The Evolution of Portfolio Construction Rethinking Time
Building investment portfolios has never been harder. With rapidly changing markets and a growing universe of investment options, your clients need your help now more than ever. Fidelity s extensive experience in shaping client outcomes can help you take your practice to the next level. We have found having a framework that considers multiple asset classes, managers, and time horizons when making portfolio decisions can be essential to address today s challenges. Differentiate, Protect, and Grow Your Practice Have confidence in your investment choices A disciplined, research-based approach can improve your investment process. Stand out with your offering When prospecting for new business or reaffirming your value with existing clients, a sensible investment framework provides a differentiator. Manage your time A consistent process to evaluate investment decisions and facilitate client conversations can help you save time in your practice. Not FDIC Insured May Lose Value No Bank Guarantee
Rethink Portfolio Construction Portfolio construction is part of Fidelity s heritage and culture. Through our dedicated approach to asset allocation research, we have pioneered a multi-asset, multi-manager, and multi-horizon framework to ground our investment decisions. After thousands of portfolio reviews for advisors we have uncovered the following 5 MYTHS of portfolio construction. MYTH 1 There Is One Optimal Portfolio MYTH 2 Always Avoid Bonds When Rates Rise MYTH 3 Style and Market Cap Alone Can Provide an Edge MYTH 4 Active Management Can t Outperform MYTH 5 Broad International Exposure Is Sufficient 1
MYTH 1 There Is One Optimal Portfolio For years, many have constructed portfolios using the efficient frontier as a guide, searching for the optimal mix of risk and return. This approach implies there is a single optimal portfolio. In fact, time horizon is rarely addressed through this process. Bring time horizon into your approach Fidelity has developed a framework that analyzes underlying factors and trends among the following three distinct time horizons: secular (10 to 30 years), business cycle (1 to 10 years), and tactical (1 to 12 months). Looking through a multi-horizon lens provides a disciplined framework to evaluate portfolio decisions. For example, there is significant potential to enhance portfolio performance by tilting exposures toward the major asset classes based on shifts in the business cycle. ASSET PERFORMANCE IS DRIVEN BY A CONFLUENCE OF VARIOUS SHORT-, INTERMEDIATE-, AND LONG-TERM FACTORS Secular (10 30 Years) Business Cycle (1 10 Years) Tactical (1 12 Months) DYNAMIC ALLOCATION TIMELINE Source: Fidelity Investments (AART). For illustrative purposes only. PATENTED In 2014, Fidelity s Asset Allocation Research Team (AART) received a patent for the business cycle asset allocation methodology. 2
REALITY Time Horizon Matters Markets are dynamic, and investment approaches that work for one time horizon could deliver a very different result for another. RETURN RISK You may have an approach for secular and tactical asset allocation, but how closely do you consider the impact of the business cycle? INVESTMENT DISCUSSIONS SEPARATED INTO THREE DISTINCT TIME HORIZONS CAN ADD DISCIPLINE TO YOUR APPROACH Secular Business Cycle Tactical 10 30 Year Time Frame Over the long term, asset performance is heavily influenced by economic trends that evolve over time, such as demographic changes and productivity growth. 1 10 Year Time Frame Over the intermediate term, asset performance is often driven largely by fluctuations in the economy, specifically the swings in cyclical factors such as corporate earnings, credit growth, and inventories. 1 12 Month Time Frame Over shorter time periods, prices can deviate from their longer -term trends, providing attractive entry and exit points. Geopolitics, consumer sentiment, and flows all play a role here. A multi-horizon framework can be used to construct forward-looking portfolios and help manage client conversations. 3
% $ MYTH 2 Always Avoid Bonds When Rates Rise When rates rise, bond prices fall that s the traditional view regarding fixed income. With government yields near historic lows, many investors are concerned about the interest rate risk in their portfolio. Trying to time interest rate movement is difficult Timing interest rate movement is challenging. While the inverse relationship between bond price and yield is a fact, the relationship is only precise over very short intervals of time. In fact, over longer periods of time, even in a rising rate environment, bonds tend to be resilient. What s more relevant in fixed income investing than interest rate timing is understanding relative performance patterns over the course of the business cycle. THE FURTHER OUT FORECASTERS TRY TO PREDICT INTEREST RATES, THE MORE ACCURACY DECREASES Predictions on average are off by: 8 bps 1 Quarter 47 bps 3 Quarters 81 bps 5 Quarters Actual 10-year note yield with five-quarter forecasting 2002 2015. Source: Federal Reserve Bank of Philadelphia Quarterly Survey of Professional Forecasters, Federal Reserve Bank of St. Louis Economic Data (FRED), FMR Co. As of 9/30/15. 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, credit, and default risks for both issuers and counterparties. 4
