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. [ ]
Post-Effective Amendment No. 1 [X]
and
REGISTRATION STATEMENT (No. 811-7319)
UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 1 [X]
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)
It is proposed that this filing will become effective
(X) immediately upon filing pursuant to paragraph (b).
( ) on ( ) pursuant to paragraph (b).
( ) 60 days after filing pursuant to paragraph (a)(1).
( ) on ( ) pursuant to paragraph (a)(1) of Rule 485.
( ) 75 days after filing pursuant to paragraph (a)(2).
( ) on ( ) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
( ) this post-effective amendment designates a new effective date for a
previously filed
post-effective amendment.
Registrant has filed a declaration pursuant to Rule 24f-2 under the
Investment Company Act of 1940 and intends to file the Notice required by
such Rule before March 1, 1997.
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 Financial Highlights
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 Charter
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.
FIDELITY
REAL ESTATE HIGH INCOME
FUND II
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.
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 fund's most recent financial report and portfolio listing or a
copy of the Statement of Additional Information (SAI) dated February
28 , 1997. The SAI has been filed with the Securities and Exchange
Commission (SEC) and is a vailable along with other related materials on
the SEC's Internet Web si te (http:/www.sec.gov). The SAI is
incorporated herein by reference (legally forms a part of the
prospectus). For a free copy of either document, call Fidelity Investments,
82 Devonshire Street, Boston, MA 02109 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 , FEDERAL RESERVE
BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT
TO INVESTMENT RISKS , INCLUDING POSSIBLE
LOSS OF PRINCIPAL AMOUN T INVESTED.
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 T O "INVESTMENT PRINCIPLES AND RISKS" ON PAGE
FOR FURTHER INFORMATION.
LIKE ALL MUTUAL FUNDS, THESE
SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
REHIFII-pro-029 7
(fund number 673)
A fund of Fidelity Covington Trust
PROSPECTUS
FEBRUARY 28 , 1997(FIDELITY_LOGO_GRAPHIC) 82 DEVONSHIRE STREET,
BOSTON, MA 02109
CONTENTS
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KEY FACTS WHO MAY WANT TO INVEST
EXPENSES The fund's yearly operating expenses.
FINANCIAL HIGHLIGHTS A summary of the fund's
financia l data .
PERFORMANCE How the fund has done over time .
THE FUND IN DETAIL CHARTER How the fund is organized .
INVESTMENT PRINCIPLES AND RISKS The fund' s
overall approach to investing .
BREAKDOWN OF EXPENSES How operatin g 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 DIVIDENDS, CAPITAL GAINS,
ACCOUNT POLICIES AND TAXES
TRANSACTION DETAILS Share price calculations and
the timing of purchases and redemptions.
APPENDIX
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KEY FACTS
WHO MAY WANT TO INVEST
This non -di versified 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 fu nd has the potential for higher
yields, and it 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 secu r ities and other
mortgage and real estate-related securities, including lower-qu a lity
securities, and are willing to accept the greater price movements and
credit risks of these securities.
A non-di versified fund may invest a greater portion of its assets in
securities of individual issuers than a diversified fund. As a result,
changes in the market value of a single issuer could cause greater
fluctuations in share value than would occ ur in a more diversified
fund.
The value of the fund's investments an d the income they generate
var y f rom day to day, and generally reflect company news , the
performance of real estate properties, changes in interest rates,
market conditions, and other political a n d economic news. The fund's
investments are also subjec t to prepayments, which can lower the
fund's yield, particularly in periods of declining interest rates.
The fund is not in itself a balanced investment plan. You should
consi der your investment objective and tolerance for risk whe n
making an investment decision. When you sell your fund s hares, they
may be worth more or less than what you paid for them.
EXPENSES
SHAREHOLDER TRANSACTION EXPENSES are charges you may pay w h en you
buy or sell shares of the fund.
Maximum sales charge on purchases and reinvested distributions None
Maximum de ferred sales charge None
Redemption fee None
Exchange fee None
ANNUAL OPERATING EXPENSES are paid o ut 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
Exp en ses" on page ).
The following figures are based on estimated expenses and are calculated
as a percentage of average net assets of the fund.
Management fee .75%
12b-1 fee (Distribution Fee) None
Other expenses .26%
1
Total operating expe nse s 1.01
%
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
PERFORMAN CE -RELATED FACTORS; HOWEVER, THE FUND'S MANAGEMENT FEE IS
CREDITED AGAINST THE ACCOUNT OR PARTNERSHIP LEVEL FEE.
EXPENSE TABLE EXAMPLE: You would pay the following expenses on a $1,000
investme nt , assuming a 5% annual return and full re demption
at the end of each time period:
1 3
Year Years
Real Estate High Income Fund II $ 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.
FINANCIAL HIGHLIGHTS
The financial highlights table that follows has been audited by Price
Waterhouse LLP , independent accountants. The fund's financial
highlights, financial statements, and report of the auditor are included in
the fund's Annual Report, and are incorporated by reference into (are
legally a part of) the fund's SAI. Contact Fidelity Distributors
Corporation (FDC) for a free copy of the Annual Report or the SAI.
SELECTED PER-SHARE DATA
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1.Period ended December 31 1996D
2.Net asset value, beginning of period $ 10.000
3.Income from Investment Operations
.214
Net investment income
4. Net realized and unrealized gain (loss) .732
5. Total from investment operations .946
6.Less Distributions
(.216)
From net investment income
7.Net asset value, end of period $ 10.730
8.Total returnB 9.52%
9.RATIOS AND SUPPLEMENTAL DATA
10.Net assets, end of period (000 omitted) $ 52,951
11.Ratio of expenses to average net assets 1.42%
A
12.Ratio of net investment income to average net assets 9.90%
A
13.Portfolio turnover rate 11%
A
14.Average commission rateC $ .0442
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A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE 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.
D SEPTEMBER 27, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996
PERFORMANCE
Bond fund performance c an be measured as TOTAL RETURN or
YIELD .
EX PLANATION OF TERMS
TOTAL RETURN is th e change in value of an investment 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-y ear results.
YIELD ref ers 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 shareho lders.
In calcu lating 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 o f
re ducing the fund's yield.
The fund may quote its adjus te d net asset value, including all
distributions paid. This value may be averaged over specified periods and
may be used to calculate the fund's moving average.
The fund's recent strategies, performance, and holdings are detailed
twice a year in financial reports, which are sent to all shareholders. For
current performance or a free annual report, call Fidelity Investments
at 1-617-563-6414 .
THE FUND IN DETAIL
CHARTER
REAL ESTATE HIGH INCOME II IS A M UTUAL FUND: an investment that
pools shareholders' money and invests it toward a specified goal. The fund
i s 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 whi c h 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. The transfer
ag ent 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, Massachu se tts 02109. 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 December 31, 1996, F MR advised funds having approximately 29
million shareholder accounts with a total value of more than $432
billi on.
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 Institution al Operations Company, Inc. (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'S INVESTMENT APPROACH
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 ma y invest in real estate debt and equity securities. These
se curities 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 total return from a bond is a combination of income and price gains
or losses. While income is the most important component of bond returns
over time, the fund's emphasis on income does not mean that the fund
invests only in the highest-yielding bonds available, or that it can avoid
risks to principal. In selecting investments for the fund, FMR considers a
bond's income potential together with its potential for price gains or
losses. FMR focuses on assembling a portfolio of income-producing
securities that it believes will provide the best tradeoff between risk and
return within the range of securities that are eligible investments for the
f und.
The fund's yield and share pri ce change daily and are based on
changes in in ter est rates, market conditions, other economic and
pol iti cal news, and on the quality and maturity of its investments.
In general, bond prices rise when interest rates fall, an d vice versa.
This effect is usually more pronounced for longer-term securities.
Lower-quality securities offer higher yields, but also carry more risk.
FMR may use variou s investment techniques to hedge a portion of the
fu nd' s risk, but there is no guarantee that these strategies wil l
wo rk as intended. When you sell your shares, they may be worth more or
less than what you paid for them.
FMR nor mally inve sts the fund's assets according to its investment
strategy. The fund also reserves the right to invest w itho ut
limitation in preferred stocks and investment-grade d ebt 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, strategie s FM R may employ
in pursuit of the fund's investment objective, a nd a summary of
related risks. Any restrictions listed supplement those discussed
earlier in this section. A complete listing of the fund's limita tions
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
unle ss it believes that they are consistent with the fund's
in ve stment objective and policies and that doing so will help the
fund achie ve its goal. Fund holdings and recent inve st ment
strategies are detailed in the fund's financial reports, which ar e sent
to shareholders twice a year. For a free SAI or fina ncial report, call
1-617-563-6414.
The 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 securities,
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 ind us try exposure.
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, an d 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
penalt ie s on loans, and in some cases there may be prohibitions on
principal prepayments for several years following origination. Assets
underlying commercial mortgage-ba ck ed securities may relate to 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 classe s, 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 les s 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
prepay ment pe nalties 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, woul d be shorter than originally expected. During periods of
declining prepayments, however, the subordinated classes may receive
payments of principal at a slower rate than expected, which may increase
the price volatility of the instru ments by lengthening their
effective maturities.
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 s ecu rities 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 or D by S&P 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. Ratings used by the
fund include those issued by S&P, Moody's, or other nationally recognized
statistical rating organizations. The fund may also invest in unrated
securities.
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.
EQUITY SECURITIES ma y include common stocks, preferred stocks,
convertible securities, and warrants. Common stocks, the most familiar
type, represent an equity (ownership) interest in a corporation. Although
equity securities have a history of long-term growth in value, their prices
fluctuate based on changes in a company's financial condition and on
overall market and economic conditions. Smaller companies are especially
sensitive to these factors.
RESTRICTIONS: With respect to 50% of its total assets, the fund may
not purchase more than 10% of the outstanding voting securities of a single
issuer.
DEBT SECURITIES. Bonds and other debt instruments are used by issuers to
borrow money from investors. The issuer pays the investor a fixed or
variable rate of interest, and must repay the amount borrowed at maturity.
Some debt securities, such as zero coupon bonds, do not pay current
interest, but are purchased at a discount from their face values. In
genera l, bond prices rise when interest rates fall, and vice versa.
De bt 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.
The table on page provide s a summary of ratings assigned to debt
holdings (not including money market instruments) in the fund's portfolio.
These figures are dollar-weighted averages of month-end portfolio holdings
during the fiscal year ended 199 6, and are presented as a percentage of
total security investments. These percentages are historical and do not
necessarily indicate the fund's current or future deb t holdings.
REAL ESTATE INVESTMENT TRUSTS are entities which either own properties or
make construction or mortgage loans. Equity trusts own re al estate
directly, and the 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 is se nsiti ve 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 management ski ll, cas h flow, and tax and regulatory
requirements.
