(2_FIDELITY_LOGOS)FIDELITY
(REGISTERED TRADEMARK)
MORTGAGE SECURITIES FUND
(INITIAL CLASS OF FIDELITY ADVISOR MORTGAGE
SECURITIES FUND)
ANNUAL REPORT
OCTOBER 31, 1997
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 THREE 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 23 NOTES TO THE FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT 32 THE AUDITORS' OPINION.
ACCOUNTANTS
DISTRIBUTIONS 33
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE
SUBMITTED FOR THE GENERAL INFORMATION
OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS
IN THE FUND UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC,
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
FOR MORE INFORMATION ON 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.
To reduce expenses and demonstrate respect for our environment, we
have initiated a project through which we will begin eliminating
duplicate copies of most financial reports and prospectuses to most
households, even if they have more than one account in the fund. If
additional copies of financial reports, prospectuses or historical
account information are needed, please call 1-800-544-6666.
PRESIDENT'S MESSAGE
(PHOTO_OF_EDWARD_C_JOHNSON_3D)DEAR SHAREHOLDER:
Although financial turmoil in Pacific Basin countries was a catalyst
for significant volatility in U.S. markets in late October, the
Standard & Poor's 500 Index remained up more than 25% year-to-date,
twice its historical annual average. Meanwhile, bond markets -
primarily influenced by a relatively steady flow of positive news on
the inflation front - continued to post moderate returns through the
first 10 months of 1997.
While it's impossible to predict the future direction of the markets
with any degree of certainty, there are certain basic principles that
can help investors plan for their future needs.
The longer your investment time frame, the less likely it is that you
will be affected by short-term market volatility. A 10-year investment
horizon appropriate for saving for a college education, for example,
enables you to weather market cycles in a long-term fund, which may
have a higher risk potential, but also has a higher potential rate of
return.
An intermediate-length fund could make sense if your investment
horizon is two to four years, while 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. These
funds seek income and a stable share price by investing in
high-quality, short-term investments. Of course, it's important to
remember that there is no assurance that a money market fund will
achieve its goal of maintaining a stable net asset value of $1.00 per
share, and that these types of funds are neither insured nor
guaranteed by any agency of the U.S. government.
Finally, no matter what your time horizon or portfolio diversity, it
makes good sense to follow a regular investment plan, investing a
certain amount of money in a fund at the same time each month or
quarter and periodically reviewing your overall portfolio. By doing
so, you won't get caught up in the excitement of a rapidly rising
market, nor will you buy all your shares at market highs. While this
strategy - known as dollar cost averaging - won't assure a profit or
protect you from a loss in a declining market, it should help you
lower the average cost of your purchases.
Remember to contact your investment professional if you need help with
your investments.
Best regards,
Edward C. Johnson 3d
FIDELITY MORTGAGE SECURITIES FUND - INITIAL CLASS
PERFORMANCE: THE BOTTOM LINE
There are several ways to evaluate 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.
Total return reflects the change in the value of an investment,
assuming reinvestment of the class' dividend income and capital gains
(the profits earned upon the sale of securities that have grown in
value). You can also look at the class' income, as reflected in its
yield, to measure performance.
CUMULATIVE TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1997 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
FIDELITY MORTGAGE SECURITIES FUND ("INITIAL CLASS") 8.86% 47.29% 137.20%
LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES 9.12% 42.15% 146.58%
SALOMON BROTHERS MORTGAGE INDEX 8.91% 42.38% 147.96%
U.S. MORTGAGE FUNDS AVERAGE 8.14% 34.84% 118.63%
CUMULATIVE TOTAL RETURNS show Initial Class' performance in percentage
terms over a set period - in this case, one year, five years or 10
years. For example, if you had invested $1,000 in a fund that had a 5%
return over the past year, the value of your investment would be
$1,050. You can compare Initial Class' returns to the performance of
both the Lehman Brothers Mortgage-Backed Securities Index and the
Salomon Brothers Mortgage Index - market capitalization weighted
indices of 15- and 30-year fixed-rate securities backed by mortgage
pools of the Government National Mortgage Association (GNMA), Fannie
Mae (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC), and
FNMA and FHLMC balloon mortgages with fixed-rate coupons. To measure
how Initial Class' performance stacked up against its peers, you can
compare it to the U.S. mortgage funds average, which reflects the
performance of mutual funds with similar objectives tracked by Lipper
Analytical Services, Inc. The past one year average represents a peer
group of 59 mutual funds. These benchmarks reflect reinvestment of
dividends and capital gains, if any, and exclude the effect of sales
charges.
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
<S> <C> <C>
PERIODS ENDED OCTOBER 31, 1997 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
FIDELITY MORTGAGE SECURITIES FUND ("INITIAL CLASS") 8.86% 8.05% 9.02%
LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES 9.12% 7.29% 9.44%
SALOMON BROTHERS MORTGAGE INDEX 8.91% 7.32% 9.51%
U.S. MORTGAGE FUNDS AVERAGE 8.14% 6.14% 8.12%
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS take Initial Class' cumulative return and
show you what would have happened if Initial Class had performed at a
constant rate each year.
$10,000 OVER 10 YEARS
IMAHDR PRASUN SHR__CHT 19971031 19971203 185350 S00000000000001
Mortgage Secs -Initial Cl LB Mortgage Backed Secs
00040 LB006
1987/10/31 10000.00 10000.00
1987/11/30 10095.37 10121.55
1987/12/31 10223.10 10255.19
1988/01/31 10566.90 10638.76
1988/02/29 10680.85 10774.57
1988/03/31 10617.55 10693.64
1988/04/30 10551.84 10646.51
1988/05/31 10507.96 10571.16
1988/06/30 10718.25 10871.94
1988/07/31 10692.79 10835.04
1988/08/31 10706.36 10858.91
1988/09/30 10921.69 11129.61
1988/10/31 11126.37 11373.64
1988/11/30 10979.26 11208.06
1988/12/31 10909.80 11149.46
1989/01/31 11107.75 11342.64
1989/02/28 11048.94 11270.39
1989/03/31 11070.77 11288.06
1989/04/30 11275.13 11515.97
1989/05/31 11541.98 11872.56
1989/06/30 11821.31 12164.34
1989/07/31 12032.97 12439.69
1989/08/31 11905.88 12278.45
1989/09/30 11957.86 12365.58
1989/10/31 12195.03 12648.06
1989/11/30 12312.54 12785.12
1989/12/31 12397.41 12860.78
1990/01/31 12283.20 12770.85
1990/02/28 12365.02 12845.89
1990/03/31 12374.73 12877.52
1990/04/30 12267.69 12761.86
1990/05/31 12624.35 13157.83
1990/06/30 12807.36 13365.89
1990/07/31 12993.49 13597.83
1990/08/31 12959.12 13453.33
1990/09/30 13028.30 13563.72
1990/10/31 13161.76 13717.52
1990/11/30 13449.76 14004.96
1990/12/31 13681.76 14239.69
1991/01/31 13823.73 14456.12
1991/02/28 13912.24 14577.98
1991/03/31 14005.81 14677.21
1991/04/30 14157.43 14812.40
1991/05/31 14231.03 14942.64
1991/06/30 14266.62 14955.97
1991/07/31 14471.53 15208.99
1991/08/31 14748.08 15485.58
1991/09/30 14978.32 15775.81
1991/10/31 15155.37 16037.21
1991/11/30 15248.02 16153.49
1991/12/31 15544.23 16478.14
1992/01/31 15469.45 16287.75
1992/02/29 15623.38 16441.86
1992/03/31 15515.41 16337.05
1992/04/30 15660.87 16497.67
1992/05/31 15919.36 16795.04
1992/06/30 16088.03 16993.18
1992/07/31 16060.42 17141.71
1992/08/31 16164.30 17364.96
1992/09/30 16265.78 17500.16
1992/10/31 16104.03 17346.67
1992/11/30 16181.87 17400.93
1992/12/31 16391.86 17625.74
1993/01/31 16541.41 17857.36
1993/02/28 16683.08 18038.45
1993/03/31 16792.03 18147.91
1993/04/30 16909.26 18241.55
1993/05/31 16959.32 18345.43
1993/06/30 17166.21 18485.89
1993/07/31 17260.57 18559.69
1993/08/31 17292.71 18647.13
1993/09/30 17330.49 18663.26
1993/10/31 17361.32 18717.21
1993/11/30 17325.03 18680.62
1993/12/31 17492.24 18831.94
1994/01/31 17653.33 19018.60
1994/02/28 17560.24 18885.89
1994/03/31 17361.23 18394.11
1994/04/30 17285.18 18258.60
1994/05/31 17432.32 18330.85
1994/06/30 17521.55 18291.16
1994/07/31 17801.64 18657.36
1994/08/31 17881.40 18716.28
1994/09/30 17687.58 18449.92
1994/10/31 17723.50 18439.38
1994/11/30 17705.82 18381.71
1994/12/31 17831.87 18528.37
1995/01/31 18169.00 18924.96
1995/02/28 18575.76 19408.06
1995/03/31 18654.59 19499.53
1995/04/30 18948.70 19776.74
1995/05/31 19544.90 20400.31
1995/06/30 19694.00 20516.28
1995/07/31 19738.73 20551.63
1995/08/31 19982.29 20764.34
1995/09/30 20188.86 20946.98
1995/10/31 20413.44 21133.33
1995/11/30 20639.46 21374.88
1995/12/31 20866.84 21641.86
1996/01/31 21037.68 21804.96
1996/02/29 20903.63 21623.88
1996/03/31 20827.80 21545.74
1996/04/30 20784.38 21484.96
1996/05/31 20703.91 21422.33
1996/06/30 20989.63 21717.21
1996/07/31 21064.58 21796.90
1996/08/31 21059.93 21796.59
1996/09/30 21393.24 22161.55
1996/10/31 21789.08 22596.28
1996/11/30 22125.71 22919.69
1996/12/31 22000.95 22799.69
1997/01/31 22138.64 22968.99
1997/02/28 22210.81 23045.58
1997/03/31 22002.56 22828.53
1997/04/30 22345.57 23192.56
1997/05/31 22566.01 23419.53
1997/06/30 22830.29 23692.71
1997/07/31 23243.21 24139.22
1997/08/31 23217.52 24081.86
1997/09/30 23469.44 24387.29
1997/10/31 23719.91 24657.67
IMATRL PRASUN SHR__CHT 19971031 19971203 185353 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was
invested in Fidelity Mortgage Securities Fund ("Initial Class") on
October 31, 1987. As the chart shows, by October 31, 1997, the value
of the investment would have grown to $23,720 - a 137.20% increase on
the initial investment. For comparison, look at how the Lehman
Brothers Mortgage-Backed Securities Index did over the same period.
With dividends and capital gains, if any, reinvested, the same $10,000
would have grown to $24,658 - a 146.58% increase. Beginning with this
report, the fund will compare its performance to that of the Lehman
Brothers Mortgage-Backed Securities Index rather than the Salomon
Brothers Mortgage Index. The indexes include the same type of bonds,
and their performance is not materially different. The fund is
changing to the Lehman Brothers index mainly because Lehman Brothers
indexes are used by most other Fidelity bond funds. For comparison
purposes, both indexes are shown on page 4.
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 OCTOBER 31,
1997 1996 1995 1994 1993
DIVIDEND RETURN 6.60% 6.66% 7.86% 5.61% 6.48%
CAPITAL APPRECIATION RETURN 2.26% 0.08% 7.32% -3.52% 1.33%
TOTAL RETURN 8.86% 6.74% 15.18% 2.09% 7.81%
</TABLE>
TOTAL RETURN COMPONENTS include both dividend returns and capital
appreciation returns. A dividend return reflects the actual dividends
paid by the class. A capital appreciation return reflects both the
amount paid by the class to shareholders as capital gain distributions
and changes in the class' share price. Both returns assume the
dividends or capital gains paid by the class are reinvested, if any.
DIVIDENDS AND YIELD
PERIODS ENDED
OCTOBER 31, 1997 PAST 1 PAST 6 PAST 1
MONTH MONTHS YEAR
DIVIDENDS PER SHARE 5.70(CENTS) 34.36(CENTS) 68.77(CENTS)
ANNUALIZED DIVIDEND RATE 6.11% 6.23% 6.31%
30-DAY ANNUALIZED YIELD 6.40% - -
DIVIDENDS per share show the income paid by the class for a set
period. If you annualize this number, based on an average share price
of $10.98 over the past one month, $10.94 over the past six months and
$10.89 over the past one year, you can compare the class' 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
The bond market's primary
nemesis - rising inflation -
remained in check throughout
most of the 12 months that ended
October 31, 1997, translating into
a generally favorable investing
climate. The Lehman Brothers
Aggregate Bond Index - a broad
measure of the U.S. taxable bond
market - returned 8.89% during
the period. Through the first half of
the period, bonds suffered from the
perception of an accelerating
economy and, in turn, that
inflation would make an
appearance. The Federal Reserve
Board raised a key short-term
interest rate in March, in an
attempt to curb any potential hints of
inflation. For the most part, though,
investors had been anticipating this
hike. Spurred on by encouraging
economic data, as well as the Fed's
reluctance to raise rates further,
bond markets rallied from April
through July. While some of these
gains evaporated in August - as
inflation fears cropped up again -
a strong September and October
helped ease the pain. The bond
market attracted wary stock
investors in October, as the U.S.
equity market stumbled due to
overseas developments. Treasuries,
in particular, performed well
toward the end of the period.
Relative interest-rate stability
provided a fairly positive backdrop
for mortgage-backed securities, as
the Lehman Brothers
Mortgage-Backed Securities Index
returned 9.12% over the 12-month
period. Sustained economic growth
and demand for higher yields
helped corporate bonds, as the
Lehman Brothers Corporate Bond
Index returned 9.25% over the
same period.
An interview with Thomas Silvia, Portfolio Manager of Fidelity Advisor
Mortgage Securities Fund
Q. HOW DID THE FUND PERFORM, TOM?
A. For the 12 months that ended October 31, 1997, the fund's Initial
Class shares returned 8.86%. During the same period, the U.S. mortgage
funds average, according to Lipper Analytical Services, returned
8.14%, and the Lehman Brothers Mortgage-Backed Securities Index
returned 9.12%.
Q. WHAT WAS THE MORTGAGE MARKET LIKE DURING THE PAST 12 MONTHS?
A. For the first nine months of the period, the mortgage market
benefited from a period of relatively stable interest rates. A calm
interest-rate environment reduces the largest source of risk for
mortgage securities - prepayments. For instance, when interest rates
decline, mortgage holders are likely to refinance their debt at a
lower rate. This hurts investors in mortgage-backed securities because
they might be forced to reinvest at a lower interest rate. On the
other hand, when interest rates are as steady as they have been
lately, the risk for prepayments declines. Therefore, the mortgage
sector was one of the best-performing categories of the bond market.
However, as interest rates began to decline in July, the mortgage
sector had difficulty keeping pace with U.S. Treasuries as a result of
increased prepayment concerns.
Q. HOW HAS THE MORTGAGE SECTOR PERFORMED COMPARED TO THE CORPORATE
SECTOR OVER THE PAST THREE MONTHS?
A. Investors sold corporate bonds because they were nervous about
credit risk, or the risk that a bond might not be paid, because of
cash flow concerns. In contrast, agency mortgage-backed securities,
such as those issued by the Federal National Mortgage Association, or
Fannie Mae, are not subject to credit risk because they are implicitly
backed by the U.S. government. Investors seemed more comfortable
buying these types of securities in the nervous credit market
environment we saw at the end of October.
Q. WHICH AREAS OF THE MORTGAGE MARKET DID YOU TARGET?
A. The additional yield that mortgage-backed securities typically
provide investors over comparable Treasuries became relatively narrow
during the period. In turn, as interest rates declined, the risk that
prepayments would hurt returns increased, so my question was, why take
the risk? In response, I maintained the fund's overweighted position
versus the index in mortgage-backed securities that I felt would
provide better prepayment protection as interest rates change. These
included discount mortgage-backed securities - or bonds selling below
their redemption values - such as 15-year Fannie Maes at 5.5% or 6%,
which are less sensitive to prepayments.
Q. AT THE END OF JULY, YOU SAID THAT COMMERCIAL MORTGAGE-BACKED
SECURITIES (CMBS) PERFORMED WELL. WAS THAT STILL THE CASE IN THE PAST
THREE MONTHS?
A. No. In the third quarter of 1997, many new CMBS issues came to
market, and the higher supply began to dampen prices. Also, since CMBS
paper tends to have a similar cash-flow structure to corporate bonds,
its yield advantage over Treasuries suffered in sympathy with
corporate bonds when corporates began to underperform.
Q. WERE THERE ANY DISAPPOINTMENTS DURING THE PERIOD?
A. During the first half of the 12-month period, the reduced number of
attractive investment alternatives in the mortgage market was the
biggest disappointment. When the market goes through its most dramatic
changes, the fund can use its value-driven, bottom-up security
selection process to capitalize on larger and more frequent
misvaluations in the mortgage market. When everything is trading in
such a tight range relative to Treasuries, there aren't many changes
in values or prepayment options to affect the cash flow of bonds. In
that case, it is difficult to differentiate the fund's returns. Toward
the end of the period, we saw a little bit more volatility in pricing,
but not as much as I would've liked to have seen.
Q. WHAT'S YOUR OUTLOOK FOR THE MORTGAGE MARKET?
A. The next six months will be totally dependent on the direction of
interest rates. If the markets rally and interest rates fall further,
there will be a significant number of prepayments and the mortgage
market should dramatically underperform Treasuries. On the other hand,
if the yield on the 10-year Treasury bond moves into a range of 6.25%
to 6.50%, the mortgage market should outperform as more investors
allocate money to the sector.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED
ON MARKET AND OTHER CONDITIONS.
TOM SILVIA ON
MORTGAGE-BACKED SECURITIES:
"Each new mortgage-backed security
is issued at the current interest rate.
For each interest-rate environment,
the market assumes that homeowners
will pay off their mortgage at a specific
speed. If interest rates decline from
the point of purchase, that mortgage
security now carries a higher interest
rate than the current market rate,
making it more attractive and
increasing its price. However,
because that security has a higher
interest rate than the new current rate,
the market assumes that the
mortgage holder will pay off the loan at
a faster rate than what was originally
anticipated. That's because
homeowners are more likely to
refinance a mortgage with a higher
rate than a mortgage with a lower
rate. As a result of the faster payoff of
principal on the mortgage security, the
price increase will be smaller than if
the pay-off rate was unchanged from
its original assumption.
"Conversely, if interest rates rise, the
mortgage-backed security will carry an
interest rate that is below the current
interest rate. In the higher
interest-rate environment, the market
will anticipate that homeowners will
be slower to pay off their relatively low
interest-rate mortgage. This means
that the bond holders'
mortgage-backed security will be
outstanding for a longer period of time,
which, along with a less attractive
interest rate, pushes the security's
price lower.
"Remember, the price of a bond always
moves in the opposite direction of its
yield. Investors buying
mortgage-backed securities are
willing to expose themselves to
relatively weak price performance in
exchange for a higher yield."
FUND FACTS
GOAL: high current income by
investing in mortgage-related
securities of all kinds
START DATE: December 31, 1984
SIZE: as of October 31, 1997,
more than $531 million
MANAGER: Thomas Silvia, since
October 1997; co-managed
since February 1997; joined
Fidelity in 1993
(checkmark)
INVESTMENT CHANGES
COUPON DISTRIBUTION AS OF OCTOBER 31, 1997
% OF FUND'S % OF FUND'S INVESTMENTS
INVESTMENTS AS OF JULY 31, 1997
LESS THAN 0.1 0.1
5%
5 - 0.8 4.7
5.99%
6 - 31.7 25.7
6.99%
7 - 43.4 27.0
7.99%
8 - 9.0 20.2
8.99%
9 - 7.2 6.6
9.99%
10 - 3.8 3.5
10.99%
11% AND 2.6 2.3
OVER
COUPON DISTRIBUTION SHOWS THE RANGE OF STATED INTEREST RATES ON THE
FUND'S INVESTMENTS, EXCLUDING SHORT-TERM INVESTMENTS.
AVERAGE YEARS TO MATURITY AS OF OCTOBER 31, 1997
AS OF JULY 31, 1997
YEARS 5.8 5.8
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 OCTOBER 31, 1997
AS OF JULY 31, 1997
YEARS 2.8 3.2
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 (% OF FUND'S INVESTMENTS)
AS OF OCTOBER 31, 1997 AS OF JULY 31, 1997
ROW: 1, COL: 1, VALUE: 46.0
ROW: 1, COL: 2, VALUE: 47.0
ROW: 1, COL: 3, VALUE: 5.0
ROW: 1, COL: 4, VALUE: 2.0
MORTGAGE-BACKED
SECURITIES 87.3%
CMOS AND
OTHER MORTGAGE
RELATED SECURITIES 2.8%
SHORT-TERM
INVESTMENTS 9.9%
MORTGAGE-BACKED
SECURITIES 91.7%
CMOS AND
OTHER MORTGAGE
RELATED SECURITIES 6.9%
SHORT-TERM
INVESTMENTS 1.4%
ROW: 1, COL: 1, VALUE: 43.0
ROW: 1, COL: 2, VALUE: 44.0
ROW: 1, COL: 3, VALUE: 3.0
ROW: 1, COL: 4, VALUE: 10.0
INVESTMENTS OCTOBER 31, 1997
SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENT IN SECURITIES
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 91.7%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
FEDERAL HOME LOAN MORTGAGE CORPORATION - 27.0%
5%, 7/1/10 $ 3,953,618 $ 3,750,995
6 1/2%, 1/1/24 to 7/1/24 4,343,335 4,294,472
7%, 5/1/99 to 11/1/12 99,980,981 101,428,855
7 1/2%, 3/1/27 to 5/1/27 368,239 376,406
8%, 10/1/07 to 12/1/18 734,600 763,235
8 1/2%, 11/1/03 to 1/1/20 3,115,133 3,278,713
9%, 9/1/08 to 5/1/21 11,211,236 12,020,757
10%, 1/1/09 to 5/1/19 2,252,569 2,458,336
10 1/2%, 8/1/10 to 12/1/20 2,550,061 2,837,252
11 1/2%, 4/1/12 107,016 119,380
11 3/4%, 6/1/11 69,165 79,183
12 1/4%, 6/1/14 to 7/1/15 312,291 363,786
12 1/2%, 5/1/12 to 4/1/15 1,176,910 1,367,246
12 3/4%, 6/1/05 to 3/1/15 195,427 222,555
13%, 1/1/11 to 6/1/15 1,800,561 2,134,309
135,495,480
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 38.0%
5 1/2%, 11/1/08 to 5/1/26 39,049 37,863
6%, 4/1/00 to 5/1/26 73,696,988 71,985,192
6 1/2%, 9/1/10 to 4/1/26 55,554,238 54,884,126
7%, 2/1/24 to 11/1/27 43,738,183 43,915,921
7 1/2%, 3/1/22 to 12/1/22 3,400,698 3,497,875
8%, 1/1/07 to 7/1/08 112,291 115,279
8 1/4%, 1/1/13 128,730 134,151
8 1/2%, 11/1/03 to 11/1/18 1,916,301 1,992,828
8 3/4%, 11/1/08 to 7/1/09 266,848 278,940
9%, 1/1/08 to 2/1/13 964,676 1,011,128
9 1/2%, 5/1/07 to 8/1/22 7,899,936 8,409,597
11%, 12/1/02 to 8/1/10 2,553,369 2,823,729
12 1/4%, 5/1/13 to 6/1/15 513,066 596,201
12 1/2%, 10/1/13 to 3/1/16 681,993 800,376
12 3/4%, 6/1/13 to 7/1/15 356,592 420,968
13 1/2%, 9/1/13 to 12/1/14 191,058 230,268
14%, 5/1/12 to 11/1/14 63,775 77,582
191,212,024
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 26.7%
7%, 10/15/22 to 11/15/23 $ 3,583,348 $ 3,613,668
7 1/2%, 7/15/05 to 10/15/27 60,463,273 61,915,331
8%, 4/15/02 to 7/15/27 30,069,845 31,230,350
8 1/2%, 7/15/16 to 8/15/27 7,388,247 7,776,183
9%, 10/15/04 to 4/15/18 5,945,992 6,390,065
9 1/2%, 6/15/09 to 7/15/22 5,099,639 5,522,448
10%, 12/15/17 to 1/15/26 11,071,393 12,332,155
10 1/2%, 1/15/98 to 2/15/18 1,363,023 1,506,600
11%, 1/15/10 to 9/15/19 2,857,536 3,264,637
11 1/2%, 10/15/10 to 7/15/18 97,713 111,878
13%, 10/15/13 103,998 124,537
13 1/2%, 7/15/11 to 10/15/14 96,620 116,240
133,904,092
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $450,249,906) 460,611,596
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.0%
U.S. GOVERNMENT AGENCY - 0.0%
Federal Home Loan Mortgage Corporation sequential
pay Series 1353 Class A, 5 1/2%, 11/15/04
(Cost $105,567) 113,304 112,772
COMMERCIAL MORTGAGE SECURITIES - 6.8%
Federal Deposit Insurance Corp. sequential pay
Series 1996-C1 Class 1A, 6 3/4%, 5/25/26 7,359,318 7,371,240
Structured Asset Securities Corp.:
commercial Series 1992-M1 Class C, 7.05%, 11/25/02 3,192,522
2,988,999
floater Series 1997-C1 Class C, 6.10625%, 7/25/00 (b)(c) 15,945,042
15,945,042
Series 1997-NI Class C, 6.055%, 9/25/28 (b) 5,000,000 5,000,000
SML, Inc. Series 1994-C1 Class C, 9.20%, 9/18/99 (a) 3,280,000
2,984,800
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $32,734,698) 34,290,081
COMPLEX MORTGAGE SECURITIES - 0.1%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
INTEREST ONLY STRIPS - 0.1%
SML, Inc. commercial Series 1994-C1
Class S, 0.81%, 9/18/99 (d) (Cost $668,924) $ 51,554,000 $ 547,761
CASH EQUIVALENTS - 1.4%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations), in a joint
trading account at 5.68%, dated
10/31/97 due 11/3/97 $ 7,064,342 7,061,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $490,820,095) $ 502,623,210
LEGEND
1. 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. Series
1994-C1 Class C,
9.20%, 9/18/99 8/11/94 $ 2,132,820
2. 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 $20,945,042 or
3.9% of net assets.
3. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
4. Security represents right to receive monthly interest payments on
an underlying pool of mortgages. Principal shown is the par amount of
the mortgage pool.
INCOME TAX INFORMATION
At October 31, 1997, the aggregate cost of investment securities for
income tax purposes was $490,970,694. Net unrealized appreciation
aggregated $11,652,516, of which $12,062,990 related to appreciated
investment securities and $410,474 related to depreciated investment
securities.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
OCTOBER 31, 1997
ASSETS
INVESTMENT IN SECURITIES, AT VALUE (INCLUDING REPURCHASE $ 502,623,210
AGREEMENTS OF $7,061,000) (COST $490,820,095) -
SEE ACCOMPANYING SCHEDULE
CASH 267
RECEIVABLE FOR INVESTMENTS SOLD 88,779,118
INTEREST RECEIVABLE 2,960,715
PREPAID EXPENSES 29,322
TOTAL ASSETS 594,392,632
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 60,989,150
PAYABLE FOR FUND SHARES REDEEMED 667,450
DISTRIBUTIONS PAYABLE 484,887
ACCRUED MANAGEMENT FEE 180,095
DISTRIBUTION FEES PAYABLE 4,277
OTHER PAYABLES AND ACCRUED EXPENSES 161,162
TOTAL LIABILITIES 62,487,021
NET ASSETS $ 531,905,611
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 519,049,272
UNDISTRIBUTED NET INVESTMENT INCOME 290,731
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) 762,493
ON INVESTMENTS
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 11,803,115
NET ASSETS $ 531,905,611
STATEMENT OF ASSETS AND LIABILITIES - CONTINUED
OCTOBER 31, 1997
CALCULATION OF MAXIMUM OFFERING PRICE $11.02
CLASS A:
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($1,647,881 (DIVIDED BY) 149,517 SHARES)
MAXIMUM OFFERING PRICE PER SHARE (100/95.25 OF $11.02) $11.57
CLASS T: $11.02
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($14,648,711 (DIVIDED BY) 1,329,149 SHARES)
MAXIMUM OFFERING PRICE PER SHARE (100/96.50 OF $11.02) $11.42
CLASS B: $11.02
NET ASSET VALUE AND OFFERING PRICE PER SHARE
($1,586,853 (DIVIDED BY) 144,046 SHARES) A
INITIAL CLASS: $11.02
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER
SHARE ($494,303,671 (DIVIDED BY) 44,836,143 SHARES)
INSTITUTIONAL CLASS: $11.01
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER
SHARE ($19,718,495 (DIVIDED BY) 1,790,755 SHARES)
A REDEMPTION PRICE PER SHARE IS EQUAL TO NET ASSET VALUE LESS ANY
APPLICABLE CONTINGENT DEFERRED SALES CHARGE.
STATEMENT OF OPERATIONS
THREE MONTHS YEAR ENDED
ENDED JULY 31, 1997
OCTOBER 31, 1997
INVESTMENT INCOME $ 9,425,840 $ 35,932,141
INTEREST
EXPENSES
MANAGEMENT FEE 578,471 2,273,788
TRANSFER AGENT FEES 277,610 1,034,760
DISTRIBUTION FEES 11,398 4,506
ACCOUNTING FEES AND EXPENSES 52,896 208,321
NON-INTERESTED TRUSTEES' COMPENSATION 547 9,585
CUSTODIAN FEES AND EXPENSES 26,149 79,667
REGISTRATION FEES 44,044 75,411
AUDIT 22,118 83,730
LEGAL 1,057 17,684
MISCELLANEOUS - 4,396
TOTAL EXPENSES BEFORE REDUCTIONS 1,014,290 3,791,848
EXPENSE REDUCTIONS (47,540) (52,945)
TOTAL EXPENSES AFTER REDUCTIONS 966,750 3,738,903
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
NET INVESTMENT INCOME 8,459,090 32,193,238
REALIZED AND UNREALIZED GAIN (LOSS) 1,110,586 4,296,274
NET REALIZED GAIN (LOSS) ON INVESTMENT SECURITIES
CHANGE IN NET UNREALIZED APPRECIATION 1,347,376 14,164,021
(DEPRECIATION) ON INVESTMENT SECURITIES
NET GAIN (LOSS) 2,457,962 18,460,295
NET INCREASE (DECREASE) IN NET ASSETS $ 10,917,052 $ 50,653,533
RESULTING FROM OPERATIONS
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
THREE MONTHS YEAR ENDED YEAR ENDED
ENDED JULY 31, JULY 31,
OCTOBER 31, 1997 1997 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS $ 8,459,090 $ 32,193,238 $ 31,763,051
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 1,110,586 4,296,274 8,694,701
CHANGE IN NET UNREALIZED 1,347,376 14,164,021 (11,251,245)
APPRECIATION (DEPRECIATION)
NET INCREASE (DECREASE) IN NET ASSETS 10,917,052 50,653,533 29,206,507
RESULTING FROM OPERATIONS
DISTRIBUTIONS TO SHAREHOLDERS (8,349,402) (32,649,725) (31,178,449)
FROM NET INVESTMENT INCOME
FROM NET REALIZED GAIN (3,850,848) (5,039,533) (4,055,960)
TOTAL DISTRIBUTIONS (12,200,250) (37,689,258) (35,234,409)
SHARE TRANSACTIONS - NET (703,316) 32,765,543 77,949,164
INCREASE (DECREASE)
TOTAL INCREASE (DECREASE) IN NET ASSETS (1,986,514) 45,729,818 71,921,262
NET ASSETS
BEGINNING OF PERIOD 533,892,125 488,162,307 416,241,045
END OF PERIOD (INCLUDING $ 531,905,611 $ 533,892,125 $ 488,162,307
UNDISTRIBUTED NET INVESTMENT INCOME
OF $290,731, $230,506 AND
$922,675, RESPECTIVELY)
FINANCIAL HIGHLIGHTS - CLASS A
THREE MONTHS YEAR ENDED
ENDED JULY 31,
OCTOBER 31,
1997 1997 E
SELECTED PER-SHARE DATA F
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.050 $ 10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .170 .268
NET REALIZED AND UNREALIZED GAIN (LOSS) .048 .224
TOTAL FROM INVESTMENT OPERATIONS .218 .492
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.168) (.272)
FROM NET REALIZED GAIN (.080) -
TOTAL DISTRIBUTIONS (.248) (.272)
NET ASSET VALUE, END OF PERIOD $ 11.020 $ 11.050
TOTAL RETURN B, C 2.00% 4.61%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 1,648 $ 1,586
RATIO OF EXPENSES TO AVERAGE NET ASSETS .90% A, .90% A,
D D
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 6.18% A 6.09% A
PORTFOLIO TURNOVER RATE 125% A 149%
A ANNUALIZED
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
C TOTAL RETURNS DO NOT INCLUDE THE ONE TIME SALES CHARGE AND FOR
PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD
HAVE BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
E FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF CLASS A
SHARES) TO JULY 31, 1997.
F NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
FINANCIAL HIGHLIGHTS - CLASS T
THREE MONTHS YEAR ENDED
ENDED JULY 31,
OCTOBER 31,
1997 1997 E
SELECTED PER-SHARE DATA F
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.050 $ 10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .167 .255
NET REALIZED AND UNREALIZED GAIN (LOSS) .048 .233
TOTAL FROM INVESTMENT OPERATIONS .215 .488
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.165) (.268)
FROM NET REALIZED GAIN (.080) -
TOTAL DISTRIBUTIONS (.245) (.268)
NET ASSET VALUE, END OF PERIOD $ 11.020 $ 11.050
TOTAL RETURN B, C 1.98% 4.57%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 14,649 $ 12,193
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.00% A, 1.00% A,
D D
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 6.10% A 5.99% A
PORTFOLIO TURNOVER RATE 125% A 149%
A ANNUALIZED
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
C TOTAL RETURNS DO NOT INCLUDE THE ONE TIME SALES CHARGE AND FOR
PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD
HAVE BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
E FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF CLASS T
SHARES) TO JULY 31, 1997.
F NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
FINANCIAL HIGHLIGHTS - CLASS B
THREE MONTHS YEAR ENDED
ENDED JULY 31,
OCTOBER 31,
1997 1997 E
SELECTED PER-SHARE DATA F
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.040 $ 10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .142 .234
NET REALIZED AND UNREALIZED GAIN (LOSS) .065 .214
TOTAL FROM INVESTMENT OPERATIONS .207 .448
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.147) (.238)
FROM NET REALIZED GAIN (.080) -
TOTAL DISTRIBUTIONS (.227) (.238)
NET ASSET VALUE, END OF PERIOD $ 11.020 $ 11.040
TOTAL RETURN B, C 1.90% 4.20%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 1,587 $ 823
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.65% A, 1.65% A,
D D
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 5.32% A 5.34% A
PORTFOLIO TURNOVER RATE 125% A 149%
A ANNUALIZED
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
C TOTAL RETURNS DO NOT INCLUDE THE CONTINGENT DEFERRED SALES CHARGE
AND FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD
HAVE BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
E FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF CLASS B
SHARES) TO JULY 31, 1997.
F NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
FINANCIAL HIGHLIGHTS - INITIAL CLASS
THREE MONTHS YEARS ENDED JULY 31,
ENDED
OCTOBER 31,
1997 1997 1996 1995 1994 C 1993
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
NET ASSET VALUE, $ 11.050 $ 10.780 $ 10.890 $ 10.580 $ 10.910 $ 10.830
BEGINNING OF PERIOD
INCOME FROM INVESTMENT
OPERATIONS
NET INVESTMENT INCOME .176 D .678 D .729 .772 .570 .788
NET REALIZED AND .047 .391 (.015) .325 (.242) (.007)
UNREALIZED GAIN (LOSS)
TOTAL FROM INVESTMENT .223 1.069 .714 1.097 .328 .781
OPERATIONS
LESS DISTRIBUTIONS
FROM NET INVESTMENT (.173) (.689) (.724) (.737) (.588) (.701)
INCOME
FROM NET REALIZED GAIN (.080) (.110) (.100) - (.040) -
IN EXCESS OF NET - - - (.050) (.030) -
REALIZED GAIN
TOTAL DISTRIBUTIONS (.253) (.799) (.824) (.787) (.658) (.701)
NET ASSET VALUE, $ 11.020 $ 11.050 $ 10.780 $ 10.890 $ 10.580 $ 10.910
END OF PERIOD
TOTAL RETURN B 2.05% 10.34% 6.72% 10.88% 3.13% 7.47%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD $ 494,304 $ 506,113 $ 488,162 $ 416,241 $ 365,801 $ 419,467
(000 OMITTED)
RATIO OF EXPENSES TO .72% A .73% .74% .77% .79% .76%
AVERAGE NET ASSETS
RATIO OF EXPENSES TO .72% A .73% .73% .77% .79% .76%
AVERAGE NET ASSETS AFTER E
EXPENSE REDUCTIONS
RATIO OF NET INVESTMENT 6.36% A 6.26% 6.75% 7.37% 6.73% 7.18%
INCOME TO AVERAGE
NET ASSETS
PORTFOLIO TURNOVER RATE 125% A 149% 221% 329% 563% 278%
</TABLE>
A ANNUALIZED
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN AND FOR PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
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.
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
E FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES.
FINANCIAL HIGHLIGHTS - INSTITUTIONAL CLASS
THREE MONTHS YEAR ENDED
ENDED JULY 31,
OCTOBER 31,
1997 1997 F
<TABLE>
<CAPTION>
<S> <C> <C>
SELECTED PER-SHARE DATA G
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.040 $ 10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .172 .263
NET REALIZED AND UNREALIZED GAIN (LOSS) .050 .226
TOTAL FROM INVESTMENT OPERATIONS .222 .489
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.172) (.279)
FROM NET REALIZED GAIN (.080) -
TOTAL DISTRIBUTIONS (.252) (.279)
NET ASSET VALUE, END OF PERIOD $ 11.010 $ 11.040
TOTAL RETURN B, C 2.05% 4.59%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 19,718 $ 13,177
RATIO OF EXPENSES TO AVERAGE NET ASSETS .75% A, .75% A,
D D
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS .75% A .70% A,
E
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 6.35% A 6.29% A
PORTFOLIO TURNOVER RATE 125% A 149%
</TABLE>
A ANNUALIZED
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
C TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD
HAVE BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
E FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES.
F FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF INSTITUTIONAL
CLASS SHARES) TO JULY 31, 1997.
G NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
NOTES TO FINANCIAL STATEMENTS
For the period ended October 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES.
Fidelity Advisor Mortgage Securities 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 fund offers Class A, Class T, Class B, Initial Class and
Institutional Class shares, each of which has equal rights as to
assets and voting privileges. Each class has exclusive voting rights
with respect to its distribution plan. Interest income, realized and
unrealized capital gains and losses, the common expenses of the fund,
and certain fund-level expense reductions, if any, are allocated on a
pro rata basis to each class based on the relative net assets of each
class to the total net assets of the fund. Each class of shares
differs in its respective distribution, transfer agent, registration,
and certain other class-specific fees, expenses, and expense
reductions.
The financial statements have been prepared in conformity with
generally accepted accounting principles which permit management to
make certain estimates and assumptions at the date of the financial
statements. On January 16, 1997, the Board of Trustees approved a
change in the fiscal year-end of the fund to October 31. Accordingly,
the financial statements of the fund are presented for the three-month
period ended October 31, 1997. The following summarizes the
significant accounting policies of the fund:
SECURITY VALUATION. Securities are valued based upon a computerized
matrix system and/or appraisals by a pricing service, both of which
consider market transactions and dealer-supplied valuations.
Securities (including restricted securities) for which 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. Short-term
securities with remaining maturities of sixty days or less for which
quotations are not readily available are valued at amortized cost or
original cost plus accrued interest, both of which approximate current
value.
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.
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
PREPAID EXPENSES. Fidelity Management & Research Company (FMR) bears
all organizational expenses except for registering and qualifying
Class A, Class T, Class B, and Institutional Class and shares of those
classes for distribution under federal and state securities law. These
expenses are borne by those classes and amortized over one year.
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 dividends
and capital gain distributions are declared separately for each class.
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 and futures and options. 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.
Undistributed 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.
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 FMR, may transfer uninvested cash balances into
one or more joint trading accounts. These balances are invested in one
or more repurchase agreements for U.S. Treasury or Federal Agency
obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are
marked-to-market daily and maintained at a value at least equal to the
principal amount of the repurchase agreement (including accrued
interest). FMR, the fund's investment adviser, is responsible for
determining that the value of the underlying securities remains in
accordance with the market value requirements stated above.
2. OPERATING POLICIES - CONTINUED
DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell
securities on a delayed delivery 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 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 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 $2,984,800 or 0.6% of net assets.
3. PURCHASES AND SALES OF INVESTMENTS.
Purchases and sales of securities, other than short-term securities,
aggregated $167,373,838 and $198,818,860, respectively, of which U.S.
government and government agency obligations aggregated $151,373,838
and $193,397,514, respectively.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a
monthly fee that is calculated on the basis of a group fee rate plus a
fixed individual fund fee rate applied to the average net assets of
the fund. The group fee rate is the weighted average of a series of
rates and is based on the monthly average net assets of all the mutual
funds advised by FMR. The rates ranged from .1100% to .3700% for the
period. The annual individual fund fee rate is .30%. In the event that
these rates were lower than the contractual rates in effect during the
period, FMR voluntarily implemented the above rates, as they resulted
in the same or a lower management fee. For the periods ended October
31, 1997 and July 31, 1997, the management fee was equivalent to an
annualized rate of .44% and an annual rate of .44%, respectively, of
average net assets.
DISTRIBUTION AND SERVICE PLAN. In accordance with Rule 12b-1 of the
1940 Act, the Trustees have adopted separate distribution plans with
respect to each class of shares (collectively referred to as "the
Plans"). Under certain of the Plans, the class pays Fidelity
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
DISTRIBUTION AND SERVICE PLAN - CONTINUED
Distributors Corporation (FDC), an affiliate of FMR, a distribution
and service fee. This fee is based on the following annual rates of
the average net assets of each applicable class:
CLASS A .15%
CLASS T .25%
CLASS B .90%*
* .65% REPRESENTS A DISTRIBUTION FEE AND .25% REPRESENTS A SHAREHOLDER
SERVICE FEE.
For the periods, each class paid FDC the following amounts, a portion
of which was paid to securities dealers, banks and other financial
institutions for the distribution of each class' applicable shares,
and providing shareholder support services:
THREE MONTHS ENDED OCTOBER 31, 1997
PAID TO DEALERS'
FDC PORTION
CLASS A $ 600 $ 600
CLASS T 8,099 8,099
CLASS B 2,699 749
$ 11,398 $ 9,448
YEAR ENDED JULY 31, 1997
PAID TO DEALERS'
FDC PORTION
CLASS A $ 530 $ 530
CLASS T 2,602 2,602
CLASS B 1,374 380
$ 4,506 $ 3,512
Under the Plans, FMR or FDC may use its resources to pay
administrative and promotional expenses related to the sale of each
class' shares. The Plans also authorize payments to third parties that
assist in the sale of each class' shares or render shareholder support
services.
SALES LOAD. FDC receives a front-end sales charge of up to 4.75% for
selling Class A shares (4.25% prior to August 1, 1997), and 3.50% for
selling Class T shares of the fund, and the proceeds of a contingent
deferred sales charge levied on Class B share redemptions occurring
within six years of purchase (five years prior to January 2, 1997).
The Class B charge is based on declining rates which range from 5% to
1% (4% to 1% prior to January 2, 1997) of the lesser of the cost of
shares at the initial date of purchase or the net asset value of the
redeemed shares, excluding any reinvested dividends and capital gains.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
SALES LOAD - CONTINUED
For the period, FDC received the following sales charge amounts
related to each class, a portion of which is paid to securities
dealers, banks, and other financial institutions:
THREE MONTHS ENDED OCTOBER 31, 1997
PAID TO DEALERS'
FDC PORTION
CLASS A $ 263 $ 83
CLASS T 8,746 6,997
CLASS B 72 0 *
$ 9,081 $ 7,080
* WHEN CLASS B SHARES ARE INITIALLY SOLD, FDC PAYS COMMISSIONS FROM
ITS OWN RESOURCES TO DEALERS THROUGH WHICH THE
SALES ARE MADE.
TRANSFER AGENT FEES. Each class of the fund has entered into a
separate transfer, dividend disbursing, and shareholder servicing
agent (collectively referred to as the Transfer Agents) contract with
respect to its shares. The Transfer Agents receive account fees and
asset-based fees that vary according to the account size and type of
account of the shareholders of the respective classes of the fund.
FIIOC and FSC pay for typesetting, printing and mailing of all
shareholder reports. For the periods, the following amounts were paid
to each transfer agent:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
THREE MONTHS ENDED OCTOBER 31, 1997
TRANSFER AMOUNT % OF
AGENT AVERAGE
NET ASSETS
CLASS A FIIOC* $ 1,160 .29**
CLASS T FIIOC* 16,843 .52**
CLASS B FIIOC* 1,270 .42**
INITIAL CLASS FSC* 249,064 .20**
INSTITUTIONAL CLASS FIIOC* 9,273 .24**
$ 277,610
YEAR ENDED JULY 31, 1997
TRANSFER AMOUNT % OF
AGENT AVERAGE
NET ASSETS
CLASS A FIIOC* $ 789 .22**
CLASS T FIIOC* 1,513 .14**
CLASS B FIIOC* 881 .57**
INITIAL CLASS FSC* 1,028,957 .20
INSTITUTIONAL CLASS FIIOC* 2,620 .21**
$ 1,034,760
</TABLE>
* FIDELITY INVESTMENTS INSTITUTIONAL OPERATIONS COMPANY, INC. (FIIOC)
AND FIDELITY SERVICE CO., INC. (FSC), AFFILIATES OF FMR.
** ANNUALIZED
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. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse operating expenses (excluding
interest, taxes, brokerage commissions and extraordinary expenses)
above the following annual rates or range of annual rates of average
net assets for each class:
FMR THREE MONTHS YEAR
EXPENSE ENDED ENDED
LIMITATIONS OCTOBER 31, 1997 JULY 31, 1997
CLASS A .90% $ 8,631 $ 10,408
CLASS T 1.00% 17,704 10,413
CLASS B 1.65% 8,961 10,927
INSTITUTIONAL CLASS .75% 9,518 12,094
$ 44,814 $ 43,842
In addition, the fund has entered into arrangements with its custodian
and each class' transfer agent whereby credits realized as a result of
uninvested cash balances were used to reduce a portion of expenses.
During the periods ended October 31, 1997 and July 31, 1997, the
fund's custodian fees were reduced by $2,726 and $8,474, respectively,
under the custodian arrangement. For the period ended July 31, 1997,
Institutional Class' expenses were reduced by $629 under the transfer
agent arrangement.