% REALITY Interest Rates May Change The reasons you invest in bonds do not. $ Managing both interest rate and credit risk is key It is important to understand both principal components of fixed income risk and returns: interest rates and credit spreads. Concerned about rising rates, many bond investors have allocated to unconventional, unconstrained strategies with low interest rate risk and outsized additions in credit risk and these strategies typically have a historically high correlation with equity markets. A multisector bond strategy with a foundation of investment-grade bonds can help diversify equity risk, and the addition of historically higher-yielding credit sectors may improve a portfolio s risk-adjusted returns. FIXED INCOME SECTORS OFFER VARYING DEGREES OF INTEREST RATE RISK AND CREDIT RISK U.S. Treasuries U.S. Government U.S. MBS 1.00 BBgBarc U.S. Agg Core Plus Portfolio 0.75 U.S. IG Corporates U.S. Treasury Correlation 0.50 Multisector Portfolio Emerging-Market Debt 0.25 U.S. High Yield -0.50-0.25 0.25 0.50 0.75 1.00 Leveraged Loans -0.25 S&P 500-0.50 S&P 500 Correlation Past performance is no guarantee of future results. It is not possible to invest directly in an index. Morningstar, 5-year correlation, as of 12/31/16. Not intended to represent the performance of any Fidelity fund. Index returns are represented by the following indices: Emerging-Market Debt: JPM EMBI Global; Leveraged Loans: S&P/LSTA Performing Loan Index; U.S. Government: Bloomberg Barclays (BBgBarc) U.S. Government Index; U.S. High Yield: BofA Merrill Lynch (ML) High Yield Constrained Index; U.S. Investment-Grade (IG) Corporates: BBgBarc U.S. Aggregate Bond Index; U.S. Treasuries: BBgBarc U.S. Treasury Index; and Mortgage-Backed Securities (MBS): BBgBarc U.S. Mortgage-Backed Securities Index. Core Plus Portfolio is a customized blend of indices, weighted as follows: 80% U.S. IG Corporates, 10% U.S. High Yield, 5% Leveraged Loans, and 5% Emerging Market. Multisector Portfolio is a customized blend of indices, weighted as follows: 40% High Yield, 25% U.S. Government, 15% Emerging Market, 15% Foreign Developed Market Bonds, and 5% Bank Loans. 5
MYTH 3 Style and Market Cap Alone Can Provide an Edge Many have traditionally relied on size and style as a framework to build equity portfolios. Add greater precision to your portfolio Viewing portfolios in terms of sector composition can allow for a deeper understanding of where returns are generated. Although stock markets can be volatile, over the long term both earnings and stock prices have trended upward in a secular fashion, with cyclical variations that differ by sector. Sectors have fairly stable composition, display clear patterns of volatility, and are imperfectly correlated to each other. Given these benefits, investors can utilize sectors in many ways over a secular, business cycle, or tactical horizon. SECTORS ARE A SIGNIFICANT DRIVER OF EQUITY RETURNS 57% COMPANY 21% SECTOR 11% STYLE 11% MARKET CAP Looking at equity portfolios in terms of sectors may help you add value to client portfolios. In Fidelity s long-term study of the top 3,000 stocks from 1990 to 2016, sectors accounted for 21% of the return differentials across U.S. stocks. Past performance is no guarantee of future results. Source: Fidelity Investments as of 11/30/16, based on rolling 12-month analysis of variance (ANOVA), which uses statistical models to attribute the variance of a variable (stock returns in the Russell 3000 ) to certain factors (sector, style, and market cap). The residual is attributed to other companyspecific factors. 6
REALITY Sectors Are a Primary Driver of Equity Returns Thinking about your sector composition through the business cycle can help you add value. Understand the clear patterns of sector volatility Sector performance is cyclically related to the economic environment, with clear patterns of volatility during different business cycle phases. You can use these patterns to choose sectors based on risk tolerance and investment goals. SECTORS HAVE PERSISTENT DIVERGENCES ACROSS CYCLE PHASES 80% Range of Average Nominal Earnings-Per-Share Growth (%) 0% Business Cycle Phase Early Mid Late 60% Consumer Discretionary Information Tech Industrials Financials Materials Energy Telecommunications Consumer Staples Utilities Health Care Recession Past performance is no guarantee of future results. The sector composites are created using a proprietary methodology by dividing the top 3,000 U.S. stocks by market capitalization into 10 sectors as defined by Global Industry Classification Standards (GICS). The EPS growth is averaged over each business cycle phase, and estimated using a proprietary Fidelity methodology from 1970 to 2010. Source: Haver Analytics, Fidelity Investments (AART), as of 12/31/15. See back for important information. Understanding the sector composition of a total equity allocation, as opposed to assessing it by style and market cap, may bring additional precision to portfolios. 7
