Fidelity Floating Rate High Income Fund

Transcription

1 Fidelity Floating Rate High Income Fund Key Takeaways The fund's share classes (excluding sales charges, if applicable) gained roughly 3% for the semiannual reporting period ending April 30, 2017, slightly trailing the 3.13% return of the benchmark S&P/LSTA Leveraged Performing Loan Index. Versus the benchmark, the fund's conservative credit-quality positioning was the primary performance detractor amid a market that was led by lower-quality loans. However, this positioning was consistent with Portfolio Manager Eric Mollenhauer's moderate-risk, core strategy. A cash stake of 7%, on average, further dampened the fund's relative performance. On the plus side, positive security selection among loans rated BB and B helped the fund's performance stay relatively close to that of the benchmark. Eric believes the loan market offers limited near-term appreciation potential, and believes most of the fund's return will be driven by coupon income. MARKET RECAP Floating-rate bank loans gained 3.13% for the six months ending April 30, 2017, as measured by the S&P/LSTA Leveraged Performing Loan Index, trailing high-yield bonds but handily outpacing the broad investment-grade fixed-income market. Following the surprising outcome of the U.S. presidential election, U.S. Treasury yields spiked and financial market sentiment abruptly shifted and appeared to focus on increasing prospects for higher interest rates and rising inflation in Oil prices rose at the end of November, reaching their highest level since July Against this backdrop, bank loans rose 1.20% in December, their strongest performance since July, bolstered by resurgent investor demand. The asset class registered more-modest gains to begin 2017, as loan refinancing intensified and the rally in stocks and credit ebbed. Loans eked out a minimal gain in March, dampened by a sharp decline in oil prices. Performance rebounded but remained muted in April, amid declining Treasury yields and uncertainty regarding the Trump administration's policy agenda. For the full period, gains were broad-based across industries, with oil & gas (+12%) leading the way by a wide margin. From a credit-quality perspective, lowerquality loans delivered the best performance, reflecting continued demand for higher-yielding securities. Not FDIC Insured May Lose Value No Bank Guarantee

2 Q&A An interview with Portfolio Manager Eric Mollenhauer Fund Facts Trading Symbol: Eric Mollenhauer Portfolio Manager FFRHX Start Date: August 16, 2000 Size (in millions): $10, 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 belowbenchmark exposure to the more opportunistic, lowerrated (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 longer-term 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. Q: Eric, how did the fund perform for the semiannual reporting period ending April 30, 2017 For the six months, the fund's share classes (excluding sales charges, if applicable) gained about 3%, slightly trailing the 3.13% return of the benchmark S&P/LSTA Leveraged Performing Loan Index. The fund performed roughly in line with our peer group average. The fund's conservative credit-quality positioning was the primary detractor from benchmark-relative performance the past six months. Overweighted exposure to BB-rated loans, combined with underweighted allocations to B- and CCC-rated loans, worked against the fund during a period when lower-quality credits led the market. That said, our credit positioning was consistent with the moderate-risk, core strategy I follow. Looking a bit longer term, the relative performance story was similar for the trailing year, as the fund lagged the benchmark and finished about in line versus the peer group average. Q: Tell us more about your strategy and how it played out the past six months. I continued to follow the strategy and approach I've used since taking over the fund in I primarily invest in bank loans issued by non-investmentgrade companies. These floating-rate instruments are senior in the company's capital structure and secured by the assets of the corporation. Throughout my tenure, I have maintained the fund's historically conservative credit profile. Because this is a core bank-loan fund, I keep most of the portfolio invested in loans rated B or higher. This period, I overweighted more-conservative loans rated BB and BBB, with average allocations of about 39% and 3%, respectively, in these credit-rating tiers. The fund was underweighted loans rated B which occupy the middle tier of credit quality with an average allocation of about 42%. Likewise, I maintained lighter-than- 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

