(2_FIDELITY_LOGOS)FIDELITY
REAL ESTATE HIGH INCOME FUND II
ANNUAL REPORT
DECEMBER 31, 1996
CONTENTS
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INVESTMENTS 3 A complete list of the fund's investments with their
market values.
FINANCIAL STATEMENTS 5 Statements of assets and liabilities, operations, and
changes in net assets, as well as financial highlights.
NOTES 7 Notes to the financial statements.
REPORT OF INDEPENDENT ACCOUNTANTS 9 The auditors' opinion.
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THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS
PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED
BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
FOR MORE INFORMATION ON THE FUND, INCLUDING CHARGES AND EXPENSES, CALL JEFF
GANDEL AT 617-563-6414 FOR A FREE PROSPECTUS. READ IT CAREFULLY BEFORE YOU
INVEST OR SEND MONEY.
FIDELITY REAL ESTATE HIGH INCOME FUND II
INVESTMENTS DECEMBER 31, 1996
Showing Percentage of Total Value of Investment in Securities
NONCONVERTIBLE BONDS - 1.9%
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
MEDIA & LEISURE - 1.9%
LODGING & GAMING - 1.9%
American Skiing Co. 12%,
7/15/06 (c) (Cost $1,010,000) B3 $ 1,000,000 $ 1,052,500
COMMERCIAL MORTGAGE SECURITIES - 32.9%
ACP Mortgage LP Series F,
7.4058%, 2/28/28 (c)(d) B 2,386,356 1,995,591
CBA Mortgage Corp.
Series 1993-C1 Class E,
7.7732%, 12/25/03 (c)(d) Ba2 3,183,000 2,862,709
CS First Boston Mortgage Securities
Corp. Series 1994-CFB1 Class E,
7.7393%, 1/25/28 (c) Ba2 969,573 838,984
Mortgage Capital Funding, Inc.
Series 1996-MC1 Class G,
7.15%, 7/15/28 (c) BB 1,850,000 1,481,156
Phoenix Real Estate Securities, Inc.
Series 1993 Class D-1,
8 1/4%, 11/25/23 (c) Ba2 1,500,000 1,385,625
Resolution Trust Corp. sequential
pay Series 1994-C1 Class F,
8%, 6/25/26 B 2,996,911 2,700,966
Structured Asset Securities Corp. (c):
Series 1996-C3 Class E,
8.458%, 6/25/30 - 2,000,000 1,764,375
Series 1996-CFL Class F,
7 3/4%, 2/25/28 - 2,500,000 2,285,156
Series 1996-CFL Class G,
7 3/4%, 2/25/28 - 3,250,000 2,396,875
Series 1996-CFL Class J,
7 3/4%, 2/25/28 - 8,640,510 950,456
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $18,505,440) 18,661,893
COMPLEX MORTGAGE SECURITIES - 1.7%
PRINCIPAL ONLY STRIPS - 1.7%
Structured Asset Securities Corp. Series
1996-CFL Class P, 0%, 2/25/28 (c)(e)
(Cost $954,025) - 3,148,072 944,422
COMMON STOCKS - 40.0%
SHARES VALUE
(NOTE 1)
CONSTRUCTION & REAL ESTATE - 39.3%
REAL ESTATE - 1.0%
Catellus Development Corp. (a) 20,000 227,500
Echelon International Corp. 14,700 229,688
Rouse Co. (The) 4,000 127,000
584,188
REAL ESTATE INVESTMENT TRUSTS - 38.3%
Ambassador Apartments, Inc. 12,000 283,500
Apartment Investment & Management Co.
