FIDELITY(registered trademark)
REAL ESTATE HIGH INCOME FUND II
ANNUAL REPORT
DECEMBER 31, 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 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 12 THE AUDITORS' OPINION.
ACCOUNTANTS
Standard & Poor's, S&P and S&P 500 are registered service marks of The
McGraw-Hill Companies, Inc. and have been licensed for use by Fidelity
Distributors Corporation.
Other third party marks appearing herein are the property of their
respective owners.
All other marks appearing herein are registered or unregistered
trademarks or service marks of FMR Corp. or an affiliated company.
This report is printed on recycled paper using soy-based inks.
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 DECEMBER 31, PAST 1 YEAR LIFE OF FUND
1999
Fidelity Real Estate High -0.46% 20.16%
Income II
ML High Yield Master 1.57% 23.60%
NAREIT Index -6.48% n/a
Real Estate Funds Average -3.14% 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
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 past
one year average represents a peer group of 132 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, PAST 1 YEAR LIFE OF FUND
1999
Fidelity Real Estate High -0.46% 5.80%
Income II
ML High Yield Master 1.57% 6.71%
NAREIT Index -6.48% n/a
Real Estate Funds Average -3.14% 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. (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
1999/07/31 124700.76 123976.15
1999/08/31 122975.15 122749.43
1999/09/30 119314.98 122278.01
1999/10/31 116256.24 121562.12
1999/11/30 115831.80 122953.28
1999/12/31 120163.61 123598.38
IMATRL PRASUN SHR__CHT 19991231 20000118 142552 R00000000000043
$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 December 31, 1999,
the value of the investment would have grown to $120,164 - a 20.16%
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
$123,598 - a 23.60% 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)
An interview with Mark Snyderman, Portfolio Manager of Fidelity Real
Estate High Income Fund II
Q. HOW DID THE FUND PERFORM, MARK?
A. For the 12 months that ended December 31, 1999, the fund posted a
total return of -0.46%. That topped the total return of the NAREIT
Index, maintained by the National Association of Real Estate
Investment Trusts, which was -6.48% during the same period. The fund
also outpaced the real estate funds average tracked by Lipper Inc.,
which returned -3.14%. The Merrill Lynch High Yield Master Index
returned 1.57% during that same time frame.
Q. WHAT FACTORS CAUSED THE FUND TO OUTPERFORM THE NAREIT INDEX AND THE
LIPPER AVERAGE YET TRAIL THE MERRILL LYNCH INDEX?
A. The fund's commercial mortgage-backed securities (CMBS)
subportfolio proved to be the largest contributor to relative
performance during the 12-month period, as these securities outpaced
the high-yield bond market by wide margins. Our CMBS exposure helped
stave off some of the negativity that pervaded the real estate
investment trust (REIT) market during this time frame, powering the
fund past its Lipper peers - a group almost exclusively invested in
REITs. On a sector basis, REITs struggled during the period as
investors chased more attractive investment opportunities elsewhere in
the marketplace, most notably in the high-flying technology sector.
Strong security selection, however, and an overweighted position in
larger, better-managed REITs - which benefited from a rally late in
the period - helped the fund's REIT subportfolio outperform the NAREIT
Index during the past 12 months. Still, with over 85% of its assets
invested in lagging real-estate equity investments, the fund struggled
to keep pace with the Merrill Lynch High Yield Master Index, which
represents a broad range of high-yield corporate bonds.
Q. HOW DID THE FUND'S HOLDINGS IN CMBS AFFECT PERFORMANCE?
A. A modestly improved technical environment caused by strengthening
investor interest in the sector and a steady falloff in new issuance -
in response to sharply rising interest rates - helped fuel the
sector's recovery during the period. In-depth credit analysis paved
the way for much of the strong performance, and the fund was rewarded
for holding some bonds whose credits improved appreciably. Yield
spreads narrowed further than corporates relative to Treasuries, which
also helped.
Q. WHAT FACTORS INFLUENCED THE PERFORMANCE OF REITS?
A. Declining earnings growth expectations spurred by slumping - albeit
positive - rental growth hampered REITs for much of the period. So,
although property markets remained relatively stable overall during
the period, they provided returns that weren't all that exciting to
the equity investor. The rotation away from growth stocks in the early
spring, as the market reached seemingly unsteady levels, helped draw
some inflows, but this movement was, for the most part, too
short-lived to offer any real sustaining value to the sector.