6. DISTRIBUTIONS TO SHAREHOLDERS.
Distributions to shareholders of each class were as follows:
THREE MONTHS YEAR ENDED YEAR ENDED
ENDED JULY 31, JULY 31,
OCTOBER 31,
1997 1997 A 1996
CLASS A
FROM NET INVESTMENT INCOME $ 24,437 $ 21,750 $ -
FROM NET REALIZED GAIN 11,558 - -
TOTAL $ 35,995 $ 21,750 $ -
CLASS T
FROM NET INVESTMENT INCOME $ 197,984 $ 64,445 $ -
FROM NET REALIZED GAIN 92,775 - -
TOTAL $ 290,759 $ 64,445 $ -
CLASS B
FROM NET INVESTMENT INCOME $ 15,690 $ 8,241 $ -
FROM NET REALIZED GAIN 7,487 - -
TOTAL $ 23,177 $ 8,241 $ -
INITIAL CLASS
FROM NET INVESTMENT INCOME $ 7,870,955 $ 32,474,399 $ 31,178,449
FROM NET REALIZED GAIN 3,640,130 5,039,533 4,055,960
TOTAL $ 11,511,085 $ 37,513,932 $ 35,234,409
INSTITUTIONAL CLASS
FROM NET INVESTMENT INCOME $ 240,336 $ 80,890 $ -
FROM NET REALIZED GAIN 98,898 - -
TOTAL $ 339,234 $ 80,890 $ -
A DISTRIBUTIONS FOR CLASS A, T, B, AND INSTITUTIONAL CLASS ARE FOR THE
PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF SHARES) TO JULY 31,
1997.
7. SHARE TRANSACTIONS.
Share transactions for each class of shares were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SHARES DOLLARS
THREE YEAR ENDED YEAR ENDED THREE YEAR ENDED YEAR ENDED
MONTHS JULY 31, JULY 31, MONTHS JULY 31, JULY 31,
ENDED ENDED
OCTOBER 31, OCTOBER 31,
1997 1997 A 1996 1997 1997 A 1996
CLASS A 3,210 141,575 - $ 35,261 $ 1,531,983 $ -
SHARES SOLD
REINVESTMENT OF 3,274 1,989 - 35,846 21,750 -
DISTRIBUTIONS
SHARES REDEEMED (531) - - (5,834) - -
NET INCREASE 5,953 143,564 - $ 65,273 $ 1,553,733 $ -
(DECREASE)
CLASS T 312,588 1,114,285 - $ 3,429,256 $ 12,183,453 $ -
SHARES SOLD
REINVESTMENT OF 25,415 5,597 - 278,358 61,712 -
DISTRIBUTIONS
SHARES REDEEMED (112,534) (16,202) - (1,233,884) (177,848) -
NET INCREASE 225,469 1,103,680 - $ 2,473,730 $ 12,067,317 $ -
(DECREASE)
CLASS B 68,692 73,891 - $ 753,079 $ 801,025 $ -
SHARES SOLD
REINVESTMENT OF 1,666 687 - 18,237 7,506 -
DISTRIBUTIONS
SHARES REDEEMED (890) - - (9,750) - -
NET INCREASE 69,468 74,578 - $ 761,566 $ 808,531 $ -
(DECREASE)
INITIAL CLASS 1,426,619 14,636,021 24,584,693 $ 15,655,743 $ 158,564,289 $ 268,954,246
SHARES SOLD
REINVESTMENT OF 854,187 2,769,613 2,644,498 9,354,223 29,925,102 28,910,230
DISTRIBUTIONS
SHARES REDEEMED (3,241,358) (16,911,618) (20,139,279) (35,550,337) (183,183,589) (219,915,312)
NET INCREASE (960,552) 494,016 7,089,912 $ (10,540,371) $ 5,305,802 $ 77,949,164
(DECREASE)
INSTITUTIONAL CLASS
SHARES SOLD 671,412 1,216,421 - $ 7,350,245 $ 13,282,379 $ -
REINVESTMENT OF 11,919 3,516 - 130,486 38,560 -
DISTRIBUTIONS
SHARES REDEEMED (86,048) (26,465) - (944,245) (290,779) -
NET INCREASE 597,283 1,193,472 - $ 6,536,486 $ 13,030,160 $ -
(DECREASE)
</TABLE>
A SHARE TRANSACTIONS FOR CLASS A, T, B, AND INSTITUTIONAL CLASS ARE
FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF SHARES) TO JULY
31, 1997.
8. REGISTRATION FEES.
For the periods, each class paid the following amounts to register its
shares for sale:
THREE MONTHS ENDED YEAR ENDED
OCTOBER 31, 1997 JULY 31, 1997 A
CLASS A $ 8,436 $ 10,398
CLASS T 8,595 11,098
CLASS B 8,436 10,398
INITIAL CLASS 9,412 31,365
INSTITUTIONAL CLASS 9,165 12,152
$ 44,044 $ 75,411
A REGISTRATION FEES FOR CLASS A, T, B AND INSTITUTIONAL CLASS ARE FOR
THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF SHARES) TO JULY 31,
1997.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Fidelity Income Fund and the Shareholders of
Fidelity Advisor Mortgage Securities 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
Fidelity Advisor Mortgage Securities Fund (a fund of Fidelity Income
Fund) at October 31, 1997, the results of its operations for the three
month period then ended, and the year ended July 31, 1997, 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 Advisor Mortgage Securities 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 October 31, 1997 by
correspondence with the custodian and the application of alternative
auditing procedures where securities purchased were not yet received
by the custodian, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
December 15, 1997
DISTRIBUTIONS
The Board of Trustees of Fidelity Advisor Mortgage Securities Fund
voted to pay to shareholders of record at the opening of business on
record date, the following distributions derived from capital gains
realized from sales of portfolio securities, and dividends derived
from net investment income:
PAY DATE RECORD DATE DIVIDENDS CAPITAL GAINS
Initial Class 12/15/97 12/12/97 - $.03
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
Robert C. Pozen, Senior Vice President
Fred L. Henning, Jr., Vice President
Dwight D. Churchill, Vice President
Arthur S. Loring, Secretary
Richard A. Silver, Treasurer
John H. Costello, Assistant Treasurer
Leonard M. Rush, Assistant Treasurer
BOARD OF TRUSTEES
Ralph F. Cox *
Phyllis Burke Davis *
Robert M. Gates *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Marvin L. Mann *
William O. McCoy *
Gerald C. McDonough *
Robert C. Pozen
Thomas R. Williams *
ADVISORY BOARD
J. Gary Burkhead
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Service Company, Inc.
Boston, MA
* INDEPENDENT TRUSTEES
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
New Markets Income
Short-Intermediate Government
Short-Term Bond
Spartan(registered trademark) Ginnie Mae
Spartan Government Income
Spartan High Income
Spartan Investment Grade Bond
Spartan Limited Maturity
Government
Spartan Short-Intermediate
Government
Spartan Short-Term Bond
Target Timeline 1999, 2001 & 2003
SM
THE FIDELITY TELEPHONE CONNECTION
MUTUAL FUND 24-HOUR SERVICE
Exchanges/Redemptions 1-800-544-7777
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)
TouchTone Xpress 1-800-544-5555
SM
AUTOMATED LINE FOR QUICKEST SERVICE
(2_FIDELITY_LOGOS)FIDELITY ADVISOR
(REGISTERED TRADEMARK)
MORTGAGE SECURITIES
FUND - INSTITUTIONAL CLASS
ANNUAL REPORT
OCTOBER 31, 1997
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 THREE 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 23 NOTES TO FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT 32 THE AUDITORS' OPINION.
ACCOUNTANTS
DISTRIBUTIONS 33
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE
SUBMITTED FOR THE GENERAL INFORMATION
OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS
IN THE FUND UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC,
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
FOR MORE INFORMATION ON ANY FIDELITY ADVISOR FUND, INCLUDING CHARGES
AND EXPENSES, CONTACT YOUR
INVESTMENT PROFESSIONAL FOR A FREE PROSPECTUS. READ IT CAREFULLY
BEFORE YOU INVEST OR SEND MONEY.
PRESIDENT'S MESSAGE
(PHOTO_OF_EDWARD_C_JOHNSON_3D)DEAR SHAREHOLDER:
Although financial turmoil in Pacific Basin countries was a catalyst
for significant volatility in U.S. markets in late October, the
Standard & Poor's 500 Index remained up more than 25% year-to-date,
twice its historical annual average. Meanwhile, bond markets -
primarily influenced by a relatively steady flow of positive news on
the inflation front - continued to post moderate returns through the
first 10 months of 1997.
While it's impossible to predict the future direction of the markets
with any degree of certainty, there are certain basic principles that
can help investors plan for their future needs.
The longer your investment time frame, the less likely it is that you
will be affected by short-term market volatility. A 10-year investment
horizon appropriate for saving for a college education, for example,
enables you to weather market cycles in a long-term fund, which may
have a higher risk potential, but also has a higher potential rate of
return.
An intermediate-length fund could make sense if your investment
horizon is two to four years, while 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. These
funds seek income and a stable share price by investing in
high-quality, short-term investments. Of course, it's important to
remember that there is no assurance that a money market fund will
achieve its goal of maintaining a stable net asset value of $1.00 per
share, and that these types of funds are neither insured nor
guaranteed by any agency of the U.S. government.
Finally, no matter what your time horizon or portfolio diversity, it
makes good sense to follow a regular investment plan, investing a
certain amount of money in a fund at the same time each month or
quarter and periodically reviewing your overall portfolio. By doing
so, you won't get caught up in the excitement of a rapidly rising
market, nor will you buy all your shares at market highs. While this
strategy - known as dollar cost averaging - won't assure a profit or
protect you from a loss in a declining market, it should help you
lower the average cost of your purchases.
Remember to contact your investment professional if you need help with
your investments.
Best regards,
Edward C. Johnson 3d
ADVISOR MORTGAGE SECURITIES FUND - INSTITUTIONAL CLASS
PERFORMANCE: THE BOTTOM LINE
There are several ways to evaluate 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.
Total return reflects the change in the value of an investment,
assuming reinvestment of the class' dividend income and capital gains
(the profits earned upon the sale of securities that have grown in
value). You can also look at the class' income, as reflected in its
yield, to measure performance. The initial offering of Institutional
Class shares took place on March 3, 1997. Returns prior to March 3,
1997 are those of Initial Class, the original class of the fund. If
Fidelity had not reimbursed certain class expenses, the total returns
and dividends would have been lower.
CUMULATIVE TOTAL RETURNS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PERIODS ENDED OCTOBER 31, 1997 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
ADVISOR MORTGAGE SECURITIES FUND - INSTITUTIONAL CLASS 8.75% 47.15% 136.96%
LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES 9.12% 42.15% 146.58%
SALOMON BROTHERS MORTGAGE INDEX 8.91% 42.38% 147.96%
U.S. MORTGAGE FUNDS AVERAGE 8.14% 34.84% 118.63%
</TABLE>
CUMULATIVE TOTAL RETURNS show Institutional Class' performance in
percentage terms over a set period - in this case, one year, five
years or 10 years. For example, if you had invested $1,000 in a fund
that had a 5% return over the past year, the value of your investment
would be $1,050. You can compare Institutional Class' returns to the
performance of both the Lehman Brothers Mortgage-Backed Securities
Index and the Salomon Brothers Mortgage Index - market capitalization
weighted indices of 15- and 30-year fixed-rate securities backed by
mortgage pools of the Government National Mortgage Association (GNMA),
Fannie Mae (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC),
and FNMA and FHLMC balloon mortgages with fixed-rate coupons. To
measure how Institutional Class' performance stacked up against its
peers, you can compare it to the U.S. mortgage funds average, which
reflects the performance of mutual funds with similar objectives
tracked by Lipper Analytical Services, Inc. The past one year average
represents a peer group of 59 mutual funds. These benchmarks reflect
reinvestment of dividends and capital gains, if any, and exclude the
effect of sales charges.
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PERIODS ENDED OCTOBER 31, 1997 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
ADVISOR MORTGAGE SECURITIES FUND - INSTITUTIONAL CLASS 8.75% 8.03% 9.01%
LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES 9.12% 7.29% 9.44%
SALOMON BROTHERS MORTGAGE INDEX 8.91% 7.32% 9.51%
U.S. MORTGAGE FUNDS AVERAGE 8.14% 6.14% 8.12%
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS take Institutional Class' cumulative
return and show you what would have happened if Institutional Class
had performed at a constant rate each year.
$10,000 OVER 10 YEARS
IMAHDR PRASUN SHR__CHT 19971031 19971128 142609 S00000000000001
FA Mortgage Sec -CL I SB Mortgage
00240 SB005
1987/10/31 10000.00 10000.00
1987/11/30 10095.37 10140.97
1987/12/31 10223.10 10259.06
1988/01/31 10566.90 10657.22
1988/02/29 10680.85 10785.06
1988/03/31 10617.55 10705.21
1988/04/30 10551.84 10638.47
1988/05/31 10507.96 10615.23
1988/06/30 10718.25 10882.17
1988/07/31 10692.79 10848.80
1988/08/31 10706.36 10871.67
1988/09/30 10921.69 11130.36
1988/10/31 11126.37 11383.80
1988/11/30 10979.26 11220.34
1988/12/31 10909.80 11162.22
1989/01/31 11107.75 11372.17
1989/02/28 11048.94 11285.94
1989/03/31 11070.77 11288.94
1989/04/30 11275.13 11488.02
1989/05/31 11541.98 11865.18
1989/06/30 11821.31 12166.99
1989/07/31 12032.97 12455.67
1989/08/31 11905.88 12271.96
1989/09/30 11957.86 12357.44
1989/10/31 12195.03 12646.12
1989/11/30 12312.54 12782.96
1989/12/31 12397.41 12854.20
1990/01/31 12283.20 12761.22
1990/02/28 12365.02 12812.96
1990/03/31 12374.73 12865.07
1990/04/30 12267.69 12745.47
1990/05/31 12624.35 13133.13
1990/06/30 12807.36 13350.20
1990/07/31 12993.49 13577.03
1990/08/31 12959.12 13465.30
1990/09/30 13028.30 13574.40
1990/10/31 13161.76 13716.87
1990/11/30 13449.76 14022.79
1990/12/31 13681.76 14254.11
1991/01/31 13823.73 14462.19
1991/02/28 13912.24 14554.04
1991/03/31 14005.81 14660.14
1991/04/30 14157.43 14813.11
1991/05/31 14231.03 14941.33
1991/06/30 14266.62 14957.45
1991/07/31 14471.53 15210.14
1991/08/31 14748.08 15489.07
1991/09/30 14978.32 15786.75
1991/10/31 15155.37 16030.82
1991/11/30 15248.02 16140.67
1991/12/31 15544.23 16484.83
1992/01/31 15469.45 16317.25
1992/02/29 15623.38 16470.59
1992/03/31 15515.41 16397.86
1992/04/30 15660.87 16547.82
1992/05/31 15919.36 16854.87
1992/06/30 16088.03 17060.70
1992/07/31 16060.42 17196.79
1992/08/31 16164.30 17428.49
1992/09/30 16265.78 17563.45
1992/10/31 16104.03 17415.74
1992/11/30 16181.87 17487.72
1992/12/31 16391.86 17700.67
1993/01/31 16541.41 17944.36
1993/02/28 16683.08 18110.07
1993/03/31 16792.03 18218.42
1993/04/30 16909.26 18341.39
1993/05/31 16959.32 18425.37
1993/06/30 17166.21 18604.58
1993/07/31 17260.57 18681.81
1993/08/31 17292.71 18758.67
1993/09/30 17330.49 18774.79
1993/10/31 17361.32 18837.78
1993/11/30 17325.03 18804.41
1993/12/31 17492.24 18945.75
1994/01/31 17653.33 19136.21
1994/02/28 17560.24 19016.61
1994/03/31 17361.23 18547.59
1994/04/30 17285.18 18430.62
1994/05/31 17432.32 18492.86
1994/06/30 17521.55 18447.12
1994/07/31 17801.64 18807.03
1994/08/31 17881.40 18845.65
1994/09/30 17687.58 18593.33
1994/10/31 17723.50 18588.46
1994/11/30 17705.82 18521.73
1994/12/31 17831.87 18675.06
1995/01/31 18169.00 19093.09
1995/02/28 18575.76 19579.72
1995/03/31 18654.59 19659.58
1995/04/30 18948.70 19923.14
1995/05/31 19544.90 20568.74
1995/06/30 19694.00 20677.84
1995/07/31 19738.73 20719.08
1995/08/31 19982.29 20909.16
1995/09/30 20188.86 21096.24
1995/10/31 20413.44 21290.44
1995/11/30 20639.46 21540.13
1995/12/31 20866.84 21806.70
1996/01/31 21037.68 21973.91
1996/02/29 20903.63 21799.57
1996/03/31 20827.80 21725.72
1996/04/30 20784.38 21625.24
1996/05/31 20703.91 21597.12
1996/06/30 20989.63 21872.68
1996/07/31 21064.58 21959.66
1996/08/31 21059.93 21963.41
1996/09/30 21393.24 22332.70
1996/10/31 21789.08 22766.47
1996/11/30 22125.71 23079.89
1996/12/31 22000.95 22977.92
1997/01/31 22138.64 23172.87
1997/02/28 22210.81 23197.99
1997/03/31 22001.71 23006.04
1997/04/30 22346.25 23355.83
1997/05/31 22566.06 23573.65
1997/06/30 22829.90 23845.09
1997/07/31 23221.28 24286.36
1997/08/31 23195.07 24242.87
1997/09/30 23446.26 24531.92
1997/10/31 23696.38 24657.67
IMATRL PRASUN SHR__CHT 19971031 19971128 142614 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was
invested in Fidelity Advisor Mortgage Securities Fund - Institutional
Class on October 31, 1987. As the chart shows, by October 31, 1997,
the value of the investment would have grown to $23,696 - a 136.96%
increase on the initial investment. For comparison, look at how the
Lehman Brothers Mortgage-Backed Securities Index did over the same
period. With dividends and capital gains, if any, reinvested, the same
$10,000 would have grown to $24,658 - a 146.58% increase. Beginning
with this report, the fund will compare its performance to that of the
Lehman Brothers Mortgage-Backed Securities Index rather than the
Salomon Brothers Mortgage Index. The indexes include the same type of
bonds, and their performance is not materially different. The fund is
changing to the Lehman Brothers index mainly because Lehman Brothers
indexes are used by most other Fidelity bond funds. For comparison
purposes, both indexes are shown on page 4.
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 OCTOBER 31,
1997 1996 1995 1994 1993
DIVIDEND RETURN 6.58% 6.66% 7.86% 5.61% 6.48%
CAPITAL APPRECIATION RETURN 2.17% 0.08% 7.32% -3.52% 1.33%
TOTAL RETURN 8.75% 6.74% 15.18% 2.09% 7.81%
TOTAL RETURN COMPONENTS include both dividend returns and capital
appreciation returns. A dividend return reflects the actual dividends
paid by the class. A capital appreciation return reflects both the
amount paid by the class to shareholders as capital gain distributions
and changes in the class' share price. Both returns assume the
dividends or capital gains paid by the class are reinvested, if any.
DIVIDENDS AND YIELD
PERIODS ENDED OCTOBER 31, 1997 PAST 1 PAST 6 LIFE OF
MONTH MONTHS CLASS
DIVIDENDS PER SHARE 5.68(CENTS) 34.20(CENTS) 45.12(CENTS)
ANNUALIZED DIVIDEND RATE 6.10% 6.21% 6.23%
30-DAY ANNUALIZED YIELD N/A - -
DIVIDENDS per share show the income paid by the class for a set
period. If you annualize this number, based on an average share price
of $10.97 over the past one month, $10.93 over the past six months,
and $10.88 over the life of the class, you can compare the class'
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. Yield information will be reported once Institutional Class has
a longer, more stable operating history.
FUND TALK: THE MANAGER'S OVERVIEW
MARKET RECAP
The bond market's primary
nemesis - rising inflation -
remained in check throughout
most of the 12 months that ended
October 31, 1997, translating into
a generally favorable investing
climate. The Lehman Brothers
Aggregate Bond Index - a broad
measure of the U.S. taxable bond
market - returned 8.89% during
the period. Through the first half of
the period, bonds suffered from the
perception of an accelerating
economy and, in turn, that
inflation would make an
appearance. The Federal Reserve
Board raised a key short-term
interest rate in March, in an
attempt to curb any potential hints of
inflation. For the most part, though,
investors had been anticipating this
hike. Spurred on by encouraging
economic data, as well as the Fed's
reluctance to raise rates further,
bond markets rallied from April
through July. While some of these
gains evaporated in August - as
inflation fears cropped up again -
a strong September and October
helped ease the pain. The bond
market attracted wary stock
investors in October, as the U.S.
equity market stumbled due to
overseas developments. Treasuries,
in particular, performed well
toward the end of the period.
Relative interest-rate stability
provided a fairly positive backdrop
for mortgage-backed securities, as
the Lehman Brothers
Mortgage-Backed Securities Index
returned 9.12% over the 12-month
period. Sustained economic growth
and demand for higher yields
helped corporate bonds, as the
Lehman Brothers Corporate Bond
Index returned 9.25% over the
same period.
An interview with Thomas Silvia, Portfolio Manager of Fidelity Advisor
Mortgage Securities Fund
Q. HOW DID THE FUND PERFORM, TOM?
A. For the 12 months that ended October 31, 1997, the fund's
Institutional Class shares returned 8.75%. During the same period, the
U.S. mortgage funds average, according to Lipper Analytical Services,
returned 8.14%, and the Lehman Brothers Mortgage-Backed Securities
Index returned 9.12%.
Q. WHAT WAS THE MORTGAGE MARKET LIKE DURING THE PAST 12 MONTHS?
A. For the first nine months of the period, the mortgage market
benefited from a period of relatively stable interest rates. A calm
interest-rate environment reduces the largest source of risk for
mortgage securities - prepayments. For instance, when interest rates
decline, mortgage holders are likely to refinance their debt at a
lower rate. This hurts investors in mortgage-backed securities because
they might be forced to reinvest at a lower interest rate. On the
other hand, when interest rates are as steady as they have been
lately, the risk for prepayments declines. Therefore, the mortgage
sector was one of the best-performing categories of the bond market.
However, as interest rates began to decline in July, the mortgage
sector had difficulty keeping pace with U.S. Treasuries as a result of
increased prepayment concerns.
Q. HOW HAS THE MORTGAGE SECTOR PERFORMED COMPARED TO THE CORPORATE
SECTOR OVER THE PAST THREE MONTHS?
A. Investors sold corporate bonds because they were nervous about
credit risk, or the risk that a bond might not be paid, because of
cash flow concerns. In contrast, agency mortgage-backed securities,
such as those issued by the Federal National Mortgage Association, or
Fannie Mae, are not subject to credit risk because they are implicitly
backed by the U.S. government. Investors seemed more comfortable
buying these types of securities in the nervous credit market
environment we saw at the end of October.
Q. WHICH AREAS OF THE MORTGAGE MARKET DID YOU TARGET?
A. The additional yield that mortgage-backed securities typically
provide investors over comparable Treasuries became relatively narrow
during the period. In turn, as interest rates declined, the risk that
prepayments would hurt returns increased, so my question was, why take
the risk? In response, I maintained the fund's overweighted position
versus the index in mortgage-backed securities that I felt would
provide better prepayment protection as interest rates change. These
included discount mortgage-backed securities - or bonds selling below
their redemption values - such as 15-year Fannie Maes at 5.5% or 6%,
which are less sensitive to prepayments.