FISCAL YEAR ENDED DECEMBER 1996 DEBT HOLDINGS, BY RATING
MOODY'S
INVESTORS SERVICE, INC. STANDARD & POOR'S
(AS A % OF OF INVESTMENTS) (AS A % OF OF INVESTMENTS)
Rating Average Rating Average
INVESTMENT GRADE*
Highest quality Aaa 0.0% AAA 0.0%
High quality Aa 0.0% AA 0.0%
Upper-medium grade A 0.0% A 0.0%
Medium grade Baa 0.0% BBB 0.0%
LOWER QUALITY*
Moderately speculative Ba 9.2% BB 10.3%
Speculative B 2.5% B 10.8%
Highly speculative Caa CCC
Poor quality Ca 0.0% CC 2.5%
Lowest quality, no interest C C
D 0.0%
(AS A % OF INVESTMENTS)
SECURITIES NOT RATED BY MOODY'S OR S&P(dagger)
Investment Grade (double dagger) --
Lower Quality (double dagger) 18.5%
Total 18.5%
* FOR SOME FOREIGN GOVERNMENT OBLIGATIONS, FMR ASSIGNS THE RATINGS OF THE
SOVEREIGN CREDIT OF THE
ISSUING GOVERNMENT.
(dagger) THE DOLLAR-WEIGHTED AVERAGE PERCENTAGES REFLECTED IN THE TABLE MAY
INCLUDE SECURITIES RATED BY
NATIONALLY RECOGNIZED RATING SERVICES, AS WELL AS UNRATED SECURITIES.
(double dagger) AS DETERMINED BY FMR
MONEY MARKET SECURITIES are high-qu ality, short-term instruments issued
by the U.S. Government, corporations, financial institutions, and other
entities. These securities may carry fixed, variable, or floating
inter est rates.
U.S. GOVERNMENT SECURITIES are high-quality debt instruments issued o r
guaranteed by the U.S. Treasury or by an agency or
instrumenta lit y of the U.S. Government. Not all U.S. Government
securities are backed by the full faith and credit of the United States.
For exa mple, U.S. Government securities such as those issued b y the
Federal National Mortgage As soc iation are supported by the
instrumentality's right to borrow money from the U.S. Treasury under
certain circumstances. Other U.S. Government securities, such as those
issued by the F ederal Farm Credit Banks Fu ndi ng Corporation, are
supported only by the credit of the entity that issued them.
FOREIGN EXPOSURE. Se curities issued by foreign entities, including
foreign governments, corporations, and banks, and securities issued by U.S.
entities with substantial foreign operations may invo lve additional
risks and considerations. Extensive public information about the foreign
entity may not be available, and unfavorable political, economic, or
governmental developments in the foreign country involved could affect the
repayment of principal or payment of inter est.
STRIPPED SECURITIES are the separate income or principal com ponents
of a debt security. The risks associated with stripp ed se curities
are similar to those of other debt securities, althoug h s tripped
securities may be more volatile, and the value of certain t ypes of
stripped securities may move in th e same direction as interest rates.
U.S. Treasury securities that have been stripped by a Federal Reserve Bank
are o bligations issued by the U .S. Treasury.
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.
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, govern m ent, 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
d emand.
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 i lliquid securities, and some other
securities, may be subject to legal restrictions. Difficulty in selling
securities may result in a loss or may be costly to the fund.
RESTRICTIONS. The fun d may not purchase a security if, as a result,
more than 15% o f its as sets would be invested in illiquid
securities.
WHEN-ISSUE D 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 cou ld change during this period.
CASH MANAGEMENT. The fund may invest in money market securities, in
repurchase agreements, and in a money market fund available only to funds
and accounts managed by FMR or its affiliates, whose goal is to seek a high
level of current income while maintaining a stable $1.00 share price. A
major change in interest rates or a default on the money market fund's
investments could cause its share price to change.
OTHER INSTRUMENTS may in clud e 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 in dustry. Economic,
business, or political changes can affect all securities of a similar
type. A fund that is not diversifie d 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 an y issuer and, with
respect to 50% of total assets, does not invest more than 5% of its total
assets in any one issue r. These limitations do not apply to U.S.
Government securities or to securities of other investment companies.
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. This limitation does 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 331/3% of its total assets.
LENDING securities to bro ker-d ealers 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.
RESTRICTIONS: Loans, in th e aggregate, may not exceed 331/3% 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 paragraphs restate all those that are fundamental. All
policies stated throughout this prospectus, other than those identified in
the followin g paragraphs, 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. The f und also pays OTHER EXPENSES , which are
explained bel ow.
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
ra t e, and multiplying the result by the fund's average net
a ss ets.
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 the fiscal year ended D ecember 1996, the group fee rate was
.14%. Th e individual fund fee rate is 0.60%.
The total annualized management fee rat e for the fiscal year
ended December 1996 was .74%.
OTHER EXPENSES
While the management fee is a significant component of the fund's annual
operating costs, the fund has other expenses as well.
FIIOC performs transfer agency, dividend disbursing and shareholder
servicing functions for the fund. Fidelity Service Company, Inc.
(FSC) calculates the NAV and dividends for the fund, maintains the fund's
general accounting records, a n d administers the fund's securities
lending program.
For the fiscal year ended De c ember 1996, the fund paid FIIOC and FSC
fees equal to .02 % and .20 %, respectively, of the fund's
average net as se ts , on an annualized basis.
The fund ha s 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
in cl ude reimbursing FDC for 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 p aym ents.
The fund also pay s other expenses, such as legal, audit, and custodian
fees; in some instances, proxy solicitation costs; and the compensation of
trustees who are not affiliated with Fidelity. A broker-dealer may use a
portion of the commissions paid by the fund to reduce the fund's custodian
or transfer a gent fees.
Th e fund's annualized por tfolio turnover rate for the
fiscal period ended December 1996 was 11 %. This rate varies from
year to year.
YOUR ACCOUNT
TYPES OF ACCOUNTS
The different ways to set up (regi s ter) your 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, cal l ed 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 order is
received and a ccepted. NAV is normally calculated at 4:00 p.m.
Eastern time.
Share certificates are not av ailable for fund shares.
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 the close of business
on the day you place your order.
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, y o u can wire money
into your account or contact your Institutional Representative.
INVESTMENTS IN THE FUND MUST BE MA DE USING THE FEDERAL RESERVE WIRE
SYSTEM. Chec ks 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.
If Fidelity Client Se rvices is not advised of your purchase prior to the
stated cutoff time, your purchase will not be accepted by the transfer
agent. All wires must be received and accepted by the transfer agent at the
fund's designated wire bank before the close of the Federal Reserve Wire
System on that day.
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 rec eived and accepted.
NAV is normally calculated at 4:00 p.m. Eastern time.
IF YOU ARE SELLIN G SOME BUT NOT ALL OF YOUR SHARES, please leave at
least $1,000,000 worth o f shares in the accou nt to keep it
open.
TO SELL SHARES BY BANK WIRE, you will need to sign up for this service in
a dvance.
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. Redemption s may be made by contacting your Institutional
Representative.
You must apply fo r th e 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 re ceived and accepted 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 and
p ro spectuses will be mailed, even if you have more than one account
in the fund. Call your Institutional Representative if you need
additional copies of financial reports and prospectuses .
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 F ebr uary.
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. If y our account is not a tax-deferred retirement account,
you should be aware of these tax implications.
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 an d t he IRS a
statement showing the taxable distributions paid to you in the previous
year.
TAXES ON TRANSACTIONS. Your rede mption s ar e 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 s hares when the fund has realized
but not yet distribute d capital gains, 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.
CURRENCY CONSIDERATIONS. If t he fund's dividends exceed its taxable
income in any year, which is sometimes the result of currency-related
losses, all or a portion of the fund's dividends may be treated as a return
of capital to shareholders for tax purposes. To minimize the risk of a
return of capital, the fund may adjust its dividends to take currency
fluctuations into account, which may cause the dividends to vary. Any
return of capital will reduce the cost basis of your shares, which will
result in a higher reported capital gain or a lower reported capital loss
when you sell your shares. The statement you receive in January will
specify if any distributions included a return of capital.
EFFECT OF FOREIGN TAXES. Foreign g overnments may impose taxes on the
fund and its investments and these taxes generally will reduce the fund's
dist ributions.
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, an d d ividing the result by the number
of shares outstanding.
The fund's assets are valued primarily on the basis of market quotations.
Foreig n securities are valued on the basis of quotations from the
primary market in which they are traded, and are translated from the local
currency into U.S. dollars using current exchange rates. Short-term
securities with remaining maturities of sixty days or less for which
quotations are not readily available are valued on the basis of amortized
cost. This method minimizes the effect of changes in a security' s
market value. In addition, if quotations are not readily avai lable, or
if the values have been materially affected by events occurring after the
closing of a foreign market, assets may be valued by a method that the
Board of Trustees believes accurately reflects fair value.
THE FUND'S OFFERING PRICE (price to buy one share) is its NAV. The
fund's REDEMPTION PRICE (price to sell one share) is its NAV.
WHEN YOU SIGN YOUR ACCOUNT APPLICATION, you will be asked to certify that
your soc ial 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
c a n require the fund to withhold 31% of your taxable distributions
and redemptions.
YOU MAY INITIATE MANY TRANSACTI O NS BY TELEPHONE. Fidelity may only
b e liable for losses resulting from unauthorized transactio ns if it
does not follow reasonable procedures designed to ve rify the identity of
the caller. Fidelity will request personalized security codes or other
information, and may also record calls. You should verify the accuracy of
the confirmation statements immediately after receipt. If you do not
want the ability to redeem and exchange by telepho n e, call your
Institutional Representative for instructions. Additional documentation may
be required from corporations, associ a tions, and certain
fiduciaries.
IF YOU ARE UNABLE TO REACH FIDE LITY BY PHONE (for example, during
periods of unusual market activity), consider placing your order by
mail.
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 the f und.
WHEN YOU PLACE AN ORDER TO BUY SHARES, your s hares will be purchased
at the next N AV calculated after your order is received and
ac ce pted. Note the following:
(small solid bullet) All of your purchases must be ma de by federal funds
wire; checks will not be accepted f or purchases.
(small solid bullet) If your wire is not received by th e close of the
Federal Reserve Wire System, you could be liable for any losses or fees the
fund or Fidelity has incurred or for interest and penalties.
(small solid bullet) You begin to earn divide nds as of the first
business day following the day of your p urchase.
WHEN YOU PLACE AN ORDER TO SELL SHARES, your shares will be sold at the
next NAV calculated after y o ur order is rec ei ved and
accepted. 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) Shares will earn dividends through the date of
redemption; however, sha res redeemed on a Friday or prior to a holiday
will co ntinue to earn dividends until the next business day.
(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 S EC.
