(2_FIDELITY_LOGOS)FIDELITY
REAL ESTATE HIGH INCOME FUND II
ANNUAL REPORT
AUGUST 31, 1993
CONTENTS
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PERFORMANCE 3 HOW THE FUND HAS DONE OVER TIME.
FUND TALK 4 THE MANAGERS' REVIEW OF FUND PERFORMANCE, STRATEGY
AND OUTLOOK.
INVESTMENTS 5 A COMPLETE LIST OF THE FUND'S INVESTMENTS WITH THEIR
MARKET VALUES.
FINANCIAL STATEMENTS 8 STATEMENTS OF ASSETS AND LIABILITIES, OPERATIONS, AND
CHANGES IN NET ASSETS, AS WELL AS FINANCIAL HIGHLIGHTS.
NOTES 10 NOTES TO THE FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT ACCOUNTANTS 12 THE AUDITORS' OPINION.
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THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE
SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND.
THIS REPORT IS NOT AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT
INSURED BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND
ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
FOR MORE INFORMATION ON THE FUND, INCLUDING CHARGES AND EXPENSES, CALL
JEFF GANDEL AT 617-563-6414 FOR A FREE PROSPECTUS. READ IT CAREFULLY
BEFORE YOU INVEST OR SEND MONEY.
REAL ESTATE HIGH INCOME FUND II
PERFORMANCE: THE BOTTOM LINE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $100,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
CUMULATIVE TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1997 PAST 1 LIFE OF
YEAR FUND
FIDELITY REAL ESTATE HIGH INCOME II 27.67% 39.82%
ML HIGH YIELD MASTER INDEX 12.82% 17.38%
HIGH CURRENT YIELD FUNDS AVERAGE 12.96% N/A
CUMULATIVE TOTAL RETURNS show the fund's performance in percentage
terms over a set period - in this case, one year or since the fund
started on September 27, 1996. For example, if you had invested $1,000
in a fund that had a 5% return over the past year, the value of your
investment would be $1,050. You can compare the fund's return to the
performance of the Merrill Lynch High Yield Master Index - a market
capitalization weighted index of all domestic and yankee high-yield
bonds. Issues included in the index have maturities of at least one
year and have a credit rating lower than BBB-/Baa3, but are not in
default. To measure how the fund's performance stacked up against its
peers, you can compare it to the high current yield funds average,
which reflects the performance of mutual funds with similar objectives
tracked by Lipper Analytical Services, Inc. The past one year average
represents a peer group of 181 mutual funds. These benchmarks include
reinvested dividends and capital gains, if any, and exclude the effect
of sales charges.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1997 PAST 1 LIFE OF
YEAR FUND
FIDELITY REAL ESTATE HIGH INCOME II 27.67% 30.47%
ML HIGH YIELD MASTER INDEX 12.82% 13.57%
HIGH CURRENT YIELD FUNDS AVERAGE 12.96% N/A
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and
show you what would have happened if the fund had performed at a
constant rate each year.
$100,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19971231 19980109 165554 S00000000000001
Real Estate High Inc II ML High Yield Master
00673 ML002
1996/09/27 100000.00 100000.00
1996/09/30 100015.46 100103.87
1996/10/31 101680.42 101200.94
1996/11/30 105246.94 103246.93
1996/12/31 109515.21 104041.39
1997/01/31 111734.97 104840.96
1997/02/28 114208.16 106311.66
1997/03/31 116045.52 105130.92
1997/04/30 115287.34 106327.48
1997/05/31 116763.18 108443.04
1997/06/30 122379.11 110121.72
1997/07/31 126954.06 112764.42
1997/08/31 126675.92 112510.70
1997/09/30 138012.42 114431.67
1997/10/31 136149.32 115191.10
1997/11/30 137072.72 116222.73
1997/12/31 139818.20 117384.75
IMATRL PRASUN SHR__CHT 19971231 19980109 165555 R00000000000019
Let's say hypothetically that $100,000 was invested in Fidelity Real
Estate High Income II Fund on September 27, 1996, when the fund
started. As the chart shows, by December 31, 1997, the value of the
investment would have grown to $139,818 - a 39.82% increase on the
initial investment. For comparison, look at how the Merrill Lynch High
Yield Master Index did over the same period. With dividends
reinvested, the same $100,000 investment would have grown to $117,385
- - a 17.38% increase.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of
how it will do tomorrow. The stock market, for
example, has a history of growth in the long
run and volatility in the short run. In turn, the
share price and return of a fund that invests in
stocks or bonds will vary. That means if you sell
your shares during a market downturn, you
might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
The following is an interview with Mark Snyderman, who manages the
fund's commercial mortgage-backed investments, and Barry Greenfield,
manager of the fund's real estate investment trust positions.
