Fidelity Floating Rate High Income Fund

Transcription

1 QUARTERLY FUND REVIEW AS OF SEPTEMBER 30, 2017 Fidelity Floating Rate High Income Fund Investment Approach Fidelity Floating Rate High Income Fund is a diversified leveraged-loan strategy focused on investing primarily in loans that banks have made to non-investment-grade companies. We apply a core investment approach, with the majority of the fund concentrated in securities rated B and BB the heart of the leveraged-loan market and below-benchmark exposure to the more opportunistic, lower-rated (CCC or below) credit tiers. In particular, we seek companies with strong balance sheets and collateral coverage, high free cash flow, manageable capital structures and improving credit profiles. In doing so, we take a longerterm investment outlook, with an eye to where we are in the credit cycle. We strive to uncover these companies through in-depth fundamental credit analysis, working in concert with Fidelity's high-income and global research teams, with the goal of achieving competitive risk-adjusted returns over a full credit cycle. PERFORMANCE SUMMARY Cumulative 3 Month YTD 1 Year Annualized 3 Year 5 Year 10 Year/ LOF 1 Fidelity Floating Rate High Income Fund Gross Expense Ratio: 0.71% % 2.77% 4.70% 3.46% 3.33% 3.91% S&P/LSTA Leveraged Performing Loan 1.02% 3.08% 5.43% 4.32% 4.38% 4.94% Morningstar Fund Bank Loan 0.90% 2.48% 4.46% 3.14% 3.46% 3.41% % Rank in Morningstar Category (1% = Best) % 34% 60% 20% # of Funds in Morningstar Category Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 08/16/ This expense ratio is from the most recent prospectus and generally is based on amounts incurred during the most recent fiscal year. This fund has a short term trading fee 1.00% for shares held less than 60 days. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate; therefore, you may have a gain or loss when you sell your shares. Current performance may be higher or lower than the performance stated. Performance shown is that of the fund's Retail Class shares (if multiclass). You may own another share class of the fund with a different expense structure and, thus, have different returns. To learn more or to obtain the most recent month-end or other share-class performance, visit fidelity.com/performance, institutional.fidelity.com, or 401k.com. Total returns are historical and include change in share value and reinvestment of dividends and capital gains, if any. Cumulative total returns are reported as of the period indicated. For definitions and other important information, please see the Definitions and Important Information section of this Fund Review. FUND INFORMATION Manager(s): Eric Mollenhauer Trading Symbol: FFRHX Start Date: August 16, 2000 Size (in millions): $10, Morningstar Category: Fund Bank Loan Lower-quality bonds can be more volatile and have greater risk of default than higher-quality bonds. Floating rate loans may not be fully collateralized and therefore may decline significantly in value. Fixed income investments entail interest rate risk (as interest rates rise bond prices usually fall), the risk of issuer default, issuer credit risk and inflation risk. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. Not FDIC Insured May Lose Value No Bank Guarantee

2 Loan Market Review The high-yield bank-loan market gained 1.01% for the third quarter of 2017, as measured by the S&P /LSTA Leveraged Performing Loan, trailing high-yield bonds but modestly outpacing the broad investment-grade fixed-income market. This quarter, investors grappled with geopolitical risk, highlighted by heated rhetoric surrounding North Korea's nuclear program. In the United States, Hurricanes Harvey and Irma caused suffering and economic disruption in Texas and Florida, respectively. Despite these developments, investors focused on a broader economic landscape that revealed a rising trajectory, with second-quarter U.S. gross domestic product revised upward to 3.1% and a labor market that continued to register reasonably positive gains. The unemployment rate dropped to 4.2% in September, a level not seen since early Looking at the loan market specifically, in July, loans registered their best monthly performance of 2017, bolstered by favorable corporate earnings results, improving flows into retail funds, and a steady increase in bond prices. Issuance of new loans fell to a 12- month low as refinancing activity continued to recede. Performance was flat in August amid a rise in stock market volatility and a steady decline in 10-year U.S. Treasury yields. In September, the asset class benefited from lessening macro stress, optimism surrounding the release of a tax plan by Congressional Republicans, continued equity market strength and a firmer backdrop for the energy sector. Within the S&P/LSTA index, gains were broad-based across industries, but generally within a fairly tight range. Oil & gas led the way, followed by insurance, industrial equipment and drugs. By contrast, retailers and publishing posted negative returns and were the weakest performers. Radio & television, building & development and telecom all sizable index components also lagged the broader market. From a credit-quality perspective, lower-quality, CC- and CCCrated loans delivered the best performance, as investors were willing to assume greater risk to access higher yields amid an improving supply-and-demand backdrop. Loan new-issue volume declined in the third quarter to $107.5 billion versus $125.6 billion in the second quarter, partly due to seasonal factors. Volume to finance mergers and acquisitions was up 41% from the third quarter of 2016, while refinancing/ repricing volume was about 9% higher. The loan default rate has declined in 2017, ending the period at 1.53%, while recovery rates have increased. Only one company defaulted in September, the third consecutive month with only one or no defaults. As a result, 2017's third quarter saw the lightest stretch of default activity since the second quarter of LEVERAGED-LOAN SPREAD AND AVERAGE YIELDS (BASIS POINTS*) Basis Points 2,400 2,000 1,600 1, THREE-MONTH LOAN RETURNS Quality Total Return BB 0.98% B 1.03% CCC and Below 1.80% S&P/LSTA Leveraged Performing Loan Source: S&P Capital IQ LCD 1.02% /31/02 3/31/04 3/31/06 3/31/08 3/31/10 3/31/12 3/31/14 3/31/16 LL Yield Spread *1 basis point = 0.01%. Source: S&P Capital IQ LCD as of 9/30/17. Yield spread is represented by the discounted spread of the S&P/LSTA Leveraged Performing Loan. The average spread is calculated from 3/31/02 through the most recent period. 2 For definitions and other important information, please see Definitions and Important Information section of this Fund Review.

