FIDELITY
REAL ESTATE HIGH INCOME FUND II
SEMIANNUAL REPORT
JUNE 30, 1999
(2_FIDELITY_LOGOS)(registered trademark)
CONTENTS
PERFORMANCE 3 HOW THE FUND HAS DONE OVER
TIME.
FUND TALK 4 THE MANAGER'S REVIEW OF FUND
PERFORMANCE, STRATEGY AND
OUTLOOK.
INVESTMENTS 5 A COMPLETE LIST OF THE FUND'S
INVESTMENTS WITH THEIR
MARKET VALUES.
FINANCIAL STATEMENTS 9 STATEMENTS OF ASSETS AND
LIABILITIES, OPERATIONS, AND
CHANGES IN NET ASSETS, AS
WELL AS FINANCIAL HIGHLIGHTS.
NOTES 11 NOTES TO THE FINANCIAL
STATEMENTS.
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE
SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND.
THIS REPORT IS NOT AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT
INSURED BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND
ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
FOR MORE INFORMATION ON THE FUND, INCLUDING CHARGES AND EXPENSES, CALL
JEFF GANDEL AT 617-563-6414 FOR A FREE PROSPECTUS. READ IT CAREFULLY
BEFORE YOU INVEST OR SEND MONEY.
FIDELITY REAL ESTATE HIGH INCOME FUND II
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, 1999 PAST 6 MONTHS PAST 1 YEAR LIFE OF FUND
Fidelity Real Estate High 7.48% -4.92% 29.76%
Income II
ML High Yield Master 1.76% 0.94% 23.83%
NAREIT Index 4.94% -10.18% n/a
Real Estate Funds Average 6.64% -5.55% n/a
High Current Yield Funds 3.56% -1.45% n/a
Average
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 value-weighted index of all domestic and yankee high-yield
bonds. Issues included in the index have maturities of one year or
more 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
shares 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
Inc. The fund formerly was included in Lipper's high current yield
category (which included 341 funds for the past six months), but will
be included in the real estate funds category (133 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, 1999 PAST 1 YEAR LIFE OF FUND
Fidelity Real Estate High -4.92% 9.91%
Income II
ML High Yield Master 0.94% 8.06%
NAREIT Index -10.18% n/a
Real Estate Funds Average -5.55% n/a
High Current Yield Funds -1.45% n/a
Average
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. (Note: Lipper calculates average annual total
returns by annualizing each fund's total return, then taking an
arithmetic average. This may produce a different figure than that
obtained by averaging the cumulative total returns and annualizing the
result.)
$100,000 OVER LIFE OF FUND
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
1998/01/31 139710.02 119104.30
1998/02/28 137538.73 119624.61
1998/03/31 140671.46 120655.52
1998/04/30 137335.36 121228.62
1998/05/31 136828.52 122012.86
1998/06/30 136474.17 122677.18
1998/07/31 129516.45 123376.78
1998/08/31 119169.93 118052.96
1998/09/30 123288.45 118288.43
1998/10/31 121429.19 116315.17
1998/11/30 122119.15 121644.09
1998/12/31 120721.10 121684.47
1999/01/31 120078.22 122828.97
1999/02/28 118689.81 121950.35
1999/03/31 117051.24 123001.20
1999/04/30 128304.78 124925.08
1999/05/31 131320.39 124058.61
1999/06/30 129756.55 123825.82
IMATRL PRASUN SHR__CHT 19990630 19990715 112552 R00000000000037
$100,000 OVER LIFE OF FUND: 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, 1999, the
value of the investment would have grown to $129,757 - a 29.76%
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
$123,826 - a 23.83% increase.
(checkmark)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.
FIDELITY REAL ESTATE HIGH INCOME FUND II
FUND TALK: THE MANAGER'S OVERVIEW
(photograph of Mark Snyderman)
NOTE TO SHAREHOLDERS: Mark Snyderman, who managed the fund's
commercial mortgage-backed investments subportfolio since its
inception, became Portfolio Manager of Fidelity Real Estate High
Income Fund II on April 1, 1999.