Q. WHICH HOLDINGS ADDED TO FUND RETURNS? WHICH DETRACTED?
A. The market rallied around the strong earnings growth delivered by
well-managed REITs such as office property giant Equity Office and
Apartment Investment & Management Co. - an operator of diversified
apartment communities. Midwest industrial warehouse concern
CenterPoint Properties was another REIT that helped. SASCO 96-CFL P,
JPMC 97-C4 NR and KPAC 94-M1 D led the way for CMBS holdings. On the
downside, shopping mall REITs General Growth Properties and Simon
Property Group recoiled from the growing threat of electronic
commerce. Diversified REIT Glenborough Realty also detracted from
performance.
Q. WHAT'S YOUR OUTLOOK?
A. I'm optimistic about the fund's prospects. If property markets
remain stable, rent growth and earnings growth should continue to
moderate for real estate companies. In this environment, I will focus
on the highest quality companies that continually add value to their
collection of assets. I expect some short-term volatility, but the
longer-term prospects remain good for our positioning in REITs.
Turning to CMBS, spreads remain wide relative to comparably rated
corporate bonds, so as long as we do our credit work right, we'll have
the opportunity to add bonds with higher yields without incurring any
additional credit risk. We'll also look to issues with improving
credit fundamentals, anticipating their price appreciation.
Additionally, I feel that there's still some opportunity for yield
spread tightening relative to Treasuries, which bodes well for the
fund.
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 December 31, 1999, more than
$321 million
MANAGER: Mark Snyderman, since inception;
joined Fidelity in 1994
FIDELITY REAL ESTATE HIGH INCOME II
INVESTMENTS DECEMBER 31, 1999
Showing Percentage of Net Assets
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CORPORATE BONDS - 0.4%
MOODY'S RATINGS (UNAUDITED) (D) 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 $ 835,000
Properties, Inc. 0% 12/31/00
NONCONVERTIBLE BONDS - 0.1%
MEDIA & LEISURE - 0.1%
LODGING & GAMING - 0.1%
ShoLodge, Inc.:
9.55% 9/1/07 Caa2 80,000 52,000
9.75% 11/1/06 Caa2 515,000 334,750
386,750
TOTAL CORPORATE BONDS 1,221,750
(Cost $1,360,583)
ASSET-BACKED SECURITIES - 0.2%
Saxon Asset Securities Trust:
8% 12/25/27 (b) BB 400,000 347,453
8.6% 12/25/27 (b) B 345,000 202,791
TOTAL ASSET-BACKED SECURITIES 550,244
(Cost $573,925)
COLLATERALIZED MORTGAGE
OBLIGATIONS - 0.3%
PRIVATE SPONSOR - 0.3%
Credit-Based Asset Servicing
and Securitization LLC
Series 1997-2:
Class 2B, 7.1864% 12/29/25 Ba3 705,823 335,928
(b)(c)(g)
Class 2C, 7.1864% 12/29/25 B3 2,550,000 700,453
(b)(c)(g)
TOTAL COLLATERALIZED MORTGAGE 1,036,381
OBLIGATIONS
(Cost $1,113,494)
COMMERCIAL MORTGAGE
SECURITIES - 7.8%
ACP Mortgage LP floater BB 1,827,408 1,553,297
Series 1 Class F, 6.7622%
2/28/28 (b)(c)
Artesia Mortgage CMBS, Inc.