3 Performance Review The fund's Retail Class shares gained 0.89% for the third quarter of 2017, slightly trailing the benchmark S&P /LSTA Leveraged Performing Loan. Given the fund's conservative positioning, we were generally pleased with its relative performance during a period when lowerquality credits led the market. The fund continued to be overweighted in BBB- and BB-rated credits and underweighted in B- and CCC-rated loans. Looking at individual holdings, the biggest relative detractor was pet-supply retailer PetSmart. In August, the firm announced that its CEO would be stepping down. Raymond Svider, a former managing partner at BC Partners, which led the consortium that took PetSmart private, will serve as interim executive chairman while the board looks for a new CEO. In September, Standard & Poor's downgraded the firm's loans to a B-rating. The loans were further depressed when dog food maker Blue Buffalo announced that it would begin selling directly to grocers. The loans of coal mine operator Murray Energy fell in August when the Trump administration denied the firm's request for an emergency order that the company said would help it avoid potential bankruptcy. Murray had sought to help keep power plants owned by financially distressed FirstEnergy Solutions a large customer of the firm open. Murray maintained that a bankruptcy filing by FirstEnergy would severely hamper its ability to meet upcoming debt repayments. On the plus side, an out-of-benchmark position in LyondellBasell Industries common stock helped. Shares of the plastics, chemicals and refining company rose about 19% for the quarter, fueled by strong second-quarter profits that beat market expectations. The firm's profit margins have long benefited from its choice of low-cost natural gas over crude oil for producing its main product, ethylene. Additionally, investors have been drawn to Lyondell's plans to return the majority of its free cash flow to them through dividends and share buybacks. Not owning loans issued by oil & gas exploration & production firm and Fieldwood Energy also contributed as these loans appeared volatile and unattractive to us. LARGEST OVERWEIGHTS BY MARKET SEGMENT Market Segment Gaming 6.83% 2.60% 4.23% 0.57% Telecommunications 9.33% 5.62% 3.71% -0.27% Services 8.40% 6.82% 1.58% 0.03% Hotels 1.93% 0.99% 0.94% 0.02% Publishing/Printing 2.82% 1.89% 0.94% 0.08% Outlook and Positioning We think the fundamental backdrop for loans remains supportive. Economic expansion in the United States, as well as abroad, and solid U.S. corporate earnings have helped risk-based assets across the board, including bank loans. Recently and for the first time since 2011 companies in the S&P 500 index posted two consecutive quarters of double-digit-percentage earnings growth from the year-earlier period, according to data provider FactSet. At the end of the third quarter, the average discounted spread over Libor in the S&P/LSTA Leveraged Loan was about four percentage points, below where it began the year and also lower than the long-term average. About 78% of the loans in the fund's benchmark were priced close to or above par (face value). In our view, these data portray a loan market where valuations are not overly attractive but also are not exceptionally rich. We think it's possible that refinancing activity in the loan market may continue to slow over the balance of However, with a relatively high percentage of outstanding loans trading at or near par, there appears to be limited near-term capital appreciation potential. As a result, we think most of the fund's return for the balance of this year is likely to come from coupon income. The fund's largest industry overweightings at period end were in lodging & casinos, telecom and leisure goods/activities/movies. The biggest underweightings were in electronics/electrical, automotive and financial intermediaries. The fund's cash allocation was about 5%, which was in line with our target. This emphasis was reflected in the fund's largest holdings as of quarter end. One of our top holdings was resort and casino operator Caesars Entertainment. We like the firm's valuation, assets and ability to generate free cash flow (cash available after a company meets its capital expenditures). Telecommunication services provider Charter Communications another top-five issuer. The firm has a solid balance sheet, a top-notch management team and in our view is well positioned in the consolidating cable TV and wireless telecom industries. Grocery store operator Albertsons another large position has economies of scale that may help it compete against the growth of e-commerce in the grocery business. What's more, we think the value of Albertsons' real estate holdings more than covers the firm's loans. LARGEST UNDERWEIGHTS BY MARKET SEGMENT Market Segment Unknown Industry 1.46% 4.37% -2.91% -1.12% Consumer Products 0.83% 2.53% -1.70% -0.67% Automotive & Auto Parts 0.76% 2.32% -1.56% 0.09% Building Materials 0.57% 2.11% -1.54% 0.35% Healthcare 8.12% 9.56% -1.44% -0.15% 3 For definitions and other important information, please see Definitions and Important Information section of this Fund Review.

