(2_FIDELITY_LOGOS)FIDELITY ADVISOR
(REGISTERED TRADEMARK)
MORTGAGE SECURITIES
FUND - CLASS A, CLASS T AND CLASS B
SEMIANNUAL REPORT
APRIL 30, 1998
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 SIX 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.
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:
Low interest rates and subdued inflation were two main factors that
bolstered stock and bond markets in the U.S. during the first four
months of 1998. The stock market continued to soar to record heights
as corporate earnings proved to be stronger than expected and
investors shrugged off concerns about the effects of economic
difficulties in Asia. The Federal Reserve Board continued its steady
interest rate policy, which boosted the performance of bonds.
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 APRIL 30, 1998 PAST 6 PAST 1 PAST 5 PAST 10
MONTHS YEAR YEARS YEARS
FIDELITY ADV MORTGAGE SECURITIES - CL A 3.14% 9.38% 44.51% 131.57%
FIDELITY ADV MORTGAGE SECURITIES - CL A -1.76% 4.18% 37.64% 120.57%
(INCL. MAX. 4.75% SALES CHARGE)
LB MORTGAGE 3.48% 10.02% 39.88% 139.67%
US MORTGAGE FUNDS AVERAGE 2.99% 9.06% 32.26% 114.30%
CUMULATIVE TOTAL RETURNS show Class A's performance in percentage
terms over a set period - in this case, six months, 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 the Lehman Brothers Mortgage-Backed Securities Index - a market
capitalization weighted index of 15- and 30-year fixed-rate securities
backed by mortgage pools of Ginnie Mae (GNMA), Fannie Mae (FNMA) and
Freddie Mac (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 six
months average represents a peer group of 67 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 APRIL 30, 1998 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
FIDELITY ADV MORTGAGE SECURITIES - CL A 9.38% 7.64% 8.76%
FIDELITY ADV MORTGAGE SECURITIES - CL A 4.18% 6.60% 8.23%
(INCL. MAX. 4.75% SALES CHARGE)
LB MORTGAGE 10.02% 6.94% 9.13%
US MORTGAGE FUNDS AVERAGE 9.06% 5.73% 7.90%
AVERAGE ANNUAL TOTAL RETURNS take Class A shares' 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
FA Mortgage Sec -CL A LB Mortgage Backed Secs
00237 LB006
1988/04/30 9525.00 10000.00
1988/05/31 9485.39 9929.23
1988/06/30 9675.22 10211.74
1988/07/31 9652.23 10177.08
1988/08/31 9664.49 10199.50
1988/09/30 9858.86 10453.76
1988/10/31 10043.62 10682.98
1988/11/30 9910.82 10527.45
1988/12/31 9848.12 10472.40
1989/01/31 10026.81 10653.85
1989/02/28 9973.72 10585.99
1989/03/31 9993.43 10602.59
1989/04/30 10177.90 10816.66
1989/05/31 10418.78 11151.59
1989/06/30 10670.93 11425.66
1989/07/31 10862.00 11684.29
1989/08/31 10747.27 11532.84
1989/09/30 10794.19 11614.68
1989/10/31 11008.28 11880.01
1989/11/30 11114.36 12008.74
1989/12/31 11190.97 12079.80
1990/01/31 11087.87 11995.34
1990/02/28 11161.73 12065.82
1990/03/31 11170.50 12095.53
1990/04/30 11073.88 11986.89
1990/05/31 11395.82 12358.82
1990/06/30 11561.02 12554.24
1990/07/31 11729.04 12772.10
1990/08/31 11698.02 12636.38
1990/09/30 11760.46 12740.06
1990/10/31 11880.94 12884.52
1990/11/30 12140.91 13154.51
1990/12/31 12350.34 13374.98
1991/01/31 12478.49 13578.27
1991/02/28 12558.38 13692.73
1991/03/31 12642.85 13785.93
1991/04/30 12779.71 13912.92
1991/05/31 12846.15 14035.24
1991/06/30 12878.28 14047.76
1991/07/31 13063.25 14285.42
1991/08/31 13312.89 14545.22
1991/09/30 13520.72 14817.82
1991/10/31 13680.54 15063.35
1991/11/30 13764.18 15172.56
1991/12/31 14031.56 15477.50
1992/01/31 13964.06 15298.67
1992/02/29 14103.01 15443.43
1992/03/31 14005.55 15344.98
1992/04/30 14136.85 15495.85
1992/05/31 14370.18 15775.16
1992/06/30 14522.44 15961.26
1992/07/31 14497.52 16100.77
1992/08/31 14591.29 16310.47
1992/09/30 14682.89 16437.45
1992/10/31 14536.89 16293.29
1992/11/30 14607.15 16344.26
1992/12/31 14796.71 16555.41
1993/01/31 14931.70 16772.97
1993/02/28 15059.59 16943.06
1993/03/31 15157.93 17045.87
1993/04/30 15263.75 17133.83
1993/05/31 15308.95 17231.40
1993/06/30 15495.70 17363.33
1993/07/31 15580.88 17432.65
1993/08/31 15609.89 17514.78
1993/09/30 15643.99 17529.93
1993/10/31 15671.82 17580.60
1993/11/30 15639.06 17546.24
1993/12/31 15790.00 17688.36
1994/01/31 15935.42 17863.70
1994/02/28 15851.39 17739.04
1994/03/31 15671.74 17277.12
1994/04/30 15603.09 17149.85
1994/05/31 15735.91 17217.71
1994/06/30 15816.46 17180.43
1994/07/31 16069.29 17524.39
1994/08/31 16141.29 17579.73
1994/09/30 15966.33 17329.55
1994/10/31 15998.76 17319.64
1994/11/30 15982.80 17265.47
1994/12/31 16096.59 17403.23
1995/01/31 16400.91 17775.74
1995/02/28 16768.08 18229.50
1995/03/31 16839.24 18315.42
1995/04/30 17104.72 18575.80
1995/05/31 17642.91 19161.50
1995/06/30 17777.50 19270.42
1995/07/31 17817.88 19303.63
1995/08/31 18037.74 19503.42
1995/09/30 18224.20 19674.97
1995/10/31 18426.93 19850.01
1995/11/30 18630.95 20076.89
1995/12/31 18836.21 20327.65
1996/01/31 18990.42 20480.85
1996/02/29 18869.42 20310.76
1996/03/31 18800.96 20237.37
1996/04/30 18761.77 20180.28
1996/05/31 18689.13 20121.45
1996/06/30 18947.05 20398.43
1996/07/31 19014.71 20473.28
1996/08/31 19010.51 20472.99
1996/09/30 19311.38 20815.79
1996/10/31 19668.70 21224.12
1996/11/30 19972.57 21527.89
1996/12/31 19859.95 21415.17
1997/01/31 19984.24 21574.20
1997/02/28 20049.39 21646.13
1997/03/31 19858.15 21442.26
1997/04/30 20165.87 21784.19
1997/05/31 20362.18 21997.38
1997/06/30 20597.47 22253.97
1997/07/31 20966.74 22673.37
1997/08/31 20921.02 22619.48
1997/09/30 21164.00 22906.36
1997/10/31 21386.79 23160.33
1997/11/30 21455.07 23236.35
1997/12/31 21620.56 23448.09
1998/01/31 21838.41 23681.37
1998/02/28 21862.13 23731.47
1998/03/31 21930.40 23831.95
1998/04/30 22057.38 23966.80
IMATRL PRASUN SHR__CHT 19980430 19980508 103333 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was
invested in Fidelity Advisor Mortgage Securities Fund - Class A on
April 30, 1988, and the current maximum 4.75% sales charge was paid.
As the chart shows, by April 30, 1998, the value of the investment
would have grown to $22,057 - a 120.57% 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 $23,967 - a 139.67% increase.
UNDERSTANDING
PERFORMANCE
HOW A FUND DID YESTERDAY IS
NO GUARANTEE OF HOW IT WILL DO
TOMORROW. BOND PRICES, FOR
EXAMPLE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION OF INTEREST
RATES. IN TURN, THE SHARE PRICE,
RETURN AND YIELD OF A FUND THAT
INVESTS IN BONDS WILL VARY. THAT
MEANS IF YOU SELL YOUR SHARES
DURING A MARKET DOWNTURN, YOU
MIGHT LOSE MONEY. BUT IF YOU CAN
RIDE OUT THE MARKET'S UPS AND
DOWNS, YOU MAY HAVE A GAIN.
(CHECKMARK)
TOTAL RETURN COMPONENTS
SIX MONTHS MARCH 3, 1997
ENDED (COMMENCEMENT OF
APRIL 30, SALE OF CLASS A
SHARES) TO
OCTOBER 31,
1998 1997
DIVIDEND RETURN 2.96% 4.18%
CAPITAL RETURN 0.18% 2.53%
TOTAL RETURN 3.14% 6.71%
TOTAL RETURN COMPONENTS include both dividend returns and capital
returns. A dividend return reflects the actual dividends paid by the
class. A capital 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 APRIL 30, 1998 PAST 1 PAST 6 PAST 1
MONTH MONTHS YEAR
DIVIDENDS PER SHARE 5.37(CENTS) 32.09(CENTS) 65.45(CENTS)
ANNUALIZED DIVIDEND RATE 5.93% 5.87% 5.96%
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 $11.01 over the past one month, $11.02 over the past six months,
and $10.98 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. 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 APRIL 30, 1998 PAST 6 PAST 1 PAST 5 PAST 10
MONTHS YEAR YEARS YEARS
FIDELITY ADV MORTGAGE SECURITIES - CL T 3.13% 9.33% 44.42% 131.43%
FIDELITY ADV MORTGAGE SECURITIES - CL T -0.48% 5.51% 39.36% 123.33%
(INCL. MAX. 3.50% SALES CHARGE)
LB MORTGAGE 3.48% 10.02% 39.88% 139.67%
US MORTGAGE FUNDS AVERAGE 2.99% 9.06% 32.26% 114.30%
CUMULATIVE TOTAL RETURNS show Class T's performance in percentage
terms over a set period - in this case, six months, 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 the Lehman Brothers Mortgage-Backed Securities Index - a market
capitalization weighted index of 15- and 30-year fixed-rate securities
backed by mortgage pools of the Ginnie Mae (GNMA), Fannie Mae (FNMA)
and Freddie Mac (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 six
months average represents a peer group of 67 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 APRIL 30, 1998 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
FIDELITY ADV MORTGAGE SECURITIES - CL T 9.33% 7.63% 8.75%
FIDELITY ADV MORTGAGE SECURITIES - CL T 5.51% 6.86% 8.37%
(INCL. MAX. 3.50% SALES CHARGE)
LB MORTGAGE 10.02% 6.94% 9.13%
US MORTGAGE FUNDS AVERAGE 9.06% 5.73% 7.90%
AVERAGE ANNUAL TOTAL RETURNS take Class T shares' 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
FA Mortgage Sec -CL T LB Mortgage Backed Secs
00239 LB006
1988/04/30 9650.00 10000.00
1988/05/31 9609.87 9929.23
1988/06/30 9802.19 10211.74
1988/07/31 9778.90 10177.08
1988/08/31 9791.32 10199.50
1988/09/30 9988.24 10453.76
1988/10/31 10175.43 10682.98
1988/11/30 10040.88 10527.45
1988/12/31 9977.36 10472.40
1989/01/31 10158.40 10653.85
1989/02/28 10104.61 10585.99
1989/03/31 10124.57 10602.59
1989/04/30 10311.47 10816.66
1989/05/31 10555.51 11151.59
1989/06/30 10810.97 11425.66
1989/07/31 11004.54 11684.29
1989/08/31 10888.31 11532.84
1989/09/30 10935.85 11614.68
1989/10/31 11152.75 11880.01
1989/11/30 11260.22 12008.74
1989/12/31 11337.84 12079.80
1990/01/31 11233.38 11995.34
1990/02/28 11308.21 12065.82
1990/03/31 11317.10 12095.53
1990/04/30 11219.20 11986.89
1990/05/31 11545.37 12358.82
1990/06/30 11712.74 12554.24
1990/07/31 11882.97 12772.10
1990/08/31 11851.54 12636.38
1990/09/30 11914.80 12740.06
1990/10/31 12036.86 12884.52
1990/11/30 12300.24 13154.51
1990/12/31 12512.42 13374.98
1991/01/31 12642.25 13578.27
1991/02/28 12723.19 13692.73
1991/03/31 12808.77 13785.93
1991/04/30 12947.42 13912.92
1991/05/31 13014.74 14035.24
1991/06/30 13047.28 14047.76
1991/07/31 13234.69 14285.42
1991/08/31 13487.60 14545.22
1991/09/30 13698.16 14817.82
1991/10/31 13860.08 15063.35
1991/11/30 13944.81 15172.56
1991/12/31 14215.70 15477.50
1992/01/31 14147.32 15298.67
1992/02/29 14288.09 15443.43
1992/03/31 14189.35 15344.98
1992/04/30 14322.37 15495.85
1992/05/31 14558.77 15775.16
1992/06/30 14713.02 15961.26
1992/07/31 14687.77 16100.77
1992/08/31 14782.78 16310.47
1992/09/30 14875.58 16437.45
1992/10/31 14727.66 16293.29
1992/11/30 14798.84 16344.26
1992/12/31 14990.89 16555.41
1993/01/31 15127.66 16772.97
1993/02/28 15257.22 16943.06
1993/03/31 15356.85 17045.87
1993/04/30 15464.06 17133.83
1993/05/31 15509.85 17231.40
1993/06/30 15699.06 17363.33
1993/07/31 15785.35 17432.65
1993/08/31 15814.74 17514.78
1993/09/30 15849.29 17529.93
1993/10/31 15877.49 17580.60
1993/11/30 15844.30 17546.24
1993/12/31 15997.22 17688.36
1994/01/31 16144.54 17863.70
1994/02/28 16059.41 17739.04
1994/03/31 15877.41 17277.12
1994/04/30 15807.86 17149.85
1994/05/31 15942.42 17217.71
1994/06/30 16024.02 17180.43
1994/07/31 16280.18 17524.39
1994/08/31 16353.12 17579.73
1994/09/30 16175.87 17329.55
1994/10/31 16208.71 17319.64
1994/11/30 16192.54 17265.47
1994/12/31 16307.83 17403.23
1995/01/31 16616.14 17775.74
1995/02/28 16988.13 18229.50
1995/03/31 17060.23 18315.42
1995/04/30 17329.20 18575.80
1995/05/31 17874.44 19161.50
1995/06/30 18010.80 19270.42
1995/07/31 18051.71 19303.63
1995/08/31 18274.45 19503.42
1995/09/30 18463.36 19674.97
1995/10/31 18668.75 19850.01
1995/11/30 18875.45 20076.89
1995/12/31 19083.40 20327.65
1996/01/31 19239.64 20480.85
1996/02/29 19117.05 20310.76
1996/03/31 19047.69 20237.37
1996/04/30 19007.99 20180.28
1996/05/31 18934.39 20121.45
1996/06/30 19195.70 20398.43
1996/07/31 19264.24 20473.28
1996/08/31 19259.99 20472.99
1996/09/30 19564.81 20815.79
1996/10/31 19926.82 21224.12
1996/11/30 20234.68 21527.89
1996/12/31 20120.58 21415.17
1997/01/31 20246.50 21574.20
1997/02/28 20312.51 21646.13
1997/03/31 20117.24 21442.26
1997/04/30 20426.79 21784.19
1997/05/31 20623.80 21997.38
1997/06/30 20860.84 22253.97
1997/07/31 21233.80 22673.37
1997/08/31 21205.90 22619.48
1997/09/30 21430.81 22906.36
1997/10/31 21654.72 23160.33
1997/11/30 21722.06 23236.35
1997/12/31 21907.99 23448.09
1998/01/31 22112.85 23681.37
1998/02/28 22138.14 23731.47
1998/03/31 22226.51 23831.95
1998/04/30 22333.11 23966.80
IMATRL PRASUN SHR__CHT 19980430 19980508 103358 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was
invested in Fidelity Advisor Mortgage Securities Fund - Class T on
April 30, 1988, and the current maximum 3.50% sales charge was paid.
As the chart shows, by April 30, 1998, the value of the investment
would have grown to $22,333 - a 123.33% 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 $23,967 - a 139.67% increase.
UNDERSTANDING
PERFORMANCE
HOW A FUND DID YESTERDAY IS
NO GUARANTEE OF HOW IT WILL DO
TOMORROW. BOND PRICES, FOR
EXAMPLE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION OF INTEREST
RATES. IN TURN, THE SHARE PRICE,
RETURN AND YIELD OF A FUND THAT
INVESTS IN BONDS WILL VARY. THAT
MEANS IF YOU SELL YOUR SHARES
DURING A MARKET DOWNTURN, YOU
MIGHT LOSE MONEY. BUT IF YOU CAN
RIDE OUT THE MARKET'S UPS AND
DOWNS, YOU MAY HAVE A GAIN.
(CHECKMARK)
TOTAL RETURN COMPONENTS
SIX MONTHS MARCH 3, 1997
ENDED (COMMENCEMENT OF
APRIL 30, SALE OF CLASS T
SHARES) TO
OCTOBER 31,
1998 1997
DIVIDEND RETURN 2.95% 4.12%
CAPITAL RETURN 0.18% 2.53%
TOTAL RETURN 3.13% 6.65%
TOTAL RETURN COMPONENTS include both dividend returns and capital
returns. A dividend return reflects the actual dividends paid by the
class. A capital 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 APRIL 30, 1998 PAST 1 PAST 6 PAST 1
MONTH MONTHS YEAR
DIVIDENDS PER SHARE 5.28(CENTS) 32.07(CENTS) 64.99(CENTS)
ANNUALIZED DIVIDEND RATE 5.83% 5.87% 5.92%
30-DAY ANNUALIZED YIELD 5.67% - -
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 $11.01 over the past one month, $11.02 over the past six months,
and $10.98 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. If Fidelity had not reimbursed certain class expenses, the
yield would have been 5.25%.