Q. AT THE END OF JULY, YOU SAID THAT COMMERCIAL MORTGAGE-BACKED
SECURITIES (CMBS) PERFORMED WELL. WAS THAT STILL THE CASE IN THE PAST
THREE MONTHS?
A. No. In the third quarter of 1997, many new CMBS issues came to
market, and the higher supply began to dampen prices. Also, since CMBS
paper tends to have a similar cash-flow structure to corporate bonds,
its yield advantage over Treasuries suffered in sympathy with
corporate bonds when corporates began to underperform.
Q. WERE THERE ANY DISAPPOINTMENTS DURING THE PERIOD?
A. During the first half of the 12-month period, the reduced number of
attractive investment alternatives in the mortgage market was the
biggest disappointment. When the market goes through its most dramatic
changes, the fund can use its value-driven, bottom-up security
selection process to capitalize on larger and more frequent
misvaluations in the mortgage market. When everything is trading in
such a tight range relative to Treasuries, there aren't many changes
in values or prepayment options to affect the cash flow of bonds. In
that case, it is difficult to differentiate the fund's returns. Toward
the end of the period, we saw a little bit more volatility in pricing,
but not as much as I would've liked to have seen.
Q. WHAT'S YOUR OUTLOOK FOR THE MORTGAGE MARKET?
A. The next six months will be totally dependent on the direction of
interest rates. If the markets rally and interest rates fall further,
there will be a significant number of prepayments and the mortgage
market should dramatically underperform Treasuries. On the other hand,
if the yield on the 10-year Treasury bond moves into a range of 6.25%
to 6.50%, the mortgage market should outperform as more investors
allocate money to the sector.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED
ON MARKET AND OTHER CONDITIONS.
TOM SILVIA ON
MORTGAGE-BACKED SECURITIES:
"Each new mortgage-backed security
is issued at the current interest rate.
For each interest-rate environment,
the market assumes that homeowners
will pay off their mortgage at a specific
speed. If interest rates decline from
the point of purchase, that mortgage
security now carries a higher interest
rate than the current market rate,
making it more attractive and
increasing its price. However,
because that security has a higher
interest rate than the new current rate,
the market assumes that the
mortgage holder will pay off the loan at
a faster rate than what was originally
anticipated. That's because
homeowners are more likely to
refinance a mortgage with a higher
rate than a mortgage with a lower
rate. As a result of the faster payoff of
principal on the mortgage security, the
price increase will be smaller than if
the pay-off rate was unchanged from
its original assumption.
"Conversely, if interest rates rise, the
mortgage-backed security will carry an
interest rate that is below the current
interest rate. In the higher
interest-rate environment, the market
will anticipate that homeowners will
be slower to pay off their relatively low
interest-rate mortgage. This means
that the bond holders'
mortgage-backed security will be
outstanding for a longer period of time,
which, along with a less attractive
interest rate, pushes the security's
price lower.
"Remember, the price of a bond always
moves in the opposite direction of its
yield. Investors buying
mortgage-backed securities are
willing to expose themselves to
relatively weak price performance in
exchange for a higher yield."
FUND FACTS
GOAL: high current income by
investing in mortgage-related
securities of all kinds
START DATE: December 31, 1984
SIZE: as of October 31, 1997,
more than $531 million
MANAGER: Thomas Silvia, since
October 1997; co-managed
since February 1997; joined
Fidelity in 1993
(checkmark)
INVESTMENT CHANGES
COUPON DISTRIBUTION AS OF OCTOBER 31, 1997
% OF FUND'S % OF FUND'S INVESTMENTS
INVESTMENTS AS OF JULY 31, 1997
LESS THAN 0.1 0.1
5%
5 - 0.8 4.7
5.99%
6 - 31.7 25.7
6.99%
7 - 43.4 27.0
7.99%
8 - 9.0 20.2
8.99%
9 - 7.2 6.6
9.99%
10 - 3.8 3.5
10.99%
11% AND 2.6 2.3
OVER
COUPON DISTRIBUTION SHOWS THE RANGE OF STATED INTEREST RATES ON THE
FUND'S INVESTMENTS, EXCLUDING SHORT-TERM INVESTMENTS.
AVERAGE YEARS TO MATURITY AS OF OCTOBER 31, 1997
AS OF JULY 31, 1997
YEARS 5.8 5.8
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 OCTOBER 31, 1997
AS OF JULY 31, 1997
YEARS 2.8 3.2
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 (% OF FUND'S INVESTMENTS)
AS OF OCTOBER 31, 1997 AS OF JULY 31, 1997
ROW: 1, COL: 1, VALUE: 46.0
ROW: 1, COL: 2, VALUE: 47.0
ROW: 1, COL: 3, VALUE: 5.0
ROW: 1, COL: 4, VALUE: 2.0
MORTGAGE-BACKED
SECURITIES 87.3%
CMOS AND
OTHER MORTGAGE
RELATED SECURITIES 2.8%
SHORT-TERM
INVESTMENTS 9.9%
MORTGAGE-BACKED
SECURITIES 91.7%
CMOS AND
OTHER MORTGAGE
RELATED SECURITIES 6.9%
SHORT-TERM
INVESTMENTS 1.4%
ROW: 1, COL: 1, VALUE: 43.0
ROW: 1, COL: 2, VALUE: 44.0
ROW: 1, COL: 3, VALUE: 3.0
ROW: 1, COL: 4, VALUE: 10.0
INVESTMENTS OCTOBER 31, 1997
SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENT IN SECURITIES
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 91.7%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
FEDERAL HOME LOAN MORTGAGE CORPORATION - 27.0%
5%, 7/1/10 $ 3,953,618 $ 3,750,995
6 1/2%, 1/1/24 to 7/1/24 4,343,335 4,294,472
7%, 5/1/99 to 11/1/12 99,980,981 101,428,855
7 1/2%, 3/1/27 to 5/1/27 368,239 376,406
8%, 10/1/07 to 12/1/18 734,600 763,235
8 1/2%, 11/1/03 to 1/1/20 3,115,133 3,278,713
9%, 9/1/08 to 5/1/21 11,211,236 12,020,757
10%, 1/1/09 to 5/1/19 2,252,569 2,458,336
10 1/2%, 8/1/10 to 12/1/20 2,550,061 2,837,252
11 1/2%, 4/1/12 107,016 119,380
11 3/4%, 6/1/11 69,165 79,183
12 1/4%, 6/1/14 to 7/1/15 312,291 363,786
12 1/2%, 5/1/12 to 4/1/15 1,176,910 1,367,246
12 3/4%, 6/1/05 to 3/1/15 195,427 222,555
13%, 1/1/11 to 6/1/15 1,800,561 2,134,309
135,495,480
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 38.0%
5 1/2%, 11/1/08 to 5/1/26 39,049 37,863
6%, 4/1/00 to 5/1/26 73,696,988 71,985,192
6 1/2%, 9/1/10 to 4/1/26 55,554,238 54,884,126
7%, 2/1/24 to 11/1/27 43,738,183 43,915,921
7 1/2%, 3/1/22 to 12/1/22 3,400,698 3,497,875
8%, 1/1/07 to 7/1/08 112,291 115,279
8 1/4%, 1/1/13 128,730 134,151
8 1/2%, 11/1/03 to 11/1/18 1,916,301 1,992,828
8 3/4%, 11/1/08 to 7/1/09 266,848 278,940
9%, 1/1/08 to 2/1/13 964,676 1,011,128
9 1/2%, 5/1/07 to 8/1/22 7,899,936 8,409,597
11%, 12/1/02 to 8/1/10 2,553,369 2,823,729
12 1/4%, 5/1/13 to 6/1/15 513,066 596,201
12 1/2%, 10/1/13 to 3/1/16 681,993 800,376
12 3/4%, 6/1/13 to 7/1/15 356,592 420,968
13 1/2%, 9/1/13 to 12/1/14 191,058 230,268
14%, 5/1/12 to 11/1/14 63,775 77,582
191,212,024
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 26.7%
7%, 10/15/22 to 11/15/23 $ 3,583,348 $ 3,613,668
7 1/2%, 7/15/05 to 10/15/27 60,463,273 61,915,331
8%, 4/15/02 to 7/15/27 30,069,845 31,230,350
8 1/2%, 7/15/16 to 8/15/27 7,388,247 7,776,183
9%, 10/15/04 to 4/15/18 5,945,992 6,390,065
9 1/2%, 6/15/09 to 7/15/22 5,099,639 5,522,448
10%, 12/15/17 to 1/15/26 11,071,393 12,332,155
10 1/2%, 1/15/98 to 2/15/18 1,363,023 1,506,600
11%, 1/15/10 to 9/15/19 2,857,536 3,264,637
11 1/2%, 10/15/10 to 7/15/18 97,713 111,878
13%, 10/15/13 103,998 124,537
13 1/2%, 7/15/11 to 10/15/14 96,620 116,240
133,904,092
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $450,249,906) 460,611,596
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.0%
U.S. GOVERNMENT AGENCY - 0.0%
Federal Home Loan Mortgage Corporation sequential
pay Series 1353 Class A, 5 1/2%, 11/15/04
(Cost $105,567) 113,304 112,772
COMMERCIAL MORTGAGE SECURITIES - 6.8%
Federal Deposit Insurance Corp. sequential pay
Series 1996-C1 Class 1A, 6 3/4%, 5/25/26 7,359,318 7,371,240
Structured Asset Securities Corp.:
commercial Series 1992-M1 Class C, 7.05%, 11/25/02 3,192,522
2,988,999
floater Series 1997-C1 Class C, 6.10625%, 7/25/00 (b)(c) 15,945,042
15,945,042
Series 1997-NI Class C, 6.055%, 9/25/28 (b) 5,000,000 5,000,000
SML, Inc. Series 1994-C1 Class C, 9.20%, 9/18/99 (a) 3,280,000
2,984,800
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $32,734,698) 34,290,081
COMPLEX MORTGAGE SECURITIES - 0.1%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
INTEREST ONLY STRIPS - 0.1%
SML, Inc. commercial Series 1994-C1
Class S, 0.81%, 9/18/99 (d) (Cost $668,924) $ 51,554,000 $ 547,761
CASH EQUIVALENTS - 1.4%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations), in a joint
trading account at 5.68%, dated
10/31/97 due 11/3/97 $ 7,064,342 7,061,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $490,820,095) $ 502,623,210
LEGEND
1. 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. Series
1994-C1 Class C,
9.20%, 9/18/99 8/11/94 $ 2,132,820
2. 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 $20,945,042 or
3.9% of net assets.
3. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
4. Security represents right to receive monthly interest payments on
an underlying pool of mortgages. Principal shown is the par amount of
the mortgage pool.
INCOME TAX INFORMATION
At October 31, 1997, the aggregate cost of investment securities for
income tax purposes was $490,970,694. Net unrealized appreciation
aggregated $11,652,516, of which $12,062,990 related to appreciated
investment securities and $410,474 related to depreciated investment
securities.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
OCTOBER 31, 1997
ASSETS
INVESTMENT IN SECURITIES, AT VALUE (INCLUDING REPURCHASE $ 502,623,210
AGREEMENTS OF $7,061,000) (COST $490,820,095) -
SEE ACCOMPANYING SCHEDULE
CASH 267
RECEIVABLE FOR INVESTMENTS SOLD 88,779,118
INTEREST RECEIVABLE 2,960,715
PREPAID EXPENSES 29,322
TOTAL ASSETS 594,392,632
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 60,989,150
PAYABLE FOR FUND SHARES REDEEMED 667,450
DISTRIBUTIONS PAYABLE 484,887
ACCRUED MANAGEMENT FEE 180,095
DISTRIBUTION FEES PAYABLE 4,277
OTHER PAYABLES AND ACCRUED EXPENSES 161,162
TOTAL LIABILITIES 62,487,021
NET ASSETS $ 531,905,611
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 519,049,272
UNDISTRIBUTED NET INVESTMENT INCOME 290,731
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) 762,493
ON INVESTMENTS
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 11,803,115
NET ASSETS $ 531,905,611
STATEMENT OF ASSETS AND LIABILITIES - CONTINUED
OCTOBER 31, 1997
CALCULATION OF MAXIMUM OFFERING PRICE $11.02
CLASS A:
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($1,647,881 (DIVIDED BY) 149,517 SHARES)
MAXIMUM OFFERING PRICE PER SHARE (100/95.25 OF $11.02) $11.57
CLASS T: $11.02
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($14,648,711 (DIVIDED BY) 1,329,149 SHARES)
MAXIMUM OFFERING PRICE PER SHARE (100/96.50 OF $11.02) $11.42
CLASS B: $11.02
NET ASSET VALUE AND OFFERING PRICE PER SHARE
($1,586,853 (DIVIDED BY) 144,046 SHARES) A
INITIAL CLASS: $11.02
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER
SHARE ($494,303,671 (DIVIDED BY) 44,836,143 SHARES)
INSTITUTIONAL CLASS: $11.01
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER
SHARE ($19,718,495 (DIVIDED BY) 1,790,755 SHARES)
A REDEMPTION PRICE PER SHARE IS EQUAL TO NET ASSET VALUE LESS ANY
APPLICABLE CONTINGENT DEFERRED SALES CHARGE.
STATEMENT OF OPERATIONS
THREE MONTHS YEAR ENDED
ENDED JULY 31, 1997
OCTOBER 31, 1997
INVESTMENT INCOME $ 9,425,840 $ 35,932,141
INTEREST
EXPENSES
MANAGEMENT FEE 578,471 2,273,788
TRANSFER AGENT FEES 277,610 1,034,760
DISTRIBUTION FEES 11,398 4,506
ACCOUNTING FEES AND EXPENSES 52,896 208,321
NON-INTERESTED TRUSTEES' COMPENSATION 547 9,585
CUSTODIAN FEES AND EXPENSES 26,149 79,667
REGISTRATION FEES 44,044 75,411
AUDIT 22,118 83,730
LEGAL 1,057 17,684
MISCELLANEOUS - 4,396
TOTAL EXPENSES BEFORE REDUCTIONS 1,014,290 3,791,848
EXPENSE REDUCTIONS (47,540) (52,945)
TOTAL EXPENSES AFTER REDUCTIONS 966,750 3,738,903
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
NET INVESTMENT INCOME 8,459,090 32,193,238
REALIZED AND UNREALIZED GAIN (LOSS) 1,110,586 4,296,274
NET REALIZED GAIN (LOSS) ON INVESTMENT SECURITIES
CHANGE IN NET UNREALIZED APPRECIATION 1,347,376 14,164,021
(DEPRECIATION) ON INVESTMENT SECURITIES
NET GAIN (LOSS) 2,457,962 18,460,295
NET INCREASE (DECREASE) IN NET ASSETS $ 10,917,052 $ 50,653,533
RESULTING FROM OPERATIONS
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
THREE MONTHS YEAR ENDED YEAR ENDED
ENDED JULY 31, JULY 31,
OCTOBER 31, 1997 1997 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS $ 8,459,090 $ 32,193,238 $ 31,763,051
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 1,110,586 4,296,274 8,694,701
CHANGE IN NET UNREALIZED 1,347,376 14,164,021 (11,251,245)
APPRECIATION (DEPRECIATION)
NET INCREASE (DECREASE) IN NET ASSETS 10,917,052 50,653,533 29,206,507
RESULTING FROM OPERATIONS
DISTRIBUTIONS TO SHAREHOLDERS (8,349,402) (32,649,725) (31,178,449)
FROM NET INVESTMENT INCOME
FROM NET REALIZED GAIN (3,850,848) (5,039,533) (4,055,960)
TOTAL DISTRIBUTIONS (12,200,250) (37,689,258) (35,234,409)
SHARE TRANSACTIONS - NET (703,316) 32,765,543 77,949,164
INCREASE (DECREASE)
TOTAL INCREASE (DECREASE) IN NET ASSETS (1,986,514) 45,729,818 71,921,262
NET ASSETS
BEGINNING OF PERIOD 533,892,125 488,162,307 416,241,045
END OF PERIOD (INCLUDING $ 531,905,611 $ 533,892,125 $ 488,162,307
UNDISTRIBUTED NET INVESTMENT INCOME
OF $290,731, $230,506 AND
$922,675, RESPECTIVELY)
FINANCIAL HIGHLIGHTS - CLASS A
THREE MONTHS YEAR ENDED
ENDED JULY 31,
OCTOBER 31,
1997 1997 E
SELECTED PER-SHARE DATA F
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.050 $ 10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .170 .268
NET REALIZED AND UNREALIZED GAIN (LOSS) .048 .224
TOTAL FROM INVESTMENT OPERATIONS .218 .492
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.168) (.272)
FROM NET REALIZED GAIN (.080) -
TOTAL DISTRIBUTIONS (.248) (.272)
NET ASSET VALUE, END OF PERIOD $ 11.020 $ 11.050
TOTAL RETURN B, C 2.00% 4.61%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 1,648 $ 1,586
RATIO OF EXPENSES TO AVERAGE NET ASSETS .90% A, .90% A,
D D
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 6.18% A 6.09% A
PORTFOLIO TURNOVER RATE 125% A 149%
A ANNUALIZED
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
C TOTAL RETURNS DO NOT INCLUDE THE ONE TIME SALES CHARGE AND FOR
PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD
HAVE BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
E FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF CLASS A
SHARES) TO JULY 31, 1997.
F NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
FINANCIAL HIGHLIGHTS - CLASS T
THREE MONTHS YEAR ENDED
ENDED JULY 31,
OCTOBER 31,
1997 1997 E
SELECTED PER-SHARE DATA F
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.050 $ 10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .167 .255
NET REALIZED AND UNREALIZED GAIN (LOSS) .048 .233
TOTAL FROM INVESTMENT OPERATIONS .215 .488
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.165) (.268)
FROM NET REALIZED GAIN (.080) -
TOTAL DISTRIBUTIONS (.245) (.268)
NET ASSET VALUE, END OF PERIOD $ 11.020 $ 11.050
TOTAL RETURN B, C 1.98% 4.57%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 14,649 $ 12,193
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.00% A, 1.00% A,
D D
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 6.10% A 5.99% A
PORTFOLIO TURNOVER RATE 125% A 149%
A ANNUALIZED
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
C TOTAL RETURNS DO NOT INCLUDE THE ONE TIME SALES CHARGE AND FOR
PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD
HAVE BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
E FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF CLASS T
SHARES) TO JULY 31, 1997.
F NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
FINANCIAL HIGHLIGHTS - CLASS B
THREE MONTHS YEAR ENDED
ENDED JULY 31,
OCTOBER 31,
1997 1997 E
SELECTED PER-SHARE DATA F
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.040 $ 10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .142 .234
NET REALIZED AND UNREALIZED GAIN (LOSS) .065 .214
TOTAL FROM INVESTMENT OPERATIONS .207 .448
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.147) (.238)
FROM NET REALIZED GAIN (.080) -
TOTAL DISTRIBUTIONS (.227) (.238)
NET ASSET VALUE, END OF PERIOD $ 11.020 $ 11.040
TOTAL RETURN B, C 1.90% 4.20%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 1,587 $ 823
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.65% A, 1.65% A,
D D
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 5.32% A 5.34% A
PORTFOLIO TURNOVER RATE 125% A 149%
A ANNUALIZED
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
C TOTAL RETURNS DO NOT INCLUDE THE CONTINGENT DEFERRED SALES CHARGE
AND FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD
HAVE BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
E FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF CLASS B
SHARES) TO JULY 31, 1997.
F NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
FINANCIAL HIGHLIGHTS - INITIAL CLASS
THREE MONTHS YEARS ENDED JULY 31,
ENDED
OCTOBER 31,
1997 1997 1996 1995 1994 C 1993
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
NET ASSET VALUE, $ 11.050 $ 10.780 $ 10.890 $ 10.580 $ 10.910 $ 10.830
BEGINNING OF PERIOD
INCOME FROM INVESTMENT
OPERATIONS
NET INVESTMENT INCOME .176 D .678 D .729 .772 .570 .788
NET REALIZED AND .047 .391 (.015) .325 (.242) (.007)
UNREALIZED GAIN (LOSS)
TOTAL FROM INVESTMENT .223 1.069 .714 1.097 .328 .781
OPERATIONS
LESS DISTRIBUTIONS
FROM NET INVESTMENT (.173) (.689) (.724) (.737) (.588) (.701)
INCOME
FROM NET REALIZED GAIN (.080) (.110) (.100) - (.040) -
IN EXCESS OF NET - - - (.050) (.030) -
REALIZED GAIN
TOTAL DISTRIBUTIONS (.253) (.799) (.824) (.787) (.658) (.701)
NET ASSET VALUE, $ 11.020 $ 11.050 $ 10.780 $ 10.890 $ 10.580 $ 10.910
END OF PERIOD
TOTAL RETURN B 2.05% 10.34% 6.72% 10.88% 3.13% 7.47%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD $ 494,304 $ 506,113 $ 488,162 $ 416,241 $ 365,801 $ 419,467
(000 OMITTED)
RATIO OF EXPENSES TO .72% A .73% .74% .77% .79% .76%
AVERAGE NET ASSETS
RATIO OF EXPENSES TO .72% A .73% .73% .77% .79% .76%
AVERAGE NET ASSETS AFTER E
EXPENSE REDUCTIONS
RATIO OF NET INVESTMENT 6.36% A 6.26% 6.75% 7.37% 6.73% 7.18%
INCOME TO AVERAGE
NET ASSETS
PORTFOLIO TURNOVER RATE 125% A 149% 221% 329% 563% 278%
</TABLE>
A ANNUALIZED
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN AND FOR PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
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.
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
E FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES.
FINANCIAL HIGHLIGHTS - INSTITUTIONAL CLASS
THREE MONTHS YEAR ENDED
ENDED JULY 31,
OCTOBER 31,
1997 1997 F
<TABLE>
<CAPTION>
<S> <C> <C>
SELECTED PER-SHARE DATA G
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.040 $ 10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .172 .263
NET REALIZED AND UNREALIZED GAIN (LOSS) .050 .226
TOTAL FROM INVESTMENT OPERATIONS .222 .489
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.172) (.279)
FROM NET REALIZED GAIN (.080) -
TOTAL DISTRIBUTIONS (.252) (.279)
NET ASSET VALUE, END OF PERIOD $ 11.010 $ 11.040
TOTAL RETURN B, C 2.05% 4.59%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 19,718 $ 13,177
RATIO OF EXPENSES TO AVERAGE NET ASSETS .75% A, .75% A,
D D
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS .75% A .70% A,
E
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 6.35% A 6.29% A
PORTFOLIO TURNOVER RATE 125% A 149%
</TABLE>
A ANNUALIZED
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
C TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD
HAVE BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
E FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES.
F FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF INSTITUTIONAL
CLASS SHARES) TO JULY 31, 1997.
G NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
NOTES TO FINANCIAL STATEMENTS
For the period ended October 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES.
Fidelity Advisor Mortgage Securities 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 fund offers Class A, Class T, Class B, Initial Class and
Institutional Class shares, each of which has equal rights as to
assets and voting privileges. Each class has exclusive voting rights
with respect to its distribution plan. Interest income, realized and
unrealized capital gains and losses, the common expenses of the fund,
and certain fund-level expense reductions, if any, are allocated on a
pro rata basis to each class based on the relative net assets of each
class to the total net assets of the fund. Each class of shares
differs in its respective distribution, transfer agent, registration,
and certain other class-specific fees, expenses, and expense
reductions.
