UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-7319
Fidelity Covington Trust
(Exact name of registrant as specified in charter)
82 Devonshire St., Boston, Massachusetts 02109
(Address of principal executive offices) (Zip code)
Eric D. Roiter, Secretary
82 Devonshire St.
Boston, Massachusetts 02109
(Name and address of agent for service)
Registrant's telephone number, including area code: 617-563-7000
Date of fiscal year end: | December 31 |
Date of reporting period: | December 31, 2003 |
Item 1. Reports to Stockholders
Fidelity®
Real Estate High Income Fund II
Annual Report
December 31, 2003
(2_fidelity_logos) (Registered_Trademark)
REHIFII-UANN-0204
1.787785.100
Contents
Performance | How the fund has done over time. | |
Management's Discussion | The manager's review of fund performance, strategy and outlook. | |
Investments | A complete list of the fund's investments with their | |
Financial Statements | Statements of assets and liabilities, operations, and changes in net assets, as well as financial highlights. | |
Notes | Notes to the financial statements. | |
Auditors' Opinion | ||
Trustees and Officers | ||
Distributions | ||
For a free copy of the fund's proxy voting guidelines, call 1-617-563-6414, or visit the Securities and Exchange Commission (SEC)'s web site at www.sec.gov.
Standard & Poor's, S&P and S&P 500 are registered service marks of The McGraw-Hill Companies, Inc. and have been licensed for use by Fidelity Distributors Corporation.
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 Corp. or an affiliated company.
(Recycle graphic) This report is printed on recycled paper using soy-based inks.
This report and the financial statements contained herein are submitted for the general information of the shareholders of the fund. This report is not authorized for distribution to prospective investors in the fund unless preceded or accompanied by an effective prospectus.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any depository institution. Shares are not insured by the FDIC, Federal Reserve Board or any other agency, and are subject to investment risks, including possible loss of principal amount invested.
Neither the fund nor Fidelity Distributors Corporation is a bank.
For more information on the fund, including charges and expenses, call Jeff Gandel at 617-563-6414 for a free prospectus. Read it carefully before you invest or send money.
Annual Report
Performance: The Bottom Line
Average annual total return reflects the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains (the profits earned upon the sale of securities that have grown in value) and assuming a constant rate of performance each year. The $100,000 table and the fund's returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. During periods of reimbursement by Fidelity, a fund's total return will be greater than it would be had the reimbursement not occurred. How a fund did yesterday is no guarantee of how it will do tomorrow.
Average Annual Total Returns
Periods ended December 31, 2003 | Past 1 | Past 5 | Life of Fund A |
Fidelity Real Estate High Income Fund II | 32.24% | 13.72% | 12.12% |
A From September 27, 1996.
$100,000 Over Life of Fund
Let's say hypothetically that $100,000 was invested in Fidelity® Real Estate High Income II Fund on September 27, 1996, when the fund started. The chart shows how the value of your investment would have grown, and also shows how the Merrill Lynch® U.S. High Yield Master Cash Pay Only Index did over the same period.
Annual Report
Management's Discussion of Fund Performance
Comments from Steve Buller, Portfolio Manager of Fidelity® Real Estate High Income Fund II
U.S. equity markets snapped a three-year losing streak in 2003, rebounding on the strength of the lowest interest rates in decades, improved corporate profits and a resurgent economy. For the year overall, the Standard & Poor's 500SM Index gained 28.69%, the Dow Jones Industrial AverageSM rose 28.14% and the NASDAQ Composite® Index advanced 50.77%. Small-cap stocks led the charge, particularly lower-quality issues in cyclical industries such as biotechnology and the Internet. As a result, the Russell 2000® Index had its best calendar year ever, climbing 47.25%. The start of the year gave little indication of the strong performance to come, as the hangover of corporate governance scandals and an impending war with Iraq clouded the outlook for 2003. However, investors were encouraged by solid gross domestic product (GDP) growth in the first two quarters of 2003, and what seemed to be a quick resolution to the Iraqi conflict. Federal tax cuts and a boom in mortgage refinancing further boosted the markets and put more discretionary income in consumers' pockets. In the third quarter, GDP growth grew 8.2%, its highest level since 1984.
For the 12-month period that ended December 31, 2003, the fund returned 32.24%. The NAREIT Index - maintained by the National Association of Real Estate Investment Trusts - returned 38.47%, while the LipperSM Real Estate Funds Average returned 36.75% during the same time frame. In addition, the Merrill Lynch® U.S. High Yield Master Cash Pay Only Index, a broad measure of the high-yield bond market, returned 27.23%. There were several reasons for the fund's underperformance. The first was my defensive portfolio management approach beginning in late spring, which dragged down relative performance. Second, the fund had more cash than was ideal. Because this fund was in the process of being liquidated, I sold a number of securities and was somewhat less active in buying new ones to replace them, which hurt in a rising market. Apartment Investment and Management was an especially poor relative performer. With more and more people taking advantage of low interest rates to buy homes, apartment REITs have struggled. Apartment Investment and Management was forced to cut its dividend, and this weighed on the stock price. The fund was helped by an investment in Newcastle Investment, which invests in mortgage-backed securities and was rewarded for its high dividend yield and excellent execution of its management strategy. The fund also benefited from owning two retail mall stocks, CBL & Associates and General Growth Properties. Both were representative of the entire mall industry, which recently has enjoyed some of the highest growth rates in the real estate world.
