Fidelity Strategic Dividend & Income Fund
嚜燕ORTFOLIO MANAGER Q&A | AS OF MAY 31, 2024
Fidelity? Strategic Dividend &
Income? Fund
Key Takeaways
MARKET RECAP
? For the semiannual reporting period ending May 31, 2024, the fund's
Risk assets enjoyed a generally strong
backdrop over the six-month period
ending May 31, 2024, driven by several
factors, including the Federal Reserve's
likely pivot to cutting interest rates later
this year. On December 13, the U.S.
central bank signaled three rate cuts in
2024, while risk assets were further aided
on March 20, when it held the benchmark
federal funds rate steady and affirmed its
projection to cut rates in 2024. Against
this backdrop, the Fidelity Strategic
Dividend & Income Composite Index
rose 9.30% the past six months. Within
the index, dividend-paying equities, as
measured by the MSCI USA High
Dividend Yield Index (+11.74%), led the
way as value stocks trailed their growth
counterparts, with the latter mostly
driven by a narrow set of firms seen as
benefiting from investors' excitement for
AI. Meanwhile, convertible securities,
according to the ICE BofA? All U.S.
Convertibles Index, gained 7.32%,
lagging the broader stock market in light
of these securities' low equity sensitivity.
Real estate investment trusts, indicated
by the FTSE NAREIT Equity REITs Index,
rose 6.69%, as certain segments of that
market that had disproportionately
struggled during the pandemic 每 namely
mall and office REITs 每 regained some
lost value, whereas others that had
recently outperformed, including
industrial REITs, were relative laggards.
Of final note, preferred stocks, as
measured by the ICE BofA? Fixed Rate
Preferred Securities Index, increased
6.42%, benefiting from mounting
expectations for lower interest rates.
Retail Class shares gained 9.81%, outperforming the 9.30% advance of
the Fidelity Strategic Dividend & Income Composite IndexSM.
? The fund's performance unfolded within a broadly favorable
environment for risk assets, buoyed by robust corporate earnings,
heightened excitement around generative artificial intelligence and
the anticipated shift by the Federal Reserve toward lowering interest
rates later this year.
? Co-Lead Portfolio Managers Adam Kramer and Ford O'Neil note that
security selection drove the portfolio's outperformance of the
Composite index the past six months, while asset allocation, the
primary way they can directly influence the fund's result, had a more
modest positive impact this period.
? Versus the Composite index, stock picks among dividend-paying
equities contributed most by far, while the fund's positioning among
convertible securities was another plus. Security selection among
preferred stocks and out-of-index exposure to infrastructure equities
further proved advantageous.
? In contrast, picks among real estate investment trusts hampered the
portfolio's relative result, as categories that had held up better in
recent years 每 including industrial and mall REITs 每 underperformed
the past six months.
? As of May 31, the co-lead managers were comfortable with the
portfolio's positioning, especially its non-Composite exposure to
infrastructure stocks 每 which they believe is the best available
opportunity within their investment universe 每 as well as a smaller
overweight in preferreds and an out-of-index stake in master limited
partnerships.
? On January 1, 2024, Rick Gandhi assumed co-management
responsibilities for the fund's preferred and convertibles sleeves.
Not FDIC Insured ? May Lose Value ? No Bank Guarantee
PORTFOLIO MANAGER Q&A | AS OF MAY 31, 2024
Q&A
An interview with Co-Lead Managers
Adam Kramer and Ford O'Neil
Adam Kramer
Co-Lead Manager
Ford O'Neil
Co-Lead Manager
Fund Facts
Trading Symbol:
FSDIX
Start Date:
December 23, 2003
Size (in millions):
$5,201.21
Investment Approach
? Fidelity? Strategic Dividend & Income? Fund is a multiasset-class strategy that seeks to provide reasonable
income, and potentially also capital appreciation, by
investing in a diversified mix of dividend-oriented equity
and hybrid securities.
? The fund's assets are allocated among high dividendyielding stocks, preferred stocks, real estate investment
trusts (REITs) and convertible securities, using a target
weighting of 50%, 20%, 15% and 15%, respectively. This
strategic allocation attempts to take advantage of the
low correlation among these equity/hybrid classes with a
goal of optimizing total returns while containing volatility
over time.
? Specialized subportfolio managers are responsible for
security selection in their respective areas of expertise
and represent the primary source of alpha (risk-adjusted
excess return), while the lead portfolio managers have
the flexibility to make tactical allocation shifts around the
target mix to help manage risk and capitalize on relativevalue opportunities.
Q: Ford, how did the fund perform for the
six-month period ending May 31, 2024?
