FIDELITY
REAL ESTATE HIGH INCOME
FUND
SEMIANNUAL REPORT
MAY 31, 1999
(Fidelity graphic logos)(registered trademark)
CONTENTS
PERFORMANCE 3 How the fund has done over
time.
FUND TALK 5 The manager's review of fund
performance, strategy and
outlook.
INVESTMENTS 6 A complete list of the fund's
investments with their
market values.
FINANCIAL STATEMENTS 10 Statements of assets and
liabilities, operations, and
changes in net assets, as
well as financial highlights.
NOTES 12 Notes to the financial
statements.
Standard & Poor's, S&P and S&P 500 are registered service marks of The
McGraw-Hill Companies, Inc. and have been licensed for use by Fidelity
Distributors Corporation.
Other third party marks appearing herein are the property of their
respective owners.
All other marks appearing herein are registered or unregistered
trademarks or service marks of FMR Corp. or an affiliated company.
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE
SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND.
THIS REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS IN THE FUND UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
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.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
FOR MORE INFORMATION ON THE FUND, INCLUDING CHARGES AND EXPENSES, CALL
JEFF GANDEL AT 617-563-6414 FOR A FREE PROSPECTUS. READ IT CAREFULLY
BEFORE YOU INVEST OR SEND MONEY.
PERFORMANCE: THE BOTTOM LINE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $100,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
CUMULATIVE TOTAL RETURNS
PERIODS ENDED MAY 31, 1999 PAST 6 MONTHS PAST 1 YEAR LIFE OF FUND
Fidelity Real Estate High 5.99% -1.61% 88.53%
Income
ML High Yield Master 1.99% 1.63% 58.56%
High Current Yield Funds 3.32% -1.70% n/a
Average
CUMULATIVE TOTAL RETURNS show the fund's performance in percentage
terms over a set period - in this case, six months, one year or since
the fund started on January 5, 1995. For example, if you had invested
$1,000 in a fund that had a 5% return over the past year, the value of
your investment would be $1,050. You can compare the fund's return to
the performance of the Merrill Lynch High Yield Master Index - a
market value-weighted index of all domestic and yankee high-yield
bonds. Issues included in the index have maturities of one year or
more and have a credit rating lower than BBB-/Baa3, but are not in
default. To measure how the fund's performance stacked up against its
peers, you can compare it to the high current yield funds average,
which reflects the performance of mutual funds with similar objectives
tracked by Lipper Inc. The past six months average represents a peer
group of 320 mutual funds. These benchmarks include reinvested
dividends and capital gains, if any, and exclude the effect of sales
charges.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED MAY 31, 1999 PAST 1 YEAR LIFE OF FUND
Fidelity Real Estate High -1.61% 15.49%
Income
ML High Yield Master 1.63% 11.04%
High Current Yield Funds -1.70% n/a
Average
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and
show you what would have happened if the fund had performed at a
constant rate each year. (Note: Lipper calculates average annual total
returns by annualizing each fund's total return, then taking an
arithmetic average. This may produce a different figure than that
obtained by averaging the cumulative total returns and annualizing the
result.)
$100,000 OVER LIFE OF FUND
Real Estate High Inc ML High Yield Master
00671 ML002
1995/01/05 100000.00 100000.00
1995/01/31 100918.56 101255.38
1995/02/28 104093.12 104414.67
1995/03/31 105430.21 105867.78
1995/04/30 107058.44 108346.52
1995/05/31 111364.63 111731.51
1995/06/30 112854.47 112584.91
1995/07/31 113387.98 113872.01
1995/08/31 115807.97 114563.12
1995/09/30 117769.89 115873.84
1995/10/31 118684.60 116695.22
1995/11/30 120329.56 117834.33
1995/12/31 121432.24 119725.79
1996/01/31 122861.39 121616.64
1996/02/29 122234.55 121799.75
1996/03/31 122094.38 121468.97
1996/04/30 123181.86 121523.99
1996/05/31 123858.23 122400.40
1996/06/30 126275.58 123135.66
1996/07/31 127320.62 123971.65
1996/08/31 127913.11 125251.90
1996/09/30 132066.15 127939.25
1996/10/31 138261.78 129341.38
1996/11/30 142842.15 131956.29
1996/12/31 143581.99 132971.66
1997/01/31 147776.98 133993.56
1997/02/28 151913.15 135873.22
1997/03/31 152800.96 134364.15
1997/04/30 158792.49 135893.43
1997/05/31 160484.33 138597.25
1997/06/30 163908.63 140742.72
1997/07/31 170965.79 144120.25
1997/08/31 170997.49 143795.99
1997/09/30 176137.46 146251.11
1997/10/31 177153.54 147221.71
1997/11/30 180300.26 148540.21
1997/12/31 182230.32 150025.34
1998/01/31 184570.38 152223.03
1998/02/28 185221.01 152888.03
1998/03/31 188396.33 154205.59
1998/04/30 190199.08 154938.05
1998/05/31 191620.34 155940.37
1998/06/30 190723.90 156789.42
1998/07/31 190878.81 157683.54
1998/08/31 186214.13 150879.36
1998/09/30 183925.92 151180.30
1998/10/31 175782.23 148658.35
1998/11/30 177871.78 155469.06
1998/12/31 180387.76 155520.67
1999/01/31 183893.19 156983.41
1999/02/28 181524.24 155860.47
1999/03/31 183839.18 157203.53
1999/04/30 187907.82 159662.37
1999/05/28 188526.41 158554.97
IMATRL PRASUN SHR__CHT 19990531 19990615 084300 R00000000000056
$100,000 OVER LIFE OF FUND: Let's say hypothetically that $100,000 was
invested in Fidelity Real Estate High Income Fund on January 5, 1995,
when the fund started. As the chart shows, by May 31, 1999, the value
of the investment would have grown to $188,526 - an 88.53% increase on
the initial investment. For comparison, look at how the Merrill Lynch
High Yield Master Index did over the same period. With dividends
reinvested, the same $100,000 investment would have grown to $158,555
- - a 58.56% increase.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of
how it will do tomorrow. Bond prices, for
example, generally move in the opposite
direction of interest rates. In turn, the share
price, return and yield of a fund that invests in
bonds will vary. That means if you sell your
shares during a market downturn, you might
lose money. But if you can ride out the
market's ups and downs, you may have a
gain.