Class A (a) 16,200 457,650
Arden Realty Group, Inc. 55,000 1,526,250
Bay Apartment Communities, Inc. 50,000 1,800,000
Bay Meadows Operating Co. 9,600 392,400
SHARES VALUE
(NOTE 1)
Beacon Properties Corp. 4,000 $ 146,500
Burnham Pacific Properties, Inc. 15,000 225,000
Cali Realty Corp. 28,750 887,656
Carr Realty Corp. 15,000 438,750
CenterPoint Properties Corp. 7,400 242,350
Columbus Realty Trust (SBI) 5,100 116,025
Crescent Real Estate Equities, Inc. 5,500 290,125
Criimi Mae, Inc. (a) 15,000 193,125
Developers Diversified Realty Corp. (a) 20,000 742,500
Equity Residential Properties Trust (SBI) 48,700 2,008,875
Essex Property Trust, Inc. 15,000 440,625
Excel Realty Trust, Inc. 7,600 192,850
Federal Realty Investment Trust (SBI) (a) 10,000 271,250
Felcor Suite Hotels, Inc. 15,000 530,625
First Industrial Realty Trust, Inc. 20,100 610,538
Glenborough Realty Trust, Inc. 11,400 200,925
Hospitality Properties Trust (SBI) 15,000 435,000
Innkeepers USA Trust 285,000 3,954,375
Liberty Property Trust (SBI) 15,000 386,250
Macerich Co. 15,900 415,388
Meridian Industrial Trust, Inc. 10,000 210,000
Patriot American Hospitality, Inc. 50,000 2,156,250
Prentiss Properties Trust (SBI) 23,400 585,000
Public Storage, Inc. 22,300 691,300
RFS Hotel Investors, Inc. 2,200 43,450
Reckson Associates Realty Corp. 15,000 633,750
Security Capital Atlantic, Inc. 5,000 122,500
Starwood Lodging Trust combined
certificate (SBI) 100 5,513
Walden Residential Properties, Inc.
(warrants) (a) 80,000 96,000
21,732,295
TOTAL CONSTRUCTION & REAL ESTATE 22,316,483
FINANCE - 0.7%
CREDIT & OTHER FINANCE - 0.7%
Security Capital US Realty Class A 30,000 378,900
TOTAL COMMON STOCKS
(Cost $20,304,132) 22,695,383
NONCONVERTIBLE PREFERRED STOCKS - 3.3%
CONSTRUCTION & REAL ESTATE - 3.3%
REAL ESTATE INVESTMENT TRUSTS - 3.3%
Walden Residential Properties,
Inc. 9.20% (Cost $1,908,397) 80,000 1,900,000
CASH EQUIVALENTS - 20.2%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account dated 12/31/96
due 1/2/97:
at 6.75% $ 8,665,248 8,662,000
at 6.87% 2,839,083 2,838,000
11,500,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $54,181,994) $ 56,754,198
LEGEND
1. Non-income producing
2. Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
3. Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $17,957,849 or 33.9% of net
assets.
4. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
5. Principal Only Strips represent the right to receive the monthly
principal payments on an underlying pool of mortgage loans.
OTHER INFORMATION
The composition of long-term debt holdings as a percentage of total value
of investment in securities, is as follows (ratings are unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 0.0% AAA, AA, A 0.0%
Baa 0.0% BBB 0.0%
Ba 9.0% BB 7.7%
B 1.9% B 8.3%
Caa 0.0% CCC 1.9%
Ca, C 0.0% CC, C 0.0%
D 0.0%
The percentage not rated by both S&P and Moody's amounted to 14.7%. FMR has
determined that unrated debt securities that are lower quality account for
14.7% of the total value of investment in securities.
INCOME TAX INFORMATION
At December 31, 1996, the aggregate cost of investment securities for
income tax purposes was $54,181,994. Net unrealized appreciation aggregated
$2,572,204, of which $2,804,654 related to appreciated investment
securities and $232,450 related to depreciated investment securities.
The fund intends to elect to defer to its fiscal year ending December 31,
1997 approximately $42,000 of losses recognized during the period November
1, 1996 to December 31, 1996.