F.O. The fund's Retail Class shares gained 9.81%,
outperforming the 9.30% advance of the Fidelity Strategic
Dividend & Income Composite IndexSM. The portfolio trailed
its peer group average, which tracks asset allocation funds
with a target equity exposure of 70% to 85%.
Security selection was the main driver of the fund's
outperformance of the Composite index. Meanwhile, asset
class positioning, the primary way Adam and I, as co-lead
managers, can directly influence performance, modestly
aided the portfolio's relative result.
Longer-term, the fund's Retail Class shares rose 14.71% the
past 12 months, versus 14.63% for the Composite index. The
portfolio lagged the peer average by a wider margin.
Q: Can you please describe the market
backdrop underlying the fund's performance?
F.O. The fund's result unfolded within a broadly favorable
environment for risk assets, buoyed by robust corporate
earnings, heightened excitement around generative artificial
intelligence and the anticipated shift by the Federal Reserve
toward lowering interest rates later this year.
In managing the fund against this backdrop, we remained
mindful of the fund's rationale: it's designed to be a vehicle
for income, along with providing the potential for capital
appreciation. As co-lead managers, Adam and I allocate
assets across several dividend- and income-paying
categories. Based on Fidelity's research, we've established a
target (neutral) mix of 50% dividend-paying common
equities, 20% preferred stocks, 15% convertible securities
and 15% REITs. As the fund's neutral positioning, this is the
combination of asset classes and weightings that, over time,
we believe should provide the most favorable risk/reward.
Our approach to managing the portfolio is always tactical,
meaning we make shifts to the asset mix based on where we
see opportunities in the marketplace at any given time.
Q: Adam, what contributed most versus the
Composite index the past six months?
A.K. The largest driver of the fund's positive relative return
was security selection among dividend-paying equities.
2 | For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.
PORTFOLIO MANAGER Q&A | AS OF MAY 31, 2024
These investments outperformed the category benchmark,
the MSCI USA High Dividend Yield Index, by 1.42
percentage points.
More specifically, picks in the industrials, utilities, health care
and financials sectors proved especially beneficial.
Underweight exposure to consumer discretionary and health
care also helped. In contrast, investment choices and an
underweight in the market-leading information technology
category 每 particularly the portfolio's lack of exposure to
certain strong-performing semiconductor-related firms 每
notably detracted from relative performance.
The fund's positioning among convertible securities was
another plus. In fact, our convertibles holdings outperformed
the asset class benchmark, the ICE BofA All U.S. Convertibles
Index, by 0.86 percentage points, largely due to an out-ofbenchmark stake in DHT Holdings, an oil-tanker company
that benefited from a favorable energy pricing backdrop.
Security selection among preferred stocks added further
value compared with the Composite. Here, solid security
selection enabled the portfolio to outpace the category
benchmark, the ICE BofA? Fixed Rate Preferred Securities
Index, by 0.59 percentage points, despite a modest drag
stemming from the fund's average overweight in this
category, which trailed the broader index. Specifically,
emphasis on fixed-to-floating-rate preferreds was particularly
beneficial. Meanwhile, investment choices in financial
services provided the biggest lift within the asset class.
Q: What else notably helped?
F.O. Non-Composite index exposure to infrastructure
equities, a group that outpaced the Composite index by 2.43
percentage points, also proved advantageous. Picks among
these securities, however, was modestly negative, primarily
due to certain underperforming real estate and energy
infrastructure positions.
The portfolio's only meaningful relative detractor the past six
months was subpar security selection in REITs, given that
these investments trailed the category benchmark by 0.98
percentage points. During the period, investors anticipated a
shift in the interest-rate environment and became more
comfortable embracing risk. Thus, many of the property
sectors that had struggled in past years produced much
stronger results, whereas those that lately held up better did
not fare as well. For example, the fund's overweight in
industrial REITs weighed on performance, as did the lack of
exposure to mall REITs, especially leading U.S. mall operator
Simon Property Group.
Q: Were there any material positioning
changes within the portfolio?
underweight in convertibles and invested most of the sale
proceeds in preferred securities, thus moving from a neutral
stance to a target overweight. I'll note that, primarily due to
market movements, the fund's target weights will typically
vary from its actual weights.
With the rest of the proceeds, we added to the fund's out-ofindex allocation to infrastructure equities, due to the
attractive risk/reward trade-off we saw in that segment of the
market. We finished the period with a 3% stake in
infrastructure stocks.
As I'll describe in the callout portion of this review, we were
finding the convertibles market particularly unattractive due
to limited equity sensitivity and little new issuance. Instead,
we favored the preferred market because we believed too
much bad news had initially been priced into fixed-tofloating-rate preferreds. These low-duration securities had
sold off amid investors' concern about potentially higher
interest rates.