Q. HOW DID THE FUND PERFORM, MARK?
A. For the six months that ended June 30, 1999, the fund returned
7.48%. During the same period, the NAREIT Index, maintained by the
National Association of Real Estate Investment Trusts, returned 4.94%,
while the real estate funds average returned 6.64%, according to
Lipper Inc. The fund also outpaced the Merrill Lynch High Yield Master
Index - a broad measure of the high-yield bond market - which returned
1.76%. For the 12-month period that ended June 30, 1999, the fund
returned -4.92%, while the Merrill Lynch index, Lipper real estate
funds average and NAREIT Index returned 0.94%, -5.55% and -10.18%,
respectively.
Q. WHAT FACTORS ALLOWED THE FUND TO OUTPERFORM ITS INVESTMENT
BENCHMARKS OVER THE PAST SIX MONTHS?
A. The fund outperformed the Merrill Lynch High Yield Master Index
because, at the end of the period, the fund had approximately 79% of
its investments in real estate investment trusts (REITs), which
significantly outperformed the high-yield bond market as a whole
during the second quarter. Relative to the Lipper average and NAREIT
index, the fund's total return benefited from solid investment
selection in the REIT subportfolio that outpaced the broader real
estate market. In addition, the fund benefited from solid credit
analysis and a recovery within the commercial mortgage-backed
securities (CMBS) market.
Q. WHAT DROVE THE RECOVERY IN REITS?
A. Having performed so badly during 1998, the REIT market had reached
the point where it appeared undervalued compared to the broader equity
market. As a result, when investors shifted assets during the second
quarter of 1999 into more value-oriented stocks from the large-cap
growth stocks that dominated the market for so long, REITs were one of
the beneficiaries of the rotation. In addition, there were a few
significant institutional buy programs in the REIT market during the
period that contributed to the rally.
Q. WHAT WAS THE CATALYST FOR THE REBOUND IN CMBS?
A. In the previous report, I discussed how an unusual supply and
demand imbalance occurred because some of the biggest buyers of
high-yield mortgage securities left the market. These buyers became
sellers because they were overleveraged with debt; when the market
turned down, their situation worsened. This dislocation in the market
resulted in a significant drop in demand, and yield spreads widened
dramatically for CMBS. Over the past six months, however, investors
began to recognize the opportunities and values this unusual event
created and they slowly returned to the market as buyers. With the
increase in demand we experienced during the period, CMBS yield
spreads stabilized and prices increased.
Q. WHICH HOLDINGS CONTRIBUTED TO THE FUND'S PERFORMANCE, AND WHICH
WERE DETRACTORS?
A. Apartment Investment & Management Co., a REIT that operates
diversified apartment communities, performed well as the market began
to recognize its earnings potential and strong fundamental business
outlook. Starwood Hotels & Resorts recovered during the period after
its stock dropped further than the company's business fundamentals
warranted during the fourth quarter of 1998. On the negative side,
Boardwalk Equities didn't perform as anticipated. It's a solid company
of Canadian apartment complexes, but the market ignored its potential.
Public Storage was also a disappointment for the fund, due in part to
the market's negative perception of the company's growth outlook.