Q. HOW DID THE FUND PERFORM, MARK?
M.S. The fund had a good year. For the 12 months that ended December
31, 1997, the fund returned 27.67%. This topped the return of the
Merrill Lynch High Yield Master Index, which returned 12.82% during
the period. The high current yield funds average returned 12.96%
during the period, according to Lipper Analytical Services.
Q. WHAT HELPED THE FUND POST SUCH HEALTHY GAINS?
M.S. Three factors worked in the fund's favor. First, there was a
considerable amount of credit-spread tightening in the real estate
debt market. When high-yield bond spreads tighten relative to U.S.
Treasuries, the fund earns significant capital appreciation. Most of
this tightening occurred in the commercial mortgage-backed segment of
the market - an area in which the fund was well-represented during the
period. Second, my process of security selection led me to buy bonds
that had higher-than-average credit appreciation potential. Most of
these choices performed well. Lastly, the real estate business
prospects throughout our market were generally favorable.
Q. WHY WAS THE ENVIRONMENT SO BENEFICIAL?
M.S. Several developments were influential. We continued to see a rise
in underlying property values, as the real estate market continued to
rebound from its early 1990s recession. In addition, the capital to
refinance mortgages became more available. The final point I'd
highlight was the supply and demand within the market. There were a
lot of new deals issued, but investor demand remained quite strong.
All of these factors helped boost the return to real estate debt
investors. In terms of the portfolio, some of the fund's larger
holdings performed very well, including bonds issued by the former
Resolution Trust Corp., as well as bonds from Confederated Life and
Oregon Commercial Mortgage. In each instance, intensive credit
research on these positions paid off nicely.
Q. BARRY, CAN YOU PAINT THE PICTURE FOR THE REAL ESTATE INVESTMENT
TRUST (REIT) MARKET OVER THE PAST YEAR?
B.G. While not quite matching its 1996 success, the REIT market was
still a pretty good place to be in 1997. During the course of the
year, the market experienced a short-term pricing correction, a record
amount of new issuance and record growth. After REIT prices had soared
to exorbitant levels in 1996 - the market gained close to 36% - REITs
were due for the pricing slowdown we witnessed in April. Some
aggressive REITs were particularly vulnerable because their value had
risen so quickly. By the end of June, the market had picked itself up
off the mat and resumed its strong run. Then came October. Some of the
more aggressive REITs in our market tend to trade in line with the
stock market. When Asia's currency woes hurt U.S. stocks, many of the
more aggressive REITs declined. New issuance also threw things out of
kilter. Supply increased sharply in the second half of the year, and
while demand was still strong, it just couldn't keep pace. To give
some perspective on its growth, the REIT market accounted for $80
billion in assets in 1996. That figure rose to around $146 billion in
1997, nearly doubling in one year. There were bound to be some growing
pains along the way.
Q. WHICH INDIVIDUAL POSITIONS PERFORMED WELL? WHICH DIDN'T?
B.G. Texas-based REITs were attractive, as the state's economy
continued to grow impressively. Health-care REITs, particularly in the
area of assisted living, performed quite well. Other REITs with Texas
exposure included Camden, AIMCO and Patriot American. One
disappointing area was the budget, no-frills hotel REITs, as the
industry increased its construction and development at a time when it
appeared the U.S. economy would be slowing. I also de-emphasized
California REITs, as previously encouraging prospects in that state
began to fade.
Q. CAN YOU EACH PROVIDE YOUR OUTLOOK GOING FORWARD?
M.S. I expect the fund to be more oriented toward lower-quality,
high-risk issues, so thorough credit analysis will be crucial. I don't
think the fund will continue to top its benchmarks by such large
margins, but I'm optimistic that we'll continue to produce good
relative returns over time.
