Fidelity Capital & Income Fund

Transcription

1 Fidelity Capital & Income Fund Key Takeaways For the semiannual reporting period ending October 31, 2017, the fund gained 5.53%, well ahead of the 3.46% advance of its benchmark, The BofA Merrill Lynch SM US High Yield Constrained Index. The fund's outperformance of the benchmark the past six months primarily was due to a non-benchmark position in equities roughly 22% of assets, on average as stocks outpaced high-yield bonds by a considerable margin. A non-benchmark stake in TXU was the fund's largest individual contributor. Bankruptcy proceedings for the Texas power firm are ongoing, and recent legal and regulatory developments have been favorable for the TXU bonds held in the fund. Other notable contributors included a sizable non-benchmark equity position in China's Alibaba Group Holding, as the online retailer benefited from the continued shift in consumer preference from brick-and-mortar stores to e-commerce. Conversely, our largest individual detractor versus the benchmark was Brazil's JBS, the world's largest meatpacking company. Our position both stock and bonds was hampered by fallout from a recent corruption scandal. As of October 31, Portfolio Manager Mark Notkin views credit markets as fairly valued, maybe even a bit overvalued, in terms of the yield spread over U.S. Treasuries. As for stocks, Mark believes price-earnings (P/E) multiples are at the higher end of their historical average, but still offer better relative value than the very low returns of lower-risk alternatives, namely Treasuries and other bonds. MARKET RECAP U.S. corporate high-yield bonds gained 3.46% for the six months ending October 31, 2017, as measured by The BofA Merrill Lynch SM US High Yield Constrained Index, which experienced some volatility and only one notable interruption to the uptrend. Despite some choppiness, high yield gained ground into late July, helped by the view that the new administration's agenda would be stimulative for the U.S. economy. In August, the market traded with a risk-off tone for a brief stretch. A two-week sell-off was mostly due to heightened geopolitical risk related to North Korea and U.S. fiscal policy issues regarding the government budget and debt ceiling, as well as some industry-specific developments. Reflecting this more-defensive tone, higher-quality bonds within the index fared best for the full six months, but only by a slim margin. By industry, gains were broad-based, with several defensive-oriented categories handily topping the market, led by utilities and insurance. Banks & thrifts also fared well, as this group largely consists of higher-quality issues. Meanwhile, metals/mining, steel and chemicals received a boost from firming commodities prices and the potential for increased infrastructure spending in the U.S. The index's largest component, energy, finished roughly in line with the market. Notable laggards included food & drug retail and super retail. Not FDIC Insured May Lose Value No Bank Guarantee

2 Q&A An interview with Portfolio Manager Mark Notkin Fund Facts Trading Symbol: Mark Notkin Portfolio Manager FAGIX Start Date: November 01, 1977 Size (in millions): $11, Investment Approach Fidelity Capital & Income Fund is a diversified high-yield bond strategy that seeks income and capital growth by investing primarily in the bonds of non-investment-grade companies. We apply an opportunistic investment approach, which results in tactical positions aimed to capitalize on relative value across a company's capital structure, including high-yield bonds, stocks, convertible securities, leveraged loans and preferred stocks. In particular, we seek companies with strong balance sheets, high free cash flow, improving business/industry fundamentals and sharp management teams that are motivated to reduce debt. In doing so, we take a longerterm investment outlook and also may take advantage of opportunities based on where we are in the credit cycle. We strive to uncover these investments through in-depth fundamental credit analysis, working in concert with Fidelity's high-income and global research teams. Q: Mark, how did the fund perform for the six months ending October 31, 2017 The fund gained 5.53%, well ahead of the 3.46% advance of its high-yield benchmark and roughly double the peer group average. Our outperformance of the benchmark primarily was due to the fund's position in equities. Stocks outpaced high-yield bonds by a wide margin this period, so our roughly 22% exposure to equities, on average considered out-ofbenchmark added the most value from an asset allocation perspective. Among equities, the biggest boost came from the information technology sector, led by strong stock picking in software & services and a sizable overweighting in semiconductor-related