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 MOO D Y'S CORPORATE BOND RATINGS:
AAA - Bonds which are ra t ed Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gi lt edged." 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 which a re rated A a 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 i n the Aaa securities.
AA - Bonds which are r ated 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 which ar e rated Baa are considered as
medium-grade obligations (i. e. , they are neither highly protected
nor poorly secure d ). 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 which are rated Ba are judged to have speculative
elements; the ir 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 which are r at ed B generally lack characteristics of
the desirable investment. Assurance of interest and principal payments or
of m ai ntenance of other terms of the contract over any long period
of time may be small.
CAA - Bonds which ar e 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 which a re r ated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked short-comings.
C - Bonds which a re rated C are the lowest-rated class of bonds,
and issues so ra ted 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. T hose bonds in the Aa, A, Baa, Ba, and B groups
which Mo ody's believes possess the strongest inve stment attributes
are designated by the symbols Aa1, A1, B aa1, and B1.
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS:
AAA - Debt rated AAA has the highest rating assigned by
Stand a rd & Poor's. 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 d iffers from the highest-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 conditio n s than debt in
higher rated categories.
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.
The B B rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BBB - rati ng.
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. The
CCC rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied B or B - rating.
CC - The rating CC ty pically is applied to debt subordinated to
senior debt t hat 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 p etiti on 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 also will be u sed upon the filing of a bankruptcy petition if
debt service payments are jeopardized.
The ratings from AA to CCC may be modified by the addition of a plus or
minus to show relative standing within the major rating categories.
No dealer , sales repres e ntative, 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 FMR; Description of the Trust
13a,b,c Investment Policies and Limitations
d Portfolio Transactions
14a,b,c Trustees and Officers
15a,b,c Trustees and Officers
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 FMR Affiliates
17a Portfolio Transactions
b Portfolio Transactions
c Portfolio Transactions
d Portfolio Transactions
e *
18a Description of the Trust
b *
19a Additional Purchase and Redemption Information
b Valuation
c *
20 Distributions and Taxes
21a(i,ii) Contracts With FMR Affiliates
a(iii),b,c *
22a *
b Performance
23 Financial Statements
*Not applicable.
FIDELITY REAL ESTATE HIGH INCOME FUND II
A FUND OF FIDELITY COVINGTON TRUST
STATEMENT OF ADDITIONAL INFORMATION
FEBRU ARY 28 , 1997
This State m ent of Additional Information (SAI) is not a
prospectus but should be read in conjunction with the fund's current
Prospectus (dated Febru ary 28 , 1997). Please retain this document
for future reference . The fund's Annual Report is a separate document
supplied with this SAI. To obtain a free additional copy of the Prospectus
or an Annual Report, please call Fidelity Investments at
1-617-563-6414.
TABLE OF CONTENTS PAGE
Investment Policies and Limitations
Portfolio Transactions
Valua ti on
Performance
Additional Purchase and Redemption Information
Distributions and Taxes
FMR
Trustees and Officers
Management Contract
Distribution and Service Plan
Contracts with FMR Affiliates
Description o f t he Trust
Financial S tate ments
INVESTMENT ADVISER
Fidelity Management & Research Company (FMR)
DISTRIBUTOR
Fidelity Distributors Corporation (FDC)
TRANSFER AGENT
Fidelity Investments Institutional Operations Company, Inc. (FIIOC )
REHIFII-ptb-029 7
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 lim it ations listed
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) In order to quali fy as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended, the fund
curren tly intends to comply with certain diversification limits imposed
by Subchapter M.
(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) T he 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.)
( vii ) The fund does not currently intend to invest all of its assets
in the securities of a single open-end management investment company
managed by Fidel ity Management & Research Company or an affiliate or
successor with substantially the same fundamental investment objective,
policies, and limitations as the fund.
For purpose s of limitation (i), Subchapter M generally requires the fund
to invest no more than 25% of its total assets in securities of any one
issuer and to invest at least 50% of its total assets so that no more than
5% of the fund's total assets are invested in securities of any one issuer.
However, Subchapter M allows unlimited investments in cash, cash items,
government securities (as defined in Subchapter M) and securities of other
investment companies. These tax requirements are generally applied at the
end of each quarter of t he fund's taxable year.
For the fund's limitations on futures and options transactions, see the
section entitled "Limitations on Futures and Options Transactions"
o n page .
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
borrowings. In accordance with exemptive orders issued by the Securities
and Exchan ge C ommission (SEC), the Board of Trustees has established
and periodically reviews procedures applicable to transactions involving
affiliated financial institutions.
ASSET-BACKED SECURITIES inc lude 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 fo r the pool,
the originator of the loans or receivables, or the entities providing the
credit support.
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 pr ice or yield, with payment and delivery taking place
after the customary settlement period for that type of securit y .
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.
EXPOSURE TO FOREIGN MARKETS. Foreig n securities, foreign currencies, and
securities issued by U.S. entities with substantial foreign operations may
involve significant risks in addition to the risks inherent in U.S.
investments. The value of securities denominated in foreign currencies and
of dividends and interest paid with respect to such securities will
fluctuate based on the relative strength of the U.S. dollar.
Foreign investment s involve a risk of local political, economic, or
social instability, military action or unrest, or adverse diplomatic
developments, and may be affected by actions of foreign governments adverse
to the interests of U.S. investors. Such actions may include the
possibility of expropriation or nationalization of assets, confiscatory
taxation, restrictions on U.S. investment or on the ability to repatriate
assets or convert currency into U.S. dollars, or other government
intervention. There is no assurance that FMR will be able to anticipate
these potential events or counter their effects. These risks are magnified
for investments in developing countries, which may have relatively unstable
governments, economies based on only a few industries, and securities
markets that tr ade a small number of securities.
Economies of particula r countries or areas of the world may differ
favorably or unfavorably from the economy of the United States. Foreign
markets may offer less protection to investors than U.S. markets. It is
anticipated that in most cases the best available market for foreign
securities will be on an exchange or in over-the-counter markets located
outside of the United States. Foreign stock markets, while growing in
volume and sophistication, are generally not as developed as those in the
United States, and securities of some foreign issuers (particularly those
located in developing countries) may be less liquid and more volatile than
securities of comparable U.S. issuers. Foreign security trading practices,
including those involving securities settlement where fund assets may be
released prior to receipt of payment, may result in increased risk in the
event of a failed trade or the insolvency of a foreign broker-dealer, and
may involve substantial delays. In addition, the costs of foreign
investing, including withholding taxes, brokerage commissions and custodial
costs, are generally higher than for U.S. investors. In general, there is
less overall governmental supervision and regulation of securities
exchanges, brokers, and listed companies than in the United States. It may
also be difficult to enforce legal rights in foreign countries. Foreign
issuers are generally not bound by uniform accounting, auditing, and
financial reporting requirements and standards of practice comparable to
those applicable to U.S. issuers.
Some foreign s ecurities impose restrictions on transfer within the
United States or to U.S. persons. Although securities subject to such
transfer restrictions may be marketable abroad, they may be less liquid
than foreign securities of the same class that are not subject to such
restrictions.
American Depositary Receipts (ADRs) as well as other "hybrid" forms of ADRs
including European Depositary Receipts (EDRs) and Global Depositary
Receipts (GDRs), are certificates evidencing ownership of shares of a
foreign issuer. These certificates are issued by depository banks and
generally trade on an established market in the United States or elsewhere.
The underlying shares are held in trust by a custodian bank or similar
financial institution in the issuer's home country. The depository bank may
not have physical custody of the underlying securities at all times and may
charge fees for various services, including forwarding dividends and
interest and corporate actions. ADRs are an alternative to directly
purchasing the underlying foreign securities in their national markets and
currencies. However, ADRs continue to be subject to many of the risks
associated with investing directly in foreign securities. These risks
include foreign exchange risk as well as the political and economic risks
of the underlying issuer's country.
FOREIGN CURRENCY TRANSACTIONS. A fund may conduct foreign currency
transactions on a spot (i.e., cash) or forward basis (i.e., by entering
into forward contracts to purchase or sell foreign currencies). Although
foreign exchange dealers generally do not charge a fee for such
conversions, 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 at one rate, while offering a
lesser rate of exchange should the counterparty desire to resell that
currency to the dealer. Forward contracts are customized transactions that
require a specific amount of a currency to be delivered at a specific
exchange rate on a specific date or range of dates in the future. Forward
contracts are generally traded in an interbank market 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. A fund may use currency forward contracts
for any purpose consistent with its investment objective.
Successful use of currency management strategies will depend on FMR's skill
in analyzing currency values. Currency management strategies may
substantially change a fund's investment exposure to changes in currency
exchange rates and could result in losses to a fund if currencies do not
perform as FMR anticipates. For example, if a currency's value rose at a
time when FMR had hedged a fund by selling that currency in exchange for
dollars, a fund would not participate in the currency's appreciation. If
FMR hedges currency exposure through proxy hedges, a fund could realize
currency losses from both the hedge and the security position if the two
currencies do not move in tandem. Similarly, if FMR increases a fund's
exposure to a foreign currency and that currency's value declines, a fund
will realize a loss. There is no assurance that FMR's use of currency
management strategies will be advantageous to a fund o r that it will
hedge at appropriate times.
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.
FUTURES AND OPTIONS. The fo llowing sections pertain to futures and
options: Asset Coverage for Futures and Options Positions, Combined
Positions, Correlation of Price Changes, Futures Contracts, Futures Margin
Payments, Limitations on Futures and Options Transactions, Liquidity of
Options and Futures Contracts, Options and Futures Relating to Foreign
Currencies, OTC Options, Purchasing Put and Call Options, and Writing Put
and Call Options.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The 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
option strategy is outstanding, unless they are replaced with other
suitable assets. As a result, there is a possibility that segregation of a
large percentage of the fund's assets could impede portfolio management or
the fund's ability to meet redemption requests or other current
obligations.
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 it typically invests, 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.
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, it agrees to sell the
underlying instrument at a specified future date. The price at which the
purchase and sale will take place is fixed when the fund enters into the
contract. Some currently available futures contracts are based on specific
securities, such as U.S. Treasury bonds or notes, and some are based on
indices of securities prices, such as the Standard & Poor's 500 Index (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 m ay be entitled to return of margin owed to it only in proportion
to the amount received by the FCM's other customers, potentially resulting
in losses to the fund.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS. The fund intends to
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, before engaging in any purchases or sales of futures
contracts or options on futures contracts. 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 option 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; or (c) purchase call options if, as a result, the current
value of option premiums for call options purchased by the fund would
exceed 5% of the fund's total assets. These limitations do not apply to
options attached to or acquired or traded together with their underlying
securities, and do not apply to securities that incorporate features
similar to options.
The above limitations on the fund's 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.
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.
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 its 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.