B.G. While REITs are not quite as cheap as they were from 1991 to
1995, they are still less expensive versus common stocks. We continue
to expect REITs to have good earnings in 1998, and they should be
attractive relative to stocks. We may also see an unprecedented number
of mergers and acquisitions within the market in 1998.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGERS ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER. THE MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED
ON MARKET AND OTHER CONDITIONS.
FUND FACTS
GOAL: to provide high current income by
investing primarily in commercial
mortgage-backed securities and real estate
investment trusts
START DATE: September 27, 1996
SIZE: as of December 31, 1997, more than
$109 million
MANAGERS: Mark Snyderman, since inception;
joined Fidelity in 1994; Barry Greenfield, since
inception; joined Fidelity in 1968
(checkmark)
REAL ESTATE HIGH INCOME FUND II
INVESTMENTS DECEMBER 31, 1997
Showing Percentage of Total Value of Investment in Securities
CORPORATE BONDS - 2.5%
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
CONVERTIBLE BONDS - 0.7%
CONSTRUCTION & REAL ESTATE - 0.7%
REAL ESTATE INVESTMENT TRUSTS - 0.7%
Rockefeller Center
Properties, Inc.
0%, 12/31/00 - $ 1,000,000 $ 720,000
NONCONVERTIBLE BONDS - 1.8%
FINANCE - 0.8%
CREDIT & OTHER FINANCE - 0.8%
Cityscape Financial Corp.
12 3/4%, 6/1/04 Caa 1,930,000 849,200
MEDIA & LEISURE - 1.0%
LODGING & GAMING - 1.0%
American Skiing Co.
12%, 7/15/06 B3 1,000,000 1,107,500
TOTAL NONCONVERTIBLE BONDS 1,956,700
TOTAL CORPORATE BONDS
(Cost $3,327,402) 2,676,700
COLLATERALIZED MORTGAGE OBLIGATIONS - 1.1%
PRIVATE SPONSOR - 1.1%
Credit-Based Asset Servicing and
Securitization LLC (c)(d)(g):
Series 1997-2 Class 2-B, 7.29%,
12/29/25 Ba3 1,000,000 515,313
Series 1997-2 Class 2C, 7.29%,
12/29/25 B3 2,550,000 685,313
1,200,626
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $1,269,868) 1,200,626
COMMERCIAL MORTGAGE SECURITIES - 22.1%
ACP Mortgage LP floater
Series F, 7.19%,
2/28/28 (c)(d) B 1,899,890 1,607,783
BKB Commercial Mortgage Trust (c)(d):
Series 1997-C1 Class F,
8.94%, 4/26/04 B 1,476,000 1,352,154
Series 1997-C1 Class G,
8.94%, 4/27/09 CCC 1,790,500 1,199,635
Series 1997-C1 Class H,
8.94%, 10/25/22 - 1,810,596 452,649
Blaylock Mortgage Capital Corp. (c):
Series 1997-A Class B5,
6.425%, 10/15/03 B- 250,000 164,160
Series 1997-A Class B6,
6.425%, 10/15/03 CCC 250,000 106,390
Series 1997-A Class B7,
6.425%, 10/15/03 - 335,000 94,842
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
CS First Boston Mortgage
Securities Corp. commercial
Series 1994-CFB1 Class F,
6.48%, 1/25/28 (c) - $ 11,687 $ 10,460
DLJ Mortgage Acceptance Corp.
Series 1994-MF4 Class C,
8 1/2%, 4/18/01 (c) - 1,046,000 755,003
Franchise Mortgage Acceptance
Corp. Loan Receivables Trust
Series 1997-A Class F,
8.10%, 4/15/19 (c)(d) - 944,114 714,576
First Chicago /Lennar Trust I
Series 1997-CHL1 Class E,
8.11%, 2/28/11 (d) - 4,000,000 3,412,500
JP Morgan Commercial Mortgage
Finance Corp. Series
1997-C4 Class
NR, 7.38%, 12/26/28 (c) - 4,885,341 1,367,895
Kidder Peabody Acceptance
Corp. I Series 1994-M1
Class D, 8.25%,
7/25/01 (c)(d) - 1,914,000 1,228,022
Meritor Mortgage Security Corp.
