SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (No. 33-60973)
UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. 3 [X]
Post-Effective Amendment No. ____ [ ]
and
REGISTRATION STATEMENT (No. 811-7319)
UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 3 [ ]
Fidelity Covington Trust
(Exact Name of Registrant as Specified in Charter)
82 Devonshire St., Boston, Massachusetts 02109
(Address Of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: 617-570-7000
Arthur S. Loring, Secretary
82 Devonshire Street
Boston, Massachusetts 02109
(Name and Address of Agent for Service)
Approximate date of Proposed Public Offering: As soon as practicable after
this Registration Statement becomes effective.
Registrant elects to register an indefinite number of shares pursuant to
Regulation 24f-2 under the Investment Company Act of 1940.
FIDELITY COVINGTON TRUST
FIDELITY REAL ESTATE HIGH INCOME FUND II
CROSS REFERENCE SHEET
Form N-1A Item Number
Part A Prospectus Caption
1 a,b Cover Page
2 a Expenses
b,c Contents; Who May Want to Invest
3 a **
b *
c Performance
d Performance
4 a(i) Charter
a(ii) Investment Principles and Risks; Securities and Investment
Practices; Fundamental Investment Policies and Restrictions
b Securities and Investment Practices
c Who May Want to Invest; Investment Principles and Risks; Securities and
Investment Practices
5 a Charter
b(i) Cover Page; FMR and Its Affiliates
b(ii) FMR and Its Affiliates; Breakdown of Expenses
b(iii) Expenses; Breakdown of Expenses
c FMR and Its Affiliates
d Cover Page; Charter; Breakdown of Expenses; FMR and Its Affiliates
e FMR and Its Affiliates, Breakdown of Expenses
f Expenses
g Expenses; FMR and Its Affiliates, Breakdown of Expenses
5A *
6 a(i) Charter
a(ii) How to Buy Shares; How to Sell Shares; Investor
Services; Transaction Details
a(iii) *
b *
c How to Buy Shares
d *
e Cover Page; How to Buy Shares; How to Sell Shares; Investor Services;
Transaction Details
f,g Dividends, Capital Gains, and Taxes
7 a Cover page; FMR and Its Affiliates
b How to Buy Shares; Transaction Details
c How to Buy Shares; Transaction Details
d How to Buy Shares
e Breakdown of Expenses
f Expenses; Breakdown of Expenses
8 How to Sell Shares; Investor Services; Transaction Details
9 *
* Not Applicable.
** To be filed by amendment.
Please read this prospectus before investing, and keep it on file for
future reference. It contains important information, including how the fund
invests and the services available to shareholders.
To learn more about the fund and its investments, you can obtain a copy of
the Statement of Additional Information (SAI) dated June 28, 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, call Fidelity Investments at 1-617-563-6414.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR
OBLIGATIONS OF, OR GUARANTEED BY, ANY
DEPOSITORY INSTITUTION. SHARES ARE NOT
INSURED BY THE FDIC, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY, AND
ARE SUBJECT TO INVESTMENT RISK, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL.
THE 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 "SECURITIES AND INVESTMENT PRACTICES" 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.
REHIFII-pro-696
FIDELITY
REAL ESTATE HIGH INCOME
FUND II
A fund of Fidelity Covington Trust
The fund seeks a high level of current income by investing primarily in
commercial mortgage-backed securities and the securities of real estate
investment trusts.
PROSPECTUS
JUNE 28, 1996
(FIDELITY_LOGO_GRAPHIC) 82 DEVONSHIRE STREET, BOSTON, MA 02109
CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
KEY FACTS WHO MAY WANT TO INVEST
EXPENSES The fund's yearly operating expenses.
PERFORMANCE
THE FUNDS IN DETAIL CHARTER How the fund is organized.
FMR AND ITS AFFILIATES
INVESTMENT PRINCIPLES AND RISKS The fund's
overall approach to investing.
SECURITIES AND INVESTMENT PRACTICES
FUNDAMENTAL INVESTMENT POLICIES AND
RESTRICTIONS
BREAKDOWN OF EXPENSES How operating costs
are calculated and what they include.
YOUR ACCOUNT TYPES OF ACCOUNTS Different ways to set up your
account.
HOW TO BUY SHARES Opening an account and
making additional investments.
HOW TO SELL SHARES Taking money out and closing
your account.
INVESTOR SERVICES Services to help you manage
your account.
SHAREHOLDER AND ACCOUNT POLICIES DIVIDENDS, CAPITAL GAINS, AND TAXES
TRANSACTION DETAILS Share price calculations and
the timing of purchases and redemptions.
APPENDIX
</TABLE>
KEY FACTS
WHO MAY WANT TO INVEST
The fund is designed for sophisticated institutional investors that invest
in the fund through a Fidelity managed account or partnership and who seek
high current income, with some potential for capital gain, from a portfolio
that consists primarily of lower-quality, high-yielding commercial
mortgage-backed securities, the securities of real estate investment
trusts, and other mortgage and real estate-related securities.
Shares of the fund are offered to banks and trust institutions investing
for their own accounts or for accounts of their customers; retirement plan
sponsors; and similar institutional customers. In each case, the fund's
shares must be purchased through a Fidelity managed account or partnership.
The fund's level of risk and potential reward depend on the quality and
maturity of its investments. Since the fund invests in commercial
mortgage-backed securities, the securities of real estate investment
trusts, and other mortgage and real estate-related securities, including
lower-quality securities, the fund has the potential for higher yields, and
also carries a higher degree of risk than funds that invest in higher
quality portfolios. The fund may be appropriate for aggressive
institutional investors who understand the potential risks and rewards of
investing in commercial mortgage-backed securities, and other mortgage and
real estate-related securities, including lower-quality securities and are
willing to accept the greater price movements and credit risks of these
securities.
The value of the fund's investments and the income it generates vary from
day to day, and generally reflect interest rates, market conditions, and
other economic and political news. Some of the fund's investments may also
be subject to prepayments, which can lower the fund's yield, particularly
in periods of declining interest rates. When you sell your shares, they may
be worth more or less than what you paid for them. By itself, the fund does
not constitute a balanced investment plan.
EXPENSES
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when you buy or sell
shares of the fund.
Maximum sales charge on purchases and None
reinvested distributions
Maximum deferred sales None
charge on redemptions
Redemption fee None
Exchange fee None
ANNUAL FUND OPERATING EXPENSES are paid out of the fund's assets. The fund
pays a management fee to Fidelity Management & Research Company (FMR). It
also incurs other expenses for services such as maintaining shareholder
records and furnishing shareholder statements and financial reports.
The fund's expenses are factored into its share price or dividends and are
not charged directly to shareholder accounts (see "Breakdown of Expenses"
on page ).
The following are projections based on estimated expenses, and are
calculated as a percentage of average net assets.
Management fee .75%
12b-1 fee (Distribution Fee) None
Other expenses . 26% 1
Total fund operating expenses 1.01
%
EXPENSE TABLE EXAMPLE: You would pay the following expenses on a $1,000
investment in the fund assuming (1) a 5% annual return and (2) full
redemption at the end of each time period:
1 Year 3 Years
$10 $32
THESE EXAMPLES ILLUSTRATE THE EFFECT OF EXPENSES, BUT ARE NOT MEANT TO
SUGGEST ACTUAL OR EXPECTED COSTS OR RETURNS, ALL OF WHICH MAY VARY.
1 FIDELITY MAY LEVY FEES FOR ACCOUNT OR PARTNERSHIP MANAGEMENT AT THE
ACCOUNT OR PARTNERSHIP LEVEL, NEGOTIATED ON A CASE-BY-CASE BASIS.
CURRENTLY, THE HIGHEST APPLICABLE ANNUAL FEE RATE IS 1.0%, PLUS PERFORMANCE
RELATED FACTORS; HOWEVER, THE FUND'S MANAGEMENT FEE IS CREDITED AGAINST THE
ACCOUNT OR PARTNERSHIP LEVEL FEE.
PERFORMANCE
This section would normally show how the fund has performed over time.
Because the fund was new when this prospectus was printed, its performance
is not included. At least twice a year, you will receive a report detailing
the fund's strategies, performance, and holdings. For current performance
or a free annual report, call Fidelity Investments at 1-617-563-6414.
TOTAL RETURN is the change in value of an investment in the 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 the fund over a
given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all stock and bond
funds. Because this differs from other accounting methods, the quoted yield
may not equal the income actually paid to shareholders.
This difference may be significant for a fund whose investments are
denominated in foreign currencies.
In calculating yield, the 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.
THE CONSUMER PRICE INDEX is a widely recognized measure of inflation
calculated by the U.S. Government.
The fund may quote its adjusted net asset value (NAV), including all
distributions paid. This value may be averaged over specified periods and
may be used to calculate the fund's moving average.
For current performance call Fidelity Investments at 1-617-563-6414.
TOTAL RETURNS AND YIELDS ARE BASED ON PAST RESULTS AND ARE NOT AN
INDICATION OF FUTURE PERFORMANCE.
THE FUND IN DETAIL
CHARTER
REAL ESTATE HIGH INCOME FUND II IS A MUTUAL FUND: an investment that pools
shareholders' money and invests it toward a specified goal. The fund is
currently a non-diversified fund of Fidelity Covington Trust, an open-end
management investment company organized as a Massachusetts business trust
on May 10, 1995.
THE 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 fund's activities,
review contractual arrangements with companies that provide services to the
fund, and review the fund's performance. The majority of trustees are not
otherwise affiliated with Fidelity.
THE FUND 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. Fidelity will
mail proxy materials in advance, including a voting card and information
about the proposals to be voted on. The number of votes you are entitled to
is based upon the dollar value of your investment.
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. It includes a number of
different subsidiaries and divisions which provide a variety of financial
services and products. The fund employs various Fidelity companies to
perform activities required for its operation.
The fund is managed by FMR, which chooses the fund's investments and
handles its business affairs .
As of April 30, 1996, FMR advised funds having approximately 26 million
shareholder accounts with a total value of more than $386 billion.
Mark P. Snyderman is co-manager of Real Estate High Income II, which he has
managed since the fund's inception. He also manages Real Estate High
Income. He joined Fidelity in May 1994 as an investment officer for
commercial mortgage-backed securities. Previously, he was director and
business head for Aldrich, Eastman & Waltch, a real estate investment
advisory firm located in Boston, Massachusetts.
Barry Greenfield is co-manager of Real Estate High Income II, which he has
managed since the fund's inception. He also is manager and vice president
of Real Estate Investment. Previously, he managed Fidelity Fund and was
director of equity research. Mr. Greenfield joined Fidelity in 1968.
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.
FDC distributes and markets Fidelity's funds and services. Fidelity
Investments Institutional Operations Company (FIIOC) performs transfer
agent servicing functions for the fund.
FMR Corp. is the ultimate parent company of FMR . 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.
To carry out the fund's transactions, FMR may use its broker-dealer
affiliates and other firms that sell fund shares, provided that the fund
receives services and commission rates comparable to those of other
broker-dealers.
INVESTMENT PRINCIPLES AND RISKS
The fund seeks a high level of current income. The fund will normally
invest so that at least 65% of its total assets will be invested in
lower-quality real estate debt securities, including commercial
mortgage-backed securities, and the securities of real estate investment
trusts. When consistent with its goal, the fund may also consider the
potential for capital gain.
The fund's investments in real estate debt and equity securities
generally are sensitive to factors such as changes in real estate values
and property taxes, interest rates, cash flow of underlying real estate
assets, overbuilding, extended vacancies of properties and the management
skill and creditworthiness of the issuer. Real estate debt and equity
securities may also be affected by tax and regulatory requirements,
such as those relating to zoning and the environment. In addition, both
real estate investment trusts and commercial mortgage-backed securities are
subject to risks affecting the ability of mortgagors to meet their payment
obligations, as well as the unique interest rate and payment priority
characteristics of a particular investment. The market for commercial
mortgage-backed securities is relatively new. Real estate investment trusts
also carry unique tax considerations which, if not met, could adversely
affect dividend payments. Also, in the event of a default of an underlying
borrower or lessee, the individual real estate investment trust could
experience delays in enforcing its rights as a mortgagee or lessor and may
incur substantial costs associated with protecting its investments.
The fund's yield and share price will change based on changes in interest
rates, market conditions, and other political and economic news and on the
quality and maturity of its investments. In general, bond prices rise when
interest rates fall, and vice versa. FMR may use various investment
techniques to hedge the fund's risks, but there is no guarantee that these
strategies will work as intended. It is important to note that the fund is
not guaranteed. When you sell your shares, they may be worth more or less
than what you paid for them.
Under normal market conditions, FMR invests the fund's assets
according to its investment strategy. The fund also reserves the right to
invest without limitation in investment-grade debt or investment-grade
money market instruments for temporary, defensive purposes.
SECURITIES AND INVESTMENT PRACTICES
The following pages contain more detailed information about types of
instruments in which the fund may invest, and strategies FMR may employ in
pursuit of the fund's investment objective. A summary of risks and
restrictions associated with these instrument types and investment
practices is included as well. A complete listing of the fund's policies
and limitations and more detailed information about the fund's investments
are contained in the fund's 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 to
the full extent permitted unless it believes that doing so will help the
fund achieve its goal. As a shareholder, you will receive financial reports
at least every six months detailing fund holdings and describing recent
investment activities.
T he fund considers real estate debt and equity securities to
include lower-quality, high yielding commercial mortgage-backed
securities, the securities of real estate investment trusts, mortgage
securiti es, collateralized mortgage obligations, regular interests
in real estate mortgage investment conduits (REMICs), adjustable rate
mortgages, bank debt, and debt or equity securities of companies
primarily engaged in the real estate industry. FMR considers a company to
be primarily engaged in the real estate industry if at least 50% of its
assets, gross income, or net profits are committed to, or derived from,
real estate. The fund may also invest in other equity and debt
securities, U.S. Treasury and agency securities and a variety of money
market instruments. The fund may invest without limitation in lower-rated
securities and non-rated securities of lower quality. Such securities are
commonly referred to as "junk bonds" and have a greater risk of default of
principal and interest.
In determining which commercial and other mortgage-backed securities the
fund will purchase, FMR will consider, among other factors, the following:
characteristics of the underlying mortgage loans, including loan-to-value
and debt service coverage ratios, loan seasoning and refinancing risk;
characteristics of the underlying property, including diversity of the loan
pool, tenant occupancy and leasing, and competitiveness in the pertinent
market; economic, environmental and local considerations; deal structure,
including historical performance of the originator, subordination
percentages and other credit enhancement features; and structural
participants such as administrators and servicers.
In addition to examining the relative value of the investments, FMR may
interact with rating agencies, review due diligence by underwriters and
rating agencies, and confirm debt service coverage ratios and security cash
flows. FMR will select investments that vary by underlying property types,
geographic regions and industry exposure.
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.
With respect to 50% of total assets, the fund may not purchase more than
10% of the outstanding voting securities of a single issuer.
MORTGAGE-BACKED SECURITIES are a form of asset-backed security that are
interests in pools of commercial or residential mortgages, and may include
complex instruments such as collateralized mortgage obligations and
stripped mortgage-backed securities. These interests may also include
mortgage pass-through securities, regular interests in REMICs or other
kinds of mortgage-backed securities. Mortgage-backed securities may be
issued by the Government or by private entities. These securities are
subject to credit risks associated with the performance of the underlying
mortgage properties. Factors such as changes in consumer spending habits,
local economic and competitive conditions, tenant occupancy rates and
regulatory or zoning restrictions, or the loss of a major tenant may
adversely affect the economic viability of a mortgaged property. In
addition, these securities are subject to prepayment risk, although
commercial mortgages tend to have shorter maturities than residential
mortgages as well as prepayment protection features. Some securities may
have a structure that makes their reaction to interest rates and other
factors difficult to predict, making their value highly volatile.
COMMERCIAL MORTGAGE-BACKED SECURITIES are generally multi-class debt or
pass-through securities backed by a mortgage loan or pool of mortgage loans
secured by commercial property, such as industrial and warehouse
properties, office buildings, retail space and shopping malls, multifamily
properties and cooperative apartments, hotels and motels, nursing homes,
hospitals, senior living centers and agricultural property. The commercial
mortgage loans that underlie commercial mortgage-backed securities often
have certain distinct characteristics. Commercial mortgage loans are
generally not fully amortizing. At their maturity date, repayment of the
remaining principal balance or "balloon" is due and the owners of the
underlying real estate must generally obtain a new loan or sell the real
estate to pay the remaining balance. Unlike most one to four family
residential mortgages, commercial real property loans often contain
provisions that substantially reduce the likelihood that such securities
will be prepaid. The provisions generally impose significant prepayment
penalties on loans and, in some cases there may be prohibitions on
principal prepayments for several years following origination. Assets
underlying commercial mortgage-backed securities may relate to only a few
properties or to a single property.
Commercial mortgage-backed securities have been issued in public and
private transactions by a variety of public and private issuers.
Non-governmental entities that have issued or sponsored commercial
mortgage-backed securities offerings include owners of commercial
properties, originators of and investors in mortgage loans, savings and
loan associations, mortgage banks, commercial banks, insurance companies,
investment banks and special purpose subsidiaries of the foregoing. The
fund may from time to time purchase commercial mortgage-backed securities
directly from issuers in privately negotiated transactions or from a holder
of such commercial mortgage-backed securities in the secondary market.
Commercial mortgage-backed securities generally are structured to provide
protection to the senior class investors against potential losses on the
underlying mortgage loans. This protection is generally provided by having
the holders of the subordinated class of securities, which may include the
fund, take the first loss if there are defaults on the underlying
commercial mortgage loans. Other protection, which may benefit all of the
classes or particular classes may include issuer guarantees, reserve funds,
additional subordinated securities, cross-collateralization, and
over-collateralization.