The financial statements have been prepared in conformity with
generally accepted accounting principles which permit management to
make certain estimates and assumptions at the date of the financial
statements. On January 16, 1997, the Board of Trustees approved a
change in the fiscal year-end of the fund to October 31. Accordingly,
the financial statements of the fund are presented for the three-month
period ended October 31, 1997. The following summarizes the
significant accounting policies of the fund:
SECURITY VALUATION. Securities are valued based upon a computerized
matrix system and/or appraisals by a pricing service, both of which
consider market transactions and dealer-supplied valuations.
Securities (including restricted securities) for which 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. Short-term
securities with remaining maturities of sixty days or less for which
quotations are not readily available are valued at amortized cost or
original cost plus accrued interest, both of which approximate current
value.
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.
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
PREPAID EXPENSES. Fidelity Management & Research Company (FMR) bears
all organizational expenses except for registering and qualifying
Class A, Class T, Class B, and Institutional Class and shares of those
classes for distribution under federal and state securities law. These
expenses are borne by those classes and amortized over one year.
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 dividends
and capital gain distributions are declared separately for each class.
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 and futures and options. 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.
Undistributed 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.
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 FMR, may transfer uninvested cash balances into
one or more joint trading accounts. These balances are invested in one
or more repurchase agreements for U.S. Treasury or Federal Agency
obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are
marked-to-market daily and maintained at a value at least equal to the
principal amount of the repurchase agreement (including accrued
interest). FMR, the fund's investment adviser, is responsible for
determining that the value of the underlying securities remains in
accordance with the market value requirements stated above.
2. OPERATING POLICIES - CONTINUED
DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell
securities on a delayed delivery 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 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 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 $2,984,800 or 0.6% of net assets.
3. PURCHASES AND SALES OF INVESTMENTS.
Purchases and sales of securities, other than short-term securities,
aggregated $167,373,838 and $198,818,860, respectively, of which U.S.
government and government agency obligations aggregated $151,373,838
and $193,397,514, respectively.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a
monthly fee that is calculated on the basis of a group fee rate plus a
fixed individual fund fee rate applied to the average net assets of
the fund. The group fee rate is the weighted average of a series of
rates and is based on the monthly average net assets of all the mutual
funds advised by FMR. The rates ranged from .1100% to .3700% for the
period. The annual individual fund fee rate is .30%. In the event that
these rates were lower than the contractual rates in effect during the
period, FMR voluntarily implemented the above rates, as they resulted
in the same or a lower management fee. For the periods ended October
31, 1997 and July 31, 1997, the management fee was equivalent to an
annualized rate of .44% and an annual rate of .44%, respectively, of
average net assets.
DISTRIBUTION AND SERVICE PLAN. In accordance with Rule 12b-1 of the
1940 Act, the Trustees have adopted separate distribution plans with
respect to each class of shares (collectively referred to as "the
Plans"). Under certain of the Plans, the class pays Fidelity
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
DISTRIBUTION AND SERVICE PLAN - CONTINUED
Distributors Corporation (FDC), an affiliate of FMR, a distribution
and service fee. This fee is based on the following annual rates of
the average net assets of each applicable class:
CLASS A .15%
CLASS T .25%
CLASS B .90%*
* .65% REPRESENTS A DISTRIBUTION FEE AND .25% REPRESENTS A SHAREHOLDER
SERVICE FEE.
For the periods, each class paid FDC the following amounts, a portion
of which was paid to securities dealers, banks and other financial
institutions for the distribution of each class' applicable shares,
and providing shareholder support services:
THREE MONTHS ENDED OCTOBER 31, 1997
PAID TO DEALERS'
FDC PORTION
CLASS A $ 600 $ 600
CLASS T 8,099 8,099
CLASS B 2,699 749
$ 11,398 $ 9,448
YEAR ENDED JULY 31, 1997
PAID TO DEALERS'
FDC PORTION
CLASS A $ 530 $ 530
CLASS T 2,602 2,602
CLASS B 1,374 380
$ 4,506 $ 3,512
Under the Plans, FMR or FDC may use its resources to pay
administrative and promotional expenses related to the sale of each
class' shares. The Plans also authorize payments to third parties that
assist in the sale of each class' shares or render shareholder support
services.
SALES LOAD. FDC receives a front-end sales charge of up to 4.75% for
selling Class A shares (4.25% prior to August 1, 1997), and 3.50% for
selling Class T shares of the fund, and the proceeds of a contingent
deferred sales charge levied on Class B share redemptions occurring
within six years of purchase (five years prior to January 2, 1997).
The Class B charge is based on declining rates which range from 5% to
1% (4% to 1% prior to January 2, 1997) of the lesser of the cost of
shares at the initial date of purchase or the net asset value of the
redeemed shares, excluding any reinvested dividends and capital gains.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
SALES LOAD - CONTINUED
For the period, FDC received the following sales charge amounts
related to each class, a portion of which is paid to securities
dealers, banks, and other financial institutions:
THREE MONTHS ENDED OCTOBER 31, 1997
PAID TO DEALERS'
FDC PORTION
CLASS A $ 263 $ 83
CLASS T 8,746 6,997
CLASS B 72 0 *
$ 9,081 $ 7,080
* WHEN CLASS B SHARES ARE INITIALLY SOLD, FDC PAYS COMMISSIONS FROM
ITS OWN RESOURCES TO DEALERS THROUGH WHICH THE
SALES ARE MADE.
TRANSFER AGENT FEES. Each class of the fund has entered into a
separate transfer, dividend disbursing, and shareholder servicing
agent (collectively referred to as the Transfer Agents) contract with
respect to its shares. The Transfer Agents receive account fees and
asset-based fees that vary according to the account size and type of
account of the shareholders of the respective classes of the fund.
FIIOC and FSC pay for typesetting, printing and mailing of all
shareholder reports. For the periods, the following amounts were paid
to each transfer agent:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
THREE MONTHS ENDED OCTOBER 31, 1997
TRANSFER AMOUNT % OF
AGENT AVERAGE
NET ASSETS
CLASS A FIIOC* $ 1,160 .29**
CLASS T FIIOC* 16,843 .52**
CLASS B FIIOC* 1,270 .42**
INITIAL CLASS FSC* 249,064 .20**
INSTITUTIONAL CLASS FIIOC* 9,273 .24**
$ 277,610
YEAR ENDED JULY 31, 1997
TRANSFER AMOUNT % OF
AGENT AVERAGE
NET ASSETS
CLASS A FIIOC* $ 789 .22**
CLASS T FIIOC* 1,513 .14**
CLASS B FIIOC* 881 .57**
INITIAL CLASS FSC* 1,028,957 .20
INSTITUTIONAL CLASS FIIOC* 2,620 .21**
$ 1,034,760
</TABLE>
* FIDELITY INVESTMENTS INSTITUTIONAL OPERATIONS COMPANY, INC. (FIIOC)
AND FIDELITY SERVICE CO., INC. (FSC), AFFILIATES OF FMR.
** ANNUALIZED
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. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse operating expenses (excluding
interest, taxes, brokerage commissions and extraordinary expenses)
above the following annual rates or range of annual rates of average
net assets for each class:
FMR THREE MONTHS YEAR
EXPENSE ENDED ENDED
LIMITATIONS OCTOBER 31, 1997 JULY 31, 1997
CLASS A .90% $ 8,631 $ 10,408
CLASS T 1.00% 17,704 10,413
CLASS B 1.65% 8,961 10,927
INSTITUTIONAL CLASS .75% 9,518 12,094
$ 44,814 $ 43,842
In addition, the fund has entered into arrangements with its custodian
and each class' transfer agent whereby credits realized as a result of
uninvested cash balances were used to reduce a portion of expenses.
During the periods ended October 31, 1997 and July 31, 1997, the
fund's custodian fees were reduced by $2,726 and $8,474, respectively,
under the custodian arrangement. For the period ended July 31, 1997,
Institutional Class' expenses were reduced by $629 under the transfer
agent arrangement.
6. DISTRIBUTIONS TO SHAREHOLDERS.
Distributions to shareholders of each class were as follows:
THREE MONTHS YEAR ENDED YEAR ENDED
ENDED JULY 31, JULY 31,
OCTOBER 31,
1997 1997 A 1996
CLASS A
FROM NET INVESTMENT INCOME $ 24,437 $ 21,750 $ -
FROM NET REALIZED GAIN 11,558 - -
TOTAL $ 35,995 $ 21,750 $ -
CLASS T
FROM NET INVESTMENT INCOME $ 197,984 $ 64,445 $ -
FROM NET REALIZED GAIN 92,775 - -
TOTAL $ 290,759 $ 64,445 $ -
CLASS B
FROM NET INVESTMENT INCOME $ 15,690 $ 8,241 $ -
FROM NET REALIZED GAIN 7,487 - -
TOTAL $ 23,177 $ 8,241 $ -
INITIAL CLASS
FROM NET INVESTMENT INCOME $ 7,870,955 $ 32,474,399 $ 31,178,449
FROM NET REALIZED GAIN 3,640,130 5,039,533 4,055,960
TOTAL $ 11,511,085 $ 37,513,932 $ 35,234,409
INSTITUTIONAL CLASS
FROM NET INVESTMENT INCOME $ 240,336 $ 80,890 $ -
FROM NET REALIZED GAIN 98,898 - -
TOTAL $ 339,234 $ 80,890 $ -
A DISTRIBUTIONS FOR CLASS A, T, B, AND INSTITUTIONAL CLASS ARE FOR THE
PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF SHARES) TO JULY 31,
1997.
7. SHARE TRANSACTIONS.
Share transactions for each class of shares were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SHARES DOLLARS
THREE YEAR ENDED YEAR ENDED THREE YEAR ENDED YEAR ENDED
MONTHS JULY 31, JULY 31, MONTHS JULY 31, JULY 31,
ENDED ENDED
OCTOBER 31, OCTOBER 31,
1997 1997 A 1996 1997 1997 A 1996
CLASS A 3,210 141,575 - $ 35,261 $ 1,531,983 $ -
SHARES SOLD
REINVESTMENT OF 3,274 1,989 - 35,846 21,750 -
DISTRIBUTIONS
SHARES REDEEMED (531) - - (5,834) - -
NET INCREASE 5,953 143,564 - $ 65,273 $ 1,553,733 $ -
(DECREASE)
CLASS T 312,588 1,114,285 - $ 3,429,256 $ 12,183,453 $ -
SHARES SOLD
REINVESTMENT OF 25,415 5,597 - 278,358 61,712 -
DISTRIBUTIONS
SHARES REDEEMED (112,534) (16,202) - (1,233,884) (177,848) -
NET INCREASE 225,469 1,103,680 - $ 2,473,730 $ 12,067,317 $ -
(DECREASE)
CLASS B 68,692 73,891 - $ 753,079 $ 801,025 $ -
SHARES SOLD
REINVESTMENT OF 1,666 687 - 18,237 7,506 -
DISTRIBUTIONS
SHARES REDEEMED (890) - - (9,750) - -
NET INCREASE 69,468 74,578 - $ 761,566 $ 808,531 $ -
(DECREASE)
INITIAL CLASS 1,426,619 14,636,021 24,584,693 $ 15,655,743 $ 158,564,289 $ 268,954,246
SHARES SOLD
REINVESTMENT OF 854,187 2,769,613 2,644,498 9,354,223 29,925,102 28,910,230
DISTRIBUTIONS
SHARES REDEEMED (3,241,358) (16,911,618) (20,139,279) (35,550,337) (183,183,589) (219,915,312)
NET INCREASE (960,552) 494,016 7,089,912 $ (10,540,371) $ 5,305,802 $ 77,949,164
(DECREASE)
INSTITUTIONAL CLASS
SHARES SOLD 671,412 1,216,421 - $ 7,350,245 $ 13,282,379 $ -
REINVESTMENT OF 11,919 3,516 - 130,486 38,560 -
DISTRIBUTIONS
SHARES REDEEMED (86,048) (26,465) - (944,245) (290,779) -
NET INCREASE 597,283 1,193,472 - $ 6,536,486 $ 13,030,160 $ -
(DECREASE)
</TABLE>
A SHARE TRANSACTIONS FOR CLASS A, T, B, AND INSTITUTIONAL CLASS ARE
FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF SHARES) TO JULY
31, 1997.
8. REGISTRATION FEES.
For the periods, each class paid the following amounts to register its
shares for sale:
THREE MONTHS ENDED YEAR ENDED
OCTOBER 31, 1997 JULY 31, 1997 A
CLASS A $ 8,436 $ 10,398
CLASS T 8,595 11,098
CLASS B 8,436 10,398
INITIAL CLASS 9,412 31,365
INSTITUTIONAL CLASS 9,165 12,152
$ 44,044 $ 75,411
A REGISTRATION FEES FOR CLASS A, T, B AND INSTITUTIONAL CLASS ARE FOR
THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF SHARES) TO JULY 31,
1997.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Fidelity Income Fund and the Shareholders of
Fidelity Advisor Mortgage Securities 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
Fidelity Advisor Mortgage Securities Fund (a fund of Fidelity Income
Fund) at October 31, 1997, the results of its operations for the three
month period then ended, and the year ended July 31, 1997, 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 Advisor Mortgage Securities 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 October 31, 1997 by
correspondence with the custodian and the application of alternative
auditing procedures where securities purchased were not yet received
by the custodian, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
December 15, 1997
DISTRIBUTIONS
The Board of Trustees of Fidelity Advisor Mortgage Securities Fund
voted to pay to shareholders of record at the opening of business on
record date, the following distributions derived from capital gains
realized from sales of portfolio securities, and dividends derived
from net investment income:
PAY DATE RECORD DATE DIVIDENDS CAPITAL GAINS
Institutional Class 12/15/97 12/12/97 - $.03
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
Robert C. Pozen, Senior Vice President
Fred L. Henning, Jr., Vice President
Dwight D. Churchill, Vice President
Arthur S. Loring, Secretary
Richard A. Silver, Treasurer
John H. Costello, Assistant Treasurer
Leonard M. Rush, Assistant Treasurer
BOARD OF TRUSTEES
Ralph F. Cox *
Phyllis Burke Davis *
Robert M. Gates *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Marvin L. Mann *
William O. McCoy *
Gerald C. McDonough *
Robert C. Pozen
Thomas R. Williams *
ADVISORY BOARD
J. Gary Burkhead
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Investments Institutional Operations Company, Inc.
Boston, MA
CUSTODIAN
The Bank of New York
New York, NY
FOCUS FUNDS
Fidelity Advisor Consumer
Industries Fund
Fidelity Advisor Cyclical
Industries Fund
Fidelity Advisor Financial
Services Fund
Fidelity Advisor Health Care Fund
Fidelity Advisor Natural
Resources Fund
Fidelity Advisor Technology Fund
Fidelity Advisor Utilities Growth Fund
GROWTH FUNDS
International Capital Appreciation Fund
Fidelity Advisor Overseas Fund
Fidelity Advisor TechnoQuant
Growth Fund
SM
Fidelity Advisor Mid Cap Fund
Fidelity Advisor Equity Growth Fund
Fidelity Advisor Growth
Opportunities Fund
Fidelity Advisor Strategic
Opportunities Fund
Fidelity Advisor Large Cap Fund
GROWTH AND INCOME FUNDS
Fidelity Advisor Growth & Income Fund
Fidelity Advisor Equity Income Fund
Fidelity Advisor Balanced Fund
TAXABLE INCOME FUNDS
Fidelity Advisor Emerging Markets Income Fund
Fidelity Advisor High Yield Fund
Fidelity Advisor Strategic Income Fund
Fidelity Advisor Mortgage
Securities Fund
Fidelity Advisor Government Investment Fund
Fidelity Advisor Intermediate Bond Fund
Fidelity Advisor Short Fixed-Income Fund
MUNICIPAL FUNDS
Fidelity Advisor Municipal Income Fund
Fidelity Advisor Intermediate Municipal Income Fund
Fidelity Advisor Short-Intermediate Municipal Income Fund
MONEY MARKET FUNDS
Prime Fund
Treasury Fund
Tax-Exempt Fund
(REGISTERED TRADEMARK)
(2_FIDELITY_LOGOS)FIDELITY ADVISOR
(REGISTERED TRADEMARK)
MORTGAGE SECURITIES
FUND - CLASS A, CLASS T AND CLASS B
ANNUAL REPORT
OCTOBER 31, 1997
CONTENTS
PRESIDENT'S MESSAGE 3 NED JOHNSON ON INVESTING STRATEGIES.
PERFORMANCE 4 HOW THE FUND HAS DONE OVER TIME.
FUND TALK 15 THE MANAGER'S REVIEW OF FUND
PERFORMANCE, STRATEGY AND OUTLOOK.
INVESTMENT CHANGES 18 A SUMMARY OF MAJOR SHIFTS IN THE FUND'S
INVESTMENTS OVER THE PAST THREE MONTHS.
INVESTMENTS 19 A COMPLETE LIST OF THE FUND'S INVESTMENTS
WITH THEIR MARKET VALUES.
FINANCIAL STATEMENTS 22 STATEMENTS OF ASSETS AND LIABILITIES,
OPERATIONS, AND CHANGES IN NET ASSETS,
AS WELL AS FINANCIAL HIGHLIGHTS.
NOTES 31 NOTES TO THE FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT 40 THE AUDITORS' OPINION.
ACCOUNTANTS
DISTRIBUTIONS 41
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE
SUBMITTED FOR THE GENERAL
INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT
AUTHORIZED FOR DISTRIBUTION TO
PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY
THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE
SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL
AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
FOR MORE INFORMATION ON ANY FIDELITY ADVISOR FUND, INCLUDING CHARGES
AND EXPENSES, CONTACT
YOUR INVESTMENT PROFESSIONAL FOR A FREE PROSPECTUS. READ IT CAREFULLY
BEFORE YOU INVEST OR
SEND MONEY.
PRESIDENT'S MESSAGE
(PHOTO_OF_EDWARD_C_JOHNSON_3D)DEAR SHAREHOLDER:
Although financial turmoil in Pacific Basin countries was a catalyst
for significant volatility in U.S. markets in late October, the
Standard & Poor's 500 Index remained up more than 25% year-to-date,
twice its historical annual average. Meanwhile, bond markets -
primarily influenced by a relatively steady flow of positive news on
the inflation front - continued to post moderate returns through the
first 10 months of 1997.
While it's impossible to predict the future direction of the markets
with any degree of certainty, there are certain basic principles that
can help investors plan for their future needs.
The longer your investment time frame, the less likely it is that you
will be affected by short-term market volatility. A 10-year investment
horizon appropriate for saving for a college education, for example,
enables you to weather market cycles in a long-term fund, which may
have a higher risk potential, but also has a higher potential rate of
return.
An intermediate-length fund could make sense if your investment
horizon is two to four years, while 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. These
funds seek income and a stable share price by investing in
high-quality, short-term investments. Of course, it's important to
remember that there is no assurance that a money market fund will
achieve its goal of maintaining a stable net asset value of $1.00 per
share, and that these types of funds are neither insured nor
guaranteed by any agency of the U.S. government.
Finally, no matter what your time horizon or portfolio diversity, it
makes good sense to follow a regular investment plan, investing a
certain amount of money in a fund at the same time each month or
quarter and periodically reviewing your overall portfolio. By doing
so, you won't get caught up in the excitement of a rapidly rising
market, nor will you buy all your shares at market highs. While this
strategy - known as dollar cost averaging - won't assure a profit or
protect you from a loss in a declining market, it should help you
lower the average cost of your purchases.
Remember to contact your investment professional if you need help with
your investments.
Best regards,
Edward C. Johnson 3d
ADVISOR MORTGAGE SECURITIES FUND - CLASS A
PERFORMANCE: THE BOTTOM LINE
There are several ways to evaluate 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.
Total return reflects the change in the value of an investment,
assuming reinvestment of the class' dividend income and capital gains
(the profits earned upon the sale of securities that have grown in
value). You can also look at the class' income, as reflected in its
yield, to measure performance. The initial offering of Class A shares
took place on March 3, 1997. Class A shares bear a 0.15% 12b-1 fee.
Returns prior to March 3, 1997 are those of Initial Class, the
original class of the fund which does not bear a 12b-1 fee. Had Class
A's 12b-1 fee been reflected, returns prior to March 3, 1997 would
have been lower. If Fidelity had not reimbursed certain class
expenses, the total returns and dividends would have been lower.
CUMULATIVE TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1997 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
ADVISOR MORTGAGE SECURITIES FUND - CLASS A 8.74% 47.12% 136.92%
ADVISOR MORTGAGE SECURITIES FUND - CLASS A 3.57% 40.13% 125.67%
(INCL. MAX. 4.75% SALES CHARGE)
LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES 9.12% 42.15% 146.58%
SALOMON BROTHERS MORTGAGE INDEX 8.91% 42.38% 147.96%
U.S. MORTGAGE FUNDS AVERAGE 8.14% 34.84% 118.63%
CUMULATIVE TOTAL RETURNS show Class A's performance in percentage
terms over a set period - in this case, one year, five years or 10
years. For example, if you had invested $1,000 in a fund that had a 5%
return over the past year, the value of your investment would be
$1,050. You can compare Class A's returns to the performance of both
the Lehman Brothers Mortgage-Backed Securities Index and the Salomon
Brothers Mortgage Index - market capitalization weighted indices of
15- and 30-year fixed-rate securities backed by mortgage pools of the
Government National Mortgage Association (GNMA), Fannie Mae (FNMA) and
Federal Home Loan Mortgage Corporation (FHLMC), and FNMA and FHLMC
balloon mortgages with fixed-rate coupons. To measure how Class A's
performance stacked up against its peers, you can compare it to the
U.S. mortgage funds average, which reflects the performance of mutual
funds with similar objectives tracked by Lipper Analytical Services,
Inc. The past one year average represents a peer group of 59 mutual
funds. These benchmarks reflect reinvestment of dividends and capital
gains, if any, and exclude the effect of sales charges.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1997 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
ADVISOR MORTGAGE SECURITIES FUND - CLASS A 8.74% 8.03% 9.01%
ADVISOR MORTGAGE SECURITIES FUND - CLASS A 3.57% 6.98% 8.48%
(INCL. MAX. 4.75% SALES CHARGE)
LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES 9.12% 7.29% 9.44%
SALOMON BROTHERS MORTGAGE INDEX 8.91% 7.32% 9.51%
U.S. MORTGAGE FUNDS AVERAGE 8.14% 6.14% 8.12%
AVERAGE ANNUAL TOTAL RETURNS take Class A's cumulative return and show
you what would have happened if Class A had performed at a constant
rate each year.
