SPARTAN(REGISTERED TRADEMARK)
(REGISTERED TRADEMARK)
LIMITED MATURITY GOVERNMENT
FUND
ANNUAL REPORT
JULY 31, 1995
CONTENTS
PRESIDENT'S MESSAGE 3 Ned Johnson on investing
strategies.
PERFORMANCE 4 How the fund has done over time.
FUND TALK 7 The manager's review of fund
performance, strategy and outlook.
INVESTMENT CHANGES 10 A summary of major shifts in the
fund's investments over the past six
months.
INVESTMENTS 11 A complete list of the fund's
investments with their market
values.
FINANCIAL STATEMENTS 16 Statements of assets and liabilities,
operations, and changes in net
assets,
as well as financial highlights.
NOTES 20 Notes to the financial statements.
REPORT OF INDEPENDENT 23 The auditors' opinion.
ACCOUNTANTS
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, THE
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
FOR MORE INFORMATION ON ANY FIDELITY FUND, INCLUDING CHARGES AND EXPENSES,
CALL
1-800-544-8888 FOR A FREE PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST
OR SEND MONEY.
PRESIDENT'S MESSAGE
DEAR SHAREHOLDER:
Although there have been positive market indications so far in 1995, no one
can predict what lies ahead for investors. Last year, stocks posted
below-average returns and bonds had one of the worst years in history. This
downturn followed a period in which the investing environment was generally
very positive.
These market ups and downs are a normal part of investing, and there are
some basic principles that are helpful for investors to remember in
different types of markets.
Keeping in mind that the effects of interest rate changes on your bond
investments will only be "paper" gains or losses unless you sell your
shares, staying in your bond fund may be appropriate if your investment
horizon is at least a year or more. The longer your investing time frame,
the more likely it is that you will retain your principal investment
through both up and down markets. For example, a 10-year time frame, such
as saving for a college education, enables you to weather these ups and
downs in a long-term fund, which has higher potential returns. An
intermediate-length fund could be appropriate if your investment horizon is
two to four years, and a short-term bond fund could be the right choice if
you need your money in one or two years.
If your time horizon is less than a year, you might want to consider moving
some of your bond investment into a money market fund, which seeks income
and a stable share price by investing in high-quality, short-term
investments. Of course, there is no assurance that a money market fund will
achieve its goal, and it is important to remember that money market funds
are not insured or guaranteed by any agency of the U.S. government.
No matter what your investment horizon or portfolio diversity, it makes
good sense to follow a regular investment plan - investing a certain amount
of money at the same time each month or quarter - and to review your
portfolio periodically. A periodic investment plan will not, of course,
assure a profit or protect against a loss.
If you have any questions, please call us at 1-800-544-8888. We stand ready
to provide the information you need to make the investments that are right
for you.
Best regards,
Edward C. Johnson 3d
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 $10,000 investment. A fund's total
return includes changes in a fund's share price, plus reinvestment of any
dividends (or income) and capital gains (the profits the fund earns when it
sells bonds that have grown in value), and the effect of the $5 account
closeout fee. If Fidelity had not reimbursed certain fund expenses, the
fund's five year and life of fund returns would have been lower. You can
also look at the fund's income to measure performance.
CUMULATIVE TOTAL RETURNS
PERIODS ENDED JULY 31, 1995 PAST 1 PAST 5 LIFE OF
YEAR YEARS FUND
Spartan Limited Maturity Government 8.15% 41.05% 68.39%
Lehman Brothers 1-3 Year Government Bond Index 7.13% 40.51% n/a
Salomon Brothers Treasury/Agency 1-10 Year 8.40% 48.44% n/a
Index
Average Short U.S. Government Fund 6.54% 37.38% n/a
Consumer Price Index 2.76% 16.95% 30.23%
CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms
over a set period - in this case, one year, five years, or since the fund
started on May 2, 1988. For example, if you 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 returns to the performance of the Lehman
Brothers 1-3 Year Government Bond Index or the Salomon Brothers
Treasury/Agency 1-10 Year Index - both broad measures of the performance of
government bonds. To measure how the fund's performance stacked up against
its peers, you can compare it to the average short U.S. government fund,
which reflects the performance of 128 funds with similar objectives tracked
by Lipper Analytical Services over the past 12 months. These benchmarks
include reinvested dividends and capital gains, if any. Comparing the
fund's performance to the consumer price index (CPI) helps show how your
fund did compared to inflation. (The CPI returns begin on the month end
closest to the fund's start date.)
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JULY 31, 1995 PAST 1 PAST 5 LIFE OF
YEAR YEARS FUND
Spartan Limited Maturity Government 8.15% 7.12% 7.45%
Lehman Brothers 1-3 Year Government Bond 7.13% 7.04% n/a
Index
Salomon Brothers Treasury/Agency 1-10 Year 8.40% 8.22% n/a
Index
Average Short U.S. Government Fund 6.54% 6.54% n/a
Consumer Price Index 2.76% 3.18% 3.71%
AVERAGE ANNUAL TOTAL RETURNS take the fund's actual (or cumulative) return
and show you what would have happened if the fund had performed at a
constant rate each year.
$10,000 OVER LIFE OF FUND
Spartan Limited Salomon Brothers T
05/31/88 10000.00 10000.00
06/30/88 10089.93 10154.00
07/31/88 10093.28 10127.60
08/31/88 10115.75 10138.74
09/30/88 10224.38 10309.07
10/31/88 10323.95 10451.34
11/30/88 10319.91 10365.64
12/31/88 10358.92 10371.85
01/31/89 10442.02 10480.76
02/28/89 10446.04 10439.88
03/31/89 10499.63 10488.95
04/30/89 10638.18 10673.56
05/31/89 10788.05 10897.70
06/30/89 10980.47 11179.95
07/31/89 11117.13 11405.79
08/31/89 11049.90 11249.53
09/30/89 11106.17 11306.90
10/31/89 11282.21 11542.08
11/30/89 11373.33 11655.20
12/31/89 11431.33 11686.67
01/31/90 11417.22 11617.71
02/28/90 11480.37 11651.41
03/31/90 11507.34 11673.54
04/30/90 11524.33 11639.69
05/31/90 11697.25 11881.80
06/30/90 11809.06 12039.82
07/31/90 11949.47 12213.20
08/31/90 11998.08 12161.90
09/30/90 12094.04 12279.87
10/31/90 12219.36 12449.33
11/30/90 12362.55 12632.34
12/31/90 12475.38 12811.72
01/31/91 12614.53 12941.12
02/28/91 12712.89 13003.23
03/31/91 12817.69 13082.55
04/30/91 12928.04 13225.15
05/31/91 12994.86 13295.25
06/30/91 13046.37 13312.53
07/31/91 13195.74 13464.29
08/31/91 13359.78 13709.34
09/30/91 13495.43 13949.26
10/31/91 13664.13 14097.12
11/30/91 13713.77 14266.28
12/31/91 13961.32 14614.38
01/31/92 13893.58 14474.08
02/29/92 13975.89 14521.85
03/31/92 13959.12 14462.31
04/30/92 14062.81 14601.15
05/31/92 14203.34 14807.02
06/30/92 14313.09 15023.21
07/31/92 14354.40 15305.64
08/31/92 14527.13 15475.53
09/30/92 14627.24 15687.55
10/31/92 14567.21 15496.16
11/30/92 14634.63 15429.53
12/31/92 14766.09 15631.65
01/31/93 14892.82 15933.35
02/28/93 15056.34 16156.41
03/31/93 15135.67 16214.58
04/30/93 15233.61 16352.40
05/31/93 15283.89 16300.07
06/30/93 15444.20 16538.05
07/31/93 15496.70 16571.13
08/31/93 15612.67 16816.38
09/30/93 15666.30 16890.37
10/31/93 15702.11 16917.40
11/30/93 15598.00 16836.19
12/31/93 15713.88 16910.27
01/31/94 15877.45 17077.69
02/28/94 15728.38 16850.55
03/31/94 15526.38 16597.79
04/30/94 15450.88 16493.23
05/31/94 15434.89 16509.72
06/30/94 15429.46 16516.33
07/31/94 15585.43 16722.78
08/31/94 15631.40 16771.28
09/30/94 15597.54 16635.43
10/31/94 15615.86 16638.76
11/30/94 15579.93 16558.89
12/31/94 15564.70 16618.50
01/31/95 15799.88 16899.35
02/28/95 16029.35 17215.37
03/31/95 16105.63 17310.06
04/30/95 16295.84 17507.39
05/31/95 16717.90 18001.10
06/30/95 16819.70 18116.31
07/31/95 16856.54 18128.99
$10,000 OVER LIFE OF FUND: Let's say you invested $10,000 in Spartan
Limited Maturity Government Fund on May 31, 1988, shortly after the fund
started. As the chart shows, by July 31, 1995, the value of your investment
would have grown to $16,857 - a 68.57% increase on your initial investment.
This assumes you still own the fund on July 31, 1995, and therefore does
not include the effect of the $5 account closeout fee. For comparison, look
at how the Salomon Brothers Treasury/Agency 1-10 Year Index did over the
same period. With dividends reinvested, the same $10,000 investment would
have grown to $18,129 - an 81.29% increase. Beginning with this report, the
fund will compare its performance to the Salomon Brothers Treasury/Agency
1-10 Year Index rather than the Lehman Brothers 1-3 Year Government Bond
Index. The new index's average maturity is closer to the range permitted
for the fund, which normally maintains an average of up to 10 years.
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
YEARS ENDED JULY 31,
1995 1994 1993 1992 1991
Dividend return 6.60% 5.22% 6.18% 6.98% 8.91%
Capital appreciation return 1.55% -4.66% 1.77% 1.79% 1.50%
Total return 8.15% 0.56% 7.95% 8.77% 10.41%
DIVIDEND returns and capital appreciation returns are both part of a bond
fund's total return. A dividend return reflects the actual dividends paid
by the fund. A capital appreciation 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 gains are
reinvested. Capital appreciation and total returns include the effect of
the $5 account closeout fee.
DIVIDENDS AND YIELD
PERIODS ENDED JULY 31, 1995 PAST PAST 6 PAST 1
MONTH MONTHS YEAR
Dividends per share 5.14(cents) 30.40(cents) 60.30(cents)
Annualized dividend rate 6.18% 6.35% 6.31%
30-day annualized yield 6.18% - -
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 $9.80 over
the past month, $9.65 over the past six months and $9.56 over the past
year, you can compare the fund's income over these three periods. The
30-day annualized YIELD is a standard formula for all 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.
FUND TALK: THE MANAGER'S OVERVIEW
MARKET RECAP
Although down slightly in July,
U.S. bond markets posted strong
returns during the 12 months
ended July 31, 1995. For the
12-month period, the Lehman
Brothers Aggregate Bond Index
- a broad measure of U.S.
taxable bonds - had a total
return of 10.11%. A strong rally
starting in November 1994
helped bonds recover from the
effects of the sharply rising
interest rate environment seen
through much of 1994.
Indications that the economy was
slowing helped push interest
rates down. In addition, the
Federal Reserve Board -
seeking to prevent the economy
from going into recession -
eased the money supply by
lowering the fed funds rate - the
rate banks charge each other for
overnight loans - by 0.25% on
July 6. The rally lost steam in July,
however, over uncertainty about
future Fed actions, and as
statistics pointed to the possibility
of future economic strength and
resultant inflation.
Mortgage-backed securities rode
along with the rally. The Salomon
Brothers Mortgage Index
returned 10.17% during the
period. Outside of the U.S.,
markets also have done well.
Emerging markets rallied from the
lows caused by Mexico's peso
devaluation in December 1994.
The J.P. Morgan Emerging
Markets Bond Index returned
10.01% during the 12-month
period. Declining interest rates and
a weak U.S. dol-
lar helped the Salomon Brothers
World Government Bond Index
- which includes U.S. issues -
to post a 18.13% return.
An interview with Curt Hollingsworth, Portfolio Manager of Spartan Limited
Maturity Government Fund
Q. CURT, HOW HAS THE FUND PERFORMED?
A. It has done well. For the 12 months ended July 31, 1995, the fund had a
total return of 8.15%. That beat the average short U.S. government bond
fund tracked by Lipper Analytical Services, which returned 6.54% for the
same 12-month period. The Salomon Brothers Treasury/Agency 1-10 Year Index
had a total return of 8.40% for the 12 months ended July 31.
Q. WHAT HELPED THE FUND BEAT THE AVERAGE FUND?
A. The fund took advantage of opportunities in U.S. agency securities and
mortgage-backed securities. Short-term agency issues reached their widest
yield spreads in several years, so I added to that position through the end
of April. By yield spread I mean a yield advantage, or the difference in
yield between agency issues and U.S. Treasuries with the same maturities.
By the end of April, the spread had tightened, causing the agencies to
outperform comparable Treasury notes. As a result, I started selling some
of them to take profits.
Q. WHAT ABOUT INVESTMENTS IN MORTGAGE-BACKED SECURITIES, WHICH ARE DOWN TO
25.2% OF THE FUND AS OF JULY 31?
A. In late 1994 and early 1995, the fund owned more mortgage-backed
securities because they offered a significant yield advantage over
comparable Treasuries. When the yield spread between mortgage-backed
securities and Treasuries increases - as it had by early 1994 - mortgage
securities typically do quite well going forward. But by the end of 1994,
mortgage securities offered only a small yield advantage, so I sold a
portion of the position to take profits. In their place, I bought the
agency securities I've just mentioned. The mortgage securities I've kept
are those with high coupons, or stated interest rates. I bought them at
undervalued levels, when market prices reflected an assumption that
prepayments - when mortgage holders pay off loan balances to take advantage
of lower interest rates - would remain high during the life of the bonds.
Recently, investors have started to realize that there is a fair amount of
value in these high-coupon mortgages, so they should present a nice
opportunity for the fund. I'll look to sell them when I think they've
reached their peak value, relative to comparable Treasury notes.
Q. HOW HAVE YOU POSITIONED THE FUND IN TERMS OF BOND MATURITIES?
A. A year ago, the fund had a relatively large weighting in cash, which
obviously is a very short-term investment, and also in longer-term
securities. At that point, the fund was relatively light in intermediate
securities with maturities of two to three years. This strategy helped the
fund's performance through most of 1994. That's because as interest rates
rose, yields on intermediate-term securities rose more than yields on
longer-term securities.
Q. HOW HAVE YOU ALTERED YOUR STRATEGY NOW THAT YIELDS HAVE FALLEN IN 1995?
A. At the end of 1994, the yield curve, or the difference in yield between
securities with various maturities, was quite flat. When that occurs,
longer-term bonds offer very little additional yield over shorter
securities. Based on historical information, I felt that the yield curve
wouldn't flatten much more, and, if anything, might steepen a little. In
the fourth quarter of 1994, I moved the fund to a "laddered" maturity
distribution, meaning it was more diversified across securities with
maturities ranging from one to 10 years. In fact, the curve started to
steepen in December, and the fund benefited from having a laddered
structure.
Q. WHAT DO YOU SEE LOOKING OUT OVER THE NEXT SIX MONTHS?
A. It's very difficult to predict the direction of interest rates. As a
result, I don't intend to actively manage the fund's duration in
anticipation of interest rate changes. Instead, I will manage the fund so
that it will have approximately the same duration as the Salomon Brothers
Treasury/Agency 1-10 Year Index. Duration is an estimate of how sensitive
the fund's share price is to a change in comparable interest rates. If I
feel comfortable that interest rates will remain relatively stable, and
that inflation will stay low, I'll tend to be more attracted to mortgage
securities and agency issues that are callable - or redeemable by the
issuer before their stated maturity dates. If it appeared that interest
rates were going to be volatile, my tendency would be to focus less on
mortgage-backed securities and more on non-callable agency issues and
Treasuries.
