Strategic Advisers Income Opportunities Fund

Transcription

1 Strategic Advisers Income Opportunities Fund Key Takeaways For the fiscal year ending February 28, 2018, the Fund gained 4.66%, outpacing the 4.12% return of the Fund's benchmark, the ICE BofAML US High Yield Constrained Index. Versus the benchmark, underlying managers with substantial allocations to the stocks of leveraged companies provided the biggest boost to Fund performance. The top contributors were Fidelity Capital & Income Fund, Fidelity Advisor High Income Advantage Fund and Artisan High Income Fund. The only notable relative detractor was small residual position in Third Avenue Focused Credit Fund. During the period, Portfolio Manager Greg Pappas increased the Fund's exposure to more "pure play" high-yield managers those that focus on bonds and tend not to own stocks. Looking ahead, Greg plans to continue allocating more of the Fund's assets to managers that have somewhat greater exposure to higher-quality bonds. MARKET RECAP U.S. corporate high-yield bonds, as measured by the ICE BofAML US High Yield Constrained Index, gained 4.12% for the 12 months ending February 28, High-yield started the period on a volatile note amid declining oil prices, rising U.S. Treasury yields and heavy new supply. The asset class began to recover in March, as oil prices rose and interest rates moderated. High-yield maintained positive momentum into late July, rising along with other risk assets and supported by the view that the new president's agenda would be stimulative for the economy. Although heightened geopolitical risk and industry-specific developments hampered the asset class for a brief stretch in August, the favorable environment for risk assets generally prevailed overall, as the index continued on an uptrend until late January. At that point, rising 10-year Treasury yields began to weigh on sentiment. High-yield bonds did poorly in February amid the most severe selloff for stocks since January 2016 and an intra-month four-year high for 10- year Treasury yields. By industry, metals/mining (+7%), chemicals (+6%) and energy (+5%) were boosted by firming commodity prices and the potential for increased infrastructure spending. Other big movers included utilities (+8%), banks & thrifts (7%) and aerospace (+7%). Notable laggards included food & drug retail (0%), telecommunications (+1%) and cable/satellite TV (+2%). Shares are offered only to certain clients of Strategic Advisers, Inc. not available for sale to the general public Not FDIC Insured May Lose Value No Bank Guarantee

2 Q&A An interview with Portfolio Manager Gregory Pappas Fund Facts Trading Symbol: Gregory Pappas Portfolio Manager FPIOX Start Date: September 27, 2007 Size (in millions): $3, Investment Approach Strategic Advisers Income Opportunities Fund (the Fund) is a multi-manager investment strategy that seeks high current income with consideration for capital appreciation by investing primarily in high-yielding, lowerquality debt securities. The Fund provides diversified exposure to multiple investment vehicles including Fidelity and non-fidelity mutual funds, and, at times, exchange-traded funds (ETFs) selected from what we believe are the best ideas of Strategic Advisers' research department. We evaluate the tradeoff between cost, liquidity and investment flexibility to determine the optimal investment mix. Our investment process emphasizes prudent manager selection based on the view that different investment approaches may outperform at different times over a full market cycle, and that combining these investment disciplines may result in a more consistent performance profile. We believe the ability to utilize the distinctive skills of a variety of managers helps provide investment diversification and also may provide the portfolio manager(s) more flexibility to invest more adeptly throughout the market cycle, and potentially allow for better risk management. Q: Greg, how did the Fund perform for the 12 months ending February 28, 2018 The Fund gained 4.66%, outpacing the 4.12% return of its benchmark, the ICE BofAML US High Yield Constrained Index, as well as our Morningstar peer average. Underlying managers with substantial allocations to stocks of leveraged companies gave the biggest boost to relative performance. Q: How did the investment environment affect Fund performance during the past year Despite bouts of volatility, particularly later in the period, generally strong corporate earnings helped high-yield bonds post a modest, coupon-driven gain for the 12-month reporting period. The yield spread for the ICE BofAML highyield benchmark tightened by 0.20%, but also exhibited volatility, as periods of selling pressure were met with renewed buying. (Bond prices rise as spreads tighten.) From a credit perspective, lower-quality bonds outperformed the market, reflecting a continuation of the favorable environment for riskier assets, largely driven by a recovery in the energy sector. Mid-tier split BB rated bonds, as well as B rated bonds, held up relatively well, performing roughly in line with the market. The issuer-weighted default rate within the Fund's benchmark declined significantly over the period, falling from 4.3% a year ago to 2.6% as of February 28, 2018 also fueled by the energy recovery. Energy issuers received a boost as oil prices rose to about $61 per barrel by the end of the period, providing a more favorable backdrop for firms to cut costs, reduce debt and improve cash flow. Within this environment, managers holding stocks of leveraged companies or having meaningful exposure to lower-rated securities performed well. Conversely, managers that took a more cautious approach toward credit risk by holding higher-quality bonds and a substantial amount of cash generally underperformed. Q: Which managers aided relative results Two Fidelity managers, each with a sizable allocation to stocks, collectively added considerable value versus the 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