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 six months, past one year, past five years and past 10
years total return figures are 5%, 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 APRIL 30, 1998 PAST 6 PAST 1 PAST 5 PAST 10
MONTHS YEAR YEARS YEARS
FIDELITY ADV MORTGAGE SECURITIES - CL B 2.80% 8.61% 43.33% 129.68%
FIDELITY ADV MORTGAGE SECURITIES - CL B -2.19% 3.61% 41.33% 129.68%
(INCL. CONTINGENT DEFERRED SALES CHARGE)
LB MORTGAGE 3.48% 10.02% 39.88% 139.67%
US MORTGAGE FUNDS AVERAGE 2.99% 9.06% 32.26% 114.30%
CUMULATIVE TOTAL RETURNS show Class B's performance in percentage
terms over a set period - in this case, six months, 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 the Lehman Brothers Mortgage-Backed Securities Index - a market
capitalization weighted index of 15- and 30-year fixed-rate securities
backed by mortgage pools of the Ginnie Mae (GNMA), Fannie Mae (FNMA)
and Freddie Mac (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 six
months average represents a peer group of 67 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 APRIL 30, 1998 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
FIDELITY ADV MORTGAGE SECURITIES - CL B 8.61% 7.46% 8.67%
FIDELITY ADV MORTGAGE SECURITIES - CL B 3.61% 7.16% 8.67%
(INCL. CONTINGENT DEFERRED SALES CHARGE)
LB MORTGAGE 10.02% 6.94% 9.13%
US MORTGAGE FUNDS AVERAGE 9.06% 5.73% 7.90%
AVERAGE ANNUAL TOTAL RETURNS take Class B shares' 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
FA Mortgage Sec -CL B LB Mortgage Backed Secs
00238 LB006
1988/04/30 10000.00 10000.00
1988/05/31 9958.41 9929.23
1988/06/30 10157.71 10211.74
1988/07/31 10133.57 10177.08
1988/08/31 10146.44 10199.50
1988/09/30 10350.51 10453.76
1988/10/31 10544.49 10682.98
1988/11/30 10405.06 10527.45
1988/12/31 10339.24 10472.40
1989/01/31 10526.84 10653.85
1989/02/28 10471.10 10585.99
1989/03/31 10491.79 10602.59
1989/04/30 10685.46 10816.66
1989/05/31 10938.36 11151.59
1989/06/30 11203.08 11425.66
1989/07/31 11403.67 11684.29
1989/08/31 11283.22 11532.84
1989/09/30 11332.48 11614.68
1989/10/31 11557.25 11880.01
1989/11/30 11668.62 12008.74
1989/12/31 11749.05 12079.80
1990/01/31 11640.81 11995.34
1990/02/28 11718.35 12065.82
1990/03/31 11727.56 12095.53
1990/04/30 11626.12 11986.89
1990/05/31 11964.12 12358.82
1990/06/30 12137.56 12554.24
1990/07/31 12313.95 12772.10
1990/08/31 12281.38 12636.38
1990/09/30 12346.94 12740.06
1990/10/31 12473.43 12884.52
1990/11/30 12746.37 13154.51
1990/12/31 12966.23 13374.98
1991/01/31 13100.78 13578.27
1991/02/28 13184.65 13692.73
1991/03/31 13273.34 13785.93
1991/04/30 13417.02 13912.92
1991/05/31 13486.77 14035.24
1991/06/30 13520.50 14047.76
1991/07/31 13714.70 14285.42
1991/08/31 13976.79 14545.22
1991/09/30 14194.99 14817.82
1991/10/31 14362.77 15063.35
1991/11/30 14450.58 15172.56
1991/12/31 14731.30 15477.50
1992/01/31 14660.43 15298.67
1992/02/29 14806.31 15443.43
1992/03/31 14703.99 15344.98
1992/04/30 14841.84 15495.85
1992/05/31 15086.81 15775.16
1992/06/30 15246.66 15961.26
1992/07/31 15220.49 16100.77
1992/08/31 15318.94 16310.47
1992/09/30 15415.11 16437.45
1992/10/31 15261.82 16293.29
1992/11/30 15335.59 16344.26
1992/12/31 15534.60 16555.41
1993/01/31 15676.33 16772.97
1993/02/28 15810.59 16943.06
1993/03/31 15913.84 17045.87
1993/04/30 16024.94 17133.83
1993/05/31 16072.38 17231.40
1993/06/30 16268.45 17363.33
1993/07/31 16357.88 17432.65
1993/08/31 16388.34 17514.78
1993/09/30 16424.14 17529.93
1993/10/31 16453.35 17580.60
1993/11/30 16418.96 17546.24
1993/12/31 16577.43 17688.36
1994/01/31 16730.10 17863.70
1994/02/28 16641.87 17739.04
1994/03/31 16453.27 17277.12
1994/04/30 16381.20 17149.85
1994/05/31 16520.65 17217.71
1994/06/30 16605.21 17180.43
1994/07/31 16870.65 17524.39
1994/08/31 16946.24 17579.73
1994/09/30 16762.56 17329.55
1994/10/31 16796.60 17319.64
1994/11/30 16779.84 17265.47
1994/12/31 16899.30 17403.23
1995/01/31 17218.80 17775.74
1995/02/28 17604.28 18229.50
1995/03/31 17678.99 18315.42
1995/04/30 17957.72 18575.80
1995/05/31 18522.74 19161.50
1995/06/30 18664.04 19270.42
1995/07/31 18706.43 19303.63
1995/08/31 18937.26 19503.42
1995/09/30 19133.02 19674.97
1995/10/31 19345.86 19850.01
1995/11/30 19560.05 20076.89
1995/12/31 19775.54 20327.65
1996/01/31 19937.45 20480.85
1996/02/29 19810.41 20310.76
1996/03/31 19738.54 20237.37
1996/04/30 19697.40 20180.28
1996/05/31 19621.13 20121.45
1996/06/30 19891.91 20398.43
1996/07/31 19962.95 20473.28
1996/08/31 19958.54 20472.99
1996/09/30 20274.41 20815.79
1996/10/31 20649.55 21224.12
1996/11/30 20968.58 21527.89
1996/12/31 20850.34 21415.17
1997/01/31 20980.83 21574.20
1997/02/28 21049.23 21646.13
1997/03/31 20835.71 21442.26
1997/04/30 21146.92 21784.19
1997/05/31 21318.16 21997.38
1997/06/30 21571.14 22253.97
1997/07/31 21924.35 22673.37
1997/08/31 21882.42 22619.48
1997/09/30 22102.95 22906.36
1997/10/31 22341.97 23160.33
1997/11/30 22379.25 23236.35
1997/12/31 22558.67 23448.09
1998/01/31 22777.97 23681.37
1998/02/28 22792.73 23731.47
1998/03/31 22850.29 23831.95
1998/04/30 22968.12 23966.80
IMATRL PRASUN SHR__CHT 19980430 19980508 103342 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was
invested in Fidelity Advisor Mortgage Securities Fund - Class B on
April 30, 1988. As the chart shows, by April 30, 1998, the value of
the investment would have grown to $22,968 - a 129.68% 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 $23,967 - a 139.67% increase.
UNDERSTANDING
PERFORMANCE
HOW A FUND DID YESTERDAY IS
NO GUARANTEE OF HOW IT WILL DO
TOMORROW. BOND PRICES, FOR
EXAMPLE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION OF INTEREST
RATES. IN TURN, THE SHARE PRICE,
RETURN AND YIELD OF A FUND THAT
INVESTS IN BONDS WILL VARY. THAT
MEANS IF YOU SELL YOUR SHARES
DURING A MARKET DOWNTURN, YOU
MIGHT LOSE MONEY. BUT IF YOU CAN
RIDE OUT THE MARKET'S UPS AND
DOWNS, YOU MAY HAVE A GAIN.
(CHECKMARK)
TOTAL RETURN COMPONENTS
SIX MONTHS MARCH 3, 1997
ENDED (COMMENCEMENT OF
APRIL 30, SALE OF CLASS B
SHARES) TO
OCTOBER 31,
1998 1997
DIVIDEND RETURN 2.62% 3.66%
CAPITAL RETURN 0.18% 2.52%
TOTAL RETURN 2.80% 6.18%
TOTAL RETURN COMPONENTS include both dividend returns and capital
returns. A dividend return reflects the actual dividends paid by the
class. A capital 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 APRIL 30, 1998 PAST 1 PAST 6 PAST 1
MONTH MONTHS YEAR
DIVIDENDS PER SHARE 4.67(CENTS) 28.50(CENTS) 57.64(CENTS)
ANNUALIZED DIVIDEND RATE 5.17% 5.22% 5.25%
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 $11.00 over the past one month, $11.02 over the past six months,
and $10.97 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. Yield information will be reported once Class B has a longer,
more stable operating history.
FUND TALK: THE MANAGER'S OVERVIEW
MARKET RECAP
A continued lack of inflationary
pressure resulted in a relatively
favorable investing climate for
bonds during the six months that
ended April 30, 1998. The Lehman
Brothers Aggregate Bond Index -
a broad gauge of the U.S. taxable
investment-grade bond market -
returned 3.59% during this period.
Global volatility and historically low
interest rates were the main stories
in late 1997. As financial problems
in Asia came to a head, wary stock
investors sought investments offering
lower volatility - helping the U.S.
bond market. The Lehman Brothers
Corporate Bond Index returned
3.83% for the six months. Corporate
bonds benefited from continued
economic growth and demand for
yield, although they faltered
somewhat in January 1998 when
investors feared a slowdown in
demand in Asia would eat into
corporate earnings.
Mortgage-backed bonds performed
well during the period, even though
lower interest rates resulted in more
mortgage prepayment activity in
early 1998. The Lehman Brothers
Mortgage-Backed Securities Index
generated a six-month return of
3.48%. High-yield and
emerging-market issues performed
very well during the first four months
of 1998. The period ended on a
positive note for the bond market as
the Commerce Department reported
that gross domestic product grew at
a stronger-than-expected rate of
4.2% in the first quarter of 1998 and
employment costs grew at a
slower-than-expected pace - signs of
continued strong economic growth
and benign inflation. However, the
Federal Reserve Board tempered this
news slightly with warnings about
the rising prices of stocks and real
estate.
An interview with Thomas Silvia, Portfolio Manager of Fidelity Advisor
Mortgage Securities Fund
Q. HOW DID THE FUND PERFORM, TOM?
A. For the six-month period that ended April 30, 1998, the fund's
Class A, Class T and Class B shares returned 3.14%, 3.13% and 2.80%,
respectively. These returns compare with the 2.99% return of the U.S.
mortgage funds average tracked by Lipper Analytical Services, and the
3.48% return for the Lehman Brothers Mortgage-Backed Securities Index.
For the 12-month period that ended April 30, the fund's Class A, Class
T and Class B shares returned 9.38%, 9.33% and 8.61%, respectively,
versus 9.06% for the Lipper average and 10.02% for the Lehman index.
Q. WHAT WAS THE MORTGAGE MARKET LIKE DURING THE PAST SIX MONTHS?
A. The market was surprisingly strong during the period. U.S. Treasury
securities began to rally sharply in November, spurred by low
inflation in the United States and strong demand by foreigners for
U.S. dollar assets. The economy grew at an annualized rate of 4.8% in
the first quarter of 1998, and consumer spending soared, yet inflation
recorded its smallest increase since 1964. Investors took the rapid
economic growth in stride, counting on the negative trade effects of
the Asian slump to offset any price increases. As bond prices were bid
higher, the yield on the 10-year Treasury dropped to 5.35% from 6.00%
at the start of the period. Usually, when Treasuries are this strong
mortgage-backed securities suffer due to prepayment concerns. To
explain, as interest rates fall, many homeowners refinance their
mortgages, returning the principal to mortgage investors. In addition
to disrupting an investor's income stream, this prepayment of
principal forces the investor to reinvest at lower prevailing rates.
In January, mortgage refinancing reached an all-time high, as measured
by the Mortgage Bankers Refinancing Index. But investors did not
abandon mortgages. Many, seeking the relatively higher yields offered
by these securities, simply reinvested their prepaid principal,
keeping demand for mortgages strong.
Q. DID YOU LIMIT THE FUND'S EXPOSURE TO BONDS THAT WERE VULNERABLE TO
PREPAYMENT?
A. Avoiding prepayments was the focus of my investment strategy
throughout the period. First, I overweighted the fund's holdings of
commercial mortgage-backed securities (CMBS). Unlike other mortgages,
CMBS issues have the advantage of prepayment protection. For example,
some loans have provisions that prohibit prepayment within the first
five years. In November, with the Asian crisis in full bloom, CMBS
issues underperformed in line with corporate bonds because investors
feared a significant slowdown in Asia would heighten credit risk in
the United States. I took the opportunity to increase the fund's
position in these securities at depressed prices, and they helped fund
performance when prepayment risk increased in other segments of the
mortgage market. The second prong of my strategy was to underweight
(relative to the index) exposure to securities with the highest risk
of prepayment. That included Fannie Mae and Freddie Mac bonds with
coupons - stated yields at issuance - ranging from 7.5% to 8.5%.
Outside this range, I traded Freddie Mac and Fannie Mae 30-year issues
for 15-year bonds, given that homeowners with 30-year mortgages are
more likely to refinance than those with mortgages of shorter
duration. Finally, I reconfigured the fund's Ginnie Mae holdings.
Purchases were concentrated in new issues, since a homeowner is less
likely to refinance a brand new mortgage; and old issues, where
homeowners have passed over previous opportunities to refinance and
thus are not likely to refinance now.
Q. WHAT ROLE DOES THE LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX
PLAY IN THE MANAGEMENT OF THE FUND?
A. It plays a very important role. It's the fund's benchmark index and
represents the universe of agency fixed-rate mortgage-backed
securities. I use the index as a starting point for my investment
decisions, managing the fund to be generally as sensitive to changes
in interest rates as the index. In addition, I refer to the index when
deciding how to allocate assets among different maturities and
segments of the mortgage market, based on my view of the relative
value of each maturity or segment.
Q. WERE THERE ANY DISAPPOINTMENTS DURING THE PERIOD?
A. The only disappointment was that there wasn't more price
volatility. The fund is managed with a value focus, benefiting from
occasional dips in the market. An uninterrupted ascent in the bond
market during the period left little room for opportunities to buy
mispriced or overlooked securities.
Q. WHAT'S YOUR OUTLOOK?
A. As long as there is the potential for lower interest rates,
prepayment will continue to be a risk for mortgage investors. I intend
to remain on the defensive until there is a clear change in the
economic landscape or until the Federal Reserve Board signals a
favorable shift in monetary policy. Also, I expect to continue to look
for better-yielding opportunities in the CMBS market and elsewhere.
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:
"CREATED IN THE 1980S,
MORTGAGE-BACKED SECURITIES HAVE
BECOME AN IMPORTANT INVESTMENT
FOR ALL FIXED-INCOME INVESTORS.
ISSUERS OF MORTGAGE-BACKED
SECURITIES CREATE A POOL OF
MORTGAGES AND THEN SELL A SECURITY
BASED ON THAT POOL TO INVESTORS.
GINNIE MAES REPRESENT SHARES IN
POOLS OF MORTGAGES ISSUED IN
ACCORDANCE WITH GUIDELINES SET BY
THE FEDERAL HOUSING ADMINISTRATION
OR THE VETERANS ADMINISTRATION, AND
INSURED BY THE GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION. GINNIE MAES
ARE THE ONLY MORTGAGE-RELATED
SECURITIES BACKED BY THE FULL FAITH
AND CREDIT OF THE U.S. GOVERNMENT.
"THE FEDERAL NATIONAL MORTGAGE
ASSOCIATION (FANNIE MAE) AND
FEDERAL HOME LOAN MORTGAGE
CORPORATION (FREDDIE MAC) PACKAGE
POOLS OF MORTGAGES ISSUED BY PRIVATE
LENDERS AND USUALLY INCORPORATE
SOME FORM OF PRIVATE MORTGAGE
INSURANCE. UNLIKE GINNIE MAES, THEY
LACK THE FULL FAITH AND CREDIT BACKING
OF THE U.S. GOVERNMENT.
"INVESTING IN MORTGAGES IS MADE
MORE COMPLEX BY A 30-YEAR
AMORTIZATION SCHEDULE, THE
UNPREDICTABILITY OF CASH FLOW AND BY
MONTHLY RATHER THAN SEMIANNUAL
PAYMENTS OF PRINCIPAL AND INTEREST.
FOR EXAMPLE, WHEN HOMEOWNERS PAY
DOWN THEIR MORTGAGES AHEAD OF
SCHEDULE OR REFINANCE AT LOWER RATES,
THOSE PAYMENTS OF PRINCIPAL ARE
RETURNED TO INVESTORS, WHO MUST
REINVEST THE PROCEEDS AT PREVAILING
INTEREST RATES. "
FUND FACTS
GOAL: HIGH CURRENT INCOME BY
INVESTING IN MORTGAGE-RELATED
SECURITIES OF ALL KINDS
START DATE: DECEMBER 31, 1984
SIZE: AS OF APRIL 30, 1998,
MORE THAN $505 MILLION
MANAGER: THOMAS SILVIA, SINCE
1997; JOINED FIDELITY IN 1993
(CHECKMARK)
INVESTMENT CHANGES
COUPON DISTRIBUTION AS OF APRIL 30, 1998
% OF FUND'S % OF FUND'S INVESTMENTS
INVESTMENTS 6 MONTHS AGO
LESS THAN 0.7 0.9
6%
6 - 25.1 31.7
6.99%
7 - 41.7 43.4
7.99%
8 - 11.6 9.0
8.99%
9 - 6.3 7.2
9.99%
10 - 3.0 3.8
10.99%
11% AND 2.1 2.6
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 APRIL 30, 1998
6 MONTHS AGO
YEARS 5.3 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 APRIL 30, 1998
6 MONTHS AGO
YEARS 2.8 2.8
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 APRIL 30, 1998 AS OF OCTOBER 31, 1997
ROW: 1, COL: 1, VALUE: 9.5
ROW: 1, COL: 2, VALUE: 18.0
ROW: 1, COL: 3, VALUE: 72.5
ROW: 1, COL: 1, VALUE: 2.0
ROW: 1, COL: 2, VALUE: 7.0
ROW: 1, COL: 3, VALUE: 91.0
MORTGAGE-BACKED
SECURITIES 72.5%
CMOS AND
OTHER MORTGAGE
RELATED SECURITIES 18.0%
SHORT-TERM
INVESTMENTS 9.5%
MORTGAGE-BACKED
SECURITIES 91.7%
CMOS AND
OTHER MORTGAGE
RELATED SECURITIES 6.9%
SHORT-TERM
INVESTMENTS 1.4%
INVESTMENTS APRIL 30, 1998 (UNAUDITED)
SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENT IN SECURITIES
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 72.5%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
FANNIE MAE - 20.3%
6%, 4/1/00 to 5/1/26 $ 33,883,750 $ 33,417,319
6 1/2%, 9/1/10 to 8/1/24 10,792,885 10,863,912
7%, 2/1/24 to 5/1/28 (c) 41,608,414 42,075,115
7 1/2%, 3/1/22 to 12/1/22 3,059,389 3,146,531
8%, 1/1/07 to 7/1/08 100,679 103,349
8 1/4%, 1/1/13 112,081 116,794
8 1/2%, 11/1/03 to 11/1/18 2,834,656 2,970,321
8 3/4%, 11/1/08 to 7/1/09 214,959 224,502
9%, 1/1/08 to 2/1/13 816,512 859,828
9 1/2%, 5/1/03 to 8/1/22 10,462,129 11,020,301
11%, 12/1/02 to 8/1/10 2,224,562 2,439,069
12 1/4%, 5/1/13 to 6/1/15 465,765 539,713
12 1/2%, 5/1/14 to 3/1/16 616,184 717,626
12 3/4%, 6/1/13 to 7/1/15 349,287 410,104
13 1/2%, 9/1/13 to 12/1/14 187,194 225,557
14%, 11/1/14 42,790 52,004
109,182,045
FREDDIE MAC - 26.7%
5%, 7/1/10 3,639,119 3,463,986
6 1/2%, 1/1/24 to 7/1/24 28,352,919 28,240,987
7%, 5/1/99 to 12/1/12 55,430,365 56,489,310
7 1/2%, 2/1/28 to 3/1/28 31,891,349 32,698,519
8%, 10/1/07 to 4/1/21 1,179,129 1,232,387
8 1/2%, 7/1/09 to 1/1/20 2,744,468 2,891,742
9%, 9/1/08 to 5/1/21 9,992,208 10,660,993
10%, 11/1/03 to 5/1/19 1,992,781 2,156,650
10 1/2%, 8/1/10 to 12/1/20 2,239,131 2,494,117
11 1/2%, 4/1/12 86,075 95,840
11 3/4%, 6/1/11 68,151 77,869
12 1/4%, 6/1/14 to 7/1/15 205,271 239,572
12 1/2%, 5/1/12 to 4/1/15 1,034,426 1,202,582
12 3/4%, 6/1/05 to 3/1/15 181,015 205,317
13%, 1/1/11 to 6/1/15 1,649,401 1,959,715
144,109,586
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 25.5%
7 1/2%, 7/15/05 to 2/15/28 54,984,627 56,519,194
8%, 4/15/02 to 2/15/28 51,266,885 53,185,846
8 1/2%, 7/15/16 to 6/15/18 1,646,015 1,759,463
9%, 10/15/04 to 4/15/18 5,110,275 5,485,923
9 1/2%, 6/15/09 to 12/15/24 5,360,212 5,797,301
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - CONTINUED
10%, 1/15/18 to 1/15/26 $ 9,495,440 $ 10,507,473
10 1/2%, 6/15/98 to 2/15/18 1,113,023 1,213,966
11%, 1/15/10 to 9/15/19 2,458,070 2,779,737
11 1/2%, 10/15/10 to 7/15/18 86,583 98,232
13%, 10/15/13 103,008 121,839
13 1/2%, 7/15/11 to 10/15/14 88,569 105,786
137,574,760
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $385,963,779) 390,866,391
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.0%
U.S. GOVERNMENT AGENCY - 0.0%
Freddie Mac sequential pay
Series1353 Class A, 5 1/2%, 11/15/04
(cost $65,110) 69,881 69,597
COMMERCIAL MORTGAGE SECURITIES - 18.0%
Bankers Trust Remic Trust 1988-1 floater Series 1998-S1A
Class D, 6.54%, 11/28/02 (a)(b) 3,890,000 3,874,805
CBM Funding Corp. sequential pay Series 1996-1
Class A-3PI, 7.08%, 11/1/07 2,300,000 2,377,266
CS First Boston Mortgage Securities Corp. Series 1997-C2
Class D, 7.27%, 4/17/11 1,850,000 1,857,227
Deutsche Mortgage and Asset Receiving Corp.