$10,000 OVER 10 YEARS
IMAHDR PRASUN SHR__CHT 19971031 19971128 142516 S00000000000001
FA Mortgage Sec -CL A SB Mortgage
00237 SB005
1987/10/31 9525.00 10000.00
1987/11/30 9615.84 10140.97
1987/12/31 9737.50 10259.06
1988/01/31 10064.97 10657.22
1988/02/29 10173.51 10785.06
1988/03/31 10113.21 10705.21
1988/04/30 10050.63 10638.47
1988/05/31 10008.83 10615.23
1988/06/30 10209.14 10882.17
1988/07/31 10184.88 10848.80
1988/08/31 10197.81 10871.67
1988/09/30 10402.91 11130.36
1988/10/31 10597.87 11383.80
1988/11/30 10457.74 11220.34
1988/12/31 10391.58 11162.22
1989/01/31 10580.13 11372.17
1989/02/28 10524.11 11285.94
1989/03/31 10544.91 11288.94
1989/04/30 10739.56 11488.02
1989/05/31 10993.74 11865.18
1989/06/30 11259.80 12166.99
1989/07/31 11461.41 12455.67
1989/08/31 11340.35 12271.96
1989/09/30 11389.86 12357.44
1989/10/31 11615.77 12646.12
1989/11/30 11727.70 12782.96
1989/12/31 11808.54 12854.20
1990/01/31 11699.75 12761.22
1990/02/28 11777.68 12812.96
1990/03/31 11786.93 12865.07
1990/04/30 11684.98 12745.47
1990/05/31 12024.69 13133.13
1990/06/30 12199.01 13350.20
1990/07/31 12376.30 13577.03
1990/08/31 12343.56 13465.30
1990/09/30 12409.45 13574.40
1990/10/31 12536.58 13716.87
1990/11/30 12810.90 14022.79
1990/12/31 13031.88 14254.11
1991/01/31 13167.11 14462.19
1991/02/28 13251.41 14554.04
1991/03/31 13340.54 14660.14
1991/04/30 13484.95 14813.11
1991/05/31 13555.05 14941.33
1991/06/30 13588.95 14957.45
1991/07/31 13784.14 15210.14
1991/08/31 14047.55 15489.07
1991/09/30 14266.85 15786.75
1991/10/31 14435.49 16030.82
1991/11/30 14523.74 16140.67
1991/12/31 14805.88 16484.83
1992/01/31 14734.65 16317.25
1992/02/29 14881.27 16470.59
1992/03/31 14778.43 16397.86
1992/04/30 14916.98 16547.82
1992/05/31 15163.19 16854.87
1992/06/30 15323.85 17060.70
1992/07/31 15297.55 17196.79
1992/08/31 15396.50 17428.49
1992/09/30 15493.15 17563.45
1992/10/31 15339.09 17415.74
1992/11/30 15413.23 17487.72
1992/12/31 15613.25 17700.67
1993/01/31 15755.69 17944.36
1993/02/28 15890.64 18110.07
1993/03/31 15994.41 18218.42
1993/04/30 16106.07 18341.39
1993/05/31 16153.75 18425.37
1993/06/30 16350.82 18604.58
1993/07/31 16440.69 18681.81
1993/08/31 16471.31 18758.67
1993/09/30 16507.29 18774.79
1993/10/31 16536.65 18837.78
1993/11/30 16502.09 18804.41
1993/12/31 16661.36 18945.75
1994/01/31 16814.80 19136.21
1994/02/28 16726.13 19016.61
1994/03/31 16536.57 18547.59
1994/04/30 16464.13 18430.62
1994/05/31 16604.29 18492.86
1994/06/30 16689.27 18447.12
1994/07/31 16956.06 18807.03
1994/08/31 17032.03 18845.65
1994/09/30 16847.42 18593.33
1994/10/31 16881.63 18588.46
1994/11/30 16864.79 18521.73
1994/12/31 16984.86 18675.06
1995/01/31 17305.97 19093.09
1995/02/28 17693.41 19579.72
1995/03/31 17768.50 19659.58
1995/04/30 18048.63 19923.14
1995/05/31 18616.51 20568.74
1995/06/30 18758.53 20677.84
1995/07/31 18801.14 20719.08
1995/08/31 19033.13 20909.16
1995/09/30 19229.89 21096.24
1995/10/31 19443.80 21290.44
1995/11/30 19659.08 21540.13
1995/12/31 19875.66 21806.70
1996/01/31 20038.39 21973.91
1996/02/29 19910.71 21799.57
1996/03/31 19838.48 21725.72
1996/04/30 19797.12 21625.24
1996/05/31 19720.47 21597.12
1996/06/30 19992.62 21872.68
1996/07/31 20064.01 21959.66
1996/08/31 20059.59 21963.41
1996/09/30 20377.06 22332.70
1996/10/31 20754.10 22766.47
1996/11/30 21074.74 23079.89
1996/12/31 20955.91 22977.92
1997/01/31 21087.05 23172.87
1997/02/28 21155.80 23197.99
1997/03/31 20954.00 23006.04
1997/04/30 21278.71 23355.83
1997/05/31 21485.84 23573.65
1997/06/30 21734.12 23845.09
1997/07/31 22123.77 24286.36
1997/08/31 22075.52 24242.87
1997/09/30 22331.91 24531.92
1997/10/31 22567.00 24657.67
IMATRL PRASUN SHR__CHT 19971031 19971128 142520 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was
invested in Fidelity Advisor Mortgage Securities Fund - Class A on
October 31, 1987, and the current maximum 4.75% sales charge was paid.
As the chart shows, by October 31, 1997, the value of the investment
would have grown to $22,567 - a 125.67% increase on the initial
investment. For comparison, look at how the Lehman Brothers
Mortgage-Backed Securities Index did over the same period. With
dividends and capital gains, if any, reinvested, the same $10,000
would have grown to $24,658 - a 146.58% increase. Beginning with this
report, the fund will compare its performance to that of the Lehman
Brothers Mortgage-Backed Securities Index rather than the Salomon
Brothers Mortgage Index. The indexes include the same type of bonds,
and their performance is not materially different. The fund is
changing to the Lehman Brothers index mainly because Lehman Brothers
indexes are used by most other Fidelity bond funds. For comparison
purposes, both indexes are shown on page 4.
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 OCTOBER 31,
1997 1996 1995 1994 1993
DIVIDEND RETURN 6.48% 6.66% 7.86% 5.61% 6.48%
CAPITAL APPRECIATION RETURN 2.26% 0.08% 7.32% -3.52% 1.33%
TOTAL RETURN 8.74% 6.74% 15.18% 2.09% 7.81%
TOTAL RETURN COMPONENTS include both dividend returns and capital
appreciation returns. A dividend return reflects the actual dividends
paid by the class. A capital appreciation return reflects both the
amount paid by the class to shareholders as capital gain distributions
and changes in the class' share price. Both returns assume the
dividends or capital gains paid by the class are reinvested, if any,
and exclude the effect of sales charges.
DIVIDENDS AND YIELD
PERIODS ENDED OCTOBER 31,
1997 PAST 1 PAST 6 LIFE OF
MONTH MONTHS CLASS
DIVIDENDS PER SHARE 5.54(CENTS) 33.36(CENTS) 43.97(CENTS)
ANNUALIZED DIVIDEND RATE 5.94% 6.05% 6.07%
30-DAY ANNUALIZED YIELD N/A - -
DIVIDENDS per share show the income paid by the class for a set
period. If you annualize this number, based on an average share price
of $10.98 over the past one month, $10.93 over the past six months,
and $10.88 over the life of the class, you can compare the class'
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. Yield information will be reported once Class A has a longer,
more stable operating history.
ADVISOR MORTGAGE SECURITIES FUND - CLASS T
PERFORMANCE: THE BOTTOM LINE
There are several ways to evaluate 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.
Total return reflects the change in the value of an investment,
assuming reinvestment of the class' dividend income and capital gains
(the profits earned upon the sale of securities that have grown in
value). You can also look at the class' income, as reflected in its
yield, to measure performance. The initial offering of Class T shares
took place on March 3, 1997. Class T shares bear a 0.25% 12b-1 fee.
Returns prior to March 3, 1997 are those of Initial Class, the
original class of the fund which does not bear a 12b-1 fee. Had Class
T's 12b-1 fee been reflected, returns prior to March 3, 1997 would
have been lower. If Fidelity had not reimbursed certain class
expenses, the total returns and dividends would have been lower.
CUMULATIVE TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1997 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
ADVISOR MORTGAGE SECURITIES FUND - CLASS T 8.67% 47.03% 136.78%
ADVISOR MORTGAGE SECURITIES FUND - CLASS T 4.87% 41.89% 128.50%
(INCL. MAX. 3.50% SALES CHARGE)
LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES 9.12% 42.15% 146.58%
SALOMON BROTHERS MORTGAGE INDEX 8.91% 42.38% 147.96%
U.S. MORTGAGE FUNDS AVERAGE 8.14% 34.84% 118.63%
CUMULATIVE TOTAL RETURNS show Class T's performance in percentage
terms over a set period - in this case, one year, five years or 10
years. For example, if you had invested $1,000 in a fund that had a 5%
return over the past year, the value of your investment would be
$1,050. You can compare Class T's returns to the performance of both
the Lehman Brothers Mortgage-Backed Securities Index and the Salomon
Brothers Mortgage Index - market capitalization weighted indices of
15- and 30-year fixed-rate securities backed by mortgage pools of the
Government National Mortgage Association (GNMA), Fannie Mae (FNMA) and
Federal Home Loan Mortgage Corporation (FHLMC), and FNMA and FHLMC
balloon mortgages with fixed-rate coupons. To measure how Class T's
performance stacked up against its peers, you can compare it to the
U.S. mortgage funds average, which reflects the performance of mutual
funds with similar objectives tracked by Lipper Analytical Services,
Inc. The past one year average represents a peer group of 59 mutual
funds. These benchmarks reflect reinvestment of dividends and capital
gains, if any, and exclude the effect of sales charges.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1997 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
ADVISOR MORTGAGE SECURITIES FUND - CLASS T 8.67% 8.01% 9.00%
ADVISOR MORTGAGE SECURITIES FUND - CLASS T 4.87% 7.25% 8.61%
(INCL. MAX. 3.50% SALES CHARGE)
LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES 9.12% 7.29% 9.44%
SALOMON BROTHERS MORTGAGE INDEX 8.91% 7.32% 9.51%
U.S. MORTGAGE FUNDS AVERAGE 8.14% 6.14% 8.12%
AVERAGE ANNUAL TOTAL RETURNS take Class T's cumulative return and show
you what would have happened if Class T had performed at a constant
rate each year.
$10,000 OVER 10 YEARS
IMAHDR PRASUN SHR__CHT 19971031 19971128 142610 S00000000000001
FA Mortgage Sec -CL T SB Mortgage
00239 SB005
1987/10/31 9650.00 10000.00
1987/11/30 9742.03 10140.97
1987/12/31 9865.29 10259.06
1988/01/31 10197.06 10657.22
1988/02/29 10307.02 10785.06
1988/03/31 10245.93 10705.21
1988/04/30 10182.53 10638.47
1988/05/31 10140.18 10615.23
1988/06/30 10343.11 10882.17
1988/07/31 10318.54 10848.80
1988/08/31 10331.64 10871.67
1988/09/30 10539.43 11130.36
1988/10/31 10736.95 11383.80
1988/11/30 10594.98 11220.34
1988/12/31 10527.96 11162.22
1989/01/31 10718.98 11372.17
1989/02/28 10662.22 11285.94
1989/03/31 10683.29 11288.94
1989/04/30 10880.50 11488.02
1989/05/31 11138.01 11865.18
1989/06/30 11407.56 12166.99
1989/07/31 11611.82 12455.67
1989/08/31 11489.17 12271.96
1989/09/30 11539.33 12357.44
1989/10/31 11768.20 12646.12
1989/11/30 11881.61 12782.96
1989/12/31 11963.50 12854.20
1990/01/31 11853.29 12761.22
1990/02/28 11932.24 12812.96
1990/03/31 11941.62 12865.07
1990/04/30 11838.33 12745.47
1990/05/31 12182.49 13133.13
1990/06/30 12359.10 13350.20
1990/07/31 12538.72 13577.03
1990/08/31 12505.55 13465.30
1990/09/30 12572.31 13574.40
1990/10/31 12701.10 13716.87
1990/11/30 12979.02 14022.79
1990/12/31 13202.90 14254.11
1991/01/31 13339.90 14462.19
1991/02/28 13425.31 14554.04
1991/03/31 13515.61 14660.14
1991/04/30 13661.92 14813.11
1991/05/31 13732.94 14941.33
1991/06/30 13767.28 14957.45
1991/07/31 13965.03 15210.14
1991/08/31 14231.90 15489.07
1991/09/30 14454.08 15786.75
1991/10/31 14624.93 16030.82
1991/11/30 14714.34 16140.67
1991/12/31 15000.18 16484.83
1992/01/31 14928.02 16317.25
1992/02/29 15076.56 16470.59
1992/03/31 14972.37 16397.86
1992/04/30 15112.74 16547.82
1992/05/31 15362.18 16854.87
1992/06/30 15524.95 17060.70
1992/07/31 15498.30 17196.79
1992/08/31 15598.55 17428.49
1992/09/30 15696.48 17563.45
1992/10/31 15540.39 17415.74
1992/11/30 15615.50 17487.72
1992/12/31 15818.15 17700.67
1993/01/31 15962.46 17944.36
1993/02/28 16099.18 18110.07
1993/03/31 16204.31 18218.42
1993/04/30 16317.43 18341.39
1993/05/31 16365.75 18425.37
1993/06/30 16565.40 18604.58
1993/07/31 16656.45 18681.81
1993/08/31 16687.47 18758.67
1993/09/30 16723.92 18774.79
1993/10/31 16753.67 18837.78
1993/11/30 16718.65 18804.41
1993/12/31 16880.01 18945.75
1994/01/31 17035.46 19136.21
1994/02/28 16945.63 19016.61
1994/03/31 16753.59 18547.59
1994/04/30 16680.20 18430.62
1994/05/31 16822.19 18492.86
1994/06/30 16908.29 18447.12
1994/07/31 17178.58 18807.03
1994/08/31 17255.55 18845.65
1994/09/30 17068.52 18593.33
1994/10/31 17103.18 18588.46
1994/11/30 17086.11 18521.73
1994/12/31 17207.76 18675.06
1995/01/31 17533.09 19093.09
1995/02/28 17925.61 19579.72
1995/03/31 18001.68 19659.58
1995/04/30 18285.49 19923.14
1995/05/31 18860.83 20568.74
1995/06/30 19004.71 20677.84
1995/07/31 19047.87 20719.08
1995/08/31 19282.91 20909.16
1995/09/30 19482.25 21096.24
1995/10/31 19698.97 21290.44
1995/11/30 19917.08 21540.13
1995/12/31 20136.50 21806.70
1996/01/31 20301.36 21973.91
1996/02/29 20172.00 21799.57
1996/03/31 20098.82 21725.72
1996/04/30 20056.93 21625.24
1996/05/31 19979.27 21597.12
1996/06/30 20254.99 21872.68
1996/07/31 20327.32 21959.66
1996/08/31 20322.84 21963.41
1996/09/30 20644.47 22332.70
1996/10/31 21026.46 22766.47
1996/11/30 21351.31 23079.89
1996/12/31 21230.92 22977.92
1997/01/31 21363.79 23172.87
1997/02/28 21433.43 23197.99
1997/03/31 21227.39 23006.04
1997/04/30 21554.02 23355.83
1997/05/31 21761.91 23573.65
1997/06/30 22012.02 23845.09
1997/07/31 22405.56 24286.36
1997/08/31 22376.13 24242.87
1997/09/30 22613.45 24531.92
1997/10/31 22849.71 24657.67
IMATRL PRASUN SHR__CHT 19971031 19971128 142616 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was
invested in Fidelity Advisor Mortgage Securities Fund - Class T on
October 31, 1987, and the current maximum 3.50% sales charge was paid.
As the chart shows, by October 31, 1997, the value of the investment
would have grown to $22,850 - a 128.50% increase on the initial
investment. For comparison, look at how the Lehman Brothers
Mortgage-Backed Securities Index did over the same period. With
dividends and capital gains, if any, reinvested, the same $10,000
would have grown to $24,658 - a 146.58% increase. Beginning with this
report, the fund will compare its performance to that of the Lehman
Brothers Mortgage-Backed Securities Index rather than the Salomon
Brothers Mortgage Index. The indexes include the same type of bonds,
and their performance is not materially different. The fund is
changing to the Lehman Brothers index mainly because Lehman Brothers
indexes are used by most other Fidelity bond funds. For comparison
purposes, both indexes are shown on pages 7 and 8.
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 OCTOBER 31,
1997 1996 1995 1994 1993
DIVIDEND RETURN 6.41% 6.66% 7.86% 5.61% 6.48%
CAPITAL APPRECIATION RETURN 2.26% 0.08% 7.32% -3.52% 1.33%
TOTAL RETURN 8.67% 6.74% 15.18% 2.09% 7.81%
TOTAL RETURN COMPONENTS include both dividend returns and capital
appreciation returns. A dividend return reflects the actual dividends
paid by the class. A capital appreciation return reflects both the
amount paid by the class to shareholders as capital gain distributions
and changes in the class' share price. Both returns assume the
dividends or capital gains paid by the class are reinvested, if any,
and exclude the effect of sales charges.
DIVIDENDS AND YIELD
PERIODS ENDED OCTOBER 31, 1997 PAST 1 PAST 6 LIFE OF
MONTH MONTHS CLASS
DIVIDENDS PER SHARE 5.45(CENTS) 32.92(CENTS) 43.33(CENTS)
ANNUALIZED DIVIDEND RATE 5.84% 5.97% 5.98%
30-DAY ANNUALIZED YIELD N/A - -
DIVIDENDS per share show the income paid by the class for a set
period. If you annualize this number, based on an average share price
of $10.98 over the past one month, $10.93 over the past six months,
and $10.88 over the life of the class, you can compare the class'
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. Yield information will be reported once Class T has a longer,
more stable operating history.
ADVISOR MORTGAGE SECURITIES FUND - CLASS B
PERFORMANCE: THE BOTTOM LINE
There are several ways to evaluate 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.
Total return reflects the change in the value of an investment,
assuming reinvestment of the class' dividend income and capital gains
(the profits earned upon the sale of securities that have grown in
value). You can also look at the class' income, as reflected in its
yield, to measure performance. The initial offering of Class B shares
took place on March 3, 1997. Class B shares bear a .90% 12b-1 fee.
Returns prior to March 3, 1997 are those of Initial Class, the
original class of the fund, which does not bear a 12b-1 fee. Had Class
B's 12b-1 fee been reflected, returns prior to March 3, 1997 would
have been lower. Class B's contingent deferred sales charges included
in the past one year, past five years and past 10 years total return
figures are 5%, 2% and 0%, respectively. If Fidelity had not
reimbursed certain class expenses, the total returns and dividends
would have been lower.
CUMULATIVE TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1997 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
ADVISOR MORTGAGE SECURITIES FUND - CLASS B 8.20% 46.39% 135.75%
ADVISOR MORTGAGE SECURITIES FUND - CLASS B 3.20% 44.39% 135.75%
(INCL. CONTINGENT DEFERRED SALES CHARGE)
LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES 9.12% 42.15% 146.58%
SALOMON BROTHERS MORTGAGE INDEX 8.91% 42.38% 147.96%
U.S. MORTGAGE FUNDS AVERAGE 8.14% 34.84% 118.63%
CUMULATIVE TOTAL RETURNS show Class B's performance in percentage
terms over a set period - in this case, one year, five years or 10
years. For example, if you had invested $1,000 in a fund that had a 5%
return over the past year, the value of your investment would be
$1,050. You can compare Class B's returns to the performance of both
the Lehman Brothers Mortgage-Backed Securities Index and the Salomon
Brothers Mortgage Index - market capitalization weighted indices of
15- and 30-year fixed-rate securities backed by mortgage pools of the
Government National Mortgage Association (GNMA), Fannie Mae (FNMA) and
Federal Home Loan Mortgage Corporation (FHLMC), and FNMA and FHLMC
balloon mortgages with fixed-rate coupons. To measure how Class B's
performance stacked up against its peers, you can compare it to the
U.S. mortgage funds average, which reflects the performance of mutual
funds with similar objectives tracked by Lipper Analytical Services,
Inc. The past one year average represents a peer group of 59 mutual
funds. These benchmarks reflect reinvestment of dividends and capital
gains, if any, and exclude the effect of sales charges.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1997 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
ADVISOR MORTGAGE SECURITIES FUND - CLASS B 8.20% 7.92% 8.95%
ADVISOR MORTGAGE SECURITIES FUND - CLASS B 3.20% 7.62% 8.95%
(INCL. CONTINGENT DEFERRED SALES CHARGE)
LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES 9.12% 7.29% 9.44%
SALOMON BROTHERS MORTGAGE INDEX 8.91% 7.32% 9.51%
U.S. MORTGAGE FUNDS AVERAGE 8.14% 6.14% 8.12%
AVERAGE ANNUAL TOTAL RETURNS take the Class B's cumulative return and
show you what would have happened if Class B had performed at a
constant rate each year.
$10,000 OVER 10 YEARS
IMAHDR PRASUN SHR__CHT 19971031 19971128 142547 S00000000000001
FA Mortgage Sec -CL B SB Mortgage
00238 SB005
1987/10/31 10000.00 10000.00
1987/11/30 10095.37 10140.97
1987/12/31 10223.10 10259.06
1988/01/31 10566.90 10657.22
1988/02/29 10680.85 10785.06
1988/03/31 10617.55 10705.21
1988/04/30 10551.84 10638.47
1988/05/31 10507.96 10615.23
1988/06/30 10718.25 10882.17
1988/07/31 10692.79 10848.80
1988/08/31 10706.36 10871.67
1988/09/30 10921.69 11130.36
1988/10/31 11126.37 11383.80
1988/11/30 10979.26 11220.34
1988/12/31 10909.80 11162.22
1989/01/31 11107.75 11372.17
1989/02/28 11048.94 11285.94
1989/03/31 11070.77 11288.94
1989/04/30 11275.13 11488.02
1989/05/31 11541.98 11865.18
1989/06/30 11821.31 12166.99
1989/07/31 12032.97 12455.67
1989/08/31 11905.88 12271.96
1989/09/30 11957.86 12357.44
1989/10/31 12195.03 12646.12
1989/11/30 12312.54 12782.96
1989/12/31 12397.41 12854.20
1990/01/31 12283.20 12761.22
1990/02/28 12365.02 12812.96
1990/03/31 12374.73 12865.07
1990/04/30 12267.69 12745.47
1990/05/31 12624.35 13133.13
1990/06/30 12807.36 13350.20
1990/07/31 12993.49 13577.03
1990/08/31 12959.12 13465.30
1990/09/30 13028.30 13574.40
1990/10/31 13161.76 13716.87
1990/11/30 13449.76 14022.79
1990/12/31 13681.76 14254.11
1991/01/31 13823.73 14462.19
1991/02/28 13912.24 14554.04
1991/03/31 14005.81 14660.14
1991/04/30 14157.43 14813.11
1991/05/31 14231.03 14941.33
1991/06/30 14266.62 14957.45
1991/07/31 14471.53 15210.14
1991/08/31 14748.08 15489.07
1991/09/30 14978.32 15786.75
1991/10/31 15155.37 16030.82
1991/11/30 15248.02 16140.67
1991/12/31 15544.23 16484.83
1992/01/31 15469.45 16317.25
1992/02/29 15623.38 16470.59
1992/03/31 15515.41 16397.86
1992/04/30 15660.87 16547.82
1992/05/31 15919.36 16854.87
1992/06/30 16088.03 17060.70
1992/07/31 16060.42 17196.79
1992/08/31 16164.30 17428.49
1992/09/30 16265.78 17563.45
1992/10/31 16104.03 17415.74
1992/11/30 16181.87 17487.72
1992/12/31 16391.86 17700.67
1993/01/31 16541.41 17944.36
1993/02/28 16683.08 18110.07
1993/03/31 16792.03 18218.42
1993/04/30 16909.26 18341.39
1993/05/31 16959.32 18425.37
1993/06/30 17166.21 18604.58
1993/07/31 17260.57 18681.81
1993/08/31 17292.71 18758.67
1993/09/30 17330.49 18774.79
1993/10/31 17361.32 18837.78
1993/11/30 17325.03 18804.41
1993/12/31 17492.24 18945.75
1994/01/31 17653.33 19136.21
1994/02/28 17560.24 19016.61
1994/03/31 17361.23 18547.59
1994/04/30 17285.18 18430.62
1994/05/31 17432.32 18492.86
1994/06/30 17521.55 18447.12
1994/07/31 17801.64 18807.03
1994/08/31 17881.40 18845.65
1994/09/30 17687.58 18593.33
1994/10/31 17723.50 18588.46
1994/11/30 17705.82 18521.73
1994/12/31 17831.87 18675.06
1995/01/31 18169.00 19093.09
1995/02/28 18575.76 19579.72
1995/03/31 18654.59 19659.58
1995/04/30 18948.70 19923.14
1995/05/31 19544.90 20568.74
1995/06/30 19694.00 20677.84
1995/07/31 19738.73 20719.08
1995/08/31 19982.29 20909.16
1995/09/30 20188.86 21096.24
1995/10/31 20413.44 21290.44
1995/11/30 20639.46 21540.13
1995/12/31 20866.84 21806.70
1996/01/31 21037.68 21973.91
1996/02/29 20903.63 21799.57
1996/03/31 20827.80 21725.72
1996/04/30 20784.38 21625.24
1996/05/31 20703.91 21597.12
1996/06/30 20989.63 21872.68
1996/07/31 21064.58 21959.66
1996/08/31 21059.93 21963.41
1996/09/30 21393.24 22332.70
1996/10/31 21789.08 22766.47
1996/11/30 22125.71 23079.89
1996/12/31 22000.95 22977.92
1997/01/31 22138.64 23172.87
1997/02/28 22210.81 23197.99
1997/03/31 21985.51 23006.04
1997/04/30 22313.89 23355.83
1997/05/31 22494.59 23573.65
1997/06/30 22761.52 23845.09
1997/07/31 23134.22 24286.36
1997/08/31 23089.98 24242.87
1997/09/30 23322.68 24531.92
1997/10/31 23574.89 24657.67
IMATRL PRASUN SHR__CHT 19971031 19971128 142549 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was
invested in Fidelity Advisor Mortgage Securities Fund - Class B on
October 31, 1987. As the chart shows, by October 31, 1997, the value
of the investment would have grown to $23,575 - a 135.75% increase on
the initial investment. For comparison, look at how the Lehman
Brothers Mortgage-Backed Securities Index did over the same period.