F.O. As the period progressed, however, valuations in the
preferred market began to rise. As such, we modestly
reduced the portfolio's exposure to preferreds and, to better
manage risk, reinvested in convertibles a bit. The asset class
finished May with a target underweight of 4.26 percentage
points, below our 5-percentage-point underweight in
January but still our largest active asset class allocation as of
period end.
Q: Any closing thoughts for shareholders as
of May 31, Ford?
F.O. We'll continue to stick with our approach of relying on
the expertise of our asset class leads to try to add value
through effective security selection, while also seeking to
generate positive relative performance by over- and
underweighting individual segments of the market we
believe may be mispriced.
As of May 31, we are comfortable with the portfolio's
positioning, especially its non-Composite exposure to
infrastructure stocks 每 the best available opportunity within
our investment universe, we believe 每 as well as a smaller
overweight in preferreds and an out-of-index stake in master
limited partnerships.
Meanwhile, with limited near-term upside for convertibles,
we are maintaining our large underweight in the asset class.
We will continually monitor conditions over the coming year
to determine whether further changes in that allocation may
be warranted. Lastly, we finished the period with neutral
positioning among equities and REITs, as we await episodic
sell-offs and/or other market events that could provide
attractive investment opportunities. ←
A.K. We made several meaningful shifts the past six months,
primarily in January, when we doubled the fund's target
3 | For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.
PORTFOLIO MANAGER Q&A | AS OF MAY 31, 2024
Adam Kramer on the fund's
underweight in convertibles:
"The past few years have been challenging for the
convertible securities market. Think back to 2020.
That first calendar year of the pandemic, we had
close to 100 new deals, as issuing companies were
looking for ways to shore up their balance sheets. In
a declining stock market, investors had the
opportunity to buy convertibles with very wide
credit spreads and depressed stock valuations. As
the market appeared 每 wrongly, in our view 每 to be
pricing in the risk of a prolonged economic
downcycle, ultimately weighing on otherwise solid
issuers, it created market inefficiencies that we
found attractive and took advantage of.
"Since then, unfortunately, we haven't seen that sort
of buying opportunity among convertibles. In early
2021, in fact, we saw the opposite: many mid-cap
software companies issued convertibles at very rich
valuations, only to see their stocks drop by half in
the subsequent 12 to 18 months. As a result, many
convertibles, just by the nature of having been
issued in an environment of elevated stock prices,
saw their equity sensitivity drop dramatically and,
consequently, their convertible prices dropped to
between 50 and 80 cents on the dollar. That decline
came even though we believed there was no
compelling reason for it. The securities were shortdated debt instruments with little to no bankruptcy
risk, given issuers' very large cash balances.
"These days, the environment for convertibles
investors is challenging because we're not seeing
new deals come to market, and potential issuers
have a lot of liquidity and other options for
financing. As a result, until the situation begins to
reverse itself, we don't see much opportunity
among convertibles.
"One potential future tailwind for the asset class,
though, is that in 2025 and 2026, about one-quarter
to one-third of the outstanding convertible issuance
will mature. That will potentially result in a wide
variety of new convertible bonds. Time will tell if
these deals come to market attractively priced, as
the economic and credit market backdrop is
constantly evolving."
4 | For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.
PORTFOLIO MANAGER Q&A | AS OF MAY 31, 2024
SUBPORTFOLIO COMPOSITION
Asset Class
Portfolio Weight Strategic Allocation
Relative Weight
Relative Change
From Six Months
Ago
Dividend-Paying Equities
50.09%
50.00%
0.09%
0.01%
Domestic Equities
43.39%
--
--
--
International Equities
6.26%
--
--
--
Cash & Net Other Assets
0.45%
--
--
--
Preferred Stock
20.80%
20.00%
0.80%
0.70%
Preferred Stock/Convertible Preferred
7.65%
--
--
--
Corporate Bonds
11.59%
--
--
--
Cash & Net Other Assets
1.55%
--
--
--
10.74%
15.00%
-4.26%
-1.45%
Convertibles
9.48%
--
--
--
Domestic Equities
0.70%
--
--
--
International Equities
0.20%
--
--
--
Corporate Bonds
0.11%
--
--
--
Convertibles
Cash & Net Other Assets
0.25%
--
--
--
15.21%
15.00%
0.21%
-0.13%
REITs & Related Investments
15.05%
--
--
--
Cash & Net Other Assets
0.16%
--
--
--
0.49%
--
0.49%
-0.10%
MLPs & Related Investments
0.47%
--
--
--
Cash & Net Other Assets
0.01%
--
--
--
2.67%
--
2.67%
0.97%
2.67%
--
--
--
REITs
MLPs
Top Level Fund
Top-Level Cash & Net Other Assets
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.
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