Fidelity Equity-Income Fund

194kB Size 2 Downloads 60 Views

•Fidelity® Equity-Income Fund is a diversified domestic equity strategy that seeks reasonable ... As of March 31, 2017, the fund's largest individual equity
QUARTERLY FUND REVIEW | AS OF JUNE 30, 2017

Fidelity® Equity-Income Fund Investment Approach

FUND INFORMATION

• Fidelity® Equity-Income Fund is a diversified domestic equity strategy that seeks reasonable income. In pursuing this objective, the fund also will consider the potential for capital appreciation. The fund seeks a yield for its shareholders that exceeds the yield on the securities comprising the S&P 500® index.

Manager(s): James Morrow Adam Kramer Ramona Persaud

• We believe that dividends provide a significant percentage of total return over time. • Stock prices are driven by changes in earnings expectations, and the accuracy of earnings estimates deteriorates as time horizons extend. A bias toward high-quality companies, generating returns on capital and equity in excess of their cost, can create shareholder value over time. • We also believe that an increasingly short-term-focused market results in some securities being mispriced relative to their true long-term value, creating opportunities to outperform. Limiting portfolio beta (sensitivity to market risk) can enhance downside protection in volatile markets.

Trading Symbol: FEQIX Start Date: May 16, 1966 Size (in millions): $7,998.09 Morningstar Category: Fund Large Value

PERFORMANCE SUMMARY Fidelity Equity-Income Fund Gross Expense Ratio: 0.67%2

Cumulative

Annualized

3 Month

YTD

1 Year

3 Year

5 Year

10 Year/ LOF1

1.53%

4.67%

16.96%

6.12%

12.21%

4.11%

Russell 3000 Value Index

1.29%

4.32%

16.21%

7.32%

13.89%

5.59%

Morningstar Fund Large Value

1.78%

5.55%

16.49%

6.40%

12.64%

5.18%

% Rank in Morningstar Category (1% = Best)

--

--

44%

61%

65%

77%

# of Funds in Morningstar Category

--

--

1,251

1,091

936

681

1 2

Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 05/16/1966. This expense ratio is from the most recent prospectus and generally is based on amounts incurred during the most recent 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, advisor.fidelity.com, or 401k.com. 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. For definitions and other important information, please see the Definitions and Important Information section of this Fund Review.

Not FDIC Insured • May Lose Value • No Bank Guarantee

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. Fixed income investments entail interest rate risk (as interest rates rise bond prices usually fall), the risk of issuer default, issuer credit risk and inflation risk. Lower-quality bonds can be more volatile and have greater risk of default than higher-quality bonds. Value stocks can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.

QUARTERLY FUND REVIEW: Fidelity® Equity-Income Fund | AS OF JUNE 30, 2017

Performance Review For the three months ending June 30, 2017, the fund's share classes gained roughly 2%, outpacing the 1.29% advance of the benchmark Russell 3000® Value Index. Relative to the benchmark, security selection added value, particularly in the financials and energy sectors, whereas our picks in consumer discretionary and industrials modestly hampered results. The fund's largest individual contributor was a sizable nonbenchmark position in alternative asset manager Blackstone Group. In light of its relatively volatile earnings stream, the company, which we have long liked for its strong market positions and solid long-term business fundamentals, lagged other financials stocks during the post-election rally late last year and earlier in 2017. This left Blackstone – one of the fund's largest positions – attractively valued on a relative basis, in our view, and set the stage for its outperformance the past three months. State Street was another notable relative contributor. Better-thanexpected first-quarter earnings – fueled by higher management fees and sizable expense reductions – lifted the stock of this Boston-based custody bank and asset manager, whose shares rose 13% this quarter. State Street repurchased $523 million of its stock in the first quarter, accelerating the program in early May, which appealed to investors. Additionally, the prospect of lower tax rates and deregulation further supported the stock. Other financials holdings adding to relative performance this period included insurance provider Chubb and financial services giant JPMorgan Chase, our largest holding. These stocks returned roughly 7% and 5%, respectively.

Market Segment

Relative Average Contribution Relative (basis Weight points)*

The Blackstone Group LP Financials

2.01%

26

State Street Corp.

Financials

1.25%

15

First Data Corp. Class A

Information Technology

0.88%

13

Chubb Ltd.

Financials

1.72%

10

JPMorgan Chase & Co.

Financials

1.92%

9

* 1 basis point = 0.01%.