(checkmark)
TOTAL RETURN COMPONENTS
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SIX MONTHS ENDED MAY 31, YEARS ENDED NOVEMBER 30, JANUARY 5, 1995 (COMMENCEMENT
OF OPERATIONS) TO NOVEMBER 30,
1999 1998 1997 1996 1995
Dividend returns 6.93% 9.74% 15.17% 9.59% 9.93%
Capital returns -0.94% -11.09% 11.05% 9.12% 10.40%
Total returns 5.99% -1.35% 26.22% 18.71% 20.33%
</TABLE>
TOTAL RETURN COMPONENTS include both dividend returns and capital
returns. A dividend return reflects the actual dividends paid by the
fund. A capital return reflects both the amount paid by the fund to
shareholders as capital gain distributions and changes in the fund's
share price. Both returns assume the dividends or capital gains, if
any, paid by the fund are reinvested.
DIVIDENDS
PERIODS ENDED MAY 31, 1999 PAST 1 MONTH PAST 6 MONTHS PAST 1 YEAR
Dividends per share 8.15(cents) 64.80(cents) 116.21(cents)
Annualized dividend rate 10.04% 13.62% 11.63%
30-day annualized yield 12.17% - -
DIVIDENDS per share show the income paid by the fund for a set period.
If you annualize this number, based on an average share price of $9.56
over the past one month, $9.54 over the past six months and $9.99 over
the past one year, you can compare the fund's income over these three
periods. The 30-day annualized YIELD is a standard formula for all
bond funds based on the yields of the bonds in the fund, averaged over
the past 30 days. This figure shows you the yield characteristics of
the fund's investments at the end of the period. It also helps you
compare funds from different companies on an equal basis.
(photograph of Mark Snyderman)
An interview with Mark Snyderman, Portfolio Manager of Fidelity Real
Estate High Income Fund
Q. HOW DID THE FUND PERFORM, MARK?
A. For the six-month period that ended May 31, 1999, the fund posted a
total return of 5.99%. During the same period, the Merrill Lynch High
Yield Master Index - a broad measure of the high-yield bond market -
returned 1.99%, while the high current yield funds average tracked by
Lipper Inc. returned 3.32%. For the 12 months that ended May 31, 1999
the fund returned -1.61%, while the Merrill Lynch index and the Lipper
average returned 1.63% and -1.70%, respectively.
Q. WHAT FACTORS ALLOWED THE FUND TO OUTPERFORM THE INDEX AND THE
LIPPER AVERAGE DURING THE PERIOD?
A. There were a number of factors that contributed to fund
performance. The yield spread on commercial mortgage-backed securities
(CMBS) relative to Treasuries tightened during the period,
demonstrating that investors were willing to venture back into the
high-yield real estate market. The supply of new issues declined in
response to increasing interest rates, while demand increased early in
the period because the high-yield CMBS market appeared to be
undervalued, relative to other sectors. In addition to a narrowing
yield spread between CMBS and Treasuries, the fund benefited from a
shorter duration in a rising interest-rate environment. Finally, good
security selection resulting from in-depth credit analysis enabled me
to purchase bonds with higher-than-average credit appreciation
potential.
Q. YOU MENTIONED HOW THE MARKET FOR COMMERCIAL MORTGAGE-BACKED
SECURITIES IMPROVED OVER THE PAST SIX MONTHS. WERE THERE ANY OTHER
REASONS FOR THE MARKET'S REBOUND?
A. In the previous report, I discussed how an unusual supply and
demand imbalance occurred when some of the biggest buyers of
high-yield mortgage securities left the market. These buyers became
sellers because they were over-leveraged with debt and, once the
market turned down, their situation worsened. This dislocation in the
market resulted in a significant drop in demand and yield spreads
widened dramatically for CMBS. Over the past six months, however,
investors began to recognize the opportunities and values this unusual
event created and they slowly returned to the market as buyers. With
the increase in demand we experienced during the period, CMBS yield
spreads tightened and prices increased.