By adjusting the priority of interest and principal payments on each class
of a given commercial mortgage-backed security, issuers are able to issue
senior investment grade securities and lower-rated or non-rated
subordinated securities tailored to meet the needs of sophisticated
institutional investors. In general, subordinated classes of commercial
mortgage-backed securities are entitled to receive repayment of principal
only after all required principal payments have been made to more senior
classes and have subordinate rights as to receipt of interest
distributions. Such subordinated classes are subject to a substantially
greater risk of nonpayment than are senior classes of commercial
mortgage-backed securities. Even within a class of subordinate securities,
most commercial mortgage-backed securities are structured with a hierarchy
of levels (or loss positions). Loss positions are the order in which
nonrecoverable losses of principal are applied to the securities within a
given structure. For instance, a first loss subordinate security will
absorb any principal losses before any higher loss position subordinate
security. This type of structure allows a number of classes of securities
to be created with varying degrees of credit exposure, prepayment exposure
and potential total return.
Subordinated classes of commercial mortgage-backed securities are
structured to absorb any credit-related losses prior to the senior class.
There are no limitations on the classes of commercial mortgage-backed
securities in which the fund may invest. Accordingly, in certain
circumstances, because the fund intends to invest in subordinated classes
of securities, if the underlying mortgage loan is not paid in full, the
fund will recover proportionally less of its investment in a commercial
mortgage-backed security than the holders of more senior classes of the
same commercial mortgage-backed security.
The rating assigned to a given issue and class of commercial
mortgage-backed securities is a product of many factors, including the
structure of the security, the level of subordination, the quality and
adequacy of the collateral, and the past performance of the originators and
servicing companies. The rating of any commercial mortgage-backed security
is determined to a substantial degree by the debt service coverage ratio
(i.e., the ratio of current net operating income from the commercial
properties, in the aggregate, to the current debt service obligations on
the properties) and the loan-to-value ratio of the pooled properties. The
amount of the securities issued in any one rating category is determined by
the rating agencies after a rigorous credit rating process which includes
analysis of the issuer, servicer and property manager, as well as
verification of the loan-to-value and debt service coverage ratios.
Loan-to-value ratios may be particularly important in the case of
commercial mortgages because most commercial mortgage loans provide that
the lender's sole remedy in the event of a default is against the mortgaged
property, and the lender is not permitted to pursue remedies with respect
to other assets of the borrower. Accordingly, loan-to-value ratios may, in
certain circumstances, determine the amount realized by the holder of the
commercial mortgage-backed security in the event of default.
RESIDENTIAL MORTGAGE-BACKED SECURITIES are mortgage-backed securities
representing participation interests in pools of one to four family
residential mortgage loans originated by private mortgage originators.
Traditionally, residential mortgage-backed securities were issued by
governmental agencies such as the Federal National Mortgage Association
(FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the
Government National Mortgage Association (GNMA). The fund may invest in
securities issued by non-governmental agencies as well as governmental
agencies. Non-governmental entities that have issued or sponsored
residential mortgage-backed securities offerings include savings and loan
associations, mortgage banks, insurance companies, investment banks and
special purpose subsidiaries of the foregoing. Similar to commercial
mortgage-backed securities, residential mortgage-backed securities have
been issued using a variety of structures, including multi-class structures
featuring senior and subordinated classes. The fund intends to invest in
the lower-rated or non-rated classes of residential mortgage-backed
securities, with credit qualities at the time of investment rated or deemed
by FMR to have similar credit and cash flow characteristics as those
discussed previously in relation to subordinated classes of commercial
mortgage-backed securities.
Although one to four family residential loans do not typically have
prepayment penalties or restrictions as commercial mortgage loans often do,
residential mortgage-backed securities are often structured so that
subordinated classes may be locked out of prepayments for a period of time.
However, in a period of extremely rapid prepayments, during which senior
classes may be retired faster than expected, the subordinated classes may
receive unscheduled payments of principal and would have average lives
that, while longer than the average lives of the senior classes, would be
shorter than originally expected.
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES include securities issued by GNMA, FNMA and FHLMC. The
U.S. Government or the issuing agency guarantees the payment of interest
and principal on these securities. However, the guarantees do not extend to
the securities' yields or values, nor do the guarantees extend to the yield
or value of the fund's shares. These securities are in most cases
"pass-through" instruments, through which the holder receives a share of
all interest and principal payments from the mortgages underlying the
security, net of certain fees.
PRIVATE MORTGAGE PASS-THROUGH SECURITIES are structured similarly to GNMA,
FNMA and FHLMC mortgage pass-through securities and are issued by
originators of and investors in mortgage loans, including depository
institutions, mortgage banks, investment banks and special purpose
subsidiaries of the foregoing. These securities usually are backed by GNMA,
FNMA or FHLMC certificates or by a pool of fixed rate or adjustable rate
mortgage loans. Securities that are backed by a pool of fixed rate or
adjustable rate mortgage loans generally are structured with one or more
types of credit enhancement.
ADJUSTABLE RATE MORTGAGE SECURITIES are pass-through mortgage securities
collateralized by mortgages with adjustable rather than fixed rates (ARMs).
ARMs eligible for inclusion in a mortgage pool generally provide for a
fixed initial mortgage interest rate for either the first three, six,
twelve, thirteen, thirty-six or sixty scheduled monthly payments.
Thereafter, the interest rates are subject to periodic adjustment based on
changes to a designated benchmark index.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH
SECURITIES. Collateralized mortgage obligations or CMOs are debt
obligations collateralized by mortgage loans or mortgage pass-through
securities. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC
certificates, but also may be collateralized by whole loans or private
mortgage pass-through securities (collectively, mortgage assets).
Multi-class pass-through securities are equity interests in a trust
composed of mortgage assets. Unless the context indicates otherwise, all
references herein to CMOs include multi-class pass-through certificates.
Payments of principal of and interest on the mortgage assets, and any
reinvestment income thereon, provide the funds to pay debt service on the
CMOs or make scheduled distributions on the multi-class pass-through
securities. CMOs may be issued by agencies or instrumentalities of the U.S.
Government, or by private originators of, or investors in, mortgage loans,
including depository institutions, mortgage banks, investment banks and
special purpose subsidiaries of the foregoing. The issuer of CMOs or
multi-class pass-through securities may elect to be treated as a REMIC. The
fund will not invest in residual interests in REMICs.
STRIPPED MORTGAGE-BACKED SECURITIES. The fund may invest in mortgage
pass-through securities where all or a substantial portion of the interest
payments go to one class of holders (interest-only securities or IOs) and
all or a substantial portion of the principal payments go to a second class
of holders (principal-only securities or POs). These securities are
commonly referred to as stripped mortgage-backed securities or SMBS. The
yields to maturity on IOs and POs are very sensitive to the rate of
principal payments (including prepayments) on the related underlying
mortgage assets, and such rate may have a material effect on yield to
maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the fund may not fully recover its
initial investment in IOs. Conversely, if the underlying mortgage assets
experience less than anticipated prepayments of principal, the yield on POs
could be materially adversely affected. In addition to SMBS issued by
agencies or instrumentalities of the U.S. Government, the fund may purchase
SMBS issued by private originators of, or investors in, mortgage loans,
including depository institutions, mortgage banks, investment banks and
special purpose subsidiaries of the foregoing.
LOWER-RATED AND NON-RATED LOWER-QUALITY DEBT SECURITIES. The
mortgage-backed securities in which the fund will invest are expected to be
lower-rated (i.e., have a credit quality below investment grade) or
non-rated subordinated classes. Investments in such lower-rated securities
or non-rated securities of lower credit quality are subject to special
risks, including a greater risk of loss of principal and non-payment of
interest.
Generally, lower-rated or non-rated securities of lower credit quality
offer a higher return potential than higher-rated securities but involve
greater volatility of price and greater risk of loss of income and
principal, including the possibility of default or bankruptcy of the
issuers of such securities. Lower-rated securities and non-rated securities
of lower quality will likely have large uncertainties or major risk
exposure to adverse conditions and are predominantly speculative. The
occurrence of adverse conditions and uncertainties would likely reduce the
value of securities held by the fund, with a commensurate effect on the
value of the fund's shares. While the market values of lower-rated
securities and non-rated securities of lower quality tend to react less to
fluctuations in interest rate levels than do those of higher-rated
securities, the market values of certain of these securities also tend to
be more sensitive to changes in economic conditions than higher-rated
securities. In addition, lower-rated securities and non-rated securities of
lower quality generally present a higher degree of credit risk. The fund
may incur additional expenses to the extent that it is required to seek
recovery upon a default in the payment of principal or interest on its fund
holdings.
Securities which are rated BB by Standard & Poor's Corporation (S&P), and
Ba by Moody's Investors Service, Inc. (Moody's) have speculative
characteristics with respect to capacity to pay interest and repay
principal. Securities which are rated B generally lack characteristics of a
desirable investment and assurance of interest and principal payments over
any long period of time may be small. Securities which are rated Caa or CCC
or below are in poor standing. Those issues may be in default or present
elements of danger with respect to principal or interest. Securities rated
C by Moody's, D by S&P, or the equivalent by another nationally recognized
statistical rating organization are the lowest rating class. Such ratings
indicate that payments are in default, or that a bankruptcy petition has
been filed with respect to the issuer or that the issuer is regarded as
having extremely poor prospects. See the Appendix on page for a general
description of bond ratings.
In general, the ratings of nationally recognized statistical rating
organizations represent the opinions of these agencies as to the quality of
securities that they rate. Such ratings, however, are relative and
subjective, and are not absolute standards of quality and do not evaluate
the market value risk of the securities. It is possible that an agency
might not change its rating of a particular issue to reflect subsequent
events. These ratings will be used by the fund as initial criteria for the
selection of securities, but the fund also will rely upon the independent
advice of FMR to evaluate potential investments.
The lower-rated securities in which the fund will invest typically will be
subject to restrictions against transfer to the general public.
Accordingly, these securities are ordinarily traded only among
institutions.
At times a major portion of an issue of lower-rated securities or non-rated
securities of lower quality may be held by relatively few institutional
purchasers. These securities may be less liquid than higher-quality debt
securities, or in fact may be illiquid. Under adverse market or economic
conditions or in the event of adverse changes in the financial condition of
the issuer, the fund may find it more difficult to sell such securities
when FMR believes it advisable to do so or may be able to sell such
securities only at prices lower than if the securities were more widely
held. In such circumstances, the fund may also find it more difficult to
determine the fair value of such securities for purposes of computing the
fund's NAV.
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. 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.
REAL ESTATE INVESTMENT TRUSTS are entities which either own properties or
make construction or mortgage loans. Equity trusts own real estate directly
and their value of, and income earned, by the trust depends upon the income
of the underlying properties and the rental income they earn. Equity trusts
may also include operating or finance companies. Equity trusts can also
realize capital gains by selling properties that have appreciated in value.
A mortgage trust can make construction, development, or long-term mortgage
loans, and are sensitive to the credit quality of the borrower. Mortgage
trusts derive their income from interest payments. Hybrid trusts combine
the characteristics of both equity and mortgage trusts, generally by
holding both ownership interests and mortgage interests in real estate. The
value of real estate investment trusts is also affected by the management
skill, cash flow, and tax and regulatory requirements.
DEBT RATINGS
MOODY'S STANDARD & POOR'S
INVESTORS SERVICE, INC. CORPORATION
Rating Rating
INVESTMENT GRADE
Highest quality Aaa AAA
High quality Aa AA
Upper-medium grade A A
Medium grade Baa BBB
LOWER-QUALITY
Moderately speculative Ba BB
Speculative B B
Highly speculative Caa CCC
Poor quality Ca CC
Lowest quality, no interest C C
In default, in arrears --- D
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
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 FNMA 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.
STRIPPED SECURITIES are the separate income or principal components of a
debt instrument. These involve risks that are similar to those of other
debt securities, although they may be more volatile, and certain stripped
securities move in the same direction as interest rates.
MONEY MARKET INSTRUMENTS are high-quality instruments that present minimal
credit risk. They may include U.S. Government obligations, commercial paper
and other short-term corporate obligations, and certificates of deposit,
bankers' acceptances, bank deposits, and other financial institution
obligations. These instruments may carry fixed or variable interest rates.
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 .
ADJUSTING INVESTMENT EXPOSURE. The fund can use various techniques to
increase or decrease its exposure to changing security prices, interest
rates, 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 the fund's portfolio of investments. If FMR judges market conditions
incorrectly or employs a strategy that does not correlate well with the
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 the 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 the fund, or there may be a
requirement that the fund supply additional cash to a borrower on demand.
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 fund's yield.
REPURCHASE AGREEMENTS. In a repurchase agreement, the 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.
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 securities, including illiquid securities, may be subject
to legal restrictions. Difficulty in selling securities may result in a
loss or may be costly to the fund.
RESTRICTION: The fund may not purchase a security if, as a result, more
than 15% of its net assets would be invested in illiquid securities.
OTHER INSTRUMENTS may include convertible securities, preferred stocks, and
asset-backed securities.
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. Since the
fund is not diversified, it may be more sensitive to changes in the market
value of a single issuer or industry.
RESTRICTIONS: The fund is considered non-diversified. Generally, to meet
federal tax requirements at the close of each quarter, the fund does not
invest more than 25% of its total assets in any one issuer and, with
respect to 50% of total assets, does not (i) invest more than 5% of its
total assets in any one issuer or (ii) hold more than 10% of the
outstanding voting securities of any one issuer. The fund may not invest
more than 25% of its total assets in any one industry, except for, under
normal market conditions, securities and instruments backed by real estate
and real estate mortgages, including interests in real estate investment
trusts and securities of companies engaged in the real-estate business.
These limitations do not apply to U.S. Government securities.
BORROWING. The fund may borrow from banks or from other funds advised by
FMR, or through reverse repurchase agreements. If the fund borrows money,
its share price may be subject to greater fluctuation until the borrowing
is paid off. If the fund makes additional investments while borrowings are
outstanding, this may be considered a form of leverage.
RESTRICTIONS: The fund may borrow only for temporary or emergency purposes,
but not in an amount exceeding 33% of its total assets.
LENDING. 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 the fund's securities. The fund may also lend money to other
funds advised by FMR and to issuers in connection with certain direct debt
transactions.
RESTRICTION: Loans, in the aggregate, may not exceed 33% of the fund's
total assets.
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 paragraph restates all those that are fundamental. All policies
stated throughout this prospectus, other than those identified in the
following paragraph, can be changed without shareholder approval.
The fund seeks a high level of current income by investing primarily in
commercial mortgage-backed securities and the securities of real estate
investment trusts.
The fund may not invest more than 25% of its total assets in any one
industry, except that it will, under normal market conditions, invest more
than 25% of its total assets in securities and instruments backed by real
estate and real estate mortgages and securities of companies engaged in the
real-estate business, including interests in real estate investment trusts.
The fund may borrow only for temporary or emergency purposes, but not in an
amount exceeding 33% of its total assets.
Loans, in the aggregate, may not exceed 33% of the fund's total assets.
BREAKDOWN OF EXPENSES
Like all mutual funds, the fund pays fees related to its daily operations.
Expenses paid out of the fund's assets are reflected in its share price or
dividends; they are neither billed directly to shareholders nor deducted
from shareholder accounts.
The fund pays a MANAGEMENT FEE to FMR for managing its investments and
business affairs. FMR in turn may pay fees to affiliates who provide
assistance with these services.
FMR may, from time to time, agree to reimburse the fund for management fees
and other expenses above a specified limit. FMR retains the ability to be
repaid by the 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 the fund's expenses and boost its
performance.
MANAGEMENT FEE
The management fee is calculated and paid to FMR every month. The fee is
calculated by adding a group fee rate to an individual fund fee rate and
multiplying the result by the fund's 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 0.37%, and it drops as
total assets under management increase.
For April 30, 1996, the group fee rate was .1458%. The individual fund fee
rate is 0.60% .
OTHER EXPENSES
FIIOC performs transfer agency, dividend disbursing and shareholder
servicing functions for the fund. Fidelity Service Co. (FSC) calculates the
NAV and dividends for the fund, maintains the fund's general accounting
records and administers the fund's securities lending program.
The fund has adopted a Distribution and Service Plan. This 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 fund's shares. The Board of Trustees
has not authorized such payments. The fund does not pay FMR any separate
fees for this service.
The fund's portfolio turnover rate is not expected to exceed 75% in the
first fiscal period, which ends on December 31, 1996. This rate will vary
from year to year.
YOUR ACCOUNT
TYPES OF ACCOUNTS
The different ways to register an account with Fidelity are listed below.
The account guidelines that follow may not apply to certain retirement
accounts. Employers and plan sponsors may offer the fund in connection with
a retirement program. Investors should call their Institutional
Representative directly.
WAYS TO SET UP YOUR ACCOUNT
TRUST
FOR MONEY BEING INVESTED BY A TRUST
The trust must be established before an account can be opened.
BUSINESS OR ORGANIZATION
FOR INVESTMENT NEEDS OF CORPORATIONS, ASSOCIATIONS, PARTNERSHIPS, OR OTHER
GROUPS
Contact your Institutional Representative.
HOW TO BUY SHARES
The fund's share price, called NAV, is calculated every business day. The
fund's shares are sold without a sales charge.
Shares are purchased at the next NAV calculated after your investment is
received and accepted by the transfer agent. The NAV is normally calculated
at 4:00 p.m. Eastern time.
If you are placing your order through your Institutional Representative, it
is the responsibility of your Institutional Representative to transmit your
order to buy shares to the transfer agent before 4:00 p.m. Eastern time.
You may open your account by wire as described below. If there is no
account application accompanying this prospectus, call your Institutional
Representative.
If you already have money invested in the fund, you can wire money into
your account or contact your Institutional Representative.
Investments in the fund must be made by using the Federal Reserve Wire
System. Checks will not be accepted as a means of investment.
BY WIRE. For wiring information and instructions, you should call the
Financial Institution through which you trade or your Institutional
Representative. There is no fee imposed by the fund for wire purchases.
However, if you buy shares through a Financial Institution, the Financial
Institution may impose a fee for wire purchases.