MYTH 4 Active Management Can t Outperform Many equity investors are unsure about how to find superior actively managed funds and may be missing out on opportunities for alpha. Understand the cyclicality of active management Since cycles can turn quickly, maintaining a combination of active and passive exposure may be the best way to capture periods of outperformance. ACTIVE AND PASSIVE MANAGEMENT EACH TEND TO WORK WELL IN CYCLES Active Active Active Active Outperforms Underperforms Outperforms Neutral Underperforms 6/91 6/93 7/93 5/99 6/99 1/04 2/04 3/09 4/09 12/14 1.40% 3.17% 2.34% 0.05% 1.24% High stock return dispersion Low stock return dispersion High stock return dispersion Low stock return dispersion Shaded areas identify the start and end dates of performance cycles based on three-year rolling return averages. Green areas indicate active manager outperformance; blue areas indicate underperformance; gray area indicates no cyclical performance distinction. Fund performance shown in each cycle reflects average one-year net rolling returns for the universe of actively managed funds in Morningstar s large cap categorization relative to each fund s primary benchmark. Fund performance is net of total operating expenses charged by the respective investment management companies. Past performance is no guarantee of future results. This chart does not represent actual or future performance of any individual investment option. See the complete equities methodology and index definitions on the inside back cover of this piece. Source: Morningstar, as of 8/31/14. 8
Simple filters may help seek out the right active managers. ACTIVE? REALITY Both Active and Passive Management Tend to Work Well in Cycles Finding above-average funds The debate about choosing active or passive equity funds tends to focus on the U.S. large cap market. A commonly held belief is that market efficiency for the category makes it more challenging for active stockpickers to outperform a broad market benchmark. FILTERING FOR LOWER FEES AND GREATER ASSETS MAY DELIVER BETTER PERFORMANCE Average One-Year Excess Returns: U.S. Large Cap Equity Mutual Funds, 1992 2016 Active Passive History shows that the average actively managed U.S. large cap fund underperformed its benchmark; however, when applying two straightforward filters,^ the average fund outperformed actively managed U.S. large cap equity funds with better average historical returns: 1. Filtering for the lowest quartile of fees 2. Filtering for greater assets When both filters are used, the average passive fund Basis Points of Excess Returns 20 0-20 -40-60 Unfiltered -36 8-4 With Both Filters still trailed its benchmark while the average actively managed fund outperformed. -80-82 -100 ^ Filters as chosen by Fidelity; different filters or filter parameters may lead to different results. See General Methodology on inside back cover for more information. Both active and passive management can add value to portfolios, and simple filters may help identify aboveaverage actively managed funds. 9
MYTH 5 Broad International Exposure Is Sufficient In the past, some have looked to diversify portfolios through broad-brush international investing. As the global landscape has evolved through recent decades, this approach may no longer make sense. For over a decade, the world s best-performing stock markets have been outside the U.S. Historically, the relative performance of U.S. and international stocks rotate, and these cycles of market leadership tend to last for several years. We believe that taking an active approach to security selection can be a compelling way to achieve favorable returns when investing internationally. LEADING PERFORMANCE FROM YEAR TO YEAR* Germany 30.78% 2012 Japan 10.50% 2013 United States 32.60% India 27.64% 2014 India 79.06% 2007 Japan -28.11% 2008 2015 Brazil 2011 134.87% 2010 Indonesia 4.31% 2009 2016 Brazil 66.10% Indonesia 36.61% 7 Past performance is no guarantee of future results. * Source: Morningstar, IMF. Calendar year returns represented by individual countries MSCI IMI Country Index. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. Diversification does not ensure a profit or guarantee against a loss. 10
REALITY REALITY International Equities Are Not a Uniform Asset Class Potential growth can be found through careful selection of investment opportunities. PRECISION? Take advantage of opportunities outside the U.S. As non-u.s companies take more positions among the top-ranked, largest companies of the world, investors should be thinking about their equity allocations in terms of the opportunities that are beginning to emerge around the globe: by country, sector, and company. NON-U.S. COMPANIES REPRESENT A GROWING SHARE OF THE WORLD ECONOMY IN TERMS OF MARKET CAP AND GDP Yet country selection is not enough. Market Cap GDP Factors such as composition of a country s U.S. The Rest of the World equity market, sector concentration, and exposure to other countries may be more relevant than GDP growth when analyzing drivers of returns over shorter and longer time horizons. 54% 46% 25% 75% Based on ACWI IMI data as of 12/31/16. Source: IMF nominal GDP data in USD. Seek out skilled and experienced active international equity managers who may be better positioned to pinpoint specific opportunities. 11