Q. WHAT'S YOUR OUTLOOK?
A. I think there is room for REITs to outperform the broader equity
market. There is compelling evidence indicating that the growth
segment of the market is overvalued and that many real estate
investments can provide high income with reasonable growth and with
little downside to their cash flows. While short-term volatility is
likely to be the watchword given the small size of these markets
compared to the broader stock market, I believe the long-term
prospects for REITs are attractive.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER AND DO NOT NECESSARILY REPRESENT THE VIEWS OF FIDELITY OR
ANY OTHER PERSON IN THE FIDELITY ORGANIZATION. ANY SUCH VIEWS ARE
SUBJECT TO CHANGE AT ANY TIME BASED UPON MARKET OR OTHER CONDITIONS
AND FIDELITY DISCLAIMS ANY RESPONSIBILITY TO UPDATE SUCH VIEWS. THESE
VIEWS MAY NOT BE RELIED ON AS INVESTMENT ADVICE AND, BECAUSE
INVESTMENT DECISIONS FOR A FIDELITY FUND ARE BASED ON NUMEROUS
FACTORS, MAY NOT BE RELIED ON AS AN INDICATION OF TRADING INTENT ON
BEHALF OF ANY FIDELITY FUND.
(checkmark)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, 1999, more than $305
million
MANAGER: Mark Snyderman, since inception;
joined Fidelity in 1994
FIDELITY REAL ESTATE HIGH INCOME FUND II
INVESTMENTS JUNE 30, 1999 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
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CORPORATE BONDS - 0.5%
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
CONVERTIBLE BONDS - 0.3%
CONSTRUCTION & REAL ESTATE -
0.3%
REAL ESTATE INVESTMENT TRUSTS
- - 0.3%
Rockefeller Center - $ 1,000,000 $ 805,000
Properties, Inc. 0% 12/31/00
MEDIA & LEISURE - 0.0%
LODGING & GAMING - 0.0%
ShoLodge, Inc. 7.5% 5/1/04 Caa1 200,000 114,500
TOTAL CONVERTIBLE BONDS 919,500
NONCONVERTIBLE BONDS - 0.2%
CONSTRUCTION & REAL ESTATE -
0.1%
REAL ESTATE - 0.1%
LNR Property Corp. 9.375% B1 250,000 236,250
3/15/08
MEDIA & LEISURE - 0.1%
LODGING & GAMING - 0.1%
ShoLodge, Inc.:
9.55% 9/1/07 B3 80,000 53,800
9.75% 11/1/06 B3 515,000 346,338
400,138
TOTAL NONCONVERTIBLE BONDS 636,388
TOTAL CORPORATE BONDS 1,555,888
(Cost $1,737,840)
ASSET-BACKED SECURITIES - 0.2%
Saxon Asset Securities Trust:
8% 12/25/27 (c) BB 400,000 352,422
8.6% 12/25/27 (c) B 345,000 207,104
TOTAL ASSET-BACKED SECURITIES 559,526
(Cost $573,925)
COLLATERALIZED MORTGAGE
OBLIGATIONS - 0.3%
PRIVATE SPONSOR - 0.3%
Credit-Based Asset Servicing
and Securitization LLC
Series 1997 2:
Class 2-B, 7.1917% 12/29/25 Ba3 760,604 344,173
(c)(d)(e)
Class 2-C, 7.1917% 12/29/25 B3 2,550,000 637,500
(c)(d)(e)
TOTAL COLLATERALIZED MORTGAGE 981,673
OBLIGATIONS
(Cost $1,142,614)
COMMERCIAL MORTGAGE
SECURITIES - 10.3%
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
ACP Mortgage LP floater B $ 1,827,408 $ 1,442,556
Series F, 7.3892% 2/28/28
(c)(e)
Artesia Mortgage CMBS, Inc.