For further information on opening an account, please consult your
Institutional Representative.
MINIMUM INVESTMENTS
TO OPEN AN ACCOUNT $5,000,000
MINIMUM BALANCE $1,000,000
HOW TO SELL SHARES
You can arrange to take money out of your fund account at any time by
selling (redeeming) some or all of your shares. Your shares will be sold at
the next NAV calculated after your order is received and accepted by the
transfer agent. NAV is normally calculated at 4:00 p.m. Eastern time.
TO SELL SHARES BY BANK WIRE, you will need to sign up for these services in
advance.
CERTAIN REQUESTS MUST INCLUDE A SIGNATURE GUARANTEE. It is designed to
protect you and Fidelity from fraud. Your request must be made in writing
and include a signature guarantee if any of the following situations apply:
(small solid bullet) You wish to redeem more than $100,000 worth of shares,
(small solid bullet) Your account registration has changed within the last
30 days,
(small solid bullet) The check is being mailed to a different address than
the one on your account (record address),
(small solid bullet) The check is being made payable to someone other than
the account owner, or
(small solid bullet) The redemption proceeds are being transferred to a
Fidelity account with a different registration.
You should be able to obtain a signature guarantee from a bank, broker,
dealer, credit union (if authorized under state law), securities exchange
or association, clearing agency, or savings association. A notary public
cannot provide a signature guarantee.
BY WIRE. Redemptions made by contacting your Institutional Representative.
BY WIRE. You must apply for the wire feature on your account application
and you must designate on your account application the U.S. commercial bank
account(s) into which you wish the redemption proceeds to be deposited.
Your Institutional Representative will then notify you that this feature
has been activated and that you may request wire redemptions.
You may change the bank account(s) designated to receive redemption
proceeds at any time prior to making a redemption request. You should
contact your Institutional Representative for further information.
There is no charge imposed by the fund for wiring of redemption proceeds.
However, if you sell shares through a Financial Institution, the Financial
Institution may impose a fee for wire redemptions.
Your redemption request must be received by the transfer agent before 4:00
p.m. Eastern time for money to be wired on the next business day.
INVESTOR SERVICES
Fidelity provides a variety of services to help you manage your account.
INFORMATION SERVICES
STATEMENTS AND REPORTS that Fidelity sends to you include the following:
(small solid bullet) Confirmation statements (after every transaction,
except a reinvestment, that affects your account balance or your account
registration)
(small solid bullet) Financial reports (every six months)
To reduce expenses, only one copy of most financial reports will be mailed,
even if you have more than one account in the fund. Call your Institutional
Representative if you need copies of financial reports.
SHAREHOLDER AND ACCOUNT POLICIES
DIVIDENDS, CAPITAL GAINS, AND TAXES
The fund distributes substantially all of its net investment income and
capital gains to shareholders each year. Income dividends are declared
daily and paid monthly. Capital gains are normally distributed in December
and January.
DISTRIBUTION OPTIONS
When you open an account, specify on your account application how you want
to receive your distributions. The fund offers three options:
1. REINVESTMENT OPTION. Your dividend and capital gain distributions will
be automatically reinvested in additional shares of the fund. If you do not
indicate a choice on your application, you will be assigned this option.
2. INCOME-EARNED OPTION. Your capital gain distributions will be
automatically reinvested in additional shares of the fund, but you will be
sent a check for each dividend distribution.
3. CASH OPTION. You will be sent a check for your dividend and capital gain
distributions.
Dividends will be reinvested at the fund's NAV on the last day of the
month. Capital gain distributions will be reinvested at the NAV as of the
date the fund deducts the distribution from its NAV. The mailing of
distribution checks will begin within seven days.
TAXES
As with any investment, you should consider how your investment in the fund
will be taxed.
TAXES ON DISTRIBUTIONS. Distributions are subject to federal income tax,
and may also be subject to state or local taxes. If you live outside the
United States, your distributions could also be taxed by the country in
which you reside. Your distributions are taxable when they are paid,
whether you take them in cash or reinvest them. However, distributions
declared in December and paid in January are taxable as if they were paid
on December 31.
For federal tax purposes, the fund's income and short-term capital gain
distributions are taxed as dividends; long-term capital gain distributions
are taxed as long-term capital gains.
Every January, the transfer agent will send you and the Internal Revenue
Service (IRS) a statement showing the taxable distributions paid to you in
the previous year.
TAXES ON TRANSACTIONS. Your redemptions-including exchanges-are subject to
capital gains tax. A capital gain or loss is the difference between the
cost of your shares and the price you receive when you sell them.
Whenever you sell shares of the fund, the transfer agent will send you a
confirmation statement showing how many shares you sold and at what price.
You will also receive a consolidated transaction statement every January.
However, it is up to you or your tax preparer to determine whether this
sale resulted in a capital gain and, if so, the amount of tax to be paid.
BE SURE TO KEEP YOUR REGULAR ACCOUNT STATEMENTS; the information they
contain will be essential in calculating the amount of your capital gains.
"BUYING A DIVIDEND." If you buy shares just before the fund deducts a
distribution from its NAV, you will pay the full price for the shares and
then receive a portion of the price back in the form of a taxable
distribution.
There are tax requirements that all funds must follow in order to avoid
federal taxation. In its effort to adhere to these requirements, the fund
may have to limit its investment activity in some types of instruments.
TRANSACTION DETAILS
THE FUND IS OPEN FOR BUSINESS each day the New York Stock Exchange (NYSE)
is open. FSC normally calculates the fund's NAV as of the close of business
of the NYSE, normally 4:00 p.m. Eastern time.
THE 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.
The fund's assets are valued primarily on the basis of market quotations.
If quotations are not readily available, assets are valued by a method that
the Board of Trustees believes accurately reflects fair value.
THE FUND'S OFFERING PRICE (price to buy one share) and REDEMPTION PRICE
(price to sell one share) are its NAV.
WHEN YOU SIGN YOUR ACCOUNT APPLICATION, you will be asked to certify that
your Social Security or taxpayer identification number is correct and that
you are not subject to 31% backup withholding for failing to report income
to the IRS. If you violate IRS regulations, the IRS can require a fund to
withhold 31% of your taxable distributions and redemptions.
YOU MAY INITIATE MANY TRANSACTIONS BY TELEPHONE. Note that Fidelity will
not be responsible for any losses resulting from unauthorized transactions
if it follows reasonable procedures designed to verify the accuracy of the
confirmation statements immediately after receipt. If an investor does not
want the ability to redeem by telephone, call your Institutional
Representative for instructions. Additional documentation may be required
from corporations, associations and certain fiduciaries.
THE FUND RESERVES THE RIGHT TO SUSPEND THE OFFERING OF SHARES for a period
of time. The 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.
WHEN YOU PLACE AN ORDER TO BUY SHARES, your order will be processed at the
NAV calculated after your order is received and accepted by the transfer
agent. Purchases begin to earn dividends as of the first business day
following the day the fund receives payment.
Net interest income for dividend purposes is determined by FSC on a daily
basis and shall be payable to shareholders of record at the time of its
declaration (including, for this purpose, holders of shares purchased, but
excluding holders of shares redeemed, on that day).
WHEN YOU PLACE AN ORDER TO SELL SHARES, your shares will be sold at the
next NAV calculated after your request is received and accepted by the
transfer agent. Note the following:
(small solid bullet) Normally, redemption proceeds will be mailed to you on
the next business day, but if making immediate payment could adversely
affect the fund, it may take up to seven days to pay you.
(small solid bullet) Redemptions may be suspended or payment dates
postponed when the NYSE is closed (other than weekends or holidays), when
trading on the NYSE is restricted, or as permitted by the SEC.
(small solid bullet) The fund may withhold redemption proceeds until it is
reasonably assured that investments made in clearinghouse funds have been
collected.
IF YOUR ACCOUNT BALANCE FALLS BELOW $1,000,000, you will be given 30 days'
notice to reestablish the minimum balance. If you do not increase your
balance, Fidelity reserves the right to close your account and send the
proceeds to you. Your shares will be redeemed at the NAV on the day your
account is closed.
THE TRANSFER AGENT MAY CHARGE A FEE FOR SPECIAL SERVICES, such as providing
historical account documents, that are beyond the normal scope of its
services.
APPENDIX
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'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 issued 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 STANDARD & POOR'S CORPORATION'S CORPORATE BOND RATINGS:
AAA - Debt rated AAA has the highest rating assigned by S&P 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 rated 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 - Debt rated 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.
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 the fund or FDC. This Prospectus and the related SAI do not
constitute an offer by the fund or by FDC to sell or to buy shares of the
fund to any person to whom it is unlawful to make such offer.
FIDELITY COVINGTON TRUST
FIDELITY REAL ESTATE HIGH INCOME FUND II
CROSS REFERENCE SHEET
Form N-1A Item Number
Part B Statement of Additional Information Caption
10a,b Cover Page
11 Table of Contents
12 *
13a,b,c Investment Policies and Limitations
d Portfolio Transactions
14a,b Trustees and Officers
c *
15a Description of the Trust
b Description of the Trust
c *
16a(i) FMR
a(ii) Trustees and Officers
a(iii),b Management Contract
c Management Contract
d *
e *
f Distribution and Service Plan
g *
h Description of the Trust
i Contracts With Companies Affiliated With FMR
17a Portfolio Transactions
b *
c Portfolio Transactions
d *
e *
18a Description of the Trust
b *
19a Additional Purchase and Redemption Information
b Valuation of Portfolio Securities
c *
20 Distributions and Taxes
21a(i,ii) Contracts With FMR Affiliates
a(iii),b,c *
22a *
b Performance
23 Statement of Assets & Liabilities
*Not applicable.
** To be filed by amendment.
FIDELITY REAL ESTATE HIGH INCOME FUND II
A FUND OF FIDELITY COVINGTON TRUST
STATEMENT OF ADDITIONAL INFORMATION
JUNE 28, 1996
This Statement of Additional Information (SAI) is not a prospectus but
should be read in conjunction with the fund's current Prospectus (dated
June 28, 1996). Please retain this document for future reference. To obtain
additional copies of the Prospectus or this SAI without charge, please call
Fidelity Distributors Corporation.
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 Contract
Distribution and Service Plan
Contracts With FMR Affiliates
Description of the Trust
Report of Independent Accountants 23
Statement of Assets & Liabilities 24
INVESTMENT ADVISER
Fidelity Management & Research Company (FMR)
DI S TRIBUTOR
Fidelity Distributors Corporation (FDC)
TRANSFER AGENT
Fidelity Investments Institutional Operations Company (FIIOC)
CUSTODIAN
The Bank of New York
REHIFII-ptb- 6 96
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 the 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.
The 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 the fund.
However, except for the fundamental investment limitations set forth below,
the investment policies and limitations described in this Statement of
Additional Information are not fundamental and may be changed without
shareholder approval. THE FOLLOWING ARE THE FUND'S FUNDAMENTAL INVESTMENT
LIMITATIONS SET FORTH IN THEIR ENTIRETY. THE FUND MAY NOT:
(1) issue senior securities, except as permitted under the Investment
Company Act of 1940;
(2) borrow money, except that the fund may borrow money for temporary or
emergency purposes (not for leveraging or investment) in an amount not
exceeding 33 1/3% of its 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;
(3) 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;
(4) 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, under normal
market conditions, the fund will invest more than 25% of its total assets
in securities and instruments backed by real estate and real estate
mortgages and securities of companies engaged in the real estate business,
including interests in real estate investment trusts;
(5) 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);
(6) 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
(7) 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.
(8) The fund may, notwithstanding any 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 ARE NOT FUNDAMENTAL AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL.
(i) To meet federal tax requirements for qualification as a "regulated
investment company." the fund limits its investments so that at the close
of each quarter of its taxable year: (a) with regard to at least 50% of
total assets, (i) no more than 5% of total assets are invested in the
securities of a single issuer, and (ii) the fund will not hold more than
10% of the outstanding voting securities of that issuer; and (b) no more
than 25% of total assets are invested in the securities of a single issuer.
Limitations (a) and (b) do not apply to "Government securities" as defined
for federal tax purposes.
(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 adviser or (b) by engaging in reverse repurchase agreements with
any party (reverse repurchase agreements are treated as borrowings for
purposes of fundamental investment limitation (2)). The fund will not
purchase any security while borrowings 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 15% 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 interests in real
estate investment trusts that are not readily marketable or interests in
real estate limited partnerships that are not listed on an exchange or
traded on the NASDAQ National Market System if, as a result, the sum of
such interests and other investments considered illiquid under limitation
(v) would exceed 15% of the fund's assets.
(vii) The fund does not currently intend to lend assets other than
securities to other parties, except by (a) lending money (up to 7.5% of the
fund's net assets) to a registered investment company or portfolio for
which FMR or an affiliate serves as investment adviser 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 mortgage-related securities or direct mortgage investments;
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 brokers 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 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 the fund's limitations on futures and options transactions, see the
section entitled "Limitations on Futures and Options Transactions" on page
9.
AFFILIATED BANK TRANSACTIONS. The 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
secured borrowings. In accordance with exemptive orders issued by the
Securities and Exchange Commission, the Board of Trustees has established
and periodically reviews procedures applicable to transactions involving
affiliated financial institutions.
DELAYED-DELIVERY TRANSACTIONS. The fund may buy and sell securities on a
delayed-delivery or when-issued basis. These transactions involve a
commitment by the fund to purchase or sell specific securities at a
predetermined price and/or yield, with payment and delivery taking place
after the customary settlement period for that type of security (and more
than seven days in the future). Typically, no interest accrues to the
purchaser until the security is delivered. The fund may receive fees for
entering into delayed-delivery transactions.
When purchasing securities on a delayed-delivery basis, the fund assumes
the rights and risks of ownership, including the risk of price and yield
fluctuations. Because the 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 the 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 the 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.
The 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.
FUND'S RIGHTS AS A SHAREHOLDER. The fund does not intend to direct or
administer the day-to-day operations of any company. The 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 the 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 the 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 the fund and the risk of actual liability if the fund is involved
in litigation. No guarantee can be made, however, that litigation against
the fund will not be undertaken or liabilities incurred.
REPURCHASE AGREEMENTS. In a repurchase agreement, the fund purchases a
security and simultaneously commits to resell 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. A repurchase
agreement involves the obligation of the seller to pay the agreed-upon
resale price, which obligation is in effect secured by the value (at least
equal to the amount of the agreed-upon resale price and marked to market
daily) of the underlying security. The fund may engage in repurchase
agreements with respect to any type of security in which it is authorized
to invest. While it does not presently appear possible to eliminate all
risks from these transactions (particularly the possibility of a decline in
the market value of the underlying securities, as well as delays and costs
to the fund in connection with bankruptcy proceedings), it is the fund's
current policy to limit repurchase agreements to those parties whose
creditworthiness has been reviewed and found satisfactory by FMR.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, the 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.
The fund will enter into reverse repurchase agreements only with parties
whose creditworthiness is deemed 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.
INTERFUND BORROWING PROGRAM. The fund has received permissions from the SEC
to lend money to and borrow money from other funds advised by FMR or its
affiliates. Interfund loans and borrowings normally will extend overnight,
but can have a maximum duration of seven days. The fund will lend through
the program only when the returns are higher than those available at the
same time 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. Loans may be called on one
day's notice, and the 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.
SECURITIES LENDING. The 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 the 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 the fund
may engage in loan transactions 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 the 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).
VARIABLE OR FLOATING RATE OBLIGATIONS bear variable or floating interest
rates and carry rights that permit holders to demand payment of the unpaid
principal balance plus accrued interest from the issuers or certain
financial intermediaries. Floating rate instruments have interest rates
that change whenever there is a change in a designated base rate while
variable rate instruments provide for a specified periodic adjustment in
the interest rate. These formulas are designed to result in a market value
for the instrument that approximates its par value.
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 the fund's investments and, through reports from FMR, the
Board monitors investments in illiquid instruments. In determining the
liquidity of the 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 the 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, and
swap agreements to be illiquid. However, with respect to over-the-counter
options the 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.
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. If through a change in values, net assets or other
circumstances, the fund were in a position where more than 15% of its net
assets were invested in illiquid securities, it would seek to take
appropriate steps to protect liquidity.
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, the 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, the fund might obtain
a less favorable price than prevailed when it decided to seek registration
of the security.
ASSET-BACKED SECURITIES may 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 financial institution(s)
providing the credit support.
MORTGAGE-BACKED SECURITIES. The fund may purchase mortgage-backed
securities, a type of asset-backed security issued by government entities
and non-government entities such as banks, mortgage lenders, or other
financial institutions. A mortgage-backed security may be 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 Fund may invest in them if FMR determines
they are consistent with the Fund's 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 and
credit risks. 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. Credit risks include
risks associated with the performance of the real estate properties
securing the mortgages such as bankruptcy, quality of management, changes
in taxes or operating expenses and environmental risks.
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.
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.
REAL ESTATE INVESTMENT TRUSTS. Equity real estate investment trusts own
real estate properties, while mortgage real estate investment trusts make
construction, development, and long-term mortgage loans. Their value may be
affected by changes in the value of the underlying property of the trusts,
or the quality of the credit extended. Both types of trusts are dependent
upon management skill, are not diversified, and are subject to heavy cash
flow dependency, defaults by borrowers, self-liquidation, and the
possibility of failing to qualify for tax-free status of income under the
Internal Revenue Code and failing to maintain exemption from the Investment
Company Act of 1940.
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 the fund's exposure to long- or
short-term interest rates (in the U.S. 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. The 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 the 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 the 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 the 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. The 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.
The fund will maintain appropriate liquid assets in a segregated custodial
account to cover its current obligations under swap agreements. If the 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 the 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.
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 daily dividend, the fund takes into account as
income a portion of the difference between a zero coupon bond's purchase
price and its face value.