names, which gained 30% the past six months. I also had success within high yield, our core area of focus, as this subportfolio handily outpaced the benchmark, bolstered by favorable security selection in a half dozen industries, especially technology. Looking back a bit longer term, the fund gained about 13% for the trailing year, topping both the benchmark and peer average by an even larger margin. Q: Did you shift the fund's allocation of assets the past six months The only notable change was in our high-yield subportfolio, which I reduced by roughly 3 percentage points, ending the period at 66% of fund assets. I shifted the proceeds to equities and cash. We held a modest allocation to floatingrate leveraged bank loans about 3% of assets at period end which I typically use to improve the quality and stability of the portfolio. Our non-benchmark investments here edged high yield, and therefore modestly contributed. To put this in perspective, these shifts are modest, as I continued to stick to my overall strategy. I pursue opportunistic investments across a company's capital structure high-yield bonds, stocks, convertible securities and preferred stock in search of income and capital appreciation. I take a bottom-up approach to identify companies with strong management teams motivated to reduce debt. I focus more on free cash flow than on 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

3 earnings per share, given the highly leveraged, or indebted, nature of high-yielding issuers. Fidelity's resources in both the equity and high-yield research groups help me identify potential securities to buy or to sell, if already held in the fund. Together, we look at a company's management team, as well as its industry dynamics, competitors, suppliers and customers to develop a view on its entire capital structure and to form a mosaic as to how we think its securities should perform. Q: What were some notable contributors The biggest boost came from a non-benchmark stake in TXU, including subsidiary Energy Future Holdings. Bankruptcy proceedings for the Texas power firm are ongoing, and recent legal and regulatory developments allowed us to sell our bonds in the holding company to a strategic investor at what we considered a good price. In addition, our larger position in TXU's second-lien bonds appreciated nicely, based on what appears to be a favorable conclusion for the bankruptcy. It helped to hold a sizable non-benchmark equity stake in China's Alibaba Group Holding, as the online retailer benefited from the continued shift in consumer preference from brick-and-mortar stores to e-commerce. Infrastructure for physical retailing is not well developed in China, so many consumers there, especially in rural areas, have no other choice than to buy online. Alibaba was our largest equity holding as of October 31. Elsewhere, we benefited from a non-benchmark equity position in Air Canada, which gained 108% for the fund this period. We believe the company has some unique growth opportunities and faces less competition than others. Its Air Canada Rouge subsidiary a non-union, lowcost carrier has notably expanded its revenue base, in part by opening up leisure routes to the Caribbean and other locations. Q: What else helped Bonds of auto-finance firm Ally Financial, the fund's largest holding the past six months, notably contributed. In particular, Ally's long-dated issues appreciated nicely as they moved toward maturity and the spread between them and shorter-dated bonds compressed. In technology, our sizable equity holdings in socialnetworking giant Facebook provided a lift. The company has roughly 2 billion active monthly users and has succeeded in capitalizing on and monetizing the transition to mobile, including helping advertisers reach their target audiences. In general, I continue to have a favorable view of tech and the secular themes we believe are driving this area of the market. Q: What hurt Our largest individual detractor versus the benchmark this period was Brazil's JBS, the world's largest meatpacking company. Our position in JBS both stock and bonds returned -8% this period, hampered by fallout from a recently settled corruption scandal. We maintained our investments in the firm based on our view that fundamentals for the meat industry, particularly beef produced in the U.S., remain strong. Furthermore, we believe JBS securities are cheap and the company can move beyond this scandal, potentially under new leadership. Two drugmakers were among our largest relative detractors. The first is Allergan, which we like for its aesthetics portfolio, including Botox wrinkle treatment. But some of its other drugs have been pressured by patent expiration and the loss of exclusivity. We sold our modest stake in Allergan bonds and