Q. DID YOU MAKE ANY SIGNIFICANT CHANGES TO THE FUND OR YOUR STRATEGY
DURING THE PERIOD?
A. Not really. Early in the period, I positioned the portfolio
appropriately to take advantage of opportunities in the CMBS market,
and this worked out well for the fund. Similar to what I mentioned in
my report six months ago, after the dramatic sell-off in the CMBS
sector I continued to take the opportunity to increase the fund's
exposure to higher-rated securities that offered attractive values and
total return potential. While I would prefer to lengthen the fund's
average duration in order to be closer to the high-yield market's
average duration, I kept the fund's overall duration shorter than the
market because the better securities from a credit point of view have
been those with shorter maturities.
Q. WHICH HOLDINGS CONTRIBUTED TO FUND PERFORMANCE AND WHICH WERE
DETRACTORS?
A. The fund's CMBS holdings issued by LB Multifamily Mortgage 91-4,
Structured Asset Securities Corp. 93 and GAFCO provided a positive
contribution to the fund's return. In each case, the cash flows of the
underlying properties, and therefore the credit quality of the
mortgages, continued to perform better than the market expected. On
the negative side, LTC Properties, a health care real estate
investment trust that owns mortgages and sale-leasebacks, did not
perform well, as the market continued to worry about upcoming Medicare
legislation that could adversely affect payments to health care
providers.
Q. WHAT'S YOUR OUTLOOK IN THE COMING MONTHS?
A. We should continue to expect volatility in the returns of the
high-yield real estate market as compared to the high-yield corporate
market, since it has fewer buyers and sellers. On the other hand, I
think there is some room for CMBS yield spreads to tighten relative to
Treasuries and comparably rated corporate bonds. While CMBS yields
narrowed during the period, they did not tighten as dramatically as
the corporate bond market, which indicates to me that there are still
opportunities in the high-yield mortgage market. Longer term, the key
to outperforming the market in any environment depends upon intensive
credit analysis that uncovers the best opportunities for the fund.
That's where I'll focus my efforts.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER AND DO NOT NECESSARILY REPRESENT THE VIEWS OF FIDELITY OR
ANY OTHER PERSON IN THE FIDELITY ORGANIZATION. ANY SUCH VIEWS ARE
SUBJECT TO CHANGE AT ANY TIME BASED UPON MARKET OR OTHER CONDITIONS
AND FIDELITY DISCLAIMS ANY RESPONSIBILITY TO UPDATE SUCH VIEWS. THESE
VIEWS MAY NOT BE RELIED ON AS INVESTMENT ADVICE AND, BECAUSE
INVESTMENT DECISIONS FOR A FIDELITY FUND ARE BASED ON NUMEROUS
FACTORS, MAY NOT BE RELIED ON AS AN INDICATION OF TRADING INTENT ON
BEHALF OF ANY FIDELITY FUND.
FUND FACTS
GOAL: to provide high current income by investing
primarily in real estate-related instruments, with an
emphasis on lower-quality issues
START DATE: January 5, 1995
SIZE: as of May 31, 1999, more than $103 million
MANAGER: Mark Snyderman, since inception; joined
Fidelity in 1994
(checkmark)
INVESTMENTS MAY 31, 1999 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
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CORPORATE BONDS - 17.0%
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
CONVERTIBLE BONDS - 5.8%
CONSTRUCTION & REAL ESTATE -
3.6%
REAL ESTATE INVESTMENT TRUSTS
- - 3.6%
Rockefeller Center - $ 4,500,000 $ 3,712,500
Properties, Inc. 0% 12/31/00
MEDIA & LEISURE - 2.2%
LODGING & GAMING - 2.2%
Capstar Hotel Co. 4.75% B1 2,250,000 1,732,500
10/15/04
ShoLodge, Inc. 7.5% 5/1/04 Caa1 972,000 558,900
2,291,400
TOTAL CONVERTIBLE BONDS 6,003,900
NONCONVERTIBLE BONDS - 11.2%
CONSTRUCTION & REAL ESTATE -
5.2%
REAL ESTATE - 3.9%
Crescent Real Estate Equities Ba1 1,850,000 1,605,190
LP 7.5% 9/15/07 (d)
LNR Property Corp.:
9.375% 3/15/08 B1 2,075,000 1,986,813
10.5% 1/15/09 B1 430,000 433,225
4,025,228
REAL ESTATE INVESTMENT TRUSTS
- - 1.3%
Ocwen Asset Investment Corp. - 1,545,000 1,328,700
11.5% 7/1/05
TOTAL CONSTRUCTION & REAL 5,353,928
ESTATE
FINANCE - 0.5%
SAVINGS & LOANS - 0.5%
Wilshire Financial Services - 2,000,000 500,000
Group, Inc. 13% 1/1/04 (e)
MEDIA & LEISURE - 5.5%
LODGING & GAMING - 5.5%
Courtyard by Marriott II B- 1,700,000 1,746,750
LP/Courtyard II Finance Co.