OTC OPTIONS. Unlike exchange-traded options, which are standardized
with respect to the underlying instrument, expiration date, contract size,
and strike price, the terms of over-the-counter (OTC) options (options not
traded on exchanges) generally are established through negotiation with the
other party to the option contract. While this type of arrangement allows
the fund greater flexibility to tailor an option to its needs, OTC options
generally involve greater credit risk than exchange-traded options, which
are guaranteed by the clearing organization of the exchanges where they are
traded.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, 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, pl us related transaction costs).
The features of call options a re 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.
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,
emerging market securities, 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 was invested in illiquid securities, it would seek to take
appropriate steps to protect liquidity.
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 relat ive to each other.
The performance of indexe d securities depends to a great extent on the
performance of the security, currency, or other instrument to which they
are indexed, and may also be influenced by interest rate changes in the
United States and abroad. At the same time, indexed securities are
sub ject to the credit risks associated with the issuer of the security,
and their values may decline substantially if the issuer's
creditworthiness deteriorates. Recent issuers of indexed securities have
included banks, corporations, and certain U.S. government agencies. Indexed
securities may be more volatile than the underlying instruments.
INTERFUND BORROWING AND LENDING PROGRAM. Pursuant to an exemptive
order issued by the SEC, the fund has received permission to lend money to,
and borrow money from, other funds advised by FMR or its affiliates.
Interfund loans and borrowings normally extend overnight, but can have a
maximum duration of seven days. Loans may be called on one day's notice.
The fund will lend through the program only when the returns are higher
than those available from an investment in repurchase agreements, and will
borrow through the program only when the costs are equal to or lower than
the cost of bank loans. 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.
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 o ther 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 c ould 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 limitations 4 and (i)).
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.
LOWER-QUALITY DEBT SECURITIES. While the market for high-yield
corporate debt securities has been in existence for many years and has
weathered previous economic downturns, the 1980s brought a dramatic
increase in the use of such securities to fund highly leveraged corporate
acquisitions and restructurings. Past experience may not provide an
accurate indication of the future performance of the high-yield bond
market, especially during periods of economic recession.
The market for lower-quality debt securities may be thinner and less active
than that for higher-quality debt securities, which can adversely
affe ct the prices at which the former are sold. If market quotations
are not available, lower-quality debt securities will be valued in
a ccordance 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 dispose of these
securities.
Since the risk of default is higher for lower-quality debt securities,
FMR's research and credit analysis are an especially important part of
managing securities of this type held by 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
or dividend coverage, asset coverage, earnings prospects, and the
experience and managerial strength of the issuer.
The fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise to exercise its rights as a security holder
to seek to protect the interests of security holders if it determines this
to be in the best interest of the fund's shareholders.
MORTGAGE-BACKED SECURITIES. The fund may purchase mortgage-backed
securities issued by government 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
risk. Prepayment, which occurs when unscheduled or early payments are made
on the underlying mortgages, may shorten the effective maturities of these
securities and may lower their total returns.
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.
REAL ESTATE-RELATED INSTRUMENTS include real estate investment
trusts, commercial and residential mortgage-backed securities, and real
estate financings. Real estate-related instruments are sensitive to factors
such as real estate values and property taxes, interest rates, cash flow of
underlying real estate assets, overbuilding, and the management skill and
creditworthiness of the issuer. Real estate-related instruments may also be
affected by tax and regulatory requirements, such as those relating to the
environment.
REPURCHASE AGREEMENTS. In a repur chase agreement, the fund purchases
a security and simultaneously commits to sell that security back to the
original seller at an agreed-upon price. The resale price reflects the
purchase price plus an agreed-upon incremental amount which is unrelated
to the coupon rate or maturity of the purchased security. To protect the
fund from risk that the original seller will not fulfill its obligation,
the securities are held in an account of the fund at a bank,
marked-to-market daily, and maintained at a value at least equal to the
sale price plus the accrued incremental amount. While it does not presently
appear possible to eliminate all risks from these transactions
(particularly the possibility that the value of the underlying security
will be less than the resale p rice, as well as delays and costs to the
fund in connection with bankruptcy proceedings), it is the fund's current
policy to engage in re purchase agreement transactions with parties
whose creditworthiness has been reviewed and found satisfactory by FMR.
RESTRICTED SECURITIES generall y 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.
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 has b een f ound satisfactory by FMR. Such
transactions may increase fluctuations in the market value of the fund's
assets and may be viewed as a fo rm of leverage.
SECURITIES LENDING. The fun d 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 understand s that it is the current view of the SEC Staff that a
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 sec urity loaned, to market forces (i.e.,
capital appreciation or depreciation).
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.
STRIPPED MORTGAGE-BACKED SECURITIES are create d 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 eff ect.
SWAP AGREEMENTS. Swap agr eements 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 int ere st rates (in the United States or abroad), foreign
currency values , mortgage securities, corporate borrowing rates, or other
factors such as security prices or inflation rates. Swap agreements can
take many different forms and are known by a variety of names. 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.
VARIABLE OR FLOATING RATE OBLIGATIONS bear varia ble 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.
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 ca lc ulating its dividends, 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 sepa r ating the interest
and principal components of a U.S. Treasury security and selling them as
two individual se curit ies. CATS (Certificates of Accrual on Treasury
Securities), TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury
Receipts) are examples of derivative zeros.
The Federal Reserve Bank cre ates 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
Co rpo ration (REFCORP) and the Financing Corporation (FICO) can also
be separated in this fashion. ORIGINAL ISSUE ZEROS are ze ro coupon
securities originally issued by the U.S. government, a government agency,
or a corporation in zero cou p on form.
POR TFO LIO 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
m an agement contract. 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 limite d 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 c o mmissions.
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; and t he
availability of securities or the purchasers or sellers of securities. In
addition, such broker-dealers may furnish analyses an d reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and performance of accounts; e ffect securities
transactions, and perform fu nctions 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 t he f und or its other clients, and conversely, such
research provided by broker-dealers who have executed transaction orders on
behalf of other FMR clients may be useful to FMR in carrying out its
obligations to the 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. From
September 1992 through December 1994, FBS operated under the name Fidelity
Brokerage Services Limited, Inc. (FBSL). As of January 1995, FBSL was
converted to an unlimited liability company and assumed the name FBS.
FMR may allocate brokerage transactions to broker-dealers who have entered
into arrangements with FMR under which the broker-dealer allocates a
portion of th e commissions paid by the 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 Trustees per iodically 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.
For the fiscal pe rio d ended December 31, 1996, the fund's
annualized portfolio turnover rate was 11% .
For the fiscal period e nded December 1996, the fund paid brokerage
commissions of $27,515. The fund pays both commissions and spreads in
connection with the placement of portfolio transactions. FBSI is paid on a
commission basis. During the fiscal period ended December 1996, the fund
paid brokerage commissions of $4,976 to FBSI. During 1996, this amounted
to approximately 18% of the aggregate brokerage commissions paid by the
fund for transactions involving approximately 23% of the aggregate dollar
amount of transactions for which the fund paid brokerage commissions.
During the fiscal period ended December 1996, the fund paid $25,851 in
commissions to brokerage firms that provided research services involving
approximately $13,403,299 of transactions. The provision of research
services was not necessarily a factor in the placement of all this business
with such firms.
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 each
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.
VAL U ATION
Fidelity Service Company, Inc. (FSC) norma lly determines the fund's net
asset value per share (NAV) as of the close of the New York Stock Exchange
(NYSE) (normally 4:00 p.m. Eastern time). The valuation of portfolio
securities is determined as of this time for the purpose of computing the
fund's NAV.
Portfolio s ecurities are valued by various methods depending on the
primary market or exchange on which they trade. Fixed-income securities and
other assets for which market quotations are readily available may be
valued at market values determined by such securities' most recent bid
prices (sales prices if the principal market is an exchange) in the
principal market in which they normally are tr aded, as furnished by
recognized dealers in such securities or assets.
Fixed-income s ecurities and convertible securities may also be valued on
the basis of information furnished by a pricing service that uses a
valu ation matrix which incorporates both dealer-supplied valuations and
electronic data processing techniques. Use of pricing se rvi ces has
been approved by the Board of Trustees. A number of pricing services are
available, and the fund may use various pricing servic e s or
discontinue the use of any pricing service.
Most equity securities for which the prim ary market is the United States
are valued at last sale price or, if no sale has occurred, at the closing
bid price. Most equity securities for which the primary market is outside
the United States are valued using the official closing price or the last
sale price in the principal market in which they are traded. If the last
sale price (on the local exchange) is unavailable, the last evaluated
qu ote or last bid price normally is used.
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.
Short-term securities with re maining maturities of sixty days or less
for which market quotations are not readily available are valued either at
amortized cost or at original cost plus accrued interest, both of which
approximate current value. In addition, securities and other assets for
which there is no readily available market value may be valued in good
faith by a committee appointed by the Board of Trustees. The procedures set
forth above need not be used to determine the value of the securities owned
by the fund if, in the opinion of a committee appointed by the Board of
Trustees, some other method would more accurately reflect the fair market
value of such secur ities.
PERFORMANCE
The fund m a y quote performance in various ways. All performance
information supplied by the fund in 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.
YIELD CALCULATIONS. Yields for t he fund are computed by dividing the
fund's interest and dividend income for a given 30-day or one-month
perio d, net of expenses, by the average number of shares entitled to
receive distributions during the period, dividing this figure by the
f un d's 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 fu nds.
Dividends from equity investments are treated as if they were accrued on a
daily basis, solely for the purposes of yield calculat ions. 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 earlie r. Capital gains and
losses generally are excluded from the calculation, as are gains and losses
from currency ex chan ge 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 re turns quoted in advertising
reflect all aspects of the fund's return, including the effect of
reinvesting dividend s a nd capital gain distributions, and any change
in the fund's NAV over a stated period. Average annual total returns are
calculated by determining the growth or decline in value of a hypothetical
historical investment in 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 tot a l return of
100% over ten years would produce an average annual total return of 7.18%,
which is the steady annual rate of return that would equal 100%
growth on a compounded basis in ten years. 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 ann ual to tal 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 annua l t otal returns represent
averaged figures as opposed to the actual year-to-year performance of the
fund.
In addition to average an nual total 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-tax or af ter-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. On December 27, 1996, the 13-week long-term moving
average was $10.15.
HISTORICAL FUND RESULTS. The fund's cumulative total return for the
period September 27, 1996 (commencement of operations) through December 31,
1996 is 9.52%.