A broker-dealer creates a derivative zero by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury
Securities), TIGRs (Treasury Investors Growth Receipts), and TRs (Treasury
Receipts) are examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and
principal components of an outstanding U.S. Treasury bond and selling them
as individual securities. Bonds issued by the Resolution Funding
Corporation and the Financing Corporation can also be separated in this
fashion. Original issue zeros are zero coupon securities originally issued
by the U.S. government, a government agency, or a corporation in zero
coupon form.
INDEXED SECURITIES. The fund may purchase securities whose prices 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. A mortgage-indexed security, for
example, could be synthesized to replicate the performance of mortgage
securities and the characteristics of direct ownership. 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
U.S. 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.
LOWER-QUALITY DEBT SECURITIES. While the market for high-yield,
lower-quality 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 restructuring. 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 the fund's ability to sell 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 the 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, dividend or debt service coverage, asset coverage, earnings
prospects, and the experience and managerial strength of the issuer.
FOREIGN INVESTMENTS. Investing in securities issued by companies or other
issuers whose principal activities are outside the United States 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. In addition,
there is generally less publicly available information about foreign
issuers' financial condition and operations, particularly those not subject
to the disclosure and reporting requirements of the U.S. securities laws.
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. Further, economies of particular
countries or areas of the world may differ favorably or unfavorably from
the economy of the United States.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments
adverse to the interests of U.S. investors, including 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
may be a greater possibility of default by foreign governments or foreign
government-sponsored enterprises. Investments in foreign countries also
involve a risk of local political, economic, or social instability,
military action or unrest, or adverse diplomatic developments. There is no
assurance that FMR will be able to anticipate these potential events or
counter their effects. The considerations noted above generally are
intensified for investments in developing countries. Developing countries
may have relatively unstable governments, economies based on only a few
industries, and securities markets that trade a small number of securities.
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 exchanges 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 expose the fund to 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.
The fund may invest in foreign securities that 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.
The fund may invest in American Depository Receipts and European Depository
Receipts (ADRs and EDRs), which 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 the 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.
FOREIGN CURRENCY TRANSACTIONS. The fund 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 fund 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.
The 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 the fund. The fund may also use swap agreements, indexed
securities, and options and futures contracts relating to foreign
currencies for the same purposes.
When the 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 fund 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 fund may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. For example,
if the 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. The 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.
The 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 the 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 fund will
segregate assets to cover currency forward contracts, if any, whose purpose
is essentially speculative. The fund 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 the 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 the 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, the 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 the 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 fund or that it will hedge at an appropriate time.
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 the 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 the 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 the
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 the 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 the fund in the event of fraud or misrepresentation. In the
absence of definitive regulatory guidance, the 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, the 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 the 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 the 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.
The fund will set aside appropriate liquid assets in a segregated custodial
account to cover its potential obligations under standby financing
commitments.
The fund limits the amount of total assets that it will invest in any one
issuer or in issuers within the same industry (see fundamental limitations
4 and (i) for the fund). For purposes of these limitations, the 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 the 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
the 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.
SHORT SALES "AGAINST THE BOX." If the fund enters into a short sale against
the box, it will be required to set aside securities equivalent in kind and
amount to the securities sold short (or securities convertible or
exchangeable into such securities) and will be required to hold such
securities while the short sale is outstanding. The fund will incur
transaction costs, including interest expenses, in connection with opening,
maintaining, and closing short sales against the box.
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.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS. The fund will file 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 fund intends to comply with Rule 4.5 under the
Commodity Exchange Act, which limits the extent to which the fund can
commit assets to initial margin deposits and options premiums.
In addition, the fund will not: (a) sell futures contracts, purchase put
options, or write call options if, as a result, more than 50% 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; (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; or (d) write call options on securities if, as
a result, the aggregate value of the securities underlying the calls would
exceed 25% of the fund's net 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 fund's limitations on investments in futures contracts and options, and
the fund's policies regarding futures contracts and options discussed
elsewhere in this SAI may be changed as regulatory agencies permit.
FUTURES CONTRACTS. When the fund purchases a futures contract, it agrees to
purchase a specified underlying instrument at a specified future date. When
the fund sells a futures contract, they agree 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). 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 the fund's exposure to positive and
negative price fluctuations in the underlying instrument, much as if it had
purchased the underlying instrument directly. When the 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 the fund's investment limitations. In the event of the
bankruptcy of an FCM that holds margin on behalf of the 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.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the 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. The 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 the 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. The 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 the 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.
COMBINED POSITIONS. The 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, the 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 the fund's current or
anticipated investments exactly. The fund 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 the fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the 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. The 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 the 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.
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 the 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 the fund to continue to hold a
position until delivery or expiration regardless of changes in its value.
As a result, the fund's access to other assets held to cover its options or
futures positions could also be impaired.
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 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
fund greater flexibility to tailor an option to their 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.
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 fund
may purchase and sell currency futures and may purchase and write currency
options to increase or decrease their exposure to different foreign
currencies. The 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
the fund's investments. A currency hedge, for example, should protect a
Yen-denominated security from a decline in the Yen, but will not protect
the fund against a price decline resulting from deterioration in the
issuer's creditworthiness. Because the value of the 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.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The fund 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 options 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
the fund's assets could impede portfolio management or the fund's ability
to meet redemption requests or other current obligations.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed on
behalf of the fund by FMR pursuant to authority contained in the fund's
management contract. If FMR grants investment management authority to the
sub-advisers (see the section entitled "Management Contracts") 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. 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; and the
reasonableness of any commissions. Generally, commissions for foreign
investments traded will be higher than for U.S. investments and may not be
subject to negotiation.
The fund may execute portfolio transactions with broker-dealers who provide
research and execution services to the fund 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; the availability of
securities or the purchasers or sellers of securities; furnishing analyses
and reports concerning issuers, industries, securities, economic factors
and trends, portfolio strategy, and performance of accounts; and effecting
securities transactions and performing functions incidental thereto (such
as clearance and settlement). The selection of such broker-dealers
generally is made by FMR (to the extent possible consistent with execution
considerations) based upon the quality of research and execution services
provided.
The receipt of research from broker-dealers that execute transactions on
behalf of the fund may be useful to FMR in rendering investment management
services to the fund or its other clients, and, conversely, such research
provided by brokers-dealers who have executed transaction orders on behalf
of other FMR clients may be useful to FMR in carrying out its obligations
to the fund. 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 the
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
fund 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 fund 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.
The fund's Trustees periodically review FMR's performance of its
responsibilities in connection with the placement of portfolio transactions
on behalf of the fund and review the commissions paid by the fund over
representative periods of time to determine if they are reasonable in
relation to the benefits to the fund.
The fund's portfolio turnover rate is not expected to exceed 75% in the
first fiscal period ending December 31, 1996.
The investment activities described herein are likely to result in the
fund's engaging in a considerable amount of trading of securities that it
held for less than one year. Accordingly, it can be expected that the fund
will have a higher turnover rate during future fiscal periods and thus a
higher incidence of short-term capital gains taxable as ordinary income,
than might be expected from investment companies that invest substantially
all of their funds on a long-term basis.
From time to time the Trustees will review whether the recapture for the
benefit of the fund of some portion of the brokerage commissions or similar
fees paid by the fund on portfolio transactions is legally permissible and
advisable. The 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 the fund to seek such recapture.
Although the Trustees and officers of the fund are substantially the same
as those of other funds managed by FMR, investment decisions for the 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 the fund. In
some cases this system could have a detrimental effect on the price or
value of the security as far as the fund is concerned. In other cases,
however, the ability of the fund to participate in volume transactions will
produce better executions and prices for the fund. It is the current
opinion of the Trustees that the desirability of retaining FMR as
investment adviser to the fund outweighs any disadvantages that may be said
to exist from exposure to simultaneous transactions.
VALUATION OF PORTFOLIO SECURITIES
Securities and other assets for which market quotations are readily
available are 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.
Foreign securities are valued based on prices furnished by independent
brokers or quotation services which express the value of securities in
their local currency. 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 currencies 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
NAV. 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 that security will be valued as
determined in good faith by a committee appointed by the Board of Trustees.
PERFORMANCE
The fund may quote its performance in various ways. All performance
information supplied by the fund's advertising is historical and is not
intended to indicate future returns. The fund's share price, yield, and
total return fluctuate in response to market conditions and other factors,
and the value of fund shares when redeemed may be more or less than their
original cost.
ADVERTISING YIELD CALCULATIONS. Yields for the fund are computed by
dividing the fund's interest income for a given 30-day or one month period,
net of expenses, by the average number of shares entitled to receive
dividends during the period, dividing this figure by the fund's net asset
value per share (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. 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 the
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. Income is adjusted to
reflect gains and losses from principal repayments received by the fund
with respect to mortgage-related securities and other asset-backed
securities. Other capital gains and losses generally are excluded from the
calculation as are gains and losses currently from exchange rate
fluctuations.
Income calculated for the purposes of calculating the 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, the fund's yield may not equal its
distribution rate, the income paid to your account, or the income reported
in the fund's financial statements.
In calculating the fund's yield, the 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 the fund's performance and in
providing a basis for comparison with other investment alternatives.
However, the 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 the
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 the 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 the fund's returns, including the effect of reinvesting
dividends and capital gain distributions, and any change in the fund's NAV
over a stated period. Average annual returns are calculated by determining
the growth or decline in value of a hypothetical historical investment in
the 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 return of 100% over ten years would produce an average annual
return of 7.18%, which is the steady annual rate that would equal 100%
growth on a compounded basis in ten years. Average annual total returns
covering periods of less than one year are calculated by determining the
fund's total return for the period, extending that return for a full year
(assuming that return remains constant over the year), and quoting the
result as an annual return. While average annual returns are a convenient
means of comparing investment alternatives, investors should realize that
the fund's performance is not constant over time, but changes from year to
year, and that average annual returns represent averaged figures as opposed
to the actual year-to-year performance of the fund.
In addition to average annual returns, the 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 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 the 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 the fund
and reflects all elements of its return. Unless otherwise indicated, the
fund's adjusted NAVs are not adjusted for sales charges, if any.
MOVING AVERAGES. The 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.
PERFORMANCE COMPARISONS. The 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, the fund's performance may
be compared to 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 from stock mutual funds.
From time to time, the 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.
The fund may be compared in advertising to Certificates of Deposits (CDs)
or other investments issued by banks or other depository institutions.
Mutual funds differ from bank investments in several respects. For example,
the fund may offer greater liquidity or higher potential returns than CDs,
and the 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.
In advertising materials, Fidelity may reference or discuss its products
and services, which may include: other Fidelity funds; retirement
investing; brokerage products and services; the effects of periodic
investment plans and dollar-cost averaging and saving for college or other
goals; charitable giving; and the Fidelity credit card. In addition,
Fidelity may quote financial or business publications and periodicals,
including model portfolios or allocations, 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.
The fund may present its fund number, Quotron(trademark) number, and CUSIP
number, and discuss or quote its current portfolio manager.
VOLATILITY. The 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, the fund
may also discuss or illustrate examples of interest rate sensitivity.
MOMENTUM INDICATORS indicate the 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 fund may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program,
an investor invests a fixed dollar amount in the fund at periodic
intervals, thereby purchasing fewer shares when prices are high and more
shares when prices are low. While such a strategy does not assure a profit
or guard against loss in a declining market, the investor's average cost
per share can be lower than if fixed numbers of shares are purchased at the
same intervals. In evaluating such a plan, investors should consider their
ability to continue purchasing shares through periods of low price levels.
The fund may be available for purchase through retirement plans or other
programs offering deferral of or exemption from income taxes, which may
produce superior after-tax returns over time. 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.
As of April 30, 1996, FMR advised over $25.5 billion in tax-free fund
assets, $82 billion in money market fund assets, $271 billion in equity
fund assets, and $53 billion in international fund assets. The fund 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.
In addition to performance rankings, the fund may compare its total expense
ratio to the average total expense ratio of similar funds tracked by
Lipper. The fund's total expense ratio is a significant factor in comparing
bond and money market investments because of its effect on yield.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The fund is open for business and its 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, Washington's Birthday
(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.
FSC normally determines the 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 SEC. To the
extent that portfolio securities are traded in other markets on days when
the NYSE is closed, the 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 the 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 payment
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 the fund's NAV. Shareholders receiving securities or other
property on redemption may realize either a gain or loss for tax purposes,
and will incur any costs of sale, as well as the associated inconveniences.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS. If you request to have distributions mailed to you and the
U.S. Postal Service cannot deliver your checks, or if your checks remain
uncashed for six months, Fidelity may reinvest your distributions at the
then-current NAV. All subsequent distributions will then be reinvested
until you provide Fidelity with alternate instructions.
DIVIDENDS. Because the fund's income is primarily derived from interest,
dividends from the fund generally will not qualify for the
dividends-received deduction available to corporate shareholders.
Short-term capital gains are distributed as dividend income, but do not
qualify for the dividends received deduction. A portion of the fund's
dividends derived from certain U.S. government obligations may be exempt
from state and local taxation. Mortgage security paydown gains (losses) are
taxable as ordinary income and, therefore, increase (decrease) taxable
dividend income. Gains (losses) attributable to foreign currency
fluctuations are generally taxable as ordinary income and therefore will
increase (decrease) dividend distributions. The fund will send each
shareholder a notice in January describing the tax status of dividend and
capital gain distributions for the prior year.
CAPITAL GAIN DISTRIBUTIONS. Long-term capital gains earned by the fund on
the sale of securities and distributed to shareholders are federally
taxable as long-term capital gains, regardless of the length of time
shareholders have held their shares. If a shareholder receives a long-term
capital gain distribution on shares of the fund, and such shares are held
for six months or less and are sold at a loss, the portion of the loss
equal to the amount of the long-term capital gain distribution will be
considered a long-term loss for tax purposes. Short-term capital gains
distributed by the fund are taxable to shareholders as dividends, not as
capital gains.
FOREIGN TAXES. Foreign governments may withhold taxes on dividends and
interest paid with respect to foreign securities. Foreign governments may
also impose taxes on other payments or gains with respect to foreign
securities. Because the fund does not currently anticipate that securities
of foreign issuers will constitute more than 50% of its total assets at the
end of its fiscal year, shareholders should not expect to claim a foreign
tax credit or deduction on their federal income tax returns with respect to
foreign taxes withheld.
TAX STATUS OF THE FUND. The 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 at the fund level,
the fund intends to distribute substantially all of its net investment
income and net realized capital gains within each calendar year as well as
on a fiscal year basis. The fund intends to comply with other tax rules
applicable to regulated investment companies, including a requirement that
capital gains from the sale of securities held less than three months
constitute less than 30% of the fund's gross income for each fiscal year.
Gains from some forward currency contracts, futures contracts, and options
are included in this 30% calculation, which may limit the fund's
investments in such instruments.
If the 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, the 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.
OTHER TAX INFORMATION. The information above is only a summary of some of
the tax consequences generally affecting the fund and its shareholders, and
no attempt has been made to discuss individual tax consequences. In
addition to federal income taxes, shareholders may be subject to state and
local taxes on distributions received from the fund. Investors should
consult their tax advisers to determine whether either fund is suitable to
their particular tax situation.
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 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 funds advised by FMR; FIIOC,
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 (66), 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 (55), 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 (64), 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). 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 serves on the Board of Directors of the
Texas State Chamber of Commerce, and he is a member of advisory boards of
Texas A&M University and the University of Texas at Austin.
PHYLLIS BURKE DAVIS (65), 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), 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 and Chairman of the non-interested Trustees,
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 (69), Trustee. 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), 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 (64), 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, a Member of the Public Oversight Board of
the American Institute of Certified Public Accountants' SEC Practice
Section (1995), and as a Public Governor of the National Association of
Securities Dealers, Inc. (1996).
*PETER S. LYNCH (53), Trustee, 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.
GERALD C. McDONOUGH (67), Trustee and Vice-Chairman of the non-interested
Trustees, 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 (72), 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.
THOMAS R. WILLIAMS (68), 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).
ROBERT A. LAWRENCE (44), 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. (57), Vice President, is Vice President of Fidelity's
money market (1994) and fixed-income (1995) funds and Senior Vice President
of FMR Texas Inc.
ARTHUR S. LORING (49), 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 (49), 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)
JOHN H. COSTELLO (50), 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) and Chief
Financial Officer of Fidelity Brokerage Services, Inc. (1990-1993).
The following table sets forth information describing the compensation of
each current Trustee of the fund for his or her services as trustee for the
year ended December 31, 1996.
COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Trustees Aggregate Pension or Estimated Annual Total
Compensation Retirement Benefits Upon Compensation
from Benefits Accrued Retirement from from the Fund
the Fund(dagger) as Part of Fund the Fund Complex*
Expenses from the Complex*
Fund Complex*
J. Gary Burkhead ** $ 0 $ 0 $ 0 $ 0
Ralph F. Cox 15 5,200 52,000 128,000
Phyllis Burke Davis 15 5,200 52,000 125,000
Richard J. Flynn 20 0 52,000 160,500
Edward C. Johnson 3d ** 0 0 0 0
E. Bradley Jones 15 5,200 49,400 128,000
Donald J. Kirk 15 5,200 52,000 129,500
Peter S. Lynch ** 0 0 0 0
Gerald C. McDonough 15 5,200 52,000 128,000
Edward H. Malone 15 5,200 44,200 128,000
Marvin L. Mann 15 5,200 52,000 128,000
Thomas R. Williams 15 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.
(dagger) Estimated
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 the 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.
The 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, at the end of the calendar year in which they reach 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.
MANAGEMENT CONTRACT
The fund employs FMR to furnish investment advisory and other services.