Series 1998 C1:
Class G, 6.871% 10/25/31 - 999,248 555,207
(c)(e)
Class NR, 6.423% 10/25/31 - 1,499,623 390,488
(c)(e)
BKB Commercial Mortgage Trust
Series 1997 C1:
Class F, 8.4733% 4/26/04 B 1,476,000 1,376,601
(c)(e)
Class G, 8.4733% 4/27/09 CCC 1,790,500 1,145,920
(c)(e)
Class H, 8.94% 10/25/22 (c)(e) - 1,810,596 362,119
Blaylock Mortgage Capital
Corp. Series 1997 A:
Class B5, 6.425% 10/15/03 (c) B- 250,000 167,773
Class B6, 6.425% 10/15/03 (c) CCC 250,000 127,070
Class B7, 6.425% 10/15/03 (c) - 335,000 112,382
DLJ Mortgage Acceptance Corp.:
Series 1994 MF11 Class B2, Ba2 2,400,000 2,096,250
8.1% 6/18/04 (c)
Series 1994 MF4 Class C, 8.5% - 1,046,000 832,878
4/18/01 (c)
First Chicago/Lennar Trust I - 4,000,000 2,920,000
Series 1997-CHL1 Class E,
8.0547% 4/1/39 (e)
FMAC Loan Receivables Trust:
Series 1997 A Class F, - 919,984 604,889
8.1088% 4/15/19 (c)(e)
Series 1998 A Class E, 7.928% BB 2,500,000 1,612,500
9/15/20 (c)(e)
General Motors Acceptance Ba3 1,000,000 811,300
Corp. Commercial Mortgage
Securities, Inc. Series
1996-C1 Class F, 7.86%
10/15/28 (c)
Kidder Peabody Acceptance - 1,914,000 1,328,137
Corp. I Series 1994 M1 Class
D, 8.1284% 7/25/01 (c)(e)
LB Multifamily Mortgage Trust Caa1 439,860 307,902
Series 1991 4 Class A1,
6.973% 4/25/21 (e)
Meritor Mortgage Security - 12,919,000 1,550,280
Corp. Series 1987 1 Class B,
9.4% 2/1/00 (c)
Morgan (JP) Commercial - 4,885,341 1,420,947
Mortgage Finance Corp.
Series 1997 C4 Class NR,
7.38% 12/26/28 (c)
COMMERCIAL MORTGAGE
SECURITIES - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
Mortgage Capital Funding, Baa3 $ 2,500,000 $ 2,270,313
Inc. Series 1998-MC3 Class
E, 0% 11/18/31 (e)
Nomura Depositor Trust Series - 1,000,000 890,625
1998-ST1A Class B1A, 7.7375%
1/15/03 (c)(e)
Resolution Trust Corp.:
floater Series 1991 M2 Class Ba3 441,954 380,081
A1, 6.6494% 9/25/20 (e)
Series 1991 M2:
Class A2, 6.7041% 9/25/20 (e) Ba3 1,316,701 1,106,029
Class A3, 7.2498% 9/25/20 (e) Ba3 796,793 645,403
Structured Asset Securities
Corp.:
Series 1995-C1 Class F, - 3,000,000 2,325,938
7.375% 9/25/24 (c)
Series 1996 CFL:
Class G, 7.75% 2/25/28 (c) B 3,250,000 2,876,250
Class H, 7.75% 2/25/28 (c) B- 1,500,000 988,065
Structured Mortgage Trust: - 650,000 443,320
Series 1997-2 Class C, 7.41%
1/30/06 (WAC) (c)
Series 1997-2 Class D, 7.41% - 800,000 488,875
1/30/06 (WAC) (c)
TOTAL COMMERCIAL MORTGAGE 31,580,098
SECURITIES
(Cost $30,644,903)
COMPLEX MORTGAGE SECURITIES -
0.3%
INTEREST ONLY STRIPS - 0.0%
BKB Commercial Mortgage Trust BBB 10,807,144 43,229
Series 1997 C1 Class X-1,
0.765% 12/26/01 (c)(e)(f)
PRINCIPAL ONLY STRIPS - 0.3%
Structured Asset Securities - 2,053,319 811,061
Corp. Series 1996 CFL Class
P, 0% 2/25/28 (c)(g)
TOTAL COMPLEX MORTGAGE 854,290
SECURITIES
(Cost $454,621)
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COMMON STOCKS - 84.3%
SHARES
BASIC INDUSTRIES - 0.5%
PAPER & FOREST PRODUCTS - 0.5%
Plum Creek Timber Co. unit 46,000 1,431,750
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
CONSTRUCTION & REAL ESTATE -
83.2%
REAL ESTATE - 5.8%
Boardwalk Equities, Inc. (a) 544,200 $ 5,543,570
Catellus Development Corp. (a) 165,700 2,568,350
Excel Legacy Corp. (a) 975,000 4,631,250
LNR Property Corp. 21,400 457,425
Oxford Properties Group, Inc. 80,000 853,217
(a)
Trammell Crow Co. (a) 70,000 1,150,625
Trizec Hahn Corp. (sub-vtg.) 135,100 2,761,667
17,966,104
REAL ESTATE INVESTMENT TRUSTS
- - 77.4%
Alexandria Real Estate 75,000 2,343,750
Equities, Inc.