The following table shows the income and capital elements of the fund's
cumulative total return. The table compares the fund's return to the record
of the S&P 500, the Dow Jones Industrial Average (DJIA), and the cost of
living, as measured by the Consumer Price Index (CPI), over the same
period. The CPI information is as of the month end closest to the initial
investment date for the fund. The S&P 500 and DJIA comparisons are provided
to show how the fund's total return compared to the record of a broad
unmanaged index of common stocks and a narrower set of stocks of major
industrial companies, respectively, over the same period. Because the fund
invests in fixed-income securities, common stocks represent a different
type of investment from the fund. Common stocks generally offer greater
growth potential than the fund, but generally experience greater price
volatility, which means greater potential for loss. In addition, common
stocks generally provide lower income than a fixed-income investment such
as the fund. The S&P 500 and DJIA returns are based on the prices of
unmanaged groups of stocks and, unlike the fund's returns, do not include
the effect of brokerage commissions or other costs of investing.
During the period from September 27, 1996 (commencement of operations) to
December 31, 1996, a hypothetical $10,000 investment in Real Estate High
Income II would have grown to $10,952, assuming all distributions were
reinvested. This was a period of fluctuating interest rates and bond
prices, and the figures below should not be considered representative of
the dividend income or capital gain or loss that could be realized from an
investment in the fund today. Tax consequences of different investments
have not been factored into the figures below.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
FID ELITY REAL ESTATE HIGH INCOME FUND II IN D ICES
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Y e ar Value of Value of Value of T otal S &P 500 D JI A C ost of
En d ed Initial Reinvested Reinvested Va lue Li ving**
$10,000 Dividend Capital Gain
Investment Distributions Distrib utions
1 996* $ 10,730 $ 222 $ 0 $ 10,952 $ 10,860 $ 11,046 $ 10,083
</TABLE>
* From September 27, 1996 (commencement of operations).
** From month-end closest to initial investment date.
Explanatory Notes: With an initial investment of $10,000 in the fund on
September 27, 1996, the net amount invested in fund shares was $10,000. The
cost of the initial investment ($10,000) together with the aggregate cost
of reinvested dividends and capital gain distributions for the period
covered (their cash value at the time they were reinvested) amounted to
$10,218. If distributions had not been reinvested, the amount of
distributions earned from the fund over time would have been smaller, and
cash payments for the perio d would have amounted to $ 216 for
dividends and $ 0 for capital gain distributions.
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. General ly , Lipper rankings are based on
total return, assume reinvestment of distributions, do not take sales
charges or redemption fees int o consideration, and are 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 sto ck, bond, and money ma rket m utual 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 stabili ty of principal, but generally do not offer the
higher potential returns available 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's performance may also be compared to that of a benchmark index
that is similar to the universe of securities in which the fund may invest.
The total return of a benchmark index reflects reinvestment of all
dividends and capital gains paid by securities included in the index.
Unlike the fund's returns, however, the index returns do not reflect
brokerage commissions, transaction fees, or other costs of investing
directly in the securities included in the index.
The fund may be compared in adv ertis ing to Certificates of Deposit
(CDs) or other investments issued by banks or other depository
institutions. Mutual funds differ from bank investments in several
respects. For example, the fund may offer greater liquidity or hig her
potent ial returns than CDs, 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 strategie s.
S uch 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 materia ls, Fidelity may reference or discuss its
products and services, which may include other Fidelity funds; retirement
investing; broke ra ge products and services; model portfolios or
allocations; saving for college or other goals; charitable giving; an d
the Fidelity credit card. In addition, Fidelity may quote or reprint
financial or business publications and periodicals as they relate to
current economic and political conditions, fund management, portfolio
composition, investment philosophy, investme nt techniques, the
desirability of owning a particular mutual fund, and Fidelity services and
products. Fidelity may also reprint, and u s e 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 f ixed dollar amount in a 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 during periods of low price
levels.
The fund may b e a vailable 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 Decem ber 31, 1996, FMR advised over $28 billion in tax-free fund
assets, $96 billion in money market fund assets, $303 billion in equit y
fund assets, $ 61 billion in international fund assets, and
$ 25 billion in Spartan 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 bu s iness and its net asset value per share
(NAV) is calculated each day the New York Stock Exchange (NYSE) is open for
trading. T he NYSE has designated the following holiday closings for
1997: New Year's Day, President's Day, Good Friday, Memor i al Day,
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 deter m ine that existing conditions make cash
payments undesirable, redemption payments may be made in whole or in part
in securities or other property, valued for this purpose as they are valued
in computing the fund's NAV. Shareholders receiving securities or other
property on rede mpt ion may realize 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 th e 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 inco me a nd 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. As a
consequence, FMR may adjust the fund's income distributions to reflect the
effect of currency fluctuations. However, if foreign currency losses exceed
the fund's net investment income during a taxable year, all or a portion of
the distributions made in the same taxable year would be recharacterized as
a return of capital to shareholders, thereby reducing each shareholder's
cost basis in his or her fund. 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 rec ei ves a
long-term capital gain distribution on shares of the fund, and such shares
are held 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 tax es on other payments or gains with respect to foreign
securities. If, at the close of its fiscal year, more than 50% of the
fund's total assets are invested in securities of foreign issuers, the fund
may elect to pass through foreign taxes paid and thereby allow
share holders to take a credit or deduction on their individual tax
returns.
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 fund distributions, and shares may be subject to
state and local personal pro perty taxes. Investors should consult
their tax advisers to determine whether the 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 acc o rdance with the majority
vote of Class B shares. Under the Investment Company Act of 1940 (1940
Act), control of a company is presumed where one individual or group of
individuals owns more than 25% of the voting stock of that company.
Therefore, through their ownership of voting common stock and the execution
of the shareholders' voting agreement, members of the Johnson family may be
deemed, under the 1940 Act, to form a controlling group with respect to FMR
Corp.
At pr esent, the principal operating activities of FMR Corp. are those
conducted by its division, Fidelity Investments Retail Marketin g
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 ( 1 991), is a management consultant
(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 wa ste, 1993), CH2M Hill Companies
(engineering), Rio Grande, Inc. (oil and gas production), and Daniel
Industries (petroleum m ea surement equipment manufacturer). In
addition, 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 Verm ont School of Business Administration.
E. BRADLEY JONE S (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, h e s erves as Chairman of the Board of Directors of the
National Arts Stabilization Fund, 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.
WILLIAM O. McCOY (63), Trustee (1997), is the Vice President of Finance
for the University of North Carolina (16-school system, 1995). Prior to
his retirement in December 1994, Mr. McCoy was Vice Chairman of the Board
of BellSouth Corporation (telecommunications, 1984) and President of
BellSouth Enterprises (1986). He is currently a Director of Liberty
Corporation (holding company, 1984), Weeks Corporation of Atlanta (real
estate, 1994), Carolina Power and Light Company (electric utility, 1996),
and the Kenan Transport Co. (1996). Previously, he was a Director of First
American Corporation (bank holding company, 1979-1996). In addition, Mr.
McCoy serves as a member of the Board of Visitors for the University of
North Carolina at Chapel Hill (1994) and for the Kenan-Flager Business
School (University of North Carolina at Chapel Hill, 1988).
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 Lea sew ay Transportation Corp. (physical
distribution services). Mr. McDonough is a Director of Brush-Wellman Inc.
(metal refin ing) , York International Corp. (air conditioning and
refrigeration), Commercial Intertech Corp. (hydraulic systems, building
syste ms, and metal products, 1992), CUNO, Inc. (liquid and gas
filtration products, 1996), and Associated Estates Realty Corporation ( a
real estate investment trust, 1993). Mr. McDonough served as a Director of
ACME-Cleveland Corp. (metal working, telecom mu nications, and
electronic products) from 1987-1996.
MARVI N 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. H ENNING, JR. (57), Vice President, is Vice President of
Fidelity's fixed-income funds (1995) and Senior Vice President of FMR
(1995).
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 (As ia ) 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 follo wing table sets forth information describing the compensation
of each Trustee of the fund for his or her services for th e fiscal
period ended December 31, 1996.
COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C>
Trustees Aggregate Total
Compensation Compensation
from from the Fund
the FundA,(dagger) Complex*,A
J. Gary Burkhead ** $ 0 $ 0
Ralph F. Cox 7 137,700
Phyllis Burke Davis 7 134,700
Richard J. Flynn*** 8 168,000
Edward C. Johnson 3d ** 0 0
E. Bradley Jones 7 134,700
Donald J. Kirk 7 136,200
Peter S. Lynch ** 0 0
William O. McCoy**** 5 85,333
Gerald C. McDonough 7 136,200
Edward H. Malone*** 7 136,200
Marvin L. Mann 7 134,700
Thomas R. Williams 7 136,200
</TABLE>
* Information is as of December 31, 1996 for 235 funds in the complex.
** Interested Trustees of the fund are compensated by FMR.
*** Richard J. Flynn and Edward H. Malone served on the Board of Trustees
through December 31, 1996.
****During the period from May 1, 1996 through December 31, 1996, William
O. McCoy served as a Member of the Advisory Board.
(dagger) Estimated
A Compensation figures include cash, a pro rata portion of benefits accrued
under the retirement program for the period ended December 30, 1996 and
required to be deferred, and may include amounts deferred at the election
of Trustees.
Under a retir e ment program adopted in July 1988 and modified in
November 1995 and November 1996 , each non-interested Trustee who
retired before December 30, 1996 may receive payments from a
Fidel it y fund during his or her lifetime based on his or her basic
trustee fees and length of service. The obligation of a fund to make such
payment s is neit her secured nor funded. A Trustee bec ame
eligible to participate in the program at the end of the calender year in
w hich he or she reache d age 72, provided that, at the time of
retirement, he or she ha d served as a Fidelity fund Trustee for
a t least five years.
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 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 funds
may invest in such designated securities under the Plan without shareholder
approval.
As of December 30, 1996, the non-interested Trustees terminated the
retirement program for Trustees who retire after such date. In connection
with the termination of the retirement program, each existing
non-interested Trustee received a credit to his or her Plan account equal
to the present value of the estimated benefits that would have been payable
under the retirement program. The amounts credited to the non-interested
Trustees' Plan accounts are subject to vesting. The termination of the
retirement program and related crediting of estimated benefits to the
Trustees' Plan accounts did not result in a material cost to the funds.
As of January 31, 1997, approximately 52% of the fund's total outstanding
shares was held by FMR affiliates. FMR Corp. is the ultimate parent company
of these FMR affiliates. By virtue of his ownership interest in FMR Corp.,
as described in the "FMR" section on page 17, Mr. Edward C. Johnson 3d,
President and Trustee of the fund, may be deemed to be a beneficial owner
of these shares. As of the above date, with the exception of Mr. Johnson
3d's deemed ownership of the fund's shares, the Trustees and officers of
the fund owned, in the aggregate, less than 1% of the fund's total
outstanding shares.
As of January 31, 1997, the following owned of record or beneficially 5% or
more of outstanding shares of the fund: International Business Machines
Corporation, 3001 Summer Street, Stamford, CT, 06905 (48%).