At the same time, shares of ConocoPhillips, the largest U.S. energy exploration and production company, detracted from relative performance, returning roughly -11% this period. The company reported lower-than-expected quarterly earnings. Several technology stocks were among our biggest relative detractors the past three months. Most notable was our overweighting in Cisco Systems, as the stock returned about -7% for the quarter. It fell sharply in May after the networking equipment maker, a sizable fund holding, reported better-thanexpected quarterly earnings, but warned of disappointing revenue for its fiscal fourth quarter. Cisco expects near-term revenue to suffer as it transitions to selling more software and subscriptions as opposed to hardware, and due to lower-than-expected IT spending by the U.S. federal government. Cisco was one of our largest positions, based on our view that many of these issues are transitory and the move to a subscription-oriented business model should pay dividends down the road. Among diversified banks, Citigroup was a standout performer, seeing its shares advance 12% for the three-month period. Unfortunately, our lack of a position in the name hampered results on a relative basis. A year-end hike in interest rates and presidential promises to roll back recession-era banking regulations lifted bank stocks. At period end, it's notable to bear in mind that Citigroup had a dividend yield that is well below the market average and is a stock we consider to be outside the mandate of the portfolio. ■

LARGEST DETRACTORS VS. BENCHMARK

LARGEST CONTRIBUTORS VS. BENCHMARK

Holding

In energy, our underweighting in Schlumberger shares added value in light of the stock's -15% return this quarter amid weak pricing trends for crude oil. The oil-field services company reported lower-than-expected revenue for the first quarter, partly due to a decline in services demand internationally. Earnings trailed the same period a year earlier, although the company's profit was in line with analysts' estimates.

Relative Average Contribution Relative (basis Weight points)*

Holding

Market Segment

Cisco Systems, Inc.

Information Technology

2.21%

-18

Citigroup, Inc.

Financials

-1.39%

-14

ConocoPhillips Co.

Energy

0.93%

-13

1.28%

-12

-0.99%

-12

Verizon Communications, Telecommunication Inc. Services Oracle Corp.

Information Technology

* 1 basis point = 0.01%.

2 | For definitions and other important information, please see Definitions and Important Information section of this Fund Review.

QUARTERLY FUND REVIEW: Fidelity® Equity-Income Fund | AS OF JUNE 30, 2017

Outlook and Positioning Our approach emphasizes attractively valued, dividend-paying companies with a strong competitive position, good earningsgrowth prospects and dividend sustainability. If we are successful in identifying these types of holdings, the fund could deliver a higher dividend yield than the market as a whole, with potentially higher quality and growth prospects, and a more favorable valuation and lower volatility. We regularly focus on the concept of reversion to the mean – we expect unusual trends to eventually normalize, and for businesses to revert back to their long-term average level of profitability. Our approach includes remaining extremely disciplined about sticking to price targets for stocks. This means not paying more for a company that we believe it is worth, as well as never hesitating to sell a stock that our research suggests has limited upside. In terms of managing risk, the portfolio tends to include a diversified set of stocks, because this helps limit the potential negative impact of any one holding. Another strategy is to write covered calls in the portfolio – a conservative form of option trading we used to try to increase the fund's return without increasing risk. This strategy did not have a meaningful impact on performance versus the benchmark the past three months. The fund includes two subportfolios: one devoted to convertible securities and high-yield bonds, and a second focused on international equities. Each provides additional diversification that can further help moderate risk. At period end, the convertibles and high-yield sleeve made up roughly 1% of the portfolio's net assets, the international equities sleeve about 5%.

During the quarter, the fund's overweighting in the consumer discretionary sector shrank. Notably, we reduced our alreadymodest exposure to the troubled retail industry, and our allocation to the group stood at just 1% of the portfolio at quarter end. Other notable changes were moving to a slight overweighting in the technology sector. As of June 30, the fund's largest individual equity overweighting was JPMorgan Chase. Other large overweightings included Cisco, cable and media company Comcast and Blackstone. In contrast, the fund's largest stock underweightings were insurance-focused conglomerate Berkshire Hathaway, energy giant Exxon Mobil and banking firm Citigroup. We did not hold Berkshire Hathaway or Citigroup. When most investors are exuberant, we tend to think it's a good time to be cautious. This is how we've positioned the portfolio. Leading up to the elections, the market was arguably highly valued, and we see it as even more so now. Also, we see a wider range of outcomes for the global economy under the Trump administration, increasing the potential for market volatility. As of quarter end, we think we're in the midst of a fairly healthy, although low-growth, economic backdrop. In the U.S., where interest rates, inflation and unemployment all are low, we think it's a good environment for the U.S. consumer. We believe these trends support the fund's period-end overweightings in consumer-oriented sectors, as well as in select technology stocks that we believe are positioned to benefit from growth in consumer spending. ■

