FIDELITY
ADVISOR ANNUITY
FUND
Please read this prospectus before investing, and keep it on file for
future reference. It contains important information to help you decide if
the goal of one or more of the funds matches your own.
To learn more about each fund and its investments, you can obtain a copy of
the funds' most recent financial report and portfolio listing or a copy of
the Statement of Additional Information (SAI) dated April 30, 1996. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is
incorporated herein by reference (legally forms a part of the prospectus).
For a free copy of either document, contact Nationwide Life Insurance
Company, One Nationwide Plaza, P.O. Box 182610, Columbus, Ohio 43216 or by
calling 1-800-573-5775.
As of the date of this Prospectus, shares of each fund may be sold only to
certain separate accounts of Nationwide Life Insurance Company, for the
purpose of funding variable annuity contracts issued by Nationwide Life
Insurance Company. Particular funds may not be available in your state due
to various insurance regulations. Please check with Nationwide Life for
available funding options. Inclusion of a fund in this Prospectus which is
not available in your state is not to be considered a solicitation. This
Prospectus should be read in conjunction with the prospectus of the
separate account of the specific annuity product which accompanies this
Prospectus.
AN INVESTMENT IN ANY FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT, AND THERE CAN BE NO ASSURANCE THAT MONEY MARKET FUND WILL
MAINTAIN A STABLE $1.00 SHARE PRICE.
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.
HIGH YIELD FUND MAY INVEST WITHOUT LIMITATION IN LOWER-QUALITY DEBT
SECURITIES, SOMETIMES CALLED "JUNK BONDS." INVESTORS SHOULD CONSIDER THAT
THESE SECURITIES CARRY GREATER RISKS, SUCH AS THE RISK OF DEFAULT, THAN
OTHER DEBT SECURITIES. REFER TO "INVESTMENT PRINCIPLES AND RISKS" ON PAGE
FOR FURTHER INFORMATION.
lIKE ALL MUTUAL FUNDS, THESE SECURITIES
HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
FAA-pro-0496
Fidelity Advisor Annuity Fund (the Trust) is designed to provide investment
vehicles for variable annuity contracts issued by Nationwide Life Insurance
Company. The Trust currently offers the following funds:
MONEY MARKET FUND
Fidelity Advisor Annuity Money Market Fund
INCOME FUNDS
Fidelity Advisor Annuity Government Investment Fund
Fidelity Advisor Annuity High Yield Fund
GROWTH & INCOME AND GROWTH FUNDS
Fidelity Advisor Annuity Income & Growth Fund
Fidelity Advisor Annuity Growth Opportunities Fund
Fidelity Advisor Annuity Overseas Fund
PROSPECTUS
APRIL 30, 1996(FIDELITY_LOGO_GRAPHIC) 82 DEVONSHIRE STREET, BOSTON, MA
02109
CONTENTS
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KEY FACTS THE FUNDS AT A GLANCE
FINANCIAL HIGHLIGHTS A summary of each fund's financial
data.
WHO MAY WANT TO INVEST
THE FUNDS IN DETAIL CHARTER How each fund is organized.
INVESTMENT PRINCIPLES AND RISKS Each fund's overall
approach to investing.
BREAKDOWN OF EXPENSES How operating costs are
calculated and what they include.
PERFORMANCE
ACCOUNT POLICIES DISTRIBUTIONS AND TAXES
TRANSACTION DETAILS Share price calculations and how to
invest and redeem.
APPENDIX Description of Moody's and S&P's Corporate Bond
Ratings.
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KEY FACTS
THE FUNDS AT A GLANCE
The funds contained in this prospectus are designed to provide investment
vehicles for variable annuity contracts issued by Nationwide Life Insurance
Company.
MANAGEMENT: Fidelity Management & Research Company (FMR) is the management
arm of Fidelity Investments, which was established in 1946 and is now
America's largest mutual fund manager. Affiliates of FMR may choose
investments for some of the funds.
MONEY MARKET FUND
FIDELITY ADVISOR ANNUITY MONEY MARKET FUND
GOAL: Income while maintaining a stable $1.00 share price.
STRATEGY: Invests in high-quality, short-term money market securities of
all types.
SIZE: As of December 31, 1995, the fund had over $ 28 million in
assets.
INCOME FUNDS
FIDELITY ADVISOR ANNUITY GOVERNMENT INVESTMENT FUND
GOAL: High level of current income.
STRATEGY: Invests primarily in obligations issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities.
SIZE: As of December 31, 1995, the fund had over $ 10 million in
assets.
FIDELITY ADVISOR ANNUITY HIGH YIELD FUND
GOAL: High current income with the potential for capital gains.
STRATEGY: Invests primarily in high-yielding debt securities, with an
emphasis on lower-quality securities.
SIZE: As of December 31, 1995, the fund had over $ 41 million in
assets.
INCOME & GROWTH AND GROWTH FUNDS
FIDELITY ADVISOR ANNUITY INCOME & GROWTH FUND
GOAL: Both income and growth of capital.
STRATEGY: Invests in a diversified portfolio of equity and fixed-income
securities.
SIZE: As of December 31, 1995, the fund had over $ 43 million in
assets.
FIDELITY ADVISOR ANNUITY GROWTH OPPORTUNITIES FUND
GOAL: Capital growth (increase in the value of the fund's shares).
STRATEGY: Invests primarily in common stocks and securities convertible
into common stocks.
SIZE: As of December 31, 1995, the fund had over $ 164 million in
assets.
FIDELITY ADVISOR ANNUITY OVERSEAS FUND
GOAL: Growth of capital.
STRATEGY: Invests primarily in foreign securities.
SIZE: As of December 31, 1995, the fund had over $ 17 million in
assets.
FINANCIAL HIGHLIGHTS
The financial highlights tables that follow and each fund's financial
statements are included in the funds' Annual Report and have been audited
by Price Waterhouse LLP , independent accountants. Their report on
the financial statements and financial highlights is included in the Annual
Report. The financial statements, the financial highlights, and the report
are incorporated by reference into the funds' SAI, which may be obtained
free of charge from Nationwide Life Insurance Company, One Nationwide
Plaza, P.O. Box 182610, Columbus, Ohio 43216 or by calling 1-800-573-5775.
MONEY MARKET
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1.Selected Per-Share Data and Ratios
2.Year ended December 31 1995E
3.Net asset value, beginning of period $ 1.000
4.Income from Investment Operations .051
Net interest income
5.Less Distributions (.051)
From net interest income
6.Net asset value, end of period $ 1.000
7.Total return B,C 5.17%
8.Net assets, end of period (000 omitted) $ 28,974
9.Ratio of expenses to average net assets .74%A
,D
10.Ratio of net interest income to average net assets 5.18%A
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A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD SHOWN. TOTAL RETURN DOES NOT REFLECT CHARGES
ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION OF
THESE CHARGES WOULD REDUCE THE TOTAL RETURN SHOWN.
D FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE
BEEN HIGHER.
E JANUARY 4, 1995 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1995
GOVERNMENT INVESTMENT
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11.Selected Per-Share Data and Ratios
12.Year ended December 31 1995E
13.Net asset value, beginning of period $ 10.000
14.Income from Investment Operations .330
Net investment income
15. Net realized and unrealized gain (loss) 1.320
16. Total from investment operations 1.650
17.Less Distributions (.330)
From net investment income
18. From net realized gain (.240)
19. Total distributions (.570)
20.Net asset value, end of period $ 11.080
21.Total return B,C 16.54%
22.Net assets, end of period (000 omitted) $ 10,726
23.Ratio of expenses to average net assets 1.00%
A,D
24.Ratio of net investment income to average net assets 5.87%
A
25.Portfolio turnover rate 220%
A
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A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD SHOWN. TOTAL RETURN DOES NOT REFLECT CHARGES
ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION OF
THESE CHARGES WOULD REDUCE THE TOTAL RETURN SHOWN.
D FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE
BEEN HIGHER.
E JANUARY 3, 1995 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1995
HIGH YIELD
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26.Selected Per-Share Data and Ratios
27.Year ended December 31 1995E
28.Net asset value, beginning of period $ 10.000
29.Income from Investment Operations .410
Net investment income
30. Net realized and unrealized gain (loss) 1.600
31. Total from investment operations 2.010
32.Less Distributions (.410)
From net investment income
33. From net realized gain (.020)
34. Total distributions (.430)
35.Net asset value, end of period $ 11.580
36.Total return B,C 20.12%
37.Net assets, end of period (000 omitted) $ 41,224
38.Ratio of expenses to average net assets 1.00%
A,D
39.Ratio of net investment income to average net assets 9.23%
A
40.Portfolio turnover rate 98%
A
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A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD SHOWN. TOTAL RETURN DOES NOT REFLECT CHARGES
ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION OF
THESE CHARGES WOULD REDUCE THE TOTAL RETURN SHOWN.
D FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE
BEEN HIGHER.
E JANUARY 3, 1995 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1995
INCOME & GROWTH
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41.Selected Per-Share Data and Ratios
42.Year ended December 31 1995C
43.Net asset value, beginning of period $ 10.00
44.Income from Investment Operations
45. Net investment income .14
46. Net realized and unrealized gain (loss) 1.25
47. Total from investment operations 1.39
48.Less Distributions
49. From net investment income (.14)
50. From net realized gain (.08)
51. Total distributions (.22)
52.Net asset value, end of period $ 11.17
53.Total return B 13.92%
54.Net assets, end of period (000 omitted) $ 43,155
55.Ratio of expenses to average net assets 1.42%A
56.Ratio of net investment income to average net assets 3.56%
57.Portfolio turnover rate 248%
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A FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE
BEEN HIGHER.
B THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD SHOWN. TOTAL RETURN DOES NOT REFLECT CHARGES
ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION OF
THESE CHARGES WOULD REDUCE THE TOTAL RETURN SHOWN.
C JANUARY 3, 1995 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1995
GROWTH OPPORTUNITIES
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58.Selected Per-Share Data and Ratios
59.Year ended December 31 1995D
60.Net asset value, beginning of period $ 10.00
61.Income from Investment Operations
62. Net investment income .11
63. Net realized and unrealized gain (loss) 3.14
64. Total from investment operations 3.25
65.Less Distributions
66. From net investment income (.11)
67. From net realized gain (.07)
68. Total distributions (.18)
69.Net asset value, end of period $ 13.07
70.Total return A 32.52%
71.Net assets, end of period (000 omitted) $ 164,303
72.Ratio of expenses to average net assets .85%
B
73.Ratio of expenses to average net assets after expense reductions .83%
C
74.Ratio of net investment income to average net assets 2.49%
75.Portfolio turnover rate 38%
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A THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD SHOWN. TOTAL RETURN DOES NOT REFLECT CHARGES
ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION OF
THESE CHARGES WOULD REDUCE THE TOTAL RETURN SHOWN.
B FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE
BEEN HIGHER.
C FMR DIRECTED CERTAIN PORTFOLIO TRADES TO BROKERS WHO PAID A PORTION OF
THE FUND'S EXPENSES.
D JANUARY 3, 1995 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1995
OVERSEAS
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76.Selected Per-Share Data and Ratios
77.Year ended December 31 1995C
78.Net asset value, beginning of period $ 10.00
79.Income from Investment Operations
80. Net investment income .05
81. Net realized and unrealized gain (loss) .97
82. Total from investment operations 1.02
83.Less Distributions
84. From net investment income (.05)
85. In excess of net investment income (.01)
86. Total distributions (.06)
87.Net asset value, end of period $ 10.96
88.Total return B 10.20%
89.Net assets, end of period (000 omitted) $ 17,595
90.Ratio of expenses to average net assets 1.50%
A
91.Ratio of net investment income to average net assets 1.23%
92.Portfolio turnover rate 43%
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A FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE
BEEN HIGHER.
B THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD SHOWN. TOTAL RETURN DOES NOT REFLECT CHARGES
ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S ACCOUNT. INCLUSION OF THESE
CHARGES WOULD REDUCE THE TOTAL RETURN SHOWN.
C JANUARY 3, 1995 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1995
WHO MAY WANT TO INVEST
The value of each fund's (except Money Market's) investments and, as
applicable, the income they generate will vary from day to day, and
generally reflect changes in market conditions, interest rates, and other
company, political, or economic news. In the short-term, stock prices can
fluctuate dramatically in response to these factors. The securities of
small, less well-known companies may be more volatile than those of larger
companies. The value of bonds fluctuates based on changes in interest rates
and in the credit quality of the issuer. Over time, however, stocks,
although more volatile, have shown greater growth potential than other
types of securities. Investments in foreign securities may involve risks in
addition to those of U.S. investments, including increased political and
economic risk, as well as exposure to currency fluctuations.
An investment in any one fund is not in itself a balanced investment plan.
You should consider your investment objective and tolerance for risk when
making an investment decision. Except for the Money Market Fund,
w hen fund shares are redeemed they may be worth more or less than their
original cost. As with any mutual fund, there is no assurance that a
fund will achieve its goal.
MONEY MARKET FUND
The fund is designed for investors who would like to earn income at current
money market rates while preserving the value of their investment. The fund
is managed to keep its share price stable at $1.00. The rate of income will
vary from day to day, generally reflecting short-term interest rates.
GOVERNMENT INVESTMENT FUND
The fund is designed for investors who seek high current income from a
portfolio of investment-grade debt securities. The fund also invests
consistent with consideration of capital preservation.
HIGH YIELD FUND
The fund is designed for investors who seek high current income with some
potential for capital growth from a portfolio of debt instruments with a
focus on lower-quality debt securities. The fund may be appropriate for
long-term, aggressive investors who understand the potential risks and
rewards of investing in lower-quality debt securities, including defaulted
securities.
INCOME & GROWTH FUND
The fund is designed for investors who are willing to ride out stock market
fluctuations in pursuit of potentially high long-term returns. The fund is
designed for investors who seek a combination of growth and income from
equity and some bond investments.
THE SPECTRUM OF FIDELITY FUNDS
Broad categories of Fidelity funds are presented
here in order of ascending risk. Generally,
investors seeking to maximize return must
assume greater risk. The funds in this
prospectus fall under one of the following
categories.
(solid bullet) MONEY MARKET Seeks income and stability by
investing in high-quality, short-term investments.
(solid bullet) INCOME Seeks income by investing in bonds.
(solid bullet) GROWTH AND INCOME Seeks long-term growth
and income by investing in stocks and bonds.
(solid bullet) GROWTH Seeks long-term growth by investing
mainly in stocks.
(checkmark)
GROWTH OPPORTUNITIES FUND
The fund is designed for investors who are willing to ride out stock market
fluctuations in pursuit of potentially high long-term returns. The fund is
designed for investors who want to be invested in the stock market for its
long-term growth potential. The fund invests for growth and does not pursue
income.
OVERSEAS FUND
The fund is designed for investors who are willing to ride out stock market
fluctuations in pursuit of potentially high long-term returns. The fund is
designed for investors who want to be invested in the stock market for its
long-term growth potential. The fund invests for growth and does not pursue
income. The fund may also be appropriate for investors who want to pursue
their investment goals in markets outside the United States. By including
international investments in your portfolio, you can achieve additional
diversification and participate in growth opportunities around the world.
THE FUNDS IN DETAIL
CHARTER
EACH FUND IS A MUTUAL FUND: an investment that pools shareholders' money
and invests it toward a specified goal. Each fund is a diversified fund of
Fidelity Advisor Annuity Fund, an open-end management investment company
organized as a Massachusetts business trust on July 14, 1994. There is a
remote possibility that one fund might become liable for a misstatement in
the prospectus about another fund.
EACH FUND IS GOVERNED BY A BOARD OF TRUSTEES which is responsible for
protecting the interests of shareholders. The trustees are experienced
executives who meet throughout the year to oversee the funds' activities,
review contractual arrangements with companies that provide services to the
funds, and review the funds' performance. The majority of trustees are not
otherwise affiliated with Fidelity.
THE FUNDS MAY HOLD SPECIAL MEETINGS AND MAIL PROXY MATERIALS. These
meetings may be called to elect or remove trustees, change fundamental
policies, approve a management contract, or for other purposes.
Shareholders not attending these meetings are encouraged to vote by proxy.
Nationwide Life Insurance Company will vote shares held in its separate
account as required by law and interpretations thereof, as may be amended
or changed from time to time. In accordance with current law and
interpretations thereof, Nationwide Life Insurance Company is required to
request voting instructions from policyowners and must vote shares in the
separate account in proportion to the voting instructions received. The
number of votes Nationwide Life Insurance Company is entitled to vote is
based upon the dollar value of its investment. For a further discussion,
please refer to your annuity's separate account prospectus.
FMR AND ITS AFFILIATES
Fidelity Investments is one of the largest investment management
organizations in the United States and has its principal business address
at 82 Devonshire Street, Boston, Massachusetts 02109. It includes a number
of different subsidiaries and divisions which provide a variety of
financial services and products. The funds employ various Fidelity
companies to perform activities required for their operation.
The funds are managed by FMR, which handles each fund's business affairs
and, with the assistance of affiliates for certain funds, chooses the
fund's investments.
(small solid bullet) FMR Texas Inc. (FMR Texas), in Irving, Texas, serves
as a sub-adviser for Money Market Fund.
(small solid bullet) Fidelity Management & Research (U.K.) Inc. (FMR U.K.),
in London, England, serves as a sub-adviser for High Yield, Income &
Growth, Growth Opportunities, and Overseas Funds.
(small solid bullet) Fidelity Management & Research (Far East) Inc. (FMR
Far East), in Tokyo, Japan, serves as a sub-adviser for High Yield, Income
& Growth, Growth Opportunities, and Overseas Funds.
(small solid bullet) Fidelity International Investment Advisors (FIIA), in
Pembroke, Bermuda, serves as a sub-adviser for Overseas Fund.
(small solid bullet) Fidelity International Investment Advisors (U.K.)
Limited (FIIAL U.K.), in Kent, England, serves as a sub-adviser for
Overseas Fund.
Robert C. Ives is manager of Fidelity Advisor Annuity Government Investment
Fund, which he has managed since February 1995. Mr. Ives also manages
Advisor Government Investment, Spartan Government Income, and Government
Securities. Previously, he managed Ginnie Mae , Mortgage Securities,
and Spartan Ginnie Mae. Mr. Ives joined Fidelity in 1991, after receiving
an M.B.A. from the University of Chicago.
FIDELITY FACTS
Fidelity offers the broadest selection of mutual
funds in the world.
(solid bullet) Number of Fidelity mutual funds: over 210
(solid bullet) Assets in Fidelity mutual funds: over
$ 354 billion
(solid bullet) Number of shareholder accounts: over
23 million
(solid bullet) Number of investment analysts and portfolio
managers: over 200
(checkmark)
Margaret L. Eagle is manager of Fidelity Advisor Annuity High Yield Fund,
which she has managed since January 1995. Ms. Eagle has managed Advisor
H igh Y ield since January 1987 and Advisor Strategic
Income 's High Yield investments since January 1986. Previously, she
managed Spartan High Income, High Income (now Capital & Income), and
several pension fund accounts. She also managed the bond portion of
Puritan. Ms. Eagle joined Fidelity in 1980.
Bettina Doulton is lead manager and vice president of Fidelity Advisor
Annuity Income & Growth Fund which she has managed since March 1996. Ms.
Doulton also manages Fidelity Advisor Income & Growth Fund and co-manages
Fidelity Puritan Fund. She previously managed Fidelity Value Fund, Fidelity
Advisor Equity-Income Fund, VIP: Equity-Income Portfolio and Fidelity
Select Automotive Portfolio. Ms. Doulton joined Fidelity in 1986.
Kevin E. Grant is also vice president of Fidelity Advisor Annuity Income &
Growth Fund and manager of its fixed-income investments since March 1996.
He co-manages Fidelity Advisor Income & Growth Fund, Fidelity Balanced
Fund, Fidelity Puritan Fund, and Fidelity Advisor Strategic Income Fund. He
also manages Fidelity Ginnie Mae Fund, Fidelity Mortgage Securities Fund,
Fidelity Advisor Limited Term Bond Fund and Spartan Ginnie Mae Fund. Mr.
Grant joined Fidelity in 1993 as manager of Fidelity Mortgage Securities
Fund. He is a former vice president and chief strategist for
mortgage-backed securities at Morgan Stanley. Previously, Mr. Grant served
as an investment director at Aetna Bond Investors.
George A. Vanderheiden is manager and vice president of Fidelity Advisor
Annuity Growth Opportunities Fund, which he has managed since January 1995.
Mr. Vanderheiden also manages Advisor Growth Opportunities, Destiny I and
Destiny II. He is a managing director of FMR Corp., and leader of the
growth group. Mr. Vanderheiden joined Fidelity in 1971.
Richard R. Mace, Jr. is vice president of Fidelity Advisor Annuity
Overseas Fund which he has managed since March 1996. Mr. Mace also manages
Fidelity Overseas Fund, VIP: Overseas Portfolio, Fidelity Advisor Overseas
Portfolio, Fidelity Global Balanced Fund, Fidelity International Value Fund
and Fidelity International Growth & Income Fund. Previously, he managed the
Fidelity Select Transportation, Fidelity Select Industrial Materials and
Fidelity Select Chemical Portfolios. Mr. Mace joined Fidelity in August
1987.
Fidelity investment personnel may invest in securities for their own
account pursuant to a code of ethics that establishes procedures for
personal investing and restricts certain transactions.
Fidelity Distributors Corporation (FDC) distributes and markets Fidelity's
funds and services. Fidelity Investments Institutional Operations Company
(FIIOC), 82 Devonshire Street, Boston, Massachusetts, performs transfer
agent servicing functions for the funds.
FMR Corp. is the ultimate parent company of FMR, FMR Texas, FMR U.K., and
FMR Far East. Members of the Edward C. Johnson 3d family are the
predominant owners of a class of shares of common stock representing
approximately 49% of the voting power of FMR Corp. Under the Investment
Company Act of 1940 (the 1940 Act), control of a company is presumed where
one individual or group of individuals owns more than 25% of the voting
stock of that company; therefore, the Johnson family may be deemed under
the 1940 Act to form a controlling group with respect to FMR Corp.
Fidelity International Limited (FIL) is the parent company of FIIA and
FIIAL U.K. The Johnson family group also owns, directly or indirectly, more
than 25% of the voting common stock of FIL.
A broker-dealer may use a portion of the commissions paid by Growth
Opportunities to reduce custodian or transfer agent fees for the
fund. FMR may use its broker-dealer affiliates and other firms that
sell fund shares to carry out a fund's transactions, provided that the fund
receives brokerage services and commission rates comparable to those of
other broker-dealers.
INVESTMENT PRINCIPLES AND RISKS
The value of each fund's domestic and foreign investments varies in
response to many factors. Stock values fluctuate in response to the
activities of individual companies and general market and economic
conditions.
The value of bonds fluctuates based on changes in interest rates, market
conditions, other economic and political news, and on their quality and
maturity. In general, bond prices rise when interest rates fall, and vice
versa. This effect is usually more pronounced for longer-term securities.
Lower-quality securities offer higher yields, but also carry more risk.
The total return from a bond is a combination of income and price gains or
losses. While income is the most important component of bond returns over
time, a fund's emphasis on income does not mean that the fund invests only
in the highest-yielding bonds available, or that it can avoid risks to
principal. In selecting investments for a fund, FMR considers a bond's
income potential together with its potential for price gains or losses. FMR
focuses on assembling a portfolio of income-producing securities that it
believes will provide the best tradeoff between risk and return within the
range of securities that are eligible investments for a bond fund.
International funds have increased economic and political risks as they are
exposed to events and factors in the various world markets. This is
especially true for funds that invest in emerging markets. Also, because
many of the funds' investments are denominated in foreign currencies,
changes in the value of foreign currencies can significantly affect a
fund's share price. FMR may use a variety of investment techniques to
either increase or decrease a fund's investment exposure to any currency.
FMR may use various investment techniques to hedge a portion of a fund's
risks, but there is no guarantee that these strategies will work as FMR
intends. When fund shares are redeemed, (except for Money Market Fund
shares) they may be worth more or less than their original cost.
FIDELITY ADVISOR ANNUITY MONEY MARKET FUND
The fund seeks to obtain as high a level of current income as is consistent
with preserving capital and providing liquidity. The fund seeks to obtain
its objective by investing in high-quality, short-term money market
securities while seeking to maintain a stable $1.00 share price.
The fund will invest only in U.S. dollar-denominated securities of domestic
and foreign issuers, including banks and other financial institutions,
governments and their agencies or instrumentalities, and corporations.
When fund shares are redeemed, they should be worth the same amount as when
they were purchased. Of course, there is no guarantee that the fund will
maintain a stable $1.00 share price. The fund follows industry-standard
guidelines on the quality and maturity of its investments, which are
designed to help maintain a stable $1.00 share price. The fund will
purchase only high-quality securities that FMR believes present minimal
credit risks and will observe maturity restrictions on securities it buys.
In general, securities with longer maturities are more vulnerable to price
changes, although they may provide higher yields. It is possible that a
major change in interest rates or a default on the fund's investments could
cause its share price (and the value of your investment) to change.
The fund earns income at current money market rates. It stresses
preservation of capital, liquidity, and income and does not seek the higher
yields or capital appreciation that more aggressive investments may
provide. The fund's yield will vary from day to day and generally reflects
current short-term interest rates and other market conditions.
FIDELITY ADVISOR ANNUITY GOVERNMENT INVESTMENT FUND
The fund seeks a high level of current income by investing primarily in
obligations issued or guaranteed by the U.S. government or any of its
agencies or instrumentalities. In seeking current income, the fund also may
consider the potential for capital gain.
The fund, under normal circumstances, will invest at least 65% of its total
assets in government securities. The fund considers "government securities"
to include those which are subject to repurchase agreements. The fund
invests primarily in obligations issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities, including U.S.
Treasury bonds, notes and bills, Government National Mortgage Association
mortgage-backed pass-through certificates (Ginnie Maes) and mortgage-backed
securities issued by the Federal National Mortgage Association (Fannie
Maes) or the Federal Home Loan Mortgage Corporation (Freddie Macs). These
securities may or may not be fully backed by the U.S. government.
Although the fund can invest in securities of any maturity, FMR seeks to
manage the fund so that it generally reacts to changes in interest rates
similarly to government bonds with maturities between five and twelve
years. As of December 31, 1995, the fund's dollar-weighted average maturity
was approximately 8.8 years.
FIDELITY ADVISOR ANNUITY HIGH YIELD FUND
The fund seeks a combination of a high level of income and the potential
for capital gains by investing in a diversified portfolio consisting
primarily of high-yielding, fixed-income and zero coupon securities, such
as bonds, debentures and notes, convertible securities and preferred
stocks.
The fund, under normal conditions, will invest at least 65% of its total
assets in high yielding, income producing debt securities and preferred
stocks, including convertible and zero coupon securities. The fund may also
invest in securities issued or guaranteed by the U.S. government, any state
or any of their respective subdivisions, agencies or instrumentalities, and
securities of foreign issuers, including securities of foreign governments.
The fund may invest up to 35% of its total assets in equity securities,
including common stocks, warrants and rights.
