(2_FIDELITY_LOGOS)FIDELITY
REAL ESTATE HIGH INCOME FUND II
SEMIANNUAL 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.
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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 JUNE 30, 1998 PAST 6 PAST 1 LIFE OF
MONTHS YEAR FUND
FIDELITY REAL ESTATE HIGH INCOME II -2.39% 11.52% 36.47%
ML HIGH YIELD MASTER 4.51% 11.40% 22.68%
NAREIT INDEX -5.15% 6.39% N/A
REAL ESTATE FUNDS AVERAGE -4.43% 9.04% N/A
HIGH CURRENT YIELD FUNDS AVERAGE 4.42% 11.45% N/A
CUMULATIVE TOTAL RETURNS show the fund's performance in percentage
terms over a set period - in this case, six months, 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. You can also compare the fund's returns to the
performance of the National Association of Real Estate Investment
Trusts (NAREIT) Index, a market capitalization weighted index that
tracks the common stocks of all tax-qualified Real Estate Investment
Trusts listed on the New York Stock Exchange, American Stock Exchange,
and NASDAQ. To measure how the fund's performance stacked up against
its peers, you can compare it to the real estate funds average, which
reflects the performance of mutual funds with similar objectives
tracked by Lipper Analytical Services, Inc. The fund formerly was
included in Lipper's high current yield category (which included 245
funds for the past six months), but will be included in the real
estate funds category (94 funds) in the future. These benchmarks
include reinvested dividends and capital gains, if any, and exclude
the effect of sales charges.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JUNE 30, 1998 PAST 1 LIFE OF
YEAR FUND
FIDELITY REAL ESTATE HIGH INCOME II 11.52% 19.37%
ML HIGH YIELD MASTER 11.40% 12.34%
NAREIT INDEX 6.39% N/A
REAL ESTATE FUNDS AVERAGE 9.04% N/A
HIGH CURRENT YIELD FUNDS AVERAGE 11.45% 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
Real Estate HI Inc ML High Yield
00673 ML002
1996/09/27 100000.000 100000.00
1996/09/30 100015.460 100103.87
1996/10/31 101680.420 101200.94
1996/11/30 105246.940 103246.93
1996/12/31 109515.210 104041.39
1997/01/31 111734.970 104840.96
1997/02/28 114208.160 106311.66
1997/03/31 116045.520 105130.92
1997/04/30 115287.340 106327.48
1997/05/31 116763.180 108443.04
1997/06/30 122379.110 110121.72
1997/07/31 126954.060 112764.42
1997/08/31 126675.920 112510.70
1997/09/30 138012.420 114431.67
1997/10/31 136149.320 115191.10
1997/11/30 137072.720 116222.73
1997/12/31 139818.200 117384.75
1998/01/31 139710.020 119104.30
1998/02/28 137538.730 119624.61
1998/03/31 140671.460 120655.52
1998/04/30 137335.360 121228.62
1998/05/31 136828.520 122012.86
1998/06/30 136474.170 122677.18
IMATRL PRASUN SHR__CHT 19980731 19980807 091921 R00000000000026
Let's say hypothetically that $100,000 was invested in Fidelity Real
Estate High Income Fund II on September 27, 1996, when the fund
started. As the chart shows, by June 30, 1998, the value of the
investment would have grown to $136,474 - a 36.47% 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 $122,677
- - a 22.68% 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 long-term growth
and short-term volatility. 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)
REAL ESTATE HIGH INCOME FUND II
FUND TALK: THE MANAGERS' OVERVIEW
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. For the six months that ended June 30, 1998, the fund returned
- -2.39%. The Merrill Lynch High Yield Master Index returned 4.51%
during this time, while the real estate funds average returned -4.43%
according to Lipper Analytical Services. The fund beat the NAREIT
index - maintained by the National Association of Real Estate
Investment Trusts - which returned -5.15% during the period. For the
12 months that ended June 30, 1998, the fund posted a return of
11.52%. The Merrill Lynch index and real estate funds average returned
11.40% and 9.04%, respectively, during that period, while the NAREIT
index returned 6.39%.