FUND FACTS
GOAL: high current income
with preservation of capital
by investing mainly in U.S.
government and agency
securities
START DATE: May 2, 1988
SIZE: as of July 31, 1995,
more than $817 million
MANAGER: Curt
Hollingsworth, since 1988;
manager Spartan Long-Term
Government Bond Fund,
since 1993; Spartan
Short-Intermediate
Government Fund, since
1992; Fidelity
Short-Intermediate
Government Fund, since
1991; joined Fidelity in 1983
(checkmark)
CURT HOLLINGSWORTH ON
TOTAL RETURN:
"Risk and return are the two
most important aspects of an
investment's performance.
When it comes to measuring
return, in my opinion total
return is the best figure to look
at. Instead of merely watching
a fund's share price - and
assuming, for example,
that they've lost 5% of their
money if the share price is
down 5% over a year -
investors are beginning to
realize that they need to take
into account the monthly
dividends they receive that
offset much of the price
decline. Interest income is the
main source of return for a
bond fund over the long term.
Fortunately, total return is
easy to explain by using a
"dollars in, dollars out"
example. If someone
invested $100 in this bond
fund a year ago and reinvested
all dividends and capital gains,
then the investment would be
worth $108.15 today. That is
what is meant by a cumulative
total return of 8.15%."
DISTRIBUTIONS
A total of 34.31% of the
dividends distributed during
the fiscal year was derived
from interest on U.S.
Government securities which
is generally exempt from state
income tax.
The fund will notify
shareholders in January 1996
of this percentage for use in
preparing 1995 income tax
returns.
INVESTMENT CHANGES
COUPON DISTRIBUTION AS OF JULY 31, 1995
% OF FUND'S % OF FUND'S INVESTMENTS
INVESTMENTS 6 MONTHS AGO
under 5% 23.1 15.9
5 - 5.99% 5.4 12.8
6 - 6.99% 6.3 9.6
7 - 7.99% 10.5 3.1
8 - 8.99% 11.7 15.4
9 - 9.99% 9.4 9.5
10 - 10.99% 5.3 6.2
11 - 11.99% 15.0 6.0
12 - 12.99% 8.0 15.8
13% and over 4.5 2.2
Zero Coupon Bonds 0.0 2.0
COUPON DISTRIBUTION SHOWS THE RANGE OF STATED INTEREST RATES ON THE FUND'S
INVESTMENTS, EXCLUDING REPURCHASE AGREEMENTS.
AVERAGE YEARS TO MATURITY AS OF JULY 31, 1995
6 MONTHS AGO
Years 5.0 4.5
AVERAGE YEARS TO MATURITY IS BASED ON THE AVERAGE TIME UNTIL PRINCIPAL
PAYMENTS ARE EXPECTED FROM EACH OF THE FUND'S BONDS, WEIGHTED BY DOLLAR
AMOUNT.
DURATION AS OF JULY 31, 1995
6 MONTHS AGO
Years 3.1 2.9
DURATION SHOWS HOW MUCH A BOND FUND'S PRICE FLUCTUATES WITH CHANGES IN
COMPARABLE INTEREST RATES. IF RATES RISE 1%, FOR EXAMPLE, A FUND WITH A
FIVE-YEAR DURATION IS LIKELY TO LOSE ABOUT 5% OF ITS VALUE. OTHER FACTORS
ALSO CAN INFLUENCE A BOND FUND'S PERFORMANCE AND SHARE PRICE. ACCORDINGLY,
A BOND FUND'S ACTUAL PERFORMANCE MAY DIFFER FROM THIS EXAMPLE.
ASSET ALLOCATION
AS OF JULY 31, 1995 AS OF JANUARY 31, 1995
Row: 1, Col: 1, Value: 1.8
Row: 1, Col: 2, Value: 3.2
Row: 1, Col: 3, Value: 70.3
Row: 1, Col: 4, Value: 24.7
Mortgage-backed
securities 43.4%
U.S. government
and government
agency obligations 52.0%
CMOs and other
mortgage related
securities 3.1%
Short-term
investments 1.5%
Mortgage-backed
securities 25.2%
U.S. government
and government
agency obligations 70.8%
CMOs and other
mortgage related
securities 3.2%
Short-term
investments 0.8%
Row: 1, Col: 1, Value: 1.5
Row: 1, Col: 2, Value: 3.1
Row: 1, Col: 3, Value: 52.0
Row: 1, Col: 4, Value: 43.4
INVESTMENTS JULY 31, 1995
Showing Percentage of Total Value of Investment in Securities
U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - 70.8%
PRINCIPAL VALUE (NOTE 1)
AMOUNT (000S) (000S)
U.S. TREASURY OBLIGATIONS - 35.9%
4 3/8%, 11/15/96 $ 68,100 $ 66,940
7 1/4%, 11/15/96 10,525 10,711
5 1/8%, 6/30/98 11,960 11,672
5 1/4%, 7/31/98 4,075 3,991
9 1/4%, 8/15/98 7,935 8,632
8 7/8%, 11/15/98 6,800 7,357
7 1/8%, 9/30/99 6,440 6,661
7 3/4%, 12/31/99 36,285 38,451
7 7/8%, 8/15/01 9,500 10,256
11 7/8%, 11/15/03 38,290 51,422
12 3/8%, 5/15/04 9,580 13,309
11 5/8%, 11/15/04 26,315 35,612
12 3/4%, 11/15/10 2,900 4,210
13 7/8%, 5/15/11 14,085 21,832
TOTAL U.S. TREASURY OBLIGATIONS 291,056
U.S. GOVERNMENT AGENCY OBLIGATIONS - 34.9%
Federal Agricultural Mortgage Corporation:
6.92%, 2/10/01 1,400 1,444
7.04%, 8/10/05 1,000 1,034
Federal Home Loan Bank:
7.59%, 12/23/96 4,520 4,617
4 3/4%, 2/24/97 (callable) (a) 59,100 57,930
6.20%, 7/17/02 2,240 2,190
6.37%, 6/30/03 1,060 1,037
Federal Home Loan Mortgage Corporation:
4.78%, 2/10/97 1,060 1,040
6.47%, 7/7/97 1,480 1,489
6.55%, 10/02/02 1,680 1,675
Federal National Mortgage Association:
3%, 7/13/98 (a) 1,530 1,528
4.70%, 9/10/98 (callable) 3,200 3,052
4.94%, 10/30/98 (callable) 3,240 3,102
Government Trust Certificates:
(assets of Trust guaranteed by U.S. Government
through Defense Security Assistance Agency):
Class 1-B, 9 1/8%, 11/15/96 1,784 1,815
Class 1-C, 9 1/4%, 11/15/01 3,350 3,663
Class 2-E, 9.40%, 5/15/02 6,910 7,591
Class T-2, 9 5/8%, 5/15/02 4,820 5,285
U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
PRINCIPAL VALUE (NOTE 1)
AMOUNT (000S) (000S)
U.S. GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
Government Trust Certificates - continued
(assets of Trust guaranteed by U.S. Government
through Export-Import Bank):
Series 1995-A, 6.28%, 6/15/04 $ 5,340 $ 5,266
Series 1992-A, 7.02%, 9/01/04 3,387 3,448
Series 1994-F, 8.178%, 12/15/04 35,225 37,271
Guaranteed Trade Trust 4.86%, 4/1/98 1,170 1,149
Private Export Funding Corporation:
5 3/4%, 4/30/98 1,765 1,740
9.10%, 10/30/98 310 335
9 1/2%, 3/31/99 9,738 10,766
5.65%, 3/15/03 1,872 1,794
8 3/4%, 6/30/03 4,245 4,772
5.48%, 9/15/03 468 448
6.86%, 4/30/04 983 990
State of Israel (guaranteed by U.S. Government through
Agency for International Development):
5 1/4%, 3/15/98 5,185 5,073
7 3/4%, 4/1/98 724 740
4 7/8%, 9/15/98 55,030 52,829
6%, 2/15/99 19,485 19,296
7 3/4%, 11/15/99 3,934 4,122
5 3/4%, 3/15/00 4,010 3,902
8%, 11/15/01 10,930 11,694
6 1/8%, 3/15/03 1,700 1,639
5 5/8%, 9/15/03 2,150 1,999
8 1/2%, 4/1/06 6,865 7,526
Student Loan Marketing Association 7.56%, 12/9/96 2,690 2,742
Tennessee Valley Authority 8 1/4%, 11/15/96 4,085 4,197
Twelve Federal Land Banks 7.95%, 10/21/96 990 1,013
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS 283,243
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $562,829) 574,299
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 25.2%
PRINCIPAL VALUE (NOTE 1)
AMOUNT (000S) (000S)
FEDERAL HOME LOAN MORTGAGE CORPORATION - 14.5%
6 1/2%, 5/1/08 $ 4,189 $ 4,108
7%, 10/1/96 to 1/1/98 . 1,269 1,285
8 1/2%, 5/1/10 to 1/1/22 8,581 8,879
9%, 11/1/09 to 11/1/16 2,949 3,079
9 1/2%, 7/1/16 to 8/1/21 15,413 16,273
10%, 12/1/00 to 2/1/23 24,073 26,060
10 1/2%, 9/1/09 to 1/1/21 14,459 15,687
10 3/4%, 7/1/13 202 224
11%, 8/1/00 to 12/1/15 1,750 1,935
11 1/4%, 2/1/10 to 10/1/14 1,963 2,178
11 1/2%, 11/1/15 to 8/1/19 691 764
11 3/4%, 1/1/10 to 10/1/15 388 430
12%, 1/1/00 to 12/1/15 3,924 4,356
12 1/4%, 7/1/10 to 8/1/15 1,936 2,147
12 1/2%, 10/1/09 to 6/1/19 22,063 24,592
12 3/4%, 2/1/10 to 8/1/11 276 307
13%, 9/1/10 to 12/1/15 3,299 3,669
13 1/4%, 11/1/10 to 12/1/14 319 353
13 1/2%, 11/1/10 to 10/1/14 587 656
13 3/4%, 10/1/14 37 41
14%, 11/1/12 to 4/1/16 239 267
14 1/2%, 12/1/10 to 9/1/12 123 137
14 3/4%, 3/1/10 54 60
16 1/4%, 7/1/11 12 13
117,500
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 5.7%
6%, 8/1/08 to 5/1/09 5,420 5,216
8%, 4/1/98 to 10/1/00 1,031 1,056
8 1/4%, 12/1/01 5,571 5,827
8 1/2%, 1/1/98 to 12/1/22 4,286 4,443
9%, 11/1/97 to 5/1/98 653 672
10 1/4%, 10/1/09 to 10/1/18 823 894
11%, 8/1/10 to 9/1/15 3,652 4,057
11 1/4%, 11/1/10 to 1/1/16 2,608 2,891
11 1/2%, 9/1/11 to 12/1/15 2,703 3,004
11 3/4%, 7/1/13 to 4/1/14 430 478
12 1/4%, 4/1/09 to 6/1/15 2,406 2,667
12 1/2%, 9/1/07 to 5/1/21 6,695 7,449
12 3/4%, 10/1/11 to 6/1/15 2,242 2,487
13%, 6/1/11 to 7/1/15 2,790 3,112
13 1/4%, 9/1/11 to 9/1/13 1,044 1,162
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - CONTINUED
PRINCIPAL VALUE (NOTE 1)
AMOUNT (000S) (000S)
FEDERAL NATIONAL MORTGAGE ASSOCIATION - CONTINUED
13 1/2%, 5/1/11 to 12/1/14 $ 157 $ 174
14%, 6/1/11 to 12/1/14 285 321
14 1/2%, 7/1/14 20 23
15%, 4/1/12 34 39
45,972
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 5.0%
8%, 9/15/06 to 11/15/07 1,628 1,672
8 1/2%, 4/15/16 to 4/15/17 155 164
9%, 11/15/04 to 12/15/16 2,910 3,088
9 1/2%, 6/15/09 to 4/15/16 13,813 14,841
10 1/2%, 8/15/15 to 4/15/16 282 306
11%, 8/15/98 to 10/15/15 552 599
11 1/2%, 4/15/10 to 1/15/21 11,544 13,014
11 3/4%, 1/15/14 72 79
12%, 11/15/12 to 6/15/15 1,661 1,858
12 1/4%, 1/15/14 169 188
12 1/2%, 6/15/14 68 76
13%, 1/15/11 to 5/15/15 1,984 2,242
13 1/4%, 9/15/13 to 10/15/14 487 535
13 1/2%, 5/15/10 to 10/15/14 1,035 1,158
13 3/4%, 8/15/14 to 9/15/14 73 81
14%, 6/15/11 to 12/15/14 257 289
16%, 9/15/11 to 4/15/13 182 210
17%, 12/15/11 16 19
40,419
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $202,575) 203,891
COLLATERALIZED MORTGAGE OBLIGATIONS - 3.2%
U.S. GOVERNMENT AGENCY - 3.2%
Federal Home Loan Mortgage Corporation:
sequential pay Series 1353, Class A,
5 1/2%, 11/15/04 716 698
planned amortization class, Series 1404-C,
6.40%, 2/15/05 5,500 5,423
COLLATERALIZED MORTGAGE OBLIGATIONS - CONTINUED
PRINCIPAL VALUE (NOTE 1)
AMOUNT (000S) (000S)
U.S. GOVERNMENT AGENCY - CONTINUED
Federal National Mortgage Association:
planned amortization class:
Series 1992, Class 155-D, 6.20%, 11/25/01 $ 1,600 $ 1,580
Series 1993-28, Class PD, 5 1/4%, 10/25/01 3,400 3,345
Series 1993, Class 11-C, 5 3/4%, 4/25/02 9,400 9,306
Series 1987-2, Z tranche, 11%, 11/25/17 4,245 4,597
Resolution Trust Corp. Series 1991-11, Class 6-A, 12.647%,
10/25/21 946 994
TOTAL U.S. GOVERNMENT AGENCY 25,943
PRIVATE SPONSOR - 0.0%
DLJ Acceptance Trust planned amortization class,
Series 1989 Class 1-F, 11%, 8/1/19 298 320
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $25,423) 26,263
REPURCHASE AGREEMENTS - 0.8%
MATURITY
AMOUNT (000S)
Investments in repurchase agreements
(U.S. Treasury obligations), in a
joint trading account at 5.82%
dated 7/31/95 due 8/1/95 $ 6,716 6,715
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $797,542) $ 811,168
1. Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date.
INCOME TAX INFORMATION
At July 31, 1995, the aggregate cost of investment securities for income
tax purposes was $797,558,000. Net unrealized appreciation aggregated
$13,610,000, of which $16,097,000 related to appreciated investment
securities and $2,487,000 related to depreciated investment securities.
At July 31, 1995, the fund had a capital loss carryforward of approximately
$49,726,000 which will expire on July 31, 2003.