Series 1998-C1 Class D, 7.231%, 7/15/12 10,200,000 10,180,875
Federal Deposit Insurance Corp. sequential pay
Series 1996-C1 Class 1A, 6 3/4%, 5/25/26 8,188,946 8,201,475
General Motors Acceptance Corp. Commercial Mortgage
Securities, Inc. Series 1997-C2 Class E,
7.624%, 4/15/11 1,600,000 1,619,072
Nomura Asset Securities Corp. Series 1998-D6
Class A-4, 7.35%, 3/15/30 (b) 15,000,000 15,014,063
Nomura Depositor Trust floater Series 1998-ST1A :
Class A-4, 6.53%, 1/15/03 (a)(b) 7,900,000 7,917,281
Class A-5, 6.87%, 1/15/03 (a)(b) 5,278,196 5,288,093
COMMERCIAL MORTGAGE SECURITIES - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
Structured Asset Securities Corp.:
commercial Series 1992-M1 Class C, 7.05%, 11/25/02 $ 3,192,522 $
3,025,912
floater Series 1997-C1 Class C, 6.60%, 7/25/00 (a)(b) 15,610,888
15,606,009
Series 1997-NI Class C, 6.055%, 9/25/28 (a) 3,553,497 3,552,387
Thirteen Affiliates of General Growth Properties, Inc.
Series 1 Class D-1, 6.917%, 11/15/04 (a) 18,200,000 18,167,604
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $95,943,674) 96,682,069
CERTIFICATES OF DEPOSIT - 8.4%
Sanwa Bank Ltd. Japan yankee 5.71%, 5/29/98 25,000,000 24,998,283
Sumitomo Bank Ltd. Japan yankee 5.71%, 5/18/98 20,000,000 19,999,070
TOTAL CERTIFICATES OF DEPOSIT
(Cost $45,000,000) 44,997,353
CASH EQUIVALENTS - 1.1%
MATURITY
AMOUNT
Investments in repurchase agreements (U.S. Treasury
obligations), in a joint trading account at 5 1/2%,
dated 4/30/98 due 5/1/98 $ 6,154,939 6,154,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $533,126,563) $ 538,769,410
LEGEND
(a) 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
$54,406,179 or 10.8% of net assets.
(b) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(c) A portion of the security was purchased on a delayed delivery or
when-issued basis (see Note 2 of Notes to Financial Statements).
INCOME TAX INFORMATION
At April 30, 1998, the aggregate cost of investment securities for
income tax purposes was $533,194,047. Net unrealized appreciation
aggregated $5,575,363, of which $7,156,070 related to appreciated
investment securities and $1,580,707 related to depreciated investment
securities.
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1998 (UNAUDITED)
ASSETS
INVESTMENT IN SECURITIES, AT VALUE (INCLUDING REPURCHASE $ 538,769,410
AGREEMENTS OF $6,154,000) (COST $533,126,563) - SEE
ACCOMPANYING SCHEDULE
CASH 2,909
RECEIVABLE FOR INVESTMENTS SOLD 23,383,991
RECEIVABLE FOR FUND SHARES SOLD 574,591
INTEREST RECEIVABLE 2,954,792
TOTAL ASSETS 565,685,693
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 39,859,866
REGULAR DELIVERY
DELAYED DELIVERY 19,268,521
PAYABLE FOR FUND SHARES REDEEMED 320,472
DISTRIBUTIONS PAYABLE 382,390
ACCRUED MANAGEMENT FEE 171,284
DISTRIBUTION FEES PAYABLE 5,088
OTHER PAYABLES AND ACCRUED EXPENSES 187,928
TOTAL LIABILITIES 60,195,549
NET ASSETS $ 505,490,144
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 492,840,841
UNDISTRIBUTED NET INVESTMENT INCOME 1,014,386
ACCUMULATED UNDISTRIBUTED NET REALIZED 5,992,070
GAIN (LOSS) ON INVESTMENTS
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 5,642,847
NET ASSETS $ 505,490,144
</TABLE>
STATEMENT OF ASSETS AND LIABILITIES - CONTINUED
APRIL 30, 1998 (UNAUDITED)
CALCULATION OF MAXIMUM OFFERING PRICE $11.01
CLASS A:
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($559,031 (DIVIDED BY) 50,778 SHARES)
MAXIMUM OFFERING PRICE PER SHARE (100/95.25 OF $11.01) $11.56
CLASS T: $11.01
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($12,719,495 (DIVIDED BY) 1,155,074 SHARES)
MAXIMUM OFFERING PRICE PER SHARE (100/96.50 OF $11.01) $11.41
CLASS B: $11.01
NET ASSET VALUE AND OFFERING PRICE PER SHARE
($3,920,411 (DIVIDED BY) 356,203 SHARES) A
INITIAL CLASS: $11.02
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER
SHARE ($466,438,664 (DIVIDED BY) 42,326,197 SHARES)
INSTITUTIONAL CLASS: $11.00
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER
SHARE ($21,852,543 (DIVIDED BY) 1,986,173 SHARES)
A REDEMPTION PRICE PER SHARE IS EQUAL TO NET ASSET VALUE LESS ANY
APPLICABLE CONTINGENT DEFERRED SALES CHARGE.
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 1998 (UNAUDITED)
INVESTMENT INCOME $ 18,182,971
INTEREST
EXPENSES
MANAGEMENT FEE $ 1,126,273
TRANSFER AGENT FEES 512,973
DISTRIBUTION FEES 27,655
ACCOUNTING FEES AND EXPENSES 103,672
NON-INTERESTED TRUSTEES' COMPENSATION 5,862
CUSTODIAN FEES AND EXPENSES 55,136
REGISTRATION FEES 93,291
AUDIT 43,841
LEGAL 14,306
MISCELLANEOUS 2,547
TOTAL EXPENSES BEFORE REDUCTIONS 1,985,556
EXPENSE REDUCTIONS (105,519) 1,880,037
NET INVESTMENT INCOME 16,302,934
REALIZED AND UNREALIZED GAIN (LOSS) 6,657,378
NET REALIZED GAIN (LOSS) ON INVESTMENT SECURITIES
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON (6,160,268)
INVESTMENT SECURITIES
NET GAIN (LOSS) 497,110
NET INCREASE (DECREASE) IN NET ASSETS RESULTING $ 16,800,044
FROM OPERATIONS
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED THREE MONTHS YEAR ENDED
APRIL 30, 1998 ENDED JULY 31,
(UNAUDITED) OCTOBER 31, 1997 1997
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS $ 16,302,934 $ 8,459,090 $ 32,193,238
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 6,657,378 1,110,586 4,296,274
CHANGE IN NET UNREALIZED (6,160,268) 1,347,376 14,164,021
APPRECIATION (DEPRECIATION)
NET INCREASE (DECREASE) IN NET ASSETS 16,800,044 10,917,052 50,653,533
RESULTING FROM OPERATIONS
DISTRIBUTIONS TO SHAREHOLDERS (15,577,043) (8,349,402) (32,649,725)
FROM NET INVESTMENT INCOME
FROM NET REALIZED GAIN (1,430,037) (3,850,848) (5,039,533)
TOTAL DISTRIBUTIONS (17,007,080) (12,200,250) (37,689,258)
SHARE TRANSACTIONS - NET (26,208,431) (703,316) 32,765,543
INCREASE (DECREASE)
TOTAL INCREASE (DECREASE) IN (26,415,467) (1,986,514) 45,729,818
NET ASSETS
NET ASSETS
BEGINNING OF PERIOD 531,905,611 533,892,125 488,162,307
END OF PERIOD (INCLUDING UNDISTRIBUTED $ 505,490,144 $ 531,905,611 $ 533,892,125
NET INVESTMENT INCOME OF
$1,014,386, $290,731 AND
$230,506, RESPECTIVELY)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FINANCIAL HIGHLIGHTS - CLASS A
SIX MONTHS THREE MONTHS YEAR ENDED
ENDED ENDED JULY 31,
APRIL 30, 1998 OCTOBER 31,
(UNAUDITED) 1997 1997 E
SELECTED PER-SHARE DATA
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.020 $ 11.050 $ 10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME F .339 .170 .268
NET REALIZED AND UNREALIZED GAIN (LOSS) .002 .048 .224
TOTAL FROM INVESTMENT OPERATIONS .341 .218 .492
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.321) (.168) (.272)
FROM NET REALIZED GAIN (.030) (.080) -
TOTAL DISTRIBUTIONS (.351) (.248) (.272)
NET ASSET VALUE, END OF PERIOD $ 11.010 $ 11.020 $ 11.050
TOTAL RETURN B, C 3.14% 2.00% 4.61%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 559 $ 1,648 $ 1,586
RATIO OF EXPENSES TO AVERAGE NET ASSETS .90% A, D .90% A, D .90% A, D
RATIO OF NET INTEREST INCOME TO AVERAGE NET ASSETS 5.92% A 6.18% A 6.09% A
PORTFOLIO TURNOVER RATE 247% A 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 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FINANCIAL HIGHLIGHTS - CLASS T
SIX MONTHS THREE MONTHS YEAR ENDED
ENDED ENDED JULY 31,
APRIL 30, 1998 OCTOBER 31,
(UNAUDITED) 1997 1997 E
SELECTED PER-SHARE DATA
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.020 $ 11.050 $ 10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME F .333 .167 .255
NET REALIZED AND UNREALIZED GAIN (LOSS) .008 .048 .233
TOTAL FROM INVESTMENT OPERATIONS .341 .215 .488
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.321) (.165) (.268)
FROM NET REALIZED GAIN (.030) (.080) -
TOTAL DISTRIBUTIONS (.351) (.245) (.268)
NET ASSET VALUE, END OF PERIOD $ 11.010 $ 11.020 $ 11.050
TOTAL RETURN B, C 3.13% 1.98% 4.57%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 12,719 $ 14,649 $ 12,193
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.00% A, D 1.00% A, D 1.00% A, D
RATIO OF NET INTEREST INCOME TO AVERAGE NET ASSETS 6.08% A 6.10% A 5.99% A
PORTFOLIO TURNOVER RATE 247% A 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 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FINANCIAL HIGHLIGHTS - CLASS B
SIX MONTHS THREE MONTHS YEAR ENDED
ENDED ENDED JULY 31,
APRIL 30, 1998 OCTOBER 31,
(UNAUDITED) 1997 1997 E
SELECTED PER-SHARE DATA
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.020 $ 11.040 $ 10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME F .293 .142 .234
NET REALIZED AND UNREALIZED GAIN (LOSS) .012 .065 .214
TOTAL FROM INVESTMENT OPERATIONS .305 .207 .448
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.285) (.147) (.238)
FROM NET REALIZED GAIN (.030) (.080) -
TOTAL DISTRIBUTIONS (.315) (.227) (.238)
NET ASSET VALUE, END OF PERIOD $ 11.010 $ 11.020 $ 11.040
TOTAL RETURN B, C 2.80% 1.90% 4.20%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 3,920 $ 1,587 $ 823
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.65% A, D 1.65% A, D 1.65% A, D
RATIO OF NET INTEREST INCOME TO AVERAGE NET ASSETS 5.46% A 5.32% A 5.34% A
PORTFOLIO TURNOVER RATE 247% A 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 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL HIGHLIGHTS - INITIAL CLASS SIX MONTHS ENDED THREE MONTHS YEARS ENDED JULY 31,
APRIL 30, 1998 ENDED
(UNAUDITED) OCTOBER 31,
1997
1997 1996 1995 1994 1993
SELECTED PER-SHARE DATA
NET ASSET VALUE,
BEGINNING OF PERIOD $11.020 $11.050 $10.780 $10.890 $10.580 $10.910 $10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .349 D .176 D .678 D .729 .772 .570 .788
NET REALIZED AND UNREALIZED
GAIN (LOSS) .017 .047 .391 (.015) .325 (.242) (.007)
TOTAL FROM INVESTMENT OPERATIONS .366 .223 1.069 .714 1.097 .328 .781
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.336) (.173) (.689) (.724) (.737) (.588) (.701)
FROM NET REALIZED GAIN (.030) (.080) (.110) (.100) - (.040) -
IN EXCESS OF NET REALIZED GAIN - - - - (.050) (.030) -
TOTAL DISTRIBUTIONS (.366) (.253) (.799) (.824) (.787) (.658) (.701)
NET ASSET VALUE, END OF PERIOD $11.020 $11.020 $11.050 $10.780 $10.890 $10.580 $10.910
TOTAL RETURN B, C 3.37% 2.05% 10.34% 6.72% 10.88% 3.13% 7.47%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD
(000 OMITTED) $466,439 $494,304 $506,113 $488,162 $416,241 $365,801 $419,467
RATIO OF EXPENSES TO AVERAGE
NET ASSETS .72% A .72% A .73% .74% .77% .79% .76%
RATIO OF EXPENSES TO AVERAGE NET
ASSETS AFTER .72% A .72% A .73% .73% E .77% .79% .76%
EXPENSE REDUCTIONS
RATIO OF NET INTEREST INCOME TO
AVERAGE NET ASSETS 6.38% A 6.36% A 6.26% 6.75% 7.37% 6.73% 7.18%
PORTFOLIO TURNOVER RATE 247% A 125% A 149% 221% 329% 563% 278%
</TABLE>
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN.
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
E FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FINANCIAL HIGHLIGHTS - INSTITUTIONAL CLASS
SIX MONTHS THREE MONTHS YEAR ENDED
ENDED ENDED JULY 31,
APRIL 30, 1998 OCTOBER 31,
(UNAUDITED) 1997 1997 F
SELECTED PER-SHARE DATA
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.010 $ 11.040 $ 10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME G .347 .172 .263
NET REALIZED AND UNREALIZED GAIN (LOSS) .008 .050 .226
TOTAL FROM INVESTMENT OPERATIONS .355 .222 .489
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.335) (.172) (.279)
FROM NET REALIZED GAIN (.030) (.080) -
TOTAL DISTRIBUTIONS (.365) (.252) (.279)
NET ASSET VALUE, END OF PERIOD $ 11.000 $ 11.010 $ 11.040
TOTAL RETURN B, C 3.26% 2.05% 4.59%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 21,853 $ 19,718 $ 13,177
RATIO OF EXPENSES TO AVERAGE NET ASSETS .75% A, D .75% A, D .75% A, D
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER EXPENSE .75% A .75% A .70% A, E
REDUCTIONS
RATIO OF NET INTEREST INCOME TO AVERAGE NET ASSETS 6.36% A 6.35% A 6.29% A
PORTFOLIO TURNOVER RATE 247% A 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 April 30, 1998 (Unaudited)
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 require management to
make certain estimates and assumptions at the date of the financial
statements. The following summarizes the significant accounting
policies of the fund:
SECURITY VALUATION. Securities are valued based upon a computerized
matrix system and/or appraisals by a pricing service, both of which
consider market transactions and dealer-supplied valuations.
Securities (including restricted securities) for which 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
among the funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are declared daily and
paid monthly from net investment income. Distributions from realized
gains, if any, are recorded on the ex-dividend date. Income dividends
and capital gain distributions are declared separately for each class.
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
DISTRIBUTIONS TO SHAREHOLDERS - CONTINUED
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.
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 market value of the securities purchased or sold on a
delayed delivery basis are identified as such in the fund's schedule
of investments. The fund may receive compensation for interest forgone
in the purchase of a delayed delivery security. With respect to
purchase commitments, the fund identifies securities as segregated in
its custodial records with a value at least equal to the amount of the
commitment. Losses may arise due to changes in the market value of the
underlying securities or if the counterparty does not perform under
the contract.
2. OPERATING POLICIES - CONTINUED
RESTRICTED SECURITIES. The fund is permitted to invest in securities
that are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from
registration or to the public if the securities are registered.
Disposal of these securities may involve time-consuming negotiations
and expense, and prompt sale at an acceptable price may be difficult.
At the end of the period, the fund had no investments in restricted
securities (excluding 144A issues).
3. PURCHASES AND SALES OF INVESTMENTS.
Purchases and sales of securities, other than short-term securities,
aggregated $659,530,789 and $622,974,699, respectively, of which U.S.
government and government agency obligations aggregated $514,530,789
and $522,912,224, 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 period, the management
fee was equivalent to an annualized rate of .44% 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
Distributors Corporation (FDC), an affiliate of FMR, a distribution
and service fee. For the period, this fee was 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.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
DISTRIBUTION AND SERVICE PLAN - CONTINUED
For the period, 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:
PAID TO PAID TO RETAINED BY
FDC INVESTMENT FDC
PROFESSIONALS
CLASS A $ 610 $ 610 $ 0
CLASS T 16,131 7,974 8,157
CLASS B 10,914 3,031 7,883
$ 27,655 $ 11,615 $ 16,040
Under the Plans, FMR 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. For the
period, the following amounts were paid to third parties under the
Plans:
CLASS A $77
CLASS T 4,857
CLASS B 289
SALES LOAD. FDC receives a front-end sales charge of up to 4.75% for
selling Class A shares, and 3.50% for selling Class T shares of the
fund. FDC receives the proceeds of contingent deferred sales charges
levied on Class B share redemptions occurring within six years of
purchase. The Class B charge is based on declining rates ranging from
5% to 1% 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. In addition, purchases of
Class A and Class T shares that were subject to a finder's fee bear a
contingent deferred sales charge on assets that do not remain in the
fund for at least one year. The Class A and Class T contingent
deferred sales charge is based on 0.25% 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:
PAID TO PAID TO
FDC INVESTMENT
PROFESSIONALS
CLASS A $ 5,423 $ 2,979
CLASS T 12,967 8,878
CLASS B 1,849 0 *
$ 20,239 $ 11,857
* 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. Fidelity Investments Institutional Operations
Company, Inc., (FIIOC), an affiliate of FMR, is the transfer, dividend
disbursing and shareholder servicing agent (collectively referred to
as the transfer agent) for the fund's Class A, Class T, Class B and
Institutional Class. Fidelity Service Company, Inc. (FSC), an
affiliate of FMR, is the transfer agent for the Initial Class. FIIOC
and FSC pay for typesetting, printing and mailing of all shareholder
reports, except proxy statements. For the period, the following
amounts were paid to FIIOC or FSC:
AMOUNT % OF
AVERAGE
NET ASSETS *
CLASS A $ 3,047 .75
CLASS T 29,850 .47
CLASS B 3,985 .33
INITIAL CLASS 452,315 .19
INSTITUTIONAL CLASS 23,776 .24
$ 512,973
* ANNUALIZED.