Q. WHAT FACTORS INFLUENCED PERFORMANCE DURING THE PERIOD?
M.S. One of the major trends over the past six months concerned the
direction of property values. For several years, we've seen a steady
rise in values. During the past six months, however, property values
stopped climbing and assumed more of a flat trajectory. Part of the
reason behind this stems from new supply. Replacement costs and
property values reached more of an equilibrium during this time and
new supply became more economical. This change in expectations for
property values proved more detrimental to the fund's real estate
investment trust (REIT) positions because REITs are often dependent on
growth expectations. At the end of the period, REITs accounted for
around 64% of the fund's underlying investments. The fund's
debt-related holdings were relatively unharmed because the real estate
debt market is less growth-dependent and often operates under the
assumption that property values will remain flat.
Q. WITH RESPECT TO THE FUND'S COMMERCIAL MORTGAGE-BACKED POSITIONS,
WHAT SORTS OF STRATEGIES DID YOU IMPLEMENT DURING THE PERIOD?
M.S. In past years, real estate debt has generated impressive returns
relative to market averages. Over the last few months, however, the
prospective return differences between the securities themselves and
the averages have narrowed. With that in mind, I generally pursued
debt instruments that offered higher prospective returns. These
included investments that I hoped would deliver low- to mid-teen
returns going forward. Over the last six months, the fund's holdings
in Meritor 87-1 bonds fared nicely, as did J.P. Morgan Commercial
Mortgage 97-C4 bonds.
Q. BARRY, THE REIT PORTION OF THE FUND WENT THROUGH A DIFFICULT
PERFORMANCE STRETCH. WHY?
B.G. My emphasis on higher-growth REITs - which tend to be
widely-owned - detracted from performance. When property-related
stocks stagnated, the more growth-dependent REITs were hit
particularly hard. When the Standard & Poor's 500 Index took off again
during this period, managers of traditional stock funds began to look
elsewhere for more aggressive securities. This general slack in REIT
demand also hurt performance. Despite these developments, though, I
remained optimistic that REIT fundamentals - namely occupancy and
lease rates - would remain firm.
Q. HOW DID THE VARIOUS REIT SEGMENTS - HOTELS, OFFICE BUILDINGS,
SHOPPING MALLS, ETC. - PERFORM DURING THE PERIOD?
B.G. Many of the fund's hotel-related REIT positions turned in
disappointing performances, with two factors playing key roles.
First, new legislation proposing restrictions on "paired share" REITs
- - common stocks of two different entities under the same management
that trade as one unit - cast an air of uncertainty over the sector.
Second, even though the fund emphasizes full service hotels, an
oversupply of limited-service hotels - such as Hampton Inn - has been
perceived as detrimental to the entire hotel sector. Office building
REITs also had a tough period, as many investors felt valuations were
excessive and new buying opportunities were limited. On the positive
side, regional shopping mall REITs performed pretty well, primarily
because they had minimal exposure to traditional stock funds. In terms
of individual performance, shopping mall REIT Simon Debartolo Group
did well, as did the fund's position in Apartment Investment &
Management. Detractors included the fund's biggest holding, Starwood
Hotels & Resorts, and Mack-Cali Realty.
Q. COULD YOU EACH PROVIDE YOUR OUTLOOK FOR THE NEXT FEW MONTHS?
B.G. In general, I think the prospective return potential for REITs is
positive. With strong stock picking as our anchor, we'll continue to
look for companies with strong business prospects that could help the
fund's return exceed that of its benchmarks.
M.S. The environment for the real estate debt market looks stable
from this vantage point. Stable property values could help our debt
security selection process, and I think supply and demand should stay
somewhat balanced. The one cloud on the horizon is that the broader
real estate debt markets may issue a glut of debt to builders with
insufficient equity. That's a situation I'll keep a close eye on.