4 3-YEAR RISK/RETURN STATISTICS Beta Standard Deviation 3.12% 2.91% Sharpe Ratio Tracking Error 0.67% -- Information Ratio R-Squared CHARACTERISTICS Duration 0.24 years 0.10 years 30-Day SEC Yield 3.44% Day SEC Restated Yield Net Asset Value $ ASSET ALLOCATION Asset Class Term & Revolving Loans 88.06% % % -0.47% Other Floating-Rate Securities 0.27% 0.00% 0.27% -0.33% Fixed-Rate Bonds 6.01% 0.00% 6.01% 0.01% Cash & Net Other Assets 5.66% 0.00% 5.66% 0.79% Net Other Assets can include fund receivables, fund payables, and offsets to other derivative positions, as well as certain assets that do not fall into any of the portfolio composition categories. Depending on the extent to which the fund invests in derivatives and the number of positions that are held for future settlement, Net Other Assets can be a negative number. CREDIT-QUALITY DIVERSIFICATION Credit Quality BBB & Above 3.18% 0.61% 2.57% -0.35% BB 36.83% 33.75% 3.08% -1.62% B 42.45% 48.03% -5.58% -0.17% CCC & Below 3.88% 6.31% -2.43% -0.02% Not Rated/Not Available 8.36% 11.30% -2.94% 1.43% Cash & Net Other Assets 5.30% 0.00% 5.30% 0.73% Net Other Assets can include fund receivables, fund payables, and offsets to other derivative positions, as well as certain assets that do not fall into any of the portfolio composition categories. Depending on the extent to which the fund invests in derivatives and the number of positions that are held for future settlement, Net Other Assets can be a negative number. Credit ratings for a rated issuer or security are categorized using Moody's Investors Service (Moody's). If Moody's does not publish a rating for a security or issuer, then the Standard & Poor's Ratings Services (S&P) rating is used. When S&P and Moody's provide different ratings for the same issuer or security, the Moody's rating is used. Securities that are not rated by these NRSROs (e.g. equity securities) are categorized as Not Rated. All U.S. government securities are included in the U.S. Government category. The table information is based on the combined investments of the fund and its pro-rata share of any investments in other Fidelity funds. LARGEST HOLDINGS BY ISSUER Issuer LAUREATE EDUCATION INC ALBERTSONS LLC CHARTER COMM OPERATING LLC CHS/CMNTY HEALTH SYSTEMS INC CAESARS GROWTH PROPERTIES HOLD Five Largest Issuers as a % of Net Assets 7.69% Total Number of Holdings 453 The five largest issuers are as of the end of the reporting period, and may not be representative of the fund's current or future investments. Holdings do not include money market investments. 4 For definitions and other important information, please see Definitions and Important Information section of this Fund Review.