CHARACTERISTICS

MARKET-SEGMENT DIVERSIFICATION

Portfolio

Index

Price/Earnings Trailing

19.4x

19.7x

Market Segment

Portfolio Weight

Index Weight

Relative Weight

Relative Change From Prior Quarter

Financials

25.86%

25.88%

-0.02%

2.79%

Price/Earnings (IBES 1-Year Forecast)

15.3x

16.2x

2.2x

2.0x

Valuation

Health Care

10.74%

13.56%

-2.82%

-2.23%

Price/Book

Energy

10.51%

10.20%

0.31%

1.13%

Price/Cash Flow

12.8x

12.5x

Return on Equity (5-Year Trailing)

14.9%

11.9%

Information Technology

10.27%

8.15%

2.12%

2.42%

Growth

Consumer Staples

10.01%

8.75%

1.26%

-0.04%

Sales/Share Growth 1-Year (Trailing)

2.8%

1.5%

Industrials

8.73%

8.92%

-0.19%

0.78%

Earnings/Share Growth 1-Year (Trailing)

-1.8%

-3.2%

21.5%

16.4%

6.8%

6.1%

Weighted Average Market Cap ($ Billions)

116.0

101.2

Weighted Median Market Cap ($ Billions)

67.9

52.4

Median Market Cap ($ Billions)

24.1

1.5

Consumer Discretionary

8.28%

7.16%

1.12%

-3.17%

Earnings/Share Growth 1-Year (IBES Forecast)

Utilities

5.35%

6.17%

-0.82%

0.56%

Earnings/Share Growth 5-Year (Trailing)

Telecommunication Services

3.71%

2.93%

0.78%

0.51%

Real Estate

2.36%

5.46%

-3.10%

-0.12%

Materials

1.76%

2.82%

-1.06%

0.25%

Other

0.00%

0.00%

0.00%

0.00%

Size

3 | For definitions and other important information, please see Definitions and Important Information section of this Fund Review.

QUARTERLY FUND REVIEW: Fidelity® Equity-Income Fund | AS OF JUNE 30, 2017

LARGEST OVERWEIGHTS BY HOLDING

LARGEST UNDERWEIGHTS BY HOLDING Relative Weight

Holding

Market Segment

JPMorgan Chase & Co.

Financials

2.43%

Cisco Systems, Inc.

Information Technology

2.34%

Comcast Corp. Class A

Consumer Discretionary

2.28%

The Blackstone Group LP

Financials

2.24%

Chubb Ltd.

Financials

1.91%

10 LARGEST HOLDINGS

Relative Weight

Holding

Market Segment

Berkshire Hathaway, Inc. Class B

Financials

-2.55%

Exxon Mobil Corp.

Energy

-2.47%

Citigroup, Inc.

Financials

-1.44%

Philip Morris International, Inc.

Consumer Staples

-1.30%

Intel Corp.

Information Technology

-1.24%

ASSET ALLOCATION

Holding

Market Segment

JPMorgan Chase & Co.

Financials

Cisco Systems, Inc.

Information Technology

Asset Class

Portfolio Weight

Index Weight

Relative Weight

Relative Change From Prior Quarter

Johnson & Johnson

Health Care

Domestic Equities

88.98%

98.79%

-9.81%

2.41%

Procter & Gamble Co.

Consumer Staples

International Equities

8.40%

1.21%

7.19%

0.46%

Chubb Ltd.

Financials

Developed Markets

7.70%

0.70%

7.00%

0.41%

Comcast Corp. Class A

Consumer Discretionary

Emerging Markets

0.70%

0.49%

0.21%

0.05%

The Blackstone Group LP

Financials

Medtronic PLC

Health Care

Tax-Advantaged Domiciles

0.00%

0.02%

-0.02%

0.00%

Verizon Communications, Inc.

Telecommunication Services

Bonds

0.41%

0.00%

0.41%

0.02%

The Williams Companies, Inc.

Energy

Cash & Net Other Assets

2.21%

0.00%

2.21%

-2.89%

10 Largest Holdings as a % of Net Assets

28.18%

Total Number of Holdings

183

The 10 largest holdings are as of the end of the reporting period, and may not be representative of the fund's current or future investments. Holdings do not include money market investments.