AMB Property Corp. 391,600 9,202,600
Amli Residential Properties 50,000 1,118,750
Trust (SBI)
AMRESCO Capital Trust, Inc. 90,000 855,000
Apartment Investment & 497,215 21,255,931
Management Co. Class A
Archstone Communities Trust 162,500 3,564,844
Arden Realty Group, Inc. 75,000 1,846,875
Asset Investors Corp. 223,000 3,331,063
AvalonBay Communities, Inc. 65,200 2,412,400
Boston Properties, Inc. 68,200 2,446,675
Bradley Real Estate, Inc. 169,200 3,510,900
(SBI)
CBL & Associates Properties, 59,800 1,577,225
Inc.
CenterPoint Properties Trust 170,900 6,259,213
Clarion Commercial Holdings, 96,600 652,050
Inc. Class A
Cousins Properties, Inc. 122,000 4,125,125
Crescent Real Estate Equities 276,400 6,564,500
Co.
Duke Realty Investments, Inc. 201,500 4,546,344
Eastgroup Properties, Inc. 157,700 3,163,856
Equity Office Properties Trust 593,296 15,203,210
Equity Residential Properties 125,200 5,641,825
Trust (SBI)
Federal Realty Investment 15,000 344,063
Trust (SBI)
FelCor Lodging Trust, Inc. 139,000 2,884,250
First Industrial Realty 66,400 1,821,850
Trust, Inc.
First Washington Realty 70,000 1,636,250
Trust, Inc.
Fortress Investment Corp. (c) 100,000 1,687,500
General Growth Properties, 72,500 2,573,750
Inc.
Glenborough Realty Trust, 390,600 6,835,500
Inc.
Golf Trust of America, Inc. 179,700 4,391,419
Highwoods Properties, Inc. 173,800 4,768,638
Home Properties of N.Y., Inc. 163,700 4,522,213
Host Marriott Corp. 90,000 1,068,750
Innkeepers USA Trust 320,000 3,200,000
Kimco Realty Corp. 257,900 10,090,338
Lexford Residential Trust 216,600 5,171,325
Liberty Property Trust (SBI) 95,100 2,365,613
LTC Properties, Inc. 277,500 3,607,500
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
CONSTRUCTION & REAL ESTATE -
CONTINUED
REAL ESTATE INVESTMENT TRUSTS
- - CONTINUED
Mack-Cali Realty Corp. 139,050 $ 4,301,859
Meditrust Corp. unit 106,100 1,385,931
MeriStar Hospitality Corp. 275,000 6,170,313
New Plan Excel Realty Trust 90,220 1,623,960
Northstar Capital Investment 85,000 1,349,375
Corp. (c)
Ocwen Asset Investment Corp. 60,000 270,000
Pacific Gulf Properties, Inc. 8,500 192,313
Philips International Realty 500 8,438
Corp.
Post Properties, Inc. 57,000 2,337,000
Public Storage, Inc. 429,400 12,023,200
Reckson Associates Realty 353,400 8,304,900
Corp.