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 June 30, 1998, more than $118 million
MANAGERS: Mark Snyderman, since inception;
joined Fidelity in 1994; Barry Greenfield, since
inception; joined Fidelity in 1968
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REAL ESTATE HIGH INCOME FUND II
INVESTMENTS JUNE 30, 1998 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
CORPORATE BONDS - 2.1%
MOODY'S RATINGS(C) PRINCIPAL VALUE
AMOUNT (NOTE 1)
CONVERTIBLE BONDS - 1.4%
CONSTRUCTION & REAL ESTATE - 0.6%
REAL ESTATE INVESTMENT TRUSTS - 0.6%
Rockefeller Center
Properties, Inc.
0%, 12/31/00 - $ 1,000,000 $ 777,500
MEDIA & LEISURE - 0.8%
LODGING & GAMING - 0.8%
Sholodge, Inc.
7.5%, 5/1/04 B2 1,170,000 912,600
TOTAL CONVERTIBLE BONDS 1,690,100
NONCONVERTIBLE BONDS - 0.7%
CONSTRUCTION & REAL ESTATE - 0.5%
REAL ESTATE - 0.5%
LNR Property Corp.
9.375%, 3/15/08 (d) B1 615,000 613,463
FINANCE - 0.2%
CREDIT & OTHER FINANCE - 0.2%
Emergent Group, Inc.
10.75%, 9/15/04 Caa1 300,000 216,000
TOTAL NONCONVERTIBLE BONDS 829,463
TOTAL CORPORATE BONDS
(Cost $2,624,226) 2,519,563
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.9%
PRIVATE SPONSOR - 0.9%
Credit-Based Asset Servicing
and Securitization LLC (d)(e):
Series 1997-2 Class 2-B,
7.2891%, 12/29/25 Ba3 1,000,000 482,188
Series 1997-2 Class 2C,
7.2891%, 12/29/25 B3 2,550,000 568,969
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $1,269,868) 1,051,157
COMMERCIAL MORTGAGE SECURITIES - 20.0%
ACP Mortgage LP floater Series F,
7.3892%, 2/28/28 (d)(e) B 1,873,627 1,604,293
BKB Commercial Mortgage Trust (d)(e):
Series 1997-C1 Class F,
8.9373%, 4/26/04 B 1,476,000 1,363,916
Series 1997-C1 Class G,
8.9373%, 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. (d):
Series 1997-A Class B5,
6.425%, 10/15/03 B- 250,000 171,797
Series 1997-A Class B6,
6.425%, 10/15/03 CCC 250,000 113,828
Series 1997-A Class B7,
6.425%, 10/15/03 - 335,000 101,966
MOODY'S RATINGS(C) PRINCIPAL VALUE
AMOUNT (NOTE 1)
CS First Boston Mortgage Securities
Corp. commercial
Series 1994-CFB1
Class F, 6.48%, 1/25/28 (d) - $ 14,057 $ 12,724
DLJ Mortgage Acceptance Corp.
Series 1994-MF4 Class C,
8.5%, 4/18/01 (d) - 1,046,000 788,913
Franchise Mortgage Acceptance
Corp. Loan Receivables Trust
Series 1997-A Class F,
8.1047%, 4/15/19 (d)(e) - 935,949 731,795
First Chicago/Lennar Trust I
Series 1997-CHL1 Class E,
8.1077%, 2/28/11 (e) - 4,000,000 3,558,125
JP Morgan Commercial Mortgage
Finance Corp. Series 1997-C4
Class NR,
7.38%, 12/26/28 (d) - 4,885,341 1,490,029
Kidder Peabody Acceptance
Corp. I Series 1994-M1
Class D, 8.1284%,
7/25/01 (d)(e) - 1,914,000 1,263,240
LB Multi-Family Mortgage Trust
Series 1991-4 Class A1,
7.3336%, 4/25/21 (e) Caa1 582,611 362,675
Meritor Mortgage Security Corp.