Series 1998 C1:
Class G, 6.871% 10/25/31 - 999,248 539,945
(b)(c)
Class NR, 6.423% 10/25/31 - 1,499,623 393,592
(b)(c)
MOODY'S RATINGS (UNAUDITED) (D) PRINCIPAL AMOUNT VALUE (NOTE 1)
BKB Commercial Mortgage Trust
Series 1997-C1:
Class G, 8.4914% 4/27/09 CCC $ 1,790,500 $ 1,145,920
(b)(c)
Class H, 8.94% 10/25/22 (b)(c) - 1,803,572 360,714
Blaylock Mortgage Capital
Corp. Series 1997-A:
Class B5, 6.425% 10/15/03 (b) B- 250,000 171,602
Class B6, 6.425% 10/15/03 (b) CCC 250,000 127,813
Class B7, 6.425% 10/15/03 (b) - 335,000 124,369
DLJ Mortgage Acceptance Corp. - 1,046,000 881,092
Series 1994-MF4 Class C,
8.5% 4/18/01 (b)
First Chicago/Lennar Trust I - 4,000,000 2,812,500
Series 1997-CHL1 Class E,
8.1256% 4/1/39 (c)
FMAC Loan Receivables Trust:
Series 1997-A Class F, - 919,983 579,015
8.1096% 4/15/19 (b)(c)
Series 1998-A Class E, BB 2,500,000 1,436,328
7.9296% 9/15/20 (b)(c)
General Motors Acceptance Ba3 1,000,000 782,520
Corp. Commercial Mortgage
Securities, Inc. Series
1996-C1 Class F, 7.86%
10/15/28 (b)
Kidder Peabody Acceptance - 1,914,000 1,435,500
Corp. I Series 1994-M1 Class
D, 8.1284% 7/25/01 (b)(c)
LB Multifamily Mortgage Trust Caa1 431,284 345,028
Series 1991-4 Class A1,
7.1377% 4/25/21 (c)
Meritor Mortgage Security - 12,919,000 1,114,910
Corp. Series 1987-1 Class
B, 9.4% 2/1/00 (b)(g)
Morgan (JP) Commercial - 4,885,341 1,429,535
Mortgage Finance Corp.
Series 1997 C4 Class NR,
7.38% 12/26/28 (b)
Nomura Depositor Trust Series - 1,000,000 916,563
1998-ST1A Class B1A,
8.1938% 1/15/03 (b)(c)
Resolution Trust Corp.:
floater Series 1991-M2 Class Baa3 335,934 288,903
A1, 6.9106% 9/25/20 (c)
Series 1991-M2:
Class A2, 7.1315% 9/25/20 (c) Baa3 1,302,528 1,094,124
Class A3, 6.9066% 9/25/20 (c) Baa3 707,354 572,957
COMMERCIAL MORTGAGE
SECURITIES - CONTINUED
MOODY'S RATINGS (UNAUDITED) (D) PRINCIPAL AMOUNT VALUE (NOTE 1)
Structured Asset Securities
Corp.:
Series 1995-C1 Class F, - $ 3,000,000 $ 2,319,961
7.375% 9/25/24 (b)
Series 1996-CFL:
Class G, 7.75% 2/25/28 (b) B+ 3,250,000 2,718,828
Class H, 7.75% 2/25/28 (b) B- 1,500,000 957,000
Structured Mortgage Trust
weighted average coupon
Series 1997-2:
Class C, 7.41% 1/30/06 (b) - 650,000 467,188
Class D, 7.41% 1/30/06 (b) - 800,000 515,375
TOTAL COMMERCIAL MORTGAGE 25,084,579
SECURITIES
(Cost $24,946,229)
COMPLEX MORTGAGE SECURITIES -
0.1%
INTEREST ONLY - 0.0%
BKB Commercial Mortgage Trust BBB 7,287,049 3,415
Series 1997-C1 Class X1,
0.6614% 12/26/01 (b)(c)(e)
PRINCIPAL ONLY - 0.1%
Structured Asset Securities - 1,296,283 512,032
Corp. Series 1996-CFL Class
P, 0% 2/25/28 (b)(f)
TOTAL COMPLEX MORTGAGE 515,447
SECURITIES
(Cost $1,097,035)
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COMMON STOCKS - 88.1%
SHARES
CONSTRUCTION & REAL ESTATE -
84.2%
REAL ESTATE - 5.3%
Boardwalk Equities, Inc. (a) 788,000 6,754,130
Catellus Development Corp. (a) 142,200 1,821,938
Excel Legacy Corp. (a) 1,010,000 3,345,625
LNR Property Corp. 21,400 425,325
Oxford Properties Group, Inc. 159,300 1,536,072
(a)
Trammell Crow Co. (a) 170,000 1,976,250
Trizec Hahn Corp. (sub. vtg.) 67,500 1,131,454
16,990,794
REAL ESTATE INVESTMENT TRUSTS
- - 78.9%
Alexandria Real Estate 100,000 3,181,250
Equities, Inc.