Under its management contract with the fund, FMR acts as investment adviser
and, subject to the supervision of the Board of Trustees, directs the
investments of the fund in accordance with its investment objective,
policies and limitations. FMR also provides the fund with all necessary
office facilities and personnel for servicing the fund's investments,
compensates all officers of the fund and all Trustees who are "interested
persons" of the Trust or of FMR, and all personnel of the 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 the fund. These services include providing facilities
for maintaining the fund's organization; supervising relations with
custodians, transfer and pricing agents, accountants, underwriters and
other persons dealing with the fund; preparing all general shareholder
communications and conducting shareholder relations; maintaining the fund's
records and the registration of the fund's shares under federal and state
laws; developing management and shareholder services for the 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
FIIOC, the fund pays all of its expenses, without limitation, that are not
assumed by those parties. The fund pays for the typesetting, printing, and
mailing of its proxy materials to shareholders, legal expenses, and the
fees of the custodian, auditor and non-interested Trustees. Although the
fund's current management contract provides that the fund will pay for
typesetting, printing, and mailing prospectuses, statements of additional
information, notices and reports to shareholders, the Trust, on behalf of
the fund has entered into a revised transfer agent agreement with FIIOC,
pursuant to which FIIOC bears the costs of providing these services to
existing shareholders. Other expenses paid by the fund include interest,
taxes, brokerage commissions, the fund's proportionate share of insurance
premiums and Investment Company Institute dues, and the costs of
registering shares under federal and state securities laws. The fund is
also liable for such non-recurring expenses as may arise, including costs
of any litigation to which the fund may be a party, and any obligation it
may have to indemnify its officers and Trustees with respect to litigation.
FMR is the fund's manager pursuant to a management contract dated May
16 , 1996, which was approved by shareholders on Ju ne 20 , 1996.
For the services of FMR under the contract, the 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. Also
shown below on the right is the effective annual group fee rate schedule
which is the result of cumulatively applying the annualized rates at
varying asset levels. For example, the effective annual fee rate at $401
billion of group net assets - the approximate level for April 1996 - was
.1458%, which is the weighted average of the respective fee rates for each
level of group net assets up to that level.
GROUP FEE RATE SCHEDULE EFFECTIVE ANNUAL FEE RATES
Average Group Annualized Group Net Effective Annual Fee
Assets Rate Assets Rate
0 - $ 3 billion .3700% $ 0.5 billion .3700%
3 - 6 .3400 25 .2664
6 - 9 .3100 50 .2188
9 - 12 .2800 75 .1986
12 - 15 .2500 100 .1869
15 - 18 .2200 125 .1793
18 - 21 .2000 150 .1736
21 - 24 .1900 175 .1690
24 - 30 .1800 200 .1652
30 - 36 .1750 225 .1618
36 - 42 .1700 250 .1587
42 - 48 .1650 275 .1560
48 - 66 .1600 300 .1536
66 - 84 .1550 325 .1514
84 - 120 .1500 350 .1494
120 - 156 .1450 375 .1476
156 - 192 .1400 400 .1459
192 - 228 .1350 425 .1443
228 - 264 .1300 450 .1427
264 - 300 .1275 475 .1413
300 - 336 .1250 500 .1399
336 - 372 .1225 525 .1385
372 - 408 .1200 550 .1372
408 - 444 .1175
444 - 480 .1150
480 - 516 .1125
Over 516 .1100
The individual fund fee rate is 0.60%. Based on the average group net
assets of the funds advised by FMR for April 1996, the annual management
fee rate would be calculated as follows:
Group Fee Rate Individual Fund Fee Rate Management Fee Rate
.1458% + .60% = .7458%
One-twelfth of this annual management fee rate is applied to the fund's net
assets averaged for the most recent month, giving a dollar amount, which is
the fee for that month.
FMR may, from time to time, voluntarily reimburse all or a portion of the
fund's operation expenses (exclusive of interest, taxes, brokerage
commissions, and extraordinary expenses) above a specified percentage of
average net assets. 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 year. Expens e reimbursements by FMR will
increase the fund's total returns and reimbursement by the fund will lower
its total returns.
DISTRIBUTION AND SERVICE PLAN
The Trustees have approved a Distribution and Service Plan (the plan) under
Rule 12b-1 of 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 the fund except pursuant to a plan adopted by the
fund under the Rule. The Board of Trustees has adopted the plan to allow
the fund and FMR to incur certain expenses that might be considered to
constitute indirect payment by the fund of distribution expenses. Under the
plans, if the payment by the fund to FMR of management fees should be
deemed to be indirect financing by the fund of the distribution of its
shares, such payment is authorized by the plan.
The 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 the fund. In addition, the
plan provides that FMR may use its resources, including its management fee
revenues, to make payments to third parties that provide assistance selling
shares of the fund, or to third parties, including banks, that render
shareholder support services.
The fund's plan has been approved by the Trustees. As required by the Rule,
the Trustees carefully considered all pertinent factors relating to the
implementation of the plan prior to their approval, and have determined
that there is a reasonable likelihood that the plan will benefit the fund
and its shareholders. In particular, the Trustees noted that the plan does
not authorize payments by the fund other than those made to FMR under its
management contract with the fund. To the extent that the plan gives FMR
and FDC greater flexibility in connection with the distribution of shares
of the fund, additional sales of the fund's shares may result.
Additionally, certain shareholder support services may be provided more
effectively under the plan by local entities with whom shareholders have
other relationships.
The Glass-Steagall Act generally prohibits federally and state chartered or
supervised banks from engaging in the business of underwriting, selling, or
distributing securities. Although the scope of this prohibition under the
Glass-Steagall Act has not been clearly defined by the courts or
appropriate regulatory agencies, FDC believes that the Glass-Steagall Act
should not preclude a bank from performing shareholder support services,
and servicing and recordkeeping functions. FDC intends to engage banks only
to perform such functions. However, changes in federal or state statutes
and regulations pertaining to the permissible activities of banks and their
affiliates or subsidiaries, as well as further judicial or administrative
decisions or interpretations, could prevent a bank from continuing to
perform all or a part of the contemplated services. If a bank were
prohibited from so acting, the Trustees would consider what actions, if
any, would be necessary to continue to provide efficient and effective
shareholder services. In such event, changes in the operation of the fund
might occur, including possible termination of any automatic investment or
redemption or other services then provided by the bank. It is not expected
that shareholders would suffer any adverse financial consequences as a
result of any of these occurrences.
The fund may execute portfolio transactions with and purchase securities
issued by depository institutions that receive payments under the plan. No
preference will be shown in the selection of investments for the
instruments of such depository institutions. In addition, state securities
laws on this issue may differ from the interpretations of federal law
expressed herein, and banks and other financial institutions may be
required to register as dealers pursuant to state law.
CONTRACTS WITH FMR AFFILIATES
FIIOC is transfer, dividend disbursing, and shareholders' servicing agent
for the fund. Under the trust's contract with FIIOC, the fund pays a per
account fee of $125 and an annual asset-based fee of .02% of fund net
assets. Under the contract, FIIOC pays out-of-pocket expenses associated
with providing transfer agent services. In addition, FIIOC bears the
expense of typesetting, printing, and mailing prospectuses, statements of
additional information, and all other reports, notices, and statements to
shareholders, with the exception of proxy statements.
The trust has a contract with Fidelity Service Co. ("FSC") which provides
that FSC will perform the calculations necessary to determine the fund's
net asset value per share and dividends, maintains the fund's accounting
records, and administers the fund's securities lending program. The fee
rates are based on the fund's average net assets, specifically, .075% for
the first $500 million of average net assets and .0375% for average net
assets in excess of $500 million. The fee is limited to a minimum of
$60,000 and a maximum of $800,000 per year.
The 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 agreement calls for FDC to use
all reasonable efforts, consistent with its other business, to secure
purchasers for shares of the fund, which are continuously offered.
Promotional and administrative expenses in connection with the offer and
sale of shares are paid by FMR.
DESCRIPTION OF THE TRUST
FUND ORGANIZATION. Fidelity Real Estate High Income II is a fund of
Fidelity Covington Trust, an open-end management investment company
organized as a Massachusetts business trust by Declaration of Trust dated
May 10, 1995. The Declaration of Trust permits the Trustees to create
additional portfolios.
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 include a provision limiting the obligations created
thereby to the Trust and its assets. The Declaration of Trust provides for
indemnification out of the fund's property of any shareholder held
personally liable for the obligations of the fund. The Declaration of Trust
also provides that the 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 a Trustee
against any liability to which he or she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her office.
VOTING RIGHTS. The fund's capital currently consists of shares of
beneficial interest. As a shareholder, you receive one vote for each dollar
of net asset value you own. The shares have no preemptive or conversion
rights; the voting and dividend rights, 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 may, as set forth
in the Declaration of Trust, call meetings for any purpose, including the
purpose of voting on removal of one or more Trustees. The Trust or the 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 fund as
determined by the current value of each shareholder's investment in the
fund's outstanding shares of the fund. If not so terminated, the fund will
continue indefinitely. The fund may invest all of its assets in another
investment company.
CUSTODIAN. The Bank of New York, 48 Wall Street, New York, New York 10286,
is custodian of the assets of the fund. The custodian is responsible for
the safekeeping of the fund's assets and the appointment of subcustodian
banks and clearing agencies. The custodian takes no part in determining the
investment policies of the fund or in deciding which securities are
purchased or sold by the fund. The fund may, however, invest in obligations
of the custodian and may purchase securities from or sell securities to the
custodian. Chemical Bank, headquartered in New York, also may serve as a
special purpose custodian of certain assets in connection with pooled
repurchase agreement transactions.
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.
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, 160 Federal Street, Boston, Massachusetts,
serves as the Trust's independent accountant. The auditor examines
financial statements for the Fund and provides other audit, tax, and
related services.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholder of
Fidelity Real Estate High Income Fund II
In our opinion, the accompanying statement of assets and liabilities
presents fairly, in all material respects, the financial position of
Fidelity Real Estate High Income Fund II ( a fund of Fidelity Covington
Trust) at June 20, 1996, in conformity with generally accepted accounting
principles. This financial statement is the responsibility of the fund's
management; our responsibility is to express an opinion on this financial
statement based on our audit. We conducted our audit of this financial
statement in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statement is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statement, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
June 20, 1996
STATEMENT OF ASSETS & LIABILITIES
Fidelity Real Estate High Income Fund II
June 20, 1996
ASSETS
CASH $100,000
NET ASSETS $100,000
Net asset value, offering price and redemption $10.00
price per share ($100,000/10,000 shares outstanding)
<TABLE>
<CAPTION>
<S> <C> <C>
NOTE 1.: NOTE 2.:
Fidelity Real Estate High Income Fund II (the fund) is a FMR, the fund's investment adviser, will bear all
non-diversified fund of Fidelity Covington Trust (the organizational expenses except the fees for registering
trust) and is authorized to issue an unlimited number of and qualifying the trust and its shares for distribution
shares. The trust, organized as a Massachusetts business under Federal and state securities laws, which will be
trust, is registered under the Investment Company Act of borne by the fund and amortized over one year.
1940, as amended (the 1940 Act), as an open-end
management investment company. The fund has had no
operations to date other than matters relating to its
organization and registration and the sale and issuance of
10,000 shares by the fund to Fidelity Management &
Research Company (FMR) for an aggregate purchase
price of $100,000.
NOTE 3.:
The fund has entered into a management agreement with
FMR, pursuant to which FMR will, among other things
supervise the fund's investment program and monitor the
performance of the fund's service providers. As the fund's
investment adviser, FMR receives a monthly basic fee
that is calculated on the basis of a group fee rate plus a
fixed individual fund fee rate applied to the average net
assets of the fund.
</TABLE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
(1) Report of Independent Accountants.
(2) Statement of Assets and Liabilities dated June 20, 1996.
(b) Exhibits:
(1) Declaration of Trust, dated May 10, 1995, was previously filed
electronically as Exhibit 1 to Pre-Effective Amendment No. 1.
(2) By-Laws of the Trust, dated May 19, 1994, were previously filed
electronically as Exhibit 2 to the Initial Registration Statement.
(3) Not applicable.
(4) Not applicable.
(5) Form of Management Contract between Fidelity Covington Trust on
behalf of Fidelity Real Estate High Income Fund II and Fidelity Management
& Research Company is filed herewith .
(6) Form of General Distribution Agreement between Fidelity Covington
Trust on behalf of Fidelity Real Estate High Income Fund II and Fidelity
Distributors Corporation is filed herewith .
(7) (a) Retirement Plan for Non-Interested Person Trustees, Directors or
General Partners, as amended on November 16, 1995, is incorporated herein
by reference to Exhibit 7(a) of Fidelity Select Portfolio's (File No.
2-69972) Post-Effective Amendment No. 54.
(b) The Fee Deferral Plan for Non-Interested Person Directors and
Trustees of the Fidelity Funds, effective as of December 1, 1995, is
incorporated herein by reference to Exhibit 7(b) of Fidelity School Street
Trust's (File No. 2-57167) Post-Effective Amendment No. 47.
(8) (a) Custodian Agreement and Appendix C, dated December 1, 1994,
between The Bank of New York and Fidelity Covington Trust on behalf of
Fidelity Real Estate High Income Fund II is incorporated herein by
reference to Exhibit 8(a) of Fidelity Hereford Street Trust's
Post-Effective Amendment No. 4 (File No. 33-52577).
(b) Form of Appendix A, dated May 16, 1996, to the Custodian Agreement,
dated December 1, 1994, between The Bank of New York and Fidelity Covington
Trust on behalf of Fidelity Real Estate High Income Fund II is filed
herewith.
(c) Appendix B, dated September 14, 1995, to the Custodian Agreement,
dated December 1, 1994, between The Bank of New York and Fidelity Covington
Trust on behalf of Fidelity Real Estate High Income Fund II is incorporated
herein by reference to Exhibit 8(e) of Fidelity Charles Street Trust's
Post-Effective Amendment No. 54 (File No. 2-73133).
(9) Not applicable.
(10) Opinion and consent of Kirkpatrick & Lockhart LLP is filed
herewith .
(11) C onsent of Price Waterhouse LLP is filed herewith .
(12) Not applicable.
(13) Investment Letter from Fidelity Management & Research Company to
Fidelity Covington Trust .
(14) Not applicable.
(15) Form of Distribution and Service Plan pursuant to Rule 12b-1 for
Fidelity Real Estate High Income Fund II is filed herewith .
(16) Schedule for computation of performance calculations is filed
herewith .
(17) Not applicable.
Item 25. Persons Controlled by or Under Common Control with Registrant
The Board of Trustees of the Registrant is the same as the Boards of
other Fidelity funds offered primarily to institutional investors, each of
which has Fidelity Management & Research Company as its investment adviser.
Nonetheless, Registrant takes the position that is not under common control
with these other funds since the power residing in the respective Boards
and officers arises as the result of an official position with the
respective funds.
Item 26. Number of Holders of Securities
As of the effective date of this Registration Statement, the Fund will
have 1 holder of shares of beneficial interest: Fidelity
Management & Research Company .
Item 27. Indemnification
Article XI, Section 2 of the Declaration of Trust sets forth the reasonable
and fair means for determining whether indemnification shall be provided to
any past or present Trustee or officer. It states that the Registrant
shall indemnify any present or past Trustee, or officer to the fullest
extent permitted by law against liability and all expenses reasonably
incurred by him in connection with any claim, action, suit or proceeding in
which he is involved by virtue of his service as a trustee, an officer, or
both. Additionally, amounts paid or incurred in settlement of such matters
are covered by this indemnification. Indemnification will not be provided
in certain circumstances, however. These include instances of willful
misfeasance, bad faith, gross negligence, and reckless disregard of the
duties involved in the conduct of the particular office involved.
Item 28. Business and Other Connections of Investment Adviser
(1) FIDELITY MANAGEMENT & RESEARCH COMPANY
FMR serves as investment adviser to a number of other investment
companies. The directors and officers of the Adviser have held, during the
past two fiscal years, the following positions of a substantial nature.
<TABLE>
<CAPTION>
<S> <C>
Edward C. Johnson 3d Chairman of the Executive Committee of FMR; President
and Chief Executive Officer of FMR Corp.; Chairman of
the Board and a Director of FMR, FMR Corp., FMR Texas
Inc., Fidelity Management & Research (U.K.) Inc., and
Fidelity Management & Research (Far East) Inc.; President
and Trustee of funds advised by FMR.
J. Gary Burkhead President of FMR; Managing Director of FMR Corp.;
President and a Director of FMR Texas Inc., Fidelity
Management & Research (U.K.) Inc., and Fidelity
Management & Research (Far East) Inc.; Senior Vice
President and Trustee of funds advised by FMR.
Peter S. Lynch Vice Chairman and Director of FMR.
Robert Beckwitt Vice President of FMR and of funds advised by FMR.
Stephan Campbell Vice President of FMR (1993).
Dwight Churchill Vice President of FMR (1993).
William Danoff Vice President of FMR (1993) and of a fund advised by
FMR.
Scott DeSano Vice President of FMR (1993).
Penelope Dobkin Vice President of FMR and of a fund advised by FMR.
Larry Domash Vice President of FMR (1993).
George Domolky Vice President of FMR (1993) and of a fund advised by
FMR.
Robert K. Duby Vice President of FMR.
Margaret L. Eagle Vice President of FMR and of a fund advised by FMR.
Kathryn L. Eklund Vice President of FMR.
Richard B. Fentin Senior Vice President of FMR (1993) and of a fund advised
by FMR.
Michael S. Gray Vice President of FMR and of funds advised by FMR.
Lawrence Greenberg Vice President of FMR (1993).
Barry A. Greenfield Vice President of FMR and of a fund advised by FMR.
William J. Hayes Senior Vice President of FMR; Equity Division Leader.
Robert Haber Vice President of FMR and of funds advised by FMR.
Richard C. Habermann Senior Vice President of FMR (1993).
Ellen S. Heller Vice President of FMR.
John Hickling Vice President of FMR (1993) and of funds advised by
FMR.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Robert F. Hill Vice President of FMR; Director of Technical Research.
Curtis Hollingsworth Vice President of FMR (1993).
Stephen P. Jonas Treasurer and Vice President of FMR (1993)); Treasurer of
FMR Texas Inc. (1993), Fidelity Management & Research
(U.K.) Inc. (1993), and Fidelity Management & Research
(Far East) Inc. (1993).