commercial Series 1987-1
Class B, 9.40%, 2/1/00 (d) - 12,919,000 2,397,766
Resolution Trust Corp. (e):
floater Series 1991-M2
Class A1, 7.0632%,
9/25/20 Ba3 812,097 714,645
Series 1991-M2 Class A2,
7.3758%, 9/25/20 Ba3 1,304,972 1,109,226
Series 1991-M2 Class A-3,
7.2498%, 9/25/20 Ba3 990,861 852,141
Structured Asset Securities Corp. (d):
Series 1996-CFL Class G,
7.75%, 2/25/28 - 3,250,000 3,085,469
Series 1996-CFL Class H,
7.75%, 2/25/28 - 1,500,000 1,231,890
Series 1996-CFL Class J,
7.75%, 2/25/28 - 30,490 4,574
Structured Mortgage Trust (d)(e):
Series 1997-2 Class C,
7.41%, 1/30/06 - 650,000 432,047
Series 1997-2 Class D,
7.41%, 1/30/06 - 800,000 518,750
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $20,144,099) 23,562,093
MORTGAGE-BACKED SECURITIES - 0.5%
Saxon Asset Securities Trust (d):
8%, 12/25/27 BB 400,000 348,875
8.6%, 12/25/27 B 345,000 224,595
TOTAL MORTGAGE-BACKED SECURITIES
(Cost $573,925) 573,470
COMPLEX MORTGAGE SECURITIES - 0.8%
MOODY'S RATINGS(C) PRINCIPAL VALUE
AMOUNT (NOTE 1)
INTEREST ONLY STRIPS - 0.1%
BKB Commercial Mortgage
Trust Series 1997-C1 Class X-1,
1.2564%, 12/26/01 (d)(e)(f) BBB $ 20,147,010 $ 82,603
PRINCIPAL ONLY STRIPS - 0.7%
Structured Asset Securities Corp.
Series 1996-CFL Class P,
0%, 2/25/28 (b)(d) - 2,372,757 830,465
TOTAL COMPLEX MORTGAGE SECURITIES
(Cost $734,987) 913,068
COMMON STOCKS - 72.2%
SHARES
BASIC INDUSTRIES - 0.9%
PAPER & FOREST PRODUCTS - 0.9%
St. Joe Corp. 40,000 1,095,000
CONSTRUCTION & REAL ESTATE - 68.7%
REAL ESTATE - 4.7%
Boardwalk Equities, Inc. (a) 60,000 694,941
Catellus Development Corp. (a) 40,000 707,500
Excel Legacy Corp. (a) 58,900 257,688
Fortress Investment Corp. (d) 100,000 2,000,000
LNR Property Corp. 11,400 292,125
Oxford Properties Group, Inc. (a) 50,000 587,634
Reckson Services Industries, Inc. 41,952 138,966
Rouse Co. (The) 13,100 411,831
Trizec Hahn Corp. (sub-vtg.) 22,200 484,006
5,574,691
REAL ESTATE INVESTMENT TRUSTS - 64.0%
AMB Property Corp. 97,800 2,396,100
Apartment Investment &
Management Co. Class A 127,900 5,052,050
Avalon Bay Communities, Inc. 46,426 1,764,188
Berkshire Realty, Inc. 20,000 233,750
Boston Properties, Inc. 19,600 676,200
Bradley Real Estate Trust (SBI) 26,500 559,813
Brandywine Realty Trust 22,800 510,150
CBL & Associates Properties, Inc. 48,000 1,164,000
Camden Property Trust (SBI) 17,900 532,525
Capstone Capital Corp. 30,000 690,000
CenterPoint Properties Corp. 10,000 330,625
Colonial Properties Trust (SBI) 86,800 2,690,800
Corporate Office Properties Trust 30,000 266,250
Crescent Real Estate Equities, Inc. 61,500 2,067,938
Developers Diversified Realty Corp. 12,000 470,250
Duke Realty Investors, Inc. 43,200 1,023,300