AMB Property Corp. 416,300 8,299,981
Amli Residential Properties 71,700 1,447,444
Trust (SBI)
AMRESCO Capital Trust, Inc. 250,000 2,125,000
Apartment Investment & 548,115 21,821,822
Management Co. Class A
Archstone Communities Trust 182,500 3,741,250
SHARES VALUE (NOTE 1)
Arden Realty Group, Inc. 186,400 $ 3,739,650
Asset Investors Corp. 268,000 2,981,500
Avalonbay Communities, Inc. 253,300 8,691,356
Boston Properties, Inc. 103,200 3,212,100
Bradley Real Estate, Inc. 169,200 2,950,425
(SBI)
Capstead Mortgage Corp. 326,000 1,365,125
CBL & Associates Properties, 34,800 717,750
Inc.
CenterPoint Properties Trust 241,100 8,649,463
Clarion Commercial Holdings, 86,100 667,275
Inc. Class A
Cousins Properties, Inc. 137,300 4,659,619
Crescent Real Estate Equities 521,400 9,580,725
Co.
Duke-Weeks Realty Corp. 223,600 4,360,200
Eastgroup Properties, Inc. 170,700 3,157,950
Equity Office Properties Trust 808,796 19,916,602
Equity Residential Properties 202,639 8,650,152
Trust (SBI)
Federal Realty Investment 30,000 564,375
Trust (SBI)
First Washington Realty 71,200 1,330,550
Trust, Inc.
Fortress Investment Corp. (b) 100,000 1,687,500
Franchise Finance Corp. of 48,700 1,165,756
America
General Growth Properties, 193,400 5,415,200
Inc.
Glenborough Realty Trust, 385,900 5,161,413
Inc.
Golf Trust of America, Inc. 326,200 5,525,013
Healthcare Realty Trust, Inc. 83,700 1,307,813
Highwoods Properties, Inc. 138,300 3,215,475
Home Properties of New York, 185,700 5,095,144
Inc.
Host Marriott Corp. 80,000 660,000
Innkeepers USA Trust 455,000 3,725,313
Kimco Realty Corp. 232,900 7,889,488
Liberty Property Trust (SBI) 130,100 3,154,925
LTC Properties, Inc. 407,500 3,438,281
Macerich Co. 68,700 1,429,819
Mack-Cali Realty Corp. 119,050 3,102,741
Manufactured Home 72,700 1,767,519
Communities, Inc.
MeriStar Hospitality Corp. 195,400 3,126,400
New Plan Excel Realty Trust 20 316
Northstar Capital Investment 85,000 1,232,500
Corp. (b)
Pacific Gulf Properties, Inc. 75,000 1,518,750
Philips International Realty 120,500 1,980,719
Corp.
Plum Creek Timber Co., Inc. 130,000 3,250,000
Post Properties, Inc. 42,000 1,606,500
ProLogis Trust 55,000 1,058,750
Public Storage, Inc. 551,000 12,500,813
Reckson Associates Realty 418,400 8,577,200
Corp.
Simon Property Group, Inc. 353,200 8,101,525
SL Green Realty Corp. 180,000 3,915,000
Spieker Properties, Inc. 173,300 6,314,619
Sun Communities, Inc. 89,700 2,887,219
Taubman Centers, Inc. 133,000 1,429,750
The Rouse Co. 159,700 3,393,625
Urban Shopping Centers, Inc. 44,600 1,209,775
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
CONSTRUCTION & REAL ESTATE -
CONTINUED
REAL ESTATE INVESTMENT TRUSTS
- - CONTINUED
Ventas, Inc. 586,500 $ 2,455,969
Vornado Realty Trust 296,300 9,629,750
253,742,144
TOTAL CONSTRUCTION & REAL 270,732,938
ESTATE
MEDIA & LEISURE - 3.9%
LODGING & GAMING - 3.9%
MeriStar Hotels & Resorts, 563,100 2,006,044
Inc. (a)
Prime Hospitality Corp. (a) 320,000 2,820,000
Starwood Hotels & Resorts 332,750 7,819,625
Worldwide, Inc. unit
12,645,669
TOTAL COMMON STOCKS 283,378,607
(Cost $304,452,624)
PREFERRED STOCKS - 0.8%
CONVERTIBLE PREFERRED STOCKS
- - 0.2%
CONSTRUCTION & REAL ESTATE -
0.2%
REAL ESTATE INVESTMENT TRUSTS
- - 0.2%
Innkeepers USA Trust Series 40,000 700,000
A, $2.16
NONCONVERTIBLE PREFERRED
STOCKS - 0.6%
CONSTRUCTION & REAL ESTATE -
0.6%
REAL ESTATE INVESTMENT TRUSTS
- - 0.6%
Crown American Realty Trust 35,200 1,245,200
Series A, $5.50
Walden Residential 43,800 681,638
Properties, Inc. $2.30
1,926,838
TOTAL PREFERRED STOCKS 2,626,838
(Cost $3,721,798)
CASH EQUIVALENTS - 1.6%
MATURITY AMOUNT
Investments in repurchase $ 5,094,435 5,093,000
agreements (U.S. Treasury
obligations), in a joint
trading account at 3.38%,
dated 12/31/99 due 1/3/00
(Cost $5,093,000)
TOTAL INVESTMENT PORTFOLIO - 319,506,846
99.3%
(Cost $342,358,688)
NET OTHER ASSETS - 0.7% 2,133,763
NET ASSETS - 100% $ 321,640,609
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LEGEND
(a) Non-income producing
(b) 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 $24,993,139 or
7.8% of net assets.