FIDELITY ADVISOR ANNUITY INCOME & GROWTH FUND
The fund seeks both income and growth of capital by investing in a
diversified portfolio of equity and fixed-income securities with income,
growth of income, and capital appreciation potential.
The fund invests in equity securities, convertible securities, common and
preferred stocks, and fixed-income securities that provide income or
opportunities for capital growth. The fund may buy securities that are not
currently paying income but offer prospects for future income. The fund may
invest in securities of foreign issuers. In selecting investments for the
fund, FMR will consider such factors as the issuer's financial strength,
its outlook for increased dividend or interest payments, and the potential
for capital gains.
FIDELITY ADVISOR ANNUITY GROWTH OPPORTUNITIES FUND
The fund seeks to provide capital growth by investing primarily in common
stocks and securities convertible into common stocks.
The fund, under normal conditions, will invest at least 65% of its total
assets in securities of companies that FMR believes have long-term growth
potential. Although the fund invests primarily in common stock and
securities convertible into common stock, it has the ability to purchase
other securities, such as preferred stock and bonds, that may produce
capital growth. The fund may invest in foreign securities without
limitation.
FIDELITY ADVISOR ANNUITY OVERSEAS FUND
The fund seeks growth of capital primarily through investments in foreign
securities.
The fund defines foreign securities as securities of issuers whose
principal activities are outside of the United States. The fund currently
intends to invest at least 65% of its total assets in securities of issuers
from at least three different countries outside of North America (the
United States, Canada, Mexico, and Central America). There is no limit on
investments in any one region, country, or currency (except for certain
state insurance limitations as described on page 12 ), although the
fund normally invests in at least three different countries.
The fund may invest in many types of issuers, including companies and other
business organizations as well as governments and their agencies. The fund
expects that equity securities (including shares of closed-end investment
companies and depositary receipts) will account for the majority of its
investments. Although the majority of the fund's investments are expected
to be in equity securities, the fund may also purchase debt securities,
including lower-quality, higher yielding securities. FMR will not emphasize
income in choosing investments unless FMR believes the income will
contribute to the securities' growth potential. FMR may also invest a
portion of the fund's assets in high-quality, short-term debt securities,
bank deposits and money market instruments (including repurchase
agreements) denominated in U.S. dollars or foreign currencies.
FMR determines where an issuer is located by looking at such factors as its
country of organization, the primary trading market for its securities, and
the location of its assets, personnel, sales, and earnings. When allocating
the fund's investments among countries and regions, FMR considers such
factors as the potential for economic growth, expected levels of inflation,
governmental policies, and the outlook for currency relationships. Although
the fund may invest significantly in the United States, the fund currently
intends to be as fully invested in non-U.S. issuers as is practicable in
light of the fund's cash flow and cash needs.
TEMPORARY DEFENSIVE POLICIES. FMR normally invests each fund's assets
according to its investment strategy. Each of High Yield, Income & Growth,
Growth Opportunities, and Overseas reserves the right to invest without
limitation in preferred stocks and investment-grade debt instruments for
temporary, defensive purposes. Government Investment reserves the right to
invest without limitation in investment-grade money market or short-term
debt instruments for temporary, defensive purposes.
INTEREST RATE RISK
In general, bond prices rise when interest rates
fall, and vice versa. Funds that hold short-term
bonds are usually less affected by changes in
interest rates than long-term bond funds. For that
reason, long-term bond funds typically offer higher
yields and carry more risk than short-term bond
funds.
(checkmark)
SECURITIES AND INVESTMENT PRACTICES
The following pages contain more detailed information about types of
instruments in which a fund may invest, strategies FMR may employ in
pursuit of a fund's investment objective, and a summary of related risks.
Any restrictions listed supplement those discussed earlier in this section.
A complete listing of each fund's limitations and more detailed information
about each fund's investments are contained in the funds' SAI. Policies and
limitations are considered at the time of purchase; the sale of instruments
is not required in the event of a subsequent change in circumstances.
FMR may not buy all of these instruments or use all of these techniques
unless it believes that they are consistent with a fund's investment
objective and policies and that doing so will help a fund achieve its goal.
Current holdings and recent investment strategies are described in each
fund's financial reports, which are sent to shareholders twice a year.
For a free SAI or financial report, call Nationwide Life Insurance
Company or your investment professional.
EQUITY SECURITIES may include common stocks, preferred stocks, convertible
securities, and warrants. Common stocks, the most familiar type, represent
an equity (ownership) interest in a corporation. Although equity securities
have a history of long-term growth in value, their prices fluctuate based
on changes in a company's financial condition and on overall market and
economic conditions. Smaller companies are especially sensitive to these
factors.
RESTRICTIONS: With respect to 75% of its total assets, each fund may not
purchase more than 10% of the outstanding voting securities of a single
issuer.
FISCAL 1995 DEBT HOLDINGS, BY RATING
MOODY'S STANDARD & POOR'S
INVESTORS SERVICE, INC. CORPORATION
Rating Average [A] Rating Average[A]
High Income & Growth High Income & Growth
INVESTMENT GRADE Yield Growth Opportunities Overseas Yield Growth
Opportunities Overseas
Highest quality Aaa 0.21% 35.33% 12.75% 0.00% AAA 0.21% 32.50% 12.75%
0.00%
High quality Aa 0.00% 0.09% 0.00% 0.00% AA 0.00% 0.12% 0.00% 0.00%
Upper-medium grade A 0.00% 1.13% 0.00% 0.00% A 0.00% 0.64% 0.00% 0.00%
Medium grade Baa 0.79% 1.14% 0.00% 0.00% BBB 0.79% 0.71% 0.00% 0.00%
LOWER QUALITY
Moderately speculative Ba 7.87% 0.44% 0.00% 0.00% BB 14.33% 0.11% 0.00%
0.00%
Speculative B 52.95% 0.83% 0.00% 0.00% B 47.42% 0.86% 0.00% 0.00%
Highly speculative Caa 11.09% 0.00% 0.00% 0.00% CCC 6.95% 0.03% 0.00% 0.00%
Poor quality Ca 0.19% 0.00% 0.00% 0.00% CC 0.00% 0.00% 0.00% 0.00%
Lowest quality, no interest C C
In default, in arrears --- D 0.41% 0.00% 0.00% 0.00%
73.10% 38.96% 12.75% 0.00% 70.11% 34.97% 12.75% 0.00%
[A] FOR SOME FOREIGN GOVERNMENT OBLIGATIONS, FMR ASSIGNS THE RATINGS OF THE
SOVEREIGN CREDIT OF THE ISSUING GOVERNMENT.
THE DOLLAR-WEIGHTED AVERAGE OF DEBT SECURITIES NOT RATED DIRECTLY OR
INDIRECTLY BY MOODY'S OR S&P AMOUNTED TO 0% FOR GROWTH
OPPORTUNITIES FUND, 4.86% FOR HIGH YIELD FUND, 1.19% FOR
INCOME & GROWTH FUND, AND 0% FOR OVERSEAS FUND. THIS MAY
INCLUDE SECURITIES RATED BY OTHER NATIONALLY RECOGNIZED RATING SERVICES, AS
WELL AS UNRATED SECURITIES. FMR HAS DETERMINED
THAT UNRATED SECURITIES THAT ARE LOWER QUALITY ACCOUNT FOR 4.86% OF
HIGH YIELD FUND'S, AND 1.17% OF INCOME & GROWTH FUND'S,
TOTAL SECURITY INVESTMENTS. REFER TO THE APPENDIX FOR A MORE COMPLETE
DISCUSSION OF THESE RATINGS.
DEBT SECURITIES. Bonds and other debt instruments are used by issuers to
borrow money from investors. The issuer pays the investor a fixed or
variable rate of interest, and must repay the amount borrowed at maturity.
Some debt securities, such as zero coupon bonds, do not pay current
interest, but are purchased at a discount from their face values. In
general, bond prices rise when interest rates fall, and vice versa. Debt
securities, loans, and other direct debt have varying degrees of quality
and varying levels of sensitivity to changes in interest rates. Longer-term
bonds are generally more sensitive to interest rate changes than short-term
bonds.
Lower-quality debt securities (sometimes called "junk bonds") are
considered to have speculative characteristics and involve greater risk of
default or price changes due to changes in the issuer's creditworthiness,
or they may already be in default. The market prices of these securities
may fluctuate more than higher-quality securities and may decline
significantly in periods of general economic difficulty.
The default rate of lower-quality debt securities is likely to be higher
when issuers have difficulty meeting projected goals or obtaining
additional financing. This could occur during economic recessions or
periods of high interest rates. If an issuer defaults, a fund may try to
protect the interests of security holders if it determines such action to
be in the interest of its shareholders.
Lower-quality securities may be thinly traded, making them difficult to
sell promptly at an acceptable price. If market quotations are unavailable,
lower-quality securities are valued under guidelines established by the
Board of Trustees, including the use of outside pricing services. Adverse
publicity and changing investor perceptions may affect the ability of
outside pricing services to value lower-quality debt securities, and the
fund's ability to dispose of these securities.
RESTRICTIONS: Purchase of a debt security is consistent with a fund's debt
quality policy if it is rated at or above the stated level by Moody's or
rated in the equivalent categories by S&P, or is unrated but judged to be
of equivalent quality by FMR. Money Market will not invest in lower-quality
debt securities. Government Investment currently intends to limit its
investments in debt securities to A-quality and above. Each of Income &
Growth, Growth Opportunities, and Overseas currently intends to limit its
investments in lower than Baa-quality debt securities to less than 35% of
its assets.
The table on page provides a summary of ratings assigned to debt
holdings (not including money market instruments) in the funds' portfolios.
These figures are dollar-weighted averages of month-end portfolio holdings
during fiscal 1995, and are presented as a percentage of total security
investments. These percentages are historical and do not necessarily
indicate a fund's current or future debt holdings.
MONEY MARKET SECURITIES are high-quality, short-term obligations issued by
the U.S. government, corporations, financial institutions, and other
entities. These obligations may carry fixed, variable, or floating interest
rates. Some money market securities employ a trust or other similar
structure to modify the maturity, price characteristics, or quality of
financial assets so that they are eligible investments for money market
funds. If the structure does not perform as intended, adverse tax or
investment consequences may result.
OTHER MONEY MARKET SECURITIES may include commercial paper, certificates of
deposit, bankers' acceptances, and time deposits.
U.S. GOVERNMENT SECURITIES are high-quality debt securities issued or
guaranteed by the U.S. Treasury or by an agency or instrumentality of the
U.S. government. Not all U.S. government securities are backed by the full
faith and credit of the United States. For example, securities issued by
the Federal Farm Credit Bank or by the Federal National Mortgage
Association are supported by the instrumentality's right to borrow money
from the U.S. Treasury under certain circumstances. However, securities
issued by the Financing Corporation are supported only by the credit of the
entity that issued them.
CREDIT SUPPORT. Issuers may employ various forms of credit enhancement,
including letters of credit, guarantees, or insurance from a bank,
insurance company, or other entity. These arrangements expose the fund to
the credit risk of the entity. In the case of foreign entities, extensive
public information about the entity may not be available and the entity may
be subject to unfavorable political, economic, or governmental developments
which might affect its ability to honor its commitment.
EXPOSURE TO FOREIGN MARKETS. Foreign securities, foreign currencies, and
securities issued by U.S. entities with substantial foreign operations may
involve additional risks and considerations. These include risks relating
to political or economic conditions in foreign countries, fluctuations in
foreign currencies, withholding or other taxes, operational risks,
increased regulatory burdens, and the potentially less stringent investor
protection and disclosure standards of foreign markets. Additionally,
governmental issuers of foreign debt securities may be unwilling to
repay principal and interest when due, and may require that the conditions
for payment be renegotiated. All of these factors can make foreign
investments, especially those in developing countries, more volatile
than U.S. investments.
RESTRICTIONS: Pursuant to certain state insurance regulations, each fund
may not invest more than 20% of its assets in any one foreign country.
However, each fund may have an additional 15% invested in securities of
issuers located in any one (but only one) of the following countries:
Australia, Canada, France, Japan, the United Kingdom or Germany.
EXPOSURE TO EMERGING MARKETS. Invest ing in emerging market s
involves risks in addition to those generally associated with
foreign investing. The extent of economic development, political
in stability, and market depth varies widely in comparison to more
developed markets . Emerging market economies may be subject
to greater social, economic, and political uncertainties or may be based on
only a few industries. All of these factors can make emerging market
securities more volatile and politically less liquid than domestic
securities.
AMERICAN DEPOSITARY RECEIPTS AND EUROPEAN DEPOSITARY RECEIPTS (ADRS AND
EDRS) are certificates evidencing ownership of shares of a foreign-based
issuer held in trust by a bank or similar financial institution. Designed
for use in U.S. and European securities markets, respectively, ADRs and
EDRs are alternatives to the purchase of the underlying securities in their
national markets and currencies.
ASSET-BACKED SECURITIES include interests in pools of lower-rated debt
securities or consumer loans. The value of these securities may be
significantly affected by changes in the market's perception of the issuers
and the creditworthiness of the parties involved.
MORTGAGE SECURITIES are interests in pools of commercial or residential
mortgages, and may include complex instruments such as collateralized
mortgage obligations and stripped mortgage-backed securities. Mortgage
securities may be issued by the U.S. government or by private entities. For
example, Ginnie Maes are interests in pools of mortgage loans insured or
guaranteed by a U.S. government agency. Because mortgage securities pay
both interest and principal as their underlying mortgages are paid off,
they are subject to prepayment risk. This is especially true for stripped
securities. Also, the value of a mortgage security may be significantly
affected by changes in interest rates. Some mortgage securities may have a
structure that makes their reaction to interest rates and other factors
difficult to predict, making their value highly volatile.
VARIABLE AND FLOATING RATE SECURITIES have interest rates that are
periodically adjusted either at specific intervals or whenever a benchmark
rate changes. These interest rate adjustments are designed to help
stabilize the security's price.
STRIPPED SECURITIES are the separate income or principal components of a
debt security. Their risks are similar to those of other debt securities,
although they may be more volatile, and the value of certain types of
stripped securities may move in the same direction as interest rates.
REPURCHASE AGREEMENTS. In a repurchase agreement, a fund buys a security at
one price and simultaneously agrees to sell it back at a higher price.
Delays or losses could result if the other party to the agreement defaults
or becomes insolvent.
FOREIGN REPURCHASE AGREEMENTS may be less well secured than U.S. repurchase
agreements, and may be denominated in foreign currencies. They also may
involve greater risk of loss if the counterparty defaults. Some
counterparties in these transactions may be less creditworthy than those in
U.S. markets.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a fund
temporarily transfers possession of a portfolio instrument to another party
in return for cash. This could increase the risk of fluctuation in the
fund's yield or in the market value of its assets.
PUT FEATURES entitle the holder to put (sell back) a security to the issuer
or a financial intermediary. In exchange for this benefit, a fund may pay
periodic fees or accept a lower interest rate. The credit quality of the
investment may be affected by the creditworthiness of the put provider.
Demand features, standby commitments, and tender options are types of put
features.
REAL ESTATE-RELATED INSTRUMENTS include real estate investment trusts,
commercial and residential mortgage-backed securities, and real estate
financings. Real estate-related instruments are sensitive to factors such
as changes in real estate values and property taxes, interest rates, cash
flow of underlying real estate assets, overbuilding, and the management
skill and creditworthiness of the issuer. Real estate-related instruments
may also be affected by tax and regulatory requirements, such as those
relating to the environment.
ADJUSTING INVESTMENT EXPOSURE. A fund can use various techniques to
increase or decrease its exposure to changing security prices, interest
rates, currency exchange rates, commodity prices, or other factors that
affect security values. These techniques may involve derivative
transactions such as buying and selling options and futures contracts,
entering into currency exchange contracts or swap agreements, purchasing
indexed securities, and selling securities short.
FMR can use these practices to adjust the risk and return characteristics
of a fund's portfolio of investments. If FMR judges market conditions
incorrectly or employs a strategy that does not correlate well with a
fund's investments, these techniques could result in a loss, regardless of
whether the intent was to reduce risk or increase return. These techniques
may increase the volatility of a fund and may involve a small investment of
cash relative to the magnitude of the risk assumed. In addition, these
techniques could result in a loss if the counterparty to the transaction
does not perform as promised.
DIRECT DEBT. Loans and other direct debt instruments are interests in
amounts owed to another party by a company, government, or other borrower.
They have additional risks beyond conventional debt securities because they
may entail less legal protection for a fund, or there may be a requirement
that the fund supply additional cash to a borrower on demand.
ILLIQUID AND RESTRICTED SECURITIES. Some investments may be determined by
FMR, under the supervision of the Board of Trustees, to be illiquid, which
means that they may be difficult to sell promptly at an acceptable price.
The sale of some illiquid securities, and some other securities, may be
subject to legal restrictions. Difficulty in selling securities may result
in a loss or may be costly to a fund.
RESTRICTIONS. Each of High Yield and Overseas may not purchase a security
if, as a result, more than 15% of its assets would be invested in illiquid
securities. Each of Money Market, Government Investment, Income & Growth
and Growth Opportunities may not purchase a security if, as a result, more
than 10% of its assets would be invested in illiquid securities.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS are trading practices in
which payment and delivery for the securities take place at a future date.
The market value of a security could change during this period, which could
affect the market value of a fund's assets.
WARRANTS are instruments which entitle the holder to buy underlying equity
securities at a specific price for a specific period of time. A warrant
tends to be more volatile than its underlying securities and ceases to have
value if it is not exercised prior to its expiration date. In addition,
changes in the value of a warrant do not necessarily correspond to changes
in the value of its underlying securities.
FINANCIAL SERVICES INDUSTRY. Companies in the financial services industry
are subject to various risks related to that industry, such as government
regulation, changes in interest rates, and exposure on loans, including
loans to foreign borrowers. If a fund invests substantially in this
industry, its performance may be affected by conditions affecting the
industry.
RESTRICTIONS: Money Market will invest more than 25% of its total assets in
the financial services industry.
DIVERSIFICATION. Diversifying a fund's investment portfolio can reduce the
risks of investing. This may include limiting the amount of money invested
in any one issuer or, on a broader scale, in any one industry.
RESTRICTIONS: Money Market may not invest more than 5% of its total assets
in any one issuer, except that the fund may invest up to 10% of its total
assets in the highest quality securities of a single issuer for up to three
business days. These limitations do not apply to U.S. government
securities.
With respect to 75% of its total assets, each of Government Investment,
High Yield, Income & Growth, Growth Opportunities, and Overseas may not
purchase a security if, as a result, more than 5% would be invested in the
securities of any one issuer. Each fund (except Money Market) also
may not invest more than 25% of its total assets in any one industry. These
limitations do not apply to U.S. government securities.
BORROWING. Each fund may borrow from banks or from other funds advised by
FMR, or through reverse repurchase agreements. If a fund borrows money, its
share price may be subject to greater fluctuation until the borrowing is
paid off. If a fund makes additional investments while borrowings are
outstanding, this may be considered a form of leverage.
RESTRICTIONS: Each fund, other than Money Market, may borrow only for
temporary or emergency purposes, but not in an amount exceeding 25% of its
assets. Money Market may borrow only for temporary or emergency purposes,
or engage in reverse repurchase agreements, but not in an amount exceeding
25% of its assets.
LENDING securities to broker-dealers and institutions, including Fidelity
Brokerage Services, Inc. (FBSI), an affiliate of FMR, is a means of earning
income. This practice could result in a loss or a delay in recovering a
fund's securities. A fund may also lend money to other funds advised by
FMR.
RESTRICTIONS: Loans, in the aggregate, may not exceed 331/3% of a fund's
total assets.
OTHER INSTRUMENTS may include securities of closed-end investment
companies, rights and depositary receipts.
INTERNAL REVENUE SERVICE (IRS) LIMITATIONS. In addition to the above, each
fund also follows certain limitations imposed by the IRS on separate
accounts of insurance companies relating to the tax-deferred status of
variable contracts. More specific information may be contained in your
annuity's prospectus.
FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS
Some of the policies and restrictions discussed on the preceding pages are
fundamental, that is, subject to change only by shareholder approval. The
following paragraphs restate all those that are fundamental. All policies
stated throughout this prospectus, other than those identified in the
following paragraphs, can be changed without shareholder approval.
FIDELITY ADVISOR ANNUITY MONEY MARKET FUND seeks to obtain as high a level
of current income as is consistent with preserving capital and providing
liquidity.
FIDELITY ADVISOR ANNUITY GOVERNMENT INVESTMENT FUND seeks a high level of
current income by investing primarily in obligations issued or guaranteed
by the U.S. government or any of its agencies or instrumentalities.
FIDELITY ADVISOR ANNUITY HIGH YIELD FUND seeks a combination of a high
level of income and the potential for capital gains by investing in a
diversified portfolio consisting primarily of high-yielding, fixed-income
and zero coupon securities, such as bonds, debentures and notes,
convertible securities and preferred stocks .
FIDELITY ADVISOR ANNUITY INCOME & GROWTH FUND seeks both income and growth
of capital by investing in a diversified portfolio of equity and
fixed-income securities with income, growth of income, and capital
appreciation potential.
FIDELITY ADVISOR ANNUITY GROWTH OPPORTUNITIES FUND seeks to provide capital
growth by investing primarily in common stocks and securities convertible
into common stocks.
FIDELITY ADVISOR ANNUITY OVERSEAS FUND seeks growth of capital primarily
through investments in foreign securities.
EACH FUND with respect to 75% of its total assets, may not purchase a
security if, as a result, more than 5% would be invested in the securities
of any one issuer and (excluding Money Market) may not purchase
more than 10% of the outstanding voting securities of a single issuer. Each
fund may not invest more than 25% of its total assets in any one industry,
except Money Market will invest more than 25% of its total assets in the
financial services industry.
Loans, in the aggregate, may not exceed 33% of a fund's total
assets.
BREAKDOWN OF EXPENSES
Like all mutual funds, the funds pay fees related to their daily
operations. Expenses paid out of a fund's assets are reflected in its share
price.
Each fund pays a MANAGEMENT FEE to FMR for managing its investments and
business affairs. FMR in turn, on behalf of Money Market, High Yield,
Income & Growth, Growth Opportunities, and Overseas Funds, pays fees to
affiliates who provide assistance with these services. Each fund also pays
OTHER EXPENSES, which are explained on page .
FMR may, from time to time, agree to reimburse a fund for management fees
and other expenses above a specified limit. FMR retains the ability to be
repaid by a fund if expenses fall below the specified limit prior to the
end of the fiscal year. Reimbursement arrangements, which may be terminated
at any time without notice, can decrease a fund's expenses and boost its
performance.
MANAGEMENT FEE
EACH FUND'S MANAGEMENT FEE is calculated and paid to FMR every month. The
fee for each fund (excluding Money Market) is calculated by adding a GROUP
FEE rate to an INDIVIDUAL FUND FEE rate, and multiplying the result by the
fund's average net assets.
MONEY MARKET'S management fee is calculated by multiplying the sum of two
components by the fund's average net assets and adding an income-based fee.
One component, the group fee rate, is discussed below. The other component,
the individual fund fee rate, is 0.03%. The income-based fee is 6% of the
fund's gross income in excess of a 5% yield and cannot rise above 0.24% of
the fund's average net assets.
THE GROUP FEE RATE is based on the average net assets of all the mutual
funds advised by FMR. This rate cannot rise above 0.52% for Income &
Growth, Growth Opportunities and Overseas Funds, and 0.37% for Money
Market, Government Investment and High Yield Funds, and it drops as total
assets under management increase.
For December 31, 1995, the group fee rate was .3097 % for Income &
Growth, Growth Opportunities and Overseas Funds and .1482 % for Money
Market, Government Investment and High Yield Funds. The individual fund fee
rates for the funds are as follows: Income & Growth: 0.20%; Government
Investment and Growth Opportunities: 0.30%; and High Yield and Overseas:
0.45%.
For the fiscal period ended December 31, 1995, the total
management fees for the funds we re as follows: Money Market:
0.24% (annualized), Income & Growth: 0.51 %; Government
Investment : 0.45% (annualized); Growth Opportunities: 0.61 %;
High Yield: 0.60% (annualized); and Overseas: 0 .76 %.
For Overseas Fund, this rate was higher than that of most other mutual
funds, but not necessarily higher than those of a typical international
fund, due to the greater complexity, expense and commitment of resources
involved in international investing.
SUB-ADVISORY AGREEMENTS. On behalf of High Yield, Income & Growth, and
Growth Opportunities Funds, FMR has sub-advisory agreements with two
affiliates, FMR U.K. and FMR Far East. On behalf of Overseas Fund, FMR has
sub-advisory agreements with three affiliates: FMR U.K., FMR Far East, and
FIIA. FIIA in turn has a sub-advisory agreement with FIIAL U.K. FMR U.K.
focuses on issuers based in Europe. FMR Far East focuses on issuers based
in Asia and the Pacific Basin. FIIA focuses on issuers based in Hong Kong,
Australia, New Zealand, and Southeast Asia (other than Japan). FIIAL U.K.
focuses on issuers based in the United Kingdom and Europe.
These sub-advisers are compensated for providing FMR with investment
research and advice on issuers based outside the United States. FMR pays
FMR U.K. and FMR Far East fees equal to 110% and 105%, respectively, of the
costs of providing these services. FMR pays FIIA a fee equal to 30% of its
management fee rate associated with investments for which the sub-adviser
provided investment advice. FIIA pays FIIAL U.K. a fee equal to 110% of the
cost of providing these services.
On behalf of High Yield, Income & Growth, Growth Opportunities and Overseas
Funds, the sub-advisers may also provide investment management services. In
return, FMR pays FMR U.K., FMR Far East, and FIIA a fee equal to 50% of its
management fee rate with respect to the fund's investments that the
sub-adviser manages on a discretionary basis. FIIA pays FIIAL U.K. a fee
equal to 110% of the cost of providing these services.
The following chart details the fees paid by FMR to FMR U.K. and FMR Far
East, on behalf of the funds (as a percentage of a fund's average net
assets) for fiscal 1995:
Fund Fee to
Fee to
FMR U.K. FMR
Far East
Income & Growth Fund .009% .011%
Growth Opportunities Fund .004% .005%
Overseas Fund .051% .059%
On behalf of Money Market Fund, FMR has a sub-advisory agreement with FMR
Texas, which has primary responsibility for providing investment management
for the fund, while FMR retains responsibility for providing the fund with
other management services. FMR pays FMR Texas 50% of its management fee
(before any expense reimbursement) for these services. FMR paid FMR Texas
0 .12 % of Money Market's average net assets for fiscal 1995.
OTHER EXPENSES
While the management fee is a significant component of each fund's annual
operating costs, the funds have other expenses as well.
FIIOC, 82 Devonshire Street, Boston, Massachusetts, performs transfer
agency, dividend disbursing and shareholder servicing functions for each
fund. Fidelity Service Co. (FSC), 82 Devonshire Street, Boston,
Massachusetts, calculates the net asset value (NAV) and dividends,
maintains the general accounting records and (except for Money Market)
administers the securities lending program for each fund.