Equity Office Properties Trust 115,796 3,285,712
Excel Realty Trust, Inc. 106,100 3,057,006
FAC Realty, Inc. (a) 65,700 525,600
Gables Residential Trust (SBI) 30,000 813,750
Glenborough Realty Trust, Inc. 169,300 4,465,288
Home Properties of New York, Inc. 45,400 1,211,613
Kimco Realty Corp. 124,800 5,116,800
Legacy Hotels Unit 30,000 175,779
Macerich Co. 35,400 1,037,663
SHARES VALUE (NOTE 1)
Mack-Cali Realty Corp. 139,250 $ 4,786,719
Nationwide Health Properties, Inc. 45,000 1,074,375
Northstar Capital Investment Corp. (a)(d) 50,000 1,000,000
PS Business Parks, Inc. 19,800 465,300
Patriot American Hospitality, Inc. 90,517 2,166,751
ProLogis Trust 23,000 575,000
Public Storage, Inc. 113,400 3,175,200
Reckson Associates Realty Corp. 87,400 2,064,825
Riocan Real Estate Investment
Trust unit 25,000 177,142
SL Green Realty Corp. 1,600 36,000
Simon Debartolo Group, Inc. 192,000 6,240,000
Spieker Properties, Inc. 29,200 1,131,500
Starwood Hotels & Resorts Trust 155,650 7,519,835
Summit Unit 35,000 373,190
Sunstone Hotel Investors, Inc. 60,100 800,081
Taubman Centers, Inc. 135,000 1,923,750
Weeks Corp. 29,000 917,125
Weingarten Realty Investors (SBI) 19,300 806,981
75,350,924
TOTAL CONSTRUCTION & REAL ESTATE 80,925,615
FINANCE - 2.1%
CREDIT & OTHER FINANCE - 1.4%
Insignia Financial Group, Inc. Class A (a) 32,500 796,250
Security Capital US Realty
Class A (Reg.) (a) 63,000 837,900
1,634,150
SECURITIES INDUSTRY - 0.7%
Security Capital Group, Inc. Class B (a) 31,300 833,363
TOTAL FINANCE 2,467,513
MEDIA & LEISURE - 0.5%
LODGING & GAMING - 0.5%
Host Marriott Corp. (a) 33,900 603,844
TOTAL COMMON STOCKS
(Cost $83,554,690) 85,091,972
PREFERRED STOCKS - 3.5%
CONVERTIBLE PREFERRED STOCKS - 0.8%
CONSTRUCTION & REAL ESTATE - 0.8%
REAL ESTATE INVESTMENT TRUSTS - 0.8%
Innkeepers USA Trust $2.16 (d) 40,000 910,000
NONCONVERTIBLE PREFERRED STOCKS - 2.7%
CONSTRUCTION & REAL ESTATE - 2.7%
REAL ESTATE INVESTMENT TRUSTS - 2.7%
Crown America Realty Trust,
Series A, 11% 40,600 2,177,175
Walden Residential Properties,
Inc. 9.20% 39,000 984,750
TOTAL NONCONVERTIBLE PREFERRED STOCKS 3,161,925
TOTAL PREFERRED STOCKS
(Cost $3,961,704) 4,071,925
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $112,863,499) $ 117,783,248
LEGEND
1. Non-income producing
2. Principal Only Strips represent the right to receive the monthly
principal payments on an underlying pool of mortgage loans.
3. Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investors Service, Inc.
4. 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 $24,026,439 or
20.2% of net assets.
5. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
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.