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 of the following classes:
FMR REIMBURSEMENT
EXPENSE
LIMITATIONS
CLASS A .90% $ 22,120
CLASS T 1.00% 35,631
CLASS B 1.65% 21,668
INSTITUTIONAL CLASS .75% 23,375
$ 102,794
In addition, the fund has entered into an arrangement 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 period, the fund's custodian fees were reduced by
$2,725 under the custodian arrangement.
6. DISTRIBUTIONS TO SHAREHOLDERS.
Distributions to shareholders of each class were as follows:
SIX MONTHS THREE MONTHS YEAR ENDED
ENDED ENDED JULY 31,
APRIL 30, OCTOBER 31,
1998 1997 1997 A
FROM NET INVESTMENT INCOME
CLASS A $ 23,189 $ 24,437 $ 21,750
CLASS T 376,301 197,984 64,445
CLASS B 62,661 15,690 8,241
INITIAL CLASS 14,507,792 7,870,955 32,474,399
INSTITUTIONAL CLASS 607,100 240,336 80,890
TOTAL $ 15,577,043 $ 8,349,402 $ 32,649,725
FROM NET REALIZED GAIN
CLASS A $ 4,543 $ 11,558 $ -
CLASS T 41,650 92,775 -
CLASS B 4,901 7,487 -
INITIAL CLASS 1,324,784 3,640,130 5,039,533
INSTITUTIONAL CLASS 54,159 98,898 -
TOTAL $ 1,430,037 $ 3,850,848 $ 5,039,533
TOTAL $ 17,007,080 $ 12,200,250 $ 37,689,258
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
SIX MONTHS THREE YEAR ENDED SIX MONTHS THREE MONTHS YEAR ENDED
ENDED MONTHS JULY 31, ENDED ENDED JULY 31,
APRIL 30, ENDED APRIL 30, OCTOBER 31,
OCTOBER 31,
1998 1997 1997 A 1998 1997 1997 A
CLASS A 71,138 3,210 141,575 $ 784,521 $ 35,261 $ 1,531,983
SHARES SOLD
REINVESTMENT OF 1,704 3,274 1,989 18,762 35,846 21,750
DISTRIBUTIONS
SHARES (171,581) (531) - (1,888,469) (5,834) -
REDEEMED
NET INCREASE (98,739) 5,953 143,564 $ (1,085,186) $ 65,273 $ 1,553,733
(DECREASE)
CLASS T 412,180 312,588 1,114,285 $ 4,538,134 $ 3,429,256 $ 12,183,453
SHARES SOLD
REINVESTMENT OF 34,980 25,415 5,597 385,401 278,358 61,712
DISTRIBUTIONS
SHARES (621,235) (112,534) (16,202) (6,853,036) (1,233,884) (177,848)
REDEEMED
NET INCREASE (174,075) 225,469 1,103,680 $ (1,929,501) $ 2,473,730 $ 12,067,317
(DECREASE)
CLASS B 230,699 68,692 73,891 $ 2,540,972 $ 753,079 $ 801,025
SHARES SOLD
REINVESTMENT OF 4,918 1,666 687 54,167 18,237 7,506
DISTRIBUTIONS
SHARES (23,460) (890) - (258,281) (9,750) -
REDEEMED
NET INCREASE 212,157 69,468 74,578 $ 2,336,858 $ 761,566 $ 808,531
(DECREASE)
INITIAL CLASS 2,815,520 1,426,619 14,636,021 $ 31,047,102 $ 15,655,743 $ 158,564,289
SHARES SOLD
REINVESTMENT OF 1,181,041 854,187 2,769,613 13,016,826 9,354,223 29,925,102
DISTRIBUTIONS
SHARES (6,506,507) (3,241,358) (16,911,618) (71,738,410) (35,550,337) (183,183,589)
REDEEMED
NET INCREASE (2,509,946) (960,552) 494,016 $ (27,674,482) $ (10,540,371) $ 5,305,802
(DECREASE)
INSTITUTIONAL 678,393 671,412 1,216,421 $ 7,466,253 $ 7,350,245 $ 13,282,379
CLASS
SHARES SOLD
REINVESTMENT OF 29,739 11,919 3,516 327,334 130,486 38,560
DISTRIBUTIONS
SHARES (512,714) (86,048) (26,465) (5,649,707) (944,245) (290,779)
REDEEMED
NET INCREASE 195,418 597,283 1,193,472 $ 2,143,880 $ 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 period, each class paid the following amounts to register its
shares for sale:
REGISTRATION
FEES
CLASS A $ 20,096
CLASS T 20,109
CLASS B 20,139
INITIAL CLASS 11,553
INSTITUTIONAL CLASS 21,394
$ 93,291
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
Eric D. Roiter, 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
Fidelity Advisor 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
MONEY MARKET FUNDS
Prime Fund
Treasury Fund
Tax-Exempt Fund
(REGISTERED TRADEMARK)
(2_FIDELITY_LOGOS)FIDELITY ADVISOR
(REGISTERED TRADEMARK)
MORTGAGE SECURITIES
FUND - INSTITUTIONAL CLASS
SEMIANNUAL REPORT
APRIL 30, 1998
CONTENTS
PRESIDENT'S MESSAGE 3 NED JOHNSON ON INVESTING STRATEGIES.
PERFORMANCE 4 HOW THE FUND HAS DONE OVER TIME.
FUND TALK 7 THE MANAGER'S REVIEW OF FUND
PERFORMANCE, STRATEGY AND OUTLOOK.
INVESTMENT CHANGES 10 A SUMMARY OF MAJOR SHIFTS IN THE FUND'S
INVESTMENTS OVER THE PAST SIX MONTHS.
INVESTMENTS 11 A COMPLETE LIST OF THE FUND'S INVESTMENTS
WITH THEIR MARKET VALUES.
FINANCIAL STATEMENTS 14 STATEMENTS OF ASSETS AND LIABILITIES,
OPERATIONS, AND CHANGES IN NET ASSETS,
AS WELL AS FINANCIAL HIGHLIGHTS.
NOTES 23 NOTES TO FINANCIAL STATEMENTS.
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:
Low interest rates and subdued inflation were two main factors that
bolstered stock and bond markets in the U.S. during the first four
months of 1998. The stock market continued to soar to record heights
as corporate earnings proved to be stronger than expected and
investors shrugged off concerns about the effects of economic
difficulties in Asia. The Federal Reserve Board continued its steady
interest rate policy, which boosted the performance of bonds.
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
PERIODS ENDED APRIL 30, 1998 PAST 6 PAST 1 PAST 5 PAST 10
MONTHS YEAR YEARS YEARS
FIDELITY ADV MORTGAGE SECURITIES - INST CL 3.26% 9.50% 44.71% 131.90%
LB MORTGAGE 3.48% 10.02% 39.88% 139.67%
US MORTGAGE FUNDS AVERAGE 2.99% 9.06% 32.26% 114.30%
CUMULATIVE TOTAL RETURNS show Institutional Class' performance in
percentage terms over a set period - in this case, six months, 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 the Lehman Brothers Mortgage-Backed
Securities Index - a market capitalization weighted index of 15- and
30-year fixed-rate securities backed by mortgage pools of the Ginnie
Mae (GNMA), Fannie Mae (FNMA) and Freddie Mac (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 six months average represents a
peer group of 67 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 APRIL 30, 1998 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
FIDELITY ADV MORTGAGE SECURITIES - INST CL 9.50% 7.67% 8.78%
LB MORTGAGE 10.02% 6.94% 9.13%
US MORTGAGE FUNDS AVERAGE 9.06% 5.73% 7.90%
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
FA Mortgage Sec -CL I LB Mortgage Backed Secs
00240 LB006
1988/04/30 10000.00 10000.00
1988/05/31 9958.41 9929.23
1988/06/30 10157.71 10211.74
1988/07/31 10133.57 10177.08
1988/08/31 10146.44 10199.50
1988/09/30 10350.51 10453.76
1988/10/31 10544.49 10682.98
1988/11/30 10405.06 10527.45
1988/12/31 10339.24 10472.40
1989/01/31 10526.84 10653.85
1989/02/28 10471.10 10585.99
1989/03/31 10491.79 10602.59
1989/04/30 10685.46 10816.66
1989/05/31 10938.36 11151.59
1989/06/30 11203.08 11425.66
1989/07/31 11403.67 11684.29
1989/08/31 11283.22 11532.84
1989/09/30 11332.48 11614.68
1989/10/31 11557.25 11880.01
1989/11/30 11668.62 12008.74
1989/12/31 11749.05 12079.80
1990/01/31 11640.81 11995.34
1990/02/28 11718.35 12065.82
1990/03/31 11727.56 12095.53
1990/04/30 11626.12 11986.89
1990/05/31 11964.12 12358.82
1990/06/30 12137.56 12554.24
1990/07/31 12313.95 12772.10
1990/08/31 12281.38 12636.38
1990/09/30 12346.94 12740.06
1990/10/31 12473.43 12884.52
1990/11/30 12746.37 13154.51
1990/12/31 12966.23 13374.98
1991/01/31 13100.78 13578.27
1991/02/28 13184.65 13692.73
1991/03/31 13273.34 13785.93
1991/04/30 13417.02 13912.92
1991/05/31 13486.77 14035.24
1991/06/30 13520.50 14047.76
1991/07/31 13714.70 14285.42
1991/08/31 13976.79 14545.22
1991/09/30 14194.99 14817.82
1991/10/31 14362.77 15063.35
1991/11/30 14450.58 15172.56
1991/12/31 14731.30 15477.50
1992/01/31 14660.43 15298.67
1992/02/29 14806.31 15443.43
1992/03/31 14703.99 15344.98
1992/04/30 14841.84 15495.85
1992/05/31 15086.81 15775.16
1992/06/30 15246.66 15961.26
1992/07/31 15220.49 16100.77
1992/08/31 15318.94 16310.47
1992/09/30 15415.11 16437.45
1992/10/31 15261.82 16293.29
1992/11/30 15335.59 16344.26
1992/12/31 15534.60 16555.41
1993/01/31 15676.33 16772.97
1993/02/28 15810.59 16943.06
1993/03/31 15913.84 17045.87
1993/04/30 16024.94 17133.83
1993/05/31 16072.38 17231.40
1993/06/30 16268.45 17363.33
1993/07/31 16357.88 17432.65
1993/08/31 16388.34 17514.78
1993/09/30 16424.14 17529.93
1993/10/31 16453.35 17580.60
1993/11/30 16418.96 17546.24
1993/12/31 16577.43 17688.36
1994/01/31 16730.10 17863.70
1994/02/28 16641.87 17739.04
1994/03/31 16453.27 17277.12
1994/04/30 16381.20 17149.85
1994/05/31 16520.65 17217.71
1994/06/30 16605.21 17180.43
1994/07/31 16870.65 17524.39
1994/08/31 16946.24 17579.73
1994/09/30 16762.56 17329.55
1994/10/31 16796.60 17319.64
1994/11/30 16779.84 17265.47
1994/12/31 16899.30 17403.23
1995/01/31 17218.80 17775.74
1995/02/28 17604.28 18229.50
1995/03/31 17678.99 18315.42
1995/04/30 17957.72 18575.80
1995/05/31 18522.74 19161.50
1995/06/30 18664.04 19270.42
1995/07/31 18706.43 19303.63
1995/08/31 18937.26 19503.42
1995/09/30 19133.02 19674.97
1995/10/31 19345.86 19850.01
1995/11/30 19560.05 20076.89
1995/12/31 19775.54 20327.65
1996/01/31 19937.45 20480.85
1996/02/29 19810.41 20310.76
1996/03/31 19738.54 20237.37
1996/04/30 19697.40 20180.28
1996/05/31 19621.13 20121.45
1996/06/30 19891.91 20398.43
1996/07/31 19962.95 20473.28
1996/08/31 19958.54 20472.99
1996/09/30 20274.41 20815.79
1996/10/31 20649.55 21224.12
1996/11/30 20968.58 21527.89
1996/12/31 20850.34 21415.17
1997/01/31 20980.83 21574.20
1997/02/28 21049.23 21646.13
1997/03/31 20851.06 21442.26
1997/04/30 21177.59 21784.19
1997/05/31 21385.90 21997.38
1997/06/30 21635.94 22253.97
1997/07/31 22006.85 22673.37
1997/08/31 21982.01 22619.48
1997/09/30 22220.06 22906.36
1997/10/31 22457.11 23160.33
1997/11/30 22531.65 23236.35
1997/12/31 22729.61 23448.09
1998/01/31 22947.40 23681.37
1998/02/28 22978.10 23731.47
1998/03/31 23074.78 23831.95
1998/04/30 23190.29 23966.80
IMATRL PRASUN SHR__CHT 19980430 19980508 103351 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was
invested in Fidelity Advisor Mortgage Securities Fund - Institutional
Class on April 30, 1988. As the chart shows, by April 30, 1998, the
value of the investment would have grown to $23,190 - a 131.90%
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 $23,967 - a 139.67% increase.
UNDERSTANDING
PERFORMANCE
HOW A FUND DID YESTERDAY IS
NO GUARANTEE OF HOW IT WILL DO
TOMORROW. BOND PRICES, FOR
EXAMPLE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION OF INTEREST
RATES. IN TURN, THE SHARE PRICE,
RETURN AND YIELD OF A FUND THAT
INVESTS IN BONDS WILL VARY. THAT
MEANS IF YOU SELL YOUR SHARES
DURING A MARKET DOWNTURN, YOU
MIGHT LOSE MONEY. BUT IF YOU CAN
RIDE OUT THE MARKET'S UPS AND
DOWNS, YOU MAY HAVE A GAIN.
(CHECKMARK)
TOTAL RETURN COMPONENTS
SIX MONTHS MARCH 3, 1997
ENDED (COMMENCEMENT OF
APRIL 30, SALE OF INSTITUTIONAL
CLASS SHARES) TO
OCTOBER 31,
1998 1997
DIVIDEND RETURN 3.08% 4.30%
CAPITAL RETURN 0.18% 2.43%
TOTAL RETURN 3.26% 6.73%
TOTAL RETURN COMPONENTS include both dividend returns and capital
returns. A dividend return reflects the actual dividends paid by the
class. A capital 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 APRIL 30, 1998 PAST 1 PAST 6 PAST 1
MONTH MONTHS YEAR
DIVIDENDS PER SHARE 5.51(CENTS) 33.45(CENTS) 67.65(CENTS)
ANNUALIZED DIVIDEND RATE 6.09% 6.13% 6.17%
30-DAY ANNUALIZED YIELD 6.14% - -
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 $11.00 over the past one month, $11.01 over the past six months,
and $10.97 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. If Fidelity had not reimbursed certain class expenses, the
yield would have been 6.06%.
FUND TALK: THE MANAGER'S OVERVIEW
MARKET RECAP
A continued lack of inflationary
pressure resulted in a relatively
favorable investing climate for
bonds during the six months that
ended April 30, 1998. The Lehman
Brothers Aggregate Bond Index -
a broad gauge of the U.S. taxable
investment-grade bond market -
returned 3.59% during this period.
Global volatility and historically low
interest rates were the main stories
in late 1997. As financial problems
in Asia came to a head, wary stock
investors sought investments offering
lower volatility - helping the U.S.
bond market. The Lehman Brothers
Corporate Bond Index returned
3.83% for the six months. Corporate
bonds benefited from continued
economic growth and demand for
yield, although they faltered
somewhat in January 1998 when
investors feared a slowdown in
demand in Asia would eat into
corporate earnings.
Mortgage-backed bonds performed
well during the period, even though
lower interest rates resulted in more
mortgage prepayment activity in
early 1998. The Lehman Brothers
Mortgage-Backed Securities Index
generated a six-month return of
3.48%. High-yield and
emerging-market issues performed
very well during the first four months
of 1998. The period ended on a
positive note for the bond market as
the Commerce Department reported
that gross domestic product grew at
a stronger-than-expected rate of
4.2% in the first quarter of 1998 and
employment costs grew at a
slower-than-expected pace - signs of
continued strong economic growth
and benign inflation. However, the
Federal Reserve Board tempered this
news slightly with warnings about
the rising prices of stocks and real
estate.
An interview with Thomas Silvia, Portfolio Manager of Fidelity Advisor
Mortgage Securities Fund
Q. HOW DID THE FUND PERFORM, TOM?
A. For the six-month period that ended April 30, 1998, the fund's
Institutional Class shares returned 3.26%, compared with 2.99% for the
U.S. mortgage funds average tracked by Lipper Analytical Services, and
3.48% for the Lehman Brothers Mortgage-Backed Securities Index. For
the 12-month period that ended April 30, the fund's Institutional
Class shares returned 9.50%, versus 9.06% for the Lipper average and
10.02% for the Lehman index.
Q. WHAT WAS THE MORTGAGE MARKET LIKE DURING THE PAST SIX MONTHS?
A. The market was surprisingly strong during the period. U.S. Treasury
securities began to rally sharply in November, spurred by low
inflation in the United States and strong demand by foreigners for
U.S. dollar assets. The economy grew at an annualized rate of 4.8% in
the first quarter of 1998, and consumer spending soared, yet inflation
recorded its smallest increase since 1964. Investors took the rapid
economic growth in stride, counting on the negative trade effects of
the Asian slump to offset any price increases. As bond prices were bid
higher, the yield on the 10-year Treasury dropped to 5.35% from 6.00%
at the start of the period. Usually, when Treasuries are this strong
mortgage-backed securities suffer due to prepayment concerns. To
explain, as interest rates fall, many homeowners refinance their
mortgages, returning the principal to mortgage investors. In addition
to disrupting an investor's income stream, this prepayment of
principal forces the investor to reinvest at lower prevailing rates.
In January, mortgage refinancing reached an all-time high, as measured
by the Mortgage Bankers Refinancing Index. But investors did not
abandon mortgages. Many, seeking the relatively higher yields offered
by these securities, simply reinvested their prepaid principal,
keeping demand for mortgages strong.
Q. DID YOU LIMIT THE FUND'S EXPOSURE TO BONDS THAT WERE VULNERABLE TO
PREPAYMENT?
A. Avoiding prepayments was the focus of my investment strategy
throughout the period. First, I overweighted the fund's holdings of
commercial mortgage-backed securities (CMBS). Unlike other mortgages,
CMBS issues have the advantage of prepayment protection. For example,
some loans have provisions that prohibit prepayment within the first
five years. In November, with the Asian crisis in full bloom, CMBS
issues underperformed in line with corporate bonds because investors
feared a significant slowdown in Asia would heighten credit risk in
the United States. I took the opportunity to increase the fund's
position in these securities at depressed prices, and they helped fund
performance when prepayment risk increased in other segments of the
mortgage market. The second prong of my strategy was to underweight
(relative to the index) exposure to securities with the highest risk
of prepayment. That included Fannie Mae and Freddie Mac bonds with
coupons - stated yields at issuance - ranging from 7.5% to 8.5%.
Outside this range, I traded Freddie Mac and Fannie Mae 30-year issues
for 15-year bonds, given that homeowners with 30-year mortgages are
more likely to refinance than those with mortgages of shorter
duration. Finally, I reconfigured the fund's Ginnie Mae holdings.
Purchases were concentrated in new issues, since a homeowner is less
likely to refinance a brand new mortgage; and old issues, where
homeowners have passed over previous opportunities to refinance and
thus are not likely to refinance now.
Q. WHAT ROLE DOES THE LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX
PLAY IN THE MANAGEMENT OF THE FUND?
A. It plays a very important role. It's the fund's benchmark index and
represents the universe of agency fixed-rate mortgage-backed
securities. I use the index as a starting point for my investment
decisions, managing the fund to be generally as sensitive to changes
in interest rates as the index. In addition, I refer to the index when
deciding how to allocate assets among different maturities and
segments of the mortgage market, based on my view of the relative
value of each maturity or segment.
Q. WERE THERE ANY DISAPPOINTMENTS DURING THE PERIOD?
A. The only disappointment was that there wasn't more price
volatility. The fund is managed with a value focus, benefiting from
occasional dips in the market. An uninterrupted ascent in the bond
market during the period left little room for opportunities to buy
mispriced or overlooked securities.