10.75% 2/1/08
ITT Corp.:
6.75% 11/15/05 Ba1 4,080,000 3,651,600
7.375% 11/15/15 Ba1 50,000 43,707
ShoLodge, Inc. 9.75% 11/1/06 B3 420,000 260,400
5,702,457
TOTAL NONCONVERTIBLE BONDS 11,556,385
TOTAL CORPORATE BONDS 17,560,285
(Cost $19,542,719)
ASSET-BACKED SECURITIES - 1.4%
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
Saxon Asset Securities Trust:
8% 12/25/27 (c) BB $ 1,000,000 $ 891,758
8.6% 12/25/27 (c) B 863,000 518,318
TOTAL ASSET-BACKED SECURITIES 1,410,076
(Cost $1,435,139)
COLLATERALIZED MORTGAGE
OBLIGATIONS - 4.2%
PRIVATE SPONSOR - 4.2%
Credit-Based Asset Servicing
and Securitization LLC
Series 1997 2:
Class 2-B, 7.1977% 12/29/25 Ba3 777,195 324,479
(c)(d)
Class 2-C, 7.1977% 12/29/25 B3 2,550,000 541,875
(FRN) (c)(d)
DLJ Mortgage Acceptance Corp.
Series 1996-TD:
Class C, 6.8799% 9/29/23 B3 607,454 461,475
(c)(d)
Class D, 6.6697% 9/29/23 - 923,342 142,541
(c)(d)
GE Capital Mortgage Services,
Inc. Series 1998-7:
Class B4, 6.5% 4/25/13 (c) - 330,075 234,972
Class B5, 6.5% 4/25/13 (c) - 247,559 59,414
G3 Mortgage Reinsurance Ltd. B2 2,800,000 2,540,125
Series 1 Class D, 11.4125%
5/25/08 (c)(d)
TOTAL COLLATERALIZED 4,304,881
MORTGAGE OBLIGATIONS
(Cost $4,731,441)
COMMERCIAL MORTGAGE
SECURITIES - 59.2%
ACP Mortgage LP floater B 1,548,620 1,227,281
Series F, 7.3892% 2/28/28
(c)(d)
Atherton Franchisee Loan
Funding LLP Series 1998-A:
Class E, 8.25% 5/15/20 (c) BB 1,500,000 1,033,594
Class F, 7.44% 8/15/19 (c) B 2,000,000 902,188
Bankers Trust REMIC Trust
1988-1 Series 1998-S1A:
Class G, 7.9375% 11/28/02 Ba2 930,000 865,772
(c)(d)
Class H, 0% 11/28/02 (FRN) B3 1,398,154 1,222,511
(c)(d)
COMMERCIAL MORTGAGE
SECURITIES - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
Berkeley Federal Bank & Trust - $ 1,400,000 $ 978,250
FSB Series 1994 Class 1-B
7.6128% 8/1/24 (c)(d)
BKB Commercial Mortgage Trust
Series 1997 C1:
Class F, 8.6583% 4/26/04 B 2,276,000 2,119,525
(c)(d)
Class G, 8.6583% 4/27/09 CCC 2,141,500 1,370,560
(c)(d)
Class H, 8.94% 10/25/22 (c)(d) - 760,975 152,195
Blaylock Mortgage Capital
Corp. Series 1997 A:
Class B5, 6.425% 10/15/03 (c) B- 110,000 74,078
Class B6, 6.425% 10/15/03 (c) CCC 110,000 52,216
Class B7, 6.425% 10/15/03 (c) - 147,000 48,923
Commercial Mortgage
Acceptance Corp.:
pass through certificates BB+ 2,200,000 1,347,156
Series 1998-C2 Class F,
5.44% 5/15/13 (c)(d)
Series 1998-C2 Class G, 5.44% BB 2,500,000 1,495,313
7/15/13 (c)(d)
CS First Boston Mortgage - 1,340,195 1,011,428
Securities Corp. Series
1997-SPICE Class G, 7.2435%
4/20/38 (c)(d)
DLJ Mortgage Acceptance Corp.:
Series 1994 MF11 Class B2, Ba2 1,000,000 874,063
8.1% 6/18/04 (c)
Series 1994 MF4 Class C, 8.5% - 460,000 364,694
4/18/01 (c)
Series 1994-MF11 Class B3, B2 1,342,000 1,057,244
8.1% 6/18/04 (c)
Enterprise Mortgage - 2,110,000 1,416,914
Acceptance Co. Series 1998 -
1 Class E, 8.18% 6/15/16 (c)
First Chicago/Lennar Trust I - 2,800,000 2,041,375
Series 1997-CHL1 Class E,
8.0984% 4/1/39 (d)
FMAC Loan Receivables Trust:
Series 1997 A Class F, - 1,382,881 916,591
8.1087% 4/15/19 (c)(d)
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
FMAC Loan Receivables Trust:
Series 1997-B:
Class E, 7.8912% 9/15/19 - $ 1,000,000 $ 687,813
(c)(d)
Class F, 7.89% 9/15/19 (c)(d) - 2,176,545 1,332,454
Series 1997-C Class F, - 1,121,366 695,247
8.2652% 12/15/19 (c)(d)
Series 1998 A Class E, BB 1,500,000 992,578
7.9278% 9/15/20 (c)(d)
GAFCO Franchisee Loan Trust - 2,700,000 2,153,250
Series 1998-1 Class D, 14%
6/1/16 (c)(d)
General Motors Acceptance Ba3 1,646,000 1,283,748
Corp. Commercial Mortgage
Securities, Inc. Series
1996-C1 Class F, 7.86%
10/15/28 (c)
Kidder Peabody Acceptance
Corp. I:
Series 1993-M3 Class F, 6.5% B2 2,000,000 1,861,875
11/25/25 (c)
Series 1994 M1 Class D, - 842,000 577,033
8.1284% 7/25/01 (c)(d)
LB Multifamily Mortgage Trust Caa1 5,621,552 3,935,081
Series 1991 4 Class A1,
6.9643% 4/25/21 (d)
LTC Commercial Mortgage Pass BB 800,000 648,376
Through Certificates Series
1998-1 Class E 7.792%
5/28/30 (c)
Morgan Stanley Capital I, - 1,156,839 1,121,773
Inc. Series 1996-MBL1 Class
E, 8.2731% 5/25/21 (c)(d)
Mortgage Capital Funding, Baa3 750,000 661,875
Inc. Series 1998-MC3 Class
E, 0% 11/18/31 (d)
Nationslink Funding Corp. BB 3,500,000 2,618,438
Commercial Mortgage pass
through certificates Series
1998-2 Class F, 7.105%
8/20/30
Nomura Depositor Trust
floater Series 1998-ST1A:
Class B-2, 9.1525% 1/15/03 - 2,000,000 1,755,938
(c)(d)
Class B2-A, 9.1525% 2/15/34 - 200,000 175,594
(c)(d)
COMMERCIAL MORTGAGE
SECURITIES - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
Penn Mutual Life Insurance
Co. (The)/Penn Insurance &
Annuity Co. Series 1996-PML:
Class L, 7.9% 11/15/26 (c) - $ 2,500,000 $ 1,298,405
Class M, 7.9% 11/15/26 (c) - 5,862,000 756,198
Resolution Trust Corp.:
floater Series 1991 M2 Class Ba3 2,182,525 1,876,971
A1, 6.6561% 9/25/20 (d)
Series 1991 M2:
Class A2, 7.1315% 9/25/20 (d) Ba3 1,332,255 1,119,094
Class A3, 7.2498% 9/25/20 (d) Ba3 730,622 591,804
Structured Asset Securities
Corp.:
Series 1993-C1 Class E, 6.6% B 3,205,577 1,923,346
10/25/24 (c)
Series 1994 - C1 Class F, B 3,250,000 2,488,027
6.87% 8/25/26
Series 1995-C1:
Class E, 7.375% 9/25/24 (c) BB 2,350,000 2,187,244
Class F, 7.375% 9/25/24 (c) - 2,000,000 1,547,266
Series 1996 CFL Class H, B- 2,500,000 1,659,900
7.75% 2/25/28 (c)
Series 1996-CFL Class G, B 3,450,000 3,053,115
7.75% 2/25/28 (c)
Structured Mortgage Trust
Series 1997-2, 7.41% 1/30/06
(WAC)
Class C (c) - 950,000 641,992
Class D (c) - 1,200,000 729,938
TOTAL COMMERCIAL MORTGAGE 60,946,244
SECURITIES
(Cost $61,692,883)
COMPLEX MORTGAGE SECURITIES -
0.0%
INTEREST ONLY - 0.0%
BKB Commercial Mortgage Trust BBB 10,807,144 43,229
Series 1997 C1 Class X-1,
0.979% 12/26/01 (c)(d)(f)
(Cost $266,261)
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COMMON STOCKS - 7.4%
SHARES VALUE (NOTE 1)
CONSTRUCTION & REAL ESTATE -
7.4%
REAL ESTATE - 1.2%
Boardwalk Equities, Inc. (a) 70,000 $ 760,301
Boardwalk Equities, Inc. 3,800 41,274
(a)(c)
Fortress Investment Corp. (c) 25,000 421,875
1,223,450
REAL ESTATE INVESTMENT TRUSTS
- - 6.2%
AMRESCO Capital Trust, Inc. 120,000 1,200,000
Apex Mortgage Capital, Inc. 11,000 139,563
Clarion Commercial Holdings, 67,400 480,225
Inc. Class A
Imperial Credit Commercial 25,000 256,250
Mortgage Investment Corp.