OTHER INFORMATION
The composition of long-term debt holdings as a percentage of total
value of investment in securities, is as follows:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 0.0% AAA, AA, A 0.0%
Baa 0.0% BBB 0.1%
Ba 2.7% BB 0.3%
B 1.8% B 6.6%
Caa 0.5% CCC 1.1%
Ca, C 0.0% CC, C 0.0%
D 0.3%
The percentage not rated by Moody's or S&P amounted to 15.0%. FMR has
determined that unrated debt securities that are lower quality account
for 15.0% of the total value of investment in securities.
INCOME TAX INFORMATION
At June 30, 1998, the aggregate cost of investment securities for
income tax purposes was $112,863,499. Net unrealized appreciation
aggregated $4,919,749, of which $7,999,594 related to appreciated
investment securities and $3,079,845 related to depreciated investment
securities.
REAL ESTATE HIGH INCOME FUND II
FINANCIAL STATEMENTS
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STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
ASSETS
INVESTMENT IN SECURITIES, AT VALUE (COST $112,863,499) - $ 117,783,248
SEE ACCOMPANYING SCHEDULE
CASH 64
FOREIGN CURRENCY HELD AT VALUE 4,636
(COST $4,636)
RECEIVABLE FOR INVESTMENTS SOLD 13,888
RECEIVABLE FOR FUND SHARES SOLD 4,500,000
DIVIDENDS RECEIVABLE 386,852
INTEREST RECEIVABLE 276,271
TOTAL ASSETS 122,964,959
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 80,413
DISTRIBUTIONS PAYABLE 6,395
ACCRUED MANAGEMENT FEE 75,564
NOTES PAYABLE 3,796,000
OTHER PAYABLES AND 32,886
ACCRUED EXPENSES
TOTAL LIABILITIES 3,991,258
NET ASSETS $ 118,973,701
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 113,298,952
UNDISTRIBUTED NET INVESTMENT INCOME 2,194,991
ACCUMULATED UNDISTRIBUTED (1,439,945)
NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 4,919,703
AND ASSETS AND LIABILITIES IN FOREIGN CURRENCIES
NET ASSETS, FOR 9,984,563 $ 118,973,701
SHARES OUTSTANDING
NET ASSET VALUE, OFFERING PRICE $11.92
AND REDEMPTION PRICE PER SHARE ($118,973,701 (DIVIDED BY) 9,984,563 SHARES)
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STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
INVESTMENT INCOME $ 2,277,280
DIVIDENDS
INTEREST 1,952,009
TOTAL INCOME 4,229,289
EXPENSES
MANAGEMENT FEE $ 415,756
TRANSFER AGENT FEES 13,141
ACCOUNTING FEES AND EXPENSES 42,551
NON-INTERESTED TRUSTEES' COMPENSATION 205
CUSTODIAN FEES AND EXPENSES 7,107
REGISTRATION FEES 5,036
AUDIT 17,314
LEGAL 1,126
INTEREST 1,261
MISCELLANEOUS 140
TOTAL EXPENSES BEFORE REDUCTIONS 503,637
EXPENSE REDUCTIONS (17,760) 485,877
NET INVESTMENT INCOME 3,743,412
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES (1,084,840)
FOREIGN CURRENCY TRANSACTIONS 7,893 (1,076,947)
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES (5,619,570)
ASSETS AND LIABILITIES IN (46) (5,619,616)
FOREIGN CURRENCIES
NET GAIN (LOSS) (6,696,563)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (2,953,151)
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STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
OPERATIONS $ 3,743,412 $ 5,099,884
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) (1,076,947) 4,273,306
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) (5,619,616) 7,967,115
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (2,953,151) 17,340,305
DISTRIBUTIONS TO SHAREHOLDERS (1,538,160) (5,099,884)
FROM NET INVESTMENT INCOME
IN EXCESS OF NET INVESTMENT INCOME - (603,357)
FROM NET REALIZED GAIN - (3,665,507)
TOTAL DISTRIBUTIONS (1,538,160) (9,368,748)
SHARE TRANSACTIONS 32,391,998 58,555,795
NET PROCEEDS FROM SALES OF SHARES
REINVESTMENT OF DISTRIBUTIONS 1,537,878 7,806,611
COST OF SHARES REDEEMED (20,250,000) (17,500,000)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 13,679,876 48,862,406
TOTAL INCREASE (DECREASE) IN NET ASSETS 9,188,565 56,833,963
NET ASSETS
BEGINNING OF PERIOD 109,785,136 52,951,173