With dividends and capital gains, if any, reinvested, the same $10,000
would have grown to $24,658 - a 146.58% increase. Beginning with this
report, the fund will compare its performance to that of the Lehman
Brothers Mortgage-Backed Securities Index rather than the Salomon
Brothers Mortgage Index. The indexes include the same type of bonds,
and their performance is not materially different. The fund is
changing to the Lehman Brothers index mainly because Lehman Brothers
indexes are used by most other Fidelity bond funds. For comparison
purposes, both indexes are shown on pages 11 and 12.
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 OCTOBER 31,
1997 1996 1995 1994 1993
DIVIDEND RETURN 5.94% 6.66% 7.86% 5.61% 6.48%
CAPITAL APPRECIATION RETURN 2.26% 0.08% 7.32% -3.52% 1.33%
TOTAL RETURN 8.20% 6.74% 15.18% 2.09% 7.81%
TOTAL RETURN COMPONENTS include both dividend returns and capital
appreciation returns. A dividend return reflects the actual dividends
paid by the class. A capital appreciation return reflects both the
amount paid by the class to shareholders as capital gain distributions
and changes in the class' share price. Both returns assume the
dividends or capital gains paid by the class are reinvested, if any,
and exclude the effect of sales charges.
DIVIDENDS AND YIELD
PERIODS ENDED OCTOBER 31, 1997 PAST 1 PAST 6 LIFE OF
MONTH MONTHS CLASS
DIVIDENDS PER SHARE 4.84(CENTS) 29.14(CENTS) 38.50(CENTS)
ANNUALIZED DIVIDEND RATE 5.19% 5.29% 5.32%
30-DAY ANNUALIZED YIELD N/A - -
DIVIDENDS per share show the income paid by the class for a set
period. If you annualize this number, based on an average share price
of $10.97 over the past one month, $10.93 over the past six months,
and $10.88 over the life of the class, you can compare the class'
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. Yield information will be reported once Class B has a longer,
more stable operating history.
FUND TALK: THE MANAGER'S OVERVIEW
MARKET RECAP
The bond market's primary
nemesis - rising inflation -
remained in check throughout
most of the 12 months that ended
October 31, 1997, translating into
a generally favorable investing
climate. The Lehman Brothers
Aggregate Bond Index - a broad
measure of the U.S. taxable bond
market - returned 8.89% during
the period. Through the first half of
the period, bonds suffered from the
perception of an accelerating
economy and, in turn, that
inflation would make an
appearance. The Federal Reserve
Board raised a key short-term
interest rate in March, in an
attempt to curb any potential hints of
inflation. For the most part, though,
investors had been anticipating this
hike. Spurred on by encouraging
economic data, as well as the Fed's
reluctance to raise rates further,
bond markets rallied from April
through July. While some of these
gains evaporated in August - as
inflation fears cropped up again -
a strong September and October
helped ease the pain. The bond
market attracted wary stock
investors in October, as the U.S.
equity market stumbled due to
overseas developments. Treasuries,
in particular, performed well
toward the end of the period.
Relative interest-rate stability
provided a fairly positive backdrop
for mortgage-backed securities, as
the Lehman Brothers
Mortgage-Backed Securities Index
returned 9.12% over the 12-month
period. Sustained economic growth
and demand for higher yields
helped corporate bonds, as the
Lehman Brothers Corporate Bond
Index returned 9.25% over the
same period.
An interview with Thomas Silvia, Portfolio Manager of Fidelity Advisor
Mortgage Securities Fund
Q. HOW DID THE FUND PERFORM, TOM?
A. For the 12 months that ended October 31, 1997, the fund's Class A,
Class T and Class B shares returned 8.74%, 8.67% and 8.20%,
respectively. During the same period, the U.S. mortgage funds average,
according to Lipper Analytical Services, returned 8.14%, and the
Lehman Brothers Mortgage-Backed Securities Index returned 9.12%.
Q. WHAT WAS THE MORTGAGE MARKET LIKE DURING THE PAST 12 MONTHS?
A. For the first nine months of the period, the mortgage market
benefited from a period of relatively stable interest rates. A calm
interest-rate environment reduces the largest source of risk for
mortgage securities - prepayments. For instance, when interest rates
decline, mortgage holders are likely to refinance their debt at a
lower rate. This hurts investors in mortgage-backed securities because
they might be forced to reinvest at a lower interest rate. On the
other hand, when interest rates are as steady as they have been
lately, the risk for prepayments declines. Therefore, the mortgage
sector was one of the best-performing categories of the bond market.
However, as interest rates began to decline in July, the mortgage
sector had difficulty keeping pace with U.S. Treasuries as a result of
increased prepayment concerns.
Q. HOW HAS THE MORTGAGE SECTOR PERFORMED COMPARED TO THE CORPORATE
SECTOR OVER THE PAST THREE MONTHS?
A. Investors sold corporate bonds because they were nervous about
credit risk, or the risk that a bond might not be paid, because of
cash flow concerns. In contrast, agency mortgage-backed securities,
such as those issued by the Federal National Mortgage Association, or
Fannie Mae, are not subject to credit risk because they are implicitly
backed by the U.S. government. Investors seemed more comfortable
buying these types of securities in the nervous credit market
environment we saw at the end of October.
Q. WHICH AREAS OF THE MORTGAGE MARKET DID YOU TARGET?
A. The additional yield that mortgage-backed securities typically
provide investors over comparable Treasuries became relatively narrow
during the period. In turn, as interest rates declined, the risk that
prepayments would hurt returns increased, so my question was, why take
the risk? In response, I maintained the fund's overweighted position
versus the index in mortgage-backed securities that I felt would
provide better prepayment protection as interest rates change. These
included discount mortgage-backed securities - or bonds selling below
their redemption values - such as 15-year Fannie Maes at 5.5% or 6%,
which are less sensitive to prepayments.
Q. AT THE END OF JULY, YOU SAID THAT COMMERCIAL MORTGAGE-BACKED
SECURITIES (CMBS) PERFORMED WELL. WAS THAT STILL THE CASE IN THE PAST
THREE MONTHS?
A. No. In the third quarter of 1997, many new CMBS issues came to
market, and the higher supply began to dampen prices. Also, since CMBS
paper tends to have a similar cash-flow structure to corporate bonds,
its yield advantage over Treasuries suffered in sympathy with
corporate bonds when corporates began to underperform.
Q. WERE THERE ANY DISAPPOINTMENTS DURING THE PERIOD?
A. During the first half of the 12-month period, the reduced number of
attractive investment alternatives in the mortgage market was the
biggest disappointment. When the market goes through its most dramatic
changes, the fund can use its value-driven, bottom-up security
selection process to capitalize on larger and more frequent
misvaluations in the mortgage market. When everything is trading in
such a tight range relative to Treasuries, there aren't many changes
in values or prepayment options to affect the cash flow of bonds. In
that case, it is difficult to differentiate the fund's returns. Toward
the end of the period, we saw a little bit more volatility in pricing,
but not as much as I would've liked to have seen.
Q. WHAT'S YOUR OUTLOOK FOR THE MORTGAGE MARKET?
A. The next six months will be totally dependent on the direction of
interest rates. If the markets rally and interest rates fall further,
there will be a significant number of prepayments and the mortgage
market should dramatically underperform Treasuries. On the other hand,
if the yield on the 10-year Treasury bond moves into a range of 6.25%
to 6.50%, the mortgage market should outperform as more investors
allocate money to the sector.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED
ON MARKET AND OTHER CONDITIONS.
TOM SILVIA ON
MORTGAGE-BACKED SECURITIES:
"Each new mortgage-backed security
is issued at the current interest rate.
For each interest-rate environment,
the market assumes that homeowners
will pay off their mortgage at a specific
speed. If interest rates decline from
the point of purchase, that mortgage
security now carries a higher interest
rate than the current market rate,
making it more attractive and
increasing its price. However,
because that security has a higher
interest rate than the new current rate,
the market assumes that the
mortgage holder will pay off the loan at
a faster rate than what was originally
anticipated. That's because
homeowners are more likely to
refinance a mortgage with a higher
rate than a mortgage with a lower
rate. As a result of the faster payoff of
principal on the mortgage security, the
price increase will be smaller than if
the pay-off rate was unchanged from
its original assumption.
"Conversely, if interest rates rise, the
mortgage-backed security will carry an
interest rate that is below the current
interest rate. In the higher
interest-rate environment, the market
will anticipate that homeowners will
be slower to pay off their relatively low
interest-rate mortgage. This means
that the bond holders'
mortgage-backed security will be
outstanding for a longer period of time,
which, along with a less attractive
interest rate, pushes the security's
price lower.
"Remember, the price of a bond always
moves in the opposite direction of its
yield. Investors buying
mortgage-backed securities are
willing to expose themselves to
relatively weak price performance in
exchange for a higher yield."
FUND FACTS
GOAL: high current income by
investing in mortgage-related
securities of all kinds
START DATE: December 31, 1984
SIZE: as of October 31, 1997,
more than $531 million
MANAGER: Thomas Silvia, since
October 1997; co-managed
since February 1997; joined
Fidelity in 1993
(checkmark)
INVESTMENT CHANGES
COUPON DISTRIBUTION AS OF OCTOBER 31, 1997
% OF FUND'S % OF FUND'S INVESTMENTS
INVESTMENTS AS OF JULY 31, 1997
LESS THAN 0.1 0.1
5%
5 - 0.8 4.7
5.99%
6 - 31.7 25.7
6.99%
7 - 43.4 27.0
7.99%
8 - 9.0 20.2
8.99%
9 - 7.2 6.6
9.99%
10 - 3.8 3.5
10.99%
11% AND 2.6 2.3
OVER
COUPON DISTRIBUTION SHOWS THE RANGE OF STATED INTEREST RATES ON THE
FUND'S INVESTMENTS, EXCLUDING SHORT-TERM INVESTMENTS.
AVERAGE YEARS TO MATURITY AS OF OCTOBER 31, 1997
AS OF JULY 31, 1997
YEARS 5.8 5.8
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 OCTOBER 31, 1997
AS OF JULY 31, 1997
YEARS 2.8 3.2
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 (% OF FUND'S INVESTMENTS)
AS OF OCTOBER 31, 1997 AS OF JULY 31, 1997
ROW: 1, COL: 1, VALUE: 46.0
ROW: 1, COL: 2, VALUE: 47.0
ROW: 1, COL: 3, VALUE: 5.0
ROW: 1, COL: 4, VALUE: 2.0
MORTGAGE-BACKED
SECURITIES 87.3%
CMOS AND
OTHER MORTGAGE
RELATED SECURITIES 2.8%
SHORT-TERM
INVESTMENTS 9.9%
MORTGAGE-BACKED
SECURITIES 91.7%
CMOS AND
OTHER MORTGAGE
RELATED SECURITIES 6.9%
SHORT-TERM
INVESTMENTS 1.4%
ROW: 1, COL: 1, VALUE: 43.0
ROW: 1, COL: 2, VALUE: 44.0
ROW: 1, COL: 3, VALUE: 3.0
ROW: 1, COL: 4, VALUE: 10.0
INVESTMENTS OCTOBER 31, 1997
SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENT IN SECURITIES
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 91.7%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
FEDERAL HOME LOAN MORTGAGE CORPORATION - 27.0%
5%, 7/1/10 $ 3,953,618 $ 3,750,995
6 1/2%, 1/1/24 to 7/1/24 4,343,335 4,294,472
7%, 5/1/99 to 11/1/12 99,980,981 101,428,855
7 1/2%, 3/1/27 to 5/1/27 368,239 376,406
8%, 10/1/07 to 12/1/18 734,600 763,235
8 1/2%, 11/1/03 to 1/1/20 3,115,133 3,278,713
9%, 9/1/08 to 5/1/21 11,211,236 12,020,757
10%, 1/1/09 to 5/1/19 2,252,569 2,458,336
10 1/2%, 8/1/10 to 12/1/20 2,550,061 2,837,252
11 1/2%, 4/1/12 107,016 119,380
11 3/4%, 6/1/11 69,165 79,183
12 1/4%, 6/1/14 to 7/1/15 312,291 363,786
12 1/2%, 5/1/12 to 4/1/15 1,176,910 1,367,246
12 3/4%, 6/1/05 to 3/1/15 195,427 222,555
13%, 1/1/11 to 6/1/15 1,800,561 2,134,309
135,495,480
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 38.0%
5 1/2%, 11/1/08 to 5/1/26 39,049 37,863
6%, 4/1/00 to 5/1/26 73,696,988 71,985,192
6 1/2%, 9/1/10 to 4/1/26 55,554,238 54,884,126
7%, 2/1/24 to 11/1/27 43,738,183 43,915,921
7 1/2%, 3/1/22 to 12/1/22 3,400,698 3,497,875
8%, 1/1/07 to 7/1/08 112,291 115,279
8 1/4%, 1/1/13 128,730 134,151
8 1/2%, 11/1/03 to 11/1/18 1,916,301 1,992,828
8 3/4%, 11/1/08 to 7/1/09 266,848 278,940
9%, 1/1/08 to 2/1/13 964,676 1,011,128
9 1/2%, 5/1/07 to 8/1/22 7,899,936 8,409,597
11%, 12/1/02 to 8/1/10 2,553,369 2,823,729
12 1/4%, 5/1/13 to 6/1/15 513,066 596,201
12 1/2%, 10/1/13 to 3/1/16 681,993 800,376
12 3/4%, 6/1/13 to 7/1/15 356,592 420,968
13 1/2%, 9/1/13 to 12/1/14 191,058 230,268
14%, 5/1/12 to 11/1/14 63,775 77,582
191,212,024
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 26.7%
7%, 10/15/22 to 11/15/23 $ 3,583,348 $ 3,613,668
7 1/2%, 7/15/05 to 10/15/27 60,463,273 61,915,331
8%, 4/15/02 to 7/15/27 30,069,845 31,230,350
8 1/2%, 7/15/16 to 8/15/27 7,388,247 7,776,183
9%, 10/15/04 to 4/15/18 5,945,992 6,390,065
9 1/2%, 6/15/09 to 7/15/22 5,099,639 5,522,448
10%, 12/15/17 to 1/15/26 11,071,393 12,332,155
10 1/2%, 1/15/98 to 2/15/18 1,363,023 1,506,600
11%, 1/15/10 to 9/15/19 2,857,536 3,264,637
11 1/2%, 10/15/10 to 7/15/18 97,713 111,878
13%, 10/15/13 103,998 124,537
13 1/2%, 7/15/11 to 10/15/14 96,620 116,240
133,904,092
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $450,249,906) 460,611,596
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.0%
U.S. GOVERNMENT AGENCY - 0.0%
Federal Home Loan Mortgage Corporation sequential
pay Series 1353 Class A, 5 1/2%, 11/15/04
(Cost $105,567) 113,304 112,772
COMMERCIAL MORTGAGE SECURITIES - 6.8%
Federal Deposit Insurance Corp. sequential pay
Series 1996-C1 Class 1A, 6 3/4%, 5/25/26 7,359,318 7,371,240
Structured Asset Securities Corp.:
commercial Series 1992-M1 Class C, 7.05%, 11/25/02 3,192,522
2,988,999
floater Series 1997-C1 Class C, 6.10625%, 7/25/00 (b)(c) 15,945,042
15,945,042
Series 1997-NI Class C, 6.055%, 9/25/28 (b) 5,000,000 5,000,000
SML, Inc. Series 1994-C1 Class C, 9.20%, 9/18/99 (a) 3,280,000
2,984,800
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $32,734,698) 34,290,081
COMPLEX MORTGAGE SECURITIES - 0.1%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
INTEREST ONLY STRIPS - 0.1%
SML, Inc. commercial Series 1994-C1
Class S, 0.81%, 9/18/99 (d) (Cost $668,924) $ 51,554,000 $ 547,761
CASH EQUIVALENTS - 1.4%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations), in a joint
trading account at 5.68%, dated
10/31/97 due 11/3/97 $ 7,064,342 7,061,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $490,820,095) $ 502,623,210
LEGEND
1. 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. Series
1994-C1 Class C,
9.20%, 9/18/99 8/11/94 $ 2,132,820
2. 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 $20,945,042 or
3.9% of net assets.
3. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
4. Security represents right to receive monthly interest payments on
an underlying pool of mortgages. Principal shown is the par amount of
the mortgage pool.
INCOME TAX INFORMATION
At October 31, 1997, the aggregate cost of investment securities for
income tax purposes was $490,970,694. Net unrealized appreciation
aggregated $11,652,516, of which $12,062,990 related to appreciated
investment securities and $410,474 related to depreciated investment
securities.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
OCTOBER 31, 1997
ASSETS
INVESTMENT IN SECURITIES, AT VALUE (INCLUDING REPURCHASE $ 502,623,210
AGREEMENTS OF $7,061,000) (COST $490,820,095) -
SEE ACCOMPANYING SCHEDULE
CASH 267
RECEIVABLE FOR INVESTMENTS SOLD 88,779,118
INTEREST RECEIVABLE 2,960,715
PREPAID EXPENSES 29,322
TOTAL ASSETS 594,392,632
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 60,989,150
PAYABLE FOR FUND SHARES REDEEMED 667,450
DISTRIBUTIONS PAYABLE 484,887
ACCRUED MANAGEMENT FEE 180,095
DISTRIBUTION FEES PAYABLE 4,277
OTHER PAYABLES AND ACCRUED EXPENSES 161,162
TOTAL LIABILITIES 62,487,021
NET ASSETS $ 531,905,611
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 519,049,272
UNDISTRIBUTED NET INVESTMENT INCOME 290,731
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) 762,493
ON INVESTMENTS
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 11,803,115
NET ASSETS $ 531,905,611
STATEMENT OF ASSETS AND LIABILITIES - CONTINUED
OCTOBER 31, 1997
CALCULATION OF MAXIMUM OFFERING PRICE $11.02
CLASS A:
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($1,647,881 (DIVIDED BY) 149,517 SHARES)
MAXIMUM OFFERING PRICE PER SHARE (100/95.25 OF $11.02) $11.57
CLASS T: $11.02
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($14,648,711 (DIVIDED BY) 1,329,149 SHARES)
MAXIMUM OFFERING PRICE PER SHARE (100/96.50 OF $11.02) $11.42
CLASS B: $11.02
NET ASSET VALUE AND OFFERING PRICE PER SHARE
($1,586,853 (DIVIDED BY) 144,046 SHARES) A
INITIAL CLASS: $11.02
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER
SHARE ($494,303,671 (DIVIDED BY) 44,836,143 SHARES)
INSTITUTIONAL CLASS: $11.01
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER
SHARE ($19,718,495 (DIVIDED BY) 1,790,755 SHARES)
A REDEMPTION PRICE PER SHARE IS EQUAL TO NET ASSET VALUE LESS ANY
APPLICABLE CONTINGENT DEFERRED SALES CHARGE.
STATEMENT OF OPERATIONS
THREE MONTHS YEAR ENDED
ENDED JULY 31, 1997
OCTOBER 31, 1997
INVESTMENT INCOME $ 9,425,840 $ 35,932,141
INTEREST
EXPENSES
MANAGEMENT FEE 578,471 2,273,788
TRANSFER AGENT FEES 277,610 1,034,760
DISTRIBUTION FEES 11,398 4,506
ACCOUNTING FEES AND EXPENSES 52,896 208,321
NON-INTERESTED TRUSTEES' COMPENSATION 547 9,585
CUSTODIAN FEES AND EXPENSES 26,149 79,667
REGISTRATION FEES 44,044 75,411
AUDIT 22,118 83,730
LEGAL 1,057 17,684
MISCELLANEOUS - 4,396
TOTAL EXPENSES BEFORE REDUCTIONS 1,014,290 3,791,848
EXPENSE REDUCTIONS (47,540) (52,945)
TOTAL EXPENSES AFTER REDUCTIONS 966,750 3,738,903
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
NET INVESTMENT INCOME 8,459,090 32,193,238
REALIZED AND UNREALIZED GAIN (LOSS) 1,110,586 4,296,274
NET REALIZED GAIN (LOSS) ON INVESTMENT SECURITIES
CHANGE IN NET UNREALIZED APPRECIATION 1,347,376 14,164,021
(DEPRECIATION) ON INVESTMENT SECURITIES
NET GAIN (LOSS) 2,457,962 18,460,295
NET INCREASE (DECREASE) IN NET ASSETS $ 10,917,052 $ 50,653,533
RESULTING FROM OPERATIONS
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
THREE MONTHS YEAR ENDED YEAR ENDED
ENDED JULY 31, JULY 31,
OCTOBER 31, 1997 1997 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS $ 8,459,090 $ 32,193,238 $ 31,763,051
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 1,110,586 4,296,274 8,694,701
CHANGE IN NET UNREALIZED 1,347,376 14,164,021 (11,251,245)
APPRECIATION (DEPRECIATION)
NET INCREASE (DECREASE) IN NET ASSETS 10,917,052 50,653,533 29,206,507
RESULTING FROM OPERATIONS
DISTRIBUTIONS TO SHAREHOLDERS (8,349,402) (32,649,725) (31,178,449)
FROM NET INVESTMENT INCOME
FROM NET REALIZED GAIN (3,850,848) (5,039,533) (4,055,960)
TOTAL DISTRIBUTIONS (12,200,250) (37,689,258) (35,234,409)
SHARE TRANSACTIONS - NET (703,316) 32,765,543 77,949,164
INCREASE (DECREASE)
TOTAL INCREASE (DECREASE) IN NET ASSETS (1,986,514) 45,729,818 71,921,262
NET ASSETS
BEGINNING OF PERIOD 533,892,125 488,162,307 416,241,045
END OF PERIOD (INCLUDING $ 531,905,611 $ 533,892,125 $ 488,162,307
UNDISTRIBUTED NET INVESTMENT INCOME
OF $290,731, $230,506 AND
$922,675, RESPECTIVELY)
FINANCIAL HIGHLIGHTS - CLASS A
THREE MONTHS YEAR ENDED
ENDED JULY 31,
OCTOBER 31,
1997 1997 E
SELECTED PER-SHARE DATA F
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.050 $ 10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .170 .268
NET REALIZED AND UNREALIZED GAIN (LOSS) .048 .224
TOTAL FROM INVESTMENT OPERATIONS .218 .492
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.168) (.272)
FROM NET REALIZED GAIN (.080) -
TOTAL DISTRIBUTIONS (.248) (.272)
NET ASSET VALUE, END OF PERIOD $ 11.020 $ 11.050
TOTAL RETURN B, C 2.00% 4.61%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 1,648 $ 1,586
RATIO OF EXPENSES TO AVERAGE NET ASSETS .90% A, .90% A,
D D
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 6.18% A 6.09% A
PORTFOLIO TURNOVER RATE 125% A 149%
A ANNUALIZED
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
C TOTAL RETURNS DO NOT INCLUDE THE ONE TIME SALES CHARGE AND FOR
PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD
HAVE BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
E FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF CLASS A
SHARES) TO JULY 31, 1997.
F NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
FINANCIAL HIGHLIGHTS - CLASS T
THREE MONTHS YEAR ENDED
ENDED JULY 31,
OCTOBER 31,
1997 1997 E
SELECTED PER-SHARE DATA F
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.050 $ 10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .167 .255
NET REALIZED AND UNREALIZED GAIN (LOSS) .048 .233
TOTAL FROM INVESTMENT OPERATIONS .215 .488
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.165) (.268)
FROM NET REALIZED GAIN (.080) -
TOTAL DISTRIBUTIONS (.245) (.268)
NET ASSET VALUE, END OF PERIOD $ 11.020 $ 11.050
TOTAL RETURN B, C 1.98% 4.57%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 14,649 $ 12,193
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.00% A, 1.00% A,
D D
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 6.10% A 5.99% A
PORTFOLIO TURNOVER RATE 125% A 149%
A ANNUALIZED
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
C TOTAL RETURNS DO NOT INCLUDE THE ONE TIME SALES CHARGE AND FOR
PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD
HAVE BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
E FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF CLASS T
SHARES) TO JULY 31, 1997.
F NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
FINANCIAL HIGHLIGHTS - CLASS B
THREE MONTHS YEAR ENDED
ENDED JULY 31,
OCTOBER 31,
1997 1997 E
SELECTED PER-SHARE DATA F
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.040 $ 10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .142 .234
NET REALIZED AND UNREALIZED GAIN (LOSS) .065 .214
TOTAL FROM INVESTMENT OPERATIONS .207 .448
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.147) (.238)
FROM NET REALIZED GAIN (.080) -
TOTAL DISTRIBUTIONS (.227) (.238)
NET ASSET VALUE, END OF PERIOD $ 11.020 $ 11.040
TOTAL RETURN B, C 1.90% 4.20%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 1,587 $ 823
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.65% A, 1.65% A,
D D
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 5.32% A 5.34% A
PORTFOLIO TURNOVER RATE 125% A 149%
A ANNUALIZED
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
C TOTAL RETURNS DO NOT INCLUDE THE CONTINGENT DEFERRED SALES CHARGE
AND FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD
HAVE BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
E FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF CLASS B
SHARES) TO JULY 31, 1997.
F NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
FINANCIAL HIGHLIGHTS - INITIAL CLASS
THREE MONTHS YEARS ENDED JULY 31,
ENDED
OCTOBER 31,
1997 1997 1996 1995 1994 C 1993
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
NET ASSET VALUE, $ 11.050 $ 10.780 $ 10.890 $ 10.580 $ 10.910 $ 10.830
BEGINNING OF PERIOD
INCOME FROM INVESTMENT
OPERATIONS
NET INVESTMENT INCOME .176 D .678 D .729 .772 .570 .788
NET REALIZED AND .047 .391 (.015) .325 (.242) (.007)
UNREALIZED GAIN (LOSS)
TOTAL FROM INVESTMENT .223 1.069 .714 1.097 .328 .781
OPERATIONS
LESS DISTRIBUTIONS
FROM NET INVESTMENT (.173) (.689) (.724) (.737) (.588) (.701)
INCOME
FROM NET REALIZED GAIN (.080) (.110) (.100) - (.040) -
IN EXCESS OF NET - - - (.050) (.030) -
REALIZED GAIN
TOTAL DISTRIBUTIONS (.253) (.799) (.824) (.787) (.658) (.701)
NET ASSET VALUE, $ 11.020 $ 11.050 $ 10.780 $ 10.890 $ 10.580 $ 10.910
END OF PERIOD
TOTAL RETURN B 2.05% 10.34% 6.72% 10.88% 3.13% 7.47%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD $ 494,304 $ 506,113 $ 488,162 $ 416,241 $ 365,801 $ 419,467
(000 OMITTED)
RATIO OF EXPENSES TO .72% A .73% .74% .77% .79% .76%
AVERAGE NET ASSETS
RATIO OF EXPENSES TO .72% A .73% .73% .77% .79% .76%
AVERAGE NET ASSETS AFTER E
EXPENSE REDUCTIONS
RATIO OF NET INVESTMENT 6.36% A 6.26% 6.75% 7.37% 6.73% 7.18%
INCOME TO AVERAGE
NET ASSETS
PORTFOLIO TURNOVER RATE 125% A 149% 221% 329% 563% 278%
</TABLE>
A ANNUALIZED
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN AND FOR PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
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.
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
E FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES.
FINANCIAL HIGHLIGHTS - INSTITUTIONAL CLASS
THREE MONTHS YEAR ENDED
ENDED JULY 31,
OCTOBER 31,
1997 1997 F
<TABLE>
<CAPTION>
<S> <C> <C>
SELECTED PER-SHARE DATA G
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.040 $ 10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .172 .263
NET REALIZED AND UNREALIZED GAIN (LOSS) .050 .226
TOTAL FROM INVESTMENT OPERATIONS .222 .489
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.172) (.279)
FROM NET REALIZED GAIN (.080) -
TOTAL DISTRIBUTIONS (.252) (.279)
NET ASSET VALUE, END OF PERIOD $ 11.010 $ 11.040
TOTAL RETURN B, C 2.05% 4.59%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 19,718 $ 13,177
RATIO OF EXPENSES TO AVERAGE NET ASSETS .75% A, .75% A,
D D
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS .75% A .70% A,
E
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 6.35% A 6.29% A
PORTFOLIO TURNOVER RATE 125% A 149%
</TABLE>
A ANNUALIZED
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
C TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD
HAVE BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
E FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES.
F FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF INSTITUTIONAL
CLASS SHARES) TO JULY 31, 1997.
G NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
NOTES TO FINANCIAL STATEMENTS
For the period ended October 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES.
Fidelity Advisor Mortgage Securities 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 fund offers Class A, Class T, Class B, Initial Class and
Institutional Class shares, each of which has equal rights as to
assets and voting privileges. Each class has exclusive voting rights
with respect to its distribution plan. Interest income, realized and
unrealized capital gains and losses, the common expenses of the fund,
and certain fund-level expense reductions, if any, are allocated on a
pro rata basis to each class based on the relative net assets of each
class to the total net assets of the fund. Each class of shares
differs in its respective distribution, transfer agent, registration,
and certain other class-specific fees, expenses, and expense
reductions.
The financial statements have been prepared in conformity with
generally accepted accounting principles which permit management to
make certain estimates and assumptions at the date of the financial
statements. On January 16, 1997, the Board of Trustees approved a
change in the fiscal year-end of the fund to October 31. Accordingly,
the financial statements of the fund are presented for the three-month
period ended October 31, 1997. The following summarizes the
significant accounting policies of the fund:
SECURITY VALUATION. Securities are valued based upon a computerized
matrix system and/or appraisals by a pricing service, both of which
consider market transactions and dealer-supplied valuations.
Securities (including restricted securities) for which 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. Short-term
securities with remaining maturities of sixty days or less for which
quotations are not readily available are valued at amortized cost or
original cost plus accrued interest, both of which approximate current
value.
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.
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
PREPAID EXPENSES. Fidelity Management & Research Company (FMR) bears
all organizational expenses except for registering and qualifying
Class A, Class T, Class B, and Institutional Class and shares of those
classes for distribution under federal and state securities law. These
expenses are borne by those classes and amortized over one year.
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 dividends
and capital gain distributions are declared separately for each class.
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 and futures and options. 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.
Undistributed 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.
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 FMR, may transfer uninvested cash balances into
one or more joint trading accounts. These balances are invested in one
or more repurchase agreements for U.S. Treasury or Federal Agency
obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are
marked-to-market daily and maintained at a value at least equal to the
principal amount of the repurchase agreement (including accrued
interest). FMR, the fund's investment adviser, is responsible for
determining that the value of the underlying securities remains in
accordance with the market value requirements stated above.
2. OPERATING POLICIES - CONTINUED
DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell
securities on a delayed delivery 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 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 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 $2,984,800 or 0.6% of net assets.
3. PURCHASES AND SALES OF INVESTMENTS.
Purchases and sales of securities, other than short-term securities,
aggregated $167,373,838 and $198,818,860, respectively, of which U.S.
government and government agency obligations aggregated $151,373,838
and $193,397,514, respectively.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a
monthly fee that is calculated on the basis of a group fee rate plus a
fixed individual fund fee rate applied to the average net assets of
the fund. The group fee rate is the weighted average of a series of
rates and is based on the monthly average net assets of all the mutual
funds advised by FMR. The rates ranged from .1100% to .3700% for the
period. The annual individual fund fee rate is .30%. In the event that
these rates were lower than the contractual rates in effect during the
period, FMR voluntarily implemented the above rates, as they resulted
in the same or a lower management fee. For the periods ended October
31, 1997 and July 31, 1997, the management fee was equivalent to an
annualized rate of .44% and an annual rate of .44%, respectively, of
average net assets.
DISTRIBUTION AND SERVICE PLAN. In accordance with Rule 12b-1 of the
1940 Act, the Trustees have adopted separate distribution plans with
respect to each class of shares (collectively referred to as "the
Plans"). Under certain of the Plans, the class pays Fidelity
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
DISTRIBUTION AND SERVICE PLAN - CONTINUED
Distributors Corporation (FDC), an affiliate of FMR, a distribution
and service fee. This fee is based on the following annual rates of
the average net assets of each applicable class:
CLASS A .15%
CLASS T .25%
CLASS B .90%*
* .65% REPRESENTS A DISTRIBUTION FEE AND .25% REPRESENTS A SHAREHOLDER
SERVICE FEE.
For the periods, each class paid FDC the following amounts, a portion
of which was paid to securities dealers, banks and other financial
institutions for the distribution of each class' applicable shares,
and providing shareholder support services:
THREE MONTHS ENDED OCTOBER 31, 1997
PAID TO DEALERS'
FDC PORTION
CLASS A $ 600 $ 600
CLASS T 8,099 8,099
CLASS B 2,699 749
$ 11,398 $ 9,448
YEAR ENDED JULY 31, 1997
PAID TO DEALERS'
FDC PORTION
CLASS A $ 530 $ 530
CLASS T 2,602 2,602
CLASS B 1,374 380
$ 4,506 $ 3,512
Under the Plans, FMR or FDC may use its resources to pay
administrative and promotional expenses related to the sale of each
class' shares. The Plans also authorize payments to third parties that
assist in the sale of each class' shares or render shareholder support
services.
SALES LOAD. FDC receives a front-end sales charge of up to 4.75% for
selling Class A shares (4.25% prior to August 1, 1997), and 3.50% for
selling Class T shares of the fund, and the proceeds of a contingent
deferred sales charge levied on Class B share redemptions occurring
within six years of purchase (five years prior to January 2, 1997).
The Class B charge is based on declining rates which range from 5% to
1% (4% to 1% prior to January 2, 1997) of the lesser of the cost of
shares at the initial date of purchase or the net asset value of the
redeemed shares, excluding any reinvested dividends and capital gains.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
SALES LOAD - CONTINUED
For the period, FDC received the following sales charge amounts
related to each class, a portion of which is paid to securities
dealers, banks, and other financial institutions:
THREE MONTHS ENDED OCTOBER 31, 1997
PAID TO DEALERS'
FDC PORTION
CLASS A $ 263 $ 83
CLASS T 8,746 6,997
CLASS B 72 0 *
$ 9,081 $ 7,080
* WHEN CLASS B SHARES ARE INITIALLY SOLD, FDC PAYS COMMISSIONS FROM
ITS OWN RESOURCES TO DEALERS THROUGH WHICH THE
SALES ARE MADE.
TRANSFER AGENT FEES. Each class of the fund has entered into a
separate transfer, dividend disbursing, and shareholder servicing
agent (collectively referred to as the Transfer Agents) contract with
respect to its shares. The Transfer Agents receive account fees and
asset-based fees that vary according to the account size and type of
account of the shareholders of the respective classes of the fund.
FIIOC and FSC pay for typesetting, printing and mailing of all
shareholder reports. For the periods, the following amounts were paid
to each transfer agent:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
THREE MONTHS ENDED OCTOBER 31, 1997
TRANSFER AMOUNT % OF
AGENT AVERAGE
NET ASSETS
CLASS A FIIOC* $ 1,160 .29**
CLASS T FIIOC* 16,843 .52**
CLASS B FIIOC* 1,270 .42**
INITIAL CLASS FSC* 249,064 .20**
INSTITUTIONAL CLASS FIIOC* 9,273 .24**
$ 277,610
YEAR ENDED JULY 31, 1997
TRANSFER AMOUNT % OF
AGENT AVERAGE
NET ASSETS
CLASS A FIIOC* $ 789 .22**
CLASS T FIIOC* 1,513 .14**
CLASS B FIIOC* 881 .57**
INITIAL CLASS FSC* 1,028,957 .20
INSTITUTIONAL CLASS FIIOC* 2,620 .21**
$ 1,034,760
</TABLE>
* FIDELITY INVESTMENTS INSTITUTIONAL OPERATIONS COMPANY, INC. (FIIOC)
AND FIDELITY SERVICE CO., INC. (FSC), AFFILIATES OF FMR.
** ANNUALIZED
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. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse operating expenses (excluding
interest, taxes, brokerage commissions and extraordinary expenses)
above the following annual rates or range of annual rates of average
net assets for each class:
FMR THREE MONTHS YEAR
EXPENSE ENDED ENDED
LIMITATIONS OCTOBER 31, 1997 JULY 31, 1997
CLASS A .90% $ 8,631 $ 10,408
CLASS T 1.00% 17,704 10,413
CLASS B 1.65% 8,961 10,927
INSTITUTIONAL CLASS .75% 9,518 12,094
$ 44,814 $ 43,842
In addition, the fund has entered into arrangements with its custodian
and each class' transfer agent whereby credits realized as a result of
uninvested cash balances were used to reduce a portion of expenses.
During the periods ended October 31, 1997 and July 31, 1997, the
fund's custodian fees were reduced by $2,726 and $8,474, respectively,
under the custodian arrangement. For the period ended July 31, 1997,
Institutional Class' expenses were reduced by $629 under the transfer
agent arrangement.
6. DISTRIBUTIONS TO SHAREHOLDERS.
Distributions to shareholders of each class were as follows:
THREE MONTHS YEAR ENDED YEAR ENDED
ENDED JULY 31, JULY 31,
OCTOBER 31,
1997 1997 A 1996
CLASS A
FROM NET INVESTMENT INCOME $ 24,437 $ 21,750 $ -
FROM NET REALIZED GAIN 11,558 - -
TOTAL $ 35,995 $ 21,750 $ -
CLASS T
FROM NET INVESTMENT INCOME $ 197,984 $ 64,445 $ -
FROM NET REALIZED GAIN 92,775 - -
TOTAL $ 290,759 $ 64,445 $ -
CLASS B
FROM NET INVESTMENT INCOME $ 15,690 $ 8,241 $ -
FROM NET REALIZED GAIN 7,487 - -
TOTAL $ 23,177 $ 8,241 $ -
INITIAL CLASS
FROM NET INVESTMENT INCOME $ 7,870,955 $ 32,474,399 $ 31,178,449
FROM NET REALIZED GAIN 3,640,130 5,039,533 4,055,960
TOTAL $ 11,511,085 $ 37,513,932 $ 35,234,409
INSTITUTIONAL CLASS
FROM NET INVESTMENT INCOME $ 240,336 $ 80,890 $ -
FROM NET REALIZED GAIN 98,898 - -
TOTAL $ 339,234 $ 80,890 $ -
A DISTRIBUTIONS FOR CLASS A, T, B, AND INSTITUTIONAL CLASS ARE FOR THE
PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF SHARES) TO JULY 31,
1997.
7. SHARE TRANSACTIONS.
Share transactions for each class of shares were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SHARES DOLLARS
THREE YEAR ENDED YEAR ENDED THREE YEAR ENDED YEAR ENDED
MONTHS JULY 31, JULY 31, MONTHS JULY 31, JULY 31,
ENDED ENDED
OCTOBER 31, OCTOBER 31,
1997 1997 A 1996 1997 1997 A 1996
CLASS A 3,210 141,575 - $ 35,261 $ 1,531,983 $ -
SHARES SOLD
REINVESTMENT OF 3,274 1,989 - 35,846 21,750 -
DISTRIBUTIONS
SHARES REDEEMED (531) - - (5,834) - -
NET INCREASE 5,953 143,564 - $ 65,273 $ 1,553,733 $ -
(DECREASE)
CLASS T 312,588 1,114,285 - $ 3,429,256 $ 12,183,453 $ -
SHARES SOLD
REINVESTMENT OF 25,415 5,597 - 278,358 61,712 -
DISTRIBUTIONS
SHARES REDEEMED (112,534) (16,202) - (1,233,884) (177,848) -
NET INCREASE 225,469 1,103,680 - $ 2,473,730 $ 12,067,317 $ -
(DECREASE)
CLASS B 68,692 73,891 - $ 753,079 $ 801,025 $ -
SHARES SOLD
REINVESTMENT OF 1,666 687 - 18,237 7,506 -
DISTRIBUTIONS
SHARES REDEEMED (890) - - (9,750) - -
NET INCREASE 69,468 74,578 - $ 761,566 $ 808,531 $ -
(DECREASE)
INITIAL CLASS 1,426,619 14,636,021 24,584,693 $ 15,655,743 $ 158,564,289 $ 268,954,246
SHARES SOLD
REINVESTMENT OF 854,187 2,769,613 2,644,498 9,354,223 29,925,102 28,910,230
DISTRIBUTIONS
SHARES REDEEMED (3,241,358) (16,911,618) (20,139,279) (35,550,337) (183,183,589) (219,915,312)
NET INCREASE (960,552) 494,016 7,089,912 $ (10,540,371) $ 5,305,802 $ 77,949,164
(DECREASE)
INSTITUTIONAL CLASS
SHARES SOLD 671,412 1,216,421 - $ 7,350,245 $ 13,282,379 $ -
REINVESTMENT OF 11,919 3,516 - 130,486 38,560 -
DISTRIBUTIONS
SHARES REDEEMED (86,048) (26,465) - (944,245) (290,779) -
NET INCREASE 597,283 1,193,472 - $ 6,536,486 $ 13,030,160 $ -
(DECREASE)
</TABLE>
A SHARE TRANSACTIONS FOR CLASS A, T, B, AND INSTITUTIONAL CLASS ARE
FOR THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF SHARES) TO JULY
31, 1997.
8. REGISTRATION FEES.
For the periods, each class paid the following amounts to register its
shares for sale:
THREE MONTHS ENDED YEAR ENDED
OCTOBER 31, 1997 JULY 31, 1997 A
CLASS A $ 8,436 $ 10,398
CLASS T 8,595 11,098
CLASS B 8,436 10,398
INITIAL CLASS 9,412 31,365
INSTITUTIONAL CLASS 9,165 12,152
$ 44,044 $ 75,411
A REGISTRATION FEES FOR CLASS A, T, B AND INSTITUTIONAL CLASS ARE FOR
THE PERIOD MARCH 3, 1997 (COMMENCEMENT OF SALE OF SHARES) TO JULY 31,
1997.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Fidelity Income Fund and the Shareholders of
Fidelity Advisor Mortgage Securities 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
Fidelity Advisor Mortgage Securities Fund (a fund of Fidelity Income
Fund) at October 31, 1997, the results of its operations for the three
month period then ended, and the year ended July 31, 1997, 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 Advisor Mortgage Securities 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 October 31, 1997 by
correspondence with the custodian and the application of alternative
auditing procedures where securities purchased were not yet received
by the custodian, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
December 15, 1997
DISTRIBUTIONS
The Board of Trustees of Fidelity Advisor Mortgage Securities Fund
voted to pay to shareholders of record at the opening of business on
record date, the following distributions derived from capital gains
realized from sales of portfolio securities, and dividends derived
from net investment income:
PAY DATE RECORD DATE DIVIDENDS CAPITAL GAINS
Class A 12/15/97 12/12/97 - $.03
Class T 12/15/97 12/12/97 - $.03
Class B 12/15/97 12/12/97 - $.03
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
Robert C. Pozen, Senior Vice President
Fred L. Henning, Jr., Vice President
Dwight D. Churchill, Vice President
Arthur S. Loring, Secretary
Richard A. Silver, Treasurer
John H. Costello, Assistant Treasurer
Leonard M. Rush, Assistant Treasurer
BOARD OF TRUSTEES
Ralph F. Cox *
Phyllis Burke Davis *
Robert M. Gates *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Marvin L. Mann *
William O. McCoy *
Gerald C. McDonough *
Robert C. Pozen
Thomas R. Williams *
ADVISORY BOARD
J. Gary Burkhead
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Investments Institutional Operations Company, Inc.
Boston, MA
CUSTODIAN
The Bank of New York
New York, NY
FOCUS FUNDS
Fidelity Advisor Consumer
Industries Fund
Fidelity Advisor Cyclical
Industries Fund
Fidelity Advisor Financial
Services Fund
Fidelity Advisor Health Care Fund
Fidelity Advisor Natural
Resources Fund
Fidelity Advisor Technology Fund
Fidelity Advisor Utilities Growth Fund
GROWTH FUNDS
International Capital Appreciation Fund
Fidelity Advisor Overseas Fund
Fidelity Advisor TechnoQuant
Growth Fund
SM
Fidelity Advisor Mid Cap Fund
Fidelity Advisor Equity Growth Fund
Fidelity Advisor Growth
Opportunities Fund
Fidelity Advisor Strategic
Opportunities Fund
Fidelity Advisor Large Cap Fund
GROWTH AND INCOME FUNDS
Fidelity Advisor Growth & Income Fund
Fidelity Advisor Equity Income Fund
Fidelity Advisor Balanced Fund
TAXABLE INCOME FUNDS
Fidelity Advisor Emerging Markets Income Fund
Fidelity Advisor High Yield Fund
Fidelity Advisor Strategic Income Fund
Fidelity Advisor Mortgage
Securities Fund
Fidelity Advisor Government Investment Fund
Fidelity Advisor Intermediate Bond Fund
Fidelity Advisor Short Fixed-Income Fund
MUNICIPAL FUNDS
Fidelity Advisor Municipal Income Fund
Fidelity Advisor Intermediate Municipal Income Fund
Fidelity Advisor Short-Intermediate Municipal Income Fund
MONEY MARKET FUNDS
Prime Fund
Treasury Fund
Tax-Exempt Fund
(REGISTERED TRADEMARK)
