PDF MUTUAL FUND Investor Guide THE Investor Guide TO FIDELITY FUNDS
[Pages:4]MUTUAL FUND Investor Guide
THE Investor Guide TO FIDELITY FUNDS
Matthew D. Sauer Founder & Chief Investment Officer
Matthew Sauer is the Founder and Chief Investment Officer of the Mutual Fund Investor Guide family of newsletters. Each month he analyzes and provides buy, sell and hold recommendations for hundreds of mutual funds and ETFs in the Investor Guide to Fidelity Funds, Investor Guide to Vanguard Funds, as well as the ETF Investor Guide.
Prior to founding the Mutual Fund Investor Guide, Matt was the President and Chief Investment Officer of the Fidelity Independent Adviser, ETF Report, and Sector Momentum Tracker.
Matt Sauer earned his Juris Doctor from Albany Law School of Union University in Albany, NY. Mr. Sauer is a licensed attorney in the State of New York. He received his Master of Business Administration, from the State University of New York at Albany and his Bachelor of Arts in Political Science and Economics from Bucknell University.
SPECIAL REPORT:
The Best Fidelity Bond Fund for 2015
FIDELITY STRATEGIC INCOME FUND (FSICX)
Income investors have seen their world turned upside down by extraordinary central bank policies in the wake of the 2008 global financial crisis. Savers who once counted on CDs and Treasury bonds for income have had to go further afield in the search for income, and have been forced to buy riskier assets than they would normally hold. Finding the right asset class becomes increasingly difficult as prices rise because along with lower yields comes greater risk of capital loss should markets reverse.
The launch of the European Central Bank's quantitative easing policy, along with the Swiss National Bank's decision to dump its peg, plus the recent election in Greece, have combined to create a roaring bull rally in bonds. The flip side is bad news for income investors: interest rates on long-term bonds have dropped sharply. At the start of 2014, the 30year Treasury yield was 3.9 percent, but since then it has fallen to 2.4 percent, with nearly half of that decline coming in the past three months.
At some point rates will reverse, but this may be dependent on what occurs overseas. German government 10-year bonds yield about 0.5 percent ? and that's a deal compared with the 0.30 percent available in Japanese bonds of a similar maturity and the negative yield offered by Swiss government 10-year bonds. The Swiss government 30-year bond yields only 0.30 percent. By comparison, the 10-year U.S. Treasury is a steal at 1.8 percent. If the U.S. dollar were to simply plateau, let alone rise further, many foreign investors might decide to buy U.S. bonds for their much higher yield, suppressing rates at the long end of the yield curve.
Interest rates haven't been falling across the board, though. Short-term bond yields have been rising since back in May 2013 when the Federal Reserve announced its plan to end quantitative easing. At that time, two-year Treasuries were yielding 0.20 percent, but by late 2014, the yield had climbed to 0.70 percent before dipping back to 0.50 percent in early 2015. Despite the dip, yields remain in an
unbroken uptrend due to expectations of Fed rate hikes later this year.
A recent article confirmed that rate hikes are likely to come in 2015. Jon Hilsenrath of The Wall Street Journal is viewed as the Federal Reserve's go-to journalist for leaking Fed policy. His article "Fed Officials on Track to Raise Short-Term Rates Later in the Year" outlines current Fed thinking on rates and the economy. Although there are concerns about global growth, the Fed is looking toward June at the earliest for a small rate hike, in order to start the country on the path to normalized monetary policy. The Federal Reserve stuck to this message in its late January meeting, stating that it sees a strong U.S. economy but can remain patient on rate hikes, due in part to low inflation.
Events can always change as the year wears on, but the outlook is for a continuation of the trends seen in 2014: higher short-term interest rates and lower long-term interest rates ? what's referred to as a flattening of the yield curve. Since fixed income investors currently generate much of their income from longer-dated bonds, it could herald lower payouts. In order to maintain a suitable level of income, many investors will be forced into the high-yield sector.
