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Fidelity® Conservative Income Bond Fund

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Fidelity® Conservative Income Bond Fund PORTFOLIO MANAGER Q&A | AS OF FEBRUARY 28, 2021 Fidelity® Conservative Income Bond Fund Key Takeaways MARKET RECAP • For the semiannual reporting period ending February 28, 2021, the The Bloomberg Barclays U.S. Aggregate fund's Retail Class shares gained 0.11%, slightly topping, net of fees, Bond Index returned -1.55% for the six the 0.07% advance of the benchmark, the Bloomberg Barclays U.S. 3-6 months ending February 28, 2021, hampered by rising long-term market Month Treasury Bill Index, but lagging the Lipper peer group average. rates. Many investors preferred the • potential for higher returns in riskier The past six months, the fund generated only a slight gain amid tight markets, as the worst economic fears spreads and low yields, as the U.S. economy expanded and inflation related to the spread of COVID-19 expectations rose. receded by period end. Taxable bonds • benefited from the U.S. Federal Against this backdrop, the fund's co-managers believe they managed Reserve's aggressive and prompt the portfolio well by selectively taking on credit risk. response to the risk of economic • contraction and dysfunction in the credit The co-managers maintained significant exposure to very short-term markets. In March 2020, the central bank corporate bonds, which contributed to the fund's performance versus lowered the fed funds rate, purchased the benchmark. taxable bonds and launched lending • facilities, while Congress passed historic Sector allocation also aided the fund's relative return, including the fiscal stimulus. This led to increased decision to overweight corporate bonds and underweight U.S. market liquidity and a return of new Treasury securities. corporate issuance. The Fed continued to • purchase U.S. Treasury bonds and Within corporates, holding the bonds of high-quality banking mortgage-backed securities, while companies helped the most by far. keeping policy rates near zero. In February 2021, yields rose notably • Positioning among the debt of industrial firms – mainly a combination because a $1.9 trillion COVID-relief bill of capital goods, energy and consumer-related companies – also offered hopes for a broad economic added value. recovery but led to rising inflation expectations. Within the Bloomberg • Conversely, the fund's cash holdings, representing about 9% of assets, Barclays index, corporate bonds returned on average, and the fund's positioning along the yield curve each -0.31%, topping the -3.43% result of U.S. produced a roughly neutral result versus the benchmark. Treasuries. Securitized sectors, meanwhile, returned -0.40%, with • As of February 28, the co-managers remained selective in an commercial mortgage-backed securities environment of tighter spreads and lower yields, and saw value in adding 0.16%. Outside the index, U.S. certain floating-rate securities that adjust their coupon payments corporate high-yield bonds rose 6.09% higher in a rising-rate environment. and Treasury Inflation-Protected Securities (TIPS) returned -0.06%. • On October 1, 2020, David DeBiase assumed co-management responsibilities for the fund. Not FDIC Insured • May Lose Value • No Bank Guarantee PORTFOLIO MANAGER Q&A | AS OF FEBRUARY 28, 2021 Q&A An interview with Co-Portfolio Managers Julian Potenza and Rob Galusza Julian Potenza Rob Galusza Co-Manager Co-Manager Q: Julian, how did the fund perform for the six months ending February 28, 2021฀ Fund Facts J.P. I think we managed the portfolio well in an environment Trading Symbol: FCONX of tight spreads and extremely low yields. The fund's Retail Class shares gained 0.11%, slightly topping, net of fees, the Start Date: March 03, 2011 0.07% advance of the benchmark, the Bloomberg Barclays U.S. 3-6 Month Treasury Bill Index, but lagging the Lipper Size (in millions): $7,913.89 peer group average. Looking slightly longer term, the fund advanced 0.80% for the trailing 12 months, topping, net of fees, the 0.55% gain of the benchmark, but lagging the peer average. Investment Approach • Fidelity® Conservative Income Bond Fund is a U.S.- Q: Would you explain what made the market dollar-denominated, investment-grade, ultra-short- environment dynamic the past six months฀ duration, fixed-income strategy that seeks a high level of J.P. The backdrop for very short-term, investment-grade current income consistent with preservation of capital. bonds remained favorable from a credit perspective. A • Our investment process focuses on research and risk combination of unprecedented monetary and fiscal support management. We emphasize a bottom-up research and and the gradual re-opening of the economy led to investors trading strategy to construct a portfolio of high-quality gaining comfort with taking on credit risk. securities that seek to meet the safety, liquidity and return objectives of