commercial Series 1987-1
Class B, 9.40%,
2/1/00 (c)(g) - 12,919,000 2,552,794
Resolution Trust Corp. (d):
floater Series 1991-M2 Class A1,
7.25%, 9/25/20 Ba3 832,832 732,892
Series 1991-M2 Class A2,
7.51%, 9/25/20 Ba3 1,315,388 1,118,080
Series 1991-M2 Class A-3,
7.54%, 9/25/20 Ba3 1,011,141 869,581
Structured Asset Securities Corp. (c):
Series 1996-CFL Class G,
7 3/4%, 2/25/28 - 3,250,000 2,987,969
Series 1996-CFL Class H,
7 3/4%, 2/25/28 - 1,500,000 1,218,315
Series 1996-CFL Class J,
7 3/4%, 2/25/28 - 8,606,011 1,290,902
Structured Mortgage Trust Series (c):
1997-2 Class C, 7.41%
1/30/06 - 650,000 418,038
1997-2 Class D, 7.41%
1/30/06 - 800,000 497,700
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $21,616,367) 24,152,340
COMPLEX MORTGAGE SECURITIES - 0.9%
INTEREST ONLY STRIPS - 0.1%
BKB Commercial Mortgage Trust
Series 1997-C1 Class X-1, 1.37%,
12/26/01 (c)(d)(f) BBB 27,428,938 172,802
COMPLEX MORTGAGE SECURITIES - CONTINUED
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
PRINCIPAL ONLY STRIPS - 0.8%
Structured Asset Securities Corp.
Series 1996-CFL Class P,
0%, 2/25/28 (c)(e) - $ 1,994,842 $ 866,048
TOTAL COMPLEX MORTGAGE SECURITIES
(Cost $679,601) 1,038,850
COMMON STOCKS - 64.3%
SHARES
CONSTRUCTION & REAL ESTATE - 61.2%
REAL ESTATE - 3.0%
Boardwalk Equities, Inc. (a) 53,000 658,074
Catellus Development Corp. (a) 56,000 1,119,995
Getty Realty Corp. 27,400 606,225
Rouse Co. (The) 5,900 193,225
Trammell Crow Co. 200 5,150
Trizec Hahn Corp. (sub-vtg.) 28,100 656,528
3,239,197
REAL ESTATE INVESTMENT TRUSTS - 58.2%
Apartment Investment & Management
Co. Class A 89,400 3,285,450
AMB Property Corp. 20,000 502,500
Alexandria Real Estate Equities, Inc. 3,500 110,469
Arden Realty Group, Inc. 18,700 575,025
Asset Investors Corp. 200 4,213
Avalon Properties, Inc. 23,300 720,844
BRE Properties, Inc. Class A 6,400 180,000
Bay Apartment Communities, Inc. 45,500 1,774,500
Bedford Property Investors, Inc. 41,200 901,250
Boston Properties, Inc. 24,600 813,338
Boykin Lodging Co. 44,100 1,165,894
Bradley Real Estate Trust (SBI) 23,300 489,300
Brandywine Realty Trust 25,000 628,125
Burnham Pacific Properties, Inc. 16,200 248,063
Camden Property Trust (SBI) 33,400 1,035,400
CarrAmerica Realty Corp. 25,000 792,188
CenterPoint Properties Corp. 10,900 382,863
Cousins Properties, Inc. 11,500 337,094
Crescent Real Estate Equities, Inc. 54,400 2,142,000
Developers Diversified Realty Corp. 48,600 1,858,950
Duke Realty Investors, Inc. 44,500 1,079,125
Eastgroup Properties, Inc. 30,000 648,750
Equity Inns, Inc. 23,700 349,575
Equity Office Properties Trust 111,796 3,528,569
Equity Residential Properties Trust (SBI) 58,700 2,968,019
Essex Property Trust, Inc. 24,900 871,500
Excel Realty Trust, Inc. 58,900 1,855,350
Felcor Suite Hotels, Inc. 41,200 1,462,600
First Industrial Realty Trust, Inc. 14,800 534,650
Glenborough Realty Trust, Inc. 56,800 1,682,700
Grove Property Trust 25,000 271,875
Highwoods Properties, Inc. 32,500 1,208,594
Home Properties of NY, Inc. 20,000 543,750
Innkeepers USA Trust 69,500 1,077,250
Liberty Property Trust (SBI) 45,000 1,285,313
Macerich Co. 3,100 88,350
Mack-Cali Realty Corp. 106,150 4,352,150
Mid-Atlantic Realty Trust 20,000 293,750
Nationwide Health Properties, Inc. 20,000 510,000