Q. WHAT'S YOUR OUTLOOK?
A. As long as there is the potential for lower interest rates,
prepayment will continue to be a risk for mortgage investors. I intend
to remain on the defensive until there is a clear change in the
economic landscape or until the Federal Reserve Board signals a
favorable shift in monetary policy. Also, I expect to continue to look
for better-yielding opportunities in the CMBS market and elsewhere.
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:
"CREATED IN THE 1980S,
MORTGAGE-BACKED SECURITIES HAVE
BECOME AN IMPORTANT INVESTMENT
FOR ALL FIXED-INCOME INVESTORS.
ISSUERS OF MORTGAGE-BACKED
SECURITIES CREATE A POOL OF
MORTGAGES AND THEN SELL A SECURITY
BASED ON THAT POOL TO INVESTORS.
GINNIE MAES REPRESENT SHARES IN
POOLS OF MORTGAGES ISSUED IN
ACCORDANCE WITH GUIDELINES SET BY
THE FEDERAL HOUSING ADMINISTRATION
OR THE VETERANS ADMINISTRATION, AND
INSURED BY THE GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION. GINNIE MAES
ARE THE ONLY MORTGAGE-RELATED
SECURITIES BACKED BY THE FULL FAITH
AND CREDIT OF THE U.S. GOVERNMENT.
"THE FEDERAL NATIONAL MORTGAGE
ASSOCIATION (FANNIE MAE) AND
FEDERAL HOME LOAN MORTGAGE
CORPORATION (FREDDIE MAC) PACKAGE
POOLS OF MORTGAGES ISSUED BY PRIVATE
LENDERS AND USUALLY INCORPORATE
SOME FORM OF PRIVATE MORTGAGE
INSURANCE. UNLIKE GINNIE MAES, THEY
LACK THE FULL FAITH AND CREDIT BACKING
OF THE U.S. GOVERNMENT.
"INVESTING IN MORTGAGES IS MADE
MORE COMPLEX BY A 30-YEAR
AMORTIZATION SCHEDULE, THE
UNPREDICTABILITY OF CASH FLOW AND BY
MONTHLY RATHER THAN SEMIANNUAL
PAYMENTS OF PRINCIPAL AND INTEREST.
FOR EXAMPLE, WHEN HOMEOWNERS PAY
DOWN THEIR MORTGAGES AHEAD OF
SCHEDULE OR REFINANCE AT LOWER RATES,
THOSE PAYMENTS OF PRINCIPAL ARE
RETURNED TO INVESTORS, WHO MUST
REINVEST THE PROCEEDS AT PREVAILING
INTEREST RATES. "
FUND FACTS
GOAL: HIGH CURRENT INCOME BY
INVESTING IN MORTGAGE-RELATED
SECURITIES OF ALL KINDS
START DATE: DECEMBER 31, 1984
SIZE: AS OF APRIL 30, 1998,
MORE THAN $505 MILLION
MANAGER: THOMAS SILVIA, SINCE
1997; JOINED FIDELITY IN 1993
(CHECKMARK)
INVESTMENT CHANGES
COUPON DISTRIBUTION AS OF APRIL 30, 1998
% OF FUND'S % OF FUND'S INVESTMENTS
INVESTMENTS 6 MONTHS AGO
LESS THAN 0.7 0.9
6%
6 - 25.1 31.7
6.99%
7 - 41.7 43.4
7.99%
8 - 11.6 9.0
8.99%
9 - 6.3 7.2
9.99%
10 - 3.0 3.8
10.99%
11% AND 2.1 2.6
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 APRIL 30, 1998
6 MONTHS AGO
YEARS 5.3 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 APRIL 30, 1998
6 MONTHS AGO
YEARS 2.8 2.8
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 APRIL 30, 1998 AS OF OCTOBER 31, 1997
ROW: 1, COL: 1, VALUE: 9.5
ROW: 1, COL: 2, VALUE: 18.0
ROW: 1, COL: 3, VALUE: 72.5
ROW: 1, COL: 1, VALUE: 2.0
ROW: 1, COL: 2, VALUE: 7.0
ROW: 1, COL: 3, VALUE: 91.0
MORTGAGE-BACKED
SECURITIES 72.5%
CMOS AND
OTHER MORTGAGE
RELATED SECURITIES 18.0%
SHORT-TERM
INVESTMENTS 9.5%
MORTGAGE-BACKED
SECURITIES 91.7%
CMOS AND
OTHER MORTGAGE
RELATED SECURITIES 6.9%
SHORT-TERM
INVESTMENTS 1.4%
INVESTMENTS APRIL 30, 1998 (UNAUDITED)
SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENT IN SECURITIES
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 72.5%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
FANNIE MAE - 20.3%
6%, 4/1/00 to 5/1/26 $ 33,883,750 $ 33,417,319
6 1/2%, 9/1/10 to 8/1/24 10,792,885 10,863,912
7%, 2/1/24 to 5/1/28 (c) 41,608,414 42,075,115
7 1/2%, 3/1/22 to 12/1/22 3,059,389 3,146,531
8%, 1/1/07 to 7/1/08 100,679 103,349
8 1/4%, 1/1/13 112,081 116,794
8 1/2%, 11/1/03 to 11/1/18 2,834,656 2,970,321
8 3/4%, 11/1/08 to 7/1/09 214,959 224,502
9%, 1/1/08 to 2/1/13 816,512 859,828
9 1/2%, 5/1/03 to 8/1/22 10,462,129 11,020,301
11%, 12/1/02 to 8/1/10 2,224,562 2,439,069
12 1/4%, 5/1/13 to 6/1/15 465,765 539,713
12 1/2%, 5/1/14 to 3/1/16 616,184 717,626
12 3/4%, 6/1/13 to 7/1/15 349,287 410,104
13 1/2%, 9/1/13 to 12/1/14 187,194 225,557
14%, 11/1/14 42,790 52,004
109,182,045
FREDDIE MAC - 26.7%
5%, 7/1/10 3,639,119 3,463,986
6 1/2%, 1/1/24 to 7/1/24 28,352,919 28,240,987
7%, 5/1/99 to 12/1/12 55,430,365 56,489,310
7 1/2%, 2/1/28 to 3/1/28 31,891,349 32,698,519
8%, 10/1/07 to 4/1/21 1,179,129 1,232,387
8 1/2%, 7/1/09 to 1/1/20 2,744,468 2,891,742
9%, 9/1/08 to 5/1/21 9,992,208 10,660,993
10%, 11/1/03 to 5/1/19 1,992,781 2,156,650
10 1/2%, 8/1/10 to 12/1/20 2,239,131 2,494,117
11 1/2%, 4/1/12 86,075 95,840
11 3/4%, 6/1/11 68,151 77,869
12 1/4%, 6/1/14 to 7/1/15 205,271 239,572
12 1/2%, 5/1/12 to 4/1/15 1,034,426 1,202,582
12 3/4%, 6/1/05 to 3/1/15 181,015 205,317
13%, 1/1/11 to 6/1/15 1,649,401 1,959,715
144,109,586
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 25.5%
7 1/2%, 7/15/05 to 2/15/28 54,984,627 56,519,194
8%, 4/15/02 to 2/15/28 51,266,885 53,185,846
8 1/2%, 7/15/16 to 6/15/18 1,646,015 1,759,463
9%, 10/15/04 to 4/15/18 5,110,275 5,485,923
9 1/2%, 6/15/09 to 12/15/24 5,360,212 5,797,301
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - CONTINUED
10%, 1/15/18 to 1/15/26 $ 9,495,440 $ 10,507,473
10 1/2%, 6/15/98 to 2/15/18 1,113,023 1,213,966
11%, 1/15/10 to 9/15/19 2,458,070 2,779,737
11 1/2%, 10/15/10 to 7/15/18 86,583 98,232
13%, 10/15/13 103,008 121,839
13 1/2%, 7/15/11 to 10/15/14 88,569 105,786
137,574,760
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $385,963,779) 390,866,391
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.0%
U.S. GOVERNMENT AGENCY - 0.0%
Freddie Mac sequential pay
Series1353 Class A, 5 1/2%, 11/15/04
(cost $65,110) 69,881 69,597
COMMERCIAL MORTGAGE SECURITIES - 18.0%
Bankers Trust Remic Trust 1988-1 floater Series 1998-S1A
Class D, 6.54%, 11/28/02 (a)(b) 3,890,000 3,874,805
CBM Funding Corp. sequential pay Series 1996-1
Class A-3PI, 7.08%, 11/1/07 2,300,000 2,377,266
CS First Boston Mortgage Securities Corp. Series 1997-C2
Class D, 7.27%, 4/17/11 1,850,000 1,857,227
Deutsche Mortgage and Asset Receiving Corp.
Series 1998-C1 Class D, 7.231%, 7/15/12 10,200,000 10,180,875
Federal Deposit Insurance Corp. sequential pay
Series 1996-C1 Class 1A, 6 3/4%, 5/25/26 8,188,946 8,201,475
General Motors Acceptance Corp. Commercial Mortgage
Securities, Inc. Series 1997-C2 Class E,
7.624%, 4/15/11 1,600,000 1,619,072
Nomura Asset Securities Corp. Series 1998-D6
Class A-4, 7.35%, 3/15/30 (b) 15,000,000 15,014,063
Nomura Depositor Trust floater Series 1998-ST1A :
Class A-4, 6.53%, 1/15/03 (a)(b) 7,900,000 7,917,281
Class A-5, 6.87%, 1/15/03 (a)(b) 5,278,196 5,288,093
COMMERCIAL MORTGAGE SECURITIES - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
Structured Asset Securities Corp.:
commercial Series 1992-M1 Class C, 7.05%, 11/25/02 $ 3,192,522 $
3,025,912
floater Series 1997-C1 Class C, 6.60%, 7/25/00 (a)(b) 15,610,888
15,606,009
Series 1997-NI Class C, 6.055%, 9/25/28 (a) 3,553,497 3,552,387
Thirteen Affiliates of General Growth Properties, Inc.
Series 1 Class D-1, 6.917%, 11/15/04 (a) 18,200,000 18,167,604
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $95,943,674) 96,682,069
CERTIFICATES OF DEPOSIT - 8.4%
Sanwa Bank Ltd. Japan yankee 5.71%, 5/29/98 25,000,000 24,998,283
Sumitomo Bank Ltd. Japan yankee 5.71%, 5/18/98 20,000,000 19,999,070
TOTAL CERTIFICATES OF DEPOSIT
(Cost $45,000,000) 44,997,353
CASH EQUIVALENTS - 1.1%
MATURITY
AMOUNT
Investments in repurchase agreements (U.S. Treasury
obligations), in a joint trading account at 5 1/2%,
dated 4/30/98 due 5/1/98 $ 6,154,939 6,154,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $533,126,563) $ 538,769,410
LEGEND
(d) 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
$54,406,179 or 10.8% of net assets.
(e) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(f) A portion of the security was purchased on a delayed delivery or
when-issued basis (see Note 2 of Notes to Financial Statements).
INCOME TAX INFORMATION
At April 30, 1998, the aggregate cost of investment securities for
income tax purposes was $533,194,047. Net unrealized appreciation
aggregated $5,575,363, of which $7,156,070 related to appreciated
investment securities and $1,580,707 related to depreciated investment
securities.
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1998 (UNAUDITED)
ASSETS
INVESTMENT IN SECURITIES, AT VALUE (INCLUDING REPURCHASE $ 538,769,410
AGREEMENTS OF $6,154,000) (COST $533,126,563) - SEE
ACCOMPANYING SCHEDULE
CASH 2,909
RECEIVABLE FOR INVESTMENTS SOLD 23,383,991
RECEIVABLE FOR FUND SHARES SOLD 574,591
INTEREST RECEIVABLE 2,954,792
TOTAL ASSETS 565,685,693
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 39,859,866
REGULAR DELIVERY
DELAYED DELIVERY 19,268,521
PAYABLE FOR FUND SHARES REDEEMED 320,472
DISTRIBUTIONS PAYABLE 382,390
ACCRUED MANAGEMENT FEE 171,284
DISTRIBUTION FEES PAYABLE 5,088
OTHER PAYABLES AND ACCRUED EXPENSES 187,928
TOTAL LIABILITIES 60,195,549
NET ASSETS $ 505,490,144
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 492,840,841
UNDISTRIBUTED NET INVESTMENT INCOME 1,014,386
ACCUMULATED UNDISTRIBUTED NET REALIZED 5,992,070
GAIN (LOSS) ON INVESTMENTS
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 5,642,847
NET ASSETS $ 505,490,144
</TABLE>
STATEMENT OF ASSETS AND LIABILITIES - CONTINUED
APRIL 30, 1998 (UNAUDITED)
CALCULATION OF MAXIMUM OFFERING PRICE $11.01
CLASS A:
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($559,031 (DIVIDED BY) 50,778 SHARES)
MAXIMUM OFFERING PRICE PER SHARE (100/95.25 OF $11.01) $11.56
CLASS T: $11.01
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($12,719,495 (DIVIDED BY) 1,155,074 SHARES)
MAXIMUM OFFERING PRICE PER SHARE (100/96.50 OF $11.01) $11.41
CLASS B: $11.01
NET ASSET VALUE AND OFFERING PRICE PER SHARE
($3,920,411 (DIVIDED BY) 356,203 SHARES) A
INITIAL CLASS: $11.02
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER
SHARE ($466,438,664 (DIVIDED BY) 42,326,197 SHARES)
INSTITUTIONAL CLASS: $11.00
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER
SHARE ($21,852,543 (DIVIDED BY) 1,986,173 SHARES)
A REDEMPTION PRICE PER SHARE IS EQUAL TO NET ASSET VALUE LESS ANY
APPLICABLE CONTINGENT DEFERRED SALES CHARGE.
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 1998 (UNAUDITED)
INVESTMENT INCOME $ 18,182,971
INTEREST
EXPENSES
MANAGEMENT FEE $ 1,126,273
TRANSFER AGENT FEES 512,973
DISTRIBUTION FEES 27,655
ACCOUNTING FEES AND EXPENSES 103,672
NON-INTERESTED TRUSTEES' COMPENSATION 5,862
CUSTODIAN FEES AND EXPENSES 55,136
REGISTRATION FEES 93,291
AUDIT 43,841
LEGAL 14,306
MISCELLANEOUS 2,547
TOTAL EXPENSES BEFORE REDUCTIONS 1,985,556
EXPENSE REDUCTIONS (105,519) 1,880,037
NET INVESTMENT INCOME 16,302,934
REALIZED AND UNREALIZED GAIN (LOSS) 6,657,378
NET REALIZED GAIN (LOSS) ON INVESTMENT SECURITIES
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON (6,160,268)
INVESTMENT SECURITIES
NET GAIN (LOSS) 497,110
NET INCREASE (DECREASE) IN NET ASSETS RESULTING $ 16,800,044
FROM OPERATIONS
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED THREE MONTHS YEAR ENDED
APRIL 30, 1998 ENDED JULY 31,
(UNAUDITED) OCTOBER 31, 1997 1997
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS $ 16,302,934 $ 8,459,090 $ 32,193,238
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 6,657,378 1,110,586 4,296,274
CHANGE IN NET UNREALIZED (6,160,268) 1,347,376 14,164,021
APPRECIATION (DEPRECIATION)
NET INCREASE (DECREASE) IN NET ASSETS 16,800,044 10,917,052 50,653,533
RESULTING FROM OPERATIONS
DISTRIBUTIONS TO SHAREHOLDERS (15,577,043) (8,349,402) (32,649,725)
FROM NET INVESTMENT INCOME
FROM NET REALIZED GAIN (1,430,037) (3,850,848) (5,039,533)
TOTAL DISTRIBUTIONS (17,007,080) (12,200,250) (37,689,258)
SHARE TRANSACTIONS - NET (26,208,431) (703,316) 32,765,543
INCREASE (DECREASE)
TOTAL INCREASE (DECREASE) IN (26,415,467) (1,986,514) 45,729,818
NET ASSETS
NET ASSETS
BEGINNING OF PERIOD 531,905,611 533,892,125 488,162,307
END OF PERIOD (INCLUDING UNDISTRIBUTED $ 505,490,144 $ 531,905,611 $ 533,892,125
NET INVESTMENT INCOME OF
$1,014,386, $290,731 AND
$230,506, RESPECTIVELY)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FINANCIAL HIGHLIGHTS - CLASS A
SIX MONTHS THREE MONTHS YEAR ENDED
ENDED ENDED JULY 31,
APRIL 30, 1998 OCTOBER 31,
(UNAUDITED) 1997 1997 E
SELECTED PER-SHARE DATA
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.020 $ 11.050 $ 10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME F .339 .170 .268
NET REALIZED AND UNREALIZED GAIN (LOSS) .002 .048 .224
TOTAL FROM INVESTMENT OPERATIONS .341 .218 .492
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.321) (.168) (.272)
FROM NET REALIZED GAIN (.030) (.080) -
TOTAL DISTRIBUTIONS (.351) (.248) (.272)
NET ASSET VALUE, END OF PERIOD $ 11.010 $ 11.020 $ 11.050
TOTAL RETURN B, C 3.14% 2.00% 4.61%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 559 $ 1,648 $ 1,586
RATIO OF EXPENSES TO AVERAGE NET ASSETS .90% A, D .90% A, D .90% A, D
RATIO OF NET INTEREST INCOME TO AVERAGE NET ASSETS 5.92% A 6.18% A 6.09% A
PORTFOLIO TURNOVER RATE 247% A 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 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FINANCIAL HIGHLIGHTS - CLASS T
SIX MONTHS THREE MONTHS YEAR ENDED
ENDED ENDED JULY 31,
APRIL 30, 1998 OCTOBER 31,
(UNAUDITED) 1997 1997 E
SELECTED PER-SHARE DATA
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.020 $ 11.050 $ 10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME F .333 .167 .255
NET REALIZED AND UNREALIZED GAIN (LOSS) .008 .048 .233
TOTAL FROM INVESTMENT OPERATIONS .341 .215 .488
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.321) (.165) (.268)
FROM NET REALIZED GAIN (.030) (.080) -
TOTAL DISTRIBUTIONS (.351) (.245) (.268)
NET ASSET VALUE, END OF PERIOD $ 11.010 $ 11.020 $ 11.050
TOTAL RETURN B, C 3.13% 1.98% 4.57%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 12,719 $ 14,649 $ 12,193
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.00% A, D 1.00% A, D 1.00% A, D
RATIO OF NET INTEREST INCOME TO AVERAGE NET ASSETS 6.08% A 6.10% A 5.99% A
PORTFOLIO TURNOVER RATE 247% A 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 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FINANCIAL HIGHLIGHTS - CLASS B
SIX MONTHS THREE MONTHS YEAR ENDED
ENDED ENDED JULY 31,
APRIL 30, 1998 OCTOBER 31,
(UNAUDITED) 1997 1997 E
SELECTED PER-SHARE DATA
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.020 $ 11.040 $ 10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME F .293 .142 .234
NET REALIZED AND UNREALIZED GAIN (LOSS) .012 .065 .214
TOTAL FROM INVESTMENT OPERATIONS .305 .207 .448
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.285) (.147) (.238)
FROM NET REALIZED GAIN (.030) (.080) -
TOTAL DISTRIBUTIONS (.315) (.227) (.238)
NET ASSET VALUE, END OF PERIOD $ 11.010 $ 11.020 $ 11.040
TOTAL RETURN B, C 2.80% 1.90% 4.20%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 3,920 $ 1,587 $ 823
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.65% A, D 1.65% A, D 1.65% A, D
RATIO OF NET INTEREST INCOME TO AVERAGE NET ASSETS 5.46% A 5.32% A 5.34% A
PORTFOLIO TURNOVER RATE 247% A 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 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL HIGHLIGHTS - INITIAL CLASS SIX MONTHS ENDED THREE MONTHS YEARS ENDED JULY 31,
APRIL 30, 1998 ENDED
(UNAUDITED) OCTOBER 31,
1997
1997 1996 1995 1994 1993
SELECTED PER-SHARE DATA
NET ASSET VALUE,
BEGINNING OF PERIOD $11.020 $11.050 $10.780 $10.890 $10.580 $10.910 $10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .349 D .176 D .678 D .729 .772 .570 .788
NET REALIZED AND UNREALIZED
GAIN (LOSS) .017 .047 .391 (.015) .325 (.242) (.007)
TOTAL FROM INVESTMENT OPERATIONS .366 .223 1.069 .714 1.097 .328 .781
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.336) (.173) (.689) (.724) (.737) (.588) (.701)
FROM NET REALIZED GAIN (.030) (.080) (.110) (.100) - (.040) -
IN EXCESS OF NET REALIZED GAIN - - - - (.050) (.030) -
TOTAL DISTRIBUTIONS (.366) (.253) (.799) (.824) (.787) (.658) (.701)
NET ASSET VALUE, END OF PERIOD $11.020 $11.020 $11.050 $10.780 $10.890 $10.580 $10.910
TOTAL RETURN B, C 3.37% 2.05% 10.34% 6.72% 10.88% 3.13% 7.47%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD
(000 OMITTED) $466,439 $494,304 $506,113 $488,162 $416,241 $365,801 $419,467
RATIO OF EXPENSES TO AVERAGE
NET ASSETS .72% A .72% A .73% .74% .77% .79% .76%
RATIO OF EXPENSES TO AVERAGE
NET ASSETS AFTER .72% A .72% A .73% .73% E .77% .79% .76%
EXPENSE REDUCTIONS
RATIO OF NET INTEREST INCOME
TO AVERAGE NET ASSETS 6.38% A 6.36% A 6.26% 6.75% 7.37% 6.73% 7.18%
PORTFOLIO TURNOVER RATE 247% A 125% A 149% 221% 329% 563% 278%
</TABLE>
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN.