Rouse Co. (The) 85,000 2,156,875
Simon Property Group, Inc. 364,300 9,244,113
SL Green Realty Corp. 110,000 2,248,125
Spieker Properties, Inc. 123,300 4,793,288
Starwood Hotels & Resorts 302,750 9,252,797
Worldwide, Inc.
Sun Communities, Inc. 81,200 2,882,600
Sunstone Hotel Investors, 123,300 1,048,050
Inc.
Taubman Centers, Inc. 103,000 1,358,313
Urban Shopping Centers, Inc. 49,000 1,543,500
Vornado Realty Trust 196,600 6,942,438
Weeks Corp. 20,000 610,000
236,638,483
TOTAL CONSTRUCTION & REAL 254,604,587
ESTATE
MEDIA & LEISURE - 0.6%
LODGING & GAMING - 0.6%
MeriStar Hotels & Resorts, 35,000 120,313
Inc.
Prime Hospitality Corp. (a) 150,000 1,800,000
1,920,313
TOTAL COMMON STOCKS 257,956,650
(Cost $250,884,974)
PREFERRED STOCKS - 1.1%
SHARES VALUE (NOTE 1)
CONVERTIBLE PREFERRED STOCKS
- - 0.2%
CONSTRUCTION & REAL ESTATE -
0.2%
REAL ESTATE INVESTMENT TRUSTS
- - 0.2%
Innkeepers USA Trust Series 40,000 $ 685,000
A, $2.16
NONCONVERTIBLE PREFERRED
STOCKS - 0.9%
CONSTRUCTION & REAL ESTATE -
0.9%
REAL ESTATE INVESTMENT TRUSTS
- - 0.9%
Crown America Realty Trust 40,600 1,913,275
Series A, $5.50
Walden Residential 36,100 780,663
Properties, Inc. $2.30
2,693,938
TOTAL PREFERRED STOCKS 3,378,938
(Cost $3,892,524)
CASH EQUIVALENTS - 3.0%
MATURITY AMOUNT
Investments in repurchase $ 9,209,237 9,208,000
agreements (U.S. Treasury
obligations), in a joint
trading account at 4.84%,
dated 6/30/99 due 7/1/99
(Cost $9,208,000)
TOTAL INVESTMENT IN $ 306,075,063
SECURITIES - 100%
(Cost $298,539,401)
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SECURITY TYPE ABBREVIATIONS
SBI - SHARES OF BENEFICIAL
INTEREST
WAC - WEIGHTED AVERAGE COUPON
LEGEND
(a) Non-income producing
(b) Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investors Service, Inc.
(c) 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
$29,382,734 or 9.6% of net assets.
(d) Partial interest payment received on the last interest payment
date.
(e) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(f) Security represents right to receive monthly interest payments on
an underlying pool of mortgages. Principal shown is the par amount of
the mortgage pool.
(g) Principal Only Strips represent the right to receive the monthly
principal payments on an underlying pool of mortgage loans.
OTHER INFORMATION
The composition of long-term debt holdings as a percentage of total
value of investments in securities, is as follows:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 0.0% AAA, AA, A 0.0%
Baa 0.7% BBB 0.0%
Ba 1.8% BB 0.9%
B 0.4% B 3.1%
Caa 0.1% CCC 0.6%
Ca, C 0.0% CC, C 0.0%
D 0.1%
The percentage not rated by Moody's or S&P amounted to 5.2%. FMR has
determined that unrated debt securities that are lower quality account
for 5.2% of the total value of investment in securities.
INCOME TAX INFORMATION
At June 30, 1999, the aggregate cost of investment securities for
income tax purposes was $300,899,225. Net unrealized appreciation
aggregated $5,175,838, of which $19,368,375 related to appreciated
investment securities and $14,192,537 related to depreciated
investment securities.
At December 31, 1998, the fund had a capital loss carryforward of
approximately $4,711,000 all of which will expire on December 31,
2006.