The following chart details the fees paid (before reimbursement, if any)
to FIIOC and FSC and each fund's total expenses (as a percentage of
the fund's average net assets) for fiscal 1995:
Fund Fee Fee Total
to to Expe
FIIO FSC nses
C
Money Market . 0 6 % .18 % .74 %
* * *
Government Investment . 0 6 % .94 % 1.00 %
* * *
High Yield . 0 6 % .32 % 1.00 %
* * *
Income & Growth . 0 5 % .31 % 1.42
%
Growth Opportunities . 0 5 % .10 % 0.85
%
Overseas . 0 5 % .71 % 1.50
%
* Annualized
FMR has voluntarily agreed to temporarily limit the Funds' total
operating expenses to 1.50% of each funds average net assets for
Overseas, Growth Opportunities and Income & Growth Funds, and to 1.00% for
High Yield, Government Investment and Money Market Funds. Absent
reimbursement, total operating expenses would be 1.16% (annualized), 1.89%
(annualized) and 2.90% for Government Investment, High Yield and Overseas
Funds, respectively. Expenses eligible for reimbursement do not include
interest, taxes, brokerage commissions or extraordinary expenses.
A portion of the brokerage commissions that certain of the funds pay is
used to reduce fund expenses. Including this reduction, the total fund
operating expenses would be 0.83% for Growth Opportunities.
Each fund also pays other expenses, such as legal, audit, and custodian
fees; proxy solicitation costs; and the compensation of trustees who are
not affiliated with Fidelity.
For fiscal 1995, each fund's (except Money Market) portfolio turnover rate
is outlined in the table below. These rates vary from year to year. High
turnover rates increase transaction costs. FMR considers these effects when
evaluating the anticipated benefits of short-term investing.
Fund Portfolio
Turnover
Rate
Gove rnment Investment Fund 220 %
*
High Yield Fund 98 % *
Income & Growth Fund 248 %
Growth Opportunities Fund 38 %
Overseas Fund 43 %
* Annualized
Each fund has adopted a Distribution and Service Plan. Each plan recognizes
that FMR may use its resources, including management fees, to pay expenses
associated with the sale of fund shares. This may include payments to third
parties, such as banks or broker-dealers, that provide shareholder support
services or engage in the sale of the funds' shares. The Board of Trustees
has not authorized such payments.
PERFORMANCE
Each fund's total return and yield may be quoted in advertising in
accordance with current law and interpretations thereof. Performance is
based on historical results and is not intended to indicate future
performance. For additional performance information, contact Nationwide
Life Insurance Company for a free annual report.
EXPLANATION OF TERMS
TOTAL RETURN is the change in value of an investment in a fund over a given
period, assuming reinvestment of any dividends and capital gains. A
CUMULATIVE TOTAL RETURN reflects actual performance over a stated period of
time. An AVERAGE ANNUAL TOTAL RETURN is a hypothetical rate of return that,
if achieved annually, would have produced the same cumulative total return
if performance had been constant over the entire period. Average annual
total returns smooth out variations in performance; they are not the same
as actual year-by-year results.
Average annual total returns covering periods of less than one year assume
that performance will remain constant for the rest of the year.
YIELD refers to the income generated by an investment in a fund over a
given period of time, expressed as an annual percentage rate. When a yield
assumes that income earned is reinvested, it is called an EFFECTIVE YIELD.
Seven-day yield illustrates the income earned by an investment in a money
market fund over a recent seven-day period. Since money market funds
maintain a stable $1.00 share price, current seven-day yields are the most
common illustration of money market fund performance.
In calculating yield, a fund may from time to time use a security's coupon
rate instead of its yield to maturity in order to reflect the risk premium
on that security. This practice will have the effect of reducing the fund's
yield.
A fund may quote its adjusted NAV, including all distributions paid. This
value may be averaged over specified periods and may be used to calculate a
fund's moving average.
The funds' recent strategies, performance, and holdings are detailed twice
a year in financial reports, which are sent to all shareholders.
TOTAL RETURNS AND YIELDS QUOTED FOR A FUND INCLUDE THE FUND'S EXPENSES, BUT
MAY NOT INCLUDE CHARGES AND EXPENSES ATTRIBUTABLE TO YOUR ANNUITY PRODUCT.
BECAUSE SHARES OF THE FUNDS MAY BE PURCHASED ONLY THROUGH VARIABLE ANNUITY
CONTRACTS, YOU SHOULD CAREFULLY REVIEW THE PROSPECTUS OF THE ANNUITY
PRODUCT YOU HAVE CHOSEN FOR INFORMATION ON RELEVANT CHARGES AND EXPENSES.
Excluding these charges from quotations of a fund's performance has the
effect of increasing the performance quoted. You should bear in mind the
effect of these charges when comparing a fund's performance to that of
other mutual funds.
ACCOUNT POLICIES
DISTRIBUTIONS AND TAXES
For a discussion of the tax status of your variable annuity contract, refer
to the prospectus of Nationwide Life Insurance Company's separate account.
It is suggested you keep all statements you receive to assist in your
personal recordkeeping.
It is expected that shares of each fund will be held under the terms of
variable annuity contracts. Under current tax law, dividends or capital
gain distributions from a fund are not currently taxable when left to
accumulate within a variable annuity. Depending on the variable contract,
withdrawals from the contract may be sub ject to ordinary income tax, in
addition to a 10% penalty tax on withdrawals before age 59.
Each fund is treated as a separate entity for federal income tax purposes.
Each fund intends to pay out all of its net investment income and net
realized capital gains for each year. Dividends from Money Market Fund
are declared daily and paid monthly. Government I nvestment, High Yield,
Income & Growth, Growth Opportunities and Overseas Funds will distribute
any dividends at least annually. Normally, net realized capital gains,
if any, are distributed each year for a fund. Such income and capital gain
distributions from a fund are automatically reinvested in additional shares
of the fund. Each fund (except Money Market) makes dividend and capital
gain distributions on a per-share basis. After each distribution from a
fund, the fund's share price drops by the amount of the distribution.
Because dividends and capital gain distributions are reinvested, the total
value of an account will not be affected because, although the shares will
have a lower price, there will be correspondingly more of them.
TRANSACTION DETAILS
THE FUNDS ARE OPEN FOR BUSINESS each day the New York Stock Exchange (NYSE)
is open. Each fund's NAV is calculated as of the close of business of the
NYSE, normally 4 p.m. Eastern time.
EACH FUND'S NAV is the value of a single share. The NAV is computed by
adding the value of the fund's investments, cash, and other assets,
subtracting its liabilities, and then dividing the result by the number of
shares outstanding.
Money Market and a fund's investments with remaining maturities of 60 days
or less values its portfolio securities on the basis of amortized cost.
This method minimizes the effect of changes in a security's market value
and helps Money Market Portfolio maintain a stable $1.00 share price.
Other than Money Market, each of the fund's assets are valued primarily on
the basis of market quotations. Foreign securities are valued on the basis
of quotations from the primary market in which they are traded, and are
translated from the local currency into U.S. dollars using current exchange
rates. If quotations are not readily available or if the values have been
materially affected by events occurring after the closing of a foreign
market, assets are valued by a method that the Board of Trustees believes
accurately reflects fair value.
EACH FUND'S OFFERING PRICE (price to buy one share) and REDEMPTION PRICE
(price to sell one share) are its NAV.
EACH FUND RESERVES THE RIGHT TO SUSPEND THE OFFERING OF SHARES for a period
of time. Each fund also reserves the right to reject any specific purchase
order. Purchase orders may be refused if, in FMR's opinion, they would
disrupt management of a fund.
INVESTMENTS AND REDEMPTIONS. Investments may be made only by separate
accounts established and maintained by Nationwide Life Insurance Company
for the purpose of funding variable annuity contracts. Please refer to the
prospectus of your annuity's separate account for information on how to
invest in and redeem from each fund.
Nationwide Life Insurance Company receives orders from its variable
contract owners to purchase or redeem shares of the funds each business
day. That night, all orders received by Nationwide on that business day are
aggregated, and Nationwide places a net purchase or redemption order for
shares of one or more funds the morning of the next business day. These
orders are generally executed at the NAV that was computed at the close of
the previous business day in order to provide a match between the variable
contract owners' orders to Nationwide and Nationwide's orders to a fund. In
some cases, an order for fund shares may be executed at the NAV next
computed after the order is actually transmitted to a fund.
Redemption proceeds will normally be wired to Nationwide Life Insurance
Company on the next business day after receipt of the redemption
instructions by a fund, but in no event later than 7 days following receipt
of instructions. Each fund may suspend redemptions or postpone payment
dates on days when the NYSE is closed (other than weekends or holidays),
when trading on the NYSE is restricted, or as permitted by the SEC.
APPENDIX
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A - Bonds rated A possess many favorable investment attributes and are to
be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA - Bonds rated Ba are judged to have speculative elements. Their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of
other terms of the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked
short-comings.
C - Bonds rated C are the lowest-rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS:
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher-rated
categories.
BB - Debt rate BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
B - Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual
or implied BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial, or economic conditions, it is
not likely to have the capacity to pay interest and repay principal.
CC - The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C - The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed but
debt service payments are continued.
CI - The rating CI is reserved for income bonds on which no interest is
being paid.
D - Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The D rating will also
be used upon the filing of a bankruptcy petition if debt service payments
are jeopardized.
The ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations, other than those
contained in this Prospectus and in the related SAI, in connection with the
offer contained in this Prospectus. If given or made, such other
information or representations must not be relied upon as having been
authorized by a fund or FDC. This Prospectus and related SAI do not
constitute an offer by a fund or by FDC to sell or to buy shares of a fund
to any person to whom it is unlawful to make such offer.
This prospectus is printed on recycled paper using soy-based inks.
FIDELITY ADVISOR ANNUITY FUND:
FIDELITY ADVISOR ANNUITY OVERSEAS FUND, FIDELITY ADVISOR ANNUITY GROWTH
OPPORTUNITIES FUND, FIDELITY ADVISOR ANNUITY INCOME & GROWTH FUND, FIDELITY
ADVISOR ANNUITY GOVERNMENT INVESTMENT FUND, FIDELITY ADVISOR ANNUITY HIGH
YIELD FUND, AND FIDELITY ADVISOR ANNUITY MONEY MARKET FUND (THE FUNDS).
APRIL 30, 1996
This Statement is not a prospectus but should be read in conjunction with
the current Prospectus (dated April 30, 1996) for Fidelity Advisor Annuity
Fund (the Trust). Please retain this document for future reference. The
funds' financial statements and financial highlights, included in the
Annual Report for the fiscal period ended December 31, 1995, are
incorporated herein by reference. Additional copies of the Prospectus or
Annual Report are available upon request from Nationwide Life Insurance
Company, One Nationwide Plaza, P.O. Box 182610, Columbus, Ohio 43216 or by
calling 1-800-573-5775.
TABLE OF CONTENTS PAGE
Investment Policies and Limitations
Portfolio Transactions
Valuation of Portfolio Securities
Performance
Additional Purchase and Redemption Information
Distributions and Taxes
FMR
Trustees and Officers
Management Contracts
Distribution and Service Plans
Contracts with FMR Affiliates
Description of the Trust
Financial Statements
Appendix
INVESTMENT ADVISER
Fidelity Management & Research Company (FMR)
INVESTMENT SUB-ADVISERS
Money Market:
FMR Texas Inc. (FMR Texas)
High Yield, Income & Growth, and Growth Opportunities:
Fidelity Management & Research (U.K.) Inc. (FMR U.K.)
Fidelity Management & Research (Far East) Inc. (FMR Far East)
Overseas:
FMR U.K.
FMR Far East
Fidelity International Investment Advisors (FIIA)
Fidelity International Investment Advisors (U.K.) Limited (FIIAL U.K.)
DISTRIBUTOR
Fidelity Distributors Corporation (FDC)
TRANSFER AGENT
Fidelity Investments Institutional Operations Company (FIIOC)
CUSTODIANS
Money Market, High Yield, and Government Investment Funds: The Bank of New
York
Income & Growth and Overseas Funds: The Chase Manhattan Bank, N.A.
Growth Opportunities Fund: Brown Brothers Harriman & Co.
INVESTMENT POLICIES AND LIMITATIONS
The following policies and limitations supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of a fund's assets that may be
invested in any security or other asset, or sets forth a policy regarding
quality standards, such standard or percentage limitation will be
determined immediately after and as a result of the fund's acquisition of
such security or other asset. Accordingly, any subsequent change in values,
net assets, or other circumstances will not be considered when determining
whether the investment complies with the fund's investment policies and
limitations.
Each fund's fundamental investment policies and limitations cannot be
changed without approval by a "majority of the outstanding voting
securities" (as defined in the Investment Company Act of 1940) of each
fund. However, except for the fundamental investment limitations listed
below, the investment policies and limitations described in this Statement
of Additional Information are not fundamental and may be changed without
shareholder approval.
MONEY MARKET FUND
THE FOLLOWING ARE MONEY MARKET FUND'S FUNDAMENTAL INVESTMENT LIMITATIONS
SET FORTH IN THEIR ENTIRETY. THE FUND MAY NOT:
(1) purchase the securities of any issuer (other than obligations issued or
guaranteed as to principal and interest by the United States, its agencies
or instrumentalities) if, as a result, more than 5% of its total assets
would be invested in the securities of such issuer, provided, however, that
with respect to 25% of its total assets, 10% of its assets may be invested
in the securities of any single issuer;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940;
(3) borrow money, except that the fund may (i) borrow money for temporary
or emergency purposes (not for leveraging or investment) and (ii) engage in
reverse repurchase agreements for any purpose; provided that (i) and (ii)
in combination do not exceed 33 1/3% of the fund's total assets (including
the amount borrowed) less liabilities (other than borrowings). Any
borrowings that come to exceed this amount will be reduced within three
days (not including Sundays and holidays) to the extent necessary to comply
with the 33 1/3% limitation;
(4) underwrite securities issued by others, except to the extent that the
fund may be considered an underwriter within the meaning of the Securities
Act of 1933 in the disposition of restricted securities;
(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, more than 25% of the fund's total
assets would be invested in the securities of companies whose principal
business activities are in the same industry, except that the fund will
invest more than 25% of its total assets in the financial services
industry;
(6) purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the fund
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business);
(7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments;
(8) lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, but this
limitation does not apply to purchases of debt securities or to repurchase
agreements; or
(9) invest in companies for the purpose of exercising control or
management.
(10) The fund may, notwithstanding any other other fundamental investment
policy or limitation, invest all of its assets in the securities of a
single open-end management investment company managed by Fidelity
Management & Research Company or an affiliate or successor with
substantially the same fundamental investment objective, policies, and
limitations as the fund.
THE FOLLOWING INVESTMENT LIMITATIONS FOR MONEY MARKET FUND ARE NOT
FUNDAMENTAL AND MAY BE CHANGED, AS REGULATORY AGENCIES PERMIT, WITHOUT
SHAREHOLDER NOTIFICATION.
(i) The fund does not currently intend to purchase a security (other than a
security issued or guaranteed by the U.S. government or any of its agencies
or instrumentalities) if, as a result, more than 5% of its total assets
would be invested in the securities of a single issuer; provided that the
fund may invest up to 10% of its total assets in the first tier securities
of a single issuer for up to three business days.
(ii) The fund does not currently intend to sell securities short, unless it
owns or has the right to obtain securities equivalent in kind and amount to
the securities sold short, and provided that transactions in futures
contracts and options are not deemed to constitute selling securities
short.
(iii) The fund does not currently intend to purchase securities on margin,
except that the fund may obtain such short-term credits as are necessary
for the clearance of transactions, and provided that margin payments in
connection with futures contracts and options on futures contracts shall
not constitute purchasing securities on margin.
(iv) The fund may borrow money only (a) from a bank or from a registered
investment company or portfolio for which FMR or an affiliate serves as
investment advisor or (b) by engaging in reverse repurchase agreements with
any party. The fund will not borrow money in excess of 25% of net assets so
long as this limitation is required for certification by certain state
insurance departments. The fund will not borrow for any general purpose
in excess of 10% of net assets. The fund will not purchase any security
while borrowings (excluding reverse repurchase agreements) representing
more than 5% of its total assets are outstanding. The fund will not borrow
from other funds advised by FMR or its affiliates if total outstanding
borrowings immediately after such borrowing would exceed 15% of the fund's
total assets.
(v) The fund does not currently intend to purchase any security if, as a
result, more than 10% of its net assets would be invested in securities
that are deemed to be illiquid because they are subject to legal or
contractual restrictions on resale or because they cannot be sold or
disposed of in the ordinary course of business at approximately the prices
at which they are valued.
(vi) The fund does not currently intend to purchase or sell futures
contracts or call options. This limitation does not apply to options
attached to, or acquired or traded together with, their underlying
securities, and does not apply to securities that incorporate features
similar to options or futures contracts.
(vii) The fund does not currently intend to lend assets other than
securities to other parties, except by lending money (up to 10% of the
fund's net assets) to a registered investment company or portfolio for
which FMR or an affiliate serves as investment advisor. (This limit does
not apply to purchases of debt securities or to repurchase agreements.)
(viii) The fund does not currently intend to (a) purchase securities of
other investment companies, except in the open market where no commission
except the ordinary broker's commission is paid, or (b) purchase or retain
securities issued by other open-end investment companies. Limitations (a)
and (b) do not apply to securities received as dividends, through offers of
exchange, or as a result of a reorganization, consolidation, or merger.
(ix) The fund does not currently intend to invest in oil, gas, or other
mineral exploration or development programs or leases.
(x) The fund does not currently intend to invest in interests in real
estate investment trusts that are not readily marketable, or to invest in
interests in real estate limited partnerships that are not listed on the
New York Stock Exchange or the American Stock Exchange or traded on the
NASDAQ National Market System.
(xi) The fund does not currently intend to invest all of its assets in the
securities of a single open-end management investment company managed by
Fidelity Management & Research Company or an affiliate or successor with
substantially the same fundamental investment objective, policies, and
limitations as the fund.
QUALITY AND MATURITY Pursuant to procedures adopted by the Board of
Trustees, the fund may purchase only high-quality securities that FMR
believes present minimal credit risks. To be considered high-quality, a
security must be rated in accordance with applicable rules in one of the
two highest categories for short-term securities by at least two nationally
recognized rating services (or by one, if only one rating service has rated
the security); or, if unrated, judged to be of equivalent quality by FMR.
High-quality securities are divided into "first tier" and "second tier"
securities. First tier securities are those deemed to be in the highest
rating category (e.g., Standard & Poor's A-1), and second tier securities
are those deemed to be in the second highest rating category (e.g.,
Standard & Poor's A-2). Split-rated securities may be determined to be
either first tier or second tier based on applicable regulations.
The fund may not invest more than 5% of its total assets in second tier
securities. In addition, the fund may not invest more than 1% of its total
assets or $1 million (whichever is greater) in the second tier securities
of a single issuer.
The fund currently intends to limit its investments to securities with
remaining maturities of 397 days or less, and to maintain a dollar-weighted
average maturity of 90 days or less. When determining the maturity of a
security, the fund may look to an interest rate reset or demand feature.
DOMESTIC AND FOREIGN ISSUERS. Investments may be made in U.S.
dollar-denominated time deposits, certificates of deposit, and bankers'
acceptances of U.S. banks and their branches located outside of the United
States, U.S. branches and agencies of foreign banks, and foreign branches
of foreign banks. The fund may also invest in U.S. dollar-denominated
securities issued or guaranteed by other U.S. or foreign issuers, including
U.S. and foreign corporations or other business organizations, foreign
governments, foreign government agencies or instrumentalities, and U.S. and
foreign financial institutions, including savings and loan institutions,
insurance companies, mortgage bankers, and real estate investment trusts,
as well as banks.
The obligations of foreign branches of U.S. banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by governmental
regulation. Payment of interest and principal on these obligations may also
be affected by governmental action in the country of domicile of the branch
(generally referred to as sovereign risk). In addition, evidence of
ownership of portfolio securities may be held outside of the United States
and a fund may be subject to the risks associated with the holding of such
property overseas. Various provisions of federal law governing the
establishment and operation of U.S. branches do not apply to foreign
branches of U.S. banks.
Obligations of U.S. branches and agencies of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by federal and state
regulation, as well as by governmental action in the country in which the
foreign bank has its head office.
Obligations of foreign issuers involve certain additional risks. These
risks may include future unfavorable political and economic developments,
withholding taxes, seizures of foreign deposits, currency controls,
interest limitations, or other governmental restrictions that might affect
payment of principal or interest, or the ability to honor a credit
commitment. Additionally, there may be less public information available
about foreign entities. Foreign issuers may be subject to less governmental
regulation and supervision than U.S. issuers. Foreign issuers also
generally are not bound by uniform accounting, auditing, and financial
reporting requirements comparable to those applicable to U.S. issuers.
GOVERNMENT INVESTMENT, HIGH YIELD, INCOME & GROWTH, GROWTH OPPORTUNITIES,
AND OVERSEAS FUNDS
THE FOLLOWING ARE GOVERNMENT INVESTMENT, HIGH YIELD, INCOME & GROWTH,
GROWTH OPPORTUNITIES, AND OVERSEAS FUNDS' FUNDAMENTAL INVESTMENT
LIMITATIONS SET FORTH IN THEIR ENTIRETY. EACH FUND MAY NOT:
(1) with respect to 75% of the fund's total assets, purchase the securities
of any issuer (other than securities issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities) if, as a result,
(a) more than 5% of the fund's total assets would be invested in the
securities of that issuer, or (b) the fund would hold more than 10% of the
outstanding voting securities of that issuer;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940;
(3) borrow money, except that the fund (i) may borrow money for temporary
or emergency purposes (not for leveraging or investment) or (ii) engage in
reverse repurchase agreements, provided that (i) and (ii) in combination
(borrowings) do not exceed 33 1/3% of its total assets (including the
amount borrowed) less liabilities (other than borrowings). Any borrowings
that come to exceed 33 1/3% of the value of the fund's total assets by
reason of a decline in net assets will be reduced within three days
(exclusive of Sundays and holidays) to the extent necessary to comply with
the 33 1/3% limitation;
(4) underwrite securities issued by others, except to the extent that the
fund may be considered an underwriter within the meaning of the Securities
Act of 1933 in the disposition of restricted securities;
(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, more than 25% of its total assets would
be invested in the securities of companies whose principal business
activities are in the same industry;
(6) purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the fund
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business);
(7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent
the fund from purchasing or selling options and futures contracts or from
investing in securities or other instruments backed by physical
commodities); or
(8) lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, but this
limitation does not apply to purchases of debt securities or to repurchase
agreements.
(9) Each fund may, notwithstanding any other other fundamental investment
policy or limitation, invest all of its assets in the securities of a
single open-end management investment company with substantially the same
fundamental investment objective, policies, and limitations as the fund.
THE FOLLOWING INVESTMENT LIMITATIONS FOR GOVERNMENT INVESTMENT, HIGH YIELD,
INCOME & GROWTH, GROWTH OPPORTUNITIES, AND OVERSEAS FUNDS ARE NOT
FUNDAMENTAL AND MAY BE CHANGED, AS REGULATORY AGENCIES PERMIT, WITHOUT
SHAREHOLDER NOTIFICATION.
(i) Each fund does not currently intend to sell securities short, unless it
owns or has the right to obtain securities equivalent in kind and amount to
the securities sold short, and provided that transactions in futures
contracts and options are not deemed to constitute selling securities
short.
(ii) Each fund does not currently intend to purchase securities on margin,
except that the fund may obtain such short-term credits as are necessary
for the clearance of transactions, and provided that margin payments in
connection with futures contracts and options on futures contracts shall
not constitute purchasing securities on margin.
(iii) Each fund may borrow money only (a) from a bank or from a registered
investment company or portfolio for which FMR or an affiliate serves as
investment advisor or (b) by engaging in reverse repurchase agreements with
any party (reverse repurchase agreements are treated as borrowings for
purposes of fundamental investment limitation (3)). Each fund will not
borrow money in excess of 25% of net assets so long as this limitation is
required for certification by certain state insurance departments. Any
borrowings that come to exceed this amount will be reduced within seven
days (not including Sundays and holidays) to the extent necessary to comply
with the 25% limitation. Each fund will not purchase any security while
borrowings representing more than 5% of its total assets are outstanding.
Each fund will not borrow from other funds advised by FMR or its affiliates
if total outstanding borrowings immediately after such borrowing would
exceed 15% of the fund's total assets.
(iv) Each fund does not currently intend to purchase any security if, as a
result, more than 10% of Growth Opportunities, Income & Growth and
Government Investment Funds' net assets and 15% of High Yield and Overseas
Funds' net assets would be invested in securities that are deemed to be
illiquid because they are subject to legal or contractual restrictions on
resale or because they cannot be sold or disposed of in the ordinary course
of business at approximately the prices at which they are valued.
(v) Each fund does not currently intend to lend assets other than
securities to other parties, except by: (a) lending money (up to 5% of net
assets for Growth Opportunities, Income & Growth and Overseas Funds and
7.5% for High Yield and Government Investment Funds' net assets) to a
registered investment company or portfolio for which FMR or an affiliate
serves as investment advisor or (b) acquiring loans, loan participations,
or other forms of direct debt instruments and, in connection therewith,
assuming any associated unfunded commitments of the sellers. (This
limitation does not apply to purchases of debt securities or to repurchase
agreements.)
(vi) Each fund does not currently intend to (a) purchase securities of
other investment companies, except in the open market where no commission
except the ordinary broker's commission is paid, or (b) purchase or retain
securities issued by other open-end investment companies. Limitations (a)
and (b) do not apply to securities received as dividends, through offers of
exchange, or as a result of a reorganization, consolidation, or merger.
(vii) Each fund does not currently intend to invest in oil, gas, or other
mineral exploration or development programs or leases.
(viii) Each fund does not currently intend to invest in interests in real
estate investment trusts that are not readily marketable, or to invest in
interests in real estate limited partnerships that are not listed on the
New York Stock Exchange or the American Stock Exchange or traded on the
NASDAQ National Market System.
(ix) Each fund does not currently intend to invest all of its assets in the
securities of a single open-end management investment company with
substantially the same fundamental investment objective, policies, and
limitations as the fund.
For each fund's limitations on futures and options transactions, see the
section entitled "Limitations on Futures and Options Transactions." For
limitations on short sales, see the sections entitled "Short Sales" and
"Short Sales Against the Box."
For the funds' policies on foreign investments, see the section entitled
"Exposure to Foreign Markets."
Higher yielding, fixed-income securities of the type in which High Yield
invests will at times be purchased at a discount from or a premium over par
value. The total return on such securities includes the potential for a
capital gain or loss. High Yield generally does not intend to hold
securities for the purpose of achieving capital gains, however, unless
current yields on these securities remain attractive. Capital gain or loss
may also be realized upon the sale of portfolio securities.
The U.S. government has from time to time in the past imposed restrictions,
through taxation and otherwise, on foreign investments by U.S. investors
such as the funds. If such restrictions should be reinstituted, it might
become necessary for Overseas Fund to invest all or substantially all of
its assets in U.S. securities. In such event, the Board of Trustees would
reevaluate the fund's investment objective and policies.