The fund intends to elect to defer to its fiscal year ending July 31, 1996
$9,707,000 of losses recognized during the period November 1, 1994 to July
31, 1995.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
AMOUNTS IN THOUSANDS (EXCEPT PER-SHARE AMOUNTS) JULY 31, 1995
ASSETS
Investment in securities, at value (including repurchase $ 811,168
agreements of $6,715) (cost $797,542) - See
accompanying schedule
Cash 1
Receivable for investments sold 1,337
Interest receivable 11,834
TOTAL ASSETS 824,340
LIABILITIES
Payable for investments purchased $ 4,837
Payable for fund shares redeemed 1,265
Distributions payable 716
Accrued management fee 447
TOTAL LIABILITIES 7,265
NET ASSETS $ 817,075
Net Assets consist of:
Paid in capital $ 865,198
Distributions in excess of net investment income (2,231)
Accumulated undistributed net realized gain (loss) (59,518)
on investments
Net unrealized appreciation (depreciation) on 13,626
investments
NET ASSETS, for 83,716 shares outstanding $ 817,075
NET ASSET VALUE, offering price and redemption price per $9.76
share ($817,075 (divided by) 83,716 shares)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF OPERATIONS
AMOUNTS IN THOUSANDS YEAR ENDED JULY 31, 1995
INVESTMENT INCOME $ 68,294
Interest
EXPENSES
Management fee $ 5,657
Non-interested trustees' compensation 5
Interest 29
TOTAL EXPENSES 5,691
NET INVESTMENT INCOME 62,603
REALIZED AND UNREALIZED GAIN (LOSS) (17,524)
Net realized gain (loss) on investment securities
Change in net unrealized appreciation (depreciation) on:
Investment securities 19,649
Delayed delivery commitments (9) 19,640
NET GAIN (LOSS) 2,116
NET INCREASE (DECREASE) IN NET ASSETS RESULTING $ 64,719
FROM OPERATIONS
STATEMENT OF CHANGES IN NET ASSETS
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
AMOUNTS IN THOUSANDS YEAR ENDED YEAR ENDED
JULY 31, JULY 31,
1995 1994
INCREASE (DECREASE) IN NET ASSETS
Operations $ 62,603 $ 96,160
Net investment income
Net realized gain (loss) (17,524) (68,416)
Change in net unrealized appreciation (depreciation) 19,640 (19,485)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING 64,719 8,259
FROM OPERATIONS
Distributions to shareholders (54,853) (71,409)
From net investment income
In excess of net realized gain - (31,339)
TOTAL DISTRIBUTIONS (54,853) (102,748)
Share transactions 113,877 379,642
Net proceeds from sales of shares
Reinvestment of distributions 45,255 89,915
Cost of shares redeemed (370,039) (886,133)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING (210,907) (416,576)
FROM SHARE TRANSACTIONS
TOTAL INCREASE (DECREASE) IN NET ASSETS (201,041) (511,065)
NET ASSETS
Beginning of period 1,018,116 1,529,181
End of period (including over distribution of net $ 817,075 $ 1,018,116
investment income of $2,231 and $3,544,
respectively)
OTHER INFORMATION
Shares
Sold 11,938 37,868
Issued in reinvestment of distributions 4,736 8,997
Redeemed (38,897) (89,181)
Net increase (decrease) (22,223) (42,316)
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED JULY 31,
1995 1994 C 1993 1992 1991
SELECTED PER-SHARE DATA
Net asset value, beginning $ 9.610 $ 10.310 $ 10.180 $ 10.060 $ 9.930
of period
Income from Investment .610 .470 .872 .836 .853
Operations
Net investment income
Net realized and unrealized .143 (.410) (.087) .021 .142
gain (loss)
Total from investment .753 .060 .785 .857 .995
operations
Less Distributions (.603) (.540) (.605) (.677) (.845)
From net investment income
From net realized gain - - (.050) (.060) (.020)
on investments
In excess of net realized gain - (.220) - - -
on investments
Total distributions (.603) (.760) (.655) (.737) (.865)
Net asset value, end of period $ 9.760 $ 9.610 $ 10.310 $ 10.180 $ 10.060
TOTAL RETURN A, B 8.16% .57% 7.96% 8.78% 10.43%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 817 $ 1,018 $ 1,529 $ 1,770 $ 880
(in millions)
Ratio of expenses to average .65% .65% .65% .61% .50%
net assets
Ratio of expenses to average net .65% .65% .65% .65% .69%
assets before expense
reductions
Ratio of net investment income 7.18% 7.37% 8.05% 8.24% 8.63%
to average net assets
Portfolio turnover rate 210% 391% 324% 330% 288%
A THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE
PERIODS SHOWN.
B TOTAL RETURNS DO NOT INCLUDE THE ACCOUNT CLOSEOUT FEE.
C EFFECTIVE AUGUST 1, 1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2, "DETERMINATION,
DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME, CAPITAL GAIN, AND RETURN OF CAPITAL
DISTRIBUTIONS BY INVESTMENT COMPANIES." AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY
REFLECT CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
For the period ended July 31, 1995
1. SIGNIFICANT ACCOUNTING POLICIES.
Spartan Limited Maturity Government Fund (the fund) is a fund of Fidelity
Income Fund (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 (the 1940 Act), as an open-end management investment company
organized as a Massachusetts business trust. 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. Short-term securities
maturing within sixty days of their purchase date are valued either at
amortized cost or original cost plus accrued interest, both of which
approximate current value. Securities for which market quotations are not
readily available are valued at their fair value as determined in good
faith under consistently applied procedures under the general supervision
of the Board of Trustees.
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
its fiscal year. The schedule of investments includes information regarding
income taxes under the caption "Income Tax Information."
INVESTMENT INCOME. Interest income, which includes accretion of original
issue discount, is accrued as earned.
EXPENSES. Most expenses of the trust can be directly attributed to a fund.
Expenses which cannot be directly attributed are apportioned between 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, market discount, capital loss
carryforwards, and losses deferred due to wash sales and excise tax
regulations.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital and may
affect the per-share allocation between net investment income and realized
and unrealized gain (loss). Distributions in excess of net investment
income and accumulated undistributed net realized gain (loss) on
investments may include temporary book and tax basis differences which will
reverse in a subsequent period. Any taxable income or gain remaining at
fiscal year end is distributed in the following year.
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
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 that mature in
60 days or less from the date of purchase, and are collateralized by U.S.
Treasury or Federal Agency obligations.
REPURCHASE AGREEMENTS. The fund, through its custodian, receives delivery
of the underlying U.S. Treasury or Federal Agency Securities, the market
value of which is required to be at least equal to the repurchase price.
For term repurchase agreement transactions, the underlying securities are
marked-to-market daily and maintained at a value at least equal to the
repurchase price. The fund's investment adviser, FMR, is responsible for
determining that the value of the underlying securities remains in
accordance with the market value requirements stated above.
DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell securities on
a when-issued or forward commitment basis. Payment and delivery may take
place a month or more after the date of the transaction. The price of the
underlying securities and the date when the securities will be delivered
and paid for are fixed at the time the transaction is negotiated. With
respect to purchase commitments, the fund identifies securities as
segregated in its custodial records with a value at least equal to the
amount of the commitment. Losses may arise due to changes in the market
value of the underlying securities or if the counterparty does not perform
under the contract.
3. PURCHASES AND SALES OF INVESTMENTS.
Purchases and sales of long-term U.S. government and government agency
obligations aggregated $1,808,701,000 and $1,985,384,000, respectively.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR pays all expenses,
except the compensation of the non-interested Trustees and certain
exceptions such as interest, taxes, brokerage commissions and extraordinary
expenses. FMR receives a fee that is computed daily at an annual rate of
.65% of the fund's average net assets.
FMR also bears the cost of providing shareholder services to the fund. To
offset the cost of providing these services, FMR or its affiliates collect
certain transaction fees from the fund's shareholders which amounted to
$29,000 for the period.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES -
CONTINUED
DISTRIBUTION AND SERVICE PLAN. Pursuant to the Distribution and Service
Plan (the Plan), and in accordance with Rule 12b-1 of the 1940 Act, FMR or
the fund's distributor, Fidelity Distributors Corporation (FDC), an
affiliate of FMR, may use their resources to pay administrative and
promotional expenses related to the sale of the fund's shares. Subject to
the approval of the Board of Trustees, the Plan also authorizes payments to
third parties that assist in the sale of the fund's shares or render
shareholder support services. No payments were made to third parties under
the Plan during the period.
5. BANK BORROWINGS.
The fund is permitted to have bank borrowings for temporary or emergency
purposes to fund shareholder redemptions. The fund has established
borrowing arrangements with certain banks. Under the most restrictive
arrangement, the fund must pledge to the bank securities having a market
value in excess of 220% of the total bank borrowings. The interest rate on
the borrowings is the bank's base rate, as revised from time to time. The
maximum loan and the average daily loan balances during the periods for
which loans were outstanding amounted to $20,483,000 and $6,131,000,
respectively. The weighted average interest rate was 6.08%.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Fidelity Income Fund and the Shareholders of Spartan
Limited Maturity Government Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Spartan
Limited Maturity Government Fund (a fund of Fidelity Income Fund) at July
31, 1995, the results of its operations for the year then ended, and the
changes in its net assets and the financial highlights for the periods
indicated in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Spartan Limited
Maturity Government Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe
that our audits, which included confirmation of securities at July 31,
1995, by correspondence with the custodian and brokers and the application
of alternative auditing procedures where confirmations from brokers were
not received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
September 1, 1995
INVESTMENT ADVISER
Fidelity Management & Research
Company
Boston, MA
OFFICERS
Edward C. Johnson 3d, President
J. Gary Burkhead, Senior Vice President
Fred L. Henning, Jr., Vice President
Curt Hollingsworth, Vice President
Arthur S. Loring, Secretary
Kenneth A. Rathgeber, Treasurer
John H. Costello, Assistant Treasurer
Leonard M. Rush, Assistant Treasurer
BOARD OF TRUSTEES
J. Gary Burkhead
Ralph F. Cox*
Phyllis Burke Davis*
Richard J. Flynn*
Edward C. Johnson 3d
E. Bradley Jones*
Donald J. Kirk*
Peter S. Lynch
Edward H. Malone*
Marvin L. Mann*
Gerald C. McDonough*
Thomas R. Williams*
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Service Co.
Boston, MA
CUSTODIAN
The Bank of New York
New York, NY
* INDEPENDENT TRUSTEES
AUTOMATED LINES FOR QUICKEST SERVICE
FIDELITY'S TAXABLE BOND FUNDS
Capital & Income
Ginnie Mae
Global Bond
Government Securities
Intermediate Bond
Investment Grade Bond
Mortgage Securities
New Markets Income
Short-Intermediate Government
Short-Term Bond
Short-Term World Income
Spartan(registered trademark) Ginnie Mae
Spartan Government Income
Spartan High Income
Spartan Investment Grade Bond
Spartan Limited Maturity
Government
Spartan Long-Term Government Bond
Spartan Short-Intermediate
Government
Spartan Short-Term Income
THE FIDELITY TELEPHONE CONNECTION
MUTUAL FUND 24-HOUR SERVICE
Account Balances 1-800-544-7544
Exchanges/Redemptions 1-800-544-7777
Mutual Fund Quotes 1-800-544-8544
Account Assistance 1-800-544-6666
Product Information 1-800-544-8888
Retirement Accounts 1-800-544-4774
(8 a.m. - 9 p.m.)
TDD Service 1-800-544-0118
for the deaf and hearing impaired
(9 a.m. - 9 p.m. Eastern time)
(registered trademark)
FIDELITY
(REGISTERED TRADEMARK)
MORTGAGE SECURITIES
PORTFOLIO
ANNUAL REPORT
JULY 31, 1995
CONTENTS
PRESIDENT'S MESSAGE 3 Ned Johnson on investing
strategies.
PERFORMANCE 4 How the fund has done over time.
FUND TALK 7 The manager's review of fund
performance, strategy and outlook.
INVESTMENT CHANGES 10 A summary of major shifts in the
fund's investments over the past six
months.
INVESTMENTS 11 A complete list of the fund's
investments with their market
values.
FINANCIAL STATEMENTS 15 Statements of assets and liabilities,
operations, and changes in net
assets,
as well as financial highlights.
NOTES 19 Notes to the financial statements.
REPORT OF INDEPENDENT 23 The auditors' opinion.
ACCOUNTANTS
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, THE
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
FOR MORE INFORMATION ON ANY FIDELITY FUND, INCLUDING CHARGES AND EXPENSES,
CALL
1-800-544-8888 FOR A FREE PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST
OR SEND MONEY.
PRESIDENT'S MESSAGE
DEAR SHAREHOLDER:
Although there have been positive market indications so far in 1995, no one
can predict what lies ahead for investors. Last year, stocks posted
below-average returns and bonds had one of the worst years in history. This
downturn followed a period in which the investing environment was generally
very positive.
These market ups and downs are a normal part of investing, and there are
some basic principles that are helpful for investors to remember in
different types of markets.
Keeping in mind that the effects of interest rate changes on your bond
investments will only be "paper" gains or losses unless you sell your
shares, staying in your bond fund may be appropriate if your investment
horizon is at least a year or more. The longer your investing time frame,
the more likely it is that you will retain your principal investment
through both up and down markets. For example, a 10-year time frame, such
as saving for a college education, enables you to weather these ups and
downs in a long-term fund, which has higher potential returns. An
intermediate-length fund could be appropriate if your investment horizon is
two to four years, and a short-term bond fund could be the right choice if
you need your money in one or two years.
If your time horizon is less than a year, you might want to consider moving
some of your bond investment into a money market fund, which seeks income
and a stable share price by investing in high-quality, short-term
investments. Of course, there is no assurance that a money market fund will
achieve its goal, and it is important to remember that money market funds
are not insured or guaranteed by any agency of the U.S. government.
No matter what your investment horizon or portfolio diversity, it makes
good sense to follow a regular investment plan - investing a certain amount
of money at the same time each month or quarter - and to review your
portfolio periodically. A periodic investment plan will not, of course,
assure a profit or protect against a loss.
If you have any questions, please call us at 1-800-544-8888. We stand ready
to provide the information you need to make the investments that are right
for you.
Best regards,
Edward C. Johnson 3d
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 $10,000 investment. A fund's total
return includes changes in a fund's share price, plus reinvestment of any
dividends (or income) and capital gains (the profits the fund earns when it
sells bonds that have grown in value). You can also look at the fund's
income to measure performance.
CUMULATIVE TOTAL RETURNS
PERIODS ENDED JULY 31, 1995 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
Mortgage Securities 10.88% 51.91% 139.20%
Salomon Brothers Mortgage Index 10.17% 52.60% 165.79%
Average U.S. Mortgage Fund 8.48% 43.66% 126.48%
Consumer Price Index 2.76% 16.95% 41.47%
CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms
over a set period - in this case, one year, five years, or 10 years. For
example, if you 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 returns to the performance of the Salomon Brothers Mortgage
Index - a broad measure of the performance of mortgage securities. To
measure how the fund's performance stacked up against its peers, you can
compare it to the average U.S. mortgage fund, which reflects the
performance of 60 U.S. mortgage funds with similar objectives tracked by
Lipper Analytical Services over the past 12 months. These benchmarks
include reinvested dividends and capital gains, if any. Comparing the
fund's performance to the consumer price index (CPI) helps show how your
fund did compared to inflation. (The CPI returns begin on the month end
closest to the fund's start date.)
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JULY 31, 1995 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
Mortgage Securities 10.88% 8.72% 9.11%
Salomon Brothers Mortgage Index 10.17% 8.82% 10.27%
Average U.S. Mortgage Fund 8.48% 7.50% 8.45%
Consumer Price Index 2.76% 3.18% 3.53%
AVERAGE ANNUAL TOTAL RETURNS take the fund's actual (or cumulative) return
and show you what would have happened if the fund had performed at a
constant rate each year.