A shareholder owning of record or beneficially more than 25% of the fund's
outstanding shares may be considered a controlling person. That
shareholder's vote could have a more significant effect on matters
presented at a shareholders' meeting than votes of other shareholders of
the f und.
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 inves t ment 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
c ustodians, 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 t he management fee payable to FMR and the fees
payable to FIIOC and FSC, 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 inf or mation, 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 th e fund's manager pursuant to a management contract dated May
16, 1996, which was approved by shareholders on June 20, 1996 .
For the se rvices of FMR under the contract, the fund pays FMR a monthly
management fee composed of the sum of two elements: a gro up fee rate
and an individual fund fee rate.
The group fee rate is based on the monthly average net assets of all of the
registered investment companies with which FMR has management contracts and
is calculated on a cumulative basis pursuant to the graduated fee rate
schedule shown below on the left. The schedule belo w on the right
shows the effective annual group fee rate at various asset levels, which is
the result of cumulatively applying the ann u alized rates on the
left. For example, the effective annual fee rate at $ 453 billion of
group net assets - the approximate level fo r December 1996 - was
.1425 %, which is the weighted average of the respective fee rates
for each level of group net assets up to $ 453 billion.
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 indiv idu al fund fee rate is .60%. Based on the average group net
assets of the funds advised by FMR for December 1996, the annual management
fee rate would be calculated as follows:
Group Fee Rate Individual Fund Fee Rate
Management Fee R ate
.1425 % +
.60% =
. 7425 %
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.
During the fisc al period ended December 31, 1996, FMR received $56,258
for its services as investment adviser to the fund. This fee was
e quivalent to .74 % of the average net assets of the fund for
1996.
FMR may, from time to time, voluntarily rei mb urse all or a portion
of the fund's operating expenses (exclusive of interest, taxes, brokerage
commission s, and extraordinary expenses). FMR retains the ability to
be repaid for these expense reimbursements in the amount that expenses fall
below the limit prior to the end of the fiscal year. Expense reimbursements
by FMR will increase the fund's total retur n s and yield and
repayment of the reimbursement by the fund will lower its total returns and
yield.
DISTRIBUTION AND SERVICE PLAN
The Trustees have ap pro ved a Distribution and Service Plan on behalf
of the fund (the Plan) pursuant to Rule 12b-1 under the Investment Company
Act of 1940 (the Rule). The Rule provides in substance that a mutual fund
may not engage directly or indirectly in financing any acti vity that
is primarily intended to result in the sale of shares of a fund except
pursuant to a plan approved on behalf of the fun d under the Rule.
The Plan, as approved by the Trustees, allows the fund and FMR to incur
certain expenses that might be consid er ed to constitute indirect
payment by the fund of distribution expenses.
Under the Plan, if the pay ment of management fees by the fund to FMR is
deemed to be indirect financing by the fund of the distribution of its
shares, suc h 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 exp enses in
connection with the offer and sale of shares of the fund. In addition, the
Plan provides that FMR may use its resourc es, including its
management fee revenues, to make payments to third parties that assist in
selling shares of the fund, or to third parties, including banks, that
render shareholder support services.
The Trustees ha ve not authorized such payments to date.
Prior to approving the P la n, the Trustees carefully considered all
pertinent factors relating to the implementation of the Plan, and have
determined that there is a reason able likelihood that the Plan will
benefit the fund and its shareholders. In particular, the Trustees noted
that the Plan doe s not authorize payments by the fund other than
those made to FMR under its management contract with the fund. To th e
exten t that the Plan gives FMR and FDC greater flexibility in
connection with the distribution of shares of the fund, additional
sale s of fund shares may result. Furthermore, certain shareholder
support services may be provided more effectively under the Pla n 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 s ha reholder support
services, or 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. In ad dition, state securities laws
on this issue may differ from the interpretations of federal law expressed
herein, and banks and financia l institutions may be required to
register as dealers pursuant to state law.
The fund may execute portfolio t rans actions with, and purchase
securities issued by, depository institutions that receive payments under
the Plan. No p reference for the instruments of such depository
institutions will be shown in the selection of investm ent s.
CONTRACTS WITH FMR AFFILIATES
FIIOC, an affili ate of FMR, is the transfer, dividend disbursing,
and shareholder servicing agent for the fund.
Under this arrangemen t, FIIOC receives an annual account fee and an
asset based fee for every account. The annual account fee is subject to
increase b ased on postal rate change.
FIIO C 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. Also, FIIOC pays out-of-pocket expenses associa ted with
transfer agent services.
FSC, an af fili ate of FMR, performs the calculations necessary to
determine NAV and dividends for the fund, maintains the fu nd's
accounting records, and administers the fund's securities lending
program. The annual fee rates for these pricing and bookkeepin g
s ervices are based on the fund's average net assets, specifically,
.0750% of the first $500 million of average net assets and .0375% of
avera g e 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. Pricing and
bookkeeping fees, including reimbursement for out-of-pocket expenses, paid
to FSC for the fiscal period ended December 1996 were $ 15,000 .
FSC also receives fees for administering the fund's securities lending
program. For the fiscal year ended December 1996, the fund did not incur
any securities lending fees.
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 ag reements call for FDC
to use all reasonable efforts, consistent with its other business, to
secure purchasers for shares of the fund, which are continuously
offered at NAV. Promotional and administrative expenses in connection with
the offer and sale of shares are paid by FMR.
DESCRIPTION OF THE TRUST
TRUST ORGANIZATION. Fidel ity Real Estate High Income Fund II is a
fund of Fidelity Covington Trust, an open-end management invest ment
company organized as a Massachusetts business trust by Declaration of Trust
dated May 10, 1995. Currently, there is one f und of the trust. The
Declaration of Trust permits the Trustees to create additional funds.
In the event tha t FMR ceases to be the investment adviser to the trust
or a fund, the right of the trust or fund to use the identifying name
"Fidelity" may be withdrawn.
The assets of the trust received for the issue or sale of shares of each
fund and all income, earnings, profits, and proceeds thereof, subject only
to the rights of creditors, are especially allocated to such fund, and
constitute the underlying assets of such fund. The underlying assets of
each fund are segregated on the books of account, and are to be charged
with the liabilities with respect to such fund and with a share of the
general expenses of the trust. Expenses with respect to the trust are to be
allocated in proportion to the asset value of the respective funds, except
where allocations of direct expense can otherwise be fairly made. The
officers of the trust, subject to the general supervision of the Board of
Trustees, have the power to determine which expenses are allocable to a
given fund, or which are general or allocable to all of the funds. In the
event of the dissolution or liquidation of the trust, shareholders o f
each fund are entitled to receive as a class the underlying assets of such
fund available for distribution.
SHAREHOLDER AND TRUSTEE LIABILITY. The trus t is an entity of the
type commonly known as a "Massachusetts business trust." Under
Massachusetts law, shareholders of such a trus t may, under certain
circumstances, be held personally liable for the obligations of the
trust . T he 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 Tr ustees 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
wrongd oing, but nothing in the Declaration of Trust protects
Trustees against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduc t of their office.
VOTING RIGHTS. The fund 's capital consists of shares of beneficial
interest. As a shareholder, you receive one vote for each dollar value of
n et asset value you own. The shares have no preemptive or conversion
rights; the voting and dividend rights, the right of rede mp tion, and
the privilege of exchange are described in the Prospectus. Shares are fully
paid and nonassessable, except as set f o rth under the heading
"Shareholder and Trustee Liability" above. Shareholders representing 10% or
more of the fund may, as set forth in t he Declaration of Trust, call
meetings of the fund for any purpose, including the purpose of voting on
removal of one or more Trus te es. The fund may be terminated upon the
sale of its assets to another open-end management investment company, or
upon liquidation a nd 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 sha rehold er's investment in 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 Ne w Y ork, 110 Washington Street, New York,
New York, is custodian of the assets of the fund. The custodian is
responsible for th e safekeeping of a fund's assets and the
appointment of any subcustodian banks and clearing agencies. The
c ustodia n takes no part in determining the investment policies of a
fund or in deciding which securities are purchased or s old by a
fund. However, a fund may invest in obligations of the custodian and may
purchase securities from or sell securities to the custo dian . The
Chase Manhattan Bank, headquartered in New York, also may serve as a
special purpose custodian of certain assets in conn e ction with
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 fund's independent accountant. The auditor
examines financial state ments for the fund and provides other audit,
tax, and related services.
FINAN C IAL STATEMENTS
The fund's financial statements and financial highlights for the fiscal
period ended December 31 , 1996, and report of the auditor, are
included in the fund's Annual Report, which is a separate report supplied
with this SAI. The fund's financial statements, including the financial
highlights, and report of the auditor are incorporated herein by reference.
For a free additional copy of the fund's Annual Report, contact Fidelity at
1-617-563-6414, 82 Devonshire Street, Boston, MA 02109.
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) (1) Financial Statements and Financial Highlights included in the
Annual Report for Fidelity Real Estate High Income Fund II for the fiscal
year ended December 31, 1996, are incorporated herein by reference to the
fund's Statement of Additional Information and were filed on February 28,
1997 for Fidelity Covington Trust (No. 811-7319) pursuant to Rule 30d-1
under the Investment Company Act of 1940.
(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 incorporated herein by reference to Exhibit (5) of
Fidelity Covington Trust's (File No. 33-60973) Pre-Effective Amendment No.
3.
(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 incorporated herein by reference to Exhibit (6)
of Fidelity Covington Trust's (File No. 33-60973) Pre-Effective Amendment
No. 3.
(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) Appendix A, dated August 31, 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 incorporated
herein by reference to Exhibit 8(b) of Daily Money Fund's Post-Effective
Amendment No. 40 (File No. 2-77909).
(c) Appendix B, dated July 31, 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 incorporated
herein by reference to Exhibit 8(c) of Fidelity Income Fund's
Post-Effective Amendment No. 35 (File No. 2-92661).
(9) Not applicable.
(10) Not applicable.
(11) Consent of Price Waterhouse LLP is filed herewith.
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(15) Form of Distribution and Service Plan pursuant to Rule 12b-1 for
Fidelity Real Estate High Income Fund II is incorporated herein by
reference to Exhibit (15) of Fidelity Covington Trust's (File No. 33-60973)
Pre-Effective Amendment No. 3.
(16) An amended schedule for computation of performance calculations is
filed herewith.
(17) A Financial Data Schedule for the fund is filed herein as Exhibit 17.
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
January 31, 1997
Title of Class Number of Record Holders
Fidelity Real Estate High Income Fund II 3
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.