the fund. However, this caused short-term spreads to tighten further as the U.S. economy expanded and inflation expectations rose. • The fund has multiple guideline constraints in place to Coupled with ultralow policy rates, which limited yields at help reduce NAV (net asset value) volatility by limiting the short end, this resulted in a very difficult environment to interest rate and credit risk. Constraints exist at both the produce a strong return. security and portfolio level and include a 5% limit on exposure to lower-quality investment-grade securities. Short-term corporate bonds spent much of the six months • While the fund attempts to minimize NAV fluctuations, it continuing to recover from the broad-based market does provide investors exposure to potentially higher- weakness in early 2020 brought about by economic concern yielding opportunities among sectors and securities not related to the outbreak and spread of COVID-19. available to money market funds. Late in 2020, fixed-income investors cheered positive news about the efficacy of COVID-19 vaccines, which drove a steeper longer-term yield curve in early November. The rise for yields moderated in December, due to rising COVID-19 cases, the planned end to some of the Fed's emergency- credit programs and Congressional delays in passing another round of economic stimulus. In January, yields began to rise again, largely due to economic optimism for the broader distribution of COVID-19 vaccines and additional economic stimulus. Then, in February, expectations for the passage of a $1.9 trillion economic stimulus package and concern the U.S. government could spend additional trillions to bolster U.S. 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 FEBRUARY 28, 2021 highways, airports and other infrastructure led to concern lukewarm result, however. The fund's stake in cash, about the rising deficit and the potential for inflation. This representing about 9% of assets, on average, had a neutral caused intermediate- and longer-term rates to rise, and for impact versus the benchmark. investors to favor short-term bonds. We tend to hold more cash in the fund when spreads are Bond markets can often tolerate modest inflation, although tight, keeping some "dry powder" available for when many investors worry too much of it can erode bond spreads widen and we see better buying opportunities. earnings over time. Also, the fund's positioning along the short-term yield curve had a roughly neutral impact versus the benchmark. We Q: How did you position the fund against this maintained some exposure to the two-year part of the yield market backdrop฀ curve, which helped versus the benchmark, although I'd describe our yield-curve positioning as a wash overall. J.P. Co-Managers Maura Walsh, David DeBiase, Rob Galusza and I did not change our fundamental approach to finding Lastly, we kept about 9% of the fund invested in U.S. value. We invested in areas of the market we thought would Treasuries, up from about 8% at the start of the period. Our earn a decent return over comparable U.S. Treasuries, but Treasury holdings didn't aid performance versus the without subjecting the fund to a lot of incremental risk. benchmark but did contribute to the fund's liquidity. The fund's exposure to interest rate risk remained Q: Rob and Julian, what is your outlook for substantially lower than what one might expect for a fund that typically purchases much-longer-dated bonds. To help short-term bonds, and how was the fund us identify risks and opportunities, we employ robust positioned as of February 28฀ governance and risk management, consisting of extensive J.P. We're seeing few areas in the market where we think quantitative modeling, formal and informal portfolio reviews, we're able to earn a decent yield. and proprietary tools. That said, we remain on the lookout for new issues in the We rely on the research teams here at Fidelity, along with corporate market. We're seeing some attractive floating-rate our own experience as portfolio managers, to invest in bonds securities, which we think could take advantage of eventually we think offer a good combination of relative value and higher rates at the short end. stable return. As always, we take a disciplined approach when evaluating these securities. R.G. As of February 28, about 80% of the fund is invested in corporate securities, down very slightly from the start of the Q: What contributed to the fund's return versus period. We remain focused largely on the bonds of higher- the benchmark฀ quality firms. J.P. Sizable exposure to very short-term corporate bonds Although it's difficult to pick up yield, we've seen these types helped. Even though credit spreads experienced volatility, of markets before. We're putting all our efforts and our for the full period they delivered a healthy return that combined decades of market experience into finding values exceeded the benchmark.
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