Note to shareholders: The liquidation of Fidelity Real Estate High Income Fund II is scheduled to be completed on or about February 29, 2004.
The views expressed in this statement reflect those of the portfolio manager only through the end of the period of the report as stated on the cover and do not necessarily represent the views of Fidelity or any other person in the Fidelity organization. Any such 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.
Annual Report
Investments December 31, 2003
Showing Percentage of Net Assets
Commercial Mortgage Securities - 0.3% | ||||
Principal | Value | |||
FMAC Loan Receivables Trust weighted average coupon Series 1997-A Class F, 0% 4/15/19 (b)(c) | $ 81,129 | $ 0 | ||
Structured Mortgage Trust weighted average coupon Series 1997-2: | ||||
Class C, 5.2875% 1/30/06 (b)(c) | 33,937 | 25,453 | ||
Class D, 5.28% 1/30/06 (b)(c) | 41,770 | 27,150 | ||
TOTAL COMMERCIAL MORTGAGE SECURITIES (Cost $167,041) | 52,603 |
Common Stocks - 96.5% | |||
Shares | |||
Automotive - 0.6% | |||
Capital Automotive (SBI) | 3,000 | 96,000 | |
Banks and Thrifts - 0.0% | |||
CS First Boston Mortgage Securities Corp. warrants 12/15/09 (a) | 781,850 | 0 | |
Healthcare - 2.1% | |||
Health Care Property Investors, Inc. | 6,200 | 314,960 | |
Homebuilding/Real Estate - 86.5% | |||
Alexandria Real Estate Equities, Inc. | 2,500 | 144,750 | |
Apartment Investment & Management Co. Class A | 22,915 | 790,565 | |
Archstone-Smith Trust | 10,375 | 290,293 | |
AvalonBay Communities, Inc. | 4,537 | 216,869 | |
Boardwalk Equities, Inc. | 24,800 | 342,596 | |
Boston Properties, Inc. | 9,600 | 462,624 | |
Catellus Development Corp. | 12,213 | 294,578 | |
CBL & Associates Properties, Inc. | 9,238 | 521,947 | |
CenterPoint Properties Trust (SBI) | 9,900 | 741,510 | |
Cousins Properties, Inc. | 5,300 | 162,180 | |
Developers Diversified Realty Corp. | 10,300 | 345,771 | |
Duke Realty Corp. | 19,400 | 601,400 | |
Equity Office Properties Trust | 18,411 | 527,475 | |
Equity Residential (SBI) | 17,778 | 524,629 | |
Federal Realty Investment Trust (SBI) | 5,950 | 228,421 | |
Forest City Enterprises, Inc. Class A | 1,800 | 85,518 | |
General Growth Properties, Inc. | 19,500 | 541,125 | |
Home Properties of New York, Inc. | 4,877 | 196,982 | |
iStar Financial, Inc. | 4,400 | 171,160 | |
Liberty Property Trust (SBI) | 9,600 | 373,440 | |
Maguire Properties, Inc. | 6,200 | 150,660 | |
Manufactured Home Communities, Inc. | 5,300 | 199,545 | |
Newcastle Investment Corp. | 9,200 | 249,320 | |
Pacific Gulf Properties, Inc. (a) | 150,000 | 2 | |
Pan Pacific Retail Properties, Inc. | 5,200 | 247,780 | |
Price Legacy Corp. (a) | 25,444 | 96,942 | |
ProLogis | 19,852 | 637,051 | |
Reckson Associates Realty Corp. | 25,400 | 617,220 | |
Regency Centers Corp. | 11,100 | 442,335 | |
Shurgard Storage Centers, Inc. Class A | 3,700 | 139,305 | |
Shares | Value | ||
Simon Property Group, Inc. | 15,000 | $ 695,100 | |
The Mills Corp. | 3,500 | 154,000 | |
The Rouse Co. | 7,400 | 347,800 | |
The St. Joe Co. | 10,900 | 406,461 | |
Ventas, Inc. | 10,400 | 228,800 | |
Vornado Realty Trust | 13,500 | 739,125 | |
12,915,279 | |||
Paper - 2.0% | |||
Plum Creek Timber Co., Inc. | 9,600 | 292,320 | |
Services - 4.8% | |||
Correctional Properties Trust | 4,100 | 118,080 | |
Public Storage, Inc. | 13,900 | 603,121 | |
721,201 | |||
Super Retail - 0.5% | |||
Cedar Shopping Centers, Inc. (a) | 5,700 | 70,794 | |
TOTAL COMMON STOCKS (Cost $7,875,934) | 14,410,554 | ||
Cash Equivalents - 98.6% | |||
Maturity | |||
Investments in repurchase agreements (Collateralized by U.S. Treasury Obligations, in a joint trading account at 0.81%, dated 12/31/03 due 1/2/04) | $ 14,722,660 | 14,722,000 |
TOTAL INVESTMENT PORTFOLIO - 195.4% (Cost $22,764,975) | 29,185,157 | |
NET OTHER ASSETS - (95.4)% | (14,250,603) | |
NET ASSETS - 100% | $ 14,934,554 |
Legend |
(a) Non-income producing |
(b) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $52,603 or 0.4% of net assets. |
(c) The coupon rate shown on floating or adjustable rate securities represents the rate at period end. |
Other Information |
Purchases and sales of securities, other than short-term securities, aggregated $29,133,717 and $112,781,372, respectively. |
The fund placed a portion of its portfolio transactions with brokerage firms which are affiliates of the investment adviser. The commissions paid to these affiliated firms were $871 for the period. |
Income Tax Information |
The fund hereby designates approximately $12,460,000 as a capital gain dividend for the purpose of the dividend paid deduction. |
See accompanying notes which are an integral part of the financial statements.