LTC Properties, Inc. 208,000 2,769,000
Northstar Capital Investment 40,000 635,000
Corp. (a)(c)
Ocwen Asset Investment Corp. 75,000 407,813
Redwood Trust, Inc. 27,151 451,385
6,339,236
TOTAL CONSTRUCTION & REAL 7,562,686
ESTATE
HEALTH - 0.0%
MEDICAL FACILITIES MANAGEMENT
- - 0.0%
LTC Healthcare, Inc. (a) 5,850 10,238
TOTAL COMMON STOCKS 7,572,924
(Cost $9,798,258)
PREFERRED STOCKS - 6.4%
CONVERTIBLE PREFERRED STOCKS
- - 3.4%
CONSTRUCTION & REAL ESTATE -
3.4%
REAL ESTATE INVESTMENT TRUSTS
- - 3.4%
Innkeepers USA Trust Series 146,500 2,563,750
A, $2.16
Reckson Associates Realty 39,400 948,063
Corp. $1.9064
3,511,813
NONCONVERTIBLE PREFERRED
STOCKS - 3.0%
CONSTRUCTION & REAL ESTATE -
3.0%
REAL ESTATE INVESTMENT TRUSTS
- - 3.0%
Crown America Realty Trust 40,300 1,936,919
Series A, $5.50
Walden Residential 60,200 1,188,950
Properties, Inc. $2.30
3,125,869
TOTAL PREFERRED STOCKS 6,637,682
(Cost $7,204,433)
CASH EQUIVALENTS - 4.4%
MATURITY AMOUNT VALUE (NOTE 1)
Investments in repurchase $ 4,509,404 $ 4,507,000
agreements (U.S. Treasury
obligations), in a joint
trading account at 4.8%,
dated 5/28/99 due 6/1/99
(Cost $4,507,000)
TOTAL INVESTMENT IN $ 102,982,321
SECURITIES - 100%
(Cost $109,178,134)
</TABLE>
SECURITY TYPE ABBREVIATIONS
FRN - FLOATING RATE NOTE
WAC - WEIGHTED AVERAGE COUPON
LEGEND
(a) Non-income producing
(b) Standard & Poor's (registered trademark) credit ratings are used
in the absence of a rating by Moody's Investors Service, Inc.
(c) Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified
institutional buyers. At the period end, the value of these securities
amounted to $52,469,914 or 50.6% of net assets.
(d) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(e) Non-income producing - issuer filed for protection under the
Federal Bankruptcy Code or is in default of interest payment.
(f) Security represents right to receive monthly interest payments on
an underlying pool of mortgages. Principal shown is the par amount of
the mortgage pool.
OTHER INFORMATION
The composition of long-term debt holdings as a percentage of total
value of investments in securities, is as follows (ratings are
unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 0.0% AAA, AA, A 0.0%
Baa 0.6% BBB 0.0%
Ba 11.7% BB 17.2%
B 11.8% B 25.4%
Caa 4.3% CCC 2.2%
Ca, C 0.0% CC, C 0.0%
D 3.8%
The percentage not rated by Moody's or S&P amounted to 25.7%. FMR has
determined that unrated debt securities that are lower quality account
for 25.7% of the total value of investment in securities.
INCOME TAX INFORMATION
At May 31, 1999, the aggregate cost of investment securities for
income tax purposes was $109,206,320. Net unrealized depreciation
aggregated $6,223,999, of which $3,118,019 related to appreciated
investment securities and $9,342,018 related to depreciated investment
securities.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1999 (UNAUDITED)
ASSETS
Investment in securities, at $ 102,982,321
value (including repurchase
agreements of $4,507,000)
(cost $109,178,134) - See
accompanying schedule
Receivable for investments 94,989
sold
Receivable for fund shares 2,947
sold
Dividends receivable 34,615
Interest receivable 998,479
TOTAL ASSETS 104,113,351
LIABILITIES
Payable to custodian bank $ 33,424
Payable for investments 343,213
purchased
Accrued management fee 62,736
Other payables and accrued 26,774
expenses
TOTAL LIABILITIES 466,147
NET ASSETS $ 103,647,204
Net Assets consist of:
Paid in capital $ 110,912,154
Distributions in excess of (399,651)
net investment income
Accumulated undistributed net (669,486)
realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation (6,195,813)
(depreciation) on investments
NET ASSETS, for 10,885,164 $ 103,647,204
shares outstanding
NET ASSET VALUE, offering $9.52
price and redemption price
per share ($103,647,204
(divided by) 10,885,164
shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MAY 31,
1999 (UNAUDITED)
INVESTMENT INCOME $ 594,764
Dividends
Interest 4,412,026
TOTAL INCOME 5,006,790
EXPENSES
Management fee $ 336,788
Transfer agent fees 10,893
Accounting fees and expenses 30,076
Non-interested trustees' 276
compensation
Custodian fees and expenses 4,170
Registration fees 8,913
Audit 19,839
Legal 693
Miscellaneous 91
Total expenses before 411,739
reductions
Expense reductions (13,501) 398,238
NET INVESTMENT INCOME 4,608,552
REALIZED AND UNREALIZED GAIN (708,448)
(LOSS)
Net realized gain (loss) on
investment securities
Change in net unrealized 1,217,726
appreciation (depreciation)
on investment securities
NET GAIN (LOSS) 509,278
NET INCREASE (DECREASE) IN $ 5,117,830
NET ASSETS RESULTING FROM
OPERATIONS
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS ENDED MAY 31, 1999 YEAR ENDED NOVEMBER 30,
(UNAUDITED) 1998
INCREASE (DECREASE) IN NET
ASSETS
Operations Net investment $ 4,608,552 $ 7,047,514
income
Net realized gain (loss) (708,448) 1,685,401
Change in net unrealized 1,217,726 (10,123,790)
appreciation (depreciation)
NET INCREASE (DECREASE) IN 5,117,830 (1,390,875)
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (5,930,729) (7,493,833)
From net investment income
From net realized gain (1,129,658) (6,036,848)
TOTAL DISTRIBUTIONS (7,060,387) (13,530,681)
Share transactions Net 24,999,999 24,999,660
proceeds from sales of shares
Reinvestment of distributions 7,060,387 13,530,317
NET INCREASE (DECREASE) IN 32,060,386 38,529,977
NET ASSETS RESULTING FROM
SHARE TRANSACTIONS
TOTAL INCREASE (DECREASE) 30,117,829 23,608,421