3 benchmark this period: Fidelity Capital & Income Fund and Fidelity Advisor High Income Advantage Fund. For both, the managers pursue an opportunistic investment strategy that often entails substantial exposure to equities. This period, each fund had about 20% of its assets in stocks the maximum allowable allocation enabling these managers to handily outpace the Fund's benchmark. Artisan High Income Fund also outperformed the benchmark by a sizable margin and was another leading contributor. This manager's investment philosophy is based on the belief that ratings agencies and other high-yield investors tend to favor companies backed by hard assets, with asset-light firms often unfairly penalized. As a result, this portfolio manager frequently finds value in the latter, including software companies and insurance brokers with recurring revenues that generate strong cash flows and require less capital reinvestment. This period, the manager did a nice job with security selection in bank loans including lower-rated loans and high-yield bonds. An investment in the High Income strategy managed by sub-adviser FIAM SM also helped. Interestingly, the portfolio manager of this strategy takes a conservative approach toward credit risk, but good security selection bolstered the strategy this period. We incorporated this sub-advised strategy within the Fund in December 2016 on the view that, given elevated highyield valuations, it was prudent to add a more-defensive mandate. I view FIAM High Income as a core strategy, and by period end it accounted for roughly 17% of Fund assets. Q: How about detractors The only notable relative detractor the past 12 months was a small residual position in Third Avenue Focused Credit Fund. This fund was closed to investor redemptions in December 2015 after the manager stumbled badly due to significant exposure to lower-quality and distressed debt during a market downturn. Third Avenue management is continuing to wind down the fund. Elsewhere, Eaton Vance Income Fund of Boston and Janus High-Yield Fund nicked our result. Both of these managers were hurt by the higher-quality emphasis of their portfolios, which included above-average cash allocations and sizable underweightings in lower-quality bonds. That said, these managers serve an important strategic role for us by helping to balance the higher-risk strategies in the Fund. Q: Did you make any significant changes to the Fund during the period In an effort to increase the Fund's exposure to more "pureplay" high-yield managers meaning those that focus on bonds and tend not to own stocks I substantially raised our allocation to Artisan High Income Fund. We think that fund is well-managed and, with its relatively small asset base of about $2.6 billion, we believe it has the potential to differentiate itself from larger funds that tend to own many more index names. And we were quite pleased with its performance this period. I also added a new position to the portfolio, Prudential High-Yield Fund, which follows a more risk-managed, benchmark-aware style that also eschews stocks. Lastly, I reduced the Fund's allocation to Janus High-Yield Fund due to organizational changes at the firm that we think have created a measure of uncertainty. Q: Please remind us of your overall investment approach. From a qualitative perspective, I seek "process diversification" by investing with managers of varying styles. Some managers pursue a more aggressive, opportunistic style, while others take a more cautious approach to the high-yield market and the Fund contains both broad types. Quantitatively, I make use of various riskmanagement tools to monitor and adjust the portfolio against the benchmark, as well as to help guard against unintended biases. When I have a strong tactical view, I'll adjust the Fund's aggregate manager exposure to reflect that view, while at the same time seeking to keep its risk in line with that of its ICE BofAML benchmark. Q: What is your outlook, Greg As of February 28, high-yield credit spreads were near their post-financial-crisis lows. At about 3.5 percentage points over comparable-maturity U.S. Treasuries, spreads appear rich by historical standards. At the same time, spreads aren't at the extreme levels we saw in the first half of 2007, when they tightened below three percentage points. The default rate has moderated and is forecast to continue declining as the capital markets remain open for issuers to refinance debt and improve their credit profiles. As for Fund positioning, I think we're at the point in the credit cycle where it's advisable to continue incrementally shifting assets to managers that have a somewhat greater allocation to higher-quality bonds. Beyond that, I plan to keep the Fund's positioning roughly consistent with its endof-period profile. 3 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