Northstar Capital Investment Corp. (a)(c) 50,000 1,000,000
SHARES VALUE
(NOTE 1)
Patriot American Hospitality, Inc. 111,617 $ 3,215,965
Public Storage, Inc. 67,600 1,985,750
Reckson Associates Realty Corp. 109,900 2,788,713
SL Green Realty Corp. 16,400 425,375
Security Capital Pacific Trust (SBI) 1,200 29,100
Spieker Properties, Inc. 91,900 3,940,213
Starwood Lodging Trust combined
certificate (SBI) 93,550 5,414,206
Sunstone Hotel Investors, Inc. 123,400 2,128,650
Trinet Corporate Realty Trust, Inc. 1,100 42,556
Weeks Corp. 1,100 35,200
Weingarten Realty Investors (SBI) 400 17,925
63,582,989
TOTAL CONSTRUCTION & REAL ESTATE 66,822,186
FINANCE - 1.2%
CREDIT & OTHER FINANCE - 1.2%
ContiFinancial Corp. (a) 1,700 42,819
Insignia Financial Group, Inc. Class A (a) 52,500 1,207,500
1,250,319
MEDIA & LEISURE - 1.9%
LODGING & GAMING - 1.9%
Meditrust Corp. 57,676 2,112,384
TOTAL COMMON STOCKS
(Cost $61,977,779) 70,184,889
NONCONVERTIBLE PREFERRED STOCKS - 2.9%
CONSTRUCTION & REAL ESTATE - 2.9%
REAL ESTATE INVESTMENT TRUSTS - 2.9%
Crown America Realty Trust,
Series A, 11% 40,600 2,121,350
Walden Residential Properties,
Inc. 9.20% 39,000 997,285
TOTAL NONCONVERTIBLE PREFERRED STOCKS
(Cost $2,961,704) 3,118,635
CASH EQUIVALENTS - 6.2%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations), in a joint
trading account at 6.40%, dated
12/31/97 due 1/2/98 $ 6,792,414 $ 6,790,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $98,622,721) $ 109,162,040
LEGEND
1. Non-income producing
2. Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investors Service, Inc.
3. Security exempt from registration under Rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt
from registration, normally to qualified institutional buyers. At the
period end, the value of these securities amounted to $21,258,763 or
19.5% of net assets.
4. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
5. Principal Only Strips represent the right to receive the monthly
principal payments on an underlying pool of mortgage loans.
6. Security represents right to receive monthly interest payments on
an underlying pool of mortgages. Principal shown is the par amount of
the mortgage pool.
7. Non-income producing - issuer filed for protection under the
Federal Bankruptcy Code or is in default of interest payment.
OTHER INFORMATION
The composition of long-term debt holdings as a percentage of total
value of investment in securities, is as follows (ratings are
unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 0.0% AAA, AA, A 0.0%
Baa 0.1% BBB 0.1%
Ba 3.0% BB 0.0%
B 4.5% B 6.1%
Caa 2.0% CCC 2.2%
Ca, C 0.0% CC, C 0.0%
D 0.0%
The percentage not rated by Moody's or S&P amounted to 16.2%. FMR has
determined that unrated debt securities that are lower quality account
for 16.2% of the total value of investment in securities.
INCOME TAX INFORMATION
At December 31, 1997, the aggregate cost of investment securities for
income tax purposes was $99,112,669. Net unrealized appreciation
aggregated $10,049,371, of which $11,587,716 related to appreciated
investment securities and $1,538,345 related to depreciated investment
securities.
The fund hereby designates approximately $550,904 as a capital gain
dividend for the purpose of the dividend paid deduction.