$10,000 OVER 10 YEARS
Mortgage Sec. (040) Salomon Brothers Mortgage Index (SB0
07/31/85 10000.00 10000.00
08/31/85 10150.21 10180.00
09/30/85 10269.07 10294.02
10/31/85 10431.40 10552.40
11/30/85 10667.01 10847.86
12/31/85 10842.71 11148.35
01/31/86 10926.64 11191.83
02/28/86 11114.99 11500.72
03/31/86 11271.30 11669.78
04/30/86 11330.46 11761.97
05/31/86 11197.06 11538.50
06/30/86 11331.47 11705.80
07/31/86 11497.70 11936.41
08/31/86 11696.32 12171.56
09/30/86 11695.02 12189.81
10/31/86 11848.12 12355.59
11/30/86 12023.16 12611.36
12/31/86 12063.41 12646.67
01/31/87 12206.79 12832.57
02/28/87 12289.34 12950.63
03/31/87 12271.18 12931.21
04/30/87 11940.63 12551.03
05/31/87 11912.44 12510.87
06/30/87 12095.16 12722.30
07/31/87 12113.21 12770.64
08/31/87 12074.44 12713.18
09/30/87 11769.63 12420.77
10/31/87 12118.40 12828.17
11/30/87 12233.97 13009.05
12/31/87 12388.75 13159.96
01/31/88 12805.39 13670.56
02/29/88 12943.48 13834.61
03/31/88 12866.76 13732.23
04/30/88 12787.14 13647.09
05/31/88 12733.96 13617.07
06/30/88 12988.80 13958.86
07/31/88 12957.94 13915.59
08/31/88 12974.39 13944.81
09/30/88 13235.34 14276.70
10/31/88 13483.38 14602.20
11/30/88 13305.10 14393.39
12/31/88 13220.93 14318.55
01/31/89 13460.81 14587.74
02/28/89 13389.54 14476.87
03/31/89 13415.99 14481.21
04/30/89 13663.64 14736.08
05/31/89 13987.03 15219.43
06/30/89 14325.53 15606.00
07/31/89 14582.03 15975.86
08/31/89 14428.01 15741.02
09/30/89 14491.00 15851.20
10/31/89 14778.42 16222.12
11/30/89 14920.83 16397.32
12/31/89 15023.68 16489.14
01/31/90 14885.27 16370.42
02/28/90 14984.42 16437.54
03/31/90 14996.19 16504.94
04/30/90 14866.48 16351.44
05/31/90 15298.68 16848.52
06/30/90 15520.46 17126.52
07/31/90 15746.02 17417.68
08/31/90 15704.38 17274.85
09/30/90 15788.21 17414.78
10/31/90 15949.94 17597.63
11/30/90 16298.95 17990.06
12/31/90 16580.10 18286.89
01/31/91 16752.15 18553.88
02/28/91 16859.40 18672.63
03/31/91 16972.80 18808.94
04/30/91 17156.53 19004.55
05/31/91 17245.72 19167.99
06/30/91 17288.85 19189.08
07/31/91 17537.18 19513.37
08/31/91 17872.31 19870.47
09/30/91 18151.32 20251.98
10/31/91 18365.88 20563.86
11/30/91 18478.16 20705.75
12/31/91 18837.11 21146.78
01/31/92 18746.50 20931.08
02/29/92 18933.03 21127.84
03/31/92 18802.19 21034.87
04/30/92 18978.46 21226.29
05/31/92 19291.71 21621.10
06/30/92 19496.11 21884.88
07/31/92 19462.65 22059.96
08/31/92 19588.54 22357.77
09/30/92 19711.52 22529.92
10/31/92 19515.51 22340.67
11/30/92 19609.83 22432.27
12/31/92 19864.31 22705.94
01/31/93 20045.54 23019.28
02/28/93 20217.22 23231.06
03/31/93 20349.24 23370.45
04/30/93 20491.31 23529.37
05/31/93 20551.98 23637.60
06/30/93 20802.70 23866.89
07/31/93 20917.04 23964.74
08/31/93 20955.99 24062.99
09/30/93 21001.77 24084.65
10/31/93 21039.13 24164.13
11/30/93 20995.15 24120.64
12/31/93 21197.79 24301.54
01/31/94 21393.00 24546.99
02/28/94 21280.20 24394.79
03/31/94 21039.03 23792.24
04/30/94 20946.86 23642.35
05/31/94 21125.18 23722.74
06/30/94 21233.31 23663.43
07/31/94 21572.73 24124.87
08/31/94 21669.39 24175.53
09/30/94 21434.51 23851.58
10/31/94 21478.04 23844.42
11/30/94 21456.61 23758.58
12/31/94 21609.37 23955.78
01/31/95 22017.92 24492.39
02/28/95 22510.84 25116.94
03/31/95 22606.37 25219.92
04/30/95 22962.78 25557.87
05/31/95 23685.28 26385.94
06/30/95 23865.97 26525.79
07/31/95 23920.17 26578.84
$10,000 OVER 10 YEARS: Let's say you invested $10,000 in Fidelity Mortgage
Securities Portfolio on July 31, 1985. As the chart shows, by July 31,
1995, the value of your investment would have grown to $23,920 - a 139.20%
increase on your initial investment. For comparison, look at how the
Salomon Brothers Mortgage Index did over the same period. With dividends
reinvested, the same $10,000 investment would have grown to $26,579 - a
165.79% 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
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED JULY 31,
1995 1994 1993 1992 1991
Dividend return 7.46% 5.52% 6.73% 7.64% 8.83%
Capital appreciation return 3.42% -2.39% 0.74% 3.34% 2.55%
Total return 10.88% 3.13% 7.47% 10.98% 11.38%
</TABLE>
DIVIDEND returns and capital appreciation returns are both part of a bond
fund's total return. A dividend return reflects the actual dividends paid
by
the fund. A capital appreciation 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 gains are
reinvested.
DIVIDENDS AND YIELD
PERIODS ENDED JULY 31, 1995 PAST PAST 6 PAST 1
MONTH MONTHS YEAR
Dividends per share 6.48(cents) 38.64(cents) 73.73(cents)
Annualized dividend rate 6.97% 7.27% 7.00%
30-day annualized yield 7.47% - -
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 $10.95 over
the past month, $10.72 over the past six months and $10.53 over the past
year, you can compare the fund's income over these three periods. The
30-day annualized YIELD is a standard formula for all 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.
FUND TALK: THE MANAGER'S OVERVIEW
MARKET RECAP
Although down slightly in July,
U.S. bond markets posted strong
returns during the 12 months
ended July 31, 1995. For the
12-month period, the Lehman
Brothers Aggregate Bond Index
- a broad measure of U.S.
taxable bonds - had a total
return of 10.11%. A strong rally
starting in November 1994
helped bonds recover from the
effects of the sharply rising
interest rate environment seen
through much of 1994.
Indications that the economy was
slowing helped push interest
rates down. In addition, the
Federal Reserve Board -
seeking to prevent the economy
from going into recession -
eased the money supply by
lowering the fed funds rate - the
rate banks charge each other for
overnight loans - by 0.25% on
July 6. The rally lost steam in July,
however, over uncertainty about
future Fed actions, and as
statistics pointed to the possibility
of future economic strength and
resultant inflation.
Mortgage-backed securities rode
along with the rally. The Salomon
Brothers Mortgage Index
returned 10.17% during the
period. Outside of the U.S.,
markets also have done well.
Emerging markets rallied from the
lows caused by Mexico's peso
devaluation in December 1994.
The J.P. Morgan Emerging
Markets Bond Index returned
8.36% during the 12-month
period. Declining interest rates and
a weak U.S. dol-
lar helped the Salomon Brothers
World Government Bond Index
- which includes U.S. issues -
to post an 18.13% return.
An interview with Kevin Grant,
Portfolio Manager of Fidelity
Mortgage Securities Fund
Q. KEVIN, HOW HAS THE FUND PERFORMED?
A. It has done well. For the 12 months ended July 31, 1995, the fund had a
total return of 10.88%. That beat the average U.S. mortgage fund tracked by
Lipper Analytical Services, which returned 8.48% during the same 12-month
period. The Salomon Brothers Mortgage Index returned 10.17% for the 12
months ended July 31.
Q. WHAT HELPED THE FUND'S PERFORMANCE?
A. There were two areas that aided the fund's total return, both of which
occurred in the first half of the period. First, I had positioned the fund
in what is known as a barbell structure, with most of the fund's
investments on either end of the yield curve. I did this in anticipation of
yield curve flattening; that is, I expected that intermediate-term interest
rates would rise more than long-term rates in the second half of 1994. As
it turned out, the flattening did occur, maybe to a greater extent than
anticipated, adding value. I've since taken the barbell off. The other area
that provided solid performance was the fund's investments in interest-only
strips (IOs) - essentially pieces of mortgages whose values are tied to
mortgage prepayments. Although they only made up about 7% of the fund's
investments, they had a large positive impact, because I bought them when
they were priced cheaply and held them until they appreciated in price. I
sold most of the fund's IO position by February after realizing a gain in
each of the positions.
Q. WHAT HAS THE BACKDROP FOR MORTGAGE-BACKED SECURITIES BEEN LIKE OVER THE
PAST SIX MONTHS?
A. For most of the period, mortgage-backed securities performed well,
riding along with the general bond market rally. Then, in June, the
mortgage market lagged somewhat, as many investors became concerned that
the drop in interest rates could lead to increased prepayment activity -
when mortgage holders pay off and refinance their loans to take advantage
of lower interest rates. In late June and July, that situation reversed
itself and the mortgage market performed well, relative to Treasuries.
Q. WHERE HAVE YOU FOUND OPPORTUNITIES?
A. The past six months were interesting for their absence of value
opportunities. I use extensive quantitative analysis to try to find
securities that appear undervalued in the marketplace - those whose prices
are low relative to their fair-value price potential. For a value
opportunity to emerge, it's as if you need to get the market standing on
"one side of the boat," attracted to particular securities. I look for
cheap securities on the "other side of the boat," aiming for solid
performance when the market starts heading back toward the "middle of the
boat." Not much happened like this in the past six months; the market
remained fairly stable. The one exception was Fannie Mae securities, which
were priced relatively cheaply, so I increased the fund's stake there to
43.2%.
Q. THE FUND HAS ABOUT 13.5% INVESTED IN MORTGAGES ON COMMERCIAL PROPERTIES
IN THE FORM OF COMMERCIAL MORTGAGE SECURITIES. HOW HAVE THESE INVESTMENTS
DONE?
A. Their price-performance has been in line with the overall mortgage
market, although I believe they are still undervalued. I believe their
price will appreciate over the next 12 months or so. Although they clearly
raise the credit risk of the fund, they are providing significant yield to
it. I work to mitigate that risk by visiting the properties, and by
limiting each position to approximately 1% of the fund. Although I can
invest up to 35% of the fund in these kinds of securities, my target
weighting is currently about 15%. If the fund owns 15% in these commercial
mortgage securities and each position is 1%, I can follow all 15 issues
very closely.
Q. WHAT'S YOUR OUTLOOK?
A. Mortgage-backed securities are presently priced lower than the current
10-year average. That kind of situation usually doesn't last very long. I
believe that mortgages have the potential to outperform Treasuries. One
situation that could cause concern would be if interest rates go down about
1%. That could cause prepayments to increase beyond expectations and
mortgage-backed securities to underperform Treasuries. We're at a point
right now where the average interest rate on outstanding mortgages is
around 7.6%, while new mortgages are being offered at just below 8%. You
can see how a drop in interest rates would affect prepayments. But even if
we were to see a significant fall in interest rates and a marked increase
in prepayments, that would be good for my style of management, because it
would create value opportunities, shaking things up enough to send people
to "one side of the boat."
FUND FACTS
GOAL: high current income
by investing mainly in
mortgage securities of all
kinds
START DATE: December 31, 1984
SIZE: as of July 31, 1995,
more than $416 million
MANAGER: Kevin Grant, since
1993; manager, Fidelity
Ginnie Mae Portfolio and
Spartan Ginnie Mae Portfolio,
since February 1995; joined
Fidelity in 1993
(checkmark)
KEVIN GRANT ON HIS INVESTMENT
STRATEGY:
"I manage the fund to reflect
the mortgage market, as
represented by the Salomon
Brothers Mortgage Index. In
doing so, my goal is to
generate returns that are
better than the mortgage
market as a whole, while
attempting to dampen relative
volatility. I do this by
managing to the index and by
looking for incremental
sources of return through
mortgage and real estate
analysis.
"I first identify groups of
securities with similar
structures and sensitivity to
interest rates. Breaking the
market down into
manageable pieces, or cells, I
can track the market by
owning one security in each
cell. I then pick the cheapest
security in each cell, and find
securities outside the cell that
will outperform it. If I keep
doing so and values change,
the fund will make money in
each cell, adding to the
aggregate performance for
shareholders.
"Over time, even if I didn't pick
the best performing security
for each cell, I'd still nearly
match the performance of the
mortgage market. If I pick the
ones that appreciate most in
value in each cell every
month, I should do very well
versus the market. I've found
this to be the best way to add
value relative to the market in
a way that controls risk."
INVESTMENT CHANGES
COUPON DISTRIBUTION AS OF JULY 31, 1995
% OF FUND'S % OF FUND'S INVESTMENTS
INVESTMENTS 6 MONTHS AGO
0 - 5.99% 1.8 1.9
6 - 6.99% 26.0 24.8
7 - 7.99% 22.4 26.4
8 - 8.99% 7.6 16.8
9 - 9.99% 20.3 9.7
10 - 10.99% 4.8 5.5
11 - 11.99% 2.3 2.2
12 - 12.99% 2.6 2.8
13% and over 0.8 1.5
COUPON DISTRIBUTION SHOWS THE RANGE OF STATED INTEREST RATES ON THE FUND'S
INVESTMENTS, EXCLUDING REPURCHASE AGREEMENTS.
AVERAGE YEARS TO MATURITY AS OF JULY 31, 1995
6 MONTHS AGO
Years 5.8 8.0
AVERAGE YEARS TO MATURITY IS BASED ON THE AVERAGE TIME UNTIL PRINCIPAL
PAYMENTS ARE EXPECTED FROM EACH OF THE FUND'S BONDS, WEIGHTED BY DOLLAR
AMOUNT.
DURATION AS OF JULY 31, 1995
6 MONTHS AGO
Years 3.8 4.2
DURATION SHOWS HOW MUCH A BOND FUND'S PRICE FLUCTUATES WITH CHANGES IN
COMPARABLE INTEREST RATES. IF RATES RISE 1%, FOR EXAMPLE, A FUND WITH A
FIVE-YEAR DURATION IS LIKELY TO LOSE ABOUT 5% OF ITS VALUE. OTHER FACTORS
ALSO CAN INFLUENCE A BOND FUND'S PERFORMANCE AND SHARE PRICE. ACCORDINGLY,
A BOND FUND'S ACTUAL PERFORMANCE MAY DIFFER FROM THIS EXAMPLE.