Working with You to Bring More to Your Practice It s time to evolve the portfolio construction discussion, to break open the myths that pervade the industry and to think about them in the context of today s challenges. We know you face choices when deciding which fund providers to use and whose insight to solicit for addressing client needs. Our portfolio construction program is built by our experts exclusively for financial advisors. Explore more ways you can bring our offerings into your practice. Access Our Teams Contact your wholesaler to put Fidelity to work for you. Dedicated specialists are focused on market and industry trends related to fixed income, sector, and international disciplines. Portfolio Construction Guidance Strategists can analyze portfolios and consult with you and your wholesaler on various portfolio challenges. Review Our Original Insight No matter what investing topic you re interested in, Fidelity provides a fresh point of view. Attend an Event Experience Fidelity s thinking up close. Ask your wholesaler about upcoming dates and locations for our popular Portfolio Construction Institute. Visit institutional.fidelity.com to view the most up-todate calendar of our insight-driven webinars and calls. Request a Portfolio Review Experience an in-depth process of discovery to strengthen the execution of your investment strategy. Visit institutional.fidelity.com for insights and perspectives supported by extensive research: Quarterly Market Update Business Cycle Update Regularly published white papers and Viewpoints 12
For page 7: The chart is based on historical information; there is not always a chronological, linear progression among the phases of the business cycle; and there have been cycles when the economy has skipped a phase or retraced an earlier one. Consumer Discretionary: Companies that provide goods and services that people want but don t necessarily need, such as televisions, cars, and sporting goods; these businesses tend to be the most sensitive to economic cycles. Consumer Staples: Companies that provide goods and services that people use on a daily basis, such as food, household products, and personal-care products; these businesses tend to be less sensitive to economic cycles. Energy: Companies whose businesses are dominated by either of the following activities: the construction or provision of oil rigs, drilling equipment, or other energy-related services and equipment, including seismic data collection; or the exploration, production, marketing, refining, and/or transportation of oil and gas products, coal, and consumable fuels. Financials: Companies involved in activities such as banking, consumer finance, investment banking and brokerage, asset management, insurance and investments, and real estate, including REITs. Health Care: Companies in two main industry groups: health care equipment suppliers and manufacturers and providers of health care services; and companies involved in the research, development, production, and marketing of pharmaceuticals and biotechnology products. Industrials: Companies whose businesses manufacture and distribute capital goods, provide commercial services and supplies, or provide transportation services. Information Technology: Companies in technology software and services and technology hardware and equipment. Materials: Companies that are engaged in a wide range of commodity-related manufacturing. Telecommunication Services: Companies that provide communications services primarily through fixed-line, cellular, wireless, high bandwidth, and/or fiber-optic cable networks. Utilities: Companies considered to be electric, gas, or water utilities, or companies that operate as independent producers and/or distributors of power. For page 8: Equities Methodology and Index Definitions: We evaluated the average return (net of total operating expenses) of all actively managed, U.S. large cap equity mutual funds relative to each fund s respective benchmark since 1991, a period chosen because it represents a time horizon extensive enough to capture multiple cycles of distinctive performance. Our identification of cycles focused on three-year rolling returns, which reflects a reasonable time period to determine a consistent performance trend; rolling returns also make observations and conclusions less sensitive to any one specific date or time period. Stock return dispersion is defined as the variability among stock returns, or dispersion, in a given stock universe. In an analysis of a number of factors influencing the performance of active U.S. large cap equity mutual fund managers from Jun. 1991 to Dec. 2013, the presence of above- or below-average stock return dispersion was seen as the most significant differentiating factor. Source: Fidelity Investments. Methodology data and sources: Morningstar full list of actively managed funds with fund absolute and excess returns (monthly and net of total operating expenses) in the U.S. large cap growth, U.S. large cap blend, and U.S. large cap value categories, along with the funds associated primary large cap benchmarks if they were one of the following large cap indexes: Standard & Poor s 500 Index, Russell 1000 Index, Russell 1000 Value Index, Russell 1000 Growth Index, Russell 3000 Index, Russell 3000 Growth Index, and Russell 3000 Value Index. Morningstar explanation of net total return calculated for actively managed U.S. large cap equity funds: Expressed in percentage terms, Morningstar s calculation of total return is determined by taking the