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
E FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FINANCIAL HIGHLIGHTS - INSTITUTIONAL CLASS
SIX MONTHS THREE MONTHS YEAR ENDED
ENDED ENDED JULY 31,
APRIL 30, 1998 OCTOBER 31,
(UNAUDITED) 1997 1997 F
SELECTED PER-SHARE DATA
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.010 $ 11.040 $ 10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME G .347 .172 .263
NET REALIZED AND UNREALIZED GAIN (LOSS) .008 .050 .226
TOTAL FROM INVESTMENT OPERATIONS .355 .222 .489
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.335) (.172) (.279)
FROM NET REALIZED GAIN (.030) (.080) -
TOTAL DISTRIBUTIONS (.365) (.252) (.279)
NET ASSET VALUE, END OF PERIOD $ 11.000 $ 11.010 $ 11.040
TOTAL RETURN B, C 3.26% 2.05% 4.59%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 21,853 $ 19,718 $ 13,177
RATIO OF EXPENSES TO AVERAGE NET ASSETS .75% A, D .75% A, D .75% A, D
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER EXPENSE .75% A .75% A .70% A, E
REDUCTIONS
RATIO OF NET INTEREST INCOME TO AVERAGE NET ASSETS 6.36% A 6.35% A 6.29% A
PORTFOLIO TURNOVER RATE 247% A 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 April 30, 1998 (Unaudited)
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 require management to
make certain estimates and assumptions at the date of the financial
statements. The following summarizes the significant accounting
policies of the fund:
SECURITY VALUATION. Securities are valued based upon a computerized
matrix system and/or appraisals by a pricing service, both of which
consider market transactions and dealer-supplied valuations.
Securities (including restricted securities) for which 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
among the funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are declared daily and
paid monthly from net investment income. Distributions from realized
gains, if any, are recorded on the ex-dividend date. Income dividends
and capital gain distributions are declared separately for each class.
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
DISTRIBUTIONS TO SHAREHOLDERS - CONTINUED
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.
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 market value of the securities purchased or sold on a
delayed delivery basis are identified as such in the fund's schedule
of investments. The fund may receive compensation for interest forgone
in the purchase of a delayed delivery security. With respect to
purchase commitments, the fund identifies securities as segregated in
its custodial records with a value at least equal to the amount of the
commitment. Losses may arise due to changes in the market value of the
underlying securities or if the counterparty does not perform under
the contract.
2. OPERATING POLICIES - CONTINUED
RESTRICTED SECURITIES. The fund is permitted to invest in securities
that are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from
registration or to the public if the securities are registered.
Disposal of these securities may involve time-consuming negotiations
and expense, and prompt sale at an acceptable price may be difficult.
At the end of the period, the fund had no investments in restricted
securities (excluding 144A issues).
3. PURCHASES AND SALES OF INVESTMENTS.
Purchases and sales of securities, other than short-term securities,
aggregated $659,530,789 and $622,974,699, respectively, of which U.S.
government and government agency obligations aggregated $514,530,789
and $522,912,224, 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 period, the management
fee was equivalent to an annualized rate of .44% 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
Distributors Corporation (FDC), an affiliate of FMR, a distribution
and service fee. For the period, this fee was 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.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
DISTRIBUTION AND SERVICE PLAN - CONTINUED
For the period, 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:
PAID TO PAID TO RETAINED BY
FDC INVESTMENT FDC
PROFESSIONALS
CLASS A $ 610 $ 610 $ 0
CLASS T 16,131 7,974 8,157
CLASS B 10,914 3,031 7,883
$ 27,655 $ 11,615 $ 16,040
Under the Plans, FMR 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. For the
period, the following amounts were paid to third parties under the
Plans:
CLASS A $77
CLASS T 4,857
CLASS B 289
SALES LOAD. FDC receives a front-end sales charge of up to 4.75% for
selling Class A shares, and 3.50% for selling Class T shares of the
fund. FDC receives the proceeds of contingent deferred sales charges
levied on Class B share redemptions occurring within six years of
purchase. The Class B charge is based on declining rates ranging from
5% to 1% 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. In addition, purchases of
Class A and Class T shares that were subject to a finder's fee bear a
contingent deferred sales charge on assets that do not remain in the
fund for at least one year. The Class A and Class T contingent
deferred sales charge is based on 0.25% 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:
PAID TO PAID TO
FDC INVESTMENT
PROFESSIONALS
CLASS A $ 5,423 $ 2,979
CLASS T 12,967 8,878
CLASS B 1,849 0 *
$ 20,239 $ 11,857
* 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. Fidelity Investments Institutional Operations
Company, Inc., (FIIOC), an affiliate of FMR, is the transfer, dividend
disbursing and shareholder servicing agent (collectively referred to
as the transfer agent) for the fund's Class A, Class T, Class B and
Institutional Class. Fidelity Service Company, Inc. (FSC), an
affiliate of FMR, is the transfer agent for the Initial Class. FIIOC
and FSC pay for typesetting, printing and mailing of all shareholder
reports, except proxy statements. For the period, the following
amounts were paid to FIIOC or FSC:
AMOUNT % OF
AVERAGE
NET ASSETS *
CLASS A $ 3,047 .75
CLASS T 29,850 .47
CLASS B 3,985 .33
INITIAL CLASS 452,315 .19
INSTITUTIONAL CLASS 23,776 .24
$ 512,973
* ANNUALIZED.
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 of the following classes:
FMR REIMBURSEMENT
EXPENSE
LIMITATIONS
CLASS A .90% $ 22,120
CLASS T 1.00% 35,631
CLASS B 1.65% 21,668
INSTITUTIONAL CLASS .75% 23,375
$ 102,794
In addition, the fund has entered into an arrangement 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 period, the fund's custodian fees were reduced by
$2,725 under the custodian arrangement.
6. DISTRIBUTIONS TO SHAREHOLDERS.
Distributions to shareholders of each class were as follows:
SIX MONTHS THREE MONTHS YEAR ENDED
ENDED ENDED JULY 31,
APRIL 30, OCTOBER 31,
1998 1997 1997 A
FROM NET INVESTMENT INCOME
CLASS A $ 23,189 $ 24,437 $ 21,750
CLASS T 376,301 197,984 64,445
CLASS B 62,661 15,690 8,241
INITIAL CLASS 14,507,792 7,870,955 32,474,399
INSTITUTIONAL CLASS 607,100 240,336 80,890
TOTAL $ 15,577,043 $ 8,349,402 $ 32,649,725
FROM NET REALIZED GAIN
CLASS A $ 4,543 $ 11,558 $ -
CLASS T 41,650 92,775 -
CLASS B 4,901 7,487 -
INITIAL CLASS 1,324,784 3,640,130 5,039,533
INSTITUTIONAL CLASS 54,159 98,898 -
TOTAL $ 1,430,037 $ 3,850,848 $ 5,039,533
TOTAL $ 17,007,080 $ 12,200,250 $ 37,689,258
B 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
SIX MONTHS THREE YEAR ENDED SIX MONTHS THREE MONTHS YEAR ENDED
ENDED MONTHS JULY 31, ENDED ENDED JULY 31,
APRIL 30, ENDED APRIL 30, OCTOBER 31,
OCTOBER 31,
1998 1997 1997 A 1998 1997 1997 A
CLASS A 71,138 3,210 141,575 $ 784,521 $ 35,261 $ 1,531,983
SHARES SOLD
REINVESTMENT OF 1,704 3,274 1,989 18,762 35,846 21,750
DISTRIBUTIONS
SHARES (171,581) (531) - (1,888,469) (5,834) -
REDEEMED
NET INCREASE (98,739) 5,953 143,564 $ (1,085,186) $ 65,273 $ 1,553,733
(DECREASE)
CLASS T 412,180 312,588 1,114,285 $ 4,538,134 $ 3,429,256 $ 12,183,453
SHARES SOLD
REINVESTMENT OF 34,980 25,415 5,597 385,401 278,358 61,712
DISTRIBUTIONS
SHARES (621,235) (112,534) (16,202) (6,853,036) (1,233,884) (177,848)
REDEEMED
NET INCREASE (174,075) 225,469 1,103,680 $ (1,929,501) $ 2,473,730 $ 12,067,317
(DECREASE)
CLASS B 230,699 68,692 73,891 $ 2,540,972 $ 753,079 $ 801,025
SHARES SOLD
REINVESTMENT OF 4,918 1,666 687 54,167 18,237 7,506
DISTRIBUTIONS
SHARES (23,460) (890) - (258,281) (9,750) -
REDEEMED
NET INCREASE 212,157 69,468 74,578 $ 2,336,858 $ 761,566 $ 808,531
(DECREASE)
INITIAL CLASS 2,815,520 1,426,619 14,636,021 $ 31,047,102 $ 15,655,743 $ 158,564,289
SHARES SOLD
REINVESTMENT OF 1,181,041 854,187 2,769,613 13,016,826 9,354,223 29,925,102
DISTRIBUTIONS
SHARES (6,506,507) (3,241,358) (16,911,618) (71,738,410) (35,550,337) (183,183,589)
REDEEMED
NET INCREASE (2,509,946) (960,552) 494,016 $ (27,674,482) $ (10,540,371) $ 5,305,802
(DECREASE)
INSTITUTIONAL 678,393 671,412 1,216,421 $ 7,466,253 $ 7,350,245 $ 13,282,379
CLASS
SHARES SOLD
REINVESTMENT OF 29,739 11,919 3,516 327,334 130,486 38,560
DISTRIBUTIONS
SHARES (512,714) (86,048) (26,465) (5,649,707) (944,245) (290,779)
REDEEMED
NET INCREASE 195,418 597,283 1,193,472 $ 2,143,880 $ 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 period, each class paid the following amounts to register its
shares for sale:
REGISTRATION
FEES
CLASS A $ 20,096
CLASS T 20,109
CLASS B 20,139
INITIAL CLASS 11,553
INSTITUTIONAL CLASS 21,394
$ 93,291
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
Eric D. Roiter, 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
Fidelity Advisor 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
MONEY MARKET FUNDS
Prime Fund
Treasury Fund
Tax-Exempt Fund
(REGISTERED TRADEMARK)
(2_FIDELITY_LOGOS)FIDELITY
(REGISTERED TRADEMARK)
MORTGAGE SECURITIES FUND
(INITIAL CLASS OF FIDELITY ADVISOR MORTGAGE
SECURITIES FUND)
SEMIANNUAL REPORT
APRIL 30, 1998
CONTENTS
PRESIDENT'S MESSAGE 3 NED JOHNSON ON INVESTING STRATEGIES.
PERFORMANCE 4 HOW THE FUND HAS DONE OVER TIME.
FUND TALK 7 THE MANAGER'S REVIEW OF FUND
PERFORMANCE, STRATEGY AND OUTLOOK.
INVESTMENT CHANGES 10 A SUMMARY OF MAJOR SHIFTS IN THE FUND'S
INVESTMENTS OVER THE PAST SIX MONTHS.
INVESTMENTS 11 A COMPLETE LIST OF THE FUND'S INVESTMENTS
WITH THEIR MARKET VALUES.
FINANCIAL STATEMENTS 14 STATEMENTS OF ASSETS AND LIABILITIES,
OPERATIONS, AND CHANGES IN NET ASSETS,
AS WELL AS FINANCIAL HIGHLIGHTS.
NOTES 23 NOTES TO THE FINANCIAL STATEMENTS.
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:
Low interest rates and subdued inflation were two main factors that
bolstered stock and bond markets in the U.S. during the first four
months of 1998. The stock market continued to soar to record heights
as corporate earnings proved to be stronger than expected and
investors shrugged off concerns about the effects of economic
difficulties in Asia. The Federal Reserve Board continued its steady
interest rate policy, which boosted the performance of bonds.
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
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
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PERIODS ENDED APRIL 30, 1998 PAST 6 PAST 1 PAST 5 PAST 10
MONTHS YEAR YEARS YEARS
FIDELITY ADV MORTGAGE SECURITIES - INITIAL CL 3.37% 9.72% 45.00% 132.36%
LB MORTGAGE 3.48% 10.02% 39.88% 139.67%
US MORTGAGE FUNDS AVERAGE 2.99% 9.06% 32.26% 114.30%
</TABLE>
CUMULATIVE TOTAL RETURNS show Initial Class' performance in percentage
terms over a set period - in this case, six months, 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 the Lehman Brothers Mortgage-Backed Securities Index -
a market capitalization weighted index of 15- and 30-year fixed-rate
securities backed by mortgage pools of Ginnie Mae (GNMA), Fannie Mae
(FNMA) and Freddie Mac (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 six months average represents a peer group of 67 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 APRIL 30, 1998 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
FIDELITY ADV MORTGAGE SECURITIES - INITIAL CL 9.72% 7.71% 8.80%
LB MORTGAGE 10.02% 6.94% 9.13%
US MORTGAGE FUNDS AVERAGE 9.06% 5.73% 7.90%
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
Mortgage Secs -Initial Cl LB Mortgage Backed Secs
00040 LB006
1988/04/30 10000.00 10000.00
1988/05/31 9958.41 9929.23
1988/06/30 10157.71 10211.74
1988/07/31 10133.57 10177.08
1988/08/31 10146.44 10199.50
1988/09/30 10350.51 10453.76
1988/10/31 10544.49 10682.98
1988/11/30 10405.06 10527.45
1988/12/31 10339.24 10472.40
1989/01/31 10526.84 10653.85
1989/02/28 10471.10 10585.99
1989/03/31 10491.79 10602.59
1989/04/30 10685.46 10816.66
1989/05/31 10938.36 11151.59
1989/06/30 11203.08 11425.66
1989/07/31 11403.67 11684.29
1989/08/31 11283.22 11532.84
1989/09/30 11332.48 11614.68
1989/10/31 11557.25 11880.01
1989/11/30 11668.62 12008.74
1989/12/31 11749.05 12079.80
1990/01/31 11640.81 11995.34
1990/02/28 11718.35 12065.82
1990/03/31 11727.56 12095.53
1990/04/30 11626.12 11986.89
1990/05/31 11964.12 12358.82
1990/06/30 12137.56 12554.24
1990/07/31 12313.95 12772.10
1990/08/31 12281.38 12636.38
1990/09/30 12346.94 12740.06
1990/10/31 12473.43 12884.52
1990/11/30 12746.37 13154.51
1990/12/31 12966.23 13374.98
1991/01/31 13100.78 13578.27
1991/02/28 13184.65 13692.73
1991/03/31 13273.34 13785.93
1991/04/30 13417.02 13912.92
1991/05/31 13486.77 14035.24
1991/06/30 13520.50 14047.76
1991/07/31 13714.70 14285.42
1991/08/31 13976.79 14545.22
1991/09/30 14194.99 14817.82
1991/10/31 14362.77 15063.35
1991/11/30 14450.58 15172.56
1991/12/31 14731.30 15477.50
1992/01/31 14660.43 15298.67
1992/02/29 14806.31 15443.43
1992/03/31 14703.99 15344.98
1992/04/30 14841.84 15495.85
1992/05/31 15086.81 15775.16
1992/06/30 15246.66 15961.26
1992/07/31 15220.49 16100.77
1992/08/31 15318.94 16310.47
1992/09/30 15415.11 16437.45
1992/10/31 15261.82 16293.29
1992/11/30 15335.59 16344.26
1992/12/31 15534.60 16555.41
1993/01/31 15676.33 16772.97
1993/02/28 15810.59 16943.06
1993/03/31 15913.84 17045.87
1993/04/30 16024.94 17133.83
1993/05/31 16072.38 17231.40
1993/06/30 16268.45 17363.33
1993/07/31 16357.88 17432.65
1993/08/31 16388.34 17514.78
1993/09/30 16424.14 17529.93
1993/10/31 16453.35 17580.60
1993/11/30 16418.96 17546.24
1993/12/31 16577.43 17688.36
1994/01/31 16730.10 17863.70
1994/02/28 16641.87 17739.04
1994/03/31 16453.27 17277.12
1994/04/30 16381.20 17149.85
1994/05/31 16520.65 17217.71
1994/06/30 16605.21 17180.43
1994/07/31 16870.65 17524.39
1994/08/31 16946.24 17579.73
1994/09/30 16762.56 17329.55
1994/10/31 16796.60 17319.64
1994/11/30 16779.84 17265.47
1994/12/31 16899.30 17403.23
1995/01/31 17218.80 17775.74
1995/02/28 17604.28 18229.50
1995/03/31 17678.99 18315.42
1995/04/30 17957.72 18575.80
1995/05/31 18522.74 19161.50
1995/06/30 18664.04 19270.42
1995/07/31 18706.43 19303.63
1995/08/31 18937.26 19503.42
1995/09/30 19133.02 19674.97
1995/10/31 19345.86 19850.01
1995/11/30 19560.05 20076.89
1995/12/31 19775.54 20327.65
1996/01/31 19937.45 20480.85
1996/02/29 19810.41 20310.76
1996/03/31 19738.54 20237.37
1996/04/30 19697.40 20180.28
1996/05/31 19621.13 20121.45
1996/06/30 19891.91 20398.43
1996/07/31 19962.95 20473.28
1996/08/31 19958.54 20472.99
1996/09/30 20274.41 20815.79
1996/10/31 20649.55 21224.12
1996/11/30 20968.58 21527.89
1996/12/31 20850.34 21415.17
1997/01/31 20980.83 21574.20
1997/02/28 21049.23 21646.13
1997/03/31 20851.87 21442.26
1997/04/30 21176.94 21784.19
1997/05/31 21385.85 21997.38
1997/06/30 21636.31 22253.97
1997/07/31 22027.63 22673.37
1997/08/31 22003.29 22619.48
1997/09/30 22242.03 22906.36
1997/10/31 22479.41 23160.33
1997/11/30 22553.47 23236.35
1997/12/31 22752.05 23448.09
1998/01/31 22970.92 23681.37
1998/02/28 23022.58 23731.47
1998/03/31 23100.00 23831.95
1998/04/30 23236.23 23966.80
IMATRL PRASUN SHR__CHT 19980430 19980508 104130 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was
invested in Fidelity Advisor Mortgage Securities Fund - Initial Class
on April 30, 1988. As the chart shows, by April 30, 1998, the value of
the investment would have grown to $23,236 - a 132.36% 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 $23,967 - a 139.67% increase.