REAL ESTATE HIGH INCOME FUND II
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
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DECEMBER 31, 1997
ASSETS
INVESTMENT IN SECURITIES, AT $ 109,162,040
VALUE (INCLUDING REPURCHASE AGREEMENTS OF $6,790,000)
(COST $98,622,721) - SEE ACCOMPANYING SCHEDULE
CASH 557
RECEIVABLE FOR INVESTMENTS SOLD 493
DIVIDENDS RECEIVABLE 370,974
INTEREST RECEIVABLE 413,391
TOTAL ASSETS 109,947,455
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 56,432
DISTRIBUTIONS PAYABLE 6,357
ACCRUED MANAGEMENT FEE 66,789
OTHER PAYABLES AND 32,741
ACCRUED EXPENSES
TOTAL LIABILITIES 162,319
NET ASSETS $ 109,785,136
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 99,295,443
DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME (10,261)
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS (39,365)
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 10,539,319
NET ASSETS, FOR 8,867,622 $ 109,785,136
SHARES OUTSTANDING
NET ASSET VALUE, OFFERING PRICE $12.38
AND REDEMPTION PRICE PER SHARE ($109,785,136 (DIVIDED BY) 8,867,622 SHARES)
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STATEMENT OF OPERATIONS
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YEAR ENDED DECEMBER 31, 1997
INVESTMENT INCOME $ 2,388,552
DIVIDENDS
INTEREST 3,407,103
TOTAL INCOME 5,795,655
EXPENSES
MANAGEMENT FEE $ 545,372
TRANSFER AGENT FEES 18,195
ACCOUNTING FEES AND EXPENSES 65,343
NON-INTERESTED TRUSTEES' COMPENSATION 278
CUSTODIAN FEES AND EXPENSES 12,187
REGISTRATION FEES 16,618
AUDIT 54,455
LEGAL 4,718
INTEREST 3,107
MISCELLANEOUS 210
TOTAL EXPENSES BEFORE REDUCTIONS 720,483
EXPENSE REDUCTIONS (24,712) 695,771
NET INVESTMENT INCOME 5,099,884
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 4,273,572
FOREIGN CURRENCY TRANSACTIONS (266) 4,273,306
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) 7,967,115
ON INVESTMENT SECURITIES
NET GAIN (LOSS) 12,240,421
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 17,340,305
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STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED SEPTEMBER 27, 1996
DECEMBER 31, (COMMENCEMENT
1997 OF OPERATIONS) TO
DECEMBER 31,
1996
OPERATIONS $ 5,099,884 $ 753,654
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 4,273,306 (15,299)
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) 7,967,115 2,572,204
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 17,340,305 3,310,559
DISTRIBUTIONS TO SHAREHOLDERS (5,099,884) (792,424)
FROM NET INVESTMENT INCOME
IN EXCESS OF NET INVESTMENT INCOME (603,357) -
FROM NET REALIZED GAIN (3,665,507) -
TOTAL DISTRIBUTIONS (9,368,748) (792,424)
SHARE TRANSACTIONS 58,555,795 54,354,999
NET PROCEEDS FROM SALES OF SHARES
REINVESTMENT OF DISTRIBUTIONS 7,806,611 733,039
COST OF SHARES REDEEMED (17,500,000) (4,655,000)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 48,862,406 50,433,038
TOTAL INCREASE (DECREASE) IN NET ASSETS 56,833,963 52,951,173
NET ASSETS
BEGINNING OF PERIOD 52,951,173 -
END OF PERIOD (INCLUDING DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME OF $(10,261)
AND $(12,460), $ 109,785,136 $ 52,951,173
RESPECTIVELY)
OTHER INFORMATION
SHARES
SOLD 4,694,782 5,312,257
ISSUED IN REINVESTMENT OF DISTRIBUTIONS 638,145 68,778
REDEEMED (1,402,267) (444,073)
NET INCREASE (DECREASE) 3,930,660 4,936,962
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
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<S> <C> <C>
FINANCIAL HIGHLIGHTS
SELECTED PER-SHARE DATA YEAR ENDED SEPTEMBER 27, 1996
DECEMBER 31, (COMMENCEMENT
1997 OF OPERATIONS) TO
DECEMBER 31,
1996
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.730 $ 10.000
INCOME FROM INVESTMENT OPERATIONS .823 C .214
NET INVESTMENT INCOME
NET REALIZED AND UNREALIZED GAIN (LOSS) 2.073 .732
TOTAL FROM INVESTMENT OPERATIONS 2.896 .946
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.721) (.216)
IN EXCESS OF NET INVESTMENT INCOME (.085) -
FROM NET REALIZED GAIN (.440) -
TOTAL DISTRIBUTIONS (1.246) (.216)
NET ASSET VALUE, END OF PERIOD $ 12.380 $ 10.730
TOTAL RETURN A, B 27.67% 9.52%
RATIO AND SUPPLEMENTAL DATA $ 109,785 $ 52,951
NET ASSETS, END OF PERIOD (000 OMITTED)
RATIO OF EXPENSES TO AVERAGE NET ASSETS .97% 1.42% F
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS .94% D 1.42% F
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 6.90% 9.90% F
PORTFOLIO TURNOVER RATE 64% 11% F
AVERAGE COMMISSION RATE E $ .0426 $ .0442
A TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED. B THE TOTAL RETURN
WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIOD SHOWN (SEE
NOTE 6 OF NOTES TO FINANCIAL STATEMENTS). C NET INVESTMENT INCOME
PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD.
D FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO EITHER
PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES (SEE NOTE 6 OF NOTES TO FINANCIAL
STATEMENTS). E 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. F ANNUALIZED
</TABLE>
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES.
Fidelity Real Estate High Income Fund II (the fund) is a fund of
Fidelity Covington Trust (the trust) and is authorized to issue an
unlimited number of shares. The trust is registered under the
Investment Company Act of 1940, as amended (the 1940 Act), as an
open-end management investment company organized as a Massachusetts
business trust. The financial statements have been prepared in
conformity with generally accepted accounting principles which permit
management to make certain estimates and assumptions at the date of
the financial statements. The following summarizes the significant
accounting policies of the fund:
SECURITY VALUATION. Equity securities for which quotations are readily
available are valued at the last sale price, or if no sale price, at
the closing bid price. Debt securities for which quotations are
readily available are valued by a pricing service at their market
values as determined by their most recent bid prices in the principal
market (sales prices if the principal market is an exchange) in which
such securities are normally traded. Securities (including restricted
securities) for which market quotations are not readily available are
valued primarily using dealer-supplied quotes or at their fair value
as determined in good faith under consistently applied procedures
under the general supervision of the Board of Trustees. Short-term
securities with remaining maturities of sixty days or less for which
quotations are not readily available are valued at amortized cost or
original cost plus accrued interest, both of which approximate current
value.
INCOME TAXES. As a qualified regulated investment company under
Subchapter M of the Internal Revenue Code, the fund is not subject to
income taxes to the extent that it distributes substantially all of
its taxable income for its fiscal year. The schedule of investments
includes information regarding income taxes under the caption "Income
Tax Information."
INVESTMENT INCOME. Interest income, which includes accretion of
original issue discount, is accrued as earned and dividend income is
recorded on the ex-dividend date. Non-cash dividends included in
dividend income, if any, are recorded at fair market value of the
securities received. The fund may place a debt obligation on
non-accrual status and reduce related interest income by ceasing
current accruals and writing off interest receivables when the
collection of all or a portion of interest has become doubtful based
on consistently applied procedures, under the general supervision of
the Board of Trustees of the fund. A debt obligation is removed from
non-accrual status when the issuer resumes interest payments or when
collectibility of interest is reasonably assured.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are declared daily and
paid monthly from net investment income. Distributions from realized
gains, if any, are recorded on the ex-dividend date.
Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences, which may result in
distribution reclassifications, are primarily due to differing
treatments for paydown gains/losses on certain securities,
partnerships, non-taxable dividends and losses deferred due to wash
sales. The fund also utilized earnings and profits distributed to
shareholders on redemption of shares as a part of the dividends paid
deduction for income tax purposes.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Distributions in excess of net investment income and accumulated
undistributed net realized gain (loss) on investments and foreign
currency transactions may include temporary book and tax basis
differences that will reverse in a subsequent period. Any taxable
income or gain remaining at fiscal year end is distributed in the
following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of
trade date. Gains and losses on securities sold are determined on the
basis of identified cost.
2. OPERATING POLICIES.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission (the SEC), the fund, along with
other affiliated entities of Fidelity Management & Research Company
(FMR), may transfer uninvested cash balances into one or more joint
trading accounts. These balances are invested in one or more
repurchase agreements for U.S. Treasury or Federal Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are
marked-to-market daily and maintained at a value at least equal to the
principal amount of the repurchase agreement (including accrued
interest). FMR, the fund's investment adviser, is responsible for
determining that the value of the underlying securities remains in
accordance with the market value requirements stated above.