IN NET ASSETS
NET ASSETS
Beginning of period 73,529,375 49,920,954
End of period (including $ 103,647,204 $ 73,529,375
under (over) distribution of
net investment income of
$(399,651) and $922,526,
respectively)
OTHER INFORMATION
Shares
Sold 2,613,030 2,262,960
Issued in reinvestment of 741,083 1,248,709
distributions
Net increase (decrease) 3,354,113 3,511,669
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
SIX MONTHS ENDED MAY 31, 1999 YEARS ENDED NOVEMBER 30,
(UNAUDITED) 1998 1997 1996 1995 E
SELECTED PER-SHARE DATA
Net asset value, beginning of $ 9.760 $ 12.420 $ 11.850 $ 11.040 $ 10.000
period
Income from Investment .476 D 1.033 D 1.124 D .950 D .922
Operations Net investment
income
Net realized and unrealized .082 (1.136) 1.594 .970 1.045
gain (loss)
Total from investment .558 (.103) 2.718 1.920 1.967
operations
Less Distributions
From net investment income (.648) (1.117) (1.508) (.930) (.837)
In excess of net investment - - - - (.090)
income
From net realized gain (.150) (1.440) (.640) (.180) -
Total distributions (.798) (2.557) (2.148) (1.110) (.927)
Net asset value, end of period $ 9.520 $ 9.760 $ 12.420 $ 11.850 $ 11.040
TOTAL RETURN B, C 5.99% (1.35)% 26.22% 18.71% 20.33%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 103,647 $ 73,529 $ 49,921 $ 57,697 $ 72,429
(000 omitted)
Ratio of expenses to average .90% A .91% 1.02% .91% 1.09% A
net assets
Ratio of expenses to average .87% A, F .89% F .99% F .90% F 1.09% A
net assets after expense
reductions
Ratio of net investment 10.04% A 9.65% 9.58% 8.72% 9.14% A
income to average net assets
Portfolio turnover rate 22% A 53% 80% 53% 49% A
</TABLE>
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN.
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD JANUARY 5, 1995 (COMMENCEMENT OF OPERATIONS) TO
NOVEMBER 30, 1995.
F FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES.
NOTES TO FINANCIAL STATEMENTS
For the period ended May 31, 1999 (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES.
Fidelity Real Estate High Income Fund (the fund) is a fund of Advisor
Series IV (the trust) and is authorized to issue an unlimited number
of shares. The trust is registered under the Investment Company Act of
1940, as amended, as an open-end management investment company
organized as a Massachusetts business trust. The financial statements
have been prepared in conformity with generally accepted accounting
principles which require management to make certain estimates and
assumptions at the date of the financial statements. The following
summarizes the significant accounting policies of the fund:
SECURITY VALUATION. Securities are valued based upon a computerized
matrix system and/or appraisals by a pricing service, both of which
consider market transactions and dealer-supplied valuations.
Securities (including restricted securities) for which quotations are
not readily available are valued primarily using dealer-supplied
quotes or at their fair value as determined in good faith under
consistently applied procedures under the general supervision of the
Board of Trustees. Short-term securities with remaining maturities of
sixty days or less for which quotations are not readily available are
valued at amortized cost or original cost plus accrued interest, both
of which approximate current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Purchases
and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the prevailing exchange rate on the
respective dates of the transactions.
Net realized gains and losses on foreign currency transactions
represent net gains and losses from sales and maturities of foreign
currency contracts, disposition of foreign currencies, the difference
between the amount of net investment income accrued and the U.S.
dollar amount actually received, and gains and losses between trade
and settlement date on purchases and sales of securities. The effects
of changes in foreign currency exchange rates on investments in
securities are included with the net realized and unrealized gain or
loss on investment securities.
INCOME TAXES. As a qualified regulated investment company under
Subchapter M of the Internal Revenue Code, the fund is not subject to
income taxes to the extent that it distributes substantially all of
its taxable income for the fiscal year. The schedule of investments
include information regarding income taxes under the caption "Income
Tax Information."
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend
date, except certain dividends from foreign securities where the
ex-dividend date may have passed, are recorded as soon as the fund is
informed of the ex-dividend date. Non-cash dividends included in
dividend income, if any, are recorded at the fair market value of the
securities received. Interest income, which includes accretion of
original issue discount, is accrued as earned. Investment income is
recorded net of foreign taxes withheld where recovery of such taxes is
uncertain. The fund may place a debt obligation on non-accrual status
and reduce related interest income by ceasing current accruals and
writing off interest receivables when the collection of all or a
portion of interest has become doubtful based on consistently applied
procedures, under the general supervision of the Board of Trustees of
the fund. A debt obligation is removed from non-accrual status when
the issuer resumes interest payments or when collectibility of
interest is reasonably assured.