ASSET ALLOCATION
AS OF JULY 31, 1995 AS OF JANUARY 31, 1995
Row: 1, Col: 1, Value: 11.4
Row: 1, Col: 2, Value: 1.5
Row: 1, Col: 3, Value: 15.4
Row: 1, Col: 4, Value: 71.7
Mortgage-backed
securities** 71.7%
CMOs and other
mortgage related
securities 19.9%
U.S. treasury
obligations 0.0%
Short-term
investments 8.4%
Mortgage-backed
securities* 72.8%
CMOs and other
mortgage related
securities 15.4%
U.S. treasury
obligations 0.4%
Short-term
investments 11.4%
Row: 1, Col: 1, Value: 8.4
Row: 1, Col: 2, Value: 0.0
Row: 1, Col: 3, Value: 19.9
Row: 1, Col: 4, Value: 71.7
* GNMA SECURITIES - 19.4%
** GNMA SECURITIES - 25.4%
INVESTMENTS JULY 31, 1995
Showing Percentage of Total Value of Investment in Securities
U.S. TREASURY OBLIGATIONS - 0.4%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
6 1/2%, 5/15/05 (Cost $2,005,313) $ 2,000,000 $ 2,009,060
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 72.8%
FEDERAL HOME LOAN MORTGAGE CORPORATION - 10.2%
5%, 7/1/10 5,013,589 4,598,364
5 1/2%, 12/1/00 to 7/1/02 2,622,028 2,520,423
6 1/2%, 1/1/24 to 7/1/24 4,902,987 4,676,225
8%, 10/1/07 to 12/1/18 1,245,724 1,269,167
8 1/2%, 11/1/03 to 1/1/20 3,663,792 3,781,350
9%, 9/1/08 to 3/1/25 16,323,489 17,132,897
10%, 1/1/09 to 5/1/19 4,062,581 4,378,047
10 1/2%, 8/1/10 to 12/1/20 4,584,056 4,880,199
11 1/2%, 4/1/12 284,501 314,476
11 3/4%, 6/1/11 98,882 109,541
12 1/4%, 6/1/14 to 7/1/15 337,368 374,496
12 1/2%, 5/1/12 to 4/1/15 1,994,196 2,222,885
12 3/4%, 6/1/05 to 3/1/15 408,604 454,572
13%, 1/1/11 to 6/1/15 2,813,034 3,136,533
49,849,175
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 43.2%
6%, 5/1/01 to 9/1/24 29,888,418 29,089,606
6 1/2%, 12/1/23 to 8/1/24 53,831,607 51,319,228
7%, 2/1/99 to 12/1/24 40,133,062 39,246,995
7 1/2%, 3/1/22 to 8/1/25 38,922,870 38,845,171
8%, 1/1/07 to 7/1/08 240,257 246,694
8 1/4%, 1/1/13 237,003 243,429
8 1/2%, 11/1/03 to 11/1/18 3,452,451 3,589,260
8 3/4%, 11/1/08 to 7/1/09 413,910 430,833
9%, 1/1/08 to 6/1/09 1,237,963 1,288,485
9 1/2%, 11/1/09 to 8/1/25 37,135,044 39,023,583
11%, 12/1/02 to 8/1/10 4,537,677 4,985,654
12 1/4%, 5/1/13 to 6/1/15 982,351 1,088,902
12 1/2%, 2/1/13 to 3/1/16 1,362,486 1,515,766
12 3/4%, 6/1/13 to 7/1/15 699,317 776,243
13 1/2%, 9/1/13 to 12/1/24 265,588 297,460
14%, 5/1/12 to 11/1/14 142,498 161,022
212,148,331
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 19.4%
6 1/2%, 10/1/23 to 8/1/24 $ 35,733,379 $ 33,963,090
7%, 7/1/23 to 5/1/24 6,881,554 6,715,913
7 1/2%, 9/1/16 to 8/1/23 11,017,900 11,014,539
8%, 5/1/21 to 7/1/25 7,404,942 7,534,069
8 1/2%, 7/1/16 to 12/1/21 3,480,468 3,632,728
9%, 9/1/16 to 4/1/18 371,321 390,230
9 1/2%, 9/1/17 to 8/1/25 7,737,160 8,212,196
9 1/2%, 9/1/24 (c)(d) 21,000,000 22,286,250
10 1/2%, 11/1/97 to 6/1/04 856,396 902,957
11 1/2%, 10/1/10 to 7/1/18 134,390 151,525
13%, 10/1/13 158,133 178,295
13 1/2%, 7/1/11 to 10/1/14 131,112 147,666
95,129,458
TOTAL U.S. GOVERNMENT AGENCY - MORTGAGE-
BACKED SECURITIES (Cost $352,577,529) 357,126,964
COLLATERALIZED MORTGAGE OBLIGATIONS - 1.0%
U.S. GOVERNMENT AGENCY - 1.0%
Federal Home Loan Mortgage Corporation:
sequential pay Series 1353 Class A,
5 1/2%, 11/15/04 286,271 279,114
Z Bond Series 9, Class E, 9.05%, 8/15/19 4,734,742 4,875,304
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $5,457,987) 5,154,418
COMMERCIAL MORTGAGE SECURITIES - 13.5%
ACP Mortgage LP Commercial floater Series F,
7.5398%, 2/28/28 (a)(f) 2,704,814 2,055,414
CBA Mortgage Corp. commercial Series 1993-C1
Class E, 7.1543%, 12/25/03 (a)(f) 3,183,000 2,698,580
CS First Boston Mortgage Securities Corp. commercial
Series 1994-M1 Class E, 12.60%, 2/15/02 (a) 4,000,000 3,988,750
Lennar Central Partners LP commercial Series:
1994-1 Class D, 9.89%, 9/15/04 (a) 4,000,000 3,997,520
1995-1 Class F, 11.70%, 5/15/05 (a) 4,000,000 4,015,000
COMMERCIAL MORTGAGE SECURITIES - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
New England Mutual Life Insurance Co. commercial
Series 1993-M1 Class D, 8%, 12/15/23 (a) $ 5,002,125 $ 4,028,274
Resolution Trust Corp. commercial Series:
1994-N2 Class 4, 10%, 12/15/04 (a)(g) 5,000,000 4,996,875
1994-N2 Class 5-A, 10 5/8%, 12/15/04 (a)(g) 4,200,000 4,130,438
1994-N2 Class 5-B, 10 5/8%, 12/15/04 (a)(g) 1,250,000 1,220,703
1994-C2 Class E, 8%, 4/25/25 6,993,289 6,304,887
1994-C2 Class G, 8%, 4/25/25 1,430,790 1,152,233
1994-C1 Class E, 8%, 6/25/26 6,269,230 5,111,382
1995-C1 Class C, 6.90%, 2/25/27 1,565,000 1,448,359
1995-C1 Class F, 6.90%, 2/25/27 5,910,396 5,140,197
SKW Real Estate commerial Class F, 12.80%, 4/15/05 (a) 2,310,750
2,310,028
SML, Inc. commercial Series 1994-C1:
Class B-3, 11.69%, 9/18/99 1,845,000 1,721,039
Class C, 9.20%, 9/18/99 (b) 3,280,000 2,267,300
Structured Asset Securities Corp. commercial Series:
1992-M1, Class C, 7.05%, 11/25/02 3,192,522 2,479,692
1995-C1, Class D, 7 3/8%, 9/25/24 4,000,000 3,555,000
1995-C1, Class E, 7 3/8%, 9/25/24 (a) 5,000,000 3,590,625
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $63,345,194) 66,212,296
COMPLEX MORTGAGE SECURITIES - 0.9%
INTEREST ONLY STRIPS - 0.9%
Federal National Mortgage Association:
Trust 47, 10.00%, 10/25/18 (e) 7,369,939 1,943,822
Trust 49, 10.00%, 2/25/19 (e) 4,575,325 1,206,742
SML, Inc. commercial Series 1994-C1
Class S, 0.81%, 9/18/99 (e) 51,554,000 1,256,629
TOTAL COMPLEX MORTGAGE SECURITIES
(Cost $4,007,195) 4,407,193
REPURCHASE AGREEMENTS - 11.4%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations), in a
joint trading account at 5.82%,
dated 7/31/95 due 8/1/95 $ 55,976,048 55,967,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $483,360,218) $ 490,876,931
LEGEND
6. 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 $37,032,207 or 8.9% of net
assets.
7. Restricted securities - Investment in securities not registered under
the Securities Act of 1933 (see Note 2 of Notes to Financial Statements).
Additional information on each holding is as follows:
ACQUISITION ACQUISITION
SECURITY DATE COST
SML, Inc.
commercial Series
1994-C1 Class C,
9.20%, 9/18/99 8/11/94 $2,132,820
8. Security purchased on a delayed delivery basis (see Note 2 of Notes to
Financial Statements).
9. Security sold on a delayed delivery basis (see Note 2 of Notes to
Financial Statements).
10. Security represents right to receive monthly interest payments on an
underlying pool of mortgages. Principal shown is the par amount of the
mortgage pool.
11. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
12. Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date.
INCOME TAX INFORMATION
At July 31, 1995, the aggregate cost of investment securities for income
tax purposes was $483,451,713. Net unrealized appreci-
ation aggregated $7,425,218, of which $10,059,607 related to appreciated
investment securities and $2,634,389 related to depreciated investment
securities.
The fund intends to elect to defer to its fiscal year ending July 31, 1996
$1,329,000 of losses recognized during the period November 1, 1994 to July
31, 1995.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
AMOUNTS IN THOUSANDS JULY 31, 1995
ASSETS
Investment in securities, at value (including repurchase $ 490,876,931
agreements of $55,967,000) (cost $483,360,218) -
See accompanying schedule
Commitment to sell securities on a delayed delivery $ (22,286,250)
basis
Receivable for securities sold on a delayed delivery 22,312,500 26,250
basis
Receivable for investments sold, regular delivery 46,041,989
Cash 292,943
Receivable for fund shares sold 307,918
Interest receivable 2,751,610
TOTAL ASSETS 540,297,641
LIABILITIES
Payable for investments purchased 101,353,547
Regular delivery
Delayed delivery 22,082,813
Accrued management fee 157,609
Other payables and accrued expenses 462,627
TOTAL LIABILITIES 124,056,596
NET ASSETS $ 416,241,045
Net Assets consist of:
Paid in capital $ 407,017,576
Undistributed net investment income 576,574
Accumulated undistributed net realized gain (loss) 1,103,932
on investments
Net unrealized appreciation (depreciation) on 7,542,963
investments
NET ASSETS, for 38,212,767 shares outstanding $ 416,241,045
NET ASSET VALUE, offering price and redemption price per $10.89
share ($416,241,045 (divided by) 38,212,767 shares)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
AMOUNTS IN THOUSANDS YEAR ENDED JULY 31, 1995
INVESTMENT INCOME $ 30,561,897
Interest
EXPENSES
Management fee $ 1,707,178
Transfer agent fees 808,136
Accounting fees and expenses 151,765
Non-interested trustees' compensation 1,785
Custodian fees and expenses 134,516
Registration fees 30,745
Audit 37,658
Legal 3,200
TOTAL EXPENSES 2,874,983
NET INVESTMENT INCOME 27,686,914
REALIZED AND UNREALIZED GAIN (LOSS) 5,690,972
Net realized gain (loss) on investment securities
Change in net unrealized appreciation (depreciation) on:
Investment securities 5,982,913
Delayed delivery commitments 188,838 6,171,751
NET GAIN (LOSS) 11,862,723
NET INCREASE (DECREASE) IN NET ASSETS RESULTING $ 39,549,637
FROM OPERATIONS
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED YEAR ENDED
JULY 31, JULY 31,
1995 1994
INCREASE (DECREASE) IN NET ASSETS
Operations $ 27,686,914 $ 25,299,446
Net investment income
Net realized gain (loss) 5,690,972 (6,701,766)
Change in net unrealized appreciation (depreciation) 6,171,751 (6,853,567)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING 39,549,637 11,744,113
FROM OPERATIONS
Distributions to shareholders (26,269,823) (20,745,350)
From net investment income
From net realized gain -- (1,532,937)
In excess of net realized gain (1,718,507) (1,074,645)
TOTAL DISTRIBUTIONS (27,988,330) (23,352,932)
Share transactions 166,536,217 75,437,490
Net proceeds from sales of shares
Reinvestment of distributions 23,325,421 19,136,884
Cost of shares redeemed (150,982,650) (136,632,161)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING 38,878,988 (42,057,787)
FROM SHARE TRANSACTIONS
TOTAL INCREASE (DECREASE) IN NET ASSETS 50,440,295 (53,666,606)
NET ASSETS
Beginning of period 365,800,750 419,467,356
End of period (including under (over) distribution of net $ 416,241,045 $ 365,800,750
investment income of $576,574 and $(675,692),
respectively)
OTHER INFORMATION
Shares
Sold 15,766,198 7,107,385
Issued in reinvestment of distributions 2,208,784 1,793,385
Redeemed (14,322,055) (12,806,427)
Net increase (decrease) 3,652,927 (3,905,657)
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED JULY 31,
1995 1994 D 1993 1992 1991
SELECTED PER-SHARE DATA
Net asset value, beginning $ 10.580 $ 10.910 $ 10.830 $ 10.480 $ 10.220
of period
Income from Investment .772 .570 .788 .808 .861
Operations
Net investment income
Net realized and unrealized .325 (.242) (.007) .313 .255
gain (loss)
Total from investment 1.097 .328 .781 1.121 1.116
operations
Less Distributions (.737) (.588) (.701) (.771) (.856)
From net investment income
From net realized gain - (.040) - - -
on investments
In excess of net realized gain (.050) (.030) - - -
on investments
Total distributions (.787) (.658) (.701) (.771) (.856)
Net asset value, end of period $ 10.890 $ 10.580 $ 10.910 $ 10.830 $ 10.480
TOTAL RETURN 10.88% 3.13% 7.47% 10.98% 11.38%
RATIOS AND SUPPLEMENTAL
DATA
Net assets, end of period $ 416 $ 366 $ 419 $ 441 $ 410
(in millions)
Ratio of expenses to average .77% .79% .76% .80% .82%
net assets
Ratio of net investment income 7.37% 6.73% 7.18% 7.57% 8.39%
to average net assets
Portfolio turnover rate 329% 563% 278% 146% 209%
</TABLE>
A EFFECTIVE AUGUST 1, 1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2,
"DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME,
CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES."
AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN
RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES.
NOTES TO FINANCIAL STATEMENTS
For the period ended July 31, 1995
1. SIGNIFICANT ACCOUNTING POLICIES.
Fidelity Mortgage Securities Portfolio (the fund) is a fund of Fidelity
Income Fund (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 (the 1940 Act), as an open-end management investment company
organized as a Massachusetts business trust. 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. Short-term securities
maturing within sixty days of their purchase date are valued either at
amortized cost or original cost plus accrued interest, both of which
approximate current value. Securities (including restricted securities) for
which market quotations are not readily available are valued at their fair
value as determined in good faith under consistently applied procedures
under the general supervision of the Board of Trustees.
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
its fiscal year. The schedule of investments includes information regarding
income taxes under the caption "Income Tax Information."
INVESTMENT INCOME. Interest income, which includes accretion of original
issue discount, is accrued as earned.
EXPENSES. Most expenses of the trust can be directly attributed to a fund.
Expenses which cannot be directly attributed are apportioned between 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 and losses deferred due to wash sales.
The fund also utilized earnings and profits distributed to shareholders on
redemption of shares as a part of the dividends paid deduction for income
tax purposes.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital and may
affect the per-share allocation between net investment income and realized
and unrealized gain (loss). Undistributed net investment income (loss) and
accumulated undistributed net realized gain (loss) on investments may
include temporary book and tax basis differences which will reverse in a
subsequent period. Any
1. SIGNIFICANT ACCOUNTING
POLICIES - CONTINUED
DISTRIBUTIONS TO SHAREHOLDERS - CONTINUED
taxable income or 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.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission (the SEC), 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 that
mature in 60 days or less from the date of purchase, and are collateralized
by U.S. Treasury or Federal Agency obligations.
