PERFORMANCE SUMMARY
|
Cumul ative |
Annualized |
|||||
|
3 Month |
YTD |
1 Year |
3 Year |
5 Year |
10 Year/ LOF 1 |
|
|
Fidelity Real Estate Income Fund (MUTF:FRIFX) Gross Expense Ratio: 0.67% 2 |
7.60% |
10.42% |
19.22% |
2.38% |
4.25% |
5.94% |
|
ICE BofA US High Yield Constrained Index |
5.28% |
8.03% |
15.67% |
3.08% |
4.53% |
4.95% |
|
FID Real Estate Income Composite Index |
8.96% |
9.51% |
20.04% |
0.69% |
2.63% |
4.68% |
|
Morningstar Fund Moderate Allocation |
5.34% |
12.27% |
21.99% |
4.89% |
8.01% |
6.89% |
|
% Rank in Morningstar Category (1% = Best) |
— |
— |
82% |
94% |
97% |
77% |
|
# of Funds in Morningstar Category |
— |
— |
733 |
682 |
643 |
491 |
|
1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 02/04/2003. 2 This expense ratio is from the most recent prospectus and generally is based on amounts incurred during the most recent fiscal year, or estimated amounts for the current fiscal year in the case of a newly launched fund. It does not include any fee waivers or reimbursements, which would be reflected in the fund’s net expense ratio. 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 Funds | Mutual Funds from Fidelity Investments, Financial Professionals | Fidelity Institutional, or Fidelity NetBenefits | Employee Benefits. 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. Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. 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. 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. Changes in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industry. The value of securities of issuers in the real estate industry can be affected by changes in real estate values and rental income, property taxes, interest rates, tax and regulatory requirements, and the management skill and creditworthiness of the issuer. Not FDIC Insured • May Lose Value • No Bank Guarantee |
Market Review
U.S. real estate investment trusts gained 16.25% in the third quarter, as measured by the FTSE NAREIT Equity REITs Index, reflecting the market’s optimism about the potential for lower borrowing costs amid falling interest rates. Against this backdrop, every industry represented in the FTSE NAREIT index gained the past three months, many by double digits.
REITs’ performance significantly outpaced the 5.89% advance of the broad U.S. stock market, according to the S&P 500®index. (SP500, SPX) The S&P 500® enjoyed a strong Q3, rising due to resilient corporate profits, the promise of artificial intelligence and the Federal Reserve’s long- anticipated pivot to cutting interest rates. Amid this favorable backdrop for higher-risk assets, the index continued its late-2023 momentum and ended September at its all-time closing high. Value stocks led the way, while smaller-cap shares outpaced large-caps in what was a broad rally, with eight of 11 sectors outperforming.
In Q3, REITs benefited from the shift toward global monetary easing, which gained steam when the Fed lowered its benchmark federal funds rate after a historic hiking cycle that began in March 2022 to combat persistently high inflation. On September 18, the central bank cut rates by 0.50 percentage points, opting for a bolder start in making its first rate reduction since March 2020. The Fed’s stated goal is to achieve a soft landing for the economy: bring down inflation amid a gradual cooling in the labor market while neither spurring nor slowing economic activity. The Fed has projected the equivalent of two more quarter-point cuts this year.
Meanwhile, real estate corporate bonds gained 5.58% for the three months, as measured by the ICE BofA®U.S. Real Estate Index – a market-capitalization-weighted measure of investment-grade corporate debt in the domestic real estate sector.
Commercial mortgage-backed securities added 4.30% in the third quarter, according to Bloomberg U.S. CMBS ex-AAA ex-Agency Guaranteed Index.
By comparison, the Bloomberg U.S. Aggregate Bond Index rose 5.20%, after gaining just 0.07% in the prior three months. For the trailing 12 months, taxable investment-grade bonds rose 11.57%. Outside the Aggregate index, U.S. Treasury Inflation-Protected Securities advanced 4.12%, per Bloomberg, compared to 5.28% for U.S. high-income corporate debt.
Elsewhere, real estate preferred stocks, which tend to be sensitive to changes in interest rates, meaningfully gained, with the MSCI REIT Preferred Index advancing 11.46% in Q3.
Performance Review
For the third quarter, the fund’s Retail Class shares gained 7.60%, trailing the 8.96% advance of the Fidelity Real Estate Income Composite Index SM.
