of all
of the registered investment companies with which FMR has management
contracts.
GROUP FEE RATE SCHEDULE EFFECTIVE ANNUAL FEE RATES
Average Group Annualized Group Net Effective Annual Fee
Assets Rate Assets Rate
0 - $3 billion .3700% $ 0.5 billion .3700%
3 - 6 .3400 25 .2664
6 - 9 .3100 50 .2188
9 - 12 .2800 75 .1986
12 - 15 .2500 100 .1869
15 - 18 .2200 125 .1793
18 - 21 .2000 150 .1736
21 - 24 .1900 175 .1690
24 - 30 .1800 200 .1652
30 - 36 .1750 225 .1618
36 - 42 .1700 250 .1587
42 - 48 .1650 275 .1560
48 - 66 .1600 300 .1536
66 - 84 .1550 325 .1514
84 - 120 .1500 350 .1494
120 - 156 .1450 375 .1476
156 - 192 .1400 400 .1459
192 - 228 .1350 425 .1443
228 - 264 .1300 450 .1427
264 - 300 .1275 475 .1413
300 - 336 .1250 500 .1399
336 - 372 .1225 525 .1385
372 - 408 .1200 550 .1372
408 - 444 .1175
444 - 480 .1150
480 - 516 .1125
Over 516 .1100
The group fee rate is calculated on a cumulative basis pursuant to the
graduated fee rate schedule shown above on the left. The schedule
above on the right shows the effective annual group fee rate at
various asset levels, which is the result of cumulatively applying the
annualized rates on the left. For example, the effective annual fee
rate at $583 billion of group net assets - the approximate level for
February 1998 - was 0.1357%, which is the weighted average of the
respective fee rates for each level of group net assets up to $583
billion.
The fund's individual fund fee rate is 0.45%. Based on the average
group net assets of the funds advised by FMR for February 1998, the
fund's annual management fee rate would be calculated as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Group Fee Rate Individual Fund Fee Rate Management Fee Rate
Strategic Income 0.1357% + 0.45% = 0.5857%
</TABLE>
One-twelfth of this annual management fee rate is applied to the
fund's net assets averaged for the most recent month, giving a dollar
amount, which is the fee for that month.
FMR may, from time to time, voluntarily reimburse all or a portion of
the fund's expenses (exclusive of interest, taxes, brokerage
commissions, and extraordinary expenses). FMR retains the ability to
be repaid for these expense reimbursements in the amount that expenses
fall below the limit prior to the end of the fiscal year.
Expense reimbursements by FMR will increase the fund's total returns
and yield, and repayment of the reimbursement by the fund will lower
its total returns and yield.
SUB-ADVISERS. On behalf of Strategic Income, FMR has entered into
sub-advisory agreements with FMR U.K., FMR Far East, FIJ, and FIIA.
FIIA, in turn, has entered into a sub-advisory agreement with
FIIA(U.K.)L. Pursuant to the sub-advisory agreements, FMR may receive
investment advice and research services outside the United States from
the sub-advisers.
On behalf of the fund, FMR may also grant the sub-advisers investment
management authority as well as the authority to buy and sell
securities if FMR believes it would be beneficial to the fund.
Currently, FMR U.K., FMR Far East, FIJ, FIIA, and FIIA(U.K.)L each
focus on issuers in countries other than the United States such as
those in Europe, Asia, and the Pacific Basin.
FMR U.K. and FMR Far East, which were organized in 1986, are wholly
owned subsidiaries of FMR. FIJ and FIIA are wholly owned subsidiaries
of Fidelity International Limited (FIL), a Bermuda company formed in
1968 which primarily provides investment advisory services to non-U.S.
investment companies and institutional investors investing in
securities throughout the world. Edward C. Johnson 3d, Johnson family
members, and various trusts for the benefit of the Johnson family own,
directly or indirectly, more than 25% of the voting common stock of
FIL. FIJ was organized in Japan in 1986. FIIA was organized in Bermuda
in 1983. FIIA(U.K.)L was organized in the United Kingdom in 1984, and
is a direct subsidiary of Fidelity Investments Management Limited and
an indirect subsidiary of FIL.