Pursuant to Section 11 of the Distribution Agreement, the Registrant
agrees to indemnify and hold harmless the Distributor and each of its
directors and officers and each person, if any, who controls the
Distributor within the meaning of Section 15 of the 1933 Act against any
loss, liability, claim, damages or expense 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 Registrant
included a materially misleading statement or omission. However, the
Registrant does not agree to indemnify the Distributor 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 Registrant by or on behalf
of the Distributor. The Registrant does not agree to indemnify the parties
against any liability to which they would be subject by reason of willful
misfeasance, bad faith, gross negligence, and reckless disregard of the
obligations and duties under the Distribution Agreement.
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 Director of FMR, FMR Corp., FMR Texas
Inc., FMR (U.K.) Inc., and FMR (Far East) Inc.; Chairman
of the Board and Representative Director of Fidelity
Investments Japan Limited; President and Trustee of funds
advised by FMR.
J. Gary Burkhead President and Director of FMR, FMR Texas Inc., FMR
(U.K.) Inc., and FMR (Far East) Inc.; Managing Director of
FMR Corp.; Senior Vice President and Trustee of funds
advised by FMR.
Peter S. Lynch Vice Chairman of the Board and Director of FMR.
Marta Amieva Vice President of FMR.
Dwight D. Churchill Vice President of FMR.
John D. Crumrine Assistant Treasurer of FMR, FMR (U.K.) Inc., FMR (Far
East) Inc., and FMR Texas Inc.; Vice President and
Treasurer of FMR Corp.
William Danoff Vice President of FMR and of a fund advised by FMR.
Scott E. DeSano Vice President of FMR.
Craig P. Dinsell Vice President of FMR.
Penelope Dobkin Vice President of FMR and of a fund advised by FMR.
George C. Domolky Vice President of FMR.
Larry A. Domash Vice President of FMR.
Bettina Doulton Vice President of FMR and of funds advised by FMR.
Margaret L. Eagle Vice President of FMR and a fund advised by FMR.
Richard B. Fentin Senior Vice President of FMR and Vice President of a fund
advised by FMR.
Gregory Fraser Vice President of FMR and of a fund advised by FMR.
Jay Freedman Assistant Clerk of FMR; Clerk of FMR Corp., FMR (U.K.)
Inc., and FMR (Far East) Inc.; Secretary of FMR Texas Inc.
Robert Gervis Vice President of FMR.
David L. Glancy Vice President of FMR and of a fund advised by FMR.
Kevin E. Grant Vice President of FMR and of funds advised by FMR.
Barry A. Greenfield Vice President of FMR and of a fund advised by FMR.
Boyce I. Greer Vice President of FMR.
Bart Grenier Vice President of FMR.
Robert Haber Vice President of FMR.
Richard C. Habermann Senior Vice President of FMR; Vice President of funds
advised by FMR.
William J. Hayes Senior Vice President of FMR; Vice President of Equity
funds advised by FMR.
Richard Hazlewood Vice President of FMR and of a fund advised by FMR.
Fred L. Henning Jr. Senior Vice President of FMR; Vice President of
Fixed-Income funds advised by FMR.
John R. Hickling Vice President of FMR and of a fund advised by FMR.
Robert F. Hill Vice President of FMR; Director of Technical Research.
Curt Hollingsworth Vice President of FMR and of funds advised by FMR.
Abigail P. Johnson Vice President of FMR and of a fund advised by FMR.
Stephen P. Jonas Vice President of FMR; Treasurer of FMR, FMR (U.K.)
Inc., FMR (Far East) Inc., and FMR Texas Inc.
David B. Jones Vice President of FMR.
Steven Kaye Vice President of FMR and of a fund advised by FMR.
Francis V. Knox Vice President of FMR; Compliance Officer of FMR (U.K.)
Inc.
David P. Kurrasch Vice President of FMR.
Robert A. Lawrence Senior Vice President of FMR; Vice President of High
Income funds advised by FMR.
Alan Leifer Vice President of FMR.
Harris Leviton Vice President of FMR and of a fund advised by FMR.
Bradford E. Lewis Vice President of FMR and of funds advised by FMR.
Arthur S. Loring Senior Vice President, Clerk, and General Counsel of FMR;
Vice President/Legal, and Assistant Clerk of FMR Corp.;
Secretary of funds advised by FMR.
Richard R. Mace Jr. Vice President of FMR and of funds advised by FMR.
Malcolm W. MacNaught II Vice President of FMR and of a fund advised by FMR.
Robert H. Morrison Vice President of FMR; Director of Equity Trading.
David L. Murphy Vice President of FMR and of funds advised by FMR.
Jacques Perold Vice President of FMR.
Anne Punzak Vice President of FMR.
Kenneth A. Rathgeber Vice President of FMR; Treasurer of funds advised by
FMR.
Lee H. Sandwen Vice President of FMR.
Patricia A. Satterthwaite Vice President of FMR and of a fund advised by FMR.
Thomas T. Soviero Vice President of FMR and of a fund advised by FMR.
Richard Spillane Vice President of FMR; Senior Vice President and Director
of Operations and Compliance of FMR (U.K.) Inc.
Robert E. Stansky Senior Vice President of FMR; Vice President of a fund
advised by FMR.
Thomas Sweeney Vice President of FMR and of a fund advised by FMR.
Beth F. Terrana Senior Vice President of FMR; Vice President of a fund
advised by FMR.
Yoko Tilley Vice President of FMR.
Joel C. Tillinghast Vice President of FMR and of a fund advised by FMR.
Robert Tuckett Vice President of FMR.
Jennifer Uhrig Vice President of FMR and of funds advised by FMR.
George A. Vanderheiden Senior Vice President of FMR; Vice President of funds
advised by FMR.
</TABLE>
Item 29. Principal Underwriters
(a) Fidelity Distributors Corporation (FDC) acts as distributor for most
funds advised by FMR.
(b)
Name and Principal Positions and Offices Positions and Offices
Business Address* With Underwriter With Registrant
Edward C. Johnson 3d Director Trustee and President
Michael Mlinac Director None
Mark Peterson Director None
Paul Hondros President None
Arthur S. Loring Vice President and Clerk Secretary
Caron Ketchum Treasurer and Controller None
Gary Greenstein Assistant Treasurer None
Jay Freedman Assistant Clerk None
Linda Holland Compliance Officer None
* 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 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.
(c) 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 certifies that it meets all
of the requirements for the effectiveness of this Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Post-Effective Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Boston, and Commonwealth of Massachusetts, on the 28th day of
February 1997.
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.
(Signature) (Title) (Date)
<TABLE>
<CAPTION>
<S> <C> <C>
/s/Edward C. Johnson 3d (dagger) President and Trustee February 28, 1997
Edward C. Johnson 3d (Principal Executive Officer)
/s/Kenneth A. Rathgeber * Treasurer February 28, 1997
Kenneth A. Rathgeber
/s/J. Gary Burkhead Trustee February 28, 1997
J. Gary Burkhead
/s/Ralph F. Cox ** Trustee February 28, 1997
Ralph F. Cox
/s/Phyllis Burke Davis ** Trustee February 28, 1997
Phyllis Burke Davis
/s/E. Bradley Jones ** Trustee February 28, 1997
E. Bradley Jones
/s/Donald J. Kirk ** Trustee February 28, 1997
Donald J. Kirk
/s/Peter S. Lynch ** Trustee February 28, 1997
Peter S. Lynch
/s/Marvin L. Mann ** Trustee February 28, 1997
Marvin L. Mann
/s/William O. McCoy ** Trustee February 28, 1997
William O. McCoy
/s/Gerald C. McDonough ** Trustee February 28, 1997
Gerald C. McDonough
/s/Thomas R. Williams ** Trustee February 28, 1997
Thomas R. Williams
</TABLE>
(dagger) Signatures affixed by J. Gary Burkhead pursuant to a power of
attorney dated January 3, 1997 and filed herewith.
* Signature affixed by John H. Costello pursuant to a power of attorney
dated December 19, 1996 and filed herewith.
** Signature affixed by Robert C. Hacker pursuant to a power of attorney
dated December 19, 1996 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 Aberdeen Street Trust Fidelity Government Securities Fund
Fidelity Advisor Annuity Fund Fidelity Hastings Street Trust
Fidelity Advisor Series I Fidelity Hereford Street Trust
Fidelity Advisor Series II Fidelity Income Fund
Fidelity Advisor Series III Fidelity Institutional Cash Portfolios
Fidelity Advisor Series IV Fidelity Institutional Tax-Exempt Cash Portfolios
Fidelity Advisor Series V Fidelity Institutional Trust
Fidelity Advisor Series VI Fidelity Investment Trust
Fidelity Advisor Series VII Fidelity Magellan Fund
Fidelity Advisor Series VIII Fidelity Massachusetts Municipal Trust
Fidelity Beacon Street Trust Fidelity Money Market Trust
Fidelity Boston Street Trust Fidelity Mt. Vernon Street Trust
Fidelity California Municipal Trust Fidelity Municipal Trust
Fidelity California Municipal Trust II Fidelity Municipal Trust II
Fidelity Capital Trust Fidelity New York Municipal Trust
Fidelity Charles Street Trust Fidelity New York Municipal Trust II
Fidelity Commonwealth Trust Fidelity Phillips Street Trust
Fidelity Congress Street Fund Fidelity Puritan Trust
Fidelity Contrafund Fidelity Revere Street Trust
Fidelity Corporate Trust Fidelity School Street Trust
Fidelity Court Street Trust Fidelity Securities Fund
Fidelity Court Street Trust II Fidelity Select Portfolios
Fidelity Covington Trust Fidelity Sterling Performance Portfolio, L.P.
Fidelity Daily Money Fund Fidelity Summer Street Trust
Fidelity Daily Tax-Exempt Fund Fidelity Trend Fund
Fidelity Destiny Plans Fidelity U.S. Investments-Bond Fund, L.P.
Fidelity Destiny Portfolios Fidelity U.S. Investments-Government Securities
Fidelity Deutsche Mark Performance Fund, L.P.
Portfolio, L.P. Fidelity Union Street Trust
Fidelity Devonshire Trust Fidelity Union Street Trust II
Fidelity Exchange Fund Fidelity Yen Performance Portfolio, L.P.
Fidelity Financial Trust Variable Insurance Products Fund
Fidelity Fixed-Income Trust Variable Insurance Products Fund II
</TABLE>
plus any other investment company for which Fidelity Management & Research
Company or an affiliate acts as investment adviser and for which the
undersigned individual serves as President and Director, Trustee, or
General Partner (collectively, the "Funds"), hereby constitute and appoint
J. Gary Burkhead my true and lawful attorney-in-fact, with full power of
substitution, and with full power to him to sign for me and in my name in
the appropriate capacity, all Registration Statements of the Funds on Form
N-1A, Form N-8A, Form N-8B-2, or any successor thereto, any and all
subsequent Amendments, Pre-Effective Amendments, or Post-Effective
Amendments to said Registration Statements on Form N-1A or any successor
thereto, 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 deems necessary or appropriate, to comply with the
provisions of the Securities Act of 1933 and the Investment Company Act of
1940, and all related requirements of the Securities and Exchange
Commission. I hereby ratify and confirm all that said attorney-in-fact or
his substitutes may do or cause to be done by virtue hereof. This power of
attorney is effective for all documents filed on or after January 3, 1997.