reduced our equity position. Valeant Pharmaceuticals International also detracted, due to the fund's underweighting in Valeant bonds. The firm's fundamentals appeared to somewhat stabilize under a new management team, but we remained cautious due to Valeant's debt and, similar to Allergan, the pending loss of exclusivity for some key drugs in its portfolio. Q: Any final thoughts for shareholders I'll note that the fund's stake in cash was a notable relative detractor this period. My decision to add to cash was mostly a byproduct of some pruning of some low-yielding, short-duration securities, as well as my desire to build a reserve that could be used to capitalize on better opportunities as they arise. At 9% of assets on October 31, our cash position is higher than the fund's historical average, but I am comfortable that this positioning helps to mitigate risk in the overall portfolio, especially considering that high yield is not particularly cheap. As of October 31, I view credit markets as fairly valued, maybe even a bit overvalued, in terms of the spread over U.S. Treasuries. This is what I would expect, given that we think fundamentals and quality are both decent the proportion of BB-rated securities in the benchmark is high relative to history, due in part to issuers being able to push out maturities amid a strong backdrop. As for stocks, P/E multiples are at the higher end of their historical average, but still offer better relative value than the very low returns of lower-risk alternatives, namely Treasuries and other bonds. 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 Mark Notkin on low inflation: "There are a lot of different theories as to why we are not seeing more inflation. In my opinion, much of it has to do with technology, the internet, e- commerce and automation all of which has been and continues to be highly deflationary, particularly as it relates to wages. As an example, think about Amazon.com and its ability and willingness to offer very low prices, and how much of an impact that has on inflation. "Other factors include commodities being well behaved overall in terms of price, including oil remaining in a reasonable range. And there's not a lot of reason to believe we are going back to U.S. Treasury yields at 4% to 5% any time soon. Also keep in mind that the ongoing rally in stocks is partly due to strong fundamentals, as measured by corporate earnings. "In general, low inflation is good for most asset classes, as I see it. In particular, stocks benefit from a low discount rate, which justifies higher P/E multiples. Also, keep in mind that high yield has a very low correlation to interest rates and therefore inflation because spreads tend to compress during periods of rising rates. Thus, high yield holds up better than most other fixed-income asset classes during a period of rising inflation and interest rates. "So what does low inflation mean for me and the fund I am confident in saying that it gives me some comfort that higher historical stock valuations are justified, as long as rates and inflation stay low. By extension, it also gives me some comfort that the fund's roughly 22% allocation to equities as of October 31 is offering good relative value and is where it should be in this type of environment." Issuer ALLY FINL INC ENERGY FUT INT CO LLC/ FIN INC CCO HLDGS LLC/CAP CORP CITIGROUP INC SFR GROUP SA Five Largest Issuers as a % of Net Assets 10.19% Total Number of Holdings 662 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 Ally Financial, Inc. 8% 11/1/31 Energy Future Intermediate Holding Co. LLC/Energy Future Intermediate Holding Finance, Inc % 3/1/22 Alibaba Group Holding Ltd. sponsored ADR Skyworks Solutions, Inc. Facebook, Inc. Class A Alphabet, Inc. Class A Energy Future Intermediate Holding Co. LLC/Energy Future Intermediate Holding Finance, Inc. 11% 10/1/21 SFR Group SA 7.375% 5/1/26 Ally Financial, Inc % 9/30/24 Red Rock Resorts, Inc. 10 Largest Holdings as a % of Net Assets Market Segment Banks & Thrifts Utilities Telecommunications Technology Technology Technology Utilities Telecommunications Banks & Thrifts Gaming 10.28% Total Number of Holdings 662 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 MARKET-SEGMENT DIVERSIFICATION Market Segment Portfolio Weight Portfolio Weight Six Months Ago Technology 11.10% 11.05% Energy 10.74% 10.36% Telecommunications 10.21% 13.05% Banks & Thrifts 10.21% 9.21% Health Care 5.22% 6.32% Diversified Financial Services 4.74% 4.72% Electric Utilities 4.08% 3.42% Services 4.07% 3.72% Cable TV 3.64% 4.00% Chemicals 3.28% 2.14% Gaming 2.71% 2.14% Metals/Mining 2.01% 1.89% Automotive 1.96% 2.61% Food/Beverage/Tobacco 1.87% 2.19% Homebuilding/Real Estate 1.78% 1.75% Broadcasting 1.71% 1.83% Super Retail 1.41% 1.30% Containers 1.21% 1.08% Air