RESTRICTED SECURITIES. The fund is permitted to invest in securities
that are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from
registration or to the public if the securities are registered.
Disposal of these securities may involve time-consuming negotiations
and expense, and prompt sale at an acceptable price may be difficult.
At the end of the period, the fund had no investments in restricted
securities (excluding 144A issues).
3. PURCHASES AND SALES OF INVESTMENTS.
Purchases and sales of securities, other than short-term securities,
aggregated $89,477,216 and $44,825,532, respectively.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a
monthly fee that is calculated on the basis of a group fee rate plus a
fixed individual fund fee rate applied to the average net assets of
the fund. The group fee rate is the weighted average of a series of
rates and is based on the monthly average net assets of all the mutual
funds advised by FMR. The rates ranged from .1100% to .3700% for the
period.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
MANAGEMENT FEE - CONTINUED
The annual individual fund fee rate is .60%. In the event that
these rates were lower than the contractual rates in effect during the
period, FMR voluntarily implemented the above rates, as they resulted
in the same or a lower management fee. For the period, the management
fee was equivalent to an annual rate of .74% of average net assets.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations
Company, Inc. (FIIOC), an affiliate of FMR, is the fund's transfer,
dividend disbursing and shareholder servicing agent. FIIOC receives
account fees and asset-based fees that vary according to account size
and type of account. FIIOC pays for typesetting, printing and mailing
of all shareholder reports, except proxy statements. For the period,
the transfer agent fees were equivalent to an annual rate of .02% of
average net assets.
ACCOUNTING FEES. Fidelity Service Company, Inc., an affiliate of FMR,
maintains each fund's accounting records. The fee is based on the
level of average net assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms were $22,602 for the
period.
5. BANK BORROWINGS.
The fund is permitted to have bank borrowings for temporary or
emergency purposes to fund shareholder redemptions. The fund has
established borrowing arrangements with certain banks. Under the most
restrictive arrangement, the fund must pledge to the bank securities
having a market value in excess of 220% of the total bank borrowings.
The interest rate on the borrowings is the bank's base rate, as
revised from time to time. The maximum loan and the average daily loan
balances during the period for which loans were outstanding amounted
to $7,077,000 and $6,396,333, respectively. The weighted average
interest rate was 5.83%.
6. EXPENSE REDUCTIONS.
The fund has entered into an arrangement with its custodian and
transfer agent whereby credits realized as a result of uninvested cash
balances were used to reduce a portion of the fund's expenses. During
the period, the fund's custodian and transfer agent fees were reduced
by $12,184 and $12,528, respectively, under these arrangements.
7. BENEFICIAL INTEREST.
At the end of the period, FMR and its affiliates were record owners of
approximately 57.5% of the total outstanding shares of the fund. In
addition, one unaffiliated shareholder was record owner of more than
10% of the outstanding shares of the fund.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Fidelity Covington Trust and the Shareholders of
Fidelity Real Estate High Income Fund II:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments (except for Moody's and Standard
& Poor's ratings), and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in
all material respects, the financial position of Fidelity Real Estate
High Income Fund II (a fund of Fidelity Covington Trust) at December
31, 1997, the results of its operations for the year then ended, and
the changes in its net assets and the financial highlights for the
periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the
responsibility of the Fidelity Real Estate High Income Fund II's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at December 31, 1997 by
correspondence with the custodian and the application of alternative
auditing procedures where securities purchased were not yet received
by the custodian, provide a reasonable basis for the opinion expressed
above.
/s/Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
February 17, 1998
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
OFFICERS
Edward C. Johnson 3d, PRESIDENT
Robert C. Pozen, SENIOR VICE PRESIDENT
Robert A. Lawrence, VICE PRESIDENT
Mark P. Snyderman, VICE PRESIDENT
Eric D. Roiter, SECRETARY
Richard A. Silver, TREASURER
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
Ralph F. Cox *
Phyllis Burke Davis *
Robert M. Gates *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Marvin L. Mann *
William O. McCoy *
Gerald C. McDonough *
Robert C. Pozen
Thomas R. Williams *
ADVISORY BOARD
J. Gary Burkhead
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER SERVICING AGENT
Fidelity Investments Institutional Operations Company, Inc.
Boston, MA
CUSTODIAN
The Bank of New York
New York, NY
* INDEPENDENT TRUSTEES