REPURCHASE AGREEMENTS. The fund, through its custodian, receives delivery
of the underlying U.S. Treasury or Federal Agency Securities, the market
value of which is required to be at least equal to the repurchase price.
For term repurchase agreement transactions, the underlying securities are
marked-to-market daily and maintained at a value at least equal to the
repurchase price. The fund's investment adviser, Fidelity Management &
Research Company (FMR), is responsible for determining that the value of
the underlying securities remains in accordance with the market value
requirements stated above.
INTERFUND LENDING PROGRAM. Pursuant to an Exemptive Order issued by the
SEC, the fund, along with other registered investment companies having
management contracts with FMR, may participate in an interfund lending
program. This program provides an alternative credit facility allowing the
fund to borrow from, or lend money to, other participating funds.
DELAYED DELIVERY TRANSACTIONS.
The fund may purchase or sell securities on a when-issued or forward
commitment basis. Payment and delivery may take place a month or more after
the date of the transaction. The price of the underlying securities and the
date when the securities will be delivered and paid for are fixed at the
time the transaction is negotiated. The market value of the securities
purchased or sold on a when-issued or forward commitment basis are
identified as such in the fund's schedule of investments. The fund may
receive compensation for interest forgone in the purchase of a delayed
delivery security. With respect to purchase commitments, the fund
identifies securities as segregated in its custodial records with a value
at least equal to the amount of the commitment. Losses may arise due to
changes in the market value of the underlying securities or if the
counterparty does not perform under the contract.
RESTRICTED SECURITIES. The fund is permitted to invest in securities that
are subject to legal or contractual restrictions
2. OPERATING POLICIES -
CONTINUED
RESTRICTED SECURITIES - CONTINUED
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, restricted securities (excluding 144A issues) amounted
to $2,267,300 or 0.5% of net assets.
3. PURCHASES AND SALES OF INVESTMENTS.
Purchases and sales of securities, other than short-term securities,
aggregated $1,281,365,020 and $1,231,716,508, respectively, of which U.S.
government and government agency obligations aggregated $1,261,946,633 and
$1,227,971,136, 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 .1200% to .3700% for the period. 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. The annual individual fund fee rate is .30%. For
the period, the management fee was equivalent to an annual rate of .45% of
average net assets.
DISTRIBUTION AND SERVICE PLAN. Pursuant to the Distribution and Service
Plan (the Plan), and in accordance with Rule 12b-1 of the 1940 Act, FMR or
the fund's distributor, Fidelity Distributors Corporation (FDC), an
affiliate of FMR, may use their resources to pay administrative and
promotional expenses related to the sale of the fund's shares. Subject to
the approval of the Board of Trustees, the Plan also authorizes payments to
third parties that assist in the sale of the fund's shares or render
shareholder support services. FMR or FDC has informed the fund that
payments made to third parties under the Plan amounted to $15,762 for the
period.
TRANSFER AGENT FEES. Fidelity Service Co. (FSC), an affiliate of FMR, is
the fund's transfer, dividend disbursing and shareholder servicing agent.
During the period August 1, 1994 to December 31, 1994, FSC received fees
based on the type, size, number of accounts and the number of transactions
made by shareholders. Effective January 1, 1995, the Board of Trustees
approved a revised transfer agent contract pursuant to which FSC receives
account fees and asset-based fees that vary according to account size and
type of account. FSC pays for typesetting, printing and mailing of all
shareholder reports, except proxy statements.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
ACCOUNTING FEES. FSC 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. INTERFUND LENDING
PROGRAM.
The fund participated in the interfund lending program as a lender. The
maximum loan and the average daily loan balances during the periods for
which loans were outstanding amounted to $32,105,000 and $11,823,143,
respectively. The weighted average interest rate was 4.98%. Interest earned
from the interfund lending program amounted to $11,542 and is included in
interest income on the Statement of Operations.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Fidelity Income Fund and the Shareholders of
Fidelity Mortgage Securities Portfolio:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments , and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
Fidelity Mortgage Securities Portfolio (a fund of Fidelity Income Fund) at
July 31, 1995, the results of its operations for the year then ended, and
the changes in its net assets and the financial highlights for the periods
indicated in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Fidelity Mortgage
Securities Portfolio's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at July 31, 1995 by correspondence with
the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
September 1, 1995
INVESTMENT ADVISER
Fidelity Management & Research
Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Management & Research
(U.K.) Inc., London, England
Fidelity Management & Research
(Far East) Inc., Tokyo, Japan
OFFICERS
Edward C. Johnson 3d, President
J. Gary Burkhead, Senior Vice President
Kevin Grant, Vice President
Fred L. Henning, Jr., Vice President
Arthur S. Loring, Secretary
Kenneth A. Rathgeber, Treasurer
John H. Costello, Assistant Treasurer
Leonard M. Rush, Assistant Treasurer
BOARD OF TRUSTEES
J. Gary Burkhead
Ralph F. Cox*
Phyllis Burke Davis*
Richard J. Flynn*
Edward C. Johnson 3d
E. Bradley Jones*
Donald J. Kirk*
Peter S. Lynch
Edward H. Malone*
Marvin L. Mann*
Gerald C. McDonough*
Thomas R. Williams*
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Service Co.
Boston, MA
CUSTODIAN
The Bank of New York
New York, NY
FIDELITY'S TAXABLE BOND FUNDS
Capital & Income
Ginnie Mae
Global Bond
Government Securities
Intermediate Bond
Investment Grade Bond
Mortgage Securities
New Markets Income
Short-Intermediate Government
Short-Term Bond
Short-Term World Income
Spartan Ginnie Mae
(registered trademark)
Spartan Government Income
Spartan High Income
Spartan Investment Grade Bond
Spartan Limited Maturity
Government
Spartan Long-Term Government Bond
Spartan Short-Intermediate
Government
Spartan Short-Term Income
THE FIDELITY TELEPHONE CONNECTION
MUTUAL FUND 24-HOUR SERVICE
Account Balances 1-800-544-7544
Exchanges/Redemptions 1-800-544-7777
Mutual Fund Quotes 1-800-544-8544
Account Assistance 1-800-544-6666
Product Information 1-800-544-8888
Retirement Accounts 1-800-544-4774
(8 a.m. - 9 p.m.)
TDD Service 1-800-544-0118
for the deaf and hearing impaired
(9 a.m. - 9 p.m. Eastern time)
(registered trademark)
* INDEPENDENT TRUSTEES
AUTOMATED LINES FOR QUICKEST SERVICE
FIDELITY
(REGISTERED TRADEMARK)
GINNIE MAE
PORTFOLIO
ANNUAL REPORT
JULY 31, 1995
CONTENTS
PRESIDENT'S MESSAGE 3 Ned Johnson on investing
strategies.
PERFORMANCE 4 How the fund has done over time.
FUND TALK 7 The manager's review of fund
performance, strategy and outlook.
INVESTMENT CHANGES 10 A summary of major shifts in the
fund's investments over the past six
months.
INVESTMENTS 11 A complete list of the fund's
investments with their market
values.
FINANCIAL STATEMENTS 14 Statements of assets and liabilities,
operations, and changes in net
assets,
as well as financial highlights.
NOTES 18 Notes to the financial statements.
REPORT OF INDEPENDENT 21 The auditors' opinion.
ACCOUNTANTS
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, THE
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
FOR MORE INFORMATION ON ANY FIDELITY FUND, INCLUDING CHARGES AND EXPENSES,
CALL
1-800-544-8888 FOR A FREE PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST
OR SEND MONEY.
PRESIDENT'S MESSAGE
DEAR SHAREHOLDER:
Although there have been positive market indications so far in 1995, no one
can predict what lies ahead for investors. Last year, stocks posted
below-average returns and bonds had one of the worst years in history. This
downturn followed a period in which the investing environment was generally
very positive.
These market ups and downs are a normal part of investing, and there are
some basic principles that are helpful for investors to remember in
different types of markets.
Keeping in mind that the effects of interest rate changes on your bond
investments will only be "paper" gains or losses unless you sell your
shares, staying in your bond fund may be appropriate if your investment
horizon is at least a year or more. The longer your investing time frame,
the more likely it is that you will retain your principal investment
through both up and down markets. For example, a 10-year time frame, such
as saving for a college education, enables you to weather these ups and
downs in a long-term fund, which has higher potential returns. An
intermediate-length fund could be appropriate if your investment horizon is
two to four years, and a short-term bond fund could be the right choice if
you need your money in one or two years.
If your time horizon is less than a year, you might want to consider moving
some of your bond investment into a money market fund, which seeks income
and a stable share price by investing in high-quality, short-term
investments. Of course, there is no assurance that a money market fund will
achieve its goal, and it is important to remember that money market funds
are not insured or guaranteed by any agency of the U.S. government.
No matter what your investment horizon or portfolio diversity, it makes
good sense to follow a regular investment plan - investing a certain amount
of money at the same time each month or quarter - and to review your
portfolio periodically. A periodic investment plan will not, of course,
assure a profit or protect against a loss.
If you have any questions, please call us at 1-800-544-8888. We stand ready
to provide the information you need to make the investments that are right
for you.
Best regards,
Edward C. Johnson 3d
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 $10,000 investment. A fund's total
return includes changes in a fund's share price, plus reinvestment of any
dividends (or income) and capital gains (the profits the fund earns when it
sells bonds that have grown in value). You can also look at the fund's
income to measure performance.
CUMULATIVE TOTAL RETURNS
PERIODS ENDED JULY 31, 1995 PAST 1 PAST 5 LIFE OF
YEAR YEARS FUND
Ginnie Mae Portfolio 10.26% 47.43% 128.42%
Salomon Brothers GNMA 10.51% 53.31% n/a
Mortgage Pass-Through Index
Average GNMA Fund 9.25% 46.29% n/a
Consumer Price Index 2.76% 16.95% 40.29%
CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms
over a set period - in this case, one year, five years, or since the fund
started on November 8, 1985. For example, if you 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 returns to the performance of the
Salomon Brothers GNMA Mortgage Pass-Through Index - a broad measure of GNMA
performance. To measure how the fund's performance stacked up against its
peers, you can compare it to the average GNMA fund, which reflects the
performance of 50 GNMA funds with similar objectives tracked by Lipper
Analytical Services over the past 12 months. Both benchmarks include
reinvested dividends and capital gains, if any. Comparing the fund's
performance to the consumer price index (CPI) helps show how your fund did
compared to inflation. (The CPI returns begin on the month end closest to
the fund's start date.)
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JULY 31, 1995 PAST 1 PAST 5 LIFE OF
YEAR YEARS FUND
Ginnie Mae Portfolio 10.26% 8.07% 8.86%
Salomon Brothers GNMA 10.51% 8.92% n/a
Mortgage Pass-Through Index
Average GNMA Fund 9.25% 7.90% n/a
Consumer Price Index 2.76% 3.18% 3.53%
AVERAGE ANNUAL TOTAL RETURNS take the fund's actual (or cumulative) return
and show you what would have happened if the fund had performed at a
constant rate each year.
$10,000 OVER LIFE OF FUND
GNMA Portfolio (015Salomon Brothers GNMA Inde
11/30/85 10000.00 10000.00
12/31/85 10380.25 10296.00
01/31/86 10428.55 10327.92
02/28/86 10673.66 10604.71
03/31/86 10889.16 10752.11
04/30/86 10969.84 10844.58
05/31/86 10753.33 10638.53
06/30/86 10917.30 10805.56
07/31/86 11081.36 11002.22
08/31/86 11328.10 11204.66
09/30/86 11300.81 11224.83
10/31/86 11473.84 11369.63
11/30/86 11688.85 11581.10
12/31/86 11724.23 11637.85
01/31/87 11879.80 11785.65
02/28/87 11976.42 11903.51
03/31/87 11934.22 11902.32
04/30/87 11528.76 11538.11
05/31/87 11466.01 11498.88
06/30/87 11637.73 11700.11
07/31/87 11642.08 11727.02
08/31/87 11568.41 11660.17
09/30/87 11242.33 11362.84
10/31/87 11616.98 11742.36
11/30/87 11708.78 11912.62
12/31/87 11859.79 12049.62
01/31/88 12261.96 12543.65
02/29/88 12380.60 12692.92
03/31/88 12355.55 12579.95
04/30/88 12247.28 12488.12
05/31/88 12203.05 12475.63
06/30/88 12464.16 12801.25
07/31/88 12420.27 12751.32
08/31/88 12437.93 12764.07
09/30/88 12685.99 13080.62
10/31/88 12907.72 13385.40
11/30/88 12776.73 13189.97
12/31/88 12709.46 13118.75
01/31/89 12911.64 13360.13
02/28/89 12844.76 13257.26
03/31/89 12859.88 13262.56
04/30/89 13110.90 13501.29
05/31/89 13444.47 13960.33
06/30/89 13805.73 14355.41
07/31/89 14034.93 14678.41
08/31/89 13902.66 14465.57
09/30/89 13935.59 14556.70
10/31/89 14233.23 14895.87
11/30/89 14370.25 15068.67
12/31/89 14469.38 15163.60
01/31/90 14310.83 15030.16
02/28/90 14393.96 15087.27
03/31/90 14422.16 15149.13
04/30/90 14260.02 14977.95
05/31/90 14715.40 15461.73
06/30/90 14922.20 15718.40
07/31/90 15159.49 15993.47
08/31/90 15120.63 15833.54
09/30/90 15214.37 15964.95
10/31/90 15382.63 16140.57
11/30/90 15728.59 16537.63
12/31/90 15988.71 16813.80
01/31/91 16190.00 17050.88
02/28/91 16255.35 17151.48
03/31/91 16368.63 17283.55
04/30/91 16489.88 17465.02
05/31/91 16615.05 17603.00
06/30/91 16635.10 17639.96
07/31/91 16881.73 17939.84
08/31/91 17182.78 18264.55
09/30/91 17436.14 18606.10
10/31/91 17673.43 18885.19
11/30/91 17768.23 19007.95
12/31/91 18157.91 19483.14
01/31/92 18007.30 19264.93
02/29/92 18199.76 19442.17
03/31/92 18092.62 19374.12
04/30/92 18247.32 19540.74
05/31/92 18550.04 19884.66
06/30/92 18757.67 20157.08
07/31/92 18848.71 20310.27
08/31/92 19057.13 20590.55
09/30/92 19194.14 20755.28
10/31/92 19038.99 20612.07
11/30/92 19136.57 20723.37
12/31/92 19374.42 20961.69
01/31/93 19630.14 21255.15
02/28/93 19804.59 21442.20
03/31/93 19913.02 21581.57
04/30/93 19981.18 21691.64
05/31/93 20095.78 21813.11
06/30/93 20292.70 22033.43
07/31/93 20399.30 22121.56
08/31/93 20450.03 22165.80
09/30/93 20451.20 22181.32
10/31/93 20521.12 22232.34
11/30/93 20402.65 22201.21
12/31/93 20558.64 22369.94
01/31/94 20790.01 22562.32
02/28/94 20594.30 22454.02
03/31/94 20077.13 21885.93
04/30/94 19916.56 21754.62
05/31/94 19934.33 21826.41
06/30/94 19866.93 21782.76
07/31/94 20270.15 22185.74
08/31/94 20320.65 22207.92
09/30/94 20037.86 21943.65
10/31/94 20012.14 21919.51
11/30/94 19947.65 21842.79
12/31/94 20148.23 22074.33
01/31/95 20573.50 22544.51
02/28/95 21102.67 23146.45
03/31/95 21207.10 23241.35
04/30/95 21494.48 23562.08
05/31/95 22155.16 24294.86
06/30/95 22283.35 24452.78
07/31/95 22348.94 24518.80
$10,000 OVER LIFE OF FUND: Let's say you invested $10,000 in Fidelity
Ginnie Mae Portfolio on November 30, 1985, soon after the fund started. As
the chart shows, by July 31, 1995, the value of your investment would have
grown to $22,349 - a 123.49% increase on your initial investment. For
comparison, look at how the Salomon Brothers GNMA Mortgage Pass-Through
Index did over the same period. With dividends reinvested the same $10,000
investment would have grown to $24,519 - a 145.19% 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
YEARS ENDED JULY 31,
1995 1994 1993 1992 1991
Dividend return 7.35% 5.24% 6.42% 7.80% 8.66%
Capital appreciation return 2.91% -5.87% 1.81% 3.85% 2.70%
Total return 10.26% -0.63% 8.23% 11.65% 11.36%
DIVIDEND returns and capital appreciation returns are both part of a bond
fund's total return. A dividend return reflects the actual dividends paid
by the fund. A capital appreciation 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 gains are
reinvested.