FIDELITY STRATEGIC INCOME FUND (FSICX)
The Fidelity Strategic Income Fund (FSICX) seeks to provide a high level of current income, primarily through investments in debt instruments, including those of lower credit quality. Capital appreciation is a secondary priority. The portfolio is broken up into four distinct general investment categories, with a breakdown as follows: 30 percent in investment-grade and U.S. securities, 40 percent in high-yield securities, 15 percent in emerging markets and 15 percent in foreign developed market securities.
FSICX offers investors the potential for reduced volatility when compared with a strict high-yield
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THE Investor Guide TO FIDELITY FUNDS
or international bond fund. Each of the four categories responds differently to various market factors and may mitigate certain adverse effects. One simple example is how the stronger U.S. dollar weighs on foreign securities but benefits U.S. securities. The fund also offers the potential of higher returns when compared with a portfolio limited to investment-grade securities.
FSICX is suitable for investors who want to increase income while diversifying their fixed income exposure.
INVESTMENT STRATEGY
The fund managers generally attempt to maintain the neutral mix of category investments with a range of plus or minus 10 percent. In the past, the managers have deviated from this conservative approach, but this is distinctly different from many other "go anywhere" funds in the multisector bond fund category. The allocation mix is regularly reviewed and receives incremental changes in favor of investments that the managers believe provide the most favorable outlook based on the objectives of the fund.
The high-yield category includes mainly lower-quality, higher-yielding U.S. debt securities. The U.S. government and investment-grade category features investment-grade mortgage and other dollar-denominated securities as well as government-issued debt instruments. The emerging market and foreign developed categories include corporate and government-issued securities of various investment grades. Individual securities are selected based on structural features and current price versus their long-term value. Fundamental considerations include the issuer's financial condition and industry position as well as general market and economic conditions. Foreign currency considerations also involve currency, political and credit risks.
Fidelity's dependable fixed-income division remains strong and relies on the talent of several knowledgeable investment managers. FSICX lead manager Joanna Bewick, along with Ford O'Neil, works with an experienced team of analysts and sub-portfolio managers to help drive re-
turns. This team includes Mark Notkin, who oversees the junk-bond sleeve, and government securities manager Bill Irving, as well as Franco Castagliuolo, Jonathan Kelly and David Simmer, who manage the investment-grade, emerging market and developed elements, respectively. While the lead manager monitors risk and cash management as well as the allocation of assets, submanagers are responsible for individual security selection within the scope of their expertise. The objective is for asset allocation to be the primary driver of returns, with security selection as a secondary driver. Opportunistic investments and controlled changes in asset allocation act as a tertiary driver.
Ms. Bewick believes that the U.S. is still in the point of the business cycle that supports the fund's higher concentration in risk assets. The result is a barbell approach with junk bond and emerging market debt at one end of the spectrum and a sizable stake in relatively safe U.S. Treasuries and mortgages at the other. This helps balance the fund's overall risk profile. The fund will build cash or increase quality when credit premiums dictate and will take sizable positions when opportunities present themselves.
The increased demand for higher-yielding securities in 2014 and the fund's selection of utility and mortgage-backed securities helped sustain performance. This should continue as the demand for yield refuses to abate. Over the long term, the fund's shrewd positioning has demonstrated solid performance. The fund's fees also stack up well relative to other similar no-load multisector bond funds.
PORTFOLIO COMPOSITION
AND HOLDINGS
As of December 2014, FSICX had $8.4 billion in total assets under management. The portfolio is weighted 85.15 percent in bonds and 8.61 percent in cash; the remainder is invested in other securities. The portfolio's collection of debt instruments is heavily weighted toward Treasuries and U.S. agency issues as well as mortgage-backed securities (MBS). The fund is underweight corporate bonds, agency MBS pass-through and asset-backed securities. The portfolio's heaviest concentrations are
in debt instruments with a yield between 0 and 4 percent, with durations of one to three years and credit ratings of AAA, BB and B.
Although short-term bonds do not offer much room for appreciation if bond yields continue to drop, the opposite is also true: the fund won't lose as much in a rising rate environment. Since the primary goal of the fund is income, the short end of the yield curve is the better place to be.