In accordance with the funds' fundamental investment policies, there are no
limitations on the percentage of the funds' assets which may be invested in
any one type of instrument. Nor are there limitations (except those imposed
by certain state insurance regulations) on the percentage of the funds'
assets which may be invested in any foreign country. However, in order to
comply with diversification requirements under Section 817(h) of the
Internal Revenue Code of 1986, as amended, in connection with FMR serving
as investment advisor, each fund has agreed to certain non-fundamental
limitations. Please refer to your insurance company's separate account
prospectus for more information.
EACH FUND'S INVESTMENTS MUST BE CONSISTENT WITH ITS INVESTMENT OBJECTIVE
AND POLICIES. ACCORDINGLY, NOT ALL OF THE SECURITY TYPES AND INVESTMENT
TECHNIQUES DISCUSSED BELOW ARE ELIGIBLE INVESTMENTS FOR EACH OF THE FUNDS.
AFFILIATED BANK TRANSACTIONS. A fund may engage in transactions with
financial institutions that are, or may be considered to be, "affiliated
persons" of the fund under the Investment Company Act of 1940. These
transactions may include repurchase agreements with custodian banks;
short-term obligations of, and repurchase agreements with, the 50 largest
U.S. banks (measured by deposits); municipal securities; U.S. government
securities with affiliated financial institutions that are primary dealers
in these securities; short-term currency transactions; and short-term
borrowings. In accordance with exemptive orders issued by the Securities
and Exchange Commission (SEC), the Board of Trustees has established and
periodically reviews procedures applicable to transactions involving
affiliated financial institutions.
ASSET-BACKED SECURITIES include pools of mortgages, loans, receivables or
other assets. Payment of principal and interest may be largely dependent
upon the cash flows generated by the assets backing the securities and, in
certain cases, supported by letters of credit, surety bonds, or other
credit enhancements. The value of asset-backed securities may also be
affected by the creditworthiness of the servicing agent for the pool, the
originator of the loans or receivables, or the entities providing the
credit support.
DELAYED-DELIVERY TRANSACTIONS. Each fund may buy and sell securities on a
delayed-delivery or when-issued basis. These transactions involve a
commitment by a fund to purchase or sell specific securities at a
predetermined price or yield, with payment and delivery taking place after
the customary settlement period for that type of security. Typically, no
interest accrues to the purchaser until the security is delivered. The
funds (excluding Money Market) may receive fees for entering into
delayed-delivery transactions.
When purchasing securities on a delayed-delivery basis, each fund assumes
the rights and risks of ownership, including the risk of price and yield
fluctuations. Because a fund is not required to pay for securities until
the delivery date, these risks are in addition to the risks associated with
the fund's other investments. If a fund remains substantially fully
invested at a time when delayed-delivery purchases are outstanding, the
delayed-delivery purchases may result in a form of leverage. When
delayed-delivery purchases are outstanding, the fund will set aside
appropriate liquid assets in a segregated custodial account to cover its
purchase obligations. When a fund has sold a security on a delayed-delivery
basis, the fund does not participate in further gains or losses with
respect to the security. If the other party to a delayed-delivery
transaction fails to deliver or pay for the securities, the fund could miss
a favorable price or yield opportunity, or could suffer a loss.
Each fund may renegotiate delayed-delivery transactions after they are
entered into, and may sell underlying securities before they are delivered,
which may result in capital gains or losses.
EXPOSURE TO FOREIGN MARKETS. Foreign securities, foreign currencies, and
securities issued by U.S. entities with substantial foreign operations may
involve significant risks in addition to the risks inherent in U.S.
investments. The value of securities denominated in foreign currencies and
of dividends and interest paid with respect to such securities will
fluctuate based on the relative strength of the U.S. dollar.
Foreign investments involve a risk of local political, economic, or social
instability, military action or unrest, or adverse diplomatic developments,
and may be affected by actions of foreign governments adverse to the
interests of U.S. investors. Such actions may include the possibility of
expropriation or nationalization of assets, confiscatory taxation,
restrictions on U.S. investment or on the ability to repatriate assets or
convert currency into U.S. dollars, or other government intervention. There
is no assurance that FMR will be able to anticipate these potential events
or counter their effects. These risks are magnified for investments in
developing countries, which may have relatively unstable governments,
economies based on only a few industries, and securities markets that trade
a small number of securities.
Economies of particular countries or areas of the world may differ
favorably or unfavorably from the economy of the United States. Foreign
markets may offer less protection to investors than U.S. markets. It is
anticipated that in most cases the best available market for foreign
securities will be on an exchange or in over-the-counter markets located
outside of the United States. Foreign stock markets, while growing in
volume and sophistication, are generally not as developed as those in the
United States, and securities of some foreign issuers (particularly those
located in developing countries) may be less liquid and more volatile than
securities of comparable U.S. issuers. Foreign security trading practices,
including those involving securities settlement where fund assets may be
released prior to receipt of payment, may result in increased risk in the
event of a failed trade or the insolvency of a foreign broker-dealer, and
may involve substantial delays. In addition, the costs of foreign
investing, including withholding taxes, brokerage commissions and custodial
costs, are generally higher than for U.S. investors. In general, there is
less overall governmental supervision and regulation of securities
exchanges, brokers, and listed companies than in the United States. It may
also be difficult to enforce legal rights in foreign countries. Foreign
issuers are generally not bound by uniform accounting, auditing, and
financial reporting requirements and standards of practice comparable to
those applicable to U.S. issuers.
Some foreign securities impose restrictions on transfer within the United
States or to U.S. persons. Although securities subject to such transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.
American Depository Receipts (ADR's) as well as other "hybrid" forms of
ADRs including European Depository Receipts (EDRs) and Global Depository
Receipts (GDRs), are certificates evidencing ownership of shares of a
foreign issuer. These certificates are issued by depository banks and
generally trade on an established market in the United States or elsewhere.
The underlying shares are held in trust by a custodian bank or similar
financial institution in the issuer's home country. The depository bank may
not have physical custody of the underlying securities at all times and may
charge fees for various services, including forwarding dividends and
interest and corporate actions. ADRs are an alternative to directly
purchasing the underlying foreign securities in their national markets and
currencies. However, ADRs continue to be subject to many of the risks
associated with investing directly in foreign securities. These risks
include foreign exchange risk as well as the political and economic risks
of the underlying issuer's country.
FOREIGN CURRENCY TRANSACTIONS. The funds (excluding Money Market) may
conduct foreign currency transactions on a spot (i.e., cash) basis or by
entering into forward contracts to purchase or sell foreign currencies at a
future date and price. The funds will convert currency on a spot basis from
time to time, and investors should be aware of the costs of currency
conversion. Although foreign exchange dealers generally do not charge a fee
for conversion, they do realize a profit based on the difference between
the prices at which they are buying and selling various currencies. Thus, a
dealer may offer to sell a foreign currency to the fund at one rate, while
offering a lesser rate of exchange should the fund desire to resell that
currency to the dealer. Forward contracts are generally traded in an
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. The parties to a forward contract
may agree to offset or terminate the contract before its maturity, or may
hold the contract to maturity and complete the contemplated currency
exchange.
Each fund may use currency forward contracts for any purpose consistent
with its investment objective. The following discussion summarizes the
principal currency management strategies involving forward contracts that
could be used by each fund. The funds may also use swap agreements, indexed
securities, and options and futures contracts relating to foreign
currencies for the same purposes.
When a fund agrees to buy or sell a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security.
By entering into a forward contract for the purchase or sale, for a fixed
amount of U.S. dollars, of the amount of foreign currency involved in the
underlying security transaction, the fund will be able to protect itself
against an adverse change in foreign currency values between the date the
security is purchased or sold and the date on which payment is made or
received. This technique is sometimes referred to as a "settlement hedge"
or "transaction hedge." The funds may also enter into forward contracts to
purchase or sell a foreign currency in anticipation of future purchases or
sales of securities denominated in foreign currency, even if the specific
investments have not yet been selected by FMR.
The funds may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. For example,
if a fund owned securities denominated in pounds sterling, it could enter
into a forward contract to sell pounds sterling in return for U.S. dollars
to hedge against possible declines in the pound's value. Such a hedge,
sometimes referred to as a "position hedge," would tend to offset both
positive and negative currency fluctuations, but would not offset changes
in security values caused by other factors. A fund could also hedge the
position by selling another currency expected to perform similarly to the
pound sterling - for example, by entering into a forward contract to sell
Deutschemarks or European Currency Units in return for U.S. dollars. This
type of hedge, sometimes referred to as a "proxy hedge," could offer
advantages in terms of cost, yield, or efficiency, but generally would not
hedge currency exposure as effectively as a simple hedge into U.S. dollars.
Proxy hedges may result in losses if the currency used to hedge does not
perform similarly to the currency in which the hedged securities are
denominated.
Each fund may enter into forward contracts to shift its investment exposure
from one currency into another. This may include shifting exposure from
U.S. dollars to a foreign currency, or from one foreign currency to another
foreign currency. For example, if a fund held investments denominated in
Deutschemarks, the fund could enter into forward contracts to sell
Deutschemarks and purchase Swiss Francs. This type of strategy, sometimes
known as a "cross-hedge," will tend to reduce or eliminate exposure to the
currency that is sold, and increase exposure to the currency that is
purchased, much as if the fund had sold a security denominated in one
currency and purchased an equivalent security denominated in another.
Cross-hedges protect against losses resulting from a decline in the hedged
currency, but will cause the fund to assume the risk of fluctuations in the
value of the currency it purchases.
Under certain conditions, SEC guidelines require mutual funds to set aside
appropriate liquid assets in a segregated custodial account to cover
currency forward contracts. As required by SEC guidelines, the funds will
segregate assets to cover currency forward contracts, if any, whose purpose
is essentially speculative. The funds will not segregate assets to cover
forward contracts entered into for hedging purposes, including settlement
hedges, position hedges, and proxy hedges.
Successful use of currency management strategies will depend on FMR's skill
in analyzing and predicting currency values. Currency management strategies
may substantially change a fund's investment exposure to changes in
currency exchange rates, and could result in losses to the fund if
currencies do not perform as FMR anticipates. For example, if a currency's
value rose at a time when FMR had hedged a fund by selling that currency in
exchange for dollars, the fund would be unable to participate in the
currency's appreciation. If FMR hedges currency exposure through proxy
hedges, a fund could realize currency losses from the hedge and the
security position at the same time if the two currencies do not move in
tandem. Similarly, if FMR increases a fund's exposure to a foreign
currency, and that currency's value declines, the fund will realize a loss.
There is no assurance that FMR's use of currency management strategies will
be advantageous to the funds or that it will hedge at an appropriate time.
FOREIGN REPURCHASE AGREEMENTS. Foreign repurchase agreements may include
agreements to purchase and sell foreign securities in exchange for fixed
U.S. dollar amounts, or in exchange for specified amounts of foreign
currency. Unlike typical U.S. repurchase agreements, foreign repurchase
agreements may not be fully collateralized at all times. However, pursuant
to certain state insurance regulations, any foreign repurchase agreements a
fund enters into will be secured by collateral consisting of liquid assets
having a market value of not less than 102% of the cash or assets
transferred to the other party. The value of a security purchased by a fund
may be more or less than the price at which the counterparty has agreed to
repurchase the security. In the event of default by the counterparty, the
fund may suffer a loss if the value of the security purchased is less than
the agreed-upon repurchase price, or if the fund is unable to successfully
assert a claim to the collateral under foreign laws. As a result, foreign
repurchase agreements may involve higher credit risks than repurchase
agreements in U.S. markets, as well as risks associated with currency
fluctuations. In addition, as with other emerging market investments,
repurchase agreements with counterparties located in emerging markets or
relating to emerging markets may involve issuers or counterparties with
lower credit ratings than typical U.S. repurchase agreements.
FUNDS' RIGHTS AS A SHAREHOLDER. The funds do not intend to direct or
administer the day-to-day operations of any company. Each fund, however,
may exercise its rights as a shareholder and may communicate its views on
important matters of policy to management, the Board of Directors, and
shareholders of a company when FMR determines that such matters could have
a significant effect on the value of the fund's investment in the company.
The activities that a fund may engage in, either individually or in
conjunction with others, may include, among others, supporting or opposing
proposed changes in a company's corporate structure or business activities;
seeking changes in a company's directors or management; seeking changes in
a company's direction or policies; seeking the sale or reorganization of
the company or a portion of its assets; or supporting or opposing third
party takeover efforts. This area of corporate activity is increasingly
prone to litigation and it is possible that a fund could be involved in
lawsuits related to such activities. FMR will monitor such activities with
a view to mitigating, to the extent possible, the risk of litigation
against a fund and the risk of actual liability if a fund is involved in
litigation. No guarantee can be made, however, that litigation against a
fund will not be undertaken or liabilities incurred.
FUTURES AND OPTIONS. The following sections pertain to futures and options:
Asset Coverage for Futures and Options Positions, Combined Positions,
Correlation of Price Changes, Futures Contracts, Futures Margin Payments,
Limitations on Futures and Options Transactions, Liquidity of Options and
Futures Contracts, Options and Futures Relating to Foreign Currencies, OTC
Options, Purchasing Put and Call Options, and Writing Put and Call Options.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The funds will comply
with guidelines established by the Securities and Exchange Commission with
respect to coverage of options and futures strategies by mutual funds, and
if the guidelines so require will set aside appropriate liquid assets in a
segregated custodial account in the amount prescribed. Securities held in a
segregated account cannot be sold while the futures or option strategy is
outstanding, unless they are replaced with other suitable assets. As a
result, there is a possibility that segregation of a large percentage of a
fund's assets could impede portfolio management or the fund's ability to
meet redemption requests or other current obligations.
COMBINED POSITIONS. A fund may purchase and write options in combination
with each other, or in combination with futures or forward contracts, to
adjust the risk and return characteristics of the overall position. For
example, a fund may purchase a put option and write a call option on the
same underlying instrument, in order to construct a combined position whose
risk and return characteristics are similar to selling a futures contract.
Another possible combined position would involve writing a call option at
one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial
price increase. Because combined options positions involve multiple trades,
they result in higher transaction costs and may be more difficult to open
and close out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of types
of exchange-traded options and futures contracts, it is likely that the
standardized contracts available will not match a fund's current or
anticipated investments exactly. The funds may invest in options and
futures contracts based on securities with different issuers, maturities,
or other characteristics from the securities in which they typically
invest, which involves a risk that the options or futures position will not
track the performance of a fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match a fund's
investments well. Options and futures prices are affected by such factors
as current and anticipated short-term interest rates, changes in volatility
of the underlying instrument, and the time remaining until expiration of
the contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options
and futures markets and the securities markets, from structural differences
in how options and futures and securities are traded, or from imposition of
daily price fluctuation limits or trading halts. A fund may purchase or
sell options and futures contracts with a greater or lesser value than the
securities it wishes to hedge or intends to purchase in order to attempt to
compensate for differences in volatility between the contract and the
securities, although this may not be successful in all cases. If price
changes in a fund's options or futures positions are poorly correlated with
its other investments, the positions may fail to produce anticipated gains
or result in losses that are not offset by gains in other investments.
FUTURES CONTRACTS. When a fund purchases a futures contract, it agrees to
purchase a specified underlying instrument at a specified future date. When
a fund sells a futures contract, it agrees to sell the underlying
instrument at a specified future date. The price at which the purchase and
sale will take place is fixed when the fund enters into the contract. Some
currently available futures contracts are based on specific securities,
such as U.S. Treasury bonds or notes, and some are based on indices of
securities prices, such as the Standard & Poor's Composite Index of 500
Stocks (S&P 500) and the Bond Buyer Municipal Bond Index. Futures can be
held until their delivery dates, or can be closed out before then if a
liquid secondary market is available.
The value of a futures contract tends to increase and decrease in tandem
with the value of its underlying instrument. Therefore, purchasing futures
contracts will tend to increase a fund's exposure to positive and negative
price fluctuations in the underlying instrument, much as if it had
purchased the underlying instrument directly. When a fund sells a futures
contract, by contrast, the value of its futures position will tend to move
in a direction contrary to the market. Selling futures contracts,
therefore, will tend to offset both positive and negative market price
changes, much as if the underlying instrument had been sold.
FUTURES MARGIN PAYMENTS. The purchaser or seller of a futures contract is
not required to deliver or pay for the underlying instrument unless the
contract is held until the delivery date. However, both the purchaser and
seller are required to deposit "initial margin" with a futures broker,
known as a futures commission merchant (FCM), when the contract is entered
into. Initial margin deposits are typically equal to a percentage of the
contract's value. If the value of either party's position declines, that
party will be required to make additional "variation margin" payments to
settle the change in value on a daily basis. The party that has a gain may
be entitled to receive all or a portion of this amount. Initial and
variation margin payments do not constitute purchasing securities on margin
for purposes of a fund's investment limitations. In the event of the
bankruptcy of an FCM that holds margin on behalf of a fund, the fund may be
entitled to return of margin owed to it only in proportion to the amount
received by the FCM's other customers, potentially resulting in losses to
the fund.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS. Each fund (excluding Money
Market) has filed a notice of eligibility for exclusion from the definition
of the term "commodity pool operator" with the Commodity Futures Trading
Commission (CFTC) and the National Futures Association, which regulate
trading in the futures markets. The funds intend to comply with Rule 4.5
under the Commodity Exchange Act, which limits the extent to which a fund
can commit assets to initial margin deposits and option premiums.
In addition, each fund will not: (a) sell futures contracts, purchase put
options, or write call options if, as a result, more than 25% of the fund's
total assets would be hedged with futures and options under normal
conditions; (b) purchase futures contracts or write put options if, as a
result, the fund's total obligations upon settlement or exercise of
purchased futures contracts and written put options would exceed 25% of its
total assets; or (c) purchase call options if, as a result, the current
value of option premiums for call options purchased by the fund would
exceed 5% of the fund's total assets. These limitations do not apply to
options attached to or acquired or traded together with their underlying
securities, and do not apply to securities that incorporate features
similar to options.
The above limitations on the funds' investments in futures contracts and
options, and the funds' policies regarding futures contracts and options
discussed elsewhere in this Statement of Additional Information may be
changed as regulatory agencies permit.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a liquid
secondary market will exist for any particular options or futures contract
at any particular time. Options may have relatively low trading volume and
liquidity if their strike prices are not close to the underlying
instrument's current price. In addition, exchanges may establish daily
price fluctuation limits for options and futures contracts, and may halt
trading if a contract's price moves upward or downward more than the limit
in a given day. On volatile trading days when the price fluctuation limit
is reached or a trading halt is imposed, it may be impossible for a fund to
enter into new positions or close out existing positions. If the secondary
market for a contract is not liquid because of price fluctuation limits or
otherwise, it could prevent prompt liquidation of unfavorable positions,
and potentially could require a fund to continue to hold a position until
delivery or expiration regardless of changes in its value. As a result, a
fund's access to other assets held to cover its options or futures
positions could also be impaired.
OPTIONS AND FUTURES RELATING TO FOREIGN CURRENCIES. Currency futures
contracts are similar to forward currency exchange contracts, except that
they are traded on exchanges (and have margin requirements) and are
standardized as to contract size and delivery date. Most currency futures
contracts call for payment or delivery in U.S. dollars. The underlying
instrument of a currency option may be a foreign currency, which generally
is purchased or delivered in exchange for U.S. dollars, or may be a futures
contract. The purchaser of a currency call obtains the right to purchase
the underlying currency, and the purchaser of a currency put obtains the
right to sell the underlying currency.
The uses and risks of currency options and futures are similar to options
and futures relating to securities or indices, as discussed above. The
funds may purchase and sell currency futures and may purchase and write
currency options to increase or decrease their exposure to different
foreign currencies. A fund may also purchase and write currency options in
conjunction with each other or with currency futures or forward contracts.
Currency futures and options values can be expected to correlate with
exchange rates, but may not reflect other factors that affect the value of
a fund's investments. A currency hedge, for example, should protect a
Yen-denominated security from a decline in the Yen, but will not protect a
fund against a price decline resulting from deterioration in the issuer's
creditworthiness. Because the value of a fund's foreign-denominated
investments changes in response to many factors other than exchange rates,
it may not be possible to match the amount of currency options and futures
to the value of the fund's investments exactly over time.
OTC OPTIONS. Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size, and
strike price, the terms of over-the-counter (OTC) options (options not
traded on exchanges) generally are established through negotiation with the
other party to the option contract. While this type of arrangement allows
the funds greater flexibility to tailor an option to its needs, OTC options
generally involve greater credit risk than exchange-traded options, which
are guaranteed by the clearing organization of the exchanges where they are
traded.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, a fund obtains
the right (but not the obligation) to sell the option's underlying
instrument at a fixed strike price. In return for this right, the fund pays
the current market price for the option (known as the option premium).
Options have various types of underlying instruments, including specific
securities, indices of securities prices, and futures contracts. The fund
may terminate its position in a put option it has purchased by allowing it
to expire or by exercising the option. If the option is allowed to expire,
the fund will lose the entire premium it paid. If the fund exercises the
option, it completes the sale of the underlying instrument at the strike
price. A fund may also terminate a put option position by closing it out in
the secondary market at its current price, if a liquid secondary market
exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price
does not fall enough to offset the cost of purchasing the option, a put
buyer can expect to suffer a loss (limited to the amount of the premium
paid, plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's
strike price. A call buyer typically attempts to participate in potential
price increases of the underlying instrument with risk limited to the cost
of the option if security prices fall. At the same time, the buyer can
expect to suffer a loss if security prices do not rise sufficiently to
offset the cost of the option.
WRITING PUT AND CALL OPTIONS. When a fund writes a put option, it takes the
opposite side of the transaction from the option's purchaser. In return for
receipt of the premium, the fund assumes the obligation to pay the strike
price for the option's underlying instrument if the other party to the
option chooses to exercise it. When writing an option on a futures
contract, the fund will be required to make margin payments to an FCM as
described above for futures contracts. A fund may seek to terminate its
position in a put option it writes before exercise by closing out the
option in the secondary market at its current price. If the secondary
market is not liquid for a put option the fund has written, however, the
fund must continue to be prepared to pay the strike price while the option
is outstanding, regardless of price changes, and must continue to set aside
assets to cover its position.
If security prices rise, a put writer would generally expect to profit,
although its gain would be limited to the amount of the premium it
received. If security prices remain the same over time, it is likely that
the writer will also profit, because it should be able to close out the
option at a lower price. If security prices fall, the put writer would
expect to suffer a loss. This loss should be less than the loss from
purchasing the underlying instrument directly, however, because the premium
received for writing the option should mitigate the effects of the decline.
Writing a call option obligates a fund to sell or deliver the option's
underlying instrument, in return for the strike price, upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the
same time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is
greater, a call writer gives up some ability to participate in security
price increases.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of in
the ordinary course of business at approximately the prices at which they
are valued. Under the supervision of the Board of Trustees, FMR determines
the liquidity of a fund's investments and, through reports from FMR, the
Board monitors investments in illiquid instruments. In determining the
liquidity of a fund's investments, FMR may consider various factors,
including (1) the frequency of trades and quotations, (2) the number of
dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including
any demand or tender features), and (5) the nature of the marketplace for
trades (including the ability to assign or offset the fund's rights and
obligations relating to the investment).
Investments currently considered by a fund to be illiquid include
repurchase agreements not entitling the holder to payment of principal and
interest within seven days, non-government stripped fixed-rate
mortgage-backed securities, and over-the-counter options. Also, FMR may
determine some restricted securities, government-stripped fixed-rate
mortgage-backed securities, loans and other direct debt instruments,
emerging market securities, and swap agreements to be illiquid. However,
with respect to over-the-counter options a fund writes, all or a portion of
the value of the underlying instrument may be illiquid depending on the
assets held to cover the option and the nature and terms of any agreement
the fund may have to close out the option before expiration. With respect
to Money Market, FMR may also determine some time deposits to be illiquid.
In the absence of market quotations, illiquid investments are priced at
fair value as determined in good faith by a committee appointed by the
Board of Trustees (for Money Market, illiquid investments are valued for
purposes of monitoring amortized cost valuation). If through a change in
values, net assets, or other circumstances, a fund were in a position where
more than 10% of Money Market, Government Investment, Income & Growth, and
Growth Opportunities Funds' net assets and more than 15% of High Yield and
Overseas Funds' net assets were invested in illiquid securities, the fund
would seek to take appropriate steps to protect liquidity.
INDEXED SECURITIES. Indexed securities have prices
that are indexed to the prices of other securities, securities indices,
currencies, precious metals or other commodities, or other financial
indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined
by reference to a specific instrument or statistic. Gold-indexed
securities, for example, typically provide for a maturity value that
depends on the price of gold, resulting in a security whose price tends to
rise and fall together with gold prices. Currency-indexed securities
typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values
of one or more specified foreign currencies, and may offer higher yields
than U.S. dollar-denominated securities of equivalent issuers.
Currency-indexed securities may be positively or negatively indexed; that
is, their maturity value may increase when the specified currency value
increases, resulting in a security that performs similarly to a
foreign-denominated instrument, or their maturity value may decline when
foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values
of a number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they
are indexed, and may also be influenced by interest rate changes in the
United States and abroad. At the same time, indexed securities are subject
to the credit risks associated with the issuer of the security, and their
values may decline substantially if the issuer's creditworthiness
deteriorates. Recent issuers of indexed securities have included banks,
corporations, and certain U.S. government agencies. Indexed securities may
be more volatile than the underlying instruments.
INTERFUND BORROWING AND LENDING PROGRAM. Pursuant to an exemptive order
issued by the SEC, each fund has received permission to lend money to, and
borrow money from, other funds advised by FMR or its affiliates. Interfund
loans and borrowings normally extend overnight, but can have a maximum
duration of seven days. Loans may be called on one day's notice. A fund
will lend through the program only when the returns are higher than those
available from other short-term instruments (such as repurchase
agreements), and will borrow through the program only when the costs are
equal to or lower than the cost of bank loans. A fund may have to borrow
from a bank at a higher interest rate if an interfund loan is called or not
renewed. Any delay in repayment to a lending fund could result in a lost
investment opportunity or additional borrowing costs.
ISSUER LOCATION. FMR determines where an issuer is located by looking at
such factors as its country of organization, the primary trading market for
its securities, and the location of its assets, personnel, sales, and
earnings. The issuer of a security is located in a particular country if:
1) the security is issued or guaranteed by the government of the country;
or 2) the issuer is organized under the laws of the country, derives at
least 50% of its revenues or profits from goods sold, investments made or
services performed in the country, or has at least 50% of its assets
located in the country.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS. Direct debt instruments are
interests in amounts owed by a corporate, governmental, or other borrower
to lenders or lending syndicates (loans and loan participations), to
suppliers of goods or services (trade claims or other receivables), or to
other parties. Direct debt instruments are subject to each fund's policies
regarding the quality of debt securities.