David B. Jones Vice President of FMR (1993).
Steven Kaye Vice President of FMR (1993) and of a fund advised by
FMR.
Frank Knox Vice President of FMR (1993).
Robert A. Lawrence Senior Vice President of FMR (1993); High Income
Division Leader.
Alan Leifer Vice President of FMR and of a fund advised by FMR.
Harris Leviton Vice President of FMR (1993) and of a fund advised by
FMR.
Bradford E. Lewis Vice President of FMR and of funds advised by FMR.
Malcolm W. MacNaught III Vice President of FMR (1993).
Robert H. Morrison Vice President of FMR; Director of Equity Trading.
David Murphy Vice President of FMR and of funds advised by FMR.
Andrew Offit Vice President of FMR (1993).
Jacques Perold Vice President of FMR.
Anne Punzak Vice President of FMR and of funds advised by FMR.
Lee Sandwen Vice President of FMR (1993).
Patricia A. Satterthwaite Vice President of FMR (1993) and of a fund advised by
FMR.
Thomas T. Soviero Vice President of FMR (1993).
Richard Spillane Vice President of FMR; Senior Vice President and Director
of Operations and Compliance of FMR U.K. (1993).
Robert E. Stansky Senior Vice President of FMR (1993) and of funds advised
by FMR.
Gary L. Swayze Vice President of FMR and of funds advised by FMR;
Tax-Free Fixed-Income Group Leader.
Thomas Sweeney Vice President of FMR (1993).
Beth F. Terrana Senior Vice President of FMR (1993) and of funds advised
by FMR.
Joel Tillinghast Vice President of FMR (1993) and of a fund advised by
FMR.
Robert Tucket Vice President of FMR (1993).
George A. Vanderheiden Senior Vice President of FMR; Vice President of funds
advised by FMR; Growth Group Leader.
Arthur S. Loring Senior Vice President (1993), Clerk, and General Counsel
of FMR; Vice President, Legal of FMR Corp.; Secretary of
funds advised by FMR.
</TABLE>
I tem 29. Principal Underwriters
(a) Fidelity Distributors Corporation (FDC) acts as distributor for most
funds advised by FMR.
(b)
<TABLE>
<CAPTION>
<S> <C> <C>
Name and Principal Positions and Offices Positions and Offices
Business Address* With Underwriter With Registrant
Edward C. Johnson 3d Director Trustee and President
W. Humphrey Bogart Director None
Arthur S. Loring Vice President and Clerk Secretary
</TABLE>
* 82 Devonshire Street, Boston, MA
(c) Not applicable.
Item 30. Location of Accounts and Records
All accounts, books, and other documents required to be maintained by
Section 31a of the 1940 Act and the Rules promulgated thereunder will be
maintained by Fidelity Management & Research Company or Fidelity Service
Co., 82 Devonshire Street, Boston, MA 02109, or by the fund's custodian,
The Bank of New York, 48 Wall Street, New York, New York 10286.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) The Registrant, on behalf of Fidelity Real Estate High Income Fund II,
undertakes to deliver to each person who has received the prospectus or
annual or semiannual financial report for the fund in an electronic format,
upon his or her request and without charge, a paper copy of the prospectus
or annual or semiannual report for the fund.
(b) The Registrant undertakes to file a Post-Effective Amendment, using
financial statements for Fidelity Real Estate High Income Fund II, which
need not be certified, within six months of the fund's effectiveness,
unless permitted by the SEC to extend this period.
(c) The Registrant undertakes for Fidelity Real Estate High Income Fund
II: (1) to call a meeting of shareholders for the purpose of voting upon
the questions of removal of a trustee or trustees, when requested to do so
by record holders of not less than 10% of its outstanding shares; and (2)
to assist in communications with other shareholders pursuant to Section
16(c)(1) and (2), whenever shareholders meeting the qualifications set
forth in Section 16(c) seek the opportunity to communicate with other
shareholders with a view toward requesting a meeting.
(d) The Registrant, on behalf of Fidelity Real Estate High Income Fund II,
provided the information required by Item 5A is contained in the annual
report, undertakes to furnish to each person to whom a prospectus has been
delivered, upon their request and without charge, a copy of the
Registrant's latest annual report to shareholders.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
hereunto duly authorized, in the City of Boston, and Commonwealth of
Massachusetts, on the 27th day of June, 1996.
FIDELITY COVINGTON TRUST
By /s/Edward C. Johnson 3d (dagger)
Edward C. Johnson 3d, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
(Signature) (Title) (Date)
/s/Edward C. Johnson 3d(dagger) President and Trustee June 27, 1996
Edward C. Johnson 3d (Principal Executive Officer)
/s/Kenneth A. Rathgeber Treasurer June 27, 1996
Kenneth A. Rathgeber
/s/J. Gary Burkhead Trustee June 27, 1996
J. Gary Burkhead
/s/Ralph F. Cox * Trustee June 27, 1996
Ralph F. Cox
/s/Phyllis Burke Davis * Trustee June 27, 1996
Phyllis Burke Davis
/s/Richard J. Flynn * Trustee June 27, 1996
Richard J. Flynn
/s/E. Bradley Jones * Trustee June 27, 1996
E. Bradley Jones
/s/Donald J. Kirk * Trustee June 27, 1996
Donald J. Kirk
/s/Peter S. Lynch * Trustee June 27, 1996
Peter S. Lynch
/s/Edward H. Malone * Trustee June 27, 1996
Edward H. Malone
/s/Marvin L. Mann_____* Trustee June 27, 1996
Marvin L. Mann
/s/Gerald C. McDonough* Trustee June 27, 1996
Gerald C. McDonough
/s/Thomas R. Williams * Trustee June 27, 1996
Thomas R. Williams
</TABLE>
(dagger) Signatures affixed by J. Gary Burkhead pursuant to a power of
attorney dated December 15, 1994 and filed herewith.
* Signature affixed by Robert C. Hacker pursuant to a power of attorney
dated December 15, 1994 and filed herewith.
POWER OF ATTORNEY
I, the undersigned President and Director, Trustee or General Partner, as
the case may be, of the following investment companies:
<TABLE>
<CAPTION>
<S> <C>
Fidelity Advisor Annuity Fund Fidelity Institutional Trust
Fidelity Advisor Series I Fidelity Investment Trust
Fidelity Advisor Series II Fidelity Magellan Fund
Fidelity Advisor Series III Fidelity Massachusetts Municipal Trust
Fidelity Advisor Series IV Fidelity Money Market Trust
Fidelity Advisor Series V Fidelity Mt. Vernon Street Trust
Fidelity Advisor Series VI Fidelity Municipal Trust
Fidelity Advisor Series VII Fidelity New York Municipal Trust
Fidelity Advisor Series VIII Fidelity Puritan Trust
Fidelity California Municipal Trust Fidelity School Street Trust
Fidelity Capital Trust Fidelity Securities Fund
Fidelity Charles Street Trust Fidelity Select Portfolios
Fidelity Commonwealth Trust Fidelity Sterling Performance Portfolio, L.P.
Fidelity Congress Street Fund Fidelity Summer Street Trust
Fidelity Contrafund Fidelity Trend Fund
Fidelity Corporate Trust Fidelity U.S. Investments-Bond Fund, L.P.
Fidelity Court Street Trust Fidelity U.S. Investments-Government Securities
Fidelity Destiny Portfolios Fund, L.P.
Fidelity Deutsche Mark Performance Fidelity Union Street Trust
Portfolio, L.P. Fidelity Yen Performance Portfolio, L.P.
Fidelity Devonshire Trust Spartan U.S. Treasury Money Market
Fidelity Exchange Fund Fund
Fidelity Financial Trust Variable Insurance Products Fund
Fidelity Fixed-Income Trust Variable Insurance Products Fund II
Fidelity Government Securities Fund
Fidelity Hastings Street Trust
Fidelity Income Fund
</TABLE>
plus any other investment company for which Fidelity Management & Research
Company acts as investment adviser and for which the undersigned individual
serves as President and Board Member (collectively, the "Funds"), hereby
severally constitute and appoint J. Gary Burkhead, my true and lawful
attorney-in-fact, with full power of substitution, and with full power to
sign for me and in my name in the appropriate capacity, all Pre-Effective
Amendments to any Registration Statements of the Funds, any and all
subsequent Post-Effective Amendments to said Registration Statements, any
Registration Statements on Form N-14, and any supplements or other
instruments in connection therewith, and generally to do all such things in
my name and behalf in connection therewith as said attorney-in-fact deem
necessary or appropriate, to comply with the provisions of the Securities
Act of 1933 and Investment Company Act of 1940, and all related
requirements of the Securities and Exchange Commission. I hereby ratify
and confirm all that said attorneys-in-fact or their substitutes may do or
cause to be done by virtue hereof.
WITNESS my hand on the date set forth below.
/s/Edward C. Johnson 3d December 15, 1994
Edward C. Johnson 3d
POWER OF ATTORNEY
We, the undersigned Directors, Trustees or General Partners, as the case
may be, of the following investment companies:
<TABLE>
<CAPTION>
<S> <C>
Fidelity Advisor Annuity Fund Fidelity Income Fund
Fidelity Advisor Series I Fidelity Institutional Trust
Fidelity Advisor Series II Fidelity Investment Trust
Fidelity Advisor Series III Fidelity Magellan Fund
Fidelity Advisor Series IV Fidelity Massachusetts Municipal Trust
Fidelity Advisor Series V Fidelity Mt. Vernon Street Trust
Fidelity Advisor Series VI Fidelity Municipal Trust
Fidelity Advisor Series VII Fidelity New York Municipal Trust
Fidelity Advisor Series VIII Fidelity Puritan Trust
Fidelity California Municipal Trust Fidelity School Street Trust
Fidelity Capital Trust Fidelity Securities Fund
Fidelity Charles Street Trust Fidelity Select Portfolios
Fidelity Commonwealth Trust Fidelity Sterling Performance Portfolio, L.P.
Fidelity Congress Street Fund Fidelity Summer Street Trust
Fidelity Contrafund Fidelity Trend Fund
Fidelity Corporate Trust Fidelity U.S. Investments-Bond Fund, L.P.
Fidelity Court Street Trust Fidelity U.S. Investments-Government Securities
Fidelity Deutsche Mark Performance Fund, L.P.
Portfolio, L.P. Fidelity Union Street Trust
Fidelity Devonshire Trust Fidelity Yen Performance Portfolio, L.P.
Fidelity Exchange Fund Spartan U.S. Treasury Money Market
Fidelity Financial Trust Fund
Fidelity Fixed-Income Trust Variable Insurance Products Fund
Fidelity Government Securities Fund Variable Insurance Products Fund II
Fidelity Hastings Street Trust
</TABLE>
plus any other investment company for which Fidelity Management & Research
Company acts as investment adviser and for which the undersigned
individuals serve as Board Members (collectively, the "Funds"), hereby
severally constitute and appoint Arthur J. Brown, Arthur C. Delibert,
Robert C. Hacker, Richard M. Phillips, Dana L. Platt and Stephanie A.
Djinis, each of them singly, our true and lawful attorneys-in-fact, with
full power of substitution, and with full power to each of them, to sign
for us and in our names in the appropriate capacities, all Pre-Effective
Amendments to any Registration Statements of the Funds, any and all
subsequent Post-Effective Amendments to said Registration Statements, any
Registration Statements on Form N-14, and any supplements or other
instruments in connection therewith, and generally to do all such things in
our names and behalf in connection therewith as said attorneys-in-fact deem
necessary or appropriate, to comply with the provisions of the Securities
Act of 1933 and Investment Company Act of 1940, and all related
requirements of the Securities and Exchange Commission, hereby ratifying
and confirming all that said attorneys-in-fact or their substitutes may do
or cause to be done by virtue hereof.
WITNESS our hands on this fifteenth day of December, 1994.
/s/Edward C. Johnson 3d /s/Donald J. Kirk
Edward C. Johnson 3d Donald J. Kirk
/s/J. Gary Burkhead /s/Peter S. Lynch
J. Gary Burkhead Peter S. Lynch
/s/Ralph F. Cox /s/Marvin L. Mann
Ralph F. Cox Marvin L. Mann
/s/Phyllis Burke Davis /s/Edward H. Malone
Phyllis Burke Davis Edward H. Malone
/s/Richard J. Flynn /s/Gerald C. McDonough
Richard J. Flynn Gerald C. McDonough
/s/E. Bradley Jones /s/Thomas R. Williams
E. Bradley Jones Thomas R. Williams
FIDELITY COVINGTON TRUST:
FIDELITY REAL ESTATE HIGH INCOME FUND II
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBER EXHIBIT NUMBERED PAGE
(5) ---- Form of Management Contract.
(6) ---- Form of General Distribution Agreement.
(7) ---- (a) Retirement Plan for Non-Interested Person Trustees,
Directors, or General Partners is incorporated by reference.
(b) Fee Deferral Plan for Non-Interested Person Directors
and Trustees of the Fidelity Funds is incorporated by reference.
(8) ---- (a) Custodian Agreement and Appendix C are incorporated by
reference.
(b) Form of Appendix A to the Custodian Agreement.
(c) Appendix B to the Custodian Agreement is incorporated
by reference.
(10) ---- Opinion and Consent of Kirkpatrick & Lockhart LLP.
(11) ---- Consent of Price Waterhouse LLP.
(13) ---- Investment Letter.
(15) ---- Form of Distribution and Service Plan pursuant to Rule 12b-1.
(16) ---- Schedule for computation of performance calculations.
EXHIBIT 5
MANAGEMENT CONTRACT
between
FIDELITY COVINGTON TRUST:
FIDELITY REAL ESTATE HIGH INCOME FUND II
and
FIDELITY MANAGEMENT & RESEARCH COMPANY
AGREEMENT made this 16th day of May, 1996, by and between Fidelity
Covington Trust, a Massachusetts business trust which may issue one or more
series of shares of beneficial interest (hereinafter called the "Fund"), on
behalf of Fidelity Real Estate High Income Fund II (hereinafter called the
"Portfolio"), and Fidelity Management & Research Company, a Massachusetts
corporation (hereinafter called the "Adviser") as set forth in its entirety
below.
1. (a) Investment Advisory Services. The Adviser undertakes to act as
investment adviser of the Portfolio and shall, subject to the supervision
of the Fund's Board of Trustees, direct the investments of the Portfolio in
accordance with the investment objective, policies and limitations as
provided in the Portfolio's Prospectus or other governing instruments, as
amended from time to time, the Investment Company Act of 1940 and rules
thereunder, as amended from time to time (the "1940 Act"), and such other
limitations as the Portfolio may impose by notice in writing to the
Adviser. The Adviser shall also furnish for the use of the Portfolio
office space and all necessary office facilities, equipment and personnel
for servicing the investments of the Portfolio; and shall pay the salaries
and fees of all officers of the Fund, of all Trustees of the Fund who are
"interested persons" of the Fund or of the Adviser and of all personnel of
the Fund or the Adviser performing services relating to research,
statistical and investment activities. The Adviser is authorized, in its
discretion and without prior consultation with the Portfolio, to buy, sell,
lend and otherwise trade in any stocks, bonds and other securities and
investment instruments on behalf of the Portfolio. The investment policies
and all other actions of the Portfolio are and shall at all times be
subject to the control and direction of the Fund's Board of Trustees.
(b) Management Services. The Adviser shall perform (or arrange for the
performance by its affiliates of) the management and administrative
services necessary for the operation of the Fund. The Adviser shall,
subject to the supervision of the Board of Trustees, perform various
services for the Portfolio, including but not limited to: (i) providing the
Portfolio with office space, equipment and facilities (which may be its
own) for maintaining its organization; (ii) on behalf of the Portfolio,
supervising relations with, and monitoring the performance of, custodians,
depositories, transfer and pricing agents, accountants, attorneys,
underwriters, brokers and dealers, insurers and other persons in any
capacity deemed to be necessary or desirable; (iii) preparing all general
shareholder communications, including shareholder reports; (iv) conducting
shareholder relations; (v) maintaining the Fund's existence and its
records; (vi) during such times as shares are publicly offered, maintaining
the registration and qualification of the Portfolio's shares under federal
and state law; and (vii) investigating the development of and developing
and implementing, if appropriate, management and shareholder services
designed to enhance the value or convenience of the Portfolio as an
investment vehicle.
The Adviser shall also furnish such reports, evaluations, information or
analyses to the Fund as the Fund's Board of Trustees may request from time
to time or as the Adviser may deem to be desirable. The Adviser shall make
recommendations to the Fund's Board of Trustees with respect to Fund
policies, and shall carry out such policies as are adopted by the Trustees.
The Adviser shall, subject to review by the Board of Trustees, furnish such
other services as the Adviser shall from time to time determine to be
necessary or useful to perform its obligations under this Contract.
(c) The Adviser shall place all orders for the purchase and sale of
portfolio securities for the Portfolio's account with brokers or dealers
selected by the Adviser, which may include brokers or dealers affiliated
with the Adviser. The Adviser shall use its best efforts to seek to
execute portfolio transactions at prices which are advantageous to the
Portfolio and at commission rates which are reasonable in relation to the
benefits received. In selecting brokers or dealers qualified to execute a
particular transaction, brokers or dealers may be selected who also provide
brokerage and research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934) to the Portfolio and/or the
other accounts over which the Adviser or its affiliates exercise investment
discretion. The Adviser is authorized to pay a broker or dealer who
provides such brokerage and research services a commission for executing a
portfolio transaction for the Portfolio which is in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction if the Adviser determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage and
research services provided by such broker or dealer. This determination
may be viewed in terms of either that particular transaction or the overall
responsibilities which the Adviser and its affiliates have with respect to
accounts over which they exercise investment discretion. The Trustees of
the Fund shall periodically review the commissions paid by the Portfolio to
determine if the commissions paid over representative periods of time were
reasonable in relation to the benefits to the Portfolio.