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. "Tax-Advantaged Domiciles" represent countries whose tax policies may be favorable for company incorporation.

3-YEAR RISK/RETURN STATISTICS Portfolio Beta

Index

0.91

1.00

10.02%

10.72%

Sharpe Ratio

0.59

0.66

Tracking Error

2.53%

--

Information Ratio

-0.47

--

R-Squared

0.95

--

Standard Deviation

4 | For definitions and other important information, please see Definitions and Important Information section of this Fund Review.

QUARTERLY FUND REVIEW: Fidelity® Equity-Income Fund | AS OF JUNE 30, 2017

Definitions and Important Information CHARACTERISTICS Earnings-Per-Share Growth measures the growth in reported earnings per share over the specified past time period. Median Market Cap identifies the median market capitalization of the portfolio or benchmark as determined by the underlying security market caps. Price-to-Book (P/B) Ratio is the ratio of a company's current share price to reported accumulated profits and capital. Price/Cash Flow is the ratio of a company's current share price to its trailing 12-months cash flow per share. Price-to-Earnings (P/E) Ratio (IBES 1-Year Forecast) is the ratio of a company's current share price to Wall Street analysts' estimates of earnings. Price-to-Earnings (P/E) Ratio Trailing is the ratio of a company's current share price to its trailing 12-months earnings per share. Return on Equity (ROE) 5-Year Trailing is the ratio of a company's last five years historical profitability to its shareholders' equity. Preferred stock is included as part of each company's net worth. Sales-Per-Share Growth measures the growth in reported sales over the specified past time period. Weighted Average Market Cap identifies the market capitalization of the average equity holding as determined by the dollars invested in the portfolio or benchmark. Weighted Median Market Cap identifies the market capitalization of the median equity holding as determined by the dollars invested in the portfolio or benchmark.

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. 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.

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. Russell 3000 Value Index is a market-capitalization-weighted index designed to measure the performance of the broad value segment of the U.S. equity market. It includes those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth rates.

MARKET-SEGMENT WEIGHTS Market-segment weights illustrate examples of sectors or industries in which the fund may invest, and may not be representative of the fund's current or future investments. Should not be construed or used as a recommendation for any sector or industry.

5 |

RANKING INFORMATION © 2017 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 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.

RELATIVE WEIGHTS Relative weights represents the % of fund assets in a particular market segment, asset class or credit quality relative to the benchmark. A positive number represents an overweight, and a negative number is an underweight. The fund's benchmark is listed immediately under the fund name in the Performance Summary.

3-YEAR RISK/RETURN STATISTICS Beta is a measure of the volatility of a fund relative to its benchmark index. A beta greater (less) than 1 is more (less) volatile than the index. Information Ratio measures a fund's active return (fund's average monthly return minus the benchmark's average monthly return) in relation to the volatility of its active returns. R-Squared measures how a fund's performance correlates with a benchmark index's performance and shows what portion of it can be explained by the performance of the overall market/index. RSquared ranges from 0, meaning no correlation, to 1, meaning perfect correlation. An R-Squared value of less than 0.5 indicates that annualized alpha and beta are not reliable performance statistics.

Standard Deviation is a statistical measurement of the dispersion of a fund's return over a specified time period. Fidelity calculates standard deviations by comparing a fund's monthly returns to its average monthly return over a 36-month period, and then annualizes the number. Investors may examine historical standard deviation in conjunction with historical returns to decide whether a fund's volatility would have been acceptable given the returns it would have produced. A higher standard deviation indicates a wider dispersion of past returns and thus greater historical volatility. Standard deviation does not indicate how the fund actually performed, but merely indicates the volatility of its returns over time. Tracking Error is the divergence between the price behavior of a position or a portfolio and the price behavior of a benchmark, creating an unexpected profit or loss.

Sharpe Ratio is a measure of historical risk-adjusted performance. It is calculated by dividing the fund's excess returns (the fund's average annual return for the period minus the 3-month "risk free" return rate) and dividing it by the standard deviation of the fund's returns. The higher the ratio, the better the fund's return per unit of risk. The three month "risk free" rate used is the 90-day Treasury Bill rate.

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.

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 02917. Fidelity Investments Institutional Services Company, Inc., 500 Salem Street, Smithfield, RI 02917. © 2017 FMR LLC. All rights reserved. Not NCUA or NCUSIF insured. May lose value. No credit union guarantee. 656701.15.0

Comments