Purchasers of loans and other forms of direct indebtedness depend primarily
upon the creditworthiness of the borrower for payment of principal and
interest. Direct debt instruments may not be rated by any nationally
recognized rating service. If a fund does not receive scheduled interest or
principal payments on such indebtedness, the fund's share price and yield
could be adversely affected. Loans that are fully secured offer a fund more
protections than an unsecured loan in the event of non-payment of scheduled
interest or principal. However, there is no assurance that the liquidation
of collateral from a secured loan would satisfy the borrower's obligation,
or that the collateral could be liquidated. Indebtedness of borrowers whose
creditworthiness is poor involves substantially greater risks and may be
highly speculative. Borrowers that are in bankruptcy or restructuring may
never pay off their indebtedness, or may pay only a small fraction of the
amount owed. Direct indebtedness of developing countries also involves a
risk that the governmental entities responsible for the repayment of the
debt may be unable, or unwilling, to pay interest and repay principal when
due.
Investments in loans through direct assignment of a financial institution's
interests with respect to a loan may involve additional risks to a fund.
For example, if a loan is foreclosed, the fund could become part owner of
any collateral, and would bear the costs and liabilities associated with
owning and disposing of the collateral. In addition, it is conceivable that
under emerging legal theories of lender liability, the fund could be held
liable as a co-lender. Direct debt instruments may also involve a risk of
insolvency of the lending bank or other intermediary. Direct debt
instruments that are not in the form of securities may offer less legal
protection to a fund in the event of fraud or misrepresentation. In the
absence of definitive regulatory guidance, each fund relies on FMR's
research in an attempt to avoid situations where fraud or misrepresentation
could adversely affect the fund.
A loan is often administered by a bank or other financial institution that
acts as agent for all holders. The agent administers the terms of the loan,
as specified in the loan agreement. Unless, under the terms of the loan or
other indebtedness, each fund has direct recourse against the borrower, it
may have to rely on the agent to apply appropriate credit remedies against
a borrower. If assets held by the agent for the benefit of a fund were
determined to be subject to the claims of the agent's general creditors,
the fund might incur certain costs and delays in realizing payment on the
loan or loan participation and could suffer a loss of principal or
interest.
Direct indebtedness purchased by each fund may include letters of credit,
revolving credit facilities, or other standby financing commitments
obligating the fund to pay additional cash on demand. These commitments may
have the effect of requiring the fund to increase its investment in a
borrower at a time when it would not otherwise have done so, even if the
borrower's condition makes it unlikely that the amount will ever be repaid.
Each fund will set aside appropriate liquid assets in a segregated
custodial account to cover its potential obligations under standby
financing commitments.
Each fund limits the amount of total assets that it will invest in any one
issuer or in issuers within the same industry (see limitations 1 and 5).
For purposes of these limitations, each fund generally will treat the
borrower as the "issuer" of indebtedness held by the fund. In the case of
loan participations where a bank or other lending institution serves as
financial intermediary between each fund and the borrower, if the
participation does not shift to the fund the direct debtor-creditor
relationship with the borrower, SEC interpretations require the fund, in
appropriate circumstances, to treat both the lending bank or other lending
institution and the borrower as "issuers" for these purposes. Treating a
financial intermediary as an issuer of indebtedness may restrict a fund's
ability to invest in indebtedness related to a single financial
intermediary, or a group of intermediaries engaged in the same industry,
even if the underlying borrowers represent many different companies and
industries.
LOWER-QUALITY DEBT SECURITIES. While the market for high-yield corporate
debt securities has been in existence for many years and has weathered
previous economic downturns, the 1980s brought a dramatic increase in the
use of such securities to fund highly leveraged corporate acquisitions and
restructurings. Past experience may not provide an accurate indication of
the future performance of the high-yield bond market, especially during
periods of economic recession.
The market for lower-quality debt securities may be thinner and less active
than that for higher-quality debt securities, which can adversely affect
the prices at which the former are sold. If market quotations are not
available, lower-quality debt securities will be valued in accordance with
procedures established by the Board of Trustees, including the use of
outside pricing services. Judgment plays a greater role in valuing
high-yield corporate debt securities than is the case for securities for
which more external sources for quotations and last-sale information are
available. Adverse publicity and changing investor perceptions may affect
the ability of outside pricing services to value lower-quality debt
securities and a fund's ability to dispose of these securities.
Since the risk of default is higher for lower-quality debt securities,
FMR's research and credit analysis are an especially important part of
managing securities of this type held by a fund. In considering investments
for the fund, FMR will attempt to identify those issuers of high-yielding
securities whose financial condition is adequate to meet future
obligations, has improved, or is expected to improve in the future. FMR's
analysis focuses on relative values based on such factors as interest or
dividend coverage, asset coverage, earnings prospects, and the experience
and managerial strength of the issuer.
Each fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise to exercise its rights as a security holder
to seek to protect the interests of security holders if it determines this
to be in the best interest of the fund's shareholders.
MONEY MARKET SECURITIES are high-quality, short-term obligations. Some
money market securities employ a trust or other similar structure to modify
the maturity, price characteristics, or quality of financial assets. For
example, put features can be used to modify the maturity of a security or
interest rate adjustment features can be used to enhance price stability.
If the structure does not perform as intended, adverse tax or investment
consequences may result. Neither the Internal Revenue Service (IRS) nor any
other regulatory authority has ruled definitively on certain legal issues
presented by structured securities. Future tax or other regulatory
determinations could adversely affect the value, liquidity, or tax
treatment of the income received from these securities or the nature and
timing of distributions made by the funds.
MORTGAGE-BACKED SECURITIES. M ortgage-backed securities are
issued by government and non-government entities such as banks, mortgage
lenders, or other financial institutions. A mortgage-backed security is an
obligation of the issuer backed by a mortgage or pool of mortgages or a
direct interest in an underlying pool of mortgages. Some mortgage-backed
securities, such as collateralized mortgage obligations or CMOs, make
payments of both principal and interest at a variety of intervals; others
make semiannual interest payments at a predetermined rate and repay
principal at maturity (like a typical bond). Mortgage-backed securities are
based on different types of mortgages including those on commercial real
estate or residential properties. Other types of mortgage-backed securities
will likely be developed in the future, and the funds may invest in them if
FMR determines they are consistent with the funds' investment objective and
policies.
The value of mortgage-backed securities may change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Non-government
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment
risk. Prepayment, which occurs when unscheduled or early payments are made
on the underlying mortgages, may shorten the effective maturities of these
securities and may lower their total returns.
MUNICIPAL SECURITIES are issued to raise money for a variety of public or
private purposes, including general financing for state and local
governments, or financing for specific projects or public facilities. They
may be issued in anticipation of future revenues and may be backed by the
full taxing power of a municipality, the revenues from a specific project,
or the credit of a private organization. The value of some or all municipal
securities may be affected by uncertainties in the municipal market related
to legislation or litigation involving the taxation of municipal securities
or the rights of municipal securities holders. A fund may own a municipal
security directly or through a participation interest.
PUT FEATURES entitle the holder to sell a security back to the issuer or a
third party at any time or at specified intervals. They are subject to the
risk that the put provider is unable to honor the put feature (purchase the
security). Put providers often support their ability to buy securities on
demand by obtaining letters of credit or other guarantees from other
entities. Demand features, standby commitments, and tender options are
types of put features.
REAL ESTATE-RELATED INSTRUMENTS include real estate investment trusts,
commercial and residential mortgage-backed securities, and real estate
financings. Real estate-related instruments are sensitive to factors such
as real estate values and property taxes, interest rates, cash flow of
underlying real estate assets, overbuilding, and the management skill and
creditworthiness of the issuer. Real estate-related instruments may also be
affected by tax and regulatory requirements, such as those relating to the
environment.
REPURCHASE AGREEMENTS. In a repurchase agreement, a fund purchases a
security and simultaneously commits to sell that security back to the
original seller at an agreed-upon price. The resale price reflects the
purchase price plus an agreed-upon incremental amount which is unrelated to
the coupon rate or maturity of the purchased security. To protect the fund
from the risk that the original seller will not fulfill its obligation, the
securities are held in an account of the fund at a bank, marked-to-market
daily, and maintained at a value at least equal to the sale price plus the
accrued incremental amount. While it does not presently appear possible to
eliminate all risks from these transactions (particularly the possibility
that the value of the underlying security will be less than the resale
price, as well as delays and costs to a fund in connection with bankruptcy
proceedings), it is each fund's current policy to engage in repurchase
agreement transactions with parties whose creditworthiness has been
reviewed and found satisfactory by FMR. Pursuant to certain state insurance
regulations, any repurchase agreements a fund enters into will be secured
by collateral consisting of liquid assets having a market value of not less
than 102% of the cash or assets transferred to the other party.
RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the
Securities Act of 1933, or in a registered public offering. Where
registration is required, a fund may be obligated to pay all or part of the
registration expense and a considerable period may elapse between the time
it decides to seek registration and the time it may be permitted to sell a
security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, a fund might obtain a
less favorable price than prevailed when it decided to seek registration of
the security. However, in general, Money Market anticipates holding
restricted securities to maturity or selling them in an exempt transaction.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a fund
sells a portfolio instrument to another party, such as a bank or
broker-dealer, in return for cash and agrees to repurchase the instrument
at a particular price and time. While a reverse repurchase agreement is
outstanding, the fund will maintain appropriate liquid assets in a
segregated custodial account to cover its obligation under the agreement. A
fund will enter into reverse repurchase agreements only with parties whose
creditworthiness has been found satisfactory by FMR. Such transactions may
increase fluctuations in the market value of the fund's assets and may be
viewed as a form of leverage.
SECURITIES LENDING. A fund may lend securities to parties such as
broker-dealers or institutional investors, including Fidelity Brokerage
Services, Inc. (FBSI). FBSI is a member of the New York Stock Exchange and
a subsidiary of FMR Corp.
Securities lending allows a fund to retain ownership of the securities
loaned and, at the same time, to earn additional income. Since there may be
delays in the recovery of loaned securities, or even a loss of rights in
collateral supplied should the borrower fail financially, loans will be
made only to parties deemed by FMR to be of good standing. Furthermore,
they will only be made if, in FMR's judgment, the consideration to be
earned from such loans would justify the risk.
FMR understands that it is the current view of the SEC Staff that a fund
may engage in securities loan transactions (except reverse
repurchase agreements) only under the following conditions: (1) the
fund must receive 100% collateral in the form of cash or cash equivalents
(e.g., U.S. Treasury bills or notes) from the borrower; (2) the borrower
must increase the collateral whenever the market value of the securities
loaned (determined on a daily basis) rises above the value of the
collateral; (3) after giving notice, the fund must be able to terminate the
loan at any time; (4) the fund must receive reasonable interest on the loan
or a flat fee from the borrower, as well as amounts equivalent to any
dividends, interest, or other distributions on the securities loaned and to
any increase in market value; (5) the fund may pay only reasonable
custodian fees in connection with the loan; and (6) the Board of Trustees
must be able to vote proxies on the securities loaned, either by
terminating the loan or by entering into an alternative arrangement with
the borrower.
Cash received through loan transactions may be invested in any security in
which a fund is authorized to invest. Investing this cash subjects that
investment, as well as the security loaned, to market forces (i.e., capital
appreciation or depreciation).
SHORT SALES "AGAINST THE BOX." A fund may sell securities short when
it owns or has the right to obtain securities equivalent in kind or amount
to the securities sold short. Short sales could be used to protect the net
asset value per share of the fund in anticipation of increased interest
rates, without sacrificing the current yield of the securities sold short.
SHORT SALES. A fund may enter into short sales with respect to stocks
underlying its convertible security holdings. For example, if FMR
anticipates a decline in the price of the stock underlying a convertible
security a fund holds, it may sell the stock short. If the stock price
subsequently declines, the proceeds of the short sale could be expected to
offset all or a portion of the effect of the stock's decline on the value
of the convertible security. A fund currently intends to hedge no more than
15% of its total assets with short sales on equity securities underlying
its convertible security holdings under normal circumstances.
When a fund enters into a short sale or a short sale "against the box", it
will be required to set aside securities equivalent in kind and amount to
those sold short (or securities convertible or exchangeable into such
securities) and will be required to hold them aside while the short sale is
outstanding. A fund will incur transaction costs, including interest
expense, in connection with opening, maintaining, and closing short sales
and short sales "against the box".
SOURCES OF CREDIT OR LIQUIDITY SUPPORT. FMR may rely on its evaluation of
the credit of a bank or another entity in determining whether to purchase a
security supported by a letter of credit guarantee, insurance or other
source of credit or liquidity. In evaluating the credit of a foreign bank
or other foreign entities, FMR will consider whether adequate public
information about the entity is available and whether the entity may be
subject to unfavorable political or economic developments, currency
controls, or other government restrictions that might affect its ability to
honor its commitment.
SOVEREIGN DEBT OBLIGATIONS. Overseas Fund may purchase sovereign debt
instruments issued or guaranteed by foreign governments or their agencies,
including debt of Latin American nations or other developing countries.
Sovereign debt may be in the form of conventional securities or other types
of debt instruments such as loans or loan participations. Sovereign debt of
developing countries may involve a high degree of risk, and my be in
default or present the risk of default. Governmental entities responsible
for repayment of the debt may be unable or unwilling to repay principal and
interest when due, and may require renegotiation or rescheduling of debt
payments. In addition, prospects for repayment of principal and interest
may depend on political as well as economic factors.
STRIPPED GOVERNMENT SECURITIES. Stripped securities are created by
separating the income and principal components of a debt instrument and
selling them separately. U.S. Treasury STRIPS (Separate Trading of
Registered Interest and Principal of Securities) are created when the
coupon payments and the principal payment are stripped from an outstanding
Treasury bond by the Federal Reserve Bank. Bonds issued by the government
agencies also may be stripped in this fashion.
Privately stripped government securities are created when a dealer deposits
a Treasury security or federal agency security with a custodian for
safekeeping and then sells the coupon payments and principal payment that
will be generated by this security. Proprietary receipts, such as
Certificates of Accrual on Treasury Securities (CATS), Treasury Investment
Growth Receipts (TIGRS), and generic Treasury Receipts (TRs), are stripped
U.S. Treasury securities that are separated into their component parts
through trusts created by their broker sponsors. Bonds issued by the
government agencies also may be stripped in this fashion.
Because of the SEC's views on privately stripped government securities,
Money Market must evaluate them as it would non-government securities
pursuant to regulatory guidelines applicable to all money market funds.
Money Market currently intends to purchase only those privately stripped
government securities that have either received the highest rating from two
nationally recognized rating services (or one, if only one has rated the
security) or, if unrated, have been judged to be of equivalent quality by
FMR pursuant to procedures adopted by the Board of Trustees.
STRIPPED MORTGAGE-BACKED SECURITIES are created when a U.S. government
agency or a financial institution separates the interest and principal
components of a mortgage-backed security and sells them as individual
securities. The holder of the "principal-only" security (PO) receives the
principal payments made by the underlying mortgage-backed security, while
the holder of the "interest-only" security (IO) receives interest payments
from the same underlying security.
The prices of stripped mortgage-backed securities may be particularly
affected by changes in interest rates. As interest rates fall, prepayment
rates tend to increase, which tends to reduce prices of IOs and increase
prices of POs. Rising interest rates can have the opposite effect.
SWAP AGREEMENTS. Swap agreements can be individually negotiated and
structured to include exposure to a variety of different types of
investments or market factors. Depending on their structure, swap
agreements may increase or decrease a fund's exposure to long- or
short-term interest rates (in the United States or abroad), foreign
currency values, mortgage securities, corporate borrowing rates, or other
factors such as security prices or inflation rates. Swap agreements can
take many different forms and are known by a variety of names. A fund is
not limited to any particular form of swap agreement if FMR determines it
is consistent with the fund's investment objective and policies.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by
the other party. For example, the buyer of an interest rate cap obtains the
right to receive payments to the extent that a specified interest rate
exceeds an agreed-upon level, while the seller of an interest rate floor is
obligated to make payments to the extent that a specified interest rate
falls below an agreed-upon level. An interest rate collar combines elements
of buying a cap and selling a floor.
Swap agreements will tend to shift a fund's investment exposure from one
type of investment to another. For example, if the fund agreed to exchange
payments in dollars for payments in foreign currency, the swap agreement
would tend to decrease the fund's exposure to U.S. interest rates and
increase its exposure to foreign currency and interest rates. Caps and
floors have an effect similar to buying or writing options. Depending on
how they are used, swap agreements may increase or decrease the overall
volatility of a fund's investments and its share price and yield.
The most significant factor in the performance of swap agreements is the
change in the specific interest rate, currency, or other factors that
determine the amounts of payments due to and from a fund. If a swap
agreement calls for payments by the fund, the fund must be prepared to make
such payments when due. In addition, if the counterparty's creditworthiness
declined, the value of a swap agreement would be likely to decline,
potentially resulting in losses. A fund expects to be able to eliminate its
exposure under swap agreements either by assignment or other disposition,
or by entering into an offsetting swap agreement with the same party or a
similarly creditworthy party.
A fund will maintain appropriate liquid assets in a segregated custodial
account to cover its current obligations under swap agreements. If a fund
enters into a swap agreement on a net basis, it will segregate assets with
a daily value at least equal to the excess, if any, of the fund's accrued
obligations under the swap agreement over the accrued amount the fund is
entitled to receive under the agreement. If a fund enters into a swap
agreement on other than a net basis, it will segregate assets with a value
equal to the full amount of the fund's accrued obligations under the
agreement.
VARIABLE AND FLOATING RATE SECURITIES provide for periodic adjustments of
the interest rate paid on the security. Variable rate securities provide
for a specified periodic adjustment in the interest rate, while floating
rate securities have interest rates that change whenever there is a change
in a designated benchmark rate. Some variable or floating rate securities
have put features.
WARRANTS. Warrants are securities that give a fund the right to purchase
equity securities from the issuer at a specific price (the strike price)
for a limited period of time. The strike price of warrants typically is
much lower than the current market price of the underlying securities, yet
they are subject to similar price fluctuations. As a result, warrants may
be more volatile investments than the underlying securities and may offer
greater potential for capital appreciation as well as capital loss.
Warrants do not entitle a holder to dividends or voting rights with respect
to the underlying securities and do not represent any rights in the assets
of the issuing company. Also, the value of the warrant does not necessarily
change with the value of the underlying securities and a warrant ceases to
have value if it is not exercised prior to expiration date. These factors
can make warrants more speculative than other types of investments.
ZERO COUPON BONDS. Zero coupon bonds do not make interest payments;
instead, they are sold at a deep discount from their face value and are
redeemed at face value when they mature. Because zero coupon bonds do not
pay current income, their prices can be very volatile when interest rates
change. In calculating its dividends, a fund takes into account as income a
portion of the difference between a zero coupon bond's purchase price and
its face value.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed on
behalf of each fund by FMR pursuant to authority contained in the
management contract. Since FMR has granted investment management authority
to the sub-advisers (see the section entitled "Management Contract"), the
sub-advisers are authorized to place orders for the purchase and sale of
portfolio securities, and will do so in accordance with the policies
described below. FMR is also responsible for the placement of transaction
orders for other investment companies and accounts for which it or its
affiliates act as investment adviser. Securities purchased and sold by
Money Market generally will be traded on a net basis (i.e., without
commission). In selecting broker-dealers, subject to applicable limitations
of the federal securities laws, FMR considers various relevant factors,
including, but not limited to: the size and type of the transaction; the
nature and character of the markets for the security to be purchased or
sold; the execution efficiency, settlement capability, and financial
condition of the broker-dealer firm; the broker-dealer's execution services
rendered on a continuing basis; the reasonableness of any commissions; and
arrangements for payment of fund expenses. Generally, commissions for
investments traded on foreign exchanges will be higher than for investments
traded on U.S. exchanges and may not be subject to negotiation.
The funds may execute portfolio transactions with broker-dealers who
provide research and execution services to the funds or other accounts over
which FMR or its affiliates exercise investment discretion. Such services
may include advice concerning the value of securities; the advisability of
investing in, purchasing, or selling securities; and the availability of
securities or the purchasers or sellers of securities. In addition, such
broker-dealers may furnish analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy,
and performance of accounts; effect securities transactions, and perform
functions incidental thereto (such as clearance and settlement). For Money
Market, FMR maintains a listing of broker-dealers who provide such services
on a regular basis. However, as many transactions on behalf of Money Market
are placed with broker-dealers (including broker-dealers on the list)
without regard to the furnishing of such services, it is not possible to
estimate the proportion of such transactions directed to such
broker-dealers solely because such services were provided. The selection of
such broker-dealers generally is made by FMR (to the extent possible
consistent with execution considerations) in accordance with a ranking of
broker-dealers determined periodically by FMR's investment staff based upon
the quality of research and execution services provided.
The receipt of research from broker-dealers that execute transactions on
behalf of the funds may be useful to FMR in rendering investment management
services to the funds or its other clients, and conversely, such research
provided by broker-dealers who have executed transaction orders on behalf
of other FMR clients may be useful to FMR in carrying out its obligations
to the funds. The receipt of such research has not reduced FMR's normal
independent research activities; however, it enables FMR to avoid the
additional expenses that could be incurred if FMR tried to develop
comparable information through its own efforts.
Subject to applicable limitations of the federal securities laws,
broker-dealers may receive commissions for agency transactions that are in
excess of the amount of commissions charged by other broker-dealers in
recognition of their research and execution services. In order to cause
each fund to pay such higher commissions, FMR must determine in good faith
that such commissions are reasonable in relation to the value of the
brokerage and research services provided by such executing broker-dealers,
viewed in terms of a particular transaction or FMR's overall
responsibilities to the funds and its other clients. In reaching this
determination, FMR will not attempt to place a specific dollar value on the
brokerage and research services provided, or to determine what portion of
the compensation should be related to those services.
FMR is authorized to use research services provided by and to place
portfolio transactions with brokerage firms that have provided assistance
in the distribution of shares of the funds or shares of other Fidelity
funds to the extent permitted by law. FMR may use research services
provided by and place agency transactions with Fidelity Brokerage Services,
Inc. (FBSI) and Fidelity Brokerage Services (FBS), subsidiaries of FMR
Corp., if the commissions are fair, reasonable, and comparable to
commissions charged by non-affiliated, qualified brokerage firms for
similar services.
FMR may allocate brokerage transactions to broker-dealers who have entered
into arrangements with FMR under which the broker-dealer allocates a
portion of the commissions paid by each fund toward payment of the fund's
expenses, such as transfer agent fees or custodian fees. The transaction
quality must, however, be comparable to those of other qualified
broker-dealers.
Section 11(a) of the Securities Exchange Act of 1934 prohibits members of
national securities exchanges from executing exchange transactions for
accounts which they or their affiliates manage, unless certain requirements
are satisfied. Pursuant to such requirements, the Board of Trustees has
authorized FBSI to execute portfolio transactions on national securities
exchanges in accordance with approved procedures and applicable SEC rules.
Each fund's Trustees periodically review FMR's performance of its
responsibilities in connection with the placement of portfolio transactions
on behalf of the funds and review the commissions paid by each fund over
representative periods of time to determine if they are reasonable in
relation to the benefits to the fund.
Because a high turnover rate increases brokerage costs, FMR carefully
weighs the added costs of short-term investment against anticipated gain.
An increased turnover rate is due to a greater volume of shareholder
purchase orders, short-term interest rate volatility and other special
market conditions. For fiscal period ended December 31, 1995, each
fund had the following turnover rates:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
GOVERNMENT HIGH INCOME & GROWTH
YEAR INVESTMENT YIELD GROWTH OPPORTUNITIES OVERSEAS
1995 220 % * 98 % * 248 % 38 % 43 %
</TABLE>
* Annualized
BROKERAGE COMMISSIONS. The following lists the total brokerage commissions
paid; the percentage of the brokerage commissions paid to brokerage firms
which provided research services; and the commissions paid to FBSI and FBSL
in dollars and as a percentage of the dollar value of all transactions in
which brokerage commissions were paid for the fiscal period ended
December 31, 1995 for each of the funds. No commissions were paid by Money
Market, Government Investment and High Yield. The funds pay both
commissions and spreads in connection with the placement of portfolio
transactions. The difference in the percentage of brokerage commissions
paid to, and the percentage of the dollar amount of transactions effected
through, FBSI and FBSL are mainly due to the results of the low commission
rates charged by FBSI and FBSL.
INCOME & GROWTH FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% Paid to % %
Firms Transactions Transactions
Period Providing To To % to through through
Ended TOTAL Research FBSI FBSL % to FBSI FBSL FBSI FBSL
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $ 65,835 89.2 % $ 12,056 $195 18.3% .3% 36.8% .3%
</TABLE>
GROWTH OPPORTUNITIES FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% Paid to % %
Firms Transactions Transactions
Period Providing To To % to through through
Ended TOTAL Research FBSI FBSL % to FBSI FBSL FBSI FBSL
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $ 105,477 66.9 % $ 40,358 $100 38.3% .1% 58.3% .1%
</TABLE>
OVERSEAS FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% Paid to % %
Firms Transactions Transactions
Period Providing To To % to through through
Ended TOTAL Research FBSI FBSL % to FBSI FBSL FBSI FBSL
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $ 40,759 77.7% $ 71 $1,240 0.2% 3.0% 0.5% 3.8%
</TABLE>
From time to time the Trustees will review whether the recapture for the
benefit of the funds of some portion of the brokerage commissions or
similar fees paid by the funds on portfolio transactions is legally
permissible and advisable. Each fund seeks to recapture soliciting
broker-dealer fees on the tender of portfolio securities, but at present no
other recapture arrangements are in effect. The Trustees intend to continue
to review whether recapture opportunities are available and are legally
permissible and, if so, to determine in the exercise of their business
judgment whether it would be advisable for each fund to seek such
recapture.
Although the Trustees and officers of each fund are substantially the same
as those of other funds managed by FMR, investment decisions for each fund
are made independently from those of other funds managed by FMR or accounts
managed by FMR affiliates. It sometimes happens that the same security is
held in the portfolio of more than one of these funds or accounts.
Simultaneous transactions are inevitable when several funds and accounts
are managed by the same investment adviser, particularly when the same
security is suitable for the investment objective of more than one fund or
account.
When two or more funds are simultaneously engaged in the purchase or sale
of the same security, the prices and amounts are allocated in accordance
with procedures believed to be appropriate and equitable for each fund. In
some cases this system could have a detrimental effect on the price or
value of the security as far as each fund is concerned. In other cases,
however, the ability of the funds to participate in volume transactions
will produce better executions and prices for the funds. It is the current
opinion of the Trustees that the desirability of retaining FMR as
investment adviser to each fund outweighs any disadvantages that may be
said to exist from exposure to simultaneous transactions.
VALUATION OF PORTFOLIO SECURITIES
MONEY MARKET FUND
The fund values its investments on the basis of amortized cost. This
technique involves valuing an instrument at its cost as adjusted for
amortization of premium or accretion of discount rather than its value
based on current market quotations or appropriate substitutes which reflect
current market conditions. The amortized cost value of an instrument may be
higher or lower than the price the fund would receive if it sold the
instrument.
Valuing the fund's instruments on the basis of amortized cost and use of
the term "money market fund" are permitted by Rule 2a-7 under the 1940 Act.
The fund must adhere to certain conditions under Rule 2a-7.