While the category average is slightly more than 70 percent domestic issues, FSICX is underweight at 53.86 percent. The fund has additional exposure to Canada, Europe and South America. The exposure to U.S. dollar-denominated securities is higher, though, at 66 percent as of December 31.
The top 10 holdings make up 20.2 percent of total assets. The fund has 576 separate bond holdings as well as small positions in stocks and other securities. The largest holdings are U.S. Treasury notes and bonds along with debt instruments issued by Fidelity Century Investments, Canada and Italy. FSICX has a 135 percent annual turnover rate.
HISTORIC PERFORMANCE AND RISK
The strategy to invest in assets from four distinct fixed-income markets has produced one-, three- and five-year total returns of 3.26 percent, 4.68 percent and 5.67 percent, respectively. The Multisector Bond Fund Category returns for the same periods were 3.31 percent, 5.34 percent and 6.39 percent. The overall four-star Morningstar-rated fund has been up 15 of the last 16 years. It has three-year beta and standard deviations of 1.04 and 4.04, respectively, which compare with the category averages of 0.94 and 4.13. The fund has a 12-month trailing yield of 3.73 percent.
FEES, EXPENSES AND DISTRIBUTIONS
The initial investment minimum is $2,500 for taxable accounts and $500 for qualified tax-deferred accounts. The no-load fund does not have any 12b-1 fees. The fund has a total expense ratio of 0.69 percent. The fund pays dividends monthly and has a 30day SEC yield of 3.63 percent.
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SPECIAL REPORT: THE BEST FIDELITY BOND FUND FOR 2015
Runners -Up
Fidelity Focused High Income (FHIFX) seeks to provide investors with a high level of current income as well as possible capital appreciation. This goal is accomplished by creating a portfolio of income-producing debt securities, convertible financial instruments and preferred stock with an emphasis on lower-quality issues. The fund may also invest in defaulted securities, common stock and other non-income-producing financial instruments. The investment focus is on domestic and foreign companies with a troubled and uncertain financial future.
As of December 2014, 97.59 percent of the fund's assets under management are allocated to bonds. These are mostly BBrated corporate bonds and asset-backed securities. The fund's top holdings are debt instruments issued by NSG Holdings, Crown America, Barclays, Altice Financial and Sprint Nextel. FHIFX has one-, three- and five-year total returns of 2.31 percent, 5.66 percent and 7.18 percent, respectively. This compares with the high-yield category average of 0.27 percent, 6.69 percent and 7.59 percent for the same periods. This overall threestar Morningstar-rated fund has threeyear beta and standard deviations of 0.90 and 4.16, respectively, compared with the category ratios of 0.75 and 4.65. The total expense ratio is 0.83 percent. The fund has a trailing 12-month yield of 4.5 percent and a 30-day SEC yield of 5.0 percent. This fund has a shorter maturity than FSICX, but it achieves a higher yield with much lower credit quality.
Seeking to provide a combination of income and capital growth, Fidelity Capital and Income (FAGIX) invests in both equity and debt securities, including defaulted issues. The investment strategy has an emphasis on lower-quality securities issued by troubled domestic and foreign companies suffering from difficult financial conditions. Investments are selected using fundamental analysis that includes criteria such as economic conditions and industry position.
As of December 2014, the portfolio was allocated 74.35 percent in bonds and 15.26 percent in U.S. stocks with the rest in cash, foreign stocks and other securities. The portfolio is heavily weighted toward B, BB and unrated corporate bonds as well as asset-backed securities. The top 10 holdings make up 10.38 percent of the portfolio. The largest individual securities are debt instruments issued by Energy Future, GMAC, Digicel Group, Ally Financial and Skyworks Solutions. The investment strategy has produced one-, three- and five-year returns of 5.86 percent, 9.8 percent and 9.19 percent, respectively. These compare with the high-yield category returns for the same periods of 0.27 percent, 6.69 percent and 7.59 percent. This five-star Morningstar-rated fund has three-year beta and standard deviations of 1.14 and 5.43, which compare with the equivalent category ratios of 0.75 and 4.65. FAGIX has an expense ratio of 0.71 percent. The fund has a trailing 12month yield of 4.18 percent and a 30-day SEC yield of 4.20 percent. This fund is attractive for aggressive investors who want a high yield along with equity exposure.