Transportation 1.12% -- CREDIT-QUALITY DIVERSIFICATION Credit Quality Portfolio Weight Portfolio Weight Six Months Ago BBB & Above 3.76% 3.51% BB 21.46% 22.06% B 28.29% 28.92% CCC & Below 11.75% 13.53% Not Rated/Not Available 25.59% 24.25% Cash & Net Other Assets 9.15% 7.73% 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. ASSET ALLOCATION Asset Class Portfolio Weight Portfolio Weight Six Months Ago Bank Debt 2.55% 1.66% Corporate Bond: Cash Pay 65.98% 68.80% Corporate Bond: Deferred Pay 0.00% 0.00% Other Debt 0.00% 0.00% Convertible Bonds 0.01% 0.01% Convertible Preferred Stock 0.02% 0.11% Non-Convertible Preferred Stock 0.02% 0.02% Equities 22.27% 21.65% Cash & Net Other Assets 9.15% 7.75% 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. 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 October 31, Month Cumulative YTD 1 3 Annualized 5 10 / LOF 1 Fidelity Capital & Income Fund Gross Expense Ratio: 0.73% % 11.08% 13.30% 6.50% 7.86% 8.08% The BofA Merrill Lynch US High Yield/US High Yield Constrained Blend 3.46% 7.46% 9.14% 5.62% 6.30% 7.78% Morningstar Fund High Yield Bond 2.89% 6.30% 7.93% 4.03% 5.01% 6.20% % Rank in Morningstar Category (1% = Best) % 3% 2% 3% # of Funds in Morningstar Category Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 11/01/ 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. 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. Please see the last page(s) of this Q&A document for most-recent calendarquarter performance. DIVIDENDS AND YIELD: Fiscal Periods ending October 31, 2017 Past One Month Past Six Months Past One 30-Day SEC Yield 3.42% Day SEC Restated Yield Average Share Price $10.29 $10.15 $10.01 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 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. 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. FUND RISKS Interest rate increases can cause the price of a debt security to decrease. Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Lower-quality bonds can be more volatile and have greater risk of default than higherquality bonds. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. 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 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. 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. Effective 12/18/17, the fund's redemption fee has been removed. 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. The BofA Merrill Lynch US High Yield/U.S. High Yield Constrained Blend is a modified market-capitalization-weighted index of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. Qualifying securities must have a below investment grade rating (based on an average of Moody's, S&P and Fitch). The country of risk of qualifying issuers must be an FX- G10 member, a Western European nation, or a territory of the U.S. or a Western European nation. The FX-G10 includes all Euro members, the U.S., Japan, the U.K., Canada, Australia, New Zealand, Switzerland, Norway and Sweden. In addition, qualifying securities must have at least one year remaining to final maturity, a fixed coupon schedule and at least $100 million in outstanding face value. Defaulted securities are excluded. The index contains all securities of The BofA Merrill Lynch US High Yield Index but caps issuer exposure at 2%. MARKET-SEGMENT WEIGHTS 7

8 Manager Facts Mark Notkin is a portfolio manager at Fidelity Management & Research Company (FMR Co.), 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, Mr. Notkin manages Fidelity Capital & Income Fund (since 2003) and Fidelity Leveraged Company Stock Fund (since 2016). Additionally, he co-manages VIP Strategic Income Portfolio (since 2003), Fidelity Strategic Income Fund (since 1999), and Fidelity Advisor Strategic Income Fund (since 1999). Prior to assuming his current management responsibilities, Mr. Notkin managed VIP High Income Portfolio from 2001 to 2003 along with various high-yield portfolios starting in Before joining Fidelity in 1994 as a high-yield analyst, Mr. Notkin was an assistant to the chief financial officer at Sunbeam-Oster Company, Inc. from 1992 to Previously, he worked as an assistant vice president of corporate finance at Bank of Boston from 1989 to 1992 and as a credit analyst at Fleet Financial Group from 1988 to He has been in the financial industry since Mr. Notkin earned his bachelor of science degree in medical engineering from the University of Massachusetts at Amherst and his master of business administration degree from Boston University. 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 Capital & Income Fund Gross Expense Ratio: 0.73% % 6.52% 7.70% 8.06% 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 11/01/ 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. 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.