The Adviser shall, in acting hereunder, be an independent contractor. The
Adviser shall not be an agent of the Portfolio.
2. It is understood that the Trustees, officers and shareholders of the
Fund are or may be or become interested in the Adviser as directors,
officers or otherwise and that directors, officers and stockholders of the
Adviser are or may be or become similarly interested in the Fund, and that
the Adviser may be or become interested in the Fund as a shareholder or
otherwise.
3. The Adviser will be compensated on the following basis for the services
and facilities to be furnished hereunder. The Adviser shall receive a
monthly management fee, payable monthly as soon as practicable after the
last day of each month, composed of a Group Fee and an Individual Fund Fee.
(a) Group Fee Rate. The Group Fee Rate shall be based upon the monthly
average of the net assets of the registered investment companies having
Advisory and Service or Management Contracts with the Adviser (computed in
the manner set forth in the fund's Declaration of Trust or other
organizational document) determined as of the close of business on each
business day throughout the month. The Group Fee Rate shall be determined
on a cumulative basis pursuant to the following schedule:
Average Net Assets Annualized Fee Rate (for each level)
0 - $ 3 billion .3700%
3 - 6 .3400
6 - 9 .3100
9 - 12 .2800
12 - 15 .2500
15 - 18 .2200
18 - 21 .2000
21 - 24 .1900
24 - 30 .1800
30 - 36 .1750
36 - 42 .1700
42 - 48 .1650
48 - 66 .1600
66 - 84 .1550
84 - 120 .1500
120 - 156 .1450
156 - 192 .1400
192 - 228 .1350
228 - 264 .1300
264 - 300 .1275
300 - 336 .1250
336 - 372 .1225
372 - 408 .1200
408 - 444 .1175
444 - 480 .1150
480 - 516 .1125
Over - 516 .1100
(b) Individual Fund Fee Rate. The Individual Fund Fee Rate shall be .60%.
The sum of the Group Fee Rate, calculated as described above to the
nearest millionth, and the Individual Fund Fee Rate shall constitute the
Annual Management Fee Rate. One-twelfth of the Annual Management Fee Rate
shall be applied to the average of the net assets of the Portfolio
(computed in the manner set forth in the Fund's Declaration of Trust or
other organizational document) determined as of the close of business on
each business day throughout the month.
(c) In case of termination of this Contract during any month, the fee for
that month shall be reduced proportionately on the basis of the number of
business days during which it is in effect, and the fee computed upon the
average net assets for the business days it is so in effect for that month.
4. It is understood that the Portfolio will pay all its expenses, which
expenses payable by the Portfolio shall include, without limitation, (i)
interest and taxes; (ii) brokerage commissions and other costs in
connection with the purchase or sale of securities and other investment
instruments; (iii) fees and expenses of the Fund's Trustees other than
those who are "interested persons" of the Fund or the Adviser; (iv) legal
and audit expenses; (v) custodian, registrar and transfer agent fees and
expenses; (vi) fees and expenses related to the registration and
qualification of the Fund and the Portfolio's shares for distribution under
state and federal securities laws; (vii) expenses of printing and mailing
reports and notices and proxy material to shareholders of the Portfolio;
(viii) all other expenses incidental to holding meetings of the Portfolio's
shareholders, including proxy solicitations therefor; (ix) a pro rata
share, based on relative net assets of the Portfolio and other registered
investment companies having Advisory and Service or Management Contracts
with the Adviser, of 50% of insurance premiums for fidelity and other
coverage; (x) its proportionate share of association membership dues; (xi)
expenses of typesetting for printing Prospectuses and Statements of
Additional Information and supplements thereto; (xii) expenses of printing
and mailing Prospectuses and Statements of Additional Information and
supplements thereto sent to existing shareholders; and (xiii) such
non-recurring or extraordinary expenses as may arise, including those
relating to actions, suits or proceedings to which the Portfolio is a party
and the legal obligation which the Portfolio may have to indemnify the
Fund's Trustees and officers with respect thereto.
5. The services of the Adviser to the Portfolio are not to be deemed
exclusive, the Adviser being free to render services to others and engage
in other activities, provided, however, that such other services and
activities do not, during the term of this Contract, interfere, in a
material manner, with the Adviser's ability to meet all of its obligations
with respect to rendering services to the Portfolio hereunder. In the
absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of obligations or duties hereunder on the part of the Adviser,
the Adviser shall not be subject to liability to the Portfolio or to any
shareholder of the Portfolio for any act or omission in the course of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of any security or other
investment instrument.
6. (a) Subject to prior termination as provided in sub-paragraph (d) of
this paragraph 6, this Contract shall continue in force until June 30, 1997
and indefinitely thereafter, but only so long as the continuance after such
date shall be specifically approved at least annually by vote of the
Trustees of the Fund or by vote of a majority of the outstanding voting
securities of the Portfolio.
(b) This Contract may be modified by mutual consent, such consent on the
part of the Fund to be authorized by vote of a majority of the outstanding
voting securities of the Portfolio.
(c) In addition to the requirements of sub-paragraphs (a) and (b) of this
paragraph 6, the terms of any continuance or modification of this Contract
must have been approved by the vote of a majority of those Trustees of the
Fund who are not parties to the Contract or interested persons of any such
party, cast in person at a meeting called for the purpose of voting on such
approval.
(d) Either party hereto may, at any time on sixty (60) days' prior written
notice to the other, terminate this Contract, without payment of any
penalty, by action of its Trustees or Board of Directors, as the case may
be, or with respect to the Portfolio by vote of a majority of the
outstanding voting securities of the Portfolio. This Contract shall
terminate automatically in the event of its assignment.
7. The Adviser is hereby expressly put on notice of the limitation of
shareholder liability as set forth in the Fund's Declaration of Trust or
other organizational document and agrees that the obligations assumed by
the Fund pursuant to this Contract shall be limited in all cases to the
Portfolio and its assets, and the Adviser shall not seek satisfaction of
any such obligation from the shareholders or any shareholder of the
Portfolio or any other Portfolios of the Fund. In addition, the Adviser
shall not seek satisfaction of any such obligations from the Trustees or
any individual Trustee. The Adviser understands that the rights and
obligations of any Portfolio under the Declaration of Trust or other
organizational document are separate and distinct from those of any and all
other Portfolios.
8. This Agreement shall be governed by, and construed in accordance with,
the laws of the Commonwealth of Massachusetts, without giving effect to the
choice of laws provisions thereof.
The terms "vote of a majority of the outstanding voting securities,"
"assignment," and "interested persons," when used herein, shall have the
respective meanings specified in the 1940 Act, as now in effect or as
hereafter amended, and subject to such orders as may be granted by the
Securities and Exchange Commission.
IN WITNESS WHEREOF the parties have caused this instrument to be signed in
their behalf by their respective officers thereunto duly authorized, and
their respective seals to be hereunto affixed, all as of the date written
above.
FIDELITY COVINGTON TRUST
on behalf of Fidelity Real Estate High Income Fund II
By _________________________________________
Senior Vice President
FIDELITY MANAGEMENT & RESEARCH COMPANY
By _________________________________________
President
LG913180012
EXHIBIT 6
GENERAL DISTRIBUTION AGREEMENT
between
FIDELITY COVINGTON TRUST
and
FIDELITY DISTRIBUTORS CORPORATION
Agreement made this 16th day of May, 1996, between Fidelity Covington
Trust, a Massachusetts business trust having its principal place of
business in Boston, Massachusetts and which may issue one or more series of
beneficial interest ("Issuer"), with respect to shares of Fidelity Real
Estate High Income Fund II, a series of the Issuer, and Fidelity
Distributors Corporation, a Massachusetts corporation having its principal
place of business in Boston, Massachusetts ("Distributors").
In consideration of the mutual promises and undertakings herein contained,
the parties agree as follows:
1. Sale of Shares - The Issuer grants to Distributors the right to sell
shares on behalf of the Issuer during the term of this Agreement and
subject to the registration requirements of the Securities Act of 1933, as
amended ("1933 Act"), and of the laws governing the sale of securities in
the various states ("Blue Sky Laws") under the following terms and
conditions: Distributors (i) shall have the right to sell, as agent on
behalf of the Issuer, shares authorized for issue and registered under the
1933 Act, and (ii) may sell shares under offers of exchange, if available,
between and among the funds advised by Fidelity Management & Research
Company ("FMR").
2. Sale of Shares by the Issuer - The rights granted to Distributors shall
be nonexclusive in that the Issuer reserves the right to sell its shares to
investors on applications received and accepted by the Issuer. Further,
the Issuer reserves the right to issue shares in connection with the merger
or consolidation, or acquisition by the Issuer through purchase or
otherwise, with any other investment company, trust, or personal holding
company.
3. Shares Covered by this Agreement - This Agreement shall apply to
unissued shares of the Issuer, shares of the Issuer held in its treasury in
the event that in the discretion of the Issuer treasury shares shall be
sold, and shares of the Issuer repurchased for resale.
4. Public Offering Price - Except as otherwise noted in the Issuer's
current Prospectus and/or Statement of Additional Information, all shares
sold to investors by Distributors or the Issuer will be sold at the public
offering price. The public offering price for all accepted subscriptions
will be the net asset value per share, as determined in the manner
described in the Issuer's current Prospectus and/or Statement of Additional
Information, plus a sales charge (if any) described in the Issuer's current
Prospectus and/or Statement of Additional Information. The Issuer shall in
all cases receive the net asset value per share on all sales. If a sales
charge is in effect, Distributors shall have the right subject to such
rules or regulations of the Securities and Exchange Commission as may then
be in effect pursuant to Section 22 of the Investment Company Act of 1940
to pay a portion of the sales charge to dealers who have sold shares of the
Issuer. If a fee in connection with shareholder redemptions is in effect,
the Issuer shall collect the fee on behalf of Distributors and, unless
otherwise agreed upon by the Issuer and Distributors, Distributors shall be
entitled to receive all of such fees.
5. Suspension of Sales - If and whenever the determination of net asset
value is suspended and until such suspension is terminated, no further
orders for shares shall be processed by Distributors except such
unconditional orders as may have been placed with Distributors before it
had knowledge of the suspension. In addition, the Issuer reserves the
right to suspend sales and Distributors' authority to process orders for
shares on behalf of the Issuer if, in the judgment of the Issuer, it is in
the best interests of the Issuer to do so. Suspension will continue for
such period as may be determined by the Issuer.
6. Solicitation of Sales - In consideration of these rights granted to
Distributors, Distributors agrees to use all reasonable efforts, consistent
with its other business, to secure purchasers for shares of the Issuer.
This shall not prevent Distributors from entering into like arrangements
(including arrangements involving the payment of underwriting commissions)
with other issuers. This does not obligate Distributors to register as a
broker or dealer under the Blue Sky Laws of any jurisdiction in which it is
not now registered or to maintain its registration in any jurisdiction in
which it is now registered. If a sales charge is in effect, Distributors
shall have the right to enter into sales agreements with dealers of its
choice for the sale of shares of the Issuer to the public at the public
offering price only and fix in such agreements the portion of the sales
charge which may be retained by dealers, provided that the Issuer shall
approve the form of the dealer agreement and the dealer discounts set forth
therein and shall evidence such approval by filing said form of dealer
agreement and amendments thereto as an exhibit to its currently effective
Registration Statement under the 1933 Act.
7. Authorized Representations - Distributors is not authorized by the
Issuer to give any information or to make any representations other than
those contained in the appropriate registration statements or Prospectuses
and Statements of Additional Information filed with the Securities and
Exchange Commission under the 1933 Act (as these registration statements,
Prospectuses and Statements of Additional Information may be amended from
time to time), or contained in shareholder reports or other material that
may be prepared by or on behalf of the Issuer for Distributors' use. This
shall not be construed to prevent Distributors from preparing and
distributing sales literature or other material as it may deem appropriate.
8. Portfolio Securities - Portfolio securities of the Issuer may be bought
or sold by or through Distributors, and Distributors may participate
directly or indirectly in brokerage commissions or "spreads" for
transactions in portfolio securities of the Issuer.
9. Registration of Shares - The Issuer agrees that it will take all action
necessary to register shares under the 1933 Act (subject to the necessary
approval of its shareholders) so that there will be available for sale the
number of shares Distributors may reasonably be expected to sell. The
Issuer shall make available to Distributors such number of copies of its
currently effective Prospectus and Statement of Additional Information as
Distributors may reasonably request. The Issuer shall furnish to
Distributors copies of all information, financial statements and other
papers which Distributors may reasonably request for use in connection with
the distribution of shares of the Issuer.
10. Expenses - The Issuer shall pay all fees and expenses (a) in connection
with the preparation, setting in type and filing of any registration
statement, Prospectus and Statement of Additional Information under the
1933 Act and amendments for the issue of its shares, (b) in connection with
the registration and qualification of shares for sale in the various states
in which the Board of Trustees of the Issuer shall determine it advisable
to qualify such shares for sale (including registering the Issuer as a
broker or dealer or any officer of the Issuer as agent or salesman in any
state), (c) of preparing, setting in type, printing and mailing any report
or other communication to shareholders of the Issuer in their capacity as
such, and (d) of preparing, setting in type, printing and mailing
Prospectuses, Statements of Additional Information and any supplements
thereto sent to existing shareholders.
As provided in the Distribution and Service Plan adopted by the Issuer, it
is recognized by the Issuer that FMR may make payment to Distributors with
respect to any expenses incurred in the distribution of shares of the
Issuer, such payments payable from the past profits or other resources of
FMR including management fees paid to it by the Issuer.
11. Indemnification - The Issuer agrees to indemnify and hold harmless
Distributors and each of its directors and officers and each person, if
any, who controls Distributors within the meaning of Section 15 of the 1933
Act against any loss, liability, claim, damages or expense (including the
reasonable cost of investigating or defending any alleged loss, liability,
claim, damages, or expense and reasonable counsel fees incurred in
connection therewith) arising by reason of any person acquiring any shares,
based upon the ground that the registration statement, Prospectus,
Statement of Additional Information, shareholder reports or other
information filed or made public by the Issuer (as from time to time
amended) included an untrue statement of a material fact or omitted to
state a material fact required to be stated or necessary in order to make
the statements not misleading under the 1933 Act, or any other statute or
the common law. However, the Issuer does not agree to indemnify
Distributors or hold it harmless to the extent that the statement or
omission was made in reliance upon, and in conformity with, information
furnished to the Issuer by or on behalf of Distributors. In no case (i) is
the indemnity of the Issuer in favor of Distributors or any person
indemnified to be deemed to protect Distributors or any person against any
liability to the Issuer or its security holders to which Distributors or
such person would otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence in the performance of its duties or by reason
of its reckless disregard of its obligations and duties under this
Agreement, or (ii) is the Issuer to be liable under its indemnity agreement
contained in this paragraph with respect to any claim made against
Distributors or any person indemnified unless Distributors or person, as
the case may be, shall have notified the Issuer in writing of the claim
within a reasonable time after the summons or other first written
notification giving information of the nature of the claim shall have been
served upon Distributors or any such person (or after Distributors or such
person shall have received notice of service on any designated agent).
However, failure to notify the Issuer of any claim shall not relieve the
Issuer from any liability which it may have to Distributors or any person
against whom such action is brought otherwise than on account of its
indemnity agreement contained in this paragraph. The Issuer shall be
entitled to participate at its own expense in the defense, or, if it so
elects, to assume the defense of any suit brought to enforce any claims,
but if the Issuer elects to assume the defense, the defense shall be
conducted by counsel chosen by it and satisfactory to Distributors or
person or persons, defendant or defendants in the suit. In the event the
Issuer elects to assume the defense of any suit and retain counsel,
Distributors, officers or directors or controlling person or persons,
defendant or defendants in the suit, shall bear the fees and expenses of
any additional counsel retained by them. If the Issuer does not elect to
assume the defense of any suit, it will reimburse Distributors, officers or
directors or controlling person or persons, defendant or defendants in the
suit, for the reasonable fees and expenses of any counsel retained by them.
The Issuer agrees to notify Distributors promptly of the commencement of
any litigation or proceedings against it or any of its officers or trustees
in connection with the issuance or sale of any of the shares.
Distributors also covenants and agrees that it will indemnify and hold
harmless the Issuer and each of its Board members and officers and each
person, if any, who controls the Issuer within the meaning of Section 15 of
the 1933 Act, against any loss, liability, damages, claim or expense
(including the reasonable cost of investigating or defending any alleged
loss, liability, damages, claim or expense and reasonable counsel fees
incurred in connection therewith) arising by reason of any person acquiring
any shares, based upon the 1933 Act or any other statute or common law,
alleging any wrongful act of Distributors or any of its employees or
alleging that the registration statement, Prospectus, Statement of
Additional Information, shareholder reports or other information filed or
made public by the Issuer (as from time to time amended) included an untrue
statement of a material fact or omitted to state a material fact required
to be stated or necessary in order to make the statements not misleading,
insofar as the statement or omission was made in reliance upon, and in
conformity with information furnished to the Issuer by or on behalf of
Distributors. In no case (i) is the indemnity of Distributors in favor of
the Issuer or any person indemnified to be deemed to protect the Issuer or
any person against any liability to which the Issuer or such person would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of its reckless
disregard of its obligations and duties under this Agreement, or (ii) is
Distributors to be liable under its indemnity agreement contained in this
paragraph with respect to any claim made against the Issuer or any person
indemnified unless the Issuer or person, as the case may be, shall have
notified Distributors in writing of the claim within a reasonable time
after the summons or other first written notification giving information of
the nature of the claim shall have been served upon the Issuer or any such
person (or after the Issuer or such person shall have received notice of
service on any designated agent). However, failure to notify Distributors
of any claim shall not relieve Distributors from any liability which it may
have to the Issuer or any person against whom the action is brought
otherwise than on account of its indemnity agreement contained in this
paragraph. In the case of any notice to Distributors, it shall be entitled
to participate, at its own expense, in the defense or, if it so elects, to
assume the defense of any suit brought to enforce the claim, but if
Distributors elects to assume the defense, the defense shall be conducted
by counsel chosen by it and satisfactory to the Issuer, to its officers and
Board and to any controlling person or persons, defendant or defendants in
the suit. In the event that Distributors elects to assume the defense of
any suit and retain counsel, the Issuer or controlling persons, defendant
or defendants in the suit, shall bear the fees and expense of any
additional counsel retained by them. If Distributors does not elect to
assume the defense of any suit, it will reimburse the Issuer, officers and
Board or controlling person or persons, defendant or defendants in the
suit, for the reasonable fees and expenses of any counsel retained by them.