WITNESS my hand on the date set forth below.
/s/Edward C. Johnson 3d January 3, 1997
Edward C. Johnson 3d
POWER OF ATTORNEY
I, the undersigned Treasurer and principal financial and accounting
officer of the following investment companies:
<TABLE>
<CAPTION>
<S> <C>
Fidelity Aberdeen Street Trust Fidelity Government Securities Fund
Fidelity Advisor Annuity Fund Fidelity Hastings Street Trust
Fidelity Advisor Series I Fidelity Hereford Street Trust
Fidelity Advisor Series II Fidelity Income Fund
Fidelity Advisor Series III Fidelity Institutional Cash Portfolios
Fidelity Advisor Series IV Fidelity Institutional Tax-Exempt Cash Portfolios
Fidelity Advisor Series V Fidelity Institutional Trust
Fidelity Advisor Series VI Fidelity Investment Trust
Fidelity Advisor Series VII Fidelity Magellan Fund
Fidelity Advisor Series VIII Fidelity Massachusetts Municipal Trust
Fidelity Beacon Street Trust Fidelity Money Market Trust
Fidelity Boston Street Trust Fidelity Mt. Vernon Street Trust
Fidelity California Municipal Trust Fidelity Municipal Trust
Fidelity California Municipal Trust II Fidelity Municipal Trust II
Fidelity Capital Trust Fidelity New York Municipal Trust
Fidelity Charles Street Trust Fidelity New York Municipal Trust II
Fidelity Commonwealth Trust Fidelity Phillips Street Trust
Fidelity Congress Street Fund Fidelity Puritan Trust
Fidelity Contrafund Fidelity Revere Street Trust
Fidelity Corporate Trust Fidelity School Street Trust
Fidelity Court Street Trust Fidelity Securities Fund
Fidelity Court Street Trust II Fidelity Select Portfolios
Fidelity Covington Trust Fidelity Sterling Performance Portfolio, L.P.
Fidelity Daily Money Fund Fidelity Summer Street Trust
Fidelity Daily Tax-Exempt Fund Fidelity Trend Fund
Fidelity Destiny Portfolios Fidelity U.S. Investments-Bond Fund, L.P.
Fidelity Deutsche Mark Performance Fidelity U.S. Investments-Government Securities
Portfolio, L.P. Fund, L.P.
Fidelity Devonshire Trust Fidelity Union Street Trust
Fidelity Exchange Fund Fidelity Union Street Trust II
Fidelity Financial Trust Fidelity Yen Performance Portfolio, L.P.
Fidelity Fixed-Income Trust Variable Insurance Products Fund
Variable Insurance Products Fund II
</TABLE>
plus any other investment company for which Fidelity Management & Research
Company or an affiliate acts as investment adviser and for which the
undersigned individual serves as President and Director, Trustee, or
General Partner (collectively, the "Funds"), hereby constitute and appoint
John H. Costello and John E. Ferris each of them singly my true and lawful
attorneys-in-fact, with full power of substitution, and with full power to
each of them to sign for me and in my name in the appropriate capacity, all
Registration Statements of the Funds on Form N-1A, Form N-8A or any
successor thereto, any and all subsequent Amendments, Pre-Effective
Amendments, or Post-Effective Amendments to said Registration Statements on
Form N-1A or any successor thereto, 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 attorneys-in-fact deems necessary or appropriate, to
comply with the provisions of the Securities Act of 1933 and the 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. This power of attorney is effective for all documents filed on or
after January 1, 1997.
WITNESS my hand on the date set forth below.
/s/Kenneth A. Rathgeber__________ December 19, 1996
Kenneth A. Rathgeber
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 Aberdeen Street Trust Fidelity Government Securities Fund
Fidelity Advisor Annuity Fund Fidelity Hastings Street Trust
Fidelity Advisor Series I Fidelity Hereford Street Trust
Fidelity Advisor Series II Fidelity Income Fund
Fidelity Advisor Series III Fidelity Institutional Cash Portfolios
Fidelity Advisor Series IV Fidelity Institutional Tax-Exempt Cash Portfolios
Fidelity Advisor Series V Fidelity Institutional Trust
Fidelity Advisor Series VI Fidelity Investment Trust
Fidelity Advisor Series VII Fidelity Magellan Fund
Fidelity Advisor Series VIII Fidelity Massachusetts Municipal Trust
Fidelity Beacon Street Trust Fidelity Money Market Trust
Fidelity Boston Street Trust Fidelity Mt. Vernon Street Trust
Fidelity California Municipal Trust Fidelity Municipal Trust
Fidelity California Municipal Trust II Fidelity Municipal Trust II
Fidelity Capital Trust Fidelity New York Municipal Trust
Fidelity Charles Street Trust Fidelity New York Municipal Trust II
Fidelity Commonwealth Trust Fidelity Phillips Street Trust
Fidelity Congress Street Fund Fidelity Puritan Trust
Fidelity Contrafund Fidelity Revere Street Trust
Fidelity Corporate Trust Fidelity School Street Trust
Fidelity Court Street Trust Fidelity Securities Fund
Fidelity Court Street Trust II Fidelity Select Portfolios
Fidelity Covington Trust Fidelity Sterling Performance Portfolio, L.P.
Fidelity Daily Money Fund Fidelity Summer Street Trust
Fidelity Daily Tax-Exempt Fund Fidelity Trend Fund
Fidelity Destiny Portfolios Fidelity U.S. Investments-Bond Fund, L.P.
Fidelity Deutsche Mark Performance Fidelity U.S. Investments-Government Securities
Portfolio, L.P. Fund, L.P.
Fidelity Devonshire Trust Fidelity Union Street Trust
Fidelity Exchange Fund Fidelity Union Street Trust II
Fidelity Financial Trust Fidelity Yen Performance Portfolio, L.P.
Fidelity Fixed-Income Trust Variable Insurance Products Fund
Variable Insurance Products Fund II
</TABLE>
plus any other investment company for which Fidelity Management & Research
Company or an affiliate acts as investment adviser and for which the
undersigned individual serves as Directors, Trustees, or General Partners
(collectively, the "Funds"), hereby constitute and appoint Arthur J. Brown,
Arthur C. Delibert, Stephanie A. Djinis, Robert C. Hacker, Thomas M.
Leahey, Richard M. Phillips, and Dana L. Platt, 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 Registration Statements of the Funds on Form
N-1A, Form N-8A or any successor thereto, any and all subsequent
Amendments, Pre-Effective Amendments, or Post-Effective Amendments to said
Registration Statements on Form N-1A or any successor thereto, 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
deems necessary or appropriate, to comply with the provisions of the
Securities Act of 1933 and the 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. This power of attorney is
effective for all documents filed on or after January 1, 1997.
WITNESS our hands on this nineteenth day of December, 1996.
/s/Edward C. Johnson 3d___________ /s/Peter S. Lynch________________
Edward C. Johnson 3d Peter S. Lynch
/s/J. Gary Burkhead_______________ /s/William O. McCoy______________
J. Gary Burkhead William O. McCoy
/s/Ralph F. Cox __________________ /s/Gerald C. McDonough___________
Ralph F. Cox Gerald C. McDonough
/s/Phyllis Burke Davis_____________ /s/Marvin L. Mann________________
Phyllis Burke Davis Marvin L. Mann
/s/E. Bradley Jones________________ /s/Thomas R. Williams ____________
E. Bradley Jones Thomas R. Williams
/s/Donald J. Kirk __________________
Donald J. Kirk
Exhibit 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference, in the Prospectus and
Statement of Additional Information constituting parts of this
Post-Effective Amendment No. 1 to the Registration Statement on Form N-1A
(the "Registration Statement") of Fidelity Covington Trust: Fidelity Real
Estate High Income Fund II, of our report dated February 21, 1997, relating
to the financial statements and financial highlights appearing in the
December 31, 1996 Annual Report to Shareholders of Fidelity Real Estate
High Income Fund II, which are also incorporated by reference into the
Registration Statement.
We also consent to the references to us under the headings "Financial
Highlights" in the Prospectus and "Auditor" in the Statement of Additional
Information.
/s/PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 28, 1997
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]
Included in this exhibit is a chart showing the data used to calculate the
30-Day Yield as of the fund's fiscal year end.
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<UNDEF>(--------------------------------------------------)
+ 1)6 - 1<UNDEF>
(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 THE COMPUTATION OF MOVING AVERAGES
Fidelity Covington Trust: Fidelity Real Estate High Income Fund II
The 13-week and 39-week moving averages are long-term or weekly moving
averages. As such, they are based upon the closing adjusted NAV (presented
here) on the last business day of each week for the past 13 and 39 weeks
through the last business day of the week closest to the fund's fiscal year
end.
Adjusted Net Asset Value:
Following Day Dividend + Following Day Capital Gains
Current Day Factor = <UNDEF>----------------------------------------------
+ 1<UNDEF> (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
13-week Moving Average is calculated as follows:
Sum of the end-of-week Adjusted Navs for the time period
13
39-week Moving Average is calculated as follows:
Sum of the end-of-week Adjusted NAVs for the time period
39
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000945908
<NAME> Fidelity Covington Trust
<SERIES>
<NUMBER> 11
<NAME> Fidelity Real Estate High Income Fund II
<MULTIPLIER> 1,000
<S>
<C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 54,182
<INVESTMENTS-AT-VALUE> 56,754
<RECEIVABLES> 695
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 57,449
<PAYABLE-FOR-SECURITIES> 4,415
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 83
<TOTAL-LIABILITIES> 4,498
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 50,433
<SHARES-COMMON-STOCK> 4,937
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 12
<ACCUMULATED-NET-GAINS> (42)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,572
<NET-ASSETS> 52,951
<DIVIDEND-INCOME> 310
<INTEREST-INCOME> 552
<OTHER-INCOME> 0
<EXPENSES-NET> 108
<NET-INVESTMENT-INCOME> 754
<REALIZED-GAINS-CURRENT> (15)
<APPREC-INCREASE-CURRENT> 2,572
<NET-CHANGE-FROM-OPS> 3,311
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 792
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,312
<NUMBER-OF-SHARES-REDEEMED> 444
<SHARES-REINVESTED> 69
<NET-CHANGE-IN-ASSETS> 52,951
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 56
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 108
<AVERAGE-NET-ASSETS> 29,327
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> .214
<PER-SHARE-GAIN-APPREC> .732
<PER-SHARE-DIVIDEND> .216
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.730
<EXPENSE-RATIO> 142
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