EXPENSES. Most expenses of trust can be directly attributed to a fund.
Expenses which cannot be directly attributed are apportioned among the
funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are declared daily and
paid monthly from net investment income. Distributions from realized
gains, if any, are recorded on the ex-dividend date.
Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences, which may result in
distribution reclassifications, are primarily due to differing
treatments for paydown gains/losses on certain securities, foreign
currency transactions, non-taxable dividends and losses deferred due
to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Distributions in excess of net investment income and accumulated
undistributed net realized gain (loss) on investments and foreign
currency transactions may include temporary book and tax basis
differences which will reverse in a subsequent period. Any taxable
gain remaining at fiscal year end is distributed in the following
year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of
trade date. Gains and losses on securities sold are determined on the
basis of identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated
securities. Losses may arise from changes in the value of the foreign
currency or if the counterparties do not perform under the contracts'
terms. The U.S. dollar value of foreign currency contracts is
determined using contractual currency exchange rates established at
the time of each trade.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the fund, along with other
affiliated entities of Fidelity Management & Research Company (FMR),
may transfer uninvested cash balances into one or more joint trading
accounts. These balances are invested in one or more repurchase
agreements for U.S. Treasury or Federal Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are
marked-to-market daily and maintained at a value at least equal to the
principal amount of the repurchase agreement (including accrued
interest). FMR, the fund's investment adviser, is responsible for
determining that the value of the underlying securities remains in
accordance with the market value requirements stated above.
2. OPERATING POLICIES - CONTINUED
RESTRICTED SECURITIES. The fund is permitted to invest in securities
that are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from
registration or to the public if the securities are registered.
Disposal of these securities may involve time-consuming negotiations
and expense, and prompt sale at an acceptable price may be difficult.
At the end of the period, the fund had no investments in restricted
securities (excluding 144A issues).
3. PURCHASES AND SALES OF INVESTMENTS.
Purchases and sales of securities, other than short-term securities,
aggregated $36,121,919 and $9,404,433, respectively.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a
monthly fee that is calculated on the basis of a group fee rate plus
a fixed individual fund fee rate applied to the average net assets of
the fund. The group fee rate is the weighted average of a series of
rates and is based on the monthly average net assets of all the mutual
funds advised by FMR. The rates ranged from .1100% to .3700% for the
period. The annual individual fund fee rate is .60%. In the event that
these rates were lower than the contractual rates in effect during the
period, FMR voluntarily implemented the above rates, as they resulted
in the same or a lower management fee. For the period, the management
fee was equivalent to an annualized rate of .73% of average net
assets.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations
Company, Inc. (FIIOC), an affiliate of FMR, is the fund's transfer,
dividend disbursing and shareholder servicing agent. FIIOC receives
account fees and asset-based fees that vary according to account size
and type of account. FIIOC pays for typesetting, printing and mailing
of all shareholder reports, except proxy statements. For the period,
the transfer agent fees were equivalent to an annualized rate of .02%
of average net assets.
ACCOUNTING FEES. Fidelity Service Company, Inc., an affiliate of FMR,
maintains the fund's accounting records. The fee is based on the level
of average net assets for the month plus out-of-pocket expenses.
5. EXPENSE REDUCTIONS.
FMR has directed certain portfolio trades to brokers who paid a
portion of the fund's expenses. For the period, the fund's expenses
were reduced by $3,120 under this arrangement.
In addition, the fund has entered into arrangements with its custodian
and transfer agent whereby credits realized as a result of uninvested
cash balances were used to reduce a portion of the fund's expenses.
During the period, the fund's custodian and transfer agent fees were
reduced by $2,208 and $8,173 respectively, under these arrangements.
6. BENEFICIAL INTEREST.
At the end of the period, three shareholders were each record owners
of more than 10% of the total outstanding shares of the fund, totaling
100%.
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
OFFICERS
Edward C. Johnson 3d, President
Robert C. Pozen, Senior Vice President
Robert A. Lawrence, Vice President
Mark P. Snyderman, Vice President
Eric D. Roiter, Secretary
Richard A. Silver, Treasurer
Matthew N. Karstetter, Deputy Treasurer
John H. Costello, Assistant Treasurer
Leonard M. Rush, Assistant Treasurer
BOARD OF TRUSTEES
Ralph F. Cox *
Phyllis Burke Davis *
Robert M. Gates *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Marvin L. Mann *
William O. McCoy *
Gerald C. McDonough *
Robert C. Pozen
Thomas R. Williams *
ADVISORY BOARD
J. Gary Burkhead
Abigail P. Johnson
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER SERVICING AGENT
Fidelity Investments Institutional Operations Company, Inc.
Boston, MA
CUSTODIAN
The Bank of New York
New York, NY
* INDEPENDENT TRUSTEES