DIVIDENDS AND YIELD
PERIODS ENDED JULY 31, 1995 PAST PAST 6 PAST 1
MONTH MONTHS YEAR
Dividends per share 6.14(cents) 36.51(cents) 71.29(cents)
Annualized dividend rate 6.76% 7.03% 6.93%
30-day annualized yield 7.06% - -
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 $10.69 over
the past month, $10.48 over the past six months and $10.28 over the past
year, you can compare the fund's income over these three periods. The
30-day annualized YIELD is a standard formula for all 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.
FUND TALK: THE MANAGER'S OVERVIEW
MARKET RECAP
Although down slightly in July,
U.S. bond markets posted strong
returns during the 12 months
ended July 31, 1995. For the
12-month period, the Lehman
Brothers Aggregate Bond Index
- a broad measure of U.S.
taxable bonds - had a total return
of 10.11%. A strong rally starting in
November 1994 helped bonds
recover from the effects of the
sharply rising interest rate
environment seen through much
of 1994. Indications that the
economy was slowing helped
push interest rates down. In
addition, the Federal Reserve
Board - seeking to prevent the
economy from going into
recession - eased the money
supply by lowering the fed funds
rate - the rate banks charge each
other for overnight loans - by
0.25% on July 6. The rally lost
steam in July, however, over
uncertainty about future Fed
actions, and as statistics pointed
to the possibility of future
economic strength and resultant
inflation. Mortgage-backed
securities rode along with the rally.
The Salomon Brothers Mortgage
Index returned 10.17% during
the period. Outside of the U.S.,
markets also have done well.
Emerging markets rallied from the
lows caused by Mexico's peso
devaluation in December 1994. The
J.P. Morgan Emerging Markets
Bond Index returned 8.36% during
the 12-month period. Declining
interest rates and a weak U.S. dol-
lar helped the Salomon Brothers
World Government Bond Index -
which includes U.S. issues - to
post a 18.13% return.
An interview with Kevin Grant, Portfolio Manager of Fidelity Ginnie Mae
Portfolio
Q. KEVIN, HOW HAS THE FUND PERFORMED?
A. For the 12 months ended July 31, 1995, the fund had a total return of
10.26%. That compares to a total return of 9.25% for the average GNMA fund
tracked by Lipper Analytical Services for the same 12-month period. The
Salomon Brothers GNMA Mortgage Pass-Through Index returned 10.51% for the
12 months ended July 31.
Q. WHAT HELPED THE FUND PERFORM BETTER THAN THE AVERAGE GNMA FUND?
A. During the period, Ginnie Maes generally outperformed Treasury bonds and
other securities in the mortgage-backed security market. I believe other
managers probably held higher percentages of their funds in Treasuries,
while I kept the fund invested mostly in Ginnie Maes. In addition, much of
the investor community probably was "caught short" when the bond market
started rallying in the beginning of the year. That is, other funds'
durations - their sensitivity to changes in interest rates - probably were
a bit lower than this fund's, meaning the other funds did not benefit from
the drop in interest rates as much as Fidelity Ginnie Mae Portfolio.
Q. WHAT HAS THE BACKDROP FOR GINNIE MAES AND MORTGAGE-BACKED SECURITIES
BEEN LIKE OVER THE PAST SIX MONTHS?
A. For most of the period, Ginnie Maes performed well, riding along with
the general bond market rally. Then, in June, the mortgage market lagged
somewhat, as investors became concerned that the drop in interest rates
would lead to increased prepayment activity - when mortgage holders pay off
and refinance their loans to take advantage of lower interest rates. In
late June and July, that situation reversed itself and the mortgage market
performed well, relative to Treasuries. Ginnie Maes, specifically, were the
best performing agency mortgage-backed securities during the past six
months.
Q. WHERE HAVE YOU FOUND OPPORTUNITIES?
A. The past six months were interesting for their absence of value
opportunities. I use extensive quantitative analysis to try to find
securities that appear undervalued in the marketplace - those whose prices
are low relative to their potential fair-value price. For a value
opportunity to emerge, it's as if you need to get the market standing on
"one side of the boat," attracted to particular securities. I look for
cheap securities on the "other side of the boat," aiming for solid
performance when the market starts heading back toward the "middle of the
boat." Not much happened like this in the past six months; the market
remained fairly stable, with no group of securities becoming particularly
overvalued or undervalued.
Q. WHY IS THAT?
A. I believe it's because many managers learned a painful lesson during a
rough 1994, with few people taking risky positions this time around.
Because of the rally, market participants would have benefited from taking
a more aggressive stance. As it worked out, though, most of them seem to
have tracked the market.
Q. WHAT HAS BEEN YOUR STRATEGY IN THIS ENVIRONMENT?
A. I am a value-oriented investor. Ginnie Maes performed well, becoming
over-priced relative to other mortgage-backed securities, as people flocked
to them during the rally. That's a typical progression of events because
the market tends to think of Ginnie Maes as more prepayment protected; they
are smaller loans, and Ginnie Mae borrowers tend to be less aggressive in
refinancing than borrowers in other agency programs. I took advantage of
this increase in Ginnie Mae values, selling at a profit and moving a
portion of the fund into Fannie Mae and Freddie Mac mortgage-backed
securities.
Q. WHAT'S YOUR OUTLOOK?
A. Mortgage-backed securities are presently priced cheaper relative to U.S.
Treasuries than the average of the past 10 years. That kind of situation
usually doesn't last very long. I believe mortgages have the potential to
outperform Treasuries over the coming year. One situation that could cause
concern would be if interest rates go down about 1%. That would cause
prepayments to increase beyond expectations and mortgage-backed securities
to underperform Treasuries. We're at a point right now where the average
interest rate on outstanding mortgages is around 7.6%, while new mortgages
are being offered at just below 8%. You can see how a drop in interest
rates could increase prepayments. But even if we were to see a significant
fall in interest rates and a marked increase in prepayments, that would be
good for my style of management, because it would create value
opportunities, shaking things up enough to send people to "one side of the
boat."
FUND FACTS
GOAL: to provide high current
income by investing mainly
in mortgage securities issued
by the Government National
Mortgage Association
(Ginnie Maes)
START DATE: November 8, 1985
SIZE: as of July 31, 1995,
more than $767 million
MANAGER: Kevin Grant, since
February 1995; manager,
Fidelity Mortgage Securities
Fund, since 1993; Fidelity
Spartan Ginnie Mae Portfolio
since February 1995; joined
Fidelity in 1993
(checkmark)
KEVIN GRANT ON HIS
INVESTMENT STRATEGY:
"I've managed the fund to
reflect the Ginnie Mae
market, as represented by the
Salomon Brothers GNMA
Mortgage Pass-Through
Index. In doing so, my goal is
to generate returns that are
better than the GNMA market
as a whole, while attempting
to dampen relative volatility.
"The first step in managing
this way is to know the index
extraordinarily well: how it's
constructed and how this
particular market operates.
Then, I identify the most
significant parts of the index,
and view them as what are
known as duration cells.
These are groups of
securities with similar
structures and sensitivity to
interest rates. Now that I've
broken the index up into
manageable pieces, I can
track the market by owning
one security in each duration
cell. My next step is to pick
the cheapest security in each
cell. If I keep doing so and
values change, the fund will
make money in each cell and
that will add to the aggregate
performance for
shareholders.
"Over time, even if I didn't pick
the best performing security
from several cells, I'd still be
pretty close to matching the
performance of the mortgage
market. If I pick the right
securities - the ones that
appreciate most in value - in
each cell every month, I
should do very well versus the
market. I've found this to be
the best way to add value
relative to the market in a way
that controls risk."
INVESTMENT CHANGES
COUPON DISTRIBUTION AS OF JULY 31, 1995
% OF FUND'S % OF FUND'S INVESTMENTS
INVESTMENTS 6 MONTHS AGO
5 - 5.99% 0.5 0.0
6 - 6.99% 13.3 4.2
7 - 7.99% 31.6 41.3
8 - 8.99% 20.6 26.6
9 - 9.99% 17.7 12.7
10 - 10.99% 3.9 4.6
11 - 11.99% 1.5 2.0
12 - 12.99% 0.7 2.2
13% and over 0.3 0.4
COUPON DISTRIBUTION SHOWS THE RANGE OF STATED INTEREST RATES ON THE FUND'S
INVESTMENTS, EXCLUDING REPURCHASE AGREEMENTS.
AVERAGE YEARS TO MATURITY AS OF JULY 31, 1995
6 MONTHS AGO
Years 6.4 9.0
AVERAGE YEARS TO MATURITY IS BASED ON THE AVERAGE TIME UNTIL PRINCIPAL
PAYMENTS ARE EXPECTED FROM EACH OF THE FUND'S BONDS, WEIGHTED BY DOLLAR
AMOUNT.
DURATION AS OF JULY 31, 1995
6 MONTHS AGO
Years 3.8 5.1
DURATION SHOWS HOW MUCH A BOND FUND'S PRICE FLUCTUATES WITH CHANGES IN
COMPARABLE INTEREST RATES. IF RATES RISE 1%, FOR EXAMPLE, A FUND WITH A
FIVE-YEAR DURATION IS LIKELY TO LOSE ABOUT 5% OF ITS VALUE. OTHER FACTORS
ALSO CAN INFLUENCE A BOND FUND'S PERFORMANCE AND SHARE PRICE. ACCORDINGLY,
A BOND FUND'S ACTUAL PERFORMANCE MAY DIFFER FROM THIS EXAMPLE.
ASSET ALLOCATION
AS OF JULY 31, 1995 AS OF JANUARY 31, 1995
Row: 1, Col: 1, Value: 9.5
Row: 1, Col: 2, Value: 2.2
Row: 1, Col: 3, Value: 3.5
Row: 1, Col: 4, Value: 42.8
Row: 1, Col: 5, Value: 41.0
Mortgage-backed
securities 92.2%
Collateralized
mortgage
obligations 1.8%
U.S. Treasury
obligations 0.0%
Short-term
investments 6.0%
Mortgage-backed
securities 88.2%
Collateralized
mortgage
obligations 1.6%
U.S. Treasury
obligations 0.3%
Short-term
investments 9.9%
Row: 1, Col: 1, Value: 6.0
Row: 1, Col: 2, Value: 2.8
Row: 1, Col: 3, Value: 49.0
Row: 1, Col: 4, Value: 42.2
INVESTMENTS JULY 31, 1995
Showing Percentage of Total Value of Investment in Securities
U.S. TREASURY OBLIGATIONS - 0.3%
6 1/2%, 5/15/05 (Cost $2,005) $ 2,000 $ 2,009
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 88.2%
FEDERAL HOME LOAN MORTGAGE CORPORATION - 7.8%
5 1/2%, 2/1/01 to 7/1/02 4,676 4,496
6 1/2%, 7/1/23 to 7/1/24 19,621 18,712
8 1/2%, 2/1/04 to 5/1/17 1,724 1,777
9%, 6/1/10 to 4/1/21 6,183 6,487
10%, 10/1/04 to 12/1/19 11,394 12,273
10 1/4%, 2/1/09 to 11/1/16 6,223 6,687
10 1/2%, 5/1/10 to 12/1/20 9,975 10,772
11 1/4%, 2/1/10 to 5/1/11 715 790
11 1/2%, 2/1/12 to 11/1/17 1,564 1,711
11 3/4%, 11/1/11 205 228
12%, 6/1/15 to 11/1/15 613 681
12 1/2%, 11/1/12 to 9/1/13 1,364 1,521
66,135
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 7.3%
6%, 10/1/23 to 4/1/25 1,383 1,286
6 1/2%, 1/1/24 to 5/1/24 7,014 6,686
7%, 12/1/23 to 5/1/25 33,411 32,596
7 1/2%, 8/1/25 16,000 15,967
8 1/2%, 6/1/08 to 4/1/16 1,969 2,049
9%, 12/1/97 to 10/1/11 483 508
10 1/4%, 12/1/15 to 10/1/18 1,079 1,173
11 1/2%, 1/1/01 to 9/1/15 957 1,058
12 1/2%, 10/1/15 443 493
14%, 11/1/12 to 10/1/14 66 75
61,891
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 73.1%
6%, 9/15/08 to 8/15/10 54,040 52,143
6 1/2%, 9/15/23 to 8/15/24 33,279 31,635
7%, 10/15/07 to 8/15/24 128,255 125,497
7 1/2%, 5/15/17 to 10/15/23 82,943 82,888
8%, 8/15/16 to 7/15/25 70,687 72,311
8 1/2%, 2/15/05 to 6/15/25 93,426 97,537
9%, 12/15/04 to 4/15/25 12,312 12,974
9 1/2%, 4/15/01 to 8/15/25 115,253 122,867
9 1/2%, 9/15/24 (a) 6,200 6,552
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - CONTINUED
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - CONTINUED
10%, 10/15/00 to 10/15/05 $ 385 $ 407
10 1/2%, 2/15/98 to 1/15/16 1,360 1,439
11%, 11/15/13 to 10/15/15 361 397
11 1/4%, 7/15/13 to 1/15/16 801 879
11 1/2%, 3/15/10 to 4/15/19 3,648 4,109
11 3/4%, 1/15/16 117 129
12%, 5/15/99 to 11/15/15 . 2,660 2,966
12 1/4%, 3/15/14 81 91
12 1/2%, 5/15/10 to 6/15/10 125 140
13%, 1/15/11 to 5/15/15 1,448 1,631
13 1/2%, 5/15/10 to 1/15/15 623 703
617,295
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $720,940) 745,321
COLLATERALIZED MORTGAGE OBLIGATIONS - 1.6%
U.S. GOVERNMENT AGENCY - 1.6%
Federal National Mortgage Association
Series 1987-2, Z tranche, 11%, 11/25/17 3,352 3,629
U.S. Dept. Veterans Affairs Vendee Mortgage Trust
sequential pay series 1992-1 class 2-B,
7 3/4%, 9/15/10 10,000 10,013
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $13,846) 13,642
REPURCHASE AGREEMENTS - 9.9%
MATURITY
AMOUNT (000S)
Investments in repurchase agreements
(U.S. Treasury obligations), in a
joint trading account at 5.82%
dated 7/31/95 due 8/1/95 $ 83,816 83,802
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $820,593) $ 844,774
LEGEND
6. Security purchased on a delayed delivery basis (see Note 2 of Notes to
Financial Statements).
INCOME TAX INFORMATION
At July 31, 1995, the aggregate cost of investment securities for income
tax purposes was $838,985,000. Net unrealized appreciation aggregated
$5,789,000, of which $10,090,000 related to appreciated investment
securities and $4,301,000 related to depreciated investment securities.