3 benchmark exposure to riskier bonds rated CCC and below, committing roughly 6% of the portfolio there the past six months. The fund's credit-quality positioning detracted versus the benchmark this period because lower-quality loans delivered the best result. Many of these loans rallied sharply when their issuers avoided bankruptcy, some by selling equity and others through debt exchanges. This was particularly true in the oil & gas industry, where our security selection hampered relative performance. Looking ahead, while I have historically placed greater emphasis on BB-rated loans, the fund's allocations may shift over time as our research team finds opportunities in a growing segment of B-rated issuers. Q: How do you construct the portfolio In building the portfolio, I focus on bottom-up security selection, emphasizing loans recommended by Fidelity's research team. I closely examine each loan's collateral coverage and the stability of the issuing firm's cash flow. I also look at industry trends and each issuer's competitive positioning, management strength and asset quality. Q: What other factors influenced relative performance this period Despite the fund's generally conservative positioning, positive security selection among loans rated BB and B helped performance stay relatively close to that of the benchmark. The fund's cash allocation, which averaged at the high end of our 5% to 7% range, was a further dampener versus the benchmark. I continued to be selective in seeking what we thought were attractive long-term investment opportunities in a market where compelling values have been difficult to find. In April, I did isolate some new opportunities that I thought may offer favorable prospects. As a result of these positioning changes, the fund's cash balance ended the period at 5%. Q: Which investments detracted versus the benchmark The biggest individual detractor was my decision to sell the CCC-rated loan issued by index component Ocean Rig, a provider of drill-ships to energy exploration & production (E&P) companies. In February, I liquidated the fund's position on the view that the loan's risk/reward profile was too speculative. However, the loan performed better than I thought it would amid the lower-quality upsurge in the market. It also hurt to avoid loans issued by oil & gas E&P firm Fieldwood Energy, believing that much higher oil prices were needed to stabilize this firm's capital structure. However, these loans rallied due to demand for lowerquality credits. United Kingdom-based Expro, an energy services company focused on deep-water rigs, was another detractor. The deep-water E&P business has been slower to recover than other parts of the oil & gas industry. Nevertheless, we added to the fund's position here, believing that the loan may recover over time. Q: What helped relative performance An overweighting in Community Health Systems one of the fund's largest positions this period was the top relative contributor. The for-profit hospital operator is in the midst of a turnaround, cutting costs and making efforts to improve its operations. The firm bolstered its balance sheet this period by selling certain assets, including four underperforming hospitals in Pennsylvania. It helped to overweight TNT Crane, a leading provider of rental cranes used in the refining and petrochemicals industries. The firm's loans rallied from depressed prices amid a turnaround in its primary markets, and our position returned 26% the past six months. Not owning heavily indebted retailer Neiman Marcus proved advantageous. The company is suffering with weak cash flow due to its debt load, as well as shifting consumer preferences for online versus brick-and-mortar retailers. Q: What's your outlook as of period end, Eric With an increasing percentage of loans trading at or above par, or face value, I think the market offers limited nearterm price-appreciation potential. As a result, I believe the fund's return primarily will be driven by coupon income. We think the economy is likely to continue growing at a moderate pace, and may accelerate depending on the success of the Trump administration's efforts to implement its economic policy priorities. Within this environment, we think it's possible for the fund to generate mid-single-digit returns over the next year. We will continue our efforts to prudently deploy capital by focusing on our research team's best ideas. This includes companies with strong balance sheets and collateral coverage, high free cash flow, manageable capital structures, and improving credit profiles. 3 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