FIDELITY REAL ESTATE HIGH INCOME FUND II
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1999 (UNAUDITED)
ASSETS
Investment in securities, at $ 306,075,063
value (including repurchase
agreements of $9,208,000)
(cost $298,539,401) - See
accompanying schedule
Cash 927
Receivable for investments 565,536
sold
Dividends receivable 1,307,766
Interest receivable 382,800
TOTAL ASSETS 308,332,092
LIABILITIES
Payable for investments $ 2,403,944
purchased
Accrued management fee 181,225
Other payables and accrued 70,619
expenses
TOTAL LIABILITIES 2,655,788
NET ASSETS $ 305,676,304
Net Assets consist of:
Paid in capital $ 306,011,557
Undistributed net investment 7,406,846
income
Accumulated undistributed net (15,277,761)
realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation 7,535,662
(depreciation) on investments
NET ASSETS, for 28,304,379 $ 305,676,304
shares outstanding
NET ASSET VALUE, offering $10.80
price and redemption price
per share ($305,676,304
(divided by) 28,304,379
shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30,
1999 (UNAUDITED)
INVESTMENT INCOME $ 6,469,834
Dividends
Interest 3,568,653
TOTAL INCOME 10,038,487
EXPENSES
Management fee $ 919,403
Transfer agent fees 30,125
Accounting fees and expenses 59,970
Non-interested trustees' 375
compensation
Custodian fees and expenses 7,368
Registration fees 28,123
Audit 16,697
Legal 63
Miscellaneous 221
Total expenses before 1,062,345
reductions
Expense reductions (81,918) 980,427
NET INVESTMENT INCOME 9,058,060
REALIZED AND UNREALIZED GAIN
(LOSS)
Net realized gain (loss) on:
Investment securities (6,022,325)
Foreign currency transactions (10,277) (6,032,602)
Change in net unrealized
appreciation (depreciation)
on:
Investment securities 16,143,042
Assets and liabilities in 47 16,143,089
foreign currencies
NET GAIN (LOSS) 10,110,487
NET INCREASE (DECREASE) IN $ 19,168,547
NET ASSETS RESULTING FROM
OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED JUNE 30, 1999 YEAR ENDED DECEMBER 31,
(UNAUDITED) 1998
INCREASE (DECREASE) IN NET
ASSETS
Operations Net investment $ 9,058,060 $ 9,354,019
income
Net realized gain (loss) (6,032,602) (9,228,242)
Change in net unrealized 16,143,089 (19,146,746)
appreciation (depreciation)
NET INCREASE (DECREASE) IN 19,168,547 (19,020,969)
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (1,762,888) (8,886,001)
From net investment income
Share transactions Net 101,592,216 132,149,141
proceeds from sales of shares
Reinvestment of distributions 1,762,888 8,885,645
Cost of shares redeemed (7,555,000) (30,442,411)
NET INCREASE (DECREASE) IN 95,800,104 110,592,375
NET ASSETS RESULTING FROM
SHARE TRANSACTIONS
TOTAL INCREASE (DECREASE) 113,205,763 82,685,405
IN NET ASSETS
NET ASSETS
Beginning of period 192,470,541 109,785,136
End of period (including $ 305,676,304 $ 192,470,541
undistributed net investment
income of $7,406,846 and
$111,674, respectively)
OTHER INFORMATION
Shares
Sold 9,860,871 11,955,831
Issued in reinvestment of 170,979 845,461
distributions
Redeemed (743,385) (2,653,000)
Net increase (decrease) 9,288,465 10,148,292
SEE ACCOMPANYING NOTES WHICH
ARE AN INTEGRAL PART OF THE
FINANCIAL STATEMENTS.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED JUNE 30, 1999 YEARS ENDED DECEMBER 31,
(UNAUDITED) 1998 1997 1996 F
SELECTED PER-SHARE DATA
Net asset value, beginning of $ 10.120 $ 12.380 $ 10.730 $ 10.000
period
Income from Investment .370 D .786 D .823 D .214
Operations Net investment
income
Net realized and unrealized .383 (2.454) 2.073 .732
gain (loss)
Total from investment .753 (1.668) 2.896 .946
operations
Less Distributions
From net investment income (.073) (.592) (.721) (.216)
In excess of net investment - - (.085) -
income
From net realized gain - - (.440) -
Total distributions (.073) (.592) (1.246) (.216)
Net asset value, end of period $ 10.800 $ 10.120 $ 12.380 $ 10.730
TOTAL RETURN B, C 7.48% (13.66)% 27.67% 9.52%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 305,676 $ 192,471 $ 109,785 $ 52,951
(000 omitted)
Ratio of expenses to average .85% A .89% .97% 1.42% A
net assets
Ratio of expenses to average .79% A, E .83% E .94% E 1.42% A
net assets after expense
reductions
Ratio of net investment 7.25% A 7.08% 6.90% 9.90% A
income to average net assets
Portfolio turnover rate 57% A 65% 64% 11% A
</TABLE>
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.