The fund intends to elect to defer to its fiscal year ending July 31, 1996
$7,954,000 of losses recognized during the period November 1, 1994 to July
31, 1995.
At July 31, 1995, the fund had a capital loss carryforward of approximately
$23,602,000 all of which will expire on July 31, 2003.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
AMOUNTS IN THOUSANDS (EXCEPT FOR PER-SHARE AMOUNTS) JULY 31, 1995
ASSETS
Investment in securities, at value (including repurchase $ 844,774
agreements of $83,802) (cost $820,593) - See
accompanying schedule
Cash 125
Receivable for investments sold 41,233
Interest receivable 5,035
TOTAL ASSETS 891,167
LIABILITIES
Payable for investments purchased $ 116,046
Regular delivery
Delayed delivery 6,552
Distributions payable 637
Accrued management fee 289
Other payables and accrued expenses 220
TOTAL LIABILITIES 123,744
NET ASSETS $ 767,423
Net Assets consist of:
Paid in capital $ 793,212
Distributions in excess of net investment income (6)
Accumulated undistributed net realized gain (loss) (49,964)
on investments
Net unrealized appreciation (depreciation) on 24,181
investments
NET ASSETS, for 72,141 shares outstanding $ 767,423
NET ASSET VALUE, offering price and redemption price per $10.64
share ($767,423 (divided by) 72,141 shares)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF OPERATIONS
AMOUNTS IN THOUSANDS YEAR ENDED JULY 31, 1995
INVESTMENT INCOME $ 58,952
Interest
EXPENSES
Management fee $ 3,352
Transfer agent fees 1,597
Accounting fees and expenses 240
Non-interested trustees' compensation 4
Custodian fees and expenses 287
Registration fees 22
Audit 56
TOTAL EXPENSES 5,558
NET INVESTMENT INCOME 53,394
REALIZED AND UNREALIZED GAIN (LOSS) (15,722)
Net realized gain (loss) on investment securities
Change in net unrealized appreciation (depreciation) on 33,459
investment securities
NET GAIN (LOSS) 17,737
NET INCREASE (DECREASE) IN NET ASSETS RESULTING $ 71,131
FROM OPERATIONS
STATEMENT OF CHANGES IN NET ASSETS
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
AMOUNTS IN THOUSANDS YEAR ENDED YEAR ENDED
JULY 31, JULY 31,
1995 1994
INCREASE (DECREASE) IN NET ASSETS
Operations $ 53,394 $ 60,757
Net investment income
Net realized gain (loss) (15,722) (42,174)
Change in net unrealized appreciation (depreciation) 33,459 (24,038)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING 71,131 (5,455)
FROM OPERATIONS
Distributions to shareholders (51,095) (46,661)
From net investment income
From net realized gain - (16,166)
In excess of net realized gain (1,476) (5,195)
TOTAL DISTRIBUTIONS (52,571) (68,022)
Share transactions 128,526 219,226
Net proceeds from sales of shares
Reinvestment of distributions 44,565 58,534
Cost of shares redeemed (192,993) (411,083)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING (19,902) (133,323)
FROM SHARE TRANSACTIONS
TOTAL INCREASE (DECREASE) IN NET ASSETS (1,342) (206,800)
NET ASSETS
Beginning of period 768,765 975,565
End of period (including distributions in excess of net $ 767,423 $ 768,765
investment income of $(6) and $(608), respectively)
OTHER INFORMATION
Shares
Sold 12,437 20,365
Issued in reinvestment of distributions 4,327 5,427
Redeemed (18,849) (38,221)
Net increase (decrease) (2,085) (12,429)
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED JULY 31,
1995 1994 A 1993 1992 1991
SELECTED PER-SHARE DATA
Net asset value, beginning $ 10.360 $ 11.260 $ 11.060 $ 10.650 $ 10.370
of period
Income from Investment .721 .582 .800 .833 .845
Operations
Net investment income
Net realized and unrealized .292 (.650) .083 .373 .288
gain (loss)
Total from investment operations 1.013 (.068) .883 1.206 1.133
Less Distributions (.713) (.582) (.683) (.796) (.853)
From net investment income
From net realized gain - (.190) - - -
on investments
In excess of net realized gain (.020) (.060) - - -
on investments
Total distributions (.733) (.832) (.683) (.796) (.853)
Net asset value, end of period $ 10.640 $ 10.360 $ 11.260 $ 11.060 $ 10.650
TOTAL RETURN 10.26% (.63) 8.23% 11.65% 11.36%
%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 767 $ 769 $ 976 $ 914 $ 797
(in millions)
Ratio of expenses to average .75% .82% .80% .80% .83%
net assets
Ratio of net investment income to 7.24% 7.03% 7.26% 7.73% 8.24%
average net assets
Portfolio turnover rate 210% 303% 259% 114% 125%
</TABLE>
B EFFECTIVE AUGUST 1, 1993 THE FUND ADOPTED STATEMENT OF POSITION 93-2,
"DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME,
CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES."
AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN
RECLASSIFICATIONS.
NOTES TO FINANCIAL STATEMENTS
For the period ended July 31, 1995
1. SIGNIFICANT ACCOUNTING POLICIES.
Fidelity Ginnie Mae Portfolio (the fund) is a fund of Fidelity Income Fund
(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
(the 1940 Act), as an open-end management investment company organized as a
Massachusetts business trust. 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. Short-term securities
maturing within sixty days of their purchase date are valued either at
amortized cost or original cost plus accrued interest, both of which
approximate current value. Securities for which market quotations are not
readily available are valued at their fair value as determined in good
faith under consistently applied procedures under the general supervision
of the Board of Trustees.
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
its fiscal year. The schedule of investments includes information regarding
income taxes under the caption "Income Tax Information."
INVESTMENT INCOME. Interest income, which includes accretion of original
issue discount, is accrued as earned.
EXPENSES. Most expenses of the trust can be directly attributed to a fund.
Expenses which cannot be directly attributed are apportioned between 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, losses deferred due to wash sales, and
excise tax regulations.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital and may
affect the per-share allocation between net investment income and realized
and unrealized gain (loss). Distributions in excess of net investment
income and accumulated undistributed net realized gain (loss) on
investments may include temporary book and tax basis differences that will
reverse in a subsequent period. Any taxable income or 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.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission (the SEC), 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 that
mature in 60 days or less from the date of purchase, and are collateralized
by U.S. Treasury or Federal Agency obligations.
REPURCHASE AGREEMENTS. The fund, through its custodian, receives delivery
of the underlying U.S. Treasury or Federal Agency Securities, the market
value of which is required to be at least equal to the repurchase price.
For term repurchase agreement transactions, the underlying securities are
marked-to-market daily and maintained at a value at least equal to the
repurchase price. The fund's investment adviser, FMR, is responsible for
determining that the value of the underlying securities remains in
accordance with the market value requirements stated above.
DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell securities on
a when-issued or forward commitment basis. Payment and delivery may take
place a month or more after the date of the transaction. The price of the
underlying securities and the date when the securities will be delivered
and paid for are fixed at the time the transaction is negotiated. The
market value of the securities purchased or sold on a when-issued or
forward commitment basis are identified as such in the fund's schedule of
investments. The fund may receive compensation for interest forgone in the
purchase of a delayed delivery security.
With respect to purchase commitments, the fund identifies securities as
segregated in its custodial records with a value at least equal to the
amount of the commitment. Losses may arise due to changes in the market
value of the underlying securities or if the counterparty does not perform
under the contract.
3. PURCHASES AND SALES OF INVESTMENTS.
Purchases and sales of long-term U.S. government and government agency
obligations aggregated $1,573,401,000 and $1,590,268,000, 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 .1200% to .3700% for the period. 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. The annual individual fund fee rate is .30%.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
MANAGEMENT FEE - CONTINUED
For the period, the management fee was equivalent to an annual rate of .45%
of average net assets.
DISTRIBUTION AND SERVICE PLAN. Pursuant to the Distribution and Service
Plan (the Plan), and in accordance with Rule 12b-1 of the 1940 Act, FMR or
the fund's distributor, Fidelity Distributors Corporation (FDC), an
affiliate of FMR, may use their resources to pay administrative and
promotional expenses related to the sale of the fund's shares. Subject to
the approval of the Board of Trustees, the Plan also authorizes payments to
third parties that assist in the sale of the fund's shares or render
shareholder support services. FMR or FDC has informed the fund that
payments made to third parties under the Plan amounted to $50,000 for the
period.
TRANSFER AGENT FEES. Fidelity Service Co. (FSC), an affiliate of FMR, is
the fund's transfer, dividend disbursing and shareholder servicing agent.
During the period August 1, 1994 to December 31, 1994, FSC received fees
based on the type, size, number of accounts and the number of transactions
made by shareholders. Effective January 1, 1995, the Board of Trustees
approved a revised transfer agent contract pursuant to which FSC receives
account fees and asset-based fees that vary according to account size and
type of account. FSC pays for typesetting, printing and mailing of all
shareholder reports, except proxy statements.
ACCOUNTING FEES. FSC 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.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Fidelity Income Fund and the Shareholders of
Fidelity Ginnie Mae Portfolio:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all mat- erial respects, the financial position of
Fidelity Ginnie Mae Portfolio, a fund of Fidelity Income Fund, at July 31,
1995, the results of its operations for the year then ended, and the
changes in its net assets and the financial highlights for the periods
indicated in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Fidelity Ginnie
Mae Portfolio's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We
believe that our audits, which included confirmation of securities at July
31, 1995 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from
brokers were not received, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
August 31, 1995
TO CALL FIDELITY
FOR FUND INFORMATION AND QUOTES
The Fidelity Telephone Connection offers you special automated telephone
services for quotes and balances. The services are easy to use,
confidential and quick. All you need is a Touch Tone telephone.
YOUR PERSONAL IDENTIFICATION NUMBER
(PIN)
The first time you call one of our automated telephone services, we'll ask
you
to set up your Personal Identification
Number (PIN). The PIN assures that
only you have automated telephone
access to your account information.
Please have your Customer Number
(T-account #) handy when you call -
you'll need it to establish your PIN. If
you would ever like to change your PIN, just choose the "Change your
Personal
Identification Number" option when
you call. If you forget your PIN, please
call a Fidelity representative at 1-800-
544-6666 for assistance.
(PHONE_GRAPHIC)(PHONE_GRAPHIC)MUTUAL FUND QUOTES*
1-800-544-8544
Just make a selection from this record-ed menu:
PRESS
For quotes on funds you own.
1.
For an individual fund quote.
2.
For the ten most frequently
requested Fidelity fund quotes.
3.
For quotes on Fidelity Select
Portfolios(registered trademark).
4.
To change your Personal
Identification Number (PIN).
5.
To speak with a Fidelity
representative.
6.
(PHONE_GRAPHIC)(PHONE_GRAPHIC)MUTUAL FUND ACCOUNT
BALANCES 1-800-544-7544
Just make a selection from this record-
ed menu:
PRESS
For balances on funds you own.
1.
For your most recent fund activity
(purchases, redemptions, and
dividends).
2.
To change your Personal
Identification Number (PIN).
3.
To speak with a Fidelity
representative.
4.
* WHEN YOU CALL THE QUOTES LINE, PLEASE REMEMBER THAT A FUND'S YIELD AND
RETURN WILL
VARY AND, EXCEPT FOR MONEY MARKET FUNDS, SHARE PRICE WILL ALSO VARY. THIS
MEANS THAT
YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. THERE IS NO
ASSURANCE THAT
MONEY MARKET FUNDS WILL BE ABLE TO MAINTAIN A STABLE $1 SHARE PRICE; AN
INVESTMENT IN
A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT.
TOTAL
RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE, REINVESTMENT OF
DIVIDENDS
AND CAPITAL GAINS, AND THE EFFECTS OF ANY SALES CHARGES.
TO WRITE FIDELITY
If more than one address is listed, please locate the address that is
closest to you. We'll give your correspondence immediate attention and send
you written confirmation upon completion of your request.
(LETTER_GRAPHIC)MAKING CHANGES
TO YOUR ACCOUNT
(such as changing name, address, bank, etc.)
Fidelity Investments
P.O. Box 770001
Cincinnati, OH 45277-0002
(LETTER_GRAPHIC)FOR NON-RETIREMENT
ACCOUNTS
BUYING SHARES
Fidelity Investments
P.O. Box 770001
Cincinnati, OH 45277-0003
OVERNIGHT EXPRESS
Fidelity Investments
100 Crosby Parkway - KP2C
Covington, KY 41015-4399
SELLING SHARES
Fidelity Investments
P.O. Box 660602
Dallas, TX 75266-0602
OVERNIGHT EXPRESS
Fidelity Investments
Attn: Redemptions - CP6I
400 East Las Colinas Blvd.
Irving, TX 75309-5517
GENERAL CORRESPONDENCE
Fidelity Investments
P.O. Box 193
Boston, MA 02210-0193
(LETTER_GRAPHIC)FOR RETIREMENT
ACCOUNTS
BUYING SHARES
Fidelity Investments
P.O. Box 770001
Cincinnati, OH 45277-0003
SELLING SHARES
Fidelity Investments
P.O. Box 660602
Dallas, TX 75266-0602
OVERNIGHT EXPRESS
Fidelity Investments
Attn: Redemptions - CP6R
400 East Las Colinas Blvd.
Irving, TX 75309-5517
GENERAL CORRESPONDENCE
Fidelity Investments
P.O. Box 660602
Dallas, TX 75266-0602
INVESTMENT ADVISER
Fidelity Management & Research
Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Management & Research
U.K. Inc., London, England
Fidelity Management & Research
Far East Inc., Tokyo, Japan
OFFICERS
Edward C. Johnson 3d, President
J. Gary Burkhead, Senior Vice President
Kevin Grant, Vice President
Fred L. Henning Jr., Vice President
Arthur S. Loring, Secretary
Kenneth A. Rathgeber, Treasurer
John H. Costello, Assistant Treasurer
Leonard M. Rush, Assistant Treasurer
BOARD OF TRUSTEES
J. Gary Burkhead
Ralph F. Cox *
Phyllis Burke Davis *
Richard J. Flynn *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Edward H. Malone *
Marvin L. Mann *
Gerald C. McDonough *
Thomas R. Williams *
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Service Co.
Boston, MA
CUSTODIAN
The Bank of New York
New York, NY
FIDELITY'S TAXABLE BOND FUNDS
Capital & Income
Ginnie Mae
Global Bond
Government Securities
Intermediate Bond
Investment Grade Bond
Mortgage Securities
New Markets Income
Short-Intermediate Government
Short-Term Bond
Short-Term World Income
Spartan(registered trademark) Ginnie Mae
Spartan Government Income
Spartan High Income
Spartan Investment Grade Bond
Spartan Limited Maturity
Government
Spartan Long-Term Government Bond
Spartan Short-Intermediate
Government
Spartan Short-Term Income
THE FIDELITY TELEPHONE CONNECTION
MUTUAL FUND 24-HOUR SERVICE
Account Balances 1-800-544-7544
Exchanges/Redemptions 1-800-544-7777
Mutual Fund Quotes 1-800-544-8544
Account Assistance 1-800-544-6666
Product Information 1-800-544-8888
Retirement Accounts 1-800-544-4774
(8 a.m. - 9 p.m.)
TDD Service 1-800-544-0118
for the deaf and hearing impaired
(9 a.m. - 9 p.m. Eastern time)
(registered trademark)
* INDEPENDENT TRUSTEES
AUTOMATED LINES FOR QUICKEST SERVICE