UNDERSTANDING
PERFORMANCE
HOW A FUND DID YESTERDAY IS
NO GUARANTEE OF HOW IT WILL DO
TOMORROW. BOND PRICES, FOR
EXAMPLE, GENERALLY MOVE IN THE
OPPOSITE DIRECTION OF INTEREST
RATES. IN TURN, THE SHARE PRICE,
RETURN AND YIELD OF A FUND THAT
INVESTS IN BONDS WILL VARY. THAT
MEANS IF YOU SELL YOUR SHARES
DURING A MARKET DOWNTURN, YOU
MIGHT LOSE MONEY. BUT IF YOU CAN
RIDE OUT THE MARKET'S UPS AND
DOWNS, YOU MAY HAVE A GAIN.
(CHECKMARK)
TOTAL RETURN COMPONENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SIX MONTHS YEARS ENDED OCTOBER 31,
ENDED
APRIL 30,
1998 1997 1996 1995 1994 1993
DIVIDEND RETURN 3.10% 6.60% 6.66% 7.86% 5.61% 6.48%
CAPITAL RETURN 0.27% 2.26% 0.08% 7.32% -3.52% 1.33%
TOTAL RETURN 3.37% 8.86% 6.74% 15.18% 2.09% 7.81%
</TABLE>
TOTAL RETURN COMPONENTS include both dividend returns and capital
returns. A dividend return reflects the actual dividends paid by the
class. A capital 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 APRIL 30, 1998 PAST 1 PAST 6 PAST 1
MONTH MONTHS YEAR
DIVIDENDS PER SHARE 5.49(CENTS) 33.58(CENTS) 67.94(CENTS)
ANNUALIZED DIVIDEND RATE 6.06% 6.14% 6.19%
30-DAY ANNUALIZED YIELD 6.15% - -
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 $11.02 over the past one month, $11.03 over the past six months and
$10.98 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
A continued lack of inflationary
pressure resulted in a relatively
favorable investing climate for
bonds during the six months that
ended April 30, 1998. The Lehman
Brothers Aggregate Bond Index -
a broad gauge of the U.S. taxable
investment-grade bond market -
returned 3.59% during this period.
Global volatility and historically low
interest rates were the main stories
in late 1997. As financial problems
in Asia came to a head, wary stock
investors sought investments offering
lower volatility - helping the U.S.
bond market. The Lehman Brothers
Corporate Bond Index returned
3.83% for the six months. Corporate
bonds benefited from continued
economic growth and demand for
yield, although they faltered
somewhat in January 1998 when
investors feared a slowdown in
demand in Asia would eat into
corporate earnings.
Mortgage-backed bonds performed
well during the period, even though
lower interest rates resulted in more
mortgage prepayment activity in
early 1998. The Lehman Brothers
Mortgage-Backed Securities Index
generated a six-month return of
3.48%. High-yield and
emerging-market issues performed
very well during the first four months
of 1998. The period ended on a
positive note for the bond market as
the Commerce Department reported
that gross domestic product grew at
a stronger-than-expected rate of
4.2% in the first quarter of 1998 and
employment costs grew at a
slower-than-expected pace - signs of
continued strong economic growth
and benign inflation. However, the
Federal Reserve Board tempered this
news slightly with warnings about
the rising prices of stocks and real
estate.
An interview with Thomas Silvia, Portfolio Manager of Fidelity Advisor
Mortgage Securities Fund
Q. HOW DID THE FUND PERFORM, TOM?
A. For the six-month period that ended April 30, 1998, the fund's
Initial Class shares returned 3.37%, compared with 2.99% for the U.S.
mortgage funds average tracked by Lipper Analytical Services, and
3.48% for the Lehman Brothers Mortgage-Backed Securities Index. For
the 12-month period that ended April 30, the fund's Initial Class
shares returned 9.72%, versus 9.06% for the Lipper average and 10.02%
for the Lehman index.
Q. WHAT WAS THE MORTGAGE MARKET LIKE DURING THE PAST SIX MONTHS?
A. The market was surprisingly strong during the period. U.S. Treasury
securities began to rally sharply in November, spurred by low
inflation in the United States and strong demand by foreigners for
U.S. dollar assets. The economy grew at an annualized rate of 4.8% in
the first quarter of 1998, and consumer spending soared, yet inflation
recorded its smallest increase since 1964. Investors took the rapid
economic growth in stride, counting on the negative trade effects of
the Asian slump to offset any price increases. As bond prices were bid
higher, the yield on the 10-year Treasury dropped to 5.35% from 6.00%
at the start of the period. Usually, when Treasuries are this strong
mortgage-backed securities suffer due to prepayment concerns. To
explain, as interest rates fall, many homeowners refinance their
mortgages, returning the principal to mortgage investors. In addition
to disrupting an investor's income stream, this prepayment of
principal forces the investor to reinvest at lower prevailing rates.
In January, mortgage refinancing reached an all-time high, as measured
by the Mortgage Bankers Refinancing Index. But investors did not
abandon mortgages. Many, seeking the relatively higher yields offered
by these securities, simply reinvested their prepaid principal,
keeping demand for mortgages strong.
Q. DID YOU LIMIT THE FUND'S EXPOSURE TO BONDS THAT WERE VULNERABLE TO
PREPAYMENT?
A. Avoiding prepayments was the focus of my investment strategy
throughout the period. First, I overweighted the fund's holdings of
commercial mortgage-backed securities (CMBS). Unlike other mortgages,
CMBS issues have the advantage of prepayment protection. For example,
some loans have provisions that prohibit prepayment within the first
five years. In November, with the Asian crisis in full bloom, CMBS
issues underperformed in line with corporate bonds because investors
feared a significant slowdown in Asia would heighten credit risk in
the United States. I took the opportunity to increase the fund's
position in these securities at depressed prices, and they helped fund
performance when prepayment risk increased in other segments of the
mortgage market. The second prong of my strategy was to underweight
(relative to the index) exposure to securities with the highest risk
of prepayment. That included Fannie Mae and Freddie Mac bonds with
coupons - stated yields at issuance - ranging from 7.5% to 8.5%.
Outside this range, I traded Freddie Mac and Fannie Mae 30-year issues
for 15-year bonds, given that homeowners with 30-year mortgages are
more likely to refinance than those with mortgages of shorter
duration. Finally, I reconfigured the fund's Ginnie Mae holdings.
Purchases were concentrated in new issues, since a homeowner is less
likely to refinance a brand new mortgage; and old issues, where
homeowners have passed over previous opportunities to refinance and
thus are not likely to refinance now.
Q. WHAT ROLE DOES THE LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX
PLAY IN THE MANAGEMENT OF THE FUND?
A. It plays a very important role. It's the fund's benchmark index and
represents the universe of agency fixed-rate mortgage-backed
securities. I use the index as a starting point for my investment
decisions, managing the fund to be generally as sensitive to changes
in interest rates as the index. In addition, I refer to the index when
deciding how to allocate assets among different maturities and
segments of the mortgage market, based on my view of the relative
value of each maturity or segment.
Q. WERE THERE ANY DISAPPOINTMENTS DURING THE PERIOD?
A. The only disappointment was that there wasn't more price
volatility. The fund is managed with a value focus, benefiting from
occasional dips in the market. An uninterrupted ascent in the bond
market during the period left little room for opportunities to buy
mispriced or overlooked securities.
Q. WHAT'S YOUR OUTLOOK?
A. As long as there is the potential for lower interest rates,
prepayment will continue to be a risk for mortgage investors. I intend
to remain on the defensive until there is a clear change in the
economic landscape or until the Federal Reserve Board signals a
favorable shift in monetary policy. Also, I expect to continue to look
for better-yielding opportunities in the CMBS market and elsewhere.
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:
"CREATED IN THE 1980S,
MORTGAGE-BACKED SECURITIES HAVE
BECOME AN IMPORTANT INVESTMENT
FOR ALL FIXED-INCOME INVESTORS.
ISSUERS OF MORTGAGE-BACKED
SECURITIES CREATE A POOL OF
MORTGAGES AND THEN SELL A SECURITY
BASED ON THAT POOL TO INVESTORS.
GINNIE MAES REPRESENT SHARES IN
POOLS OF MORTGAGES ISSUED IN
ACCORDANCE WITH GUIDELINES SET BY
THE FEDERAL HOUSING ADMINISTRATION
OR THE VETERANS ADMINISTRATION, AND
INSURED BY THE GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION. GINNIE MAES
ARE THE ONLY MORTGAGE-RELATED
SECURITIES BACKED BY THE FULL FAITH
AND CREDIT OF THE U.S. GOVERNMENT.
"THE FEDERAL NATIONAL MORTGAGE
ASSOCIATION (FANNIE MAE) AND
FEDERAL HOME LOAN MORTGAGE
CORPORATION (FREDDIE MAC) PACKAGE
POOLS OF MORTGAGES ISSUED BY PRIVATE
LENDERS AND USUALLY INCORPORATE
SOME FORM OF PRIVATE MORTGAGE
INSURANCE. UNLIKE GINNIE MAES, THEY
LACK THE FULL FAITH AND CREDIT BACKING
OF THE U.S. GOVERNMENT.
"INVESTING IN MORTGAGES IS MADE
MORE COMPLEX BY A 30-YEAR
AMORTIZATION SCHEDULE, THE
UNPREDICTABILITY OF CASH FLOW AND BY
MONTHLY RATHER THAN SEMIANNUAL
PAYMENTS OF PRINCIPAL AND INTEREST.
FOR EXAMPLE, WHEN HOMEOWNERS PAY
DOWN THEIR MORTGAGES AHEAD OF
SCHEDULE OR REFINANCE AT LOWER RATES,
THOSE PAYMENTS OF PRINCIPAL ARE
RETURNED TO INVESTORS, WHO MUST
REINVEST THE PROCEEDS AT PREVAILING
INTEREST RATES. "
FUND FACTS
GOAL: HIGH CURRENT INCOME BY
INVESTING IN MORTGAGE-RELATED
SECURITIES OF ALL KINDS
START DATE: DECEMBER 31, 1984
SIZE: AS OF APRIL 30, 1998,
MORE THAN $505 MILLION
MANAGER: THOMAS SILVIA, SINCE
1997; JOINED FIDELITY IN 1993
(CHECKMARK)
INVESTMENT CHANGES
COUPON DISTRIBUTION AS OF APRIL 30, 1998
% OF FUND'S % OF FUND'S INVESTMENTS
INVESTMENTS 6 MONTHS AGO
LESS THAN 0.7 0.9
6%
6 - 25.1 31.7
6.99%
7 - 41.7 43.4
7.99%
8 - 11.6 9.0
8.99%
9 - 6.3 7.2
9.99%
10 - 3.0 3.8
10.99%
11% AND 2.1 2.6
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 APRIL 30, 1998
6 MONTHS AGO
YEARS 5.3 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 APRIL 30, 1998
6 MONTHS AGO
YEARS 2.8 2.8
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 APRIL 30, 1998 AS OF OCTOBER 31, 1997
ROW: 1, COL: 1, VALUE: 9.5
ROW: 1, COL: 2, VALUE: 18.0
ROW: 1, COL: 3, VALUE: 72.5
ROW: 1, COL: 1, VALUE: 2.0
ROW: 1, COL: 2, VALUE: 7.0
ROW: 1, COL: 3, VALUE: 91.0
MORTGAGE-BACKED
SECURITIES 72.5%
CMOS AND
OTHER MORTGAGE
RELATED SECURITIES 18.0%
SHORT-TERM
INVESTMENTS 9.5%
MORTGAGE-BACKED
SECURITIES 91.7%
CMOS AND
OTHER MORTGAGE
RELATED SECURITIES 6.9%
SHORT-TERM
INVESTMENTS 1.4%
INVESTMENTS APRIL 30, 1998 (UNAUDITED)
SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENT IN SECURITIES
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 72.5%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
FANNIE MAE - 20.3%
6%, 4/1/00 to 5/1/26 $ 33,883,750 $ 33,417,319
6 1/2%, 9/1/10 to 8/1/24 10,792,885 10,863,912
7%, 2/1/24 to 5/1/28 (c) 41,608,414 42,075,115
7 1/2%, 3/1/22 to 12/1/22 3,059,389 3,146,531
8%, 1/1/07 to 7/1/08 100,679 103,349
8 1/4%, 1/1/13 112,081 116,794
8 1/2%, 11/1/03 to 11/1/18 2,834,656 2,970,321
8 3/4%, 11/1/08 to 7/1/09 214,959 224,502
9%, 1/1/08 to 2/1/13 816,512 859,828
9 1/2%, 5/1/03 to 8/1/22 10,462,129 11,020,301
11%, 12/1/02 to 8/1/10 2,224,562 2,439,069
12 1/4%, 5/1/13 to 6/1/15 465,765 539,713
12 1/2%, 5/1/14 to 3/1/16 616,184 717,626
12 3/4%, 6/1/13 to 7/1/15 349,287 410,104
13 1/2%, 9/1/13 to 12/1/14 187,194 225,557
14%, 11/1/14 42,790 52,004
109,182,045
FREDDIE MAC - 26.7%
5%, 7/1/10 3,639,119 3,463,986
6 1/2%, 1/1/24 to 7/1/24 28,352,919 28,240,987
7%, 5/1/99 to 12/1/12 55,430,365 56,489,310
7 1/2%, 2/1/28 to 3/1/28 31,891,349 32,698,519
8%, 10/1/07 to 4/1/21 1,179,129 1,232,387
8 1/2%, 7/1/09 to 1/1/20 2,744,468 2,891,742
9%, 9/1/08 to 5/1/21 9,992,208 10,660,993
10%, 11/1/03 to 5/1/19 1,992,781 2,156,650
10 1/2%, 8/1/10 to 12/1/20 2,239,131 2,494,117
11 1/2%, 4/1/12 86,075 95,840
11 3/4%, 6/1/11 68,151 77,869
12 1/4%, 6/1/14 to 7/1/15 205,271 239,572
12 1/2%, 5/1/12 to 4/1/15 1,034,426 1,202,582
12 3/4%, 6/1/05 to 3/1/15 181,015 205,317
13%, 1/1/11 to 6/1/15 1,649,401 1,959,715
144,109,586
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 25.5%
7 1/2%, 7/15/05 to 2/15/28 54,984,627 56,519,194
8%, 4/15/02 to 2/15/28 51,266,885 53,185,846
8 1/2%, 7/15/16 to 6/15/18 1,646,015 1,759,463
9%, 10/15/04 to 4/15/18 5,110,275 5,485,923
9 1/2%, 6/15/09 to 12/15/24 5,360,212 5,797,301
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - CONTINUED
10%, 1/15/18 to 1/15/26 $ 9,495,440 $ 10,507,473
10 1/2%, 6/15/98 to 2/15/18 1,113,023 1,213,966
11%, 1/15/10 to 9/15/19 2,458,070 2,779,737
11 1/2%, 10/15/10 to 7/15/18 86,583 98,232
13%, 10/15/13 103,008 121,839
13 1/2%, 7/15/11 to 10/15/14 88,569 105,786
137,574,760
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $385,963,779) 390,866,391
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.0%
U.S. GOVERNMENT AGENCY - 0.0%
Freddie Mac sequential pay
Series1353 Class A, 5 1/2%, 11/15/04
(cost $65,110) 69,881 69,597
COMMERCIAL MORTGAGE SECURITIES - 18.0%
Bankers Trust Remic Trust 1988-1 floater Series 1998-S1A
Class D, 6.54%, 11/28/02 (a)(b) 3,890,000 3,874,805
CBM Funding Corp. sequential pay Series 1996-1
Class A-3PI, 7.08%, 11/1/07 2,300,000 2,377,266
CS First Boston Mortgage Securities Corp. Series 1997-C2
Class D, 7.27%, 4/17/11 1,850,000 1,857,227
Deutsche Mortgage and Asset Receiving Corp.
Series 1998-C1 Class D, 7.231%, 7/15/12 10,200,000 10,180,875
Federal Deposit Insurance Corp. sequential pay
Series 1996-C1 Class 1A, 6 3/4%, 5/25/26 8,188,946 8,201,475
General Motors Acceptance Corp. Commercial Mortgage
Securities, Inc. Series 1997-C2 Class E,
7.624%, 4/15/11 1,600,000 1,619,072
Nomura Asset Securities Corp. Series 1998-D6
Class A-4, 7.35%, 3/15/30 (b) 15,000,000 15,014,063
Nomura Depositor Trust floater Series 1998-ST1A :
Class A-4, 6.53%, 1/15/03 (a)(b) 7,900,000 7,917,281
Class A-5, 6.87%, 1/15/03 (a)(b) 5,278,196 5,288,093
COMMERCIAL MORTGAGE SECURITIES - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
Structured Asset Securities Corp.:
commercial Series 1992-M1 Class C, 7.05%, 11/25/02 $ 3,192,522 $
3,025,912
floater Series 1997-C1 Class C, 6.60%, 7/25/00 (a)(b) 15,610,888
15,606,009
Series 1997-NI Class C, 6.055%, 9/25/28 (a) 3,553,497 3,552,387
Thirteen Affiliates of General Growth Properties, Inc.
Series 1 Class D-1, 6.917%, 11/15/04 (a) 18,200,000 18,167,604
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $95,943,674) 96,682,069
CERTIFICATES OF DEPOSIT - 8.4%
Sanwa Bank Ltd. Japan yankee 5.71%, 5/29/98 25,000,000 24,998,283
Sumitomo Bank Ltd. Japan yankee 5.71%, 5/18/98 20,000,000 19,999,070
TOTAL CERTIFICATES OF DEPOSIT
(Cost $45,000,000) 44,997,353
CASH EQUIVALENTS - 1.1%
MATURITY
AMOUNT
Investments in repurchase agreements (U.S. Treasury
obligations), in a joint trading account at 5 1/2%,
dated 4/30/98 due 5/1/98 $ 6,154,939 6,154,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $533,126,563) $ 538,769,410
LEGEND
(g) 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
$54,406,179 or 10.8% of net assets.
(h) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(i) A portion of the security was purchased on a delayed delivery or
when-issued basis (see Note 2 of Notes to Financial Statements).
INCOME TAX INFORMATION
At April 30, 1998, the aggregate cost of investment securities for
income tax purposes was $533,194,047. Net unrealized appreciation
aggregated $5,575,363, of which $7,156,070 related to appreciated
investment securities and $1,580,707 related to depreciated investment
securities.
