Fidelity Future Quarterly Leaders Report Fund

Quarterly Report

as at 31 December 2015

Fidelity Future Leaders Fund

Fund description

Invests in 40 to 70 mid- and small-cap Australian companies. Stock selection focuses on attractively valued companies with strong competitive positioning and sound company management. The portfolio construction process places a strong emphasis on building a diversified and blended portfolio that aims to perform through different market cycles.

Fund facts Portfolio manager: James Abela Benchmark: S&P/ASX Mid Small Index Inception date: 22 July 2013 Fund size: AU$8.22M Number of stocks: 40 to 70 Management cost: 1.20% Buy/sell spread: 0.25%/0.25%

Portfolio guidelines Stocks: +/-5% from benchmark Industry: +/10% from benchmark Cash: Target range between 0% and 10%

Top 10 holdings %

Tatts Group Ltd Aristocrat Leisure Ltd Treasury Wine Estates Ltd Blackmores Ltd Rea Group Ltd Sirtex Medical Ltd Corporate Travel Managemnt Ltd Tpg Telecom Ltd Bellamy's Australia Ltd Burson Group Ltd

Fund B'mk 5.2 2.3 4.8 2.1 4.4 2.1 3.9 1.0 3.6 0.9 3.5 0.8 3.4 0.3 3.4 1.1 3.3 0.3 3.1 0.4

Past performance %

Fidelity Future Leaders Fund S&P/ASX Mid Small Index Excess return

1 mth 6.13 2.81 3.32

3 mth 14.94 9.88 5.06

6 mth 17.12 7.40 9.72

1 yr pa

21.25

10.75

10.50

3 yrs p.a.

-

-

-

5 yrs p.a.

-

-

-

Since Inception p.a (22.07.2013)

16.71

9.61

7.10

Past performance is not a reliable indicator of future performance. Total returns (net) have been calculated using mid prices and are net of Fidelity's management costs, transactional and operational costs and assumes reinvestment of distributions. No allowance has been made for tax or the buy/sell spread. Returns of more than one year are annualised. The return of capital is not guaranteed.

Industry breakdown %

Consumer Discretionary

Consumer Staples

29.6 22.6

15.3 6.6

Energy

1.4 1.5

Financials

17.4 20.7

Health Care

12.2 11.1

Industrials

5.1 12.3

Information

10.8

Technology

3.6

Materials

3.5

15.2

Telecommunication Services

Uninvested Cash

3.4 2.7

1.4 0

Utilities 0

3.7

Market cap distribution %

>10bn

1.6 2.3

5-10bn

34.5 20.7

1-5bn

35 49.5

0-1bn

19.4 18.1

Other Index/Unclassified

7.1 9.5

Other index/unclassified refers to stocks not listed, stocks de-listed, private equities, index derivatives and any securities not covered in the 'MDM universe'.

Fund Benchmark

Fidelity funds are available on platforms and mastertrusts via financial advisers. Investors who wish to place at least $25,000 in a single fund can invest with us directly. For further information, please visit .au or call Client Services on 1800 044 922.

This Fund is subject to the risk of stock market fluctuations. Management costs and the buy/sell spread are current as at the date shown above but may be subject to change in the future. Management costs include GST but exclude abnormal expenses and transactional and operational costs. Investors accessing the Fund through a master trust or wrap account will also bear any fees charged by the operator of such master trust or wrap account. Any apparent discrepancies in the numbers are due to rounding.

Market performance

The ASX300 ex ASX50 index gained by 9.9% over the quarter and outperformed its large-cap peers. Companies with a positive earnings outlook performed well as investors reacted positively to businesses that continue to offer highquality growth. Consumer discretionary was the best performing sector amid an improvement in consumer confidence and healthy employment growth. Financials advanced following a surprise decision by major banks to increase their mortgage rates. Bank dividend yields were attractive and the risk of additional capital raisings diminished, while lending growth was strong.