5 Definitions and Important Information Unless otherwise disclosed to you, in providing this information, Fidelity is not undertaking to provide impartial investment advice, act as an impartial adviser, or to give advice in a fiduciary capacity. CHARACTERISTICS Duration is a measure of a security's price sensitivity to changes in interest rates. Duration differs from maturity in that it considers a security's interest payments in addition to the amount of time until the security reaches maturity, and also takes into account certain maturity shortening features (e.g., demand features, interest rate resets, and call options) when applicable. Securities with longer durations generally tend to be more sensitive to interest rate changes than securities with shorter durations. A fund with a longer average duration generally can be expected to be more sensitive to interest rate changes than a fund with a shorter average duration. 30-day SEC Yield is a standard yield calculation developed by the Securities and Exchange Commission for bond funds. The yield is calculated by dividing the net investment income per share earned during the 30-day period by the maximum offering price per share on the last day of the period. The yield figure reflects the dividends and interest earned during the 30-day period, after the deduction of the fund's expenses. It is sometimes referred to as "SEC 30-Day Yield" or "standardized yield". 30-Day SEC Restated Yield is the fund's 30-day yield without applicable waivers or reimbursements, stated as of month-end. Net Asset Value is the dollar value of one share of a fund; determined by taking the total assets of a fund, subtracting the total liabilities, and dividing by the total number of shares outstanding. and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Fidelity does not review the Morningstar data and, for mutual fund performance, you should check the fund's current prospectus for the most up-to-date information concerning applicable loads, fees and expenses. % Rank in Morningstar Category is the fund's total-return percentile rank relative to all funds that have the same Morningstar Category. The highest (or most favorable) percentile rank is 1 and the lowest (or least favorable) percentile rank is 100. The top-performing fund in a category will always receive a rank of 1%. % Rank in Morningstar Category is based on total returns which include reinvested dividends and capital gains, if any, and exclude sales charges. Multiple share classes of a fund have a common portfolio but impose different expense structures. RELATIVE WEIGHTS weights represents the % of fund assets in a particular market segment, asset class or credit quality relative to the benchmark. A positive number represents an overweight, and a negative number is an underweight. The fund's benchmark is listed immediately under the fund name in the Performance Summary. IMPORTANT FUND INFORMATION positioning data presented in this commentary is based on the fund's primary benchmark (index) unless a secondary benchmark is provided to assess performance. INDICES It is not possible to invest directly in an index. All indices represented are unmanaged. All indices include reinvestment of dividends and interest income unless otherwise noted. S&P/LSTA Leveraged Performing Loan is a market-valueweighted index designed to represent the performance of U.S. dollar-denominated institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings, spreads and interest payments. MARKET-SEGMENT WEIGHTS Market-segment weights illustrate examples of sectors or industries in which the fund may invest, and may not be representative of the fund's current or future investments. Should not be construed or used as a recommendation for any sector or industry. RANKING INFORMATION 2017 Morningstar, Inc. All rights reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or redistributed; 5

6 3-YEAR RISK/RETURN STATISTICS Beta is a measure of the volatility of a fund relative to its benchmark index. A beta greater (less) than 1 is more (less) volatile than the index. Information Ratio measures a fund's active return (fund's average monthly return minus the benchmark's average monthly return) in relation to the volatility of its active returns. R-Squared measures how a fund's performance correlates with a benchmark index's performance and shows what portion of it can be explained by the performance of the overall market/index. R- Squared ranges from 0, meaning no correlation, to 1, meaning perfect correlation. An R-Squared value of less than 0.5 indicates that annualized alpha and beta are not reliable performance statistics. Sharpe Ratio is a measure of historical risk-adjusted performance. It is calculated by dividing the fund's excess returns (the fund's average annual return for the period minus the 3-month "risk free" return rate) and dividing it by the standard deviation of the fund's returns. The higher the ratio, the better the fund's return per unit of risk. The three month "risk free" rate used is the 90-day Treasury Bill rate. Standard Deviation is a statistical measurement of the dispersion of a fund's return over a specified time period. Fidelity calculates standard deviations by comparing a fund's monthly returns to its average monthly return over a 36-month period, and then annualizes the number. Investors may examine historical standard deviation in conjunction with historical returns to decide whether a fund's volatility would have been acceptable given the returns it would have produced. A higher standard deviation indicates a wider dispersion of past returns and thus greater historical volatility. Standard deviation does not indicate how the fund actually performed, but merely indicates the volatility of its returns over time. Tracking Error is the divergence between the price behavior of a position or a portfolio and the price behavior of a benchmark, creating an unexpected profit or loss. Before investing in any mutual fund, please carefully consider the investment objectives, risks, charges, and expenses. For this and other information, call or write Fidelity for a free prospectus or, if available, a summary prospectus. Read it carefully before you invest. Past performance is no guarantee of future results. Views expressed are through the end of the period stated and do not necessarily represent the views of Fidelity. 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. The securities mentioned are not necessarily holdings invested in by the portfolio manager(s) or FMR LLC. References to specific company securities should not be construed as recommendations or investment advice. Diversification does not ensure a profit or guarantee against a loss. S&P 500 is a registered service mark of Standard & Poor's Financial Services LLC. 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 LLC or an affiliated company. Fidelity Brokerage Services LLC, Member NYSE, SIPC., 900 Salem Street, Smithfield, RI Fidelity Investments Institutional Services Company, Inc., 500 Salem Street, Smithfield, RI FMR LLC. All rights reserved. Not NCUA or NCUSIF insured. May lose value. No credit union guarantee