The Board of Trustees of the trust oversees FMR's adherence to SEC rules
concerning money market funds, and has established procedures designed to
stabilize the fund's net asset value (NAV) at $1.00. At such intervals as
they deem appropriate, the Trustees consider the extent to which NAV
calculated by using market valuations would deviate from $1.00 per share.
If the Trustees believe that a deviation from the fund's amortized cost per
share may result in material dilution or other unfair results to
shareholders, the Trustees have agreed to take such corrective action, if
any, as they deem appropriate to eliminate or reduce, to the extent
reasonably practicable, the dilution or unfair results. Such corrective
action could include selling portfolio instruments prior to maturity to
realize capital gains or losses or to shorten average portfolio maturity;
withholding dividends; redeeming shares in kind; establishing NAV by using
available market quotations; and such other measures as the Trustees may
deem appropriate.
During periods of declining interest rates, the fund's yield based on
amortized cost may be higher than the yield based on market valuations.
Under these circumstances, a shareholder of the fund would be able to
obtain a somewhat higher yield than would result if the fund utilized
market valuations to determine its NAV. The converse would apply in a
period of rising interest rates.
GOVERNMENT INVESTMENT AND HIGH YIELD FUNDS
Securities and other assets for which market quotations are readily
available may be valued at market values determined by their most recent
bid prices (sales prices if the principal market is an exchange) in the
principal market in which such securities normally are traded. Securities
and other assets for which market quotations are not readily available
(including restricted securities, if any) are appraised at their fair value
as determined in good faith under consistently applied procedures under the
general supervision of the Board of Trustees.
Securities may also be valued on the basis of valuations furnished by a
pricing service that uses both dealer-supplied valuations and evaluations
based on expert analysis of market data and other factors if such
valuations are believed to reflect more accurately the fair value of such
securities. Use of a pricing service has been approved by the Board of
Trustees. There are a number of pricing services available, and the
Trustees, or officers acting on behalf of the Trustees, on the basis of
ongoing evaluation of these pricing services, may use other pricing
services or may discontinue the use of any pricing service in whole or in
part.
Securities not valued by the pricing service, and for which quotations are
readily available, are valued at market values determined on the basis of
their latest available bid prices as furnished by recognized dealers in
such securities. Futures contracts and options are valued on the basis of
market quotations, if available.
INCOME & GROWTH, GROWTH OPPORTUNITIES AND OVERSEAS FUNDS
Portfolio securities are valued by various methods depending on the primary
market or exchange on which they trade. Most equity securities for which
the primary market is the U.S. are valued at last sale price or, if no sale
has occurred, at the closing bid price. Most equity securities for which
the primary market is outside the U.S. are valued using the official
closing price or the last sale price in the principal market where they are
traded. If the last sale price (on the local exchange) is unavailable, the
last evaluated quote or last bid price is normally used. Short-term
securities are valued either at amortized cost or at original cost plus
accrued interest, both of which approximate current value. Convertible
securities and fixed-income securities are valued primarily by a pricing
service that uses a vendor security valuation matrix which incorporates
both dealer-supplied valuations and electronic data processing techniques.
This two-fold approach is believed to more accurately reflect fair value
because it takes into account appropriate factors such as institutional
trading in similar groups of securities, yield, quality, coupon rate,
maturity, type of issue, trading characteristics, and other market data,
without exclusive reliance upon quoted, exchange, or over-the counter
prices. Use of pricing services has been approved by the Board of Trustees.
Securities and other assets for which there is no readily available market
are valued in good faith by a committee appointed by the Board of Trustees.
The procedures set forth above need not be used to determine the value of
the securities owned by a fund if, in the opinion of a committee appointed
by the Board of Trustees, some other method (e.g., closing over-the-counter
bid prices in the case of debt instruments traded on an exchange) would
more accurately reflect the fair market value of such securities.
Generally, the valuation of foreign and domestic equity securities, as well
as corporate bonds, U.S. government securities, money market instruments,
and repurchase agreements, is substantially completed each day at the close
of the NYSE. The values of any such securities held by a fund are
determined as of such time for the purpose of computing the fund's net
asset value. Foreign security prices are furnished by independent brokers
or quotation services which express the value of securities in their local
currency. Fidelity Service Company (FSC) gathers all exchange rates daily
at the close of the NYSE using the last quoted price on the local currency
and then translates the value of foreign securities from their local
currency into U.S. dollars. Any changes in the value of forward contracts
due to exchange rate fluctuations and days to maturity are included in the
calculation of net asset value. If an extraordinary event that is expected
to materially affect the value of a portfolio security occurs after the
close of an exchange on which that security is traded, then the security
will be valued as determined in good faith by a committee appointed by the
Board of Trustees.
PERFORMANCE
A fund may quote performance in various ways. All performance information
supplied by a fund in advertising is historical and is not intended to
indicate future returns. Each fund's share price, and each fund's total
return and yield fluctuate in response to market conditions and other
factors, and the value of non-money market fund shares when redeemed may be
more or less than their original cost.
YIELD CALCULATION (MONEY MARKET). To compute the fund's yield for a period,
the net change in value of a hypothetical account containing one share
reflects the value of additional shares purchased with dividends from the
one original share and dividends declared on both the original share and
any additional shares. The net change is then divided by the value of the
account at the beginning of the period to obtain a base period return. This
base period return is annualized to obtain a current annualized yield. The
fund also may calculate an effective yield by compounding the base period
return over a one-year period. In addition to the current yield, the fund
may quote yields in advertising based on any historical seven-day period.
Yields for the fund are calculated on the same basis as other money market
funds, as required by applicable regulations.
YIELD CALCULATIONS (EXCLUDING MONEY MARKET). Yields for a fund are computed
by dividing the fund's interest and dividend income for a given 30-day or
one-month period, net of expenses, by the average number of shares entitled
to receive distributions during the period, dividing this figure by the
fund's net asset value (NAV) at the end of the period, and annualizing the
result (assuming compounding of income) in order to arrive at an annual
percentage rate. Income is calculated for purposes of yield quotations in
accordance with standardized methods applicable to all stock and bond
funds. Dividends from equity investments are treated as if they were
accrued on a daily basis, solely for the purposes of yield calculations. In
general, interest income is reduced with respect to bonds trading at a
premium over their par value by subtracting a portion of the premium from
income on a daily basis, and is increased with respect to bonds trading at
a discount by adding a portion of the discount to daily income. For a
fund's investments denominated in foreign currencies, income and expenses
are calculated first in their respective currencies, and are then converted
to U.S. dollars, either when they are actually converted or at the end of
the 30-day or one month period, whichever is earlier. Capital gains and
losses generally are excluded from the calculation as are gains and losses
from currency exchange rate fluctuations.
Income calculated for the purposes of calculating a fund's yield differs
from income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding of income
assumed in yield calculations, a fund's yield may not equal its
distribution rate or the income reported in the fund's financial
statements. In calculating yield, a fund may from time to time use a
portfolio security's coupon rate instead of its yield to maturity in order
to reflect the risk premium on that security. This practice will have the
effect of reducing the fund's yield.
Yield information may be useful in reviewing a fund's performance and in
providing a basis for comparison with other investment alternatives.
However, each fund's yield fluctuates, unlike investments that pay a fixed
interest rate over a stated period of time. When comparing investment
alternatives, investors should also note the quality and maturity of the
portfolio securities of respective investment companies they have chosen to
consider.
Investors should recognize that in periods of declining interest rates a
fund's yield will tend to be somewhat higher than prevailing market rates,
and in periods of rising interest rates the fund's yield will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net
new money to a fund from the continuous sale of its shares will likely be
invested in instruments producing lower yields than the balance of the
fund's holdings, thereby reducing the fund's current yield. In periods of
rising interest rates, the opposite can be expected to occur.
TOTAL RETURN CALCULATIONS. Total returns quoted in advertising reflect all
aspects of a fund's return, including the effect of reinvesting dividends
and capital gain distributions, and any change in the fund's NAV over a
stated period. Average annual total returns are calculated by determining
the growth or decline in value of a hypothetical historical investment in a
fund over a stated period, and then calculating the annually compounded
percentage rate that would have produced the same result if the rate of
growth or decline in value had been constant over the period. For example,
a cumulative total return of 100% over ten years would produce an average
annual total return of 7.18%, which is the steady annual rate of return
that would equal 100% growth on a compounded basis in ten years. While
average annual total returns are a convenient means of comparing investment
alternatives, investors should realize that a fund's performance is not
constant over time, but changes from year to year, and that average annual
total returns represent averaged figures as opposed to the actual
year-to-year performance of the fund.
In addition to average annual total returns, a fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an
investment over a stated period. Average annual and cumulative total
returns may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments, or a series of
redemptions, over any time period. Total returns may be broken down into
their components of income and capital (including capital gains and changes
in share price) in order to illustrate the relationship of these factors
and their contributions to total return. Total returns may be quoted on a
before-tax or after-tax basis. Total returns, yields, and other performance
information may be quoted numerically or in a table, graph, or similar
illustration.
NET ASSET VALUE. Charts and graphs using a fund's net asset values,
adjusted net asset values, and benchmark indices may be used to exhibit
performance. An adjusted NAV includes any distributions paid by a fund and
reflects all elements of its return. Unless otherwise indicated, a fund's
adjusted NAVs are not adjusted for sales charges, if any.
MOVING AVERAGES. A fund may illustrate performance using moving averages. A
long-term moving average is the average of each week's adjusted closing NAV
for a specified period. A short-term moving average is the average of each
day's adjusted closing NAV for a specified period. Moving Average Activity
Indicators combine adjusted closing NAVs from the last business day of each
week with moving averages for a specified period to produce indicators
showing when an NAV has crossed, stayed above, or stayed below its moving
average. On December 29, 1995, the 13-week and 39-week long-term moving
averages were $ 10.90 and $ 10.65 , for Income & Growth;
$ 12.65 and $ 11.95 for Growth Opportunities; and $ 10.68
and $10.63 for Overseas, respectively.
Historical Fund Results Yields Cumulative
Total Returns
AS OF 12/31/95 Life of
Fund*
Money Market Fund 7-day 5.17 %*
5.39 %
Government Investment Fund 30-day 16.54 %
n/a
High Yield Fund 30-day 20.12 %
n/a
Income & Growth Fund n/a 13.92 %
Growth Opportunities Fund n/a 32.52 %
Overseas Fund n/a 10.20 %
Returns are not annualized. Returns for less than one year are not
indicative of long-term results. If FMR had not reimbursed certain fund
expenses during certain of these periods, the total returns would have been
lower.
* Money Market commenced operations January 4, 1995. Each of Government
Investment, High Yield, Income & Growth, Growth Opportunities, and Overseas
Funds commenced operations January 3, 1995.
The following charts show the income and capital elements of each fund's
total return from the date it commenced operations through the year ended
December 31, 1995. The charts compare the funds' returns to the record of
the S&P 500, the Dow Jones Industrial Average (DJIA), and the cost of
living (measured by the Consumer Price Index, or CPI), and, for Overseas
the Morgan Stanley Capital International Europe, Australasia, Far
East Index (EAFE), an unmanaged index of 900 foreign common stocks, over
the same period. In addition, Government Investment may compare its
performance to the Salomon Treasury/Agency Index, and High Yield may
compare its performance to the Merrill Lynch High Yield Master Index.
The S&P and DJIA comparisons are provided to show how the funds' total
returns compared to the record of a broad average of U.S. common stock
prices and a narrower set of stocks of major U.S. industrial companies.
Each fund has the ability to invest in securities not included in either
index, and its investment portfolio may or may not be similar in
composition to the indices. Of course, since Money Market, Government
Investment and High Yield Funds invest in fixed-income securities, common
stocks represent a different type of investment from the funds. Common
stocks generally offer potential greater growth than a money market or bond
fund, but generally experience greater price volatility, which means
greater potential for loss. In addition, common stocks generally provide
lower income than a fixed-income investment such as a money market or bond
fund. Figures for S&P, DJIA, and EAFE are based on the prices of unmanaged
groups of stocks and, unlike the funds' returns, their returns do not
include the effect of paying brokerage commissions and other costs of
investing.
MONEY MARKET FUND. During the period from January 4, 1995 (commencement of
operations) to December 31, 1995, a hypothetical $10,000 investment in
Money Market would have grown to $ 10,517 , assuming all distributions
were reinvested. This was a period of fluctuating interest rates and the
figures below should not be considered representative of the dividend
income or capital gain or loss that could be realized from an investment in
the fund today.
MONEY MARKET FUND INDICES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Year Value of Value of Value of Total S&P 500 DJIA Cost of
Ended Initial Reinvested Reinvested Value Living**
$10,000 Dividend Capital Gain
Investment Distributions Distributions
1995* $ 10,000 $ 517 $0 $ 10,517 $ 13,760 $ 13,655 $ 10,254
</TABLE>
* From January 4, 1995 (commencement of operations).
** From month-end closest to initial investment date.
Explanatory Notes: With an initial investment of $10,000 made on January 4,
1995, the net amount invested in fund shares was $10,000. The cost of the
initial investment ($10,000), together with the aggregate cost of
reinvested dividends for the period covered (their cash value at the time
they were reinvested), amounted to $ 10,517 . If distributions had not
been reinvested, the amount of distributions earned from the fund over time
would have been smaller, and cash payments (dividends) for the period would
have amounted to $ 505 . The fund did not distribute any capital gains
during the period. Tax consequences of different investments have not been
factored into the above figures.
GOVERNMENT INVESTMENT FUND. During the period from January 3, 1995
(commencement of operations) to December 31, 1995, a hypothetical $10,000
investment in Government Investment would have grown to $ 11,654 ,
assuming all distributions were reinvested. This was a period of
fluctuating interest rates and bond prices and the figures below should not
be considered representative of the dividend income or capital gain or loss
that could be realized from an investment in the fund today.
GOVERNMENT INVESTMENT FUND INDICES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Year Value of Value of Value of Total S&P 500 DJIA Cost of
Ended Initial Reinvested Reinvested Value Living**
$10,000 Dividend Capital Gain
Investment Distributions Distributions
1995* $11,080 $ 332 $ 242 $ 11,654 $ 13,756 $ 13,670 $ 10,254
</TABLE>
* From January 3, 1995 (commencement of operations).
** From month-end closest to initial investment date.
Explanatory Notes: With an initial investment of $10,000 made on January 3,
1995, the net amount invested in fund shares was $10,000. The cost of the
initial investment ($10,000), together with the aggregate cost of
reinvested dividends and capital gain distributions for the period covered
(their cash value at the time they were reinvested), amounted to
$ 10,570 . If distributions had not been reinvested, the amount of
distributions earned from the fund over time would have been smaller, and
cash payments for the period would have amounted to $ 330 for
dividends and $ 240 for capital gains distributions. Tax consequences
of different investments have not been factored into the above figures.
HIGH YIELD FUND. During the period from January 3, 1995 (commencement of
operations) to December 31, 1995, a hypothetical $10,000 investment in High
Yield would have grown to $ 12,012 , assuming all distributions were
reinvested. This was a period of fluctuating interest rates and bond prices
and the figures below should not be considered representative of the
dividend income or capital gain or loss that could be realized from an
investment in the fund today.
HIGH YIELD FUND INDICES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Year Value of Value of Value of Total S&P 500 DJIA Cost of
Ended Initial Reinvested Reinvested Value Living**
$10,000 Dividend Capital Gain
Investment Distributions Distributions
1995* $ 11,580 $ 412 $ 20 $ 12,012 $ 13,756 $ 13,670 $ 10,254
</TABLE>
* From January 3, 1995 (commencement of operations).
** From month-end closest to initial investment date.
Explanatory Notes: With an initial investment of $10,000 made on January 3,
1995, the net amount invested in fund shares was $10,000. The cost of the
initial investment ($10,000), together with the aggregate cost of
reinvested dividends and capital gain distributions for the period covered
(their cash value at the time they were reinvested), amounted to
$ 10,430 . If distributions had not been reinvested, the amount of
distributions earned from the fund over time would have been smaller, and
cash payments for the period would have amounted to $ 410 for
dividends and $ 20 for capital gains distributions. Tax consequences
of different investments have not been factored into the above figures.
INCOME & GROWTH FUND. During the period from January 3, 1995 (commencement
of operations) to December 31, 1995, a hypothetical $10,000 investment in
Income & Growth would have grown to $ 11,392 , assuming all
distributions were reinvested. This was a period of fluctuating interest
rates, bond prices, and stock prices and the figures below should not be
considered representative of the dividend income or capital gain or loss
that could be realized from an investment in the fund today.
INCOME & GROWTH FUND INDICES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Year Value of Value of Value of Total S&P 500 DJIA Cost of
Ended Initial Reinvested Reinvested Value Living**
$10,000 Dividend Capital Gain
Investment Distributions Distributions
1995* $ 11,170 $ 141 $ 81 $ 11,392 $ 13,756 $ 13,670 $ 10,254
</TABLE>
* From January 3, 1995 (commencement of operations).
** From month-end closest to initial investment date.
Explanatory Notes: With an initial investment of $10,000 made on January 3,
1995, the net amount invested in fund shares was $10,000. The cost of the
initial investment ($10,000), together with the aggregate cost of
reinvested dividends and capital gain distributions for the period covered
(their cash value at the time they were reinvested), amounted to
$ 10,220 . If distributions had not been reinvested, the amount of
distributions earned from the fund over time would have been smaller, and
cash payments for the period would have amounted to $ 140 for
dividends and $ 80 for capital gains distributions. Tax consequences
of different investments have not been factored into the above figures.
GROWTH OPPORTUNITIES FUND. During the period from January 3, 1995
(commencement of operations) to December 31, 1995, a hypothetical $10,000
investment in Growth Opportunities would have grown to $ 13,252 ,
assuming all distributions were reinvested. This was a period of
fluctuating stock prices and the figures below should not be considered
representative of the dividend income or capital gain or loss that could be
realized from an investment in the fund today.
GROWTH OPPORTUNITIES FUND INDICES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Year Value of Value of Value of Total S&P 500 DJIA Cost of
Ended Initial Reinvested Reinvested Value Living**
$10,000 Dividend Capital Gain
Investment Distributions Distributions
1995* $ 13,070 $ 111 $ 71 $ 13,252 $ 13,756 $ 13,670 $ 10,254
</TABLE>
* From January 3, 1995 (commencement of operations).
** From month-end closest to initial investment date.
Explanatory Notes: With an initial investment of $10,000 made on January 3,
1995, the net amount invested in fund shares was $10,000. The cost of the
initial investment ($10,000), together with the aggregate cost of
reinvested dividends and capital gain distributions for the period covered
(their cash value at the time they were reinvested), amounted to
$ 10,180 . If distributions had not been reinvested, the amount of
distributions earned from the fund over time would have been smaller, and
cash payments for the period would have amounted to $ 110 for
dividends and $ 70 for capital gains distributions. Tax consequences
of different investments have not been factored into the above figures.
OVERSEAS FUND. During the period from January 3, 1995 (commencement of
operations) to December 31, 1995, a hypothetical $10,000 investment in
Overseas would have grown to $ 11,020 , assuming all distributions
were reinvested. This was a period of fluctuating stock prices and the
figures below should not be considered representative of the dividend
income or capital gain or loss that could be realized from an investment in
the fund today.
OVERSEAS FUND INDICES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Value of Value of Value of Total S&P 500 DJIA EAFE Cost of
Ended Initial Reinvested Reinvested Value Index Living**
$10,000 Dividend Capital
Investment Distribut Gain
ion s Distribution
s
1995* $ 10,960 $60 $0 $ 11,020 $ 13,756 $ 13,670 $ 11,120 $ 10,254
</TABLE>
* From January 3, 1995 (commencement of operations).
** From month-end closest to initial investment date.
Explanatory Notes: With an initial investment of $10,000 made on January 3,
1995, the net amount invested in fund shares was $10,000. The cost of the
initial investment ($10,000), together with the aggregate cost of
reinvested dividends and capital gain distributions for the period covered
(their cash value at the time they were reinvested), amounted to
$ 10,060 . If distributions had not been reinvested, the amount of
distributions earned from the fund over time would have been smaller, and
cash payments for the period would have amounted to $ 60 for
dividends. The fund did not distribute any capital gains during the
period. Tax consequences of different investments (with the exception
of foreign tax withholdings) have not been factored into the above figures.
INTERNATIONAL INDICES, MARKET CAPITALIZATION, AND NATIONAL
STOCK MARKET RETURN
The following tables show the total market capitalization of certain
countries according to the Morgan Stanley Capital International Indices
database, the total market capitalization of Latin American countries
according to the International Finance Corporation Emerging Markets
database, and the performance of national stock markets as measured in U.S.
dollars by the Morgan Stanley Capital International stock market indices
for the twelve months ended October 31, 1993. Of course, these results are
not indicative of future stock market performance or the funds'
performance. Market conditions during the periods measured fluctuated
widely. Brokerage commissions and other fees are not factored into the
values of the indices.
MARKET CAPITALIZATION. Companies outside the U.S. now make up nearly
two-thirds of the world's stock market capitalization. According to Morgan
Stanley Capital International, the size of the markets as measured in U.S.
dollars grew from $2,011 billion in 1982 to $8,512 billion in 1995.
The following table measures the total market capitalization of certain
countries according to the Morgan Stanley Capital International Indices
database. The value of the markets are measured in billions of U.S. dollars
as of December 31, 1995.
TOTAL MARKET CAPITALIZATION
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Australia $ 245 Japan $ 3,583
Austria $ 37 Netherlands $ 304
Belgium $ 101 Norway $ 43
Canada $ 333 Singapore/Malaysia $ 354
Denmark $ 56 Spain $ 152
France $ 505 Sweden $ 177
Germany $ 579 Switzerland $ 402
Hong Kong $ 274 United Kingdom $ 354
Italy $ 180 United States $ 6,338
</TABLE>
The following table measures the total market capitalization of Latin
American countries according to the International Finance Corporation
Emerging Markets database. The value of the markets is measured in billions
of U.S. dollars as of December 31, 1995.
TOTAL MARKET CAPITALIZATION - LATIN AMERICA
Argentina $ 26.0 Colombia $ 5.6
Brazil $ 77.1 Mexico $ 59.4
Chile $ 37.0 Venezuela $ 2.5
NATIONAL STOCK MARKET PERFORMANCE. Certain national stock markets have
outperformed the U.S. stock market. The first table below represents the
performance of national stock markets as measured in U.S. dollars by the
Morgan Stanley Capital International Stock Market Indices for the twelve
months ended December 31, 1995. The second table shows the same performance
as measured in local currency. Each table measures total return based on
the period's change in price, dividends paid on stocks in the index, and
the effect of reinvesting dividends net of any applicable foreign taxes.
These are unmanaged indices composed of a sampling of selected companies
representing an approximation of the market structure of the designated
country.
STOCK MARKET PERFORMANCE (CUMULATIVE TOTAL RETURNS)
MEASURED IN U.S. DOLLARS (INCLUDES NET DIVIDENDS REINVESTED MONTHLY)
12 MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Australia 12.46% Japan 0.86%
Austria -4.42% Netherlands 28.87%
Belgium 27.32% Norway 6.51%
Canada 19.06% Singapore/Malaysia 11.61%
Denmark 19.41% Spain 31.15%
France 14.77% Sweden 34.07%
Germany 17.00% Switzerland 45.04%
Hong Kong 22.57% United Kingdom 21.27%
Italy 1.66% United States 38.19%
</TABLE>
The following table shows average annualized stock market returns
measured in U.S. dollars as of December 31, 1995.
STOCK MARKET PERFORMANCE
Five Years Ended
Ten Years Ended
December 29, 1995 December 29, 1995
Germany 64.61% 175.35%
Hong Kong 273.52% 747.72%
Japan 32.39% 234.22%
Spain 53.08% 419.41%
United Kingdom 65.92% 305.25%
United States 118.74% 298.28%
The results are not indicative of future stock market performance or of
any fund's performance. Market conditions during the periods measured
fluctuated widely. Brokerage commissions and other fees are not factored
into the values of the indices.
PERFORMANCE COMPARISONS. A fund's performance may be compared to the
performance of other mutual funds in general, or to the performance of
particular types of mutual funds. These comparisons may be expressed as
mutual fund rankings prepared by Lipper Analytical Services, Inc. (Lipper),
an independent service located in Summit, New Jersey that monitors the
performance of mutual funds. Lipper generally ranks funds on the basis of
total return, assuming reinvestment of distributions, but does not take
sales charges or redemption fees into consideration, and is prepared
without regard to tax consequences. Lipper may also rank funds based on
yield. In addition to the mutual fund rankings, a fund's performance may be
compared to stock, bond, and money market mutual fund performance indices
prepared by Lipper or other organizations. When comparing these indices, it
is important to remember the risk and return characteristics of each type
of investment. For example, while stock mutual funds may offer higher
potential returns, they also carry the highest degree of share price
volatility. Likewise, money market funds may offer greater stability of
principal, but generally do not offer the higher potential returns
available from stock mutual funds.
From time to time, a fund's performance may also be compared to other
mutual funds tracked by financial or business publications and periodicals.
For example, the fund may quote Morningstar, Inc. in its advertising
materials. Morningstar, Inc. is a mutual fund rating service that rates
mutual funds on the basis of risk-adjusted performance. Rankings that
compare the performance of Fidelity funds to one another in appropriate
categories over specific periods of time may also be quoted in advertising.
A fund may be compared in advertising to Certificates of Deposit (CDs) or
other investments issued by banks or other depository institutions. Mutual
funds differ from bank investments in several respects. For example, a fund
may offer greater liquidity or higher potential returns than CDs, a fund
does not guarantee your principal or your return, and fund shares are not
FDIC insured.
Fidelity may provide information designed to help individuals understand
their investment goals and explore various financial strategies. Such
information may include information about current economic, market, and
political conditions; materials that describe general principles of
investing, such as asset allocation, diversification, risk tolerance, and
goal setting; questionnaires designed to help create a personal financial
profile; worksheets used to project savings needs based on assumed rates of
inflation and hypothetical rates of return; and action plans offering
investment alternatives. Materials may also include discussions of
Fidelity's asset allocation funds and other Fidelity funds, products, and
services.
Ibbotson Associates of Chicago, Illinois (Ibbotson) provides historical
returns of the capital markets in the United States, including common
stocks, small capitalization stocks, long-term corporate bonds,
intermediate-term government bonds, long-term government bonds, Treasury
bills, the U.S. rate of inflation (based on the CPI), and combinations of
various capital markets. The performance of these capital markets is based
on the returns of different indices.
Fidelity funds may use the performance of these capital markets in order to
demonstrate general risk-versus-reward investment scenarios. Performance
comparisons may also include the value of a hypothetical investment in any
of these capital markets. The risks associated with the security types in
any capital market may or may not correspond directly to those of the
funds. Ibbotson calculates total returns in the same method as the funds.
The funds may also compare performance to that of other compilations or
indices that may be developed and made available in the future.
Each fixed-income fund may compare its performance or the performance of
securities in which that fixed-income fund may invest to averages published
by IBC USA (Publications), Inc. of Ashland, Massachusetts. These averages
assume reinvestment of distributions. The Bond Fund Report AverageSTM/All
Taxable (High Yield and Government Investment), which is reported in the
BOND FUND REPORT,(Registered trademark) covers over 488 taxable bond funds.