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1998 (UNAUDITED)
ASSETS
INVESTMENT IN SECURITIES, AT VALUE (INCLUDING REPURCHASE $ 538,769,410
AGREEMENTS OF $6,154,000) (COST $533,126,563) - SEE
ACCOMPANYING SCHEDULE
CASH 2,909
RECEIVABLE FOR INVESTMENTS SOLD 23,383,991
RECEIVABLE FOR FUND SHARES SOLD 574,591
INTEREST RECEIVABLE 2,954,792
TOTAL ASSETS 565,685,693
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 39,859,866
REGULAR DELIVERY
DELAYED DELIVERY 19,268,521
PAYABLE FOR FUND SHARES REDEEMED 320,472
DISTRIBUTIONS PAYABLE 382,390
ACCRUED MANAGEMENT FEE 171,284
DISTRIBUTION FEES PAYABLE 5,088
OTHER PAYABLES AND ACCRUED EXPENSES 187,928
TOTAL LIABILITIES 60,195,549
NET ASSETS $ 505,490,144
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 492,840,841
UNDISTRIBUTED NET INVESTMENT INCOME 1,014,386
ACCUMULATED UNDISTRIBUTED NET REALIZED 5,992,070
GAIN (LOSS) ON INVESTMENTS
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 5,642,847
NET ASSETS $ 505,490,144
</TABLE>
STATEMENT OF ASSETS AND LIABILITIES - CONTINUED
APRIL 30, 1998 (UNAUDITED)
CALCULATION OF MAXIMUM OFFERING PRICE $11.01
CLASS A:
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($559,031 (DIVIDED BY) 50,778 SHARES)
MAXIMUM OFFERING PRICE PER SHARE (100/95.25 OF $11.01) $11.56
CLASS T: $11.01
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($12,719,495 (DIVIDED BY) 1,155,074 SHARES)
MAXIMUM OFFERING PRICE PER SHARE (100/96.50 OF $11.01) $11.41
CLASS B: $11.01
NET ASSET VALUE AND OFFERING PRICE PER SHARE
($3,920,411 (DIVIDED BY) 356,203 SHARES) A
INITIAL CLASS: $11.02
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER
SHARE ($466,438,664 (DIVIDED BY) 42,326,197 SHARES)
INSTITUTIONAL CLASS: $11.00
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER
SHARE ($21,852,543 (DIVIDED BY) 1,986,173 SHARES)
A REDEMPTION PRICE PER SHARE IS EQUAL TO NET ASSET VALUE LESS ANY
APPLICABLE CONTINGENT DEFERRED SALES CHARGE.
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 1998 (UNAUDITED)
INVESTMENT INCOME $ 18,182,971
INTEREST
EXPENSES
MANAGEMENT FEE $ 1,126,273
TRANSFER AGENT FEES 512,973
DISTRIBUTION FEES 27,655
ACCOUNTING FEES AND EXPENSES 103,672
NON-INTERESTED TRUSTEES' COMPENSATION 5,862
CUSTODIAN FEES AND EXPENSES 55,136
REGISTRATION FEES 93,291
AUDIT 43,841
LEGAL 14,306
MISCELLANEOUS 2,547
TOTAL EXPENSES BEFORE REDUCTIONS 1,985,556
EXPENSE REDUCTIONS (105,519) 1,880,037
NET INVESTMENT INCOME 16,302,934
REALIZED AND UNREALIZED GAIN (LOSS) 6,657,378
NET REALIZED GAIN (LOSS) ON INVESTMENT SECURITIES
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON (6,160,268)
INVESTMENT SECURITIES
NET GAIN (LOSS) 497,110
NET INCREASE (DECREASE) IN NET ASSETS RESULTING $ 16,800,044
FROM OPERATIONS
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED THREE MONTHS YEAR ENDED
APRIL 30, 1998 ENDED JULY 31,
(UNAUDITED) OCTOBER 31, 1997 1997
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS $ 16,302,934 $ 8,459,090 $ 32,193,238
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 6,657,378 1,110,586 4,296,274
CHANGE IN NET UNREALIZED (6,160,268) 1,347,376 14,164,021
APPRECIATION (DEPRECIATION)
NET INCREASE (DECREASE) IN NET ASSETS 16,800,044 10,917,052 50,653,533
RESULTING FROM OPERATIONS
DISTRIBUTIONS TO SHAREHOLDERS (15,577,043) (8,349,402) (32,649,725)
FROM NET INVESTMENT INCOME
FROM NET REALIZED GAIN (1,430,037) (3,850,848) (5,039,533)
TOTAL DISTRIBUTIONS (17,007,080) (12,200,250) (37,689,258)
SHARE TRANSACTIONS - NET (26,208,431) (703,316) 32,765,543
INCREASE (DECREASE)
TOTAL INCREASE (DECREASE) IN (26,415,467) (1,986,514) 45,729,818
NET ASSETS
NET ASSETS
BEGINNING OF PERIOD 531,905,611 533,892,125 488,162,307
END OF PERIOD (INCLUDING UNDISTRIBUTED $ 505,490,144 $ 531,905,611 $ 533,892,125
NET INVESTMENT INCOME OF
$1,014,386, $290,731 AND
$230,506, RESPECTIVELY)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FINANCIAL HIGHLIGHTS - CLASS A
SIX MONTHS THREE MONTHS YEAR ENDED
ENDED ENDED JULY 31,
APRIL 30, 1998 OCTOBER 31,
(UNAUDITED) 1997 1997 E
SELECTED PER-SHARE DATA
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.020 $ 11.050 $ 10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME F .339 .170 .268
NET REALIZED AND UNREALIZED GAIN (LOSS) .002 .048 .224
TOTAL FROM INVESTMENT OPERATIONS .341 .218 .492
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.321) (.168) (.272)
FROM NET REALIZED GAIN (.030) (.080) -
TOTAL DISTRIBUTIONS (.351) (.248) (.272)
NET ASSET VALUE, END OF PERIOD $ 11.010 $ 11.020 $ 11.050
TOTAL RETURN B, C 3.14% 2.00% 4.61%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 559 $ 1,648 $ 1,586
RATIO OF EXPENSES TO AVERAGE NET ASSETS .90% A, D .90% A, D .90% A, D
RATIO OF NET INTEREST INCOME TO AVERAGE NET ASSETS 5.92% A 6.18% A 6.09% A
PORTFOLIO TURNOVER RATE 247% A 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 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FINANCIAL HIGHLIGHTS - CLASS T
SIX MONTHS THREE MONTHS YEAR ENDED
ENDED ENDED JULY 31,
APRIL 30, 1998 OCTOBER 31,
(UNAUDITED) 1997 1997 E
SELECTED PER-SHARE DATA
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.020 $ 11.050 $ 10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME F .333 .167 .255
NET REALIZED AND UNREALIZED GAIN (LOSS) .008 .048 .233
TOTAL FROM INVESTMENT OPERATIONS .341 .215 .488
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.321) (.165) (.268)
FROM NET REALIZED GAIN (.030) (.080) -
TOTAL DISTRIBUTIONS (.351) (.245) (.268)
NET ASSET VALUE, END OF PERIOD $ 11.010 $ 11.020 $ 11.050
TOTAL RETURN B, C 3.13% 1.98% 4.57%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 12,719 $ 14,649 $ 12,193
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.00% A, D 1.00% A, D 1.00% A, D
RATIO OF NET INTEREST INCOME TO AVERAGE NET ASSETS 6.08% A 6.10% A 5.99% A
PORTFOLIO TURNOVER RATE 247% A 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 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FINANCIAL HIGHLIGHTS - CLASS B
SIX MONTHS THREE MONTHS YEAR ENDED
ENDED ENDED JULY 31,
APRIL 30, 1998 OCTOBER 31,
(UNAUDITED) 1997 1997 E
SELECTED PER-SHARE DATA
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.020 $ 11.040 $ 10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME F .293 .142 .234
NET REALIZED AND UNREALIZED GAIN (LOSS) .012 .065 .214
TOTAL FROM INVESTMENT OPERATIONS .305 .207 .448
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.285) (.147) (.238)
FROM NET REALIZED GAIN (.030) (.080) -
TOTAL DISTRIBUTIONS (.315) (.227) (.238)
NET ASSET VALUE, END OF PERIOD $ 11.010 $ 11.020 $ 11.040
TOTAL RETURN B, C 2.80% 1.90% 4.20%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 3,920 $ 1,587 $ 823
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.65% A, D 1.65% A, D 1.65% A, D
RATIO OF NET INTEREST INCOME TO AVERAGE NET ASSETS 5.46% A 5.32% A 5.34% A
PORTFOLIO TURNOVER RATE 247% A 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 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL HIGHLIGHTS - INITIAL CLASS SIX MONTHS ENDED THREE MONTHS YEARS ENDED JULY 31,
APRIL 30, 1998 ENDED
(UNAUDITED) OCTOBER 31,
1997
1997 1996 1995 1994 1993
SELECTED PER-SHARE DATA
NET ASSET VALUE,
BEGINNING OF PERIOD $11.020 $11.050 $10.780 $10.890 $10.580 $10.910 $10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .349 D .176 D .678 D .729 .772 .570 .788
NET REALIZED AND UNREALIZED
GAIN (LOSS) .017 .047 .391 (.015) .325 (.242) (.007)
TOTAL FROM INVESTMENT OPERATIONS .366 .223 1.069 .714 1.097 .328 .781
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.336) (.173) (.689) (.724) (.737) (.588) (.701)
FROM NET REALIZED GAIN (.030) (.080) (.110) (.100) - (.040) -
IN EXCESS OF NET REALIZED GAIN - - - - (.050) (.030) -
TOTAL DISTRIBUTIONS (.366) (.253) (.799) (.824) (.787) (.658) (.701)
NET ASSET VALUE, END OF PERIOD $11.020 $11.020 $11.050 $10.780 $10.890 $10.580 $10.910
TOTAL RETURN B, C 3.37% 2.05% 10.34% 6.72% 10.88% 3.13% 7.47%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD
(000 OMITTED) $466,439 $494,304 $506,113 $488,162 $416,241 $365,801 $419,467
RATIO OF EXPENSES TO AVERAGE
NET ASSETS .72% A .72% A .73% .74% .77% .79% .76%
RATIO OF EXPENSES TO AVERAGE
NET ASSETS AFTER .72% A .72% A .73% .73% E .77% .79% .76%
EXPENSE REDUCTIONS
RATIO OF NET INTEREST INCOME
TO AVERAGE NET ASSETS 6.38% A 6.36% A 6.26% 6.75% 7.37% 6.73% 7.18%
PORTFOLIO TURNOVER RATE 247% A 125% A 149% 221% 329% 563% 278%
</TABLE>
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN.
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
E FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FINANCIAL HIGHLIGHTS - INSTITUTIONAL CLASS
SIX MONTHS THREE MONTHS YEAR ENDED
ENDED ENDED JULY 31,
APRIL 30, 1998 OCTOBER 31,
(UNAUDITED) 1997 1997 F
SELECTED PER-SHARE DATA
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.010 $ 11.040 $ 10.830
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME G .347 .172 .263
NET REALIZED AND UNREALIZED GAIN (LOSS) .008 .050 .226
TOTAL FROM INVESTMENT OPERATIONS .355 .222 .489
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.335) (.172) (.279)
FROM NET REALIZED GAIN (.030) (.080) -
TOTAL DISTRIBUTIONS (.365) (.252) (.279)
NET ASSET VALUE, END OF PERIOD $ 11.000 $ 11.010 $ 11.040
TOTAL RETURN B, C 3.26% 2.05% 4.59%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 21,853 $ 19,718 $ 13,177
RATIO OF EXPENSES TO AVERAGE NET ASSETS .75% A, D .75% A, D .75% A, D
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER EXPENSE .75% A .75% A .70% A, E
REDUCTIONS
RATIO OF NET INTEREST INCOME TO AVERAGE NET ASSETS 6.36% A 6.35% A 6.29% A
PORTFOLIO TURNOVER RATE 247% A 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 April 30, 1998 (Unaudited)
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 require management to
make certain estimates and assumptions at the date of the financial
statements. The following summarizes the significant accounting
policies of the fund:
SECURITY VALUATION. Securities are valued based upon a computerized
matrix system and/or appraisals by a pricing service, both of which
consider market transactions and dealer-supplied valuations.
Securities (including restricted securities) for which 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
among the funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are declared daily and
paid monthly from net investment income. Distributions from realized
gains, if any, are recorded on the ex-dividend date. Income dividends
and capital gain distributions are declared separately for each class.
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
DISTRIBUTIONS TO SHAREHOLDERS - CONTINUED
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.
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 market value of the securities purchased or sold on a
delayed delivery basis are identified as such in the fund's schedule
of investments. The fund may receive compensation for interest forgone
in the purchase of a delayed delivery security. With respect to
purchase commitments, the fund identifies securities as segregated in
its custodial records with a value at least equal to the amount of the
commitment. Losses may arise due to changes in the market value of the
underlying securities or if the counterparty does not perform under
the contract.
2. OPERATING POLICIES - CONTINUED
RESTRICTED SECURITIES. The fund is permitted to invest in securities
that are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from
registration or to the public if the securities are registered.
Disposal of these securities may involve time-consuming negotiations
and expense, and prompt sale at an acceptable price may be difficult.
At the end of the period, the fund had no investments in restricted
securities (excluding 144A issues).
3. PURCHASES AND SALES OF INVESTMENTS.
Purchases and sales of securities, other than short-term securities,
aggregated $659,530,789 and $622,974,699, respectively, of which U.S.
government and government agency obligations aggregated $514,530,789
and $522,912,224, 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 period, the management
fee was equivalent to an annualized rate of .44% 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
Distributors Corporation (FDC), an affiliate of FMR, a distribution
and service fee. For the period, this fee was 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.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
DISTRIBUTION AND SERVICE PLAN - CONTINUED
For the period, 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:
PAID TO PAID TO RETAINED BY
FDC INVESTMENT FDC
PROFESSIONALS
CLASS A $ 610 $ 610 $ 0
CLASS T 16,131 7,974 8,157
CLASS B 10,914 3,031 7,883
$ 27,655 $ 11,615 $ 16,040
Under the Plans, FMR 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. For the
period, the following amounts were paid to third parties under the
Plans:
CLASS A $77
CLASS T 4,857
CLASS B 289
SALES LOAD. FDC receives a front-end sales charge of up to 4.75% for
selling Class A shares, and 3.50% for selling Class T shares of the
fund. FDC receives the proceeds of contingent deferred sales charges
levied on Class B share redemptions occurring within six years of
purchase. The Class B charge is based on declining rates ranging from
5% to 1% 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. In addition, purchases of
Class A and Class T shares that were subject to a finder's fee bear a
contingent deferred sales charge on assets that do not remain in the
fund for at least one year. The Class A and Class T contingent
deferred sales charge is based on 0.25% 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:
PAID TO PAID TO
FDC INVESTMENT
PROFESSIONALS
CLASS A $ 5,423 $ 2,979
CLASS T 12,967 8,878
CLASS B 1,849 0 *
$ 20,239 $ 11,857
* 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. Fidelity Investments Institutional Operations
Company, Inc., (FIIOC), an affiliate of FMR, is the transfer, dividend
disbursing and shareholder servicing agent (collectively referred to
as the transfer agent) for the fund's Class A, Class T, Class B and
Institutional Class. Fidelity Service Company, Inc. (FSC), an
affiliate of FMR, is the transfer agent for the Initial Class. FIIOC
and FSC pay for typesetting, printing and mailing of all shareholder
reports, except proxy statements. For the period, the following
amounts were paid to FIIOC or FSC:
AMOUNT % OF
AVERAGE
NET ASSETS *
CLASS A $ 3,047 .75
CLASS T 29,850 .47
CLASS B 3,985 .33
INITIAL CLASS 452,315 .19
INSTITUTIONAL CLASS 23,776 .24
$ 512,973
* ANNUALIZED.
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 of the following classes:
FMR REIMBURSEMENT
EXPENSE
LIMITATIONS
CLASS A .90% $ 22,120
CLASS T 1.00% 35,631
CLASS B 1.65% 21,668
INSTITUTIONAL CLASS .75% 23,375
$ 102,794
In addition, the fund has entered into an arrangement 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 period, the fund's custodian fees were reduced by
$2,725 under the custodian arrangement.
6. DISTRIBUTIONS TO SHAREHOLDERS.
Distributions to shareholders of each class were as follows:
SIX MONTHS THREE MONTHS YEAR ENDED
ENDED ENDED JULY 31,
APRIL 30, OCTOBER 31,
1998 1997 1997 A
FROM NET INVESTMENT INCOME
CLASS A $ 23,189 $ 24,437 $ 21,750
CLASS T 376,301 197,984 64,445
CLASS B 62,661 15,690 8,241
INITIAL CLASS 14,507,792 7,870,955 32,474,399
INSTITUTIONAL CLASS 607,100 240,336 80,890
TOTAL $ 15,577,043 $ 8,349,402 $ 32,649,725
FROM NET REALIZED GAIN
CLASS A $ 4,543 $ 11,558 $ -
CLASS T 41,650 92,775 -
CLASS B 4,901 7,487 -
INITIAL CLASS 1,324,784 3,640,130 5,039,533
INSTITUTIONAL CLASS 54,159 98,898 -
TOTAL $ 1,430,037 $ 3,850,848 $ 5,039,533
TOTAL $ 17,007,080 $ 12,200,250 $ 37,689,258
B 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
SIX MONTHS THREE YEAR ENDED SIX MONTHS THREE MONTHS YEAR ENDED
ENDED MONTHS JULY 31, ENDED ENDED JULY 31,
APRIL 30, ENDED APRIL 30, OCTOBER 31,
OCTOBER 31,
1998 1997 1997 A 1998 1997 1997 A
CLASS A 71,138 3,210 141,575 $ 784,521 $ 35,261 $ 1,531,983
SHARES SOLD
REINVESTMENT OF 1,704 3,274 1,989 18,762 35,846 21,750
DISTRIBUTIONS
SHARES (171,581) (531) - (1,888,469) (5,834) -
REDEEMED
NET INCREASE (98,739) 5,953 143,564 $ (1,085,186) $ 65,273 $ 1,553,733
(DECREASE)
CLASS T 412,180 312,588 1,114,285 $ 4,538,134 $ 3,429,256 $ 12,183,453
SHARES SOLD
REINVESTMENT OF 34,980 25,415 5,597 385,401 278,358 61,712
DISTRIBUTIONS
SHARES (621,235) (112,534) (16,202) (6,853,036) (1,233,884) (177,848)
REDEEMED
NET INCREASE (174,075) 225,469 1,103,680 $ (1,929,501) $ 2,473,730 $ 12,067,317
(DECREASE)
CLASS B 230,699 68,692 73,891 $ 2,540,972 $ 753,079 $ 801,025
SHARES SOLD
REINVESTMENT OF 4,918 1,666 687 54,167 18,237 7,506
DISTRIBUTIONS
SHARES (23,460) (890) - (258,281) (9,750) -
REDEEMED
NET INCREASE 212,157 69,468 74,578 $ 2,336,858 $ 761,566 $ 808,531
(DECREASE)
INITIAL CLASS 2,815,520 1,426,619 14,636,021 $ 31,047,102 $ 15,655,743 $ 158,564,289
SHARES SOLD
REINVESTMENT OF 1,181,041 854,187 2,769,613 13,016,826 9,354,223 29,925,102
DISTRIBUTIONS
SHARES (6,506,507) (3,241,358) (16,911,618) (71,738,410) (35,550,337) (183,183,589)
REDEEMED
NET INCREASE (2,509,946) (960,552) 494,016 $ (27,674,482) $ (10,540,371) $ 5,305,802
(DECREASE)
INSTITUTIONAL 678,393 671,412 1,216,421 $ 7,466,253 $ 7,350,245 $ 13,282,379
CLASS
SHARES SOLD
REINVESTMENT OF 29,739 11,919 3,516 327,334 130,486 38,560
DISTRIBUTIONS
SHARES (512,714) (86,048) (26,465) (5,649,707) (944,245) (290,779)
REDEEMED
NET INCREASE 195,418 597,283 1,193,472 $ 2,143,880 $ 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 period, each class paid the following amounts to register its
shares for sale:
REGISTRATION
FEES
CLASS A $ 20,096
CLASS T 20,109
CLASS B 20,139
INITIAL CLASS 11,553
INSTITUTIONAL CLASS 21,394
$ 93,291
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
Eric D. Roiter, 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
Strategic Income
Capital & Income
Ginnie Mae
Government Securities
Intermediate Bond
International 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(trademark) 1999, 2001 & 2003
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(trademark) 1-800-544-5555
AUTOMATED LINE FOR QUICKEST SERVICE