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.
F FOR THE PERIOD SEPTEMBER 27, 1996
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996.
NOTES TO FINANCIAL STATEMENTS
For the period ended June 30, 1999 (Unaudited)
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, 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.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Purchases
and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the prevailing exchange rate on the
respective dates of the transactions.
Net realized gains and losses on foreign currency transactions
represent net gains and losses from sales and maturities of foreign
currency contracts, disposition of foreign currencies, the difference
between the amount of net investment income accrued and the U.S.
dollar amount actually received, and gains and losses between trade
and settlement date on purchases and sales of securities. The effects
of changes in foreign currency exchange rates on investments in
securities are included with the net realized and unrealized gain or
loss on investment securities.
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. Dividend income is recorded on the ex-dividend
date, except certain dividends from foreign securities where the
ex-dividend date may have passed, are recorded as soon as the fund is
informed of the ex-dividend date. Non-cash dividends included in
dividend income, if any, are recorded at the fair market value of the
securities received. Interest income, which includes accretion of
original issue discount, is accrued as earned. Investment income is
recorded net of foreign taxes withheld where recovery of such taxes is
uncertain. 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.
EXPENSES. Most expenses of the trust can be directly attributed to a
fund. Expenses which cannot be directly attributed are apportioned
among the funds in the trust.
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, foreign
currency transactions, non-taxable dividends, capital loss
carryforwards, and losses deferred due to wash sales and excise tax
regulations.
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 which will
reverse in a subsequent period. Any taxable income or gain remaining
at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of
trade date. Gains and losses on securities sold are determined on the
basis of identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated
securities. Losses may arise from changes in the value of the foreign
currency or if the counterparties do not perform under the contracts'
terms. The U.S. dollar value of foreign currency contracts is
determined using contractual currency exchange rates established at
the time of each trade.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the fund, along with other
affiliated entities of Fidelity Management & Research Company (FMR),
may transfer uninvested cash balances into one or more joint trading
accounts. These balances are invested in one or more repurchase
agreements for U.S. Treasury or Federal Agency obligations.
2. OPERATING POLICIES - CONTINUED
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 $165,421,120 and $69,176,702, 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 .73% 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 annualized 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 $13,409 for the
period.
5. EXPENSE REDUCTIONS.
FMR has directed certain portfolio trades to brokers who paid a
portion of the fund's expenses. For the period, the fund's expenses
were reduced by $51,575 under this arrangement.
In addition, 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 $749 and $29,594, respectively, under these arrangements.
6. BENEFICIAL INTEREST.
At the end of the period, FMR and its affiliates were record owners of
approximately 75% 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
Mark P. Snyderman, VICE PRESIDENT
Eric D. Roiter, SECRETARY
Richard A. Silver, TREASURER
Matthew N. Karstetter, DEPUTY 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
Abigail P. Johnson
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