The IBC/Donoghue's MONEY FUND AVERAGES(trademark)/All Taxable (Money
Market), which is reported in the MONEY FUND REPORT(registered trademark),
covers over 766 taxable money market funds. When evaluating comparisons to
money market funds, investors should consider the relevant differences in
investment objectives and policies. Specifically, money market funds invest
in short-term, high-quality instruments and seek to maintain a stable $1.00
share price. A bond fund, however, invests in longer-term instruments and
its share price changes daily in response to a variety of factors.
In advertising materials, Fidelity may reference or discuss its products
and services, which may include other Fidelity funds; retirement investing;
brokerage products and services; model portfolios or allocations; saving
for college or other goals; charitable giving; and the Fidelity credit
card. In addition, Fidelity may quote or reprint financial or business
publications and periodicals as they relate to current economic and
political conditions, fund management, portfolio composition, investment
philosophy, investment techniques, the desirability of owning a particular
mutual fund, and Fidelity services and products. Fidelity may also reprint,
and use as advertising and sales literature, articles from Fidelity Focus,
a quarterly magazine provided free of charge to Fidelity fund shareholders.
A fund may present its fund number, Quotron(trademark) number, and CUSIP
number, and discuss or quote its current portfolio manager.
VOLATILITY. A fund may quote various measures of volatility and benchmark
correlation in advertising. In addition, the fund may compare these
measures to those of other funds. Measures of volatility seek to compare
the fund's historical share price fluctuations or total returns to those of
a benchmark. Measures of benchmark correlation indicate how valid a
comparative benchmark may be. All measures of volatility and correlation
are calculated using averages of historical data. In advertising, a fund
may also discuss or illustrate examples of interest rate sensitivity.
MOMENTUM INDICATORS indicate a fund's price movements over specific periods
of time. Each point on the momentum indicator represents the fund's
percentage change in price movements over that period.
The funds may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program,
a policyowner invests at periodic intervals a fixed dollar amount in an
insurance company's sub-account, which in turn invests in a fund, thereby
purchasing fewer units when prices are high and more units when prices are
low. While such a strategy does not assure a profit or guard against loss
in a declining market, the policyowner's average cost per unit can be lower
than if fixed numbers of units had been purchased at those intervals. In
evaluating such a plan, policyowners should consider their ability to
continue purchasing units through periods of low price levels.
As of February 29, 1996 , FMR advised over $ 26.5 billion in
tax-free fund assets, over $ 80 billion in money market fund
assets, over $ 256 billion in equity fund assets, over
$ 55 billion in international fund assets, and over $ 23
billion in Spartan fund assets. The funds may reference the growth and
variety of money market mutual funds and the adviser's innovation and
participation in the industry. The equity funds under management figure
represents the largest amount of equity fund assets under management by a
mutual fund investment adviser in the United States, making FMR America's
leading equity (stock) fund manager. FMR, its subsidiaries, and affiliates
maintain a worldwide information and communications network for the purpose
of researching and managing investments abroad.
Each fund is available only through the purchase of variable annuity
contracts offering deferral of income taxes on earnings . For
example, a $1,000 investment earning a taxable return of 10% annually would
have an after-tax value of $1,949 after ten years, assuming tax was
deducted from the return each year at a 31% rate. An equivalent
tax-deferred investment would have an after-tax value of $2,100 after ten
years, assuming tax was deducted at a 31% rate from the tax-deferred
earnings at the end of the ten-year period. Individuals holding shares of a
fund through a variable annuity contract may receive additional tax
benefits from the deferral of income taxes associated with variable
contracts. Individuals should consult their tax advisors to determine the
effect of holding variable contracts on their individual tax situations.
YIELDS AND TOTAL RETURNS QUOTED FOR A FUND INCLUDE THE FUND'S EXPENSES, BUT
MAY NOT INCLUDE CHARGES AND EXPENSES ATTRIBUTABLE TO ANY PARTICULAR
INSURANCE PRODUCT. SINCE YOU CAN PURCHASE SHARES OF EACH FUND ONLY THROUGH
A VARIABLE ANNUITY CONTRACT, YOU SHOULD CAREFULLY REVIEW THE PROSPECTUS OF
THE ANNUITY PRODUCT YOU HAVE CHOSEN FOR INFORMATION ON RELEVANT CHARGES AND
EXPENSES. Excluding these charges from quotations of a fund's performance
has the effect of increasing the performance quoted.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each fund is open for business and its net asset value per share (NAV) is
calculated each day the New York Stock Exchange (NYSE) is open for trading.
The NYSE has designated the following holiday closings for 1996: New Year's
Day, Presidents' Day (observed), Good Friday, Memorial Day (observed),
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. Although
FMR expects the same holiday schedule to be observed in the future, the
NYSE may modify its holiday schedule at any time. In addition, the funds
will not process wire purchases and redemptions on days when the Federal
Reserve Wire System is closed.
FSC normally determines each fund's NAV as of the close of the NYSE
(normally 4:00 p.m. Eastern time). However, NAV may be calculated earlier
if trading on the NYSE is restricted or as permitted by the Securities and
Exchange Commission (SEC). To the extent that portfolio securities are
traded in other markets on days when the NYSE is closed, a fund's NAV may
be affected on days when investors do not have access to the fund to
purchase or redeem shares. In addition, trading in some of a fund's
portfolio securities may not occur on days when the fund is open for
business.
If the Trustees determine that existing conditions make cash payments
undesirable, redemption payments may be made in whole or in part in
securities or other property, valued for this purpose as they are valued in
computing a fund's NAV. Shareholders receiving securities or other property
on redemption may realize a gain or loss for tax purposes, and will incur
any costs of sale, as well as the associated inconveniences.
In the Prospectus, each fund has notified shareholders that it reserves the
right at any time, without prior notice, to refuse purchases if, in FMR's
judgment, the fund would be unable to invest effectively in accordance with
its investment objective and policies, or would otherwise potentially be
adversely affected.
DISTRIBUTIONS AND TAXES
For a discussion of tax consequences of variable contracts, please refer to
Nationwide Life Insurance Company's separate account prospectus.
Variable contracts purchased through insurance company separate accounts
provide for the accumulation of all earnings from interest, dividends, and
capital appreciation without current federal income tax liability to the
owner. Depending on the variable contract, distributions from the contract
may be subject to ordinary income tax and a 10% penalty tax on
distributions before age 59 1/2. Only the portion of a distribution
attributable to income is subject to federal income tax. Investors should
consult with competent tax advisors for a more complete discussion of
possible tax consequences in a particular situation.
Section 817(h) of the Internal Revenue Code provides that the investments
of a separate account underlying a variable insurance contract (or the
investments of a mutual fund, the shares of which are owned by the variable
separate account) must be "adequately diversified" in order for the
contract to be treated as an annuity or life insurance for tax purposes.
The Treasury Department has issued regulations prescribing these
diversification requirements. Each fund intends to comply with these
requirements.
Each fund intends to qualify each year as a "regulated investment company"
for tax purposes, so that it will not be liable for federal tax on income
and capital gains distributed to shareholders. In order to qualify as a
regulated investment company and avoid being subject to federal income or
excise taxes, each fund intends to distribute substantially all its net
taxable income and net realized capital gains within each calendar year as
well as on a fiscal period basis. Each fund also intends to comply
with other tax rules applicable to regulated investment companies including
a requirement that gross capital gains from selling securities held less
than three months must constitute less than 30% of a fund's gross income
for each fiscal period . Gains from some forward currency contracts,
futures contracts, and options are included in this 30% calculation, which
may limit a fund's investments in such instruments. Income and capital gain
distributions are reinvested in additional shares of the fund. This is done
to preserve the tax advantaged status of the variable contracts. Each fund
is treated as a separate entity from the other funds of Fidelity Advisor
Annuity Fund for tax purposes. Money Market may distribute any net realized
short-term gains once each year, or more frequently if necessary, in order
to maintain the fund's NAV at $1.00 per share and to comply with tax
regulations.
If a fund purchases shares in certain foreign investment entities, defined
as passive foreign investment companies (PFICs) in the Internal Revenue
Code, it may be subject to U.S. federal income tax on a portion of any
excess distribution or gain from the disposition of such shares. Interest
charges may also be imposed on the fund with respect to deferred taxes
arising from such distributions or gains. Generally, a fund will elect to
mark-to-market any PFIC shares. Unrealized gains will be recognized as
income for tax purposes and must be distributed to shareholders as
dividends.
MONEY MARKET FUND. As of December 31, 1995, the fund had a capital loss
carryforward of approximately $87, which will expire on December 31, 2003.
OVERSEAS FUND. As of December 31, 1995, the fund had a capital loss
carryforward of approximately $42,000, which will expire on December 31,
2003.
INCOME & GROWTH . As of December 31, 1995, the fund was required
to defer $3,096 of losses on futures contracts and options .
FMR
All of the stock of FMR is owned by FMR Corp., its parent organized in
1972. The voting common stock of FMR Corp. is divided into two classes.
Class B is held predominantly by members of the Edward C. Johnson 3d family
and is entitled to 49% of the vote on any matter acted upon by the voting
common stock. Class A is held predominantly by non-Johnson family member
employees of FMR Corp. and its affiliates and is entitled to 51% of the
vote on any such matter. The Johnson family group and all other Class B
shareholders have entered into a shareholders' voting agreement under which
all Class B shares will be voted in accordance with the majority vote of
Class B shares. Under the Investment Company Act of 1940 (1940 Act),
control of a company is presumed where one individual or group of
individuals owns more than 25% of the voting stock of that company.
Therefore, through their ownership of voting common stock and the execution
of the shareholders' voting agreement, members of the Johnson family may be
deemed, under the 1940 Act, to form a controlling group with respect to FMR
Corp.
At present, the principal operating activities of FMR Corp. are those
conducted by three of its divisions as follows: FSC, which is the transfer
and shareholder servicing agent for certain of the funds advised by FMR;
Fidelity Investments Institutional Operations Company, which performs
shareholder servicing functions for institutional customers and funds sold
through intermediaries; and Fidelity Investments Retail Marketing Company,
which provides marketing services to various companies within the Fidelity
organization.
Fidelity investment personnel may invest in securities for their own
account pursuant to a code of ethics that sets forth all employees'
fiduciary responsibilities regarding the funds, establishes procedures for
personal investing and restricts certain transactions. For example, all
personal trades in most securities require pre-clearance, and participation
in initial public offerings is prohibited. In addition, restrictions on the
timing of personal investing in relation to trades by Fidelity funds and on
short-term trading have been adopted.
TRUSTEES AND OFFICERS
The Trustees and executive officers of the trust are listed below. Except
as indicated, each individual has held the office shown or other offices in
the same company for the last five years. All persons named as Trustees
also serve in similar capacities for other funds advised by FMR. The
business address of each Trustee and officer who is an "interested person"
(as defined in the Investment Company Act of 1940) is 82 Devonshire Street,
Boston, Massachusetts 02109, which is also the address of FMR. The business
address of all the other Trustees is Fidelity Investments, P.O. Box 9235,
Boston, Massachusetts 02205-9235. Those Trustees who are "interested
persons" by virtue of their affiliation with either the trust or FMR are
indicated by an asterisk (*).
*EDWARD C. JOHNSON 3d ( 65 ), Trustee and President, is Chairman,
Chief Executive Officer and a Director of FMR Corp.; a Director and
Chairman of the Board and of the Executive Committee of FMR; Chairman and a
Director of FMR Texas Inc., Fidelity Management & Research (U.K.) Inc., and
Fidelity Management & Research (Far East) Inc.
*J. GARY BURKHEAD ( 54 ), Trustee and Senior Vice President, is
President of FMR; and President and a Director of FMR Texas Inc., Fidelity
Management & Research (U.K.) Inc., and Fidelity Management & Research (Far
East) Inc.
RALPH F. COX ( 63 ), Trustee (1991), is a consultant to Western Mining
Corporation (1994). Prior to February 1994, he was President of Greenhill
Petroleum Corporation (petroleum exploration and production, 1990). Until
March 1990, Mr. Cox was President and Chief Operating Officer of Union
Pacific Resources Company (exploration and production). He is a Director of
Sanifill Corporation (non-hazardous waste, 1993) and CH2M Hill Companies
(engineering). In addition, he served on the Board of Directors of the
Norton Company (manufacturer of industrial devices, 1983-1990) and
continues to serve on the Board of Directors of the Texas State Chamber of
Commerce, and is a member of advisory boards of Texas A&M University and
the University of Texas at Austin.
PHYLLIS BURKE DAVIS (64 ), Trustee (1992). Prior to her retirement in
September 1991, Mrs. Davis was the Senior Vice President of Corporate
Affairs of Avon Products, Inc. She is currently a Director of BellSouth
Corporation (telecommunications), Eaton Corporation (manufacturing, 1991),
and the TJX Companies, Inc. (retail stores, 1990), and previously served as
a Director of Hallmark Cards, Inc. (1985-1991) and Nabisco Brands, Inc. In
addition, she is a member of the President's Advisory Council of The
University of Vermont School of Business Administration.
RICHARD J. FLYNN ( 72 ), Trustee, is a financial consultant. Prior to
September 1986, Mr. Flynn was Vice Chairman and a Director of the Norton
Company (manufacturer of industrial devices). He is currently a Trustee of
College of the Holy Cross and Old Sturbridge Village, Inc., and he
previously served as a Director of Mechanics Bank (1971-1995).
E. BRADLEY JONES ( 68 ), Trustee (1990). Prior to his retirement in
1984, Mr. Jones was Chairman and Chief Executive Officer of LTV Steel
Company. He is a Director of TRW Inc. (original equipment and replacement
products), Cleveland-Cliffs Inc. (mining), Consolidated Rail Corporation,
Birmingham Steel Corporation, and RPM, Inc. (manufacturer of chemical
products, 1990), and he previously served as a Director of NACCO
Industries, Inc. (mining and marketing, 1985-1995) and Hyster-Yale
Materials Handling, Inc. (1985-1995). In addition, he serves as a Trustee
of First Union Real Estate Investments, a Trustee and member of the
Executive Committee of the Cleveland Clinic Foundation, a Trustee and
member of the Executive Committee of University School (Cleveland), and a
Trustee of Cleveland Clinic Florida.
DONALD J. KIRK ( 63 ), Trustee, is Executive-in-Residence (1995) at
Columbia University Graduate School of Business and a financial consultant.
From 1987 to January 1995, Mr. Kirk was a Professor at Columbia University
Graduate School of Business. Prior to 1987, he was Chairman of the
Financial Accounting Standards Board. Mr. Kirk is a Director of General Re
Corporation (reinsurance), and he previously served as a Director of
Valuation Research Corp. (appraisals and valuations, 1993-1995). In
addition, he serves as Chairman of the Board of Directors of the National
Arts Stabilization Fund, Vice Chairman of the Board of Trustees of the
Greenwich Hospital Association, and as a Member of the Public Oversight
Board of the American Institute of Certified Public Accountants' SEC
Practice Section (1995).
*PETER S. LYNCH (53 ), Trustee (1990) is Vice Chairman and Director
of FMR (1992). Prior to May 31, 1990, he was a Director of FMR and
Executive Vice President of FMR (a position he held until March 31, 1991);
Vice President of Fidelity Magellan Fund and FMR Growth Group Leader; and
Managing Director of FMR Corp. Mr. Lynch was also Vice President of
Fidelity Investments Corporate Services (1991-1992). He is a Director of
W.R. Grace & Co. (chemicals) and Morrison Knudsen Corporation (engineering
and construction). In addition, he serves as a Trustee of Boston College,
Massachusetts Eye & Ear Infirmary, Historic Deerfield (1989) and Society
for the Preservation of New England Antiquities, and as an Overseer of the
Museum of Fine Arts of Boston (1990).
GERALD C. McDONOUGH ( 66 ), Trustee, is Chairman of G.M. Management
Group (strategic advisory services). Prior to his retirement in July 1988,
he was Chairman and Chief Executive Officer of Leaseway Transportation
Corp. (physical distribution services). Mr. McDonough is a Director of
ACME-Cleveland Corp. (metal working, telecommunications and electronic
products), Brush-Wellman Inc. (metal refining), York International Corp.
(air conditioning and refrigeration), Commercial Intertech Corp. (water
treatment equipment, 1992), and Associated Estates Realty Corporation (a
real estate investment trust, 1993).
EDWARD H. MALONE ( 71 ), Trustee. Prior to his retirement in 1985, Mr.
Malone was Chairman, General Electric Investment Corporation and a Vice
President of General Electric Company. He is a Director of Allegheny Power
Systems, Inc. (electric utility), General Re Corporation (reinsurance) and
Mattel Inc. (toy manufacturer). In addition, he serves as a Trustee of the
Naples Philharmonic Center for the Arts and Rensselaer Polytechnic
Institute, and he is a member of the Advisory Boards of Butler Capital
Corporation Funds and Warburg, Pincus Partnership Funds.
MARVIN L. MANN ( 63 ), Trustee (1993) is Chairman of the Board,
President, and Chief Executive Officer of Lexmark International, Inc.
(office machines, 1991). Prior to 1991, he held the positions of Vice
President of International Business Machines Corporation ("IBM") and
President and General Manager of various IBM divisions and subsidiaries.
Mr. Mann is a Director of M.A. Hanna Company (chemicals, 1993) and Infomart
(marketing services, 1991), a Trammell Crow Co. In addition, he serves as
the Campaign Vice Chairman of the Tri-State United Way (1993) and is a
member of the University of Alabama President's Cabinet (1990).
THOMAS R. WILLIAMS ( 67 ), Trustee, is President of The Wales Group,
Inc. (management and financial advisory services). Prior to retiring in
1987, Mr. Williams served as Chairman of the Board of First Wachovia
Corporation (bank holding company), and Chairman and Chief Executive
Officer of The First National Bank of Atlanta and First Atlanta Corporation
(bank holding company). He is currently a Director of BellSouth Corporation
(telecommunications), ConAgra, Inc. (agricultural products), Fisher
Business Systems, Inc. (computer software), Georgia Power Company (electric
utility), Gerber Alley & Associates, Inc. (computer software), National
Life Insurance Company of Vermont, American Software, Inc., and AppleSouth,
Inc. (restaurants, 1992).
WILLIAM J. HAYES ( 61 ), Vice President (1994), is Vice President of
Fidelity's equity funds; Senior Vice President of FMR; and Managing
Director of FMR Corp.
ROBERT H. MORRISON ( 56 ), Manager of Security Transactions of
Fidelity's equity funds is Vice President of FMR.
ROBERT A. LAWRENCE ( 43 ), Vice President (1994), is Vice President of
Fidelity's high income funds and Senior Vice President of FMR (1993). Prior
to joining FMR, Mr. Lawrence was Managing Director of the High Yield
Department for Citicorp (1984-1991).]
FRED L. HENNING, JR. ( 56 ), Vice President, is Vice President of
Fidelity's money market (1994) and fixed-income (1995) funds and Senior
Vice President of FMR Texas Inc.
ROBERT LITTERST ( 36 ), Vice President of Money Market Fund (1995), is
an employee of FMR.
ROBERT HABER ( 38) , Vice President of Income & Growth Fund (1995), is
an employee of FMR.
GEORGE A. VANDERHEIDEN ( 50 ), Vice President of Growth Opportunities
Fund (1995), is an employee of FMR.
ARTHUR S. LORING ( 48 ), Secretary, is Senior Vice President (1993)
and General Counsel of FMR, Vice President-Legal of FMR Corp., and Vice
President and Clerk of FDC.
KENNETH A. RATHGEBER ( 48 ), Treasurer (1995), is Treasurer of the
Fidelity funds and is an employee of FMR (1995). Before joining FMR, Mr.
Rathgeber was a Vice President of Goldman Sachs & Co. (1978-1995), where he
served in various positions, including Vice President of Proprietary
Accounting (1988-1992), Global Co-Controller (1992-1994), and Chief
Operations Officer of Goldman Sachs (Asia) LLC (1994-1995).
THOMAS D. MAHER ( 51 ), Assistant Vice President (1990), is Assistant
Vice President of Fidelity's money market funds and Vice President and
Associate General Counsel of FMR Texas Inc. (1990). Prior to 1990, Mr.
Maher was an employee of FMR.
JOHN H. COSTELLO ( 49 ), Assistant Treasurer, is an employee of FMR.
LEONARD M. RUSH ( 50 ), Assistant Treasurer (1994), is an employee of
FMR (1994). Prior to becoming Assistant Treasurer of the Fidelity funds,
Mr. Rush was Chief Compliance Officer of FMR Corp. (1993-1994); Chief
Financial Officer of Fidelity Brokerage Services, Inc. (1990-1993); and
Vice President, Assistant Controller, and Director of the Accounting
Department - First Boston Corp. (1986-1990).
The following table sets forth information describing the compensation of
each current trustee of each fund for his or her services as trustee for
the fiscal period ended December 31, 1995.
COMPENSATION TABLE
Aggregate Compensation
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
J. Gary Ralph Phyllis Richard Edward C. E. Donald Peter S. Gerald C. Edward Marvin Thomas
Burkhead** F. Cox Burke J. Flynn Johnson 3d** Bradley J. Kirk Lynch** McDonough H. L. R.
Davis Jones Malone Mann Williams
Money $ 0 $ 4 $3 $ 5 $0 $ 4 $ 4 $ 0 $ 3 $ 4 $ 4 $ 3
Market[+]
Government $ 0 $ 2 $2 $ 2 $0 $2 $ 2 $ 0 $ 2 $ 2 $ 2 $ 2
Investment[+]
High Yield[+] $ 0 $ 5 $ 4 $ 6 $ 0 $ 5 $ 5 $ 0 $ 4 $ 5 $ 5 $ 4
Income & $ 0 $ 5 $ 5 $ 6 $ 0 $ 5 $ 5 $ 0 $ 5 $ 5 $ 5 $ 4
Growth[+]
Growth $ 0 $ 16 $ 15 $ 21 $ 0 $ 16 $ 16 $ 0 $ 15 $ 16 $ 16 $ 15
Opportunities[+
]
Overseas[+] $ 0 $ 2 $ 2 $ 3 $ 0 $ 2 $ 2 $ 0 $ 2 $ 2 $ 2 $ 2
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Trustees Pension or Estimated Annual Total
Retirement Benefits Benefits Upon Compensation
Accrued as Part of Fund Retirement from the from the
Expenses from the Fund Complex* Fund Complex*
Fund Complex*
J. Gary Burkhead** $ 0 $ 0 $ 0
Ralph F. Cox 5,200 52,000 128,000
Phyllis Burke Davis 5,200 52,000 125,000
Richard J. Flynn 0 52,000 160,500
Edward C. Johnson 3d** 0 0 0
E. Bradley Jones 5,200 49,400 128,000
Donald J. Kirk 5,200 52,000 129,500
Peter S. Lynch** 0 0 0
Gerald C. McDonough 5,200 52,000 128,000
Edward H. Malone 5,200 44,200 128,000
Marvin L. Mann 5,200 52,000 128,000
Thomas R. Williams 5,200 52,000 125,000
</TABLE>
* Information is as of December 31, 1995 for 219 funds in the complex.
** Interested trustees of the fund are compensated by FMR.
+ Estimated, the fund commenced operations January 3, 1995 (Money Market
commenced operations January 4, 1995).
The non-interested Trustees may elect to defer receipt of all or a
percentage of their annual fees in accordance with the terms of a Deferred
Compensation Plan (the Plan). Under the Plan, compensation deferred by a
Trustee is periodically adjusted as though an equivalent amount had been
invested and reinvested in shares of one or more funds in the complex
designated by such Trustee (designated securities). The amount paid to the
Trustee under the Plan will be determined based upon the performance of
such investments. Deferral of Trustees' fees in accordance with the Plan
will have a negligible effect on a fund's assets, liabilities, and net
income per share, and will not obligate the fund to retain the services of
any Trustee or to pay any particular level of compensation to the Trustee.
Each fund may invest in such designated securities under the Plan without
shareholder approval.
Under a retirement program adopted in July 1988, the non-interested
Trustees, upon reaching age 72, become eligible to participate in a
retirement program under which they receive payments during their lifetime
from a fund based on their basic trustee fees and length of service. The
obligation of a fund to make such payments is not secured or funded.
Trustees become eligible if, at the time of retirement, they have served on
the Board for at least five years. Currently, Messrs. Ralph S. Saul,
William R. Spaulding, Bertram H. Witham, and David L. Yunich, all former
non-interested Trustees, receive retirement benefits under the program.
On December 31, 1995, the Trustees and officers of each fund owned, in the
aggregate, less than 1% of each fund's total outstanding shares.
A shareholder owning of record or beneficially more than 25% of a fund's
outstanding shares may be considered a controlling person. That
shareholder's vote could have a more significant effect on matters
presented at a shareholders' meeting than votes of other shareholders. As
of December 31, 1995, significant shares of the funds were held by
Nationwide Life Insurance Company with the figure beneath each fund
representing Nationwide's holdings as a percentage of the fund's total
outstanding shares.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Money Government Income & Growth
Market Investment High Yield Growth Opportunities Overseas
Nationwide Life Insurance Company 100% 78% 95% 100% 100% 94%
(Columbus, OH)
</TABLE>
MANAGEMENT CONTRACTS
Each fund employs FMR to furnish investment advisory and other services.
Under its management contract with each fund, FMR acts as investment
adviser and, subject to the supervision of the Board of Trustees, directs
the investments of each fund in accordance with its investment objective,
policies, and limitations. FMR also provides each fund with all necessary
office facilities and personnel for servicing each fund's investments,
compensates all officers of each fund and all Trustees who are "interested
persons" of the trust or of FMR, and all personnel of each fund or FMR
performing services relating to research, statistical, and investment
activities.
In addition, FMR or its affiliates, subject to the supervision of the Board
of Trustees, provide the management and administrative services necessary
for the operation of each fund. These services include providing facilities
for maintaining each fund's organization; supervising relations with
custodians, transfer and pricing agents, accountants, underwriters, and
other persons dealing with each fund; preparing all general shareholder
communications and conducting shareholder relations; maintaining each
fund's records and the registration of each fund's shares under federal and
state laws; developing management and shareholder services for each fund;
and furnishing reports, evaluations, and analyses on a variety of subjects
to the Trustees.
In addition to the management fee payable to FMR and the fees payable to
FSC and FIIOC, each fund pays all of its expenses, without limitation, that
are not assumed by those parties. Each fund pays for typesetting, printing,
and mailing proxy material to shareholders, legal expenses, and the fees of
the custodian, auditor, and non-interested Trustees. Although each fund's
current management contract provides that it will pay for typesetting,
printing, and mailing prospectuses, statements of additional information,
notices, and reports to existing shareholders, the trust on behalf of each
fund has entered into a revised transfer agent agreement with FIIOC,
pursuant to which FIIOC bears the cost of providing these services to
existing shareholders. Other expenses paid by each fund include interest,
taxes, brokerage commissions, each fund's proportionate share of insurance
premiums and Investment Company Institute dues, and the costs of
registering shares under federal and state securities laws. Each fund is
also liable for such non-recurring expenses as may arise, including costs
of any litigation to which each fund may be a party, and any obligation it
may have to indemnify its officers and Trustees with respect to litigation.