In Q3, the biggest detractor from the fund’s performance versus the Composite index was the preferred stock portfolio. Stock selection here hurt, as the fund’s holdings trailed the MSCI REIT Preferred Index by 4.10 percentage points. In addition, the fund’s large underweight in the asset class hurt relative performance, given that the preferred index outpaced the Composite index for the quarter.
Another relative detractor was the fund’s CMBS portfolio. An overweight in the category hurt most, given that the Bloomberg U.S. CMBS ex-AAA ex-Agency Guaranteed Index lagged the Composite index by several percentage points. In addition, security selection in this segment modestly detracted, because our CMBS holdings collectively underperformed the Bloomberg index by 0.60 percentage points.
Also, the fund’s cash allocation, which historically has been between 5% and 10% of net assets to allow us to take advantage of attractive buying opportunities when they appear, detracted from the fund’s relative performance the past three months. Cash represented 8% of the fund as of September 30.
On the positive side, the fund was favorably positioned in the real estate bond segment. Security selection in this portfolio sleeve contributed, with our bond investments outperforming the ICE BofA U.S. Real Estate Index by 0.84 percentage points. The fund’s underweight in the category also helped.
In addition, the fund benefited from its slight overweight in real estate common stocks, as this category was the best performer in the Composite index, gaining about 16% in Q3.
Outlook and Positioning
We seek to achieve what we consider a reasonable absolute total return by investing in real estate stocks and bonds, aiming for a higher yield and less volatility than what is typically available by investing in REIT common stocks alone. The lower volatility occurs mostly because bonds and preferred stocks are senior in priority to common stocks, so their prices move less when growth disappoints. As always, the past three months we selected investments primarily based on bottom-up (security-by-security) fundamental research.
We rely on our years of experience in commercial real estate investing and the expertise of our research team.
Shifts to the fund’s asset allocation generally are modest, as we try to avoid big, rapid changes. Instead, we favor an incremental approach because we believe we are better at identifying longer- term trends in the market. When we see unique opportunities, however, we may choose to shift the fund’s asset mix more quickly.
In Q3, the fund’s allocation to investment-grade real estate corporate bonds drifted downward, from 23% at midyear to 22% on September 30, even as the weighting remained meaningfully higher than earlier in 2024. We continued to appreciate these securities’ much-higher coupons than in the past. In addition, despite issuers’ strong balance sheets, these securities were trading at historically high yields, giving the fund increased margin of safety in owning these securities. Meanwhile, the portfolio’s available cash grew to 8% on September 30, up from about 5% three months earlier. As we mentioned, we typically maintain between 5% and 10% of the portfolio in cash to pursue attractive buying opportunities when they emerge.
Another small portfolio shift included a modest reduction in real estate common stocks, which went from about 23% of the portfolio on June 30 to roughly 22% on September 30. Meanwhile, the fund’s allocations to real estate preferred stocks and high-yield real estate bonds remained consistent, finishing the quarter at about 14% and 10%, respectively.
One reason we are comfortable with the fund’s higher overall weighting in fixed income – representing about 57% of the portfolio as of September 30, including investment-grade and high-yield real estate corporate bonds and CMBS – is because bondholders are among the earliest to be repaid if issuers encounter financial difficulty. Meanwhile, due to higher short- and long-term interest rates these days, investment-grade bonds now offer compelling yields. Their income has become more competitive with high-yield debt, but generally with lower credit risk.
Meanwhile, for some of our higher-yielding but lower-rated fixed- income investments, if we are right about assessing the securities’ credit quality, we expect the fund to benefit from spread narrowing while also collecting the coupon. When we invest in CMBS, we favor issuers with underlying property types that offer rising operating income, modest leverage and good ownership, and that provide comparable yields to high-yield real estate corporate bonds.
Looking ahead, we recognize certain risks in today’s marketplace, from a possible recession or areas of the market challenged by oversupply – such as Sunbelt apartments – so we are constructing the portfolio accordingly, by focusing on property types with durable cash flow and by limiting exposure to those with more- cyclical rents. Overall, however, we are generally optimistic about the commercial real estate industry’s potential to enjoy stabilizing property values, more available financing and growing cash flow. Couple these factors with real estate securities’ currently attractive yields and appreciation potential, and we’re quite hopeful.
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