Annual Report
Financial Statements
Statement of Assets and Liabilities
December 31, 2003 | ||
Assets | ||
Investment in securities, at value (including repurchase | $ 29,185,157 | |
Receivable for investments sold | 772,843 | |
Dividends receivable | 88,674 | |
Interest receivable | 4,035 | |
Prepaid expenses | 382 | |
Other receivables | 478 | |
Total assets | 30,051,569 | |
Liabilities | ||
Payable to custodian bank | $ 316,669 | |
Payable for fund shares redeemed | 14,700,000 | |
Accrued management fee | 17,489 | |
Other affiliated payables | 5,371 | |
Other payables and accrued expenses | 77,486 | |
Total liabilities | 15,117,015 | |
Net Assets | $ 14,934,554 | |
Net Assets consist of: | ||
Excess of amounts paid on value of shares redeemed over paid in capital | (3,990,662) | |
Undistributed net investment income | 1,540,758 | |
Accumulated undistributed net realized gain (loss) on | 10,964,271 | |
Net unrealized appreciation (depreciation) on investments and assets and liabilities in foreign currencies | 6,420,187 | |
Net Assets, for 2,022,140 shares outstanding | $ 14,934,554 | |
Net Asset Value, offering price | $ 7.39 |
Statement of Operations
Year ended December 31, 2003 | ||
Investment Income | ||
Dividends | $ 2,581,853 | |
Interest | 1,265,019 | |
Total income | 3,846,872 | |
Expenses | ||
Management fee | $ 502,698 | |
Transfer agent fees | 11,829 | |
Accounting fees and expenses | 60,145 | |
Non-interested trustees' compensation | 309 | |
Custodian fees and expenses | 11,814 | |
Registration fees | 2,300 | |
Audit | 72,745 | |
Legal | 6,724 | |
Miscellaneous | 728 | |
Total expenses before reductions | 669,292 | |
Expense reductions | (15,250) | 654,042 |
Net investment income (loss) | 3,192,830 | |
Realized and Unrealized Gain (Loss) Net realized gain (loss) on: | ||
Investment securities | 24,932,224 | |
Foreign currency transactions | 2,014 | |
Total net realized gain (loss) | 24,934,238 | |
Change in net unrealized appreciation (depreciation) on: Investment securities | (10,039,654) | |
Assets and liabilities in foreign currencies | 5 | |
Total change in net unrealized appreciation (depreciation) | (10,039,649) | |
Net gain (loss) | 14,894,589 | |
Net increase (decrease) in net assets resulting from operations | $ 18,087,419 |
See accompanying notes which are an integral part of the financial statements.
Annual Report
Financial Statements - continued
Statement of Changes in Net Assets
Year ended | Year ended | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net investment income (loss) | $ 3,192,830 | $ 8,663,322 |
Net realized gain (loss) | 24,934,238 | 2,718,016 |
Change in net unrealized appreciation (depreciation) | (10,039,649) | (490,881) |
Net increase (decrease) in net assets resulting from operations | 18,087,419 | 10,890,457 |
Distributions to shareholders from net investment income | (682,840) | (3,827,212) |
Distributions to shareholders from net realized gain | (12,905,922) | (14,846,094) |
Total distributions | (13,588,762) | (18,673,306) |
Share transactions | 2,358,600 | 400,000 |
Reinvestment of distributions | 13,584,715 | 11,886,608 |
Cost of shares redeemed | (96,618,854) | (144,400,000) |
Net increase (decrease) in net assets resulting from share transactions | (80,675,539) | (132,113,392) |
Total increase (decrease) in net assets | (76,176,882) | (139,896,241) |