MONEY MARKET FUND. FMR is the fund's manager pursuant to a Management
Contract dated November 18, 1994, and approved by the fund's sole
shareholder November 21, 1994. For the services of FMR under the contract,
the fund pays FMR a monthly management fee composed of a group fee rate and
an individual fund fee rate (.03%), and an income-based component of 6% of
the fund's gross income in excess of a 5% yield. The maximum income-based
component is .24% of average net assets. A discussion of the group fee rate
is below.
GOVERNMENT INVESTMENT AND HIGH YIELD FUNDS. FMR is Government Investment
and High Yield Funds' manager pursuant to Management Contracts each dated
November 18, 1994, and approved by each fund's sole shareholder November
21, 1994. For the services of FMR under the contracts, each fund pays FMR a
monthly management fee composed of the sum of two elements: a group fee
rate and an individual fund fee rate.
The group fee rate for Money Market, Government Investment, and High Yield
Funds is based on the monthly average net assets of all of the registered
investment companies with which FMR has management contracts and is
calculated on a cumulative basis pursuant to the graduated fee rate
schedule shown below on the left. The schedule below on the right shows the
effective annual group fee rate at various asset levels, which is the
result of cumulatively applying the annualized rates on the left. For
example, the effective annual fee rate at $ 366 billion of group net
assets - their approximate level for December 1995 - was . 1482 %,
which is the weighted average of the respective fee rates for each level of
group net assets up to $ 366 billion.
GROUP FEE RATE SCHEDULE EFFECTIVE ANNUAL FEE RATES
Annualized Group Effective
Average Group Rate Net Annual
Assets Assets Fee Rate
0 - $ 3 billion .3700% $ 25 billion .2664%
3 - 6 .3400 150 .2188
6 - 9 .3100 175 .1986
9 - 12 .2800 100 .1869
12 - 15 .2500 125 .1793
15 - 18 .2200 150 .1736
18 - 21 .2000 175 .1690
21 - 24 .1900 200 .1652
24 - 30 .1800 225 .1618
30 - 36 .1750 250 .1587
36 - 42 .1700 275 .1560
42 - 48 .1650 300 .1536
48 - 66 .1600 325 .1514
66 - 84 .1550 350 .1494
84 - 120 .1500 375 .1476
120 - 156 .1450 400 .1459
156 - 192 .1400
192 - 228 .1350
228 - 264 .1300
264 - 300 .1275
300 - 336 .1250
336 - 372 .1225
Over 372 .1200
On January 1, 1996, FMR voluntarily added new breakpoints to the schedule
for average group assets in excess of $372 billion, pending shareholder
approval of a new management contract reflecting the revised schedule and
additional breakpoints. The revised group fee rate schedule and its
extensions provide for lower management fee rates as FMR's assets under
management increase. For average group assets in excess of $372 billion,
the revised group fee rate schedule with additional breakpoints voluntarily
adopted by FMR is as follows:
GROUP FEE RATE SCHEDULE EFFECTIVE ANNUAL FEE RATES
Average Group Annualized Group Net Effective Annual
Assets Rate Assets Fee Rate
$ 372 - 408 billion .1200% $425 billion .1443%
408 - 444 .1175 450 .1427
444 - 480 .1150 475 .1413
480 - 516 .1125 500 .1399
Over 516 .1100 525 .1385
550 .1372
The individual fund fee rate for MONEY MARKET FUND is .03%.
One twelfth of the sum of the group fee rate and the individual fund fee
rate is applied to the fund's average net assets for the current month,
giving a dollar amount which is the fee for that month.
If the fund's monthly gross yield is 5% or less, the total management fee
is the sum of the group fee and the individual fund fee. If the fund's
monthly gross yield is greater than 5%, the management fee that FMR
receives includes an income-based component. The income-based component
equals 6% of that portion of the fund's gross income that represents a
gross yield of more than 5% per year. The maximum income-based component is
.24% (annualized) of average net assets, at a fund gross yield of 9%. Gross
income for this purpose, includes interest accrued and/or discount earned
(including both original issue discount and market discount) on portfolio
obligations, less amortization of premium. Realized and unrealized gains
and losses, if any, are not included in gross income.
The individual fund fee rate for GOVERNMENT INVESTMENT FUND is .30%. Based
on the average net assets of funds advised by FMR for December 1995, the
annual management fee rate would be calculated as follows:
Group Fee Rate Individual Fund Fee Rate Basic Fee Rate
. 1482 % + .30% = . 4482 %
The individual fund fee rate for HIGH YIELD FUND is .45%. Based on the
average net assets of funds advised by FMR for December 1995, the annual
management fee rate would be calculated as follows:
Group Fee Rate Individual Fund Fee Rate Basic Fee Rate
. 1482 % + .45% = . 5982 %
One twelfth of the annual management fee rate is applied to each fund's net
assets averaged for the most recent month, giving a dollar amount which is
the fee for that month.
During the fiscal period ended December 31, 1995, FMR received
$ 26,382 , $ 21,325 , and $ 84,269 , respectively for its
services as investment adviser to Money Market, Government Investment, and
High Yield Funds. These fees were equivalent to .24 %
(annualized) , .45 % (annualized) , and .60 %
(annualized) respectively, of the average net assets of Money
Market, Government Investment, and High Yield Funds for the fiscal
period .
INCOME & GROWTH, GROWTH OPPORTUNITIES, AND OVERSEAS FUNDS. FMR is each
fund's manager pursuant to Management Contracts each dated November 18,
1994, and approved by each fund's sole shareholder November 21, 1994. For
the services of FMR under the contracts, each fund pays FMR a monthly
management fee composed of the sum of two elements: a group fee rate and an
individual fund fee rate.
The group fee rate is based on the monthly average net assets of all of the
registered investment companies with which FMR has management contracts and
is calculated on a cumulative basis pursuant to the graduated fee rate
schedule shown below on the left. The schedule below on the right shows the
effective annual group fee rate at various asset levels, which is the
result of cumulatively applying the annualized rates on the left. For
example, the effective annual fee rate at $366 billion of group net
assets - the approximate level for December 1995 - was . 3097 %, which
is the weighted average of the respective fee rates for each level of group
net assets up to $366 billion.
GROUP FEE RATE SCHEDULE EFFECTIVE ANNUAL FEE RATES
Annualized Group Effective
Average Group Rate Net Annual
Assets Assets Fee Rate
0 - $ 3 billion .520% $ 0.5 billion .5200%
3 - 6 .490 25 .4238
6 - 9 .460 50 .3823
9 - 12 .430 75 .3626
12 - 15 .400 100 .3512
15 - 18 .385 125 .3430
18 - 21 .370 150 .3371
21 - 24 .360 175 .3325
24 - 30 .350 200 .3284
30 - 36 .345 225 .3249
36 - 42 .340 250 .3219
42 - 48 .335 275 .3190
48 - 66 .325 300 .3163
66 - 84 .320 325 .3137
84 - 102 .315 350 .3113
102 - 138 .310 375 .3090
138 - 174 .305 400 .3067
174 - 210 .300
210 - 246 .295
246 - 282 .290
282 318 .285
318 354 .280
354 390 .275
Over 390 .270
On January 1, 1996, FMR voluntarily added new breakpoints to the schedule
for average group assets in excess of $390 billion, pending shareholder
approval of a new management contract reflecting the revised schedule and
additional breakpoints. The revised group fee rate schedule and its
extensions provide for lower management fee rates as FMR's assets under
management increase. For average group assets in excess of $390 billion,
the revised group fee rate schedule with additional breakpoints voluntarily
adopted by FMR is as follows:
GROUP FEE RATE SCHEDULE EFFECTIVE ANNUAL FEE RATES
Average Group Annualized Group Net Effective Annual
Assets Rate Assets Fee Rate
390 - 426 .2700 425 .3046
426 - 462 .2650 450 .3024
462 - 498 .2600 475 .3003
498 - 534 .2550 500 .2982
Over 534 .2500 525 .2962
550 .2942
The individual fund fee rate for the funds are as follows: .20% for Income
& Growth; .30% for Growth Opportunities; and .45% for Overseas. Based on
the average group net assets of the funds advised by FMR for December 1995,
the annual management fee rate for each fund would be calculated as
follows:
INCOME & GROWTH FUND
Group Fee Rate Individual Fund Fee Rate Basic Fee Rate
. 3097 % + .20% = . 5097 %
GROWTH OPPORTUNITIES FUND
Group Fee Rate Individual Fund Fee Rate Basic Fee Rate
. 3097 % + .30% = . 6097 %
OVERSEAS FUND
Group Fee Rate Individual Fund Fee Rate Basic Fee Rate
. 3097 % + .45% = . 7597 %
One-twelfth of the annual management fee rate is applied to each fund's net
assets averaged for the most recent month, giving a dollar amount, which is
the fee for that month.
During the fiscal period ended December 31, 1995, FMR received
$ 75,801 for its services as investment adviser to INCOME & GROWTH
FUND. This fee was equivalent to .51 % of the average net assets of
the fund for the fiscal period . During the fiscal period ended
December 31, 1995, FMR received $311,959 for its services as investment
adviser to GROWTH OPPORTUNITIES FUND. This fee was equivalent to .61% of
the average net assets of the fund for the fiscal period. During the fiscal
period ended December 31, 1995, FMR received $48,214, for its services as
investment adviser to OVERSEAS FUND. This fee was equivalent to .76% of the
average net assets of the fund for the fiscal period.
FMR may, from time to time, voluntarily reimburse all or a portion of a
fund's operating expenses (exclusive of interest, taxes, brokerage
commissions, and extraordinary expenses). FMR retains the ability to be
repaid for these expense reimbursements in the amount that expenses fall
below the limit prior to the end of the fiscal period . Expense
reimbursements by FMR will increase a fund's total returns and yield and
repayment of the reimbursement by a fund will lower its total returns and
yield.
FMR has voluntarily agreed, subject to revision or termination, to
reimburse a fund if, and to the extent that, the fund's aggregate operating
expenses (including the management fee) exceed an annual rate of 1.00% of
average net assets (Money Market, Government Investment and High Yield
Fund) or 1.50% of average net assets (Income & Growth, Growth Opportunities
and Overseas Funds) for any fiscal period , or for a portion of such
year if FMR's agreement is terminated or revised. Under this arrangement,
FMR reimbursed $42,405 (Government Investment), $22,881 (High Yield) and
$88,472 (Overseas) , for the fiscal period ended December 31,
1995.
SUB-ADVISERS. On behalf of High Yield, Income & Growth, and Growth
Opportunities, FMR has entered into sub-advisory agreements with FMR U.K.
and FMR Far East. On behalf of Overseas, FMR has entered into sub-advisory
agreements with FMR U.K., FMR Far East, and FIIA. FIIA, in turn, has
entered into a sub-advisory agreement with FIIAL U.K. Pursuant to the
sub-advisory agreements, FMR may receive investment advice and research
services outside the United States and may also grant the sub-advisers
investment management authority as well as the authority to buy and sell
securities if FMR believes it would be beneficial to a fund.
Currently, FMR U.K., FMR Far East, FIIA, and FIIAL U.K. each focus on
issuers in countries other than the United States such as those in Europe,
Asia, and the Pacific Basin.
FMR U.K. and FMR Far East, which were organized in 1986, are wholly owned
subsidiaries of FMR. FIIA is a wholly owned subsidiary of Fidelity
International Limited (FIL), a Bermuda company formed in 1968 which
primarily provides investment advisory services to non-U.S. investment
companies and institutional investors investing in securities throughout
the world. Edward C. Johnson 3d, Johnson family members, and various trusts
for the benefit of the Johnson family owns, directly or indirectly, more
than 25% of the voting common stock of FIL. FIIA was organized in Bermuda
in 1983. FIIAL U.K. was organized in the United Kingdom in 1984, and is a
wholly owned subsidiary of Fidelity International Management Holdings
Limited, an indirect wholly owned subsidiary of FIL.
Under the sub-advisory agreements FMR pays the fees of FMR U.K., FMR Far
East, and FIIA. FIIA, in turn, pays the fees of FIIAL U.K. For providing
non-discretionary investment advice and research services the sub-advisers
are compensated as follows:
(small solid bullet) FMR pays FMR U.K. and FMR Far East fees equal to 110%
and 105%, respectively, of FMR U.K.'s and FMR Far East's costs incurred in
connection with providing investment advice and research services.
(small solid bullet) FMR pays FIIA a fee equal to 30% of FMR's monthly
management fee with respect to the average net assets held by the fund for
which FIIA has provided FMR with investment advice and research services.
(small solid bullet) FIIA pays FIIAL U.K. a fee equal to 110% of FIIAL
U.K.'s costs incurred in connection with providing investment advice and
research services.
For providing discretionary investment management and executing portfolio
transactions, the sub-advisers are compensated as follows:
(small solid bullet) FMR pays FMR U.K., FMR Far East, and FIIA a fee equal
to 50% of its monthly management fee with respect to the fund's average net
assets managed by the sub-adviser on a discretionary basis.
(small solid bullet) FIIA pays FIIAL U.K. a fee equal to 110% of FIIAL
U.K.'s costs incurred in connection with providing discretionary investment
management services.
For providing discretionary investment management and executing portfolio
transactions, FMR, on behalf of Income & Growth, Growth Opportunities
and Overseas Funds paid FMR U.K. fees totaling $ 1,361, $2,167 and
$3,226, respectively, for fiscal 1995.
For providing discretionary investment management and executing
portfolio transactions, FMR, on behalf of Income & Growth, Growth
Opportunities, and Overseas Funds paid FMR Far East fees totaling $1,598,
$2,421 and $3,761, respectively, for fiscal 1995.
FMR entered into the sub-advisory agreements described above on November
18, 1994.
On behalf of MONEY MARKET, FMR has entered into a sub-advisory agreement
with FMR Texas, pursuant to which FMR Texas has primary responsibility for
providing portfolio investment management services to the fund.
Under the sub-advisory agreement, dated November 18, 1994, which was
approved by the fund's sole shareholder November 21, 1994, FMR pays FMR
Texas fees equal to 50% of the management fee payable to FMR under its
management contract with the fund. The fee paid to FMR Texas are not
reduced by any voluntary or mandatory expense reimbursements that may be in
effect from time to time. On behalf of the fund, for the fiscal
period ended December 31, 1995, FMR paid FMR Texas fees of
$ 13,191 .
DISTRIBUTION AND SERVICE PLANS
The Trustees have approved Distribution and Service Plans on behalf of the
funds (the Plans) pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the Rule). The Rule provides in substance that a mutual fund may
not engage directly or indirectly in financing any activity that is
primarily intended to result in the sale of shares of a fund except
pursuant to a plan approved on behalf of the fund under the Rule. The
Plans, as approved by the Trustees, allow the funds and FMR to incur
certain expenses that might be considered to constitute indirect payment by
the funds of distribution expenses.
Under each Plan, if the payment of management fees by the funds to FMR is
deemed to be indirect financing by the funds of the distribution of their
shares, such payment is authorized by the Plans. Each Plan also
specifically recognizes that FMR, either directly or through FDC, may use
its management fee revenue, past profits, or other resources, without
limitation, to pay promotional and administrative expenses in connection
with the offer and sale of shares of each fund. In addition, each Plan
provides that FMR may use its resources, including its management fee
revenues, to make payments to third parties that assist in selling shares
of each fund, or to third parties, including banks, that render shareholder
support services. The Trustees have not authorized such payments to date.
Prior to approving each Plan, the Trustees carefully considered all
pertinent factors relating to the implementation of each Plan, and have
determined that there is a reasonable likelihood that the Plan will benefit
each fund and its shareholders. In particular, the Trustees noted that each
Plan does not authorize payments by each fund other than those made to FMR
under its management contract with the fund. To the extent that each Plan
gives FMR and FDC greater flexibility in connection with the distribution
of shares of each fund, additional sales of fund shares may result.
Furthermore, certain shareholder support services may be provided more
effectively under the Plans by local entities with whom shareholders have
other relationships. Each fund's Plan was approved by FMR as the then sole
shareholder on November 21, 1994.
Each fund may execute portfolio transactions with, and purchase securities
issued by, depository institutions that receive payments under the Plans.
No preference for the instruments of such depository institutions will be
shown in the selection of investments.
CONTRACTS WITH FMR AFFILIATES
Each fund has an agreement with FSC, an affiliate of FMR Corp., under which
FSC determines the NAV per share and dividends of each fund and maintains
the portfolio and general accounting records of each fund. The fee rates in
effect as of January 1, 1996, are based on each fund's average net assets
as follows: for Money Market, 0.0175% for the first $500 million of average
net assets and 0.0075% for average net assets in excess of $500 million.
The fee is limited to a minimum of $40,000 and a maximum of $800,000 per
year; for High Yield and Overseas, 0.075% for the first $500 million of
average net assets and 0.0375% for average net assets in excess of $500
million; for Government Investment, 0.04% for the first $500 million of
average net assets and 0.02% for average net assets in excess of $500
million; and for Income & Growth and Growth Opportunities, 0.06% for the
first $500 million of average net assets and 0.03% for average net assets
in excess of $500 million. The fee for Government Investment, High Yield,
Income & Growth, Growth Opportunities, and Overseas is limited to a minimum
of $60,000 and a maximum of $800,000 per year.
The following are the fees paid by each fund to FSC for the fiscal
period ended December 31, 1995:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Government Income & Growth
Money Market Investment High Yield Growth Opportunities Overseas
1995 $ 19,843 $ 44,637 $ 44,637 $ 46,084 $ 52,050 $ 44,824
</TABLE>
Each fund utilizes FIIOC, an affiliate of FMR Corp., to maintain the master
accounts of the participating insurance companies. Under the contract, each
fund pays an account fee of $125 and an asset based fee of 0.05% for each
account. The asset-based fees of the growth and growth and income funds are
subject to adjustment if the year-to-date total return of the S&P 500 is
greater than positive or negative 15%. In addition to providing transfer
agent and shareholder servicing functions, FIIOC pays all transfer agent
out-of-pocket expenses and also pays for typesetting, printing and mailing
Prospectuses, Statements of Additional Information, reports, notices and
statements to shareholders allocable to the master account of participating
insurance companies.
The following are the fees paid by each fund to FIIOC (including
reimbursement for out-of-pocket expenses) for the fiscal period
ended December 31, 1995:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Government Income & Growth
Money Market Investment High Yield Growth Opportunities Overseas
1995 $ 6,427 $ 2,667 $ 7,991 $ 7,545 $ 18,071 $ 3,442
</TABLE>
If a portion of each applicable fund's brokerage commissions had not been
allocated toward payment of these fees, the transfer agent fees for the
fiscal period ended December 31, 1995, would have been as
follows: Income & Growth $7,710 and Growth Opportunities $25,521.
FSC also receives fees for administering a fund's securities lending
program. Securities lending fees are based on the number and duration of
individual securities loans. For fiscal period 1995, no lending fees
were incurred by the funds.
Each fund has a distribution agreement with FDC, a Massachusetts
corporation organized on July 18, 1960. FDC is a broker-dealer registered
under the Securities Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc. The distribution agreements call
for FDC to use all reasonable efforts, consistent with its other business,
to secure purchasers for shares of each fund, which are continuously
offered at net asset value. Promotional and administrative expenses in
connection with the offer and sale of shares are paid by FMR.
DESCRIPTION OF THE TRUST
TRUST ORGANIZATION. Fidelity Advisor Annuity Money Market Fund, Fidelity
Advisor Annuity High Yield Fund, Fidelity Advisor Annuity Income & Growth
Fund, Fidelity Advisor Annuity Growth Opportunities Fund, Fidelity Advisor
Annuity Government Investment Fund and Fidelity Advisor Annuity Overseas
Fund are funds of Fidelity Advisor Annuity Fund, an open-end management
investment company organized as a Massachusetts business trust on July 14,
1994. The Declaration of Trust permits the Trustees to create additional
funds.
Investments in the trust may be made only by the separate accounts of
Nationwide Life Insurance Company for the purpose of funding variable
annuity contracts issued by Nationwide.
In the event that FMR ceases to be the investment adviser to the trust or a
fund, the right of the trust or fund to use the identifying name "Fidelity"
may be withdrawn. There is a remote possibility that one fund might become
liable for any misstatement in its prospectus or statement of additional
information about another fund.
The assets of the trust received for the issue or sale of shares of each
fund and all income, earnings, profits, and proceeds thereof, subject only
to the rights of creditors, are especially allocated to such fund, and
constitute the underlying assets of such fund. The underlying assets of
each fund are segregated on the books of account, and are to be charged
with the liabilities with respect to such fund and with a share of the
general expenses of the trust. Expenses with respect to the trust are to be
allocated in proportion to the asset value of the respective funds, except
where allocations of direct expense can otherwise be fairly made. The
officers of the trust, subject to the general supervision of the Board of
Trustees, have the power to determine which expenses are allocable to a
given fund, or which are general or allocable to all of the funds. In the
event of the dissolution or liquidation of the trust, shareholders of each
fund are entitled to receive as a class the underlying assets of such fund
available for distribution.
SHAREHOLDER AND TRUSTEE LIABILITY. The trust is an entity of the type
commonly known as a "Massachusetts business trust." Under Massachusetts
law, shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. The Declaration of
Trust provides that the trust shall not have any claim against shareholders
except for the payment of the purchase price of shares and requires that
each agreement, obligation, or instrument entered into or executed by the
trust or the Trustees shall include a provision limiting the obligations
created thereby to the trust and its assets. The Declaration of Trust
provides for indemnification out of each fund's property of any
shareholders held personally liable for the obligations of the fund. The
Declaration of Trust also provides that each fund shall, upon request,
assume the defense of any claim made against any shareholder for any act or
obligation of the fund and satisfy any judgment thereon. Thus, the risk of
a shareholder incurring financial loss on account of shareholder liability
is limited to circumstances in which the fund itself would be unable to
meet its obligations. FMR believes that, in view of the above, the risk of
personal liability to shareholders is remote.
The Declaration of Trust further provides that the Trustees, if they have
exercised reasonable care, will not be liable for any neglect or
wrongdoing, but nothing in the Declaration of Trust protects Trustees
against any liability to which they would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of their office.
VOTING RIGHTS. Each fund's capital consists of shares of beneficial
interest. As a shareholder, Nationwide Life receives one vote for each
dollar value of net asset value it owns. The shares have no preemptive or
conversion rights; the voting and dividend rights, and the right of
redemption are described in the prospectus. Shares are fully paid and
nonassessable, except as set forth under the heading "Shareholder and
Trustee Liability" above. Shareholders representing 10% or more of the
trust or fund may, as set forth in the Declaration of trust, call meetings
of the trust or fund for any purpose related to the trust or fund, as the
case may be, including, in the case of a meeting of the entire trust, the
purpose of voting on removal of one or more Trustees. The trust or fund may
be terminated upon the sale of its assets to another open-end management
investment company, or upon liquidation and distribution of its assets, if
approved by vote of the holders of a majority of the trust or the fund, as
determined by the current value of each shareholder's investment in the
fund or trust. If not so terminated, the trust or fund will continue
indefinitely.
CUSTODIAN. The Bank of New York, 110 Washington Street, New York New York,
is custodian of Money Market, Government Investment, and High Yield Funds'
assets; The Chase Manhattan Bank, N.A., 1211 Avenue of the Americas, New
York, New York 10036, is custodian of Income & Growth and Overseas Funds'
assets; and Brown Brothers Harriman & Co., 40 Water Street, Boston,
Massachusetts, is custodian of Growth Opportunities Fund's assets. The
custodians take no part in determining the investment policies of the funds
or in deciding which securities are purchased or sold by the funds. The
funds, however, may invest in obligations of the custodians and may
purchase or sell securities from or to the custodians. The Bank of New York
and Chemical Bank, each headquartered in New York, also may serve as a
special purpose custodian of certain assets in connection with pooled
repurchase agreement transactions. Investors should understand that the
expense ratio for the Overseas Fund may be higher than that of investment
companies which invest exclusively in domestic securities since the cost of
maintaining the custody of foreign securities is higher.
FMR, its officers and directors, its affiliated companies, and the Board of
Trustees may, from time to time, conduct transactions with various banks,
including banks serving as custodians for certain funds advised by FMR. The
Boston branch of Brown Brothers Harriman & Co. leases its office space from
an affiliate of FMR at a lease payment which, when entered into, was
consistent with prevailing market rates. Transactions that have occurred to
date include mortgages and personal and general business loans. In the
judgment of FMR, the terms and conditions of those transactions were not
influenced by existing or potential custodial or other fund relationships.
AUDITOR. Price Waterhouse LLP serves as independent accountant of
the trust. The auditor examines financial statements for the funds and
provides other audit, tax, and related services.
FINANCIAL STATEMENTS
Each fund's financial statements and financial highlights for the fiscal
period ended December 31, 1995 are included in the fund's Annual
Report, which is a separate report supplied with this Statement of
Additional Information. Each fund's financial statements and financial
highlights are incorporated herein by reference.
APPENDIX
DOLLAR-WEIGHTED AVERAGE MATURITY is derived by multiplying the value of
each investment by the number of days remaining to its maturity, adding
these calculations, and then dividing the total by the value of the fund's
portfolio. An obligation's maturity is typically determined on a stated
final maturity basis, although there are some exceptions to this rule.
For example, if it is probable that the issuer of an instrument will take
advantage of a maturity-shortening device, such as a call, refunding, or
redemption provision, the date on which the instrument will probably be
called, refunded, or redeemed may be considered to be its maturity date.
Also, the maturities of mortgage-backed securities and some asset-backed
securities, such as collateralized mortgage obligations, are determined on
a weighted average life basis, which is the average time for principal to
be repaid. For a mortgage security, this average time is calculated by
estimating the timing of principal payments, including unscheduled
prepayments, during the life of the mortgage. The weighted average life of
these securities is likely to be substantially shorter than their stated
final maturity.
The descriptions that follow are examples of eligible ratings for the
funds. A fund may, however, consider the ratings for other types of
investments and the ratings assigned by other rating organizations when
determining the eligibility of a particular investment.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S COMMERCIAL PAPER RATINGS:
Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following
characteristics:
Leading market positions in well established industries.
High rates of return on funds employed.
Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
Broad margins in earning coverage of fixed financial charges and with high
internal cash generation.
Well established access to a range of financial markets and assured sources
of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earning trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated PRIME-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes
in the level of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate liquidity is
maintained.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S COMMERCIAL PAPER RATINGS:
A - Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with
the numbers 1, 2, and 3 to indicate the relative degree of safety.
A-1 - This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+)
sign designation.
A-2 - Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
A-3 - This designation indicates that the capacity for timely payment is
satisfactory. These issues are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying the
higher designations.
B - Issues rated B are regarded as having only adequate capacity for timely
payment. However, such capacity may be damaged by changing or short-term
adversities.
C - This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D - Debt rated D is in payment default. The D rating category is used when
interest or principal payments are not made on the date due even if the
applicable period has not expired, unless S&P believes that such payments
will be made during such grace period.