4 LARGEST HOLDINGS BY ISSUER Eric Mollenhauer expands on his outlook: "Institutional loan new-issue volume totaled $418 billion on a year-to-date basis through April 30, About 80% of new issuance during this period was to refinance existing loans. Due to the volume of refinancing, the average yield spread of the S&P/LSTA Leveraged Performing Loan Index has compressed by 0.40% since the beginning of the year. "Bank loans trade at a spread over the 3-month London Interbank Offered Rate, or Libor, a widely used benchmark for short-term lending among banks. As of April 30, 3-month Libor was about 1.2% and the average discounted spread over Libor in the S&P/LSTA index was about 4 percentage points, which is below the long-term average of 4.7%. Although it is true that loan coupons have begun to adjust higher now that Libor has exceeded 1%, the benefit of a rising Libor has partially been offset by new issues coming to market at lower yield spreads. "The average coupon within the index was roughly 4.8% at the end of April, and the 12-month total default rate was 1.4%. As a result, even though yield spreads in the loan market have shrunk, we think investors continue to be well-compensated amid a historically low level of default risk. "During the past two years, most loan-market defaults or near defaults have occurred in the energy and metals & mining groups. Looking ahead, we think retail, health care and some parts of the information technology sector could be areas that come under significant stress. Consistent with this view, health care and electronics/electrical were among the fund's biggest underweightings at period end." Issuer LAUREATE EDUCATION INC ALBERTSONS LLC CHS/CMNTY HEALTH SYSTEMS INC CHARTER COMM OPERATING LLC CAESARS GROWTH PROPERTIES HOLD Five Largest Issuers as a % of Net Assets 9.94% Total Number of Holdings 455 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. 10 LARGEST HOLDINGS Holding Laureate Education, Inc. Tranche B 1LN, term loan 4/21/24 Albertson's LLC Tranche B 4LN, term loan % 8/25/21 Caesars Growth Properties Holdings, LLC Tranche 1LN, term loan 6.25% 5/8/21 Laureate Education, Inc. Tranche B, term loan % 3/17/21 Valeant Pharmaceuticals International, Inc. Tranche B, term loan 5.74% 4/1/22 Intelsat Jackson Holdings SA Tranche B 2LN, term loan % 6/30/19 Bass Pro Shops LLC. Tranche B, term loan % 12/16/23 Community Health Systems, Inc. Tranche H, term loan % 1/27/21 Caesars Entertainment Resort Properties LLC Tranche B 1LN, term loan 7% 10/11/20 Scientific Games Corp. Tranche B 3LN, term loan % 10/1/21 10 Largest Holdings as a % of Net Assets Market Segment Services Food & Drug Retail Gaming Services Healthcare Telecommunications Super Retail Healthcare Gaming Gaming 12.51% Total Number of Holdings 455 The 10 largest holdings 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, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

5 CREDIT-QUALITY DIVERSIFICATION Credit Quality Portfolio Weight Portfolio Weight Six Months Ago BBB & Above 3.42% 2.91% BB 37.80% 39.61% B 41.79% 40.70% CCC & Below 4.92% 6.17% Not Rated/Not Available 6.58% 3.53% Cash & Net Other Assets 5.49% 7.08% 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. ASSET ALLOCATION Asset Class Portfolio Weight Portfolio Weight Six Months Ago Term & Revolving Loans 87.84% 84.73% Other Floating-Rate Securities 0.73% 1.47% Fixed-Rate Bonds 5.62% 6.35% Cash & Net Other Assets 5.81% 7.45% 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. MARKET-SEGMENT DIVERSIFICATION Market Segment Portfolio Weight Portfolio Weight Six Months Ago Electronics/Electrical 8.02% 6.83% Business Equipment & Services 7.78% 6.96% All Telecom 7.58% 6.25% Lodging & Casinos 6.68% 7.19% Health Care 6.60% 8.27% Leisure Goods/Activities/Movies 6.47% 4.07% Utilities 5.10% 5.95% Retailers (Except Food & Drug) 4.79% 4.25% Cable & Satellite Television 4.75% 5.47% Oil & Gas 3.82% 3.49% Financial Intermediaries 3.27% 3.51% Publishing 2.85% 2.76% Food/Drug Retailers 2.75% 3.82% Building & Development 2.48% 2.82% Food Service 2.47% 2.19% Insurance 2.44% 1.63% Containers & Glass Products 2.38% 3.17% Nonferrous Metals/Minerals 1.85% 1.95% Drugs 1.82% 2.29% Chemicals & Plastics 1.59% 2.24% Equipment Leasing 1.34% 1.40% Radio & Television 1.31% 1.29% Aerospace & Defense 0.96% 1.28% Surface Transport 0.81% 0.70% Industrial Equipment 0.76% 0.98% Forest Products 0.65% 0.10% Food Products 0.55% 0.30% Automotive 0.44% 0.48% Cosmetics/Toiletries 0.31% 0.00% Steel 0.24% 0.39% Air Transport 0.15% 0.20% Ecological Services & Equipment 0.13% 0.31% Clothing/Textiles 0.09% 0.07% Farming/Agriculture 0.05% 0.05% Rail Industries 0.00% 0.00% Beverage & Tobacco 0.00% 0.21% Brokers, Dealers & Investment Houses 0.00% 0.00% Home Furnishings 0.00% 0.00% Conglomerates 0.00% 0.00% Uncategorized 1.23% 0.00% 5 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