END OF PERIOD (INCLUDING UNDER (OVER) DISTRIBUTION OF NET
INVESTMENT INCOME OF $2,194,991 AND $(10,261), $ 118,973,701 $ 109,785,136
RESPECTIVELY)
OTHER INFORMATION
SHARES
SOLD 2,687,794 4,694,782
ISSUED IN REINVESTMENT OF DISTRIBUTIONS 126,684 638,145
REDEEMED (1,697,537) (1,402,267)
NET INCREASE (DECREASE) 1,116,941 3,930,660
</TABLE>
<TABLE>
<CAPTION>
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SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
<TABLE>
<CAPTION>
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FINANCIAL HIGHLIGHTS
SELECTED PER-SHARE DATA SIX MONTHS ENDED YEAR ENDED SEPTEMBER 27, 1996
JUNE 30, 1998 DECEMBER 31, (COMMENCEMENT
(UNAUDITED) 1997 OF OPERATIONS) TO
DECEMBER 31,
1996
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.380 $ 10.730 $ 10.000
INCOME FROM INVESTMENT OPERATIONS .399 D .823 D .214
NET INVESTMENT INCOME
NET REALIZED AND UNREALIZED GAIN (LOSS) (.693) 2.073 .732
TOTAL FROM INVESTMENT OPERATIONS (.294) 2.896 .946
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.166) (.721) (.216)
IN EXCESS OF NET INVESTMENT INCOME - (.085) -
FROM NET REALIZED GAIN - (.440) -
TOTAL DISTRIBUTIONS (.166) (1.246) (.216)
NET ASSET VALUE, END OF PERIOD $ 11.920 $ 12.380 $ 10.730
TOTAL RETURN B, C (2.39)% 27.67% 9.52%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 118,974 $ 109,785 $ 52,951
RATIO OF EXPENSES TO AVERAGE NET ASSETS .90% A .97% 1.42% A
RATIO OF EXPENSES TO AVERAGE NET ASSETS
AFTER EXPENSE REDUCTIONS .87% A, E .94% E 1.42% A
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 6.67% A 6.90% 9.90% A
PORTFOLIO TURNOVER RATE 78% A 64% 11% A
AVERAGE COMMISSION RATE F $ .0424 $ .0426 $ .0442
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN
ONE YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD
CERTAIN EXPENSES NOT BEEN REDUCED DURING THE
PERIODS SHOWN (SEE NOTE 6 OF NOTES TO
FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED
BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD.
E 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).
F 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.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 1998 (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES.
Fidelity Real Estate High Income 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 require 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 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 the 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.
Undistributed 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 $64,412,619 and $42,427,658, 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. 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 annualized rate of .74% of average net
assets.
4. FEES AND OTHER TRANSACTIONS WITH
AFFILIATES - CONTINUED
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 annualized rate of .02%
of average net assets.
ACCOUNTING FEES. Fidelity Service Company, Inc. (FSC), an affiliate of
FMR, maintains the fund's accounting records. The fee is based on the
level of average net assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms were $15,514 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 $3,796,000 and $2,396,667, respectively. The weighted average
interest rate was 6.31%.
6. EXPENSE REDUCTIONS.
The fund has entered into arrangements 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
$7,107 and $10,653, respectively, under these arrangements.
7. BENEFICIAL INTEREST.
At the end of the period, FMR and its affiliates were record owners of
approximately 54.2% of the total outstanding shares of the fund. In
addition, one unaffiliated shareholder was record owner of more than
10% of the total outstanding shares of the fund.
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
Barry Greenfield, 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