The four-star Morningstar-rated Fidelity Floating Rate High Income (FFRHX) fund seeks to provide investors with a high level of current income. To accomplish this, the fund invests 80 percent of assets in floating-rate loans, which are often of lower quality. The fund may also invest in investment-grade debt securities, money market funds and repurchase agreements. The securities, which may be issued by domestic or foreign companies, are selected using a fundamental analysis approach.
The portfolio is weighted 94.83 percent toward bonds. These are mostly B- and BB-rated bank loans. The fund's top 10 holdings make up 16.72 percent of assets. The most widely held securities are issued by Heinz, Community Health, Fortescue, HCA and Hilton Worldwide. The fund has one-, three- and five-year total returns of 0.02 percent, 3.33 percent and 3.95 percent, which compare with the bank loan category averages for the same period of 0.14 percent, 4.49 percent and 4.76 percent. FFRHX has an expense ratio of 0.69 percent as well as beta and standard deviations of 0.40 and 2.08, respectively. The fund has a 12-month trailing yield of 3.56 percent and a 30-day SEC yield of 4.32 percent. FFRHX is a great choice for investors worried about rising interest rates. The bank loans in FFRHX reset at periodic intervals, which delivers both the potential for higher income and lower risk of capital losses during a time of rising interest rates. Whether those come in 2015 or not remains to be seen. Even if the Fed hikes rates, if they rise only at the short end of the yield curve, the effect on a fund such as FFRHX will be very minor.
If you have any questions or comments about these funds, we would be delighted to speak with you. Please call us at (888) 252-5372, Monday through Friday 8:30am to 5:30pm, eastern time. You can also email me at Matt@.
mutualfundinvestorguide
mutualfundIG
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THE Investor Guide TO FIDELITY FUNDS
FIDELITY STRATEGIC INCOME FUND (FSICX)
Top 10 Holdings
% Assets
Fidelity Cent Invt Portfolios
5.49
US Treasury Note 0.375%
2.53
US Treasury Bond 3.625%
2.15
Canada Govt 1.25%
1.98
Italy(Rep Of) 2.15%
1.43
US Treasury Note 2.5%
1.42
US Treasury Note 0.5%
1.40
Italy Govt 1.5% 08/01/2019
1.33
NYSE/Liffe 2 Year US Treasury Note Future Mar15
1.26
Japan(Govt Of) 1.9%
1.21
% Coupon
N/A
0.38 3.62 1.25 2.15 2.50 0.50 1.50 N/A 1.90
FUND CHARACTERISTICS
YTD Return 1 Year Average Annual Return 3 Year Average Annual Return 5 Year Average Annual Return
Morningstar Category Beta
Standard Deviation 30-Day SEC Yield
Turnover NAV
NET Assets Morningstar Overall Rating
Morningstar Risk Rating Investment Minimum Front / Deffered Load
Short - Term Redemption Period / Fee Expense Ratio Holdings
0.64% 3.26% 4.68% 5.67% Multisector Bond 1.04 4.04 3.63% 135% $10.73 $8.4 B 4 star Average $2,500 None None 0.69%
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INVESTOR GUIDE TO VANGUARD FUNDS For years, we have covered a limited number of Vanguard mutual funds. Recently, I introduced a newsletter dedicated specifically to Vanguard funds and no-transaction-fee funds accessible to Vanguard investors. We provide ten model portfolios, plus buy, hold and sell recommendations on over 600 mutual funds. I am confident you will find this advice invaluable as you make your investment decisions.
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DISCLOSURE: Mutual Fund Investor Guide, LLC (MFIG) is an independent company unaffiliated with any of the fund companies discussed in this newsletter, including Fidelity Investments. These results include the reinvestment of all dividends and capital gains. Model trading does not involve financial risk; model trading cannot completely duplicate the financial risk associated with actual trading. MFIG is not an investment advisor and does not provide specific investment advice. This newsletter has been prepared solely for informational purposes. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. All investments involve risk including total loss of principal.
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