In economic news, Australia's GDP growth over the third quarter of 2015 beat market expectations due to robust growth in net exports, as well as a solid improvement in household consumption and housing investment. Low interest rates and the fall in the value of the Australian dollar buoyed domestic demand and export growth. More frequent economic indicators also supported optimism. National Australia Bank's (NAB) Business Confidence Survey improved in November, indicating that firms are optimistic about firmer domestic activity and the government's policy reform agenda. The consumer confidence index edged lower in November, but ended higher over the year, and retail sales continued to register positive growth. The Reserve Bank of Australia decided to leave its benchmark cash rate unchanged at 2.0% over the quarter. The jobs report was strong across the board as the unemployment rate fell to 5.8% and the participation rate rose.

Fund performance

The fund strongly outperformed the index over the quarter. The preference for highquality businesses benefiting from structural tailwinds supported performance. Consumer staples buoyed returns. The holding in baby food producer A2 Milk surged as the firm materially upgraded its earnings guidance. Its shares were further supported by the robust outlook for growth in China, where changing lifestyle preferences and higher disposable income underpins demand for high-quality products. Organic baby food company Bellamy's Australia and vitamins brand Blackmore's also gained due to expectations of strong growth in China.

Consumer discretionaries bolstered performance. The overweight stance in Corporate Travel Management advanced following the announcement of its acquisition of a US-based travel agency that is expected to support its earnings growth. Holdings in advertising firm APN Outdoor and real estate portal operator REA Group also added value. The former gained on the back of positive data for outdoor advertising, while the latter benefits from rising advertising needs given slowing property markets.

Healthcare holdings added value. Shares in Fisher & Paykel rose as it is likely to gain market share. Meanwhile, the lack of exposure to Primary Health Care enhanced relative value as its shares declined following an earnings downgrade. Elsewhere, a risk-aware approach to portfolio construction helped avoid blowups such as facilities manager Spotless Group Holdings.

Quarterly Report

Major contributors to quarterly performance %

As at 31/12/15

A2 Milk

1.67

Bellamy's Australia

1.49

Blackmores

0.84

PWR Holdings

0.73

Spotless Group

0.56

Major detractors to quarterly performance %

As at 31/12/15

Integrated Research

-0.61

TPG Telecom

-0.51

GBST Holdings

-0.41

Sims Metal Management

-0.41

Speedcast International

-0.35

Outlook

Attractive dividend yields, strong balance sheets, high-quality management and strong GDP growth relative to other developed markets should continue to support Australian equities. This is an interesting period for stock pickers as weak stock correlations continue to create a wider dispersion between winners and losers. With earnings growth becoming scarce, as the market aggregate earnings per share (EPS) is nearly zero, genuine growth stocks will command a rising premium. Looking forward, risk (including China uncertainty, emerging markets collapse, and bond market moving back to safety as junk bonds wobble) is being re-priced. In this environment, investors should be wary of companies that create growth from cheap debt, acquisitions, cheap equity or buy backs as this is not a sustainable source of growth over the long term. Hence, the quality of earnings growth should be a key consideration in the valuation phase of the investment process. At a time when the world economy is expected to remain in a low growth phase for a while, such stocks will be rare and will be bid up by the market. In addition, opportunities are emerging in industries that are in a period of transition, or have been highly sold-off due to weaker commodity and oil prices. From a macroeconomic perspective, the engine of economic growth continues to shift from mining to non-mining service sectors. Usual transition mechanisms such as lower interest rates are starting to support housing construction, domestic tourism, manufacturing and exports. Structural advantages, including robust population growth, low government debt levels, and an abundance of resources that are in high demand, remain in place. Australia also benefits from a tax regime that creates an incentive for company managers to make considered capital investments. This results in high-quality, high-return growth businesses and a stock market that offers a high level of after-tax income yield.

.au This document is intended for the general information of financial advisers and wholesale clients only. This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 ("Fidelity Australia"). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. Prior to making an investment decision, retail clients should seek advice from their financial advisers. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information. You should also consider the relevant Product Disclosure Statements ("PDS") for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 044 922 or by downloading it from our website at .au. This document may include general commentary on market activity, sector trends or other broadbased economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity's managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise. ? 2016 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.

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