6 FISCAL PERFORMANCE SUMMARY: Periods ending April 30, Month Cumulative YTD 1 3 Annualized 5 10 / LOF 1 Fidelity Floating Rate High Income Fund Gross Expense Ratio: 0.71% % 1.45% 7.42% 3.09% 3.56% 3.82% S&P/LSTA Leveraged Performing Loan Index 3.13% 1.64% 8.22% 4.12% 4.81% 4.73% Morningstar Fund Bank Loan 2.73% 1.35% 7.24% 2.89% 3.84% 3.22% % Rank in Morningstar Category (1% = Best) % 44% 65% 14% # 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 prospectus in effect as of the date shown above and generally is based on amounts incurred during that 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, advisor.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. Please see the last page(s) of this Q&A document for most-recent calendarquarter performance. DIVIDENDS AND YIELD: Fiscal Periods ending April 30, 2017 Past One Month Past Six Months Past One 30-Day SEC Yield 3.05% Day SEC Restated Yield Average Share Price $9.65 $9.63 $9.54 Dividends Per Share Fiscal period represents the fund's semiannual or annual review period. 6 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

7 Definitions and Important Information DIVIDENDS AND YIELD 30-Day SEC Restated Yield is the fund's 30-day yield without applicable waivers or reimbursements, stated as of month-end. 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". Dividends per share show the income paid by the fund for a set period of time. If you annualize this number, you can compare the fund's income over different periods. 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. FUND RISKS 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. IMPORTANT FUND INFORMATION Relative 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 Index is a market-valueweighted index designed to represent the performance of U.S. dollardenominated 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; 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 7

8 Manager Facts Eric Mollenhauer is a portfolio manager at Fidelity Management & Research Company (FMRCo), the investment advisor for Fidelity's family of mutual funds. Fidelity Investments is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing and other financial products and services to more than 20 million individuals, institutions and financial intermediaries. In this role he manages Fidelity Total Bond Floating Rate Secured sub-portfolio (since 2015), Fidelity Advisor Floating Rate High Income Fund (since 2013), and Fidelity Series Floating Rate High Income Fund (since 2011). He also co-manages Fidelity Floating Rate Central Fund, Fidelity Floating Rate High Income Trust for Canada, FIAM Leveraged Loan Commingled Pool (since 2007), FIAM Leveraged Loan LP, VIP Floating Rate High Income Portfolio, and the Floating Rate High Income Fund for Canada. He also co-manages all of Fidelity's collateralized loan obligation strategies. Prior to assuming his current responsibilities, Mr. Mollenhauer worked as director of High Yield research from 2003 to 2006, where he was responsible for overseeing Fidelity's high-yield research professionals and resources, and managing high-yield bond portfolios available to non-u.s. investors. He joined the High Yield division at Fidelity in 1995 as a research analyst, where he covered the paper, entertainment and leisure, gaming and lodging, services, homebuilding, and printing and publishing industries. Mr. Mollenhauer has been in the investments industry since Mr. Mollenhauer earned his bachelor of arts degree in business administration from Gordon College. He is a Charted Financial Analyst charterholder. 8 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

9 PERFORMANCE SUMMARY: Quarter ending September 30, Annualized 5 10 / LOF 1 Fidelity Floating Rate High Income Fund Gross Expense Ratio: 0.71% % 3.46% 3.33% 3.91% 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 08/16/ This expense ratio is from the prospectus in effect as of the date shown above and generally is based on amounts incurred during that 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. 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. Information included on this page is as of the most recent calendar quarter. 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 Diversification does not ensure a profit or guarantee against a loss.