FIDELITY REAL ESTATE HIGH INCOME FUND II
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
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DECEMBER 31, 1996
ASSETS
Investment in securities, at value (including repurchase agreements of $11,500,000) (cost $54,181,994) - See $ 56,754,198
accompanying schedule
Receivable for investments sold 42,513
Dividends receivable 217,947
Interest receivable 434,736
TOTAL ASSETS 57,449,394
LIABILITIES
Payable to custodian bank $ 20,378
Payable for investments purchased 4,415,135
Accrued management fee 26,952
Other payables and accrued expenses 35,756
TOTAL LIABILITIES 4,498,221
NET ASSETS $ 52,951,173
Net Assets consist of:
Paid in capital $ 50,433,038
Distributions in excess of net investment income (12,460
)
Accumulated undistributed net realized gain (loss) on investments (41,609
)
Net unrealized appreciation (depreciation) on investments 2,572,204
NET ASSETS, for 4,936,962 $ 52,951,173
shares outstanding
NET ASSET VALUE, offering price $10.73
and redemption price per
share ($52,951,173 (divided by)
4,936,962 shares)
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STATEMENT OF OPERATIONS
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SEPTEMBER 27, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996
INVESTMENT INCOME $ 309,524
Dividends
Interest 552,084
TOTAL INCOME 861,608
EXPENSES
Management fee $ 56,258
Transfer agent fees 1,519
Accounting fees and expenses 15,000
Non-interested trustees' compensation 11
Custodian fees 1,213
Registration fees 15,283
Audit 16,249
Legal 2,421
Total expenses 107,954
NET INVESTMENT INCOME 753,654
REALIZED AND UNREALIZED GAIN (LOSS) (15,299
Net realized gain (loss) on )
investment securities
Change in net unrealized appreciation (depreciation) on investment securities 2,572,204
NET GAIN (LOSS) 2,556,905
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 3,310,559
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STATEMENT OF CHANGES IN NET ASSETS
SEPTEMBER 27, 1996
(COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31, 1996
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INCREASE (DECREASE) IN NET ASSETS
Operations $ 753,654
Net investment income
Net realized gain (loss) (15,299)
Change in net unrealized appreciation (depreciation) 2,572,204
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 3,310,559
Distributions to shareholders from net investment income (792,424)
Share transactions 54,354,999
Net proceeds from sales of shares
Reinvestment of distributions 733,039
Cost of shares redeemed (4,655,000)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 50,433,038
TOTAL INCREASE (DECREASE) IN NET ASSETS 52,951,173
NET ASSETS
Beginning of period -
End of period (including distributions in excess of net investment income of $12,460) $ 52,951,173
OTHER INFORMATION
Shares
Sold 5,312,257
Issued in reinvestment of distributions 68,778
Redeemed (444,073)
Net increase (decrease) 4,936,962
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SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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FINANCIAL HIGHLIGHTS
SEPTEMBER 27, 1996
(COMMENCEMENT OF
OPERATIONS) TO
DECEMBER 31, 1996
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.000
Income from Investment Operations .214
Net investment income
Net realized and unrealized gain (loss) .732
Total from investment operations .946
Less Distributions
From net investment income (.216)
Net asset value, end of period $ 10.730
TOTAL RETURN B 9.52%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 52,951
Ratio of expenses to average net assets 1.42%
A
Ratio of net investment income to average net assets 9.90%
A
Portfolio turnover rate 11%
A
Average commission rate C $ .0442
A ANNUALIZED
B TOTAL RETURN FOR PERIODS OF LESS THAN ONE YEAR IS NOT ANNUALIZED.
C A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR
SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM
PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX
OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND
COMMISSION RATE STRUCTURES MAY DIFFER.
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES.
Fidelity Real Estate High Income Fund II (the fund) is a fund of Fidelity
Covington Trust (the trust) and is authorized to issue an unlimited number
of shares. The trust is registered under the Investment Company Act of
1940, as amended (the 1940 Act), as an open-end management investment
company organized as a Massachusetts business trust. The financial
statements have been prepared in conformity with generally accepted
accounting principles which permit management to make certain estimates and
assumptions at the date of the financial statements. The following
summarizes the significant accounting policies of the fund:
SECURITY VALUATION. Debt securities are valued based upon a computerized
matrix system and/or appraisals by a pricing service, both of which
consider market transactions and dealer-supplied valuations. Equity
securities for which quotations are readily available are valued at the
last sale price, or if no sale price, at the closing bid price. Securities
(including restricted securities) for which market quotations are not
readily available are valued at their fair value as determined in good
faith under consistently applied procedures under the general supervision
of the Board of Trustees. Short-term securities with remaining maturities
of sixty days or less for which quotations are not readily available are
valued at amortized cost or original cost plus accrued interest, both of
which approximate current value.
INCOME TAXES. The fund intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code. By so qualifying, the fund
will not be subject to income taxes to the extent that it distributes
substantially all of its taxable income for its fiscal year. The schedule
of investments includes information regarding income taxes under the
caption "Income Tax Information."
INVESTMENT INCOME. Interest income, which includes accretion of original
issue discount, is accrued as earned and dividend income is recorded on the
ex-dividend date.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are declared daily and paid
monthly from net investment income. Distributions to shareholders from
realized capital gains on investments, if any, are recorded on the
ex-dividend date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences may result in distribution reclassifications.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital and may
affect the per-share allocation between net investment income and realized
and unrealized gain (loss). Distributions in excess of net investment
income and accumulated undistributed net realized gain (loss) on
investments may include temporary book and tax basis differences which will
reverse in a subsequent period. Any taxable income or gain remaining at
fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of trade
date. Gains and losses on securities sold are determined on the basis of
identified cost.
2. OPERATING POLICIES.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the fund, along with other affiliated
entities of Fidelity Management & Research Company (FMR), may transfer
uninvested cash balances into one or more joint trading accounts. These
balances are invested in one or more repurchase agreements that mature in
60 days or less from the date of purchase for U.S. Treasury or Federal
Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
Securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are marked-to-market
daily and maintained at a value at least equal to the principal amount of
the repurchase agreement (including accrued interest). FMR, the fund's
investment adviser, is responsible for determining that the value of the
underlying securities remains in accordance with the market value
requirements stated above.
RESTRICTED SECURITIES. The fund is permitted to invest in securities that
are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from registration
or to the public if the securities are registered. Disposal of these
securities may involve time-consuming negotiations and expense, and prompt
sale at an acceptable price may be difficult. At the end of the period, the
fund had no investments in restricted securities (excluding 144A issues).
3. PURCHASES AND SALES OF INVESTMENTS.
Purchases and sales of securities, other than short-term securities,
aggregated $43,396,619 and $736,103, respectively.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly
fee that is calculated on the basis of a group fee rate plus a fixed
individual fund fee rate applied to the average net assets of the fund. The
group fee rate is the weighted average of a series of rates and is based on
the monthly average net assets of all the mutual funds advised by FMR. The
rates ranged from .1100% to .3700% for the period. In the event that these
rates were lower than the contractual rates in effect during the period,
FMR voluntarily implemented the above rates, as they resulted in the same
or a lower management fee. The annual individual fund fee rate is .60%. For
the period, the management fee was equivalent to an annualized rate of .74%
of average net assets.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations Company
(FIIOC), an affiliate of FMR, is the fund's transfer, dividend disbursing
and shareholder servicing agent. FIIOC receives account fees and
asset-based fees that vary according to account size and type of account.
FIIOC pays for typesetting, printing and mailing of all shareholder
reports, except proxy statements. For the period, the transfer agent fees
were equivalent to an annualized rate of .02% of average net assets.
ACCOUNTING FEES. Fidelity Service Co. (FSC), an affiliate of FMR, maintains
the fund's accounting records. The fee is based on the level of average net
assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms were $4,976 for the period.
5. BENEFICIAL INTEREST.
At the end of the period, FMR and its affiliates were record owners of
approximately 52% of the total outstanding shares. In addition, one
unaffiliated shareholder was record owner of more than 10% of the total
outstanding shares of the fund.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Fidelity Covington Trust and the Shareholders of
Fidelity Real Estate High Income Fund II:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments (except for Moody's and Standard &
Poor's ratings), and the related statements of operations and of changes in
net assets and the financial highlights present fairly, in all material
respects, the financial position of Fidelity Real Estate High Income Fund
II (a fund of Fidelity Covington Trust) at December 31, 1996, and the
results of its operations, the changes in its net assets and the financial
highlights for the period September 27, 1996 (commencement of operations)
through December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the
Fidelity Real Estate High Income Fund II's management; our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit of these financial statements in accordance with
generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at December 31, 1996 by correspondence with the
custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provides a
reasonable basis for the opinion expressed above.
/s/PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 21, 1997
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
OFFICERS
Edward C. Johnson 3d, PRESIDENT
J. Gary Burkhead, SENIOR VICE PRESIDENT
Robert A. Lawrence, VICE PRESIDENT
Arthur S. Loring, SECRETARY
Kenneth A. Rathgeber, TREASURER
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
J. Gary Burkhead
Ralph F. Cox *
Phyllis Burke Davis *
Richard J. Flynn *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Edward H. Malone *
Marvin L. Mann *
Gerald C. McDonough *
Thomas R. Williams *
ADVISORY BOARD
William O. McCoy
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER SERVICING AGENT
Fidelity Investments Institutional Operations Company
Boston, MA
CUSTODIAN
The Bank of New York
New York, NY
* INDEPENDENT TRUSTEES