Under the sub-advisory agreements FMR pays the fees of FMR U.K., FMR
Far East, FIJ, and FIIA. FIIA, in turn, pays the fees of FIIA(U.K.)L.
For providing non-discretionary investment advice and research
services the sub-advisers are compensated as follows:
(small solid bullet) FMR pays FMR U.K. and FMR Far East fees equal to
110% and 105%, respectively, of FMR U.K.'s and FMR Far East's costs
incurred in connection with providing investment advice and research
services.
(small solid bullet) FMR pays FIIA and FIJ fees equal to 30% of FMR's
monthly management fee with respect to the average net assets held by
the fund for which the sub-adviser has provided FMR with investment
advice and research services.
(small solid bullet) FIIA pays FIIA(U.K.)L a fee equal to 110% of
FIIA(U.K.)L's costs incurred in connection with providing investment
advice and research services.
For providing discretionary investment management and executing
portfolio transactions, the sub-advisers are compensated as follows:
(small solid bullet) FMR pays FMR U.K., FMR Far East, FIJ, and FIIA a
fee equal to 50% of its monthly management fee with respect to the
fund's average net assets managed by the sub-adviser on a
discretionary basis.
(small solid bullet) FIIA pays FIIA(U.K.)L a fee equal to 110% of
FIIA(U.K.)L's costs incurred in connection with providing
discretionary investment management services.
DISTRIBUTION AND SERVICE PLAN
The Trustees have approved a Distribution and Service Plan on behalf
of the fund (the Plan) pursuant to Rule 12b-1 under the 1940 Act (the
Rule). The Rule provides in substance that a mutual fund may not
engage directly or indirectly in financing any activity that is
primarily intended to result in the sale of shares of the fund except
pursuant to a plan approved on behalf of the fund under the Rule. The
Plan, as approved by the Trustees, allows the fund and FMR to incur
certain expenses that might be considered to constitute indirect
payment by the fund of distribution expenses.
Under the Plan, if the payment of management fees by the fund to FMR
is deemed to be indirect financing by the fund of the distribution of
its shares, such payment is authorized by the Plan. The Plan
specifically recognizes that FMR may use its management fee revenue,
as well as its past profits or its other resources, to pay FDC for
expenses incurred in connection with the distribution of fund shares.
In addition, the Plan provides that FMR, directly or through FDC, may
make payments to third parties, such as banks or broker-dealers, that
engage in the sale of fund shares, or provide shareholder support
services. Currently, the Board of Trustees has authorized such
payments for shares.
Prior to approving the Plan, the Trustees carefully considered all
pertinent factors relating to the implementation of the Plan, and
determined that there is a reasonable likelihood that the Plan will
benefit the fund and its shareholders. In particular, the Trustees
noted that the Plan does not authorize payments by the fund other than
those made to FMR under its management contract with the fund. To the
extent that the Plan gives FMR and FDC greater flexibility in
connection with the distribution of fund shares, additional sales of
fund shares may result. Furthermore, certain shareholder support
services may be provided more effectively under the Plan by local
entities with whom shareholders have other relationships.
The Glass-Steagall Act generally prohibits federally and state
chartered or supervised banks from engaging in the business of
underwriting, selling, or distributing securities. Although the scope
of this prohibition under the Glass-Steagall Act has not been clearly
defined by the courts or appropriate regulatory agencies, FDC believes
that the Glass-Steagall Act should not preclude a bank from performing
shareholder support services, or servicing and recordkeeping
functions. FDC intends to engage banks only to perform such functions.
However, changes in federal or state statutes and regulations
pertaining to the permissible activities of banks and their affiliates
or subsidiaries, as well as further judicial or administrative
decisions or interpretations, could prevent a bank from continuing to
perform all or a part of the contemplated services. If a bank were
prohibited from so acting, the Trustees would consider what actions,
if any, would be necessary to continue to provide efficient and
effective shareholder services. In such event, changes in the
operation of the fund might occur, including possible termination of
any automatic investment or redemption or other services then provided
by the bank. It is not expected that shareholders would suffer any
adverse financial consequences as a result of any of these
occurrences. In addition, state securities laws on this issue may
differ from the interpretations of federal law expressed herein, and
banks and other financial institutions may be required to register as
dealers pursuant to state law.
The fund may execute portfolio transactions with, and purchase
securities issued by, depository institutions that receive payments
under the Plan. No preference for the instruments of such depository
institutions will be shown in the selection of investments.
CONTRACTS WITH FMR AFFILIATES
The fund has entered into a transfer agent agreement with FSC, an
affiliate of FMR. Under the terms of the agreement, FSC performs
transfer agency, dividend disbursing, and shareholder services for the
fund.
For providing transfer agency services, FSC receives an account fee
and an asset-based fee each paid monthly with respect to each account
in the fund. For retail accounts and certain institutional accounts,
these fees are based on account size and fund type. For certain
institutional retirement accounts, these fees are based on fund type.
For certain other institutional retirement accounts, these fees are
based on account type (i.e., omnibus or non-omnibus) and, for
non-omnibus accounts, fund type. The account fees are subject to
increase based on postage rate changes.
FSC also collects small account fees from certain accounts with
balances of less than $2,500.
In addition, FSC receives the pro rata portion of the transfer agency
fees applicable to shareholder accounts in each Fidelity Freedom Fund,
a fund of funds managed by an FMR affiliate, according to the
percentage of the Freedom Fund's assets that is invested in the fund.
FSC pays out-of-pocket expenses associated with providing transfer
agent services. In addition, FSC bears the expense of typesetting,
printing, and mailing prospectuses, statements of additional
information, and all other reports, notices, and statements to
existing shareholders, with the exception of proxy statements.
The fund has also entered into a service agent agreement with FSC.
Under the terms of the agreement, FSC calculates the NAV and dividends
for the fund, maintains the fund's portfolio and general accounting
records, and administers the fund's securities lending program.
For providing pricing and bookkeeping services, FSC receives a monthly
fee based on the fund's average daily net assets throughout the month.
The annual fee rates for pricing and bookkeeping services are 0.0400%
of the first $500 million of average net assets and 0.0200% of average
net assets in excess of $500 million. The fee, not including
reimbursement for out-of-pocket expenses, is limited to a minimum of
$60,000 and a maximum of $800,000 per year.
For administering the fund's securities lending program, FSC receives
fees based on the number and duration of individual securities loans.
The fund has entered into a distribution agreement with FDC, an
affiliate of FMR organized as a Massachusetts corporation on July 18,
1960. FDC is a broker-dealer registered under the Securities Exchange
Act of 1934 and a member of the National Association of Securities
Dealers, Inc. The distribution agreement calls for FDC to use all
reasonable efforts, consistent with its other business, to secure
purchasers for shares of the fund, which are continuously offered at
NAV. Promotional and administrative expenses in connection with the
offer and sale of shares are paid by FMR.
DESCRIPTION OF THE TRUST
TRUST ORGANIZATION. Fidelity Strategic Income Fund is a fund of
Fidelity School Street Trust, an open-end management investment
company organized as a Massachusetts business trust on September 10,
1976 under the name Fidelity Municipal Bond Fund. The trust's name was
changed to Fidelity Mid-Term Municipals on February 28, 1977. The
trust's name was later changed to Fidelity Limited Term Municipals on
April 15, 1977 and to Fidelity School Street Trust on June 17, 1993.
Currently, there are four funds in the trust: Fidelity Strategic
Income Fund, Spartan Intermediate Municipal Income Fund, Fidelity
International Bond Fund, and Fidelity New Markets Income Fund.
In the event that FMR ceases to be the investment adviser to the trust
or a fund, the right of the trust or fund to use the identifying names
"Fidelity" and "Spartan" may be withdrawn.