Distributors agrees to notify the Issuer promptly of the commencement of
any litigation or proceedings against it in connection with the issue and
sale of any of the shares.
12. Effective Date - This agreement shall be effective upon its execution,
and unless terminated as provided, shall continue in force until January
31, 1997 and thereafter from year to year, provided continuance is approved
annually by the vote of a majority of the Board members of the Issuer, and
by the vote of those Board members of the Issuer who are not "interested
persons" of the Issuer and, if a plan under Rule 12b-1 under the Investment
Company Act of 1940 is in effect, by the vote of those Board members of the
Issuer who are not "interested persons" of the Issuer and who are not
parties to the Distribution and Service Plan or this Agreement and have no
financial interest in the operation of the Distribution and Service Plan or
in any agreements related to the Distribution and Service Plan, cast in
person at a meeting called for the purpose of voting on the approval. This
Agreement shall automatically terminate in the event of its assignment. As
used in this paragraph, the terms "assignment" and "interested persons"
shall have the respective meanings specified in the Investment Company Act
of 1940 as now in effect or as hereafter amended. In addition to
termination by failure to approve continuance or by assignment, this
Agreement may at any time be terminated by either party upon not less than
sixty days' prior written notice to the other party.
13. Notice - Any notice required or permitted to be given by either party
to the other shall be deemed sufficient if sent by registered or certified
mail, postage prepaid, addressed by the party giving notice to the other
party at the last address furnished by the other party to the party giving
notice: if to the Issuer, at 82 Devonshire Street, Boston, Massachusetts,
and if to Distributors, at 82 Devonshire Street, Boston, Massachusetts.
14. Limitation of Liability - Distributors is expressly put on notice of
the limitation of shareholder liability as set forth in the Declaration of
Trust or other organizational document of the Issuer and agrees that the
obligations assumed by the Issuer under this contract shall be limited in
all cases to the Issuer and its assets. Distributors shall not seek
satisfaction of any such obligation from the shareholders or any
shareholder of the Issuer. Nor shall Distributors seek satisfaction of any
such obligation from the Trustees or any individual Trustee of the Issuer.
Distributors understands that the rights and obligations of each series of
shares of the Issuer under the Issuer's Declaration of Trust or other
organizational document are separate and distinct from those of any and all
other series.
15. This agreement shall be governed by, and construed in accordance with,
the laws of the Commonwealth of Massachusetts, without giving effect to the
choice of laws provisions thereof.
IN WITNESS WHEREOF, the Issuer has executed this instrument in its name
and behalf, and its seal affixed, by one of its officers duly authorized,
and Distributors has executed this instrument in its name and behalf by one
of its officers duly authorized, as of the day and year first above
written.
FIDELITY COVINGTON TRUST
By _____________________________
FIDELITY DISTRIBUTORS CORPORATION
By _____________________________
EXHIBIT 8(B)
APPENDIX "A"
TO
CUSTODIAN AGREEMENT
BETWEEN
The Bank of New York and each of the following Investment Companies
Dated as of May 16, 1996
The following is a list of the Funds and their respective Portfolios for
which the Custodian shall serve under a Custodian Agreement dated as of
December 1, 1994:
FUND Portfolio Effective as of:
Fidelity Advisor Annuity Fund Fidelity Advisor Annuity Government
Investment Fund December 1, 1994
Fidelity Advisor Annuity High Yield Fund December 1, 1994
Fidelity Advisor Annuity Money Market Fund September 14, 1995
Fidelity Advisor Series II Fidelity Advisor Government Investment Fund
December 1, 1994
Fidelity Advisor High Yield Fund December 1, 1994
Fidelity Advisor Short Fixed-Income Fund December 1, 1994
Fidelity Advisor IV Fidelity Advisor Limited Term Bond Fund December 1,
1994
Fidelity Institutional Short-Intermediate Government Portfolio December 1,
1994
Fidelity Real Estate High Income Fund December 1, 1994
Fidelity Advisor Series VIII Fidelity Advisor Strategic Income Fund
December 1, 1994
Fidelity Boston Street Trust Fidelity Target Timeline 1999 January 18,
1996
Fidelity Target Timeline 2001 January 18, 1996
Fidelity Target Timeline 2003 January 18, 1996
Fidelity Charles Street Trust Fidelity Short-Intermediate Government Fund
December 1, 1994
Spartan Short-Term Income Fund December 1, 1994
Spartan Investment-Grade Bond Fund December 1, 1994
Fidelity Commonwealth Trust Fidelity Intermediate Bond Fund December 1,
1994
Fidelity Covington Trust Fidelity Real Estate High Income Fund II May 16,
1996
Daily Money Fund Capital Reserves: Money Market Portfolio September 14,
1995
Capital Reserves: U.S. Government Portfolio September 14, 1995
Treasury only (f/k/a Fidelity U.S.
Treasury Income Portfolio) September 14, 1995
Money Market Portfolio September 14, 1995
U. S. Treasury Portfolio September 14, 1995
Fidelity Devonshire Trust Spartan Long-Term Government Bond Fund December
1, 1994
Spartan Adjustable Rate Government Fund December 1, 1994
Fidelity Fixed-Income Trust Fidelity Short-Term Bond Portfolio December 1,
1994
Fidelity Investment Grade Bond Fund December 1, 1994
Spartan Government Income Fund December 1, 1994
Spartan High Income Fund December 1, 1994
Spartan Short-Intermediate Government Fund December 1, 1994
Fidelity Government Securities Fund Fidelity Government Securities Fund
December 1, 1994
Fidelity Hereford Street Trust Spartan Money Market Fund December 1, 1994
Spartan U.S. Government Money Market Fund September 14, 1995
Spartan U.S. Treasury Money Market Fund September 14, 1995
Fidelity Income Fund Fidelity Ginnie Mae Portfolio December 1, 1994
Fidelity Mortgage Securities Portfolio December 1, 1994
Spartan Limited Maturity Government Fund December 1, 1994
Fidelity Institutional Cash Portfolios Domestic (f/k/a Domestic Money
Market Portfolio) September 14, 1995
Money Market (f/k/a Money Market Portfolio) September 14, 1995
Government (f/k/a U.S. Government Portfolio) September 14, 1995
Treasury II (f/k/a U.S. Treasury Portfolio II) September 14, 1995
Fidelity Institutional Investors Trust SLAM: Government Money Market
Portfolio September 14, 1995
Fidelity Institutional Trust Fidelity U.S. Bond Index Portfolio December 1,
1994
Fidelity Money Market Trust Domestic Money Market Portfolio September 14,
1995
Retirement Government Money Market Portfolio September 14, 1995
Retirement Money Market Portfolio September 14, 1995
Fidelity Phillips Street Trust Fidelity Cash Reserves December 1, 1994
Fidelity U.S. Government Reserves September 14, 1995
Fidelity School Street Trust Spartan Bond Strategist December 1, 1994
Fidelity Select Portfolios Money Market Portfolio December 1, 1994
Fidelity Summer Street Trust Fidelity Capital & Income Fund December 1,
1994
Fidelity Union Street Trust Spartan Ginnie Mae Fund December 1, 1994
Fidelity Union Street Trust II Fidelity Daily Income Trust December 1,
1994
Spartan World Money Market Fund December 1, 1994
Variable Insurance Products Fund High Income Portfolio December 1, 1994
Variable Insurance Products Fund II Investment Grade Bond Portfolio
December 1, 1994
Variable Insurance Products Fund Money Market Portfolio September 14,
1995
IN WITNESS WHEREOF, each of the parties hereto has caused this Appendix to
be executed in its name and behalf as of the day and year first set forth
opposite each such Portfolio.
Each of the Investment Companies The Bank of New York
listed on this Appendix "A", on behalf
of each of their respective Portfolios
By: ________________________ By: ________________________
Name: ________________________ Name: ________________________
Title: ________________________ Title: ________________________
EXHIBIT 10
June 26, 1996
Arthur S. Loring
Fidelity Covington Trust
82 Devonshire Street
Boston, Massachusetts 02109
Dear Mr. Loring:
Fidelity Covington Trust ("Trust") is an unincorporated voluntary
association organized under the laws of the State of Massachusetts pursuant
to a Declaration of Trust dated May 10, 1995. You have requested our
opinion regarding certain matters in connection with the Trust's issuance
of shares of beneficial interest ("Shares") in a series designated as
Fidelity Real Estate High Income Fund II.
We have, as counsel, participated in various business and other matters
related to the Trust. We have examined copies, either certified or
otherwise proved to be genuine, of the Declaration of Trust and By-Laws of
the Trust, the minutes of meetings of the trustees and other documents
relating to the organization and operation of the Trust, and we generally
are familiar with its business affairs. Based on the foregoing, it is our
opinion that the unlimited number of unissued Shares designated as Fidelity
Real Estate High Income Fund II, which are currently being registered, may
be legally and validly issued from time to time in accordance with the
Trust's Declaration of Trust and By-Laws and subject to compliance with the
Securities Act of 1933, the Investment Company Act of 1940, and applicable
state laws regulating the offer and sale of securities; and when so issued,
will be legally issued, fully paid and nonassessable by the Trust.
The Trust is an entity of the type commonly known as a "business trust."
Under the laws of certain states, shareholders could, 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. It also requires that each note, bond, contract, certificate or
other undertaking issued by or on behalf of the Trust or the Trustees
include a provision limiting the obligations created thereby to the Trust
and its assets. The Declaration of Trust further provides (i) for
indemnification out of the assets of the applicable series for all losses
and expenses of any shareholder held personally liable for the obligations
of the Trust solely by virtue of ownership of shares of the Trust and (ii)
for the Trust, upon the request of a shareholder, to assume the defense of
any claim against the shareholder for any act or obligation of the Trust.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the applicable
series would be unable to meet its obligations.
We hereby consent to the filing of this opinion in connection with the
Trust's Registration Statement on Form N-1A to be filed with the Securities
and Exchange Commission.
Sincerely,
KIRKPATRICK & LOCKHART LLP
By: /s/ Robert C. Hacker
Robert C. Hacker
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-Effective Amendment No. 3 under the
Securities Act of 1933 to the registration statement on Form N-1A of Real
Estate High Income Fund II of our report dated June 20, 1996, relating to
the financial statement of Fidelity Real Estate High Income Fund II which
appears in the Statement of Additional Information.
PRICE WATERHOUSE LLP
Boston, Massachusetts
June 24, 1996
EXHIBIT 13
June 20, 1996
Fidelity Covington Trust
82 Devonshire Street
Boston, MA 02109
Ladies and Gentlemen:
Fidelity Management & Research Company ("FMR") agrees to purchase 10,000
shares of Common Stock, without par value (the "Shares"), of the trust at a
price of $10.00 per share. FMR shall tender to the trust the amount of
$100,000 in full payment for the Shares.
FMR represents and warrants to the trust that the Shares are being acquired
for investment and not with a view to distribution thereof, and that FMR
has no present intention to redeem or dispose of any of the Shares.
Very truly yours,
Fidelity Management & Research
Company
By: /s/ Arthur S. Loring
Name: Arthur S. Loring
Title: Senior Vice President and
General Counsel
EXHIBIT 15
FORM OF
DISTRIBUTION AND SERVICE PLAN
of Fidelity Covington Trust:
Fidelity Real Estate High Income Fund II
1. This Distribution and Service Plan (the "Plan"), when effective in
accordance with its terms, shall be the written plan contemplated by Rule
12b-1 under the Investment Company Act of 1940 (the "Act") of Fidelity Real
Estate High Income Fund II (the "Portfolio"), a series of shares of
Fidelity Covington Trust (the "Fund").
2. The Fund has entered into a General Distribution Agreement with respect
to the Portfolio with Fidelity Distributors Corporation (the
"Distributor"), a wholly-owned subsidiary of Fidelity Management & Research
Company (the "Adviser"), under which the Distributor uses all reasonable
efforts, consistent with its other business, to secure purchasers for the
Portfolio's shares of beneficial interest ("shares"). Under the agreement,
the Distributor pays the expenses of printing and distributing any
prospectuses, reports and other literature used by the Distributor,
advertising, and other promotional activities in connection with the
offering of shares of the Portfolio for sale to the public. It is
understood that the Adviser may reimburse the Distributor for these
expenses from any source available to it, including management fees paid to
it by the Portfolio.
3. The Adviser directly, or through the Distributor, may, subject to the
approval of the Trustees, make payments to securities dealers and other
third parties who engage in the sale of shares or who render shareholder
support services, including but not limited to providing office space,
equipment and telephone facilities, answering routine inquiries regarding
the Portfolio, processing shareholder transactions and providing such other
shareholder services as the Fund may reasonably request.
4. The Portfolio will not make separate payments as a result of this Plan
to the Adviser, Distributor or any other party, it being recognized that
the Portfolio presently pays, and will continue to pay, a management fee to
the Adviser. To the extent that any payments made by the Portfolio to the
Adviser, including payment of management fees, should be deemed to be
indirect financing of any activity primarily intended to result in the sale
of shares of the Portfolio within the context of Rule 12b-1 under the Act,
then such payments shall be deemed to be authorized by this Plan.
5. This Plan shall become effective upon the first business day of the
month following approval by a vote of at least a "majority of the
outstanding voting securities of the Portfolio" (as defined in the Act),
the plan having been approved by a vote of a majority of the Trustees of
the Fund, including a majority of Trustees who are not "interested persons"
of the Fund (as defined in the Act) and who have no direct or indirect
financial interest in the operation of this Plan or in any agreements
related to this Plan (the "Independent Trustees"), cast in person at a
meeting called for the purpose of voting on this Plan.
6. This Plan shall, unless terminated as hereinafter provided, remain in
effect from the date specified above until April 30, 1997, and from year to
year thereafter, provided, however, that such continuance is subject to
approval annually by a vote of a majority of the Trustees of the Fund,
including a majority of the Independent Trustees, cast in person at a
meeting called for the purpose of voting on this Plan. This Plan may be
amended at any time by the Board of Trustees, provided that (a) any
amendment to authorize direct payments by the Portfolio to finance any
activity primarily intended to result in the sale of shares of the
Portfolio, to increase materially the amount spent by the Portfolio for
distribution, or any amendment of the Management Contract to increase the
amount to be paid by the Portfolio thereunder shall be effective only upon
approval by a vote of a majority of the outstanding voting securities of
the Portfolio, and (b) any material amendments of this Plan shall be
effective only upon approval in the manner provided in the first sentence
in this paragraph.
7. This Plan may be terminated at any time, without the payment of any
penalty, by vote of a majority of the Independent Trustees or by a vote of
a majority of the outstanding voting securities of the Portfolio.
8. During the existence of this Plan, the Fund shall require the Adviser
and/or Distributor to provide the Fund, for review by the Fund's Board of
Trustees, and the Trustees shall review, at least quarterly, a written
report of the amounts expended in connection with financing any activity
primarily intended to result in the sale of shares of the Portfolio (making
estimates of such costs where necessary or desirable) and the purposes for
which such expenditures were made.
9. This Plan does not require the Adviser or Distributor to perform any
specific type or level of distribution activities or to incur any specific
level of expenses for activities primarily intended to result in the sale
of shares of the Portfolio.
10. Consistent with the limitation of shareholder liability as set forth
in the Fund's Declaration of Trust, any obligations assumed by the
Portfolio pursuant to this Plan and any agreements related to this Plan
shall be limited in all cases to the Portfolio and its assets, and shall
not constitute obligations of any other series of shares of the Fund.
11. If any provision of this Plan shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of the Plan shall not
be affected thereby.
LG912940020
EXHIBIT 16
PAGE 1 OF 2
SCHEDULE FOR COMPUTATION OF PERFORMANCE CALCULATIONS
CUMULATIVE TOTAL RETURNS and their income and capital components are
described in the fund's Statement of Additional Information, and are based
on the net asset values, dividends, capital gain distributions, and
reinvestment prices of the historical period covered.
AVERAGE ANNUAL RETURNS are calculated according to the following formula:
Average Annual Return = [(1 + Cumulative Return)1/n] - 1
[where n = the number of years in the base period]
The 30-DAY YIELD is calculated according to the methods prescribed in Form
N-1A Item 22(b)(ii).
30-Day Total Net Income
30-Day Yield = 2[(--------------------------------------------) + 1)6 - 1]
(30-Day Average Shares Outstanding)(Prior Day Price)
Fidelity Covington Trust: Fidelity Real Estate High Income Fund II
EXHIBIT 16
PAGE 2 OF 2
SCHEDULE FOR COMPUTATION OF ADJUSTED NAVS
Adjusted NAVs are derived by dividing the fund's actual NAV by a "factor"
that adjusts the NAV for any reinvestment of dividends and capital gains,
if any, that occurred during the period. The factor typically starts at "1"
beginning at the end of the period and, going backward, increases each time
a distribution is paid. (The end of the period adjusted NAV should equal
the fund's actual NAV, barring any month-end distributions.)
ADJUSTED NET ASSET VALUE:
Following Day Dividend + Following Day Capital Gains
Current Day Factor = [----------------------- + 1] (Following Day Factor)
Following Day NAV
Where:
Following Day Factor = 1.0 until the day preceding the first distribution.
Current Day NAV
Adjusted NAV = ---------------
Current Day Factor
Fidelity Covington Trust: Fidelity Real Estate High Income Fund II