change in price, reinvesting, if applicable, all income and capital-gains distributions during that month, and dividing by the starting price. Reinvestments are made using the actual reinvestment price, and daily payoffs are reinvested monthly. Unless otherwise noted, Morningstar does not adjust total returns for sales charges (such as front-end loads, deferred loads, and redemption fees), preferring to give a clearer picture of performance. The total returns do account for management, administrative, 12b-1 fees, and other costs taken out of assets (i.e., total operating expenses). The data set ranged monthly from Jan. 1991 to Aug. 2014. Funds that stopped reporting returns between those dates are included in the data set, to reduce survivorship bias. Rolling three-year and one-year returns of the large cap categorized funds in the above-mentioned universe were calculated by taking a simple average of all the funds net returns relative to their benchmarks (net of total operating expenses). Active manager performance cycle start dates: Given the overlapping nature of 3-year rolling return calculations, the cycle start dates were determined to be 18 months (half the 3-year period) prior to when a cycle moved from a positive value to a negative value, or vice versa. See cycle start and end dates in the chart. Source: Fidelity Investments. Index definitions: The Russell 1000 Index is an unmanaged market capitalization-weighted index of the stocks of the 1,000 largest U.S.-domiciled companies. The Russell 1000 Growth (Value) Index is an unmanaged market capitalization-weighted index of those stocks of the 1,000 largest U.S.-domiciled companies that exhibit growth-oriented (value-oriented) characteristics. The Russell 3000 Index is an unmanaged market capitalization-weighted index of those stocks of the 3,000 largest U.S.-domiciled companies. The Russell 3000 Growth (Value) Index is an unmanaged market capitalization-weighted index of those stocks of the 3,000 largest U.S.-domiciled companies that exhibit growth-oriented (value-oriented) characteristics. The S&P 500 Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. S&P 500 is a registered service mark of Standard & Poor s Financial Services LLC. For page 9: GENERAL METHODOLOGY Fund Selection: Our main analysis focused on all U.S. large cap equity mutual funds tracked by Morningstar between 1/1/1992 and 12/31/2016, including all blend, value, and growth funds within each category and including actively managed and passive index funds. We included funds that did not exist for the entire period (closed or merged funds), to reduce survivorship bias. We eliminated funds identified as passive that were labeled as enhanced index, and eliminated funds with a tracking error greater than 1% (which are unlikely to be actual passive index strategies despite their identification in the database). For international large cap funds, we eliminated funds benchmarked to a price index, for greater comparability. See below for benchmark indexes included and definitions. Our analysis began with the entire set of funds with available data from Morningstar at any point over the full period: 2,016 actively managed mutual funds and 120 passive index mutual funds. We selected the oldest share class for each fund as representative; where more than one share class was the oldest available, we chose the class labeled as retail. For U.S. large cap equity, average fund counts for each subset of selected funds are as follows: Unfiltered (full set of funds available): active 836, passive 50. Fee filter only: active 221, passive 13. Size filter only: active 79, passive 5. Both filters applied: active 46, passive 3. Total fund counts for international large cap equity funds: active 454, passive 29; average fund counts for performance calculation: active 222, passive 12. Total fund counts for U.S. small cap equity funds: active 728, passive 43; average fund counts for performance calculation: active 302, passive 20. Actively and passively managed funds are subject to fees and expenses that do not apply to indexes. Indexes are unmanaged. Averaging excess returns: We used Morningstar data on returns from 1/1/1992 through 12/31/16. We calculated each fund s excess returns on a one-year rolling basis, relative to each fund s primary prospectus benchmark and net of reported expense ratio, for each month. We used an equal-weighted average to calculate overall industry one-year returns for each month. (We chose equal weighting for the averages in order to represent the average performance of the range of individual funds available to investors, rather than asset weighting, which may introduce bias into an analysis.) For filtered subsets of funds, average excess returns ascribed were the one-year forward rolling returns, calculated monthly. All filtered subsets were rebalanced monthly. If a fund closed or was merged during a one-year rolling period, its returns were recorded for the months that it was in existence, and the weighting of the remaining funds in the subset was increased proportionally for the remainder of the year. Excess return: the amount by which a portfolio s performance exceeds its benchmark, net (in the case of the analysis in this article) or gross of operating expenses, in percentage points.