The assets of the trust received for the issue or sale of shares of
each fund and all income, earnings, profits, and proceeds thereof,
subject only to the rights of creditors, are especially allocated to
such fund, and constitute the underlying assets of such fund. The
underlying assets of each fund are segregated on the books of account,
and are to be charged with the liabilities with respect to such fund
and with a share of the general expenses of the trust. Expenses with
respect to the trust are to be allocated in proportion to the asset
value of the respective funds, except where allocations of direct
expense can otherwise be fairly made. The officers of the trust,
subject to the general supervision of the Board of Trustees, have the
power to determine which expenses are allocable to a given fund, or
which are general or allocable to all of the funds. In the event of
the dissolution or liquidation of the trust, shareholders of each fund
are entitled to receive as a class the underlying assets of such fund
available for distribution.
SHAREHOLDER AND TRUSTEE LIABILITY. The trust is an entity of the type
commonly known as a "Massachusetts business trust." Under
Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable for the obligations of the
trust. The Declaration of Trust provides that the trust shall not have
any claim against shareholders except for the payment of the purchase
price of shares and requires that each agreement, obligation, or
instrument entered into or executed by the trust or the Trustees
include a provision limiting the obligations created thereby to the
trust and its assets. The Declaration of Trust provides for
indemnification out of each fund's property of any shareholder held
personally liable for the obligations of the fund. The Declaration of
Trust also provides that each fund shall, upon request, assume the
defense of any claim made against any shareholder for any act or
obligation of the fund and satisfy any judgment thereon. Thus, the
risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which a fund
itself would be unable to meet its obligations. FMR believes that, in
view of the above, the risk of personal liability to shareholders is
remote.
The Declaration of Trust further provides that the Trustees, if they
have exercised reasonable care, will not be liable for any neglect or
wrongdoing, but nothing in the Declaration of Trust protects Trustees
against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of their
office.
VOTING RIGHTS. Each fund's capital consists of shares of beneficial
interest. As a shareholder, you receive one vote for each dollar value
of net asset value you own. The shares have no preemptive or
conversion rights; the voting and dividend rights, the right of
redemption, and the privilege of exchange are described in the
Prospectus. Shares are fully paid and nonassessable, except as set
forth under the heading "Shareholder and Trustee Liability" above.
Shareholders representing 10% or more of the trust or a fund may, as
set forth in the Declaration of Trust, call meetings of the trust or a
fund for any purpose related to the trust or fund, as the case may be,
including, in the case of a meeting of the entire trust, the purpose
of voting on removal of one or more Trustees. The trust or any fund
may be terminated upon the sale of its assets to another open-end
management investment company, or upon liquidation and distribution of
its assets, if approved by vote of the holders of a majority of the
trust or the fund, as determined by the current value of each
shareholder's investment in the fund or trust. If not so terminated,
the trust and its funds will continue indefinitely. Each fund may
invest all of its assets in another investment company.
CUSTODIAN. The Bank of New York, is custodian of the assets of
Fidelity Strategic Income Fund. The custodian is responsible for the
safekeeping of a fund's assets and the appointment of any subcustodian
banks and clearing agencies. The custodian takes no part in
determining the investment policies of a fund or in deciding which
securities are purchased or sold by a fund. However, a fund may invest
in obligations of the custodian and may purchase securities from or
sell securities to the custodian. The Chase Manhattan Bank,
headquartered in New York, also may serve as a special purpose
custodian of certain assets in connection with repurchase agreement
transactions.
FMR, its officers and directors, its affiliated companies, and the
Board of Trustees may, from time to time, conduct transactions with
various banks, including banks serving as custodians for certain funds
advised by FMR. Transactions that have occurred to date include
mortgages and personal and general business loans. In the judgment of
FMR, the terms and conditions of those transactions were not
influenced by existing or potential custodial or other fund
relationships.
AUDITOR. Coopers & Lybrand L.L.P., One Post Office Square, Boston,
Massachusetts serves as the fund's independent accountant. The auditor
examines financial statements for the fund and provides other audit,
tax, and related services.