4 ASSET ALLOCATION Greg Pappas on high-yield managers investing in stocks: "High-yield managers may have various tactical reasons for investing in leveraged-company stocks. Currently, a number of managers, including those in the Fund, believe stock valuations are more attractive than high-yield bond valuations. They base their view on factors such as the difference between the average 'earnings yield' of a broad equity-market index, such as the S&P 500, and the current yield of the ICE BofAML US High Yield Constrained Index. "For an individual stock, earnings yield is the earnings per share for the most recent 12-month period divided by the stock's current market price. The earnings yield shows the percentage of each dollar invested in a stock that was earned by the company. (It is the inverse of a stock's price-toearnings ratio.) High-yield managers compare the earnings yield of a broad equity market index with the current average yield of a high-yield market index. If the earnings yield is higher, they may see this as an indication that stocks are undervalued relative to high-yield bonds, and vice-versa. "High-yield managers may also hold stocks simply because they historically have offered greater appreciation potential than bonds. Many managers believe the in-depth knowledge they have of a corporation's financial structure allows them to invest in its stock and bonds, thereby positioning their funds to potentially benefit in two ways. However, this strategy is only successful if the corporation's stock performs at least as well as its high-yield bonds. "Lastly, managers may invest in stocks because they believe a company's stock is more liquid, or easier to trade at favorable pricing, than its bonds. In such cases, a manager may conclude that it is better for risk-management purposes to hold both the shares and bonds of that particular firm." Asset Class Portfolio Weight Portfolio Weight Six Months Ago Bond Investments 99.40% 99.63% Bonds 16.69% 16.26% Mutual Funds 82.71% 83.37% ETFs 0.00% 0.00% Equities 0.00% 0.00% Cash & Net Other Assets 0.60% 0.37% 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. MANAGER ALLOCATION Manager Portfolio Weight Sub-Adviser Total 17.39% FIAM LLC 17.39% Top Mutual Fund Positions 80.70% Fidelity Capital & Income Fund 16.65% Hotchkis & Wiley High Yield Fu 12.71% Artisan High Income Fund Inves 9.58% T. Rowe Price High Yield Fund 9.17% MainStay High Yield Corporate 8.77% BlackRock High Yield Bond Fund 5.77% Prudential High Yield Fund 5.68% Fidelity Advisor High Income A 5.10% Eaton Vance Income Fund of Bos 4.78% Fidelity High Income Fund 2.49% Remaining Investments 1.91% Manager allocations are as of the end of the reporting period and may not be representative of the fund's current or future investments. Excludes 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 FISCAL PERFORMANCE SUMMARY: Periods ending February 28, Month Cumulative YTD 1 3 Annualized 5 10 / LOF 1 Strategic Advisers Income Opportunities Fund Gross Expense Ratio: 1.08% % -0.30% 4.66% 4.57% 4.86% 7.26% ICE BofAML US High Yield Constrained Index 1.01% -0.30% 4.12% 5.22% 5.36% 8.21% Morningstar Fund High Yield Bond 0.78% -0.50% 3.47% 3.88% 4.10% 6.70% % Rank in Morningstar Category (1% = Best) % 29% 23% 32% # of Funds in Morningstar Category Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 09/27/ 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. 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 calendar-quarter performance. DIVIDENDS: Fiscal Periods ending February 28, 2018 Past One Month Past Six Months Past One Average Share Price $9.54 $9.64 $9.60 Dividends Per Share Fiscal period represents the fund's semiannual or annual review period. 5 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

6 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 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 In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible. The fund may invest in lower-quality debt securities that involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Prepayment of principal prior to a securities maturity can cause greater price volatility if interest rates change. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which may be magnified in emerging markets. The fund can invest in ETFs which may trade at a discount to their NAV. Fund of funds bear the risks of the investment strategies of their underlying funds. 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. 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. ICE BofAML US High Yield Constrained Index is a modified market capitalization weighted index of US dollar denominated below investment grade corporate debt publicly issued in the US 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 US or a Western European nation. The FX-G10 includes all Euro members, the US, Japan, the UK, 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 ICE BofAML US High Yield Index but caps issuer exposure at 2%. RANKING INFORMATION 2018 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 6

7 Manager Facts Greg Pappas is a portfolio manager and Fixed Income group leader at Strategic Advisers, Inc. (SAI), a registered investment adviser and a Fidelity Investments company. 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 is responsible for overseeing the Fixed Income investment strategy and managing a variety of funds, including Strategic Advisers Core Income Fund, Strategic Advisers Income Opportunities Fund, Strategic Advisers Short Duration Fund, Strategic Advisers Core Income Multi-Manager Fund and Strategic Advisers Income Opportunities Fund of Funds, as well as the fixed income sub-portfolios for Fidelity Portfolio Advisory Service, Fidelity Charitable Gift Fund Legacy Pool and the 529 Multi-Firm portfolios. Prior to assuming his current position in 1996, Mr. Pappas was vice president for fixed income product and business development in Fidelity's National Financial Correspondent Services group from 1990 to Before joining Fidelity in 1990, he was a senior portfolio manager at Bank of New England. He has been in the investments industry since Mr. Pappas earned his bachelor of arts degree in economics, with honors, from St. Lawrence University. He is a Chartered Financial Analyst (CFA ) charterholder and a member of the Boston Security Analysts Society. 7 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

8 PERFORMANCE SUMMARY: Quarter ending March 31, Annualized 5 10 / LOF 1 Strategic Advisers Income Opportunities Fund Gross Expense Ratio: 1.08% % 4.45% 4.48% 7.25% 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 09/27/ 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. 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. Diversification does not ensure a profit or guarantee against a loss. 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