(c) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(d) S&P(registered trademark) credit ratings are used in the absence
of a rating by Moody's Investors Service, Inc.
(e) Security represents the right to receive the monthly interest
payments on an underlying pool of mortgages. Principal shown is the
par amount of the mortgage pool.
(f) Principal Only Strips represent the right to receive the monthly
principal payments on an underlying pool of mortgage loans.
(g) Partial interest payment received on the last interest payment
date.
OTHER INFORMATION
The composition of long-term debt holdings as a percentage of total
value of investments 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 0.6% BBB 0.0%
Ba 0.4% BB 1.3%
B 0.2% B 1.9%
Caa 0.2% CCC 0.5%
Ca, C 0.0% CC, C 0.0%
D 0.1%
The percentage not rated by Moody's or S&P amounted to 4.7%. FMR has
determined that unrated debt securities that are lower quality account
for 4.7% of the total value of investment in securities.
INCOME TAX INFORMATION
At December 31, 1999, the aggregate cost of investment securities
for income tax purposes was $343,381,792. Net unrealized
depreciation aggregated $23,874,946, of which $9,521,005
related to appreciated investment securities and $33,395,951 related
to depreciated investment securities.
At December 31, 1999, the fund had a capital loss carryforward of
approximately $14,653,000 of which $4,711,000 and $9,942,000 will
expire on December 31, 2006 and 2007, respectively.
The fund intends to elect to defer to its fiscal year ending December
31, 2000 approximately $4,698,000 of losses recognized during the
period
November 1, 1999 to December 31, 1999.
FIDELITY REAL ESTATE HIGH INCOME FUND II
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
ASSETS
Investment in securities, at $ 319,506,846
value (including repurchase
agreements of $5,093,000)
(cost $342,358,688) - See
accompanying schedule
Cash 395
Receivable for investments 81,841
sold
Dividends receivable 2,212,677
Interest receivable 321,395
TOTAL ASSETS 322,123,154
LIABILITIES
Payable for investments $ 182,820
purchased
Accrued management fee 184,962
Other payables and accrued 114,763
expenses
TOTAL LIABILITIES 482,545
NET ASSETS $ 321,640,609
Net Assets consist of:
Paid in capital $ 363,407,781
Undistributed net investment 1,458,823
income
Accumulated undistributed net (20,374,153)
realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation (22,851,842)
(depreciation) on investments
NET ASSETS, for 34,115,682 $ 321,640,609
shares outstanding
NET ASSET VALUE, offering $9.43
price and redemption price
per share ($321,640,609
(divided by) 34,115,682
shares)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
INVESTMENT INCOME $ 15,651,391
Dividends
Interest 7,569,211
TOTAL INCOME 23,220,602
EXPENSES
Management fee $ 2,022,496
Transfer agent fees 65,468
Accounting fees and expenses 132,272
Non-interested trustees' 794
compensation
Custodian fees and expenses 20,757
Registration fees 42,438
Audit 39,512
Legal 28,464
Miscellaneous 838
Total expenses before 2,353,039
reductions
Expense reductions (148,018) 2,205,021
NET INVESTMENT INCOME 21,015,581
REALIZED AND UNREALIZED GAIN
(LOSS)
Net realized gain (loss) on:
Investment securities (10,716,795)
Foreign currency transactions (9,839) (10,726,634)
Change in net unrealized
appreciation (depreciation)
on:
Investment securities (14,244,462)
Assets and liabilities in 47 (14,244,415)
foreign currencies
NET GAIN (LOSS) (24,971,049)
NET INCREASE (DECREASE) IN $ (3,955,468)
NET ASSETS RESULTING FROM
OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET YEAR ENDED DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 1998
ASSETS
Operations Net investment $ 21,015,581 $ 9,354,019
income
Net realized gain (loss) (10,726,634) (9,228,242)
Change in net unrealized (14,244,415) (19,146,746)
appreciation (depreciation)
NET INCREASE (DECREASE) IN (3,955,468) (19,020,969)
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (20,070,792) (8,886,001)
from net investment income
Share transactions Net 157,809,888 132,149,141
proceeds from sales of shares
Reinvestment of distributions 20,070,792 8,885,645
Cost of shares redeemed (24,684,352) (30,442,411)
NET INCREASE (DECREASE) IN 153,196,328 110,592,375
NET ASSETS RESULTING FROM
SHARE TRANSACTIONS
TOTAL INCREASE (DECREASE) 129,170,068 82,685,405
IN NET ASSETS
NET ASSETS
Beginning of period 192,470,541 109,785,136
End of period (including $ 321,640,609 $ 192,470,541
undistributed net investment
income of $1,458,823 and
$111,674, respectively)
OTHER INFORMATION
Shares
Sold 15,428,030 11,955,831
Issued in reinvestment of 2,106,648 845,461
distributions
Redeemed (2,434,910) (2,653,000)
Net increase (decrease) 15,099,768 10,148,292
</TABLE>
<TABLE>
<CAPTION>
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FINANCIAL HIGHLIGHTS
YEARS ENDED DECEMBER 31, 1999 1998 1997 1996 E
SELECTED PER-SHARE DATA
Net asset value, beginning of $ 10.120 $ 12.380 $ 10.730 $ 10.000
period
Income from Investment .761 D .786 D .823 D .214
Operations Net investment
income
Net realized and unrealized (.806) (2.454) 2.073 .732
gain (loss)
Total from investment (.045) (1.668) 2.896 .946
operations
Less Distributions
From net investment income (.645) (.592) (.721) (.216)
In excess of net investment - - (.085) -
income
From net realized gain - - (.440) -
Total distributions (.645) (.592) (1.246) (.216)
Net asset value, end of period $ 9.430 $ 10.120 $ 12.380 $ 10.730
TOTAL RETURN B, C (.46)% (13.66)% 27.67% 9.52%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 321,641 $ 192,471 $ 109,785 $ 52,951
(000 omitted)
Ratio of expenses to average .85% .89% .97% 1.42% A
net assets
Ratio of expenses to average .79% F .83% F .94% F 1.42% A
net assets after expense
reductions
Ratio of net investment 7.57% 7.08% 6.90% 9.90% A
income to average net assets
Portfolio turnover rate 41% 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 FOR THE PERIOD SEPTEMBER 27, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996.
F FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH
THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF
THE FUND'S EXPENSES.
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1999
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. Foreign equity securities are valued based on
quotations from the principal market in which such securities are
normally traded. If trading or events occurring in other markets after
the close of the principal market in which foreign securities are
traded, and before the close of the business of the fund, are expected
to materially affect the value of those securities, then they are
valued at their fair value taking this trading or these events into
account. Fair value is determined in good faith under consistently
applied procedures under the general supervision of the Board of
Trustees. 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. 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.
DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily and paid
monthly from net investment income. Distributions to shareholders from
realized capital gains on investments, if any, are recorded on the
ex-dividend date.
Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences, which may result in
distribution reclassifications, are primarily due to differing
treatments for market discount, 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.
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 $258,689,176 and $110,294,894, 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 .0920% 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 annual 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 annual rate of .02% of
average net assets.
ACCOUNTING FEES. Fidelity Service Company, Inc., 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 $26,424 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 $99,307 under this arrangement.
In addition, through arrangements with the fund's custodian and
transfer agent, 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 $3,040 and $45,671, respectively, under these arrangements.
6. BENEFICIAL INTEREST.
At the end of the period, FMR and its affiliates were record owners of
approximately 55% 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.
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, 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, 1999, and the results of its operations, the
changes in its net assets and the financial highlights for the periods
indicated, in conformity with accounting principles generally accepted
in the United States. 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 auditing standards
generally accepted in the United States, 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, 1999 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 11, 2000
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
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
Ned C. Lautenbach
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