Evolve your portfolio construction discussions today. Contact your Fidelity wholesaler to get started. institutional.fidelity.com 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. FILTERS We used Morningstar data on fund expense ratios to represent fees. The fee filter is rebalanced monthly; over the full period, the average cutoff for lowest quartile of fees was 85 bps for active, 19 bps for passive. The size filter is rebalanced monthly. The size filter used a different methodology for active and passive in order to generate comparable selectivity; for passive funds, using the same filter as for active funds produced an average annual excess return of -36 basis points for the filtered subset in the initial research (using data from January 1, 1992, through December 31, 2014, for the previously published study), while using a filter that selected for the top 10% of passive index funds by AUM (approximating the selectivity of the top five fund family filter for actively managed funds) produced a better average annual excess return of -16 basis points. INDEXES Funds in the study included active and passive funds tracked by Morningstar and benchmarked to the following indexes: U.S. large cap equity (all in USD): Russell 1000, Russell 1000 Growth, Russell 1000 Value, Russell 3000, Russell 3000 Growth, Russell 3000 Value, and S&P 500. INDEX DEFINITIONS Russell 1000 Index is a market capitalization-weighted index designed to measure the performance of the large cap segment of the U.S. equity market. Russell 1000 Growth (Value) Index is an unmanaged market capitalization-weighted index of those stocks of the 1,000 largest U.S.-domiciled companies that exhibit growth-oriented (value-oriented) characteristics. Russell 3000 Index is a market capitalization-weighted index designed to measure the performance of the 3,000 largest companies in the U.S. equity market. Russell 3000 Growth (Value) Index is an unmanaged market capitalization-weighted index of those stocks of the 3,000 largest U.S.-domiciled companies that exhibit growth-oriented (value-oriented) characteristics. S&P 500 Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. Past performance and dividend rates are historical and do not guarantee future results. Diversification does not ensure a profit or guarantee against a loss. All indexes are unmanaged. Performance of the indexes includes reinvestment of dividends and interest income, and, unless otherwise noted, is not illustrative of any particular investment. An investment cannot be made in any index. 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, credit, and default risks for both issuers and counterparties. Sector funds can be more volatile because of their narrow concentration in a specific industry. Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. Lower-quality bonds can be more volatile and have greater risk of default than higher-quality bonds. The fund can invest in securities that may have a leveraging effect (such as derivatives and forward-settling securities) that may increase market exposure, magnify investment risks, and cause losses to be realized more quickly. Third-party trademarks and service marks are the property of their respective owners. All other trademarks and service marks are the property of FMR LLC or an affiliated company. Patented business cycle methodology covers business cycle dating scheme and application of the cycle phases in order to create a portfolio (i.e., a suggested asset allocation for each phase of the business cycle). Before investing, consider the fund s investment objectives, risks, charges, and expenses. Contact your investment professional or visit fidelity.com, institutional.fidelity.com, or 401k.com for a prospectus, or a summary prospectus if available, containing this information. Read it carefully. 742681.6.0 FIDELITY INVESTMENTS INSTITUTIONAL SERVICES COMPANY, INC., 500 SALEM STREET, SMITHFIELD, RI 02917 1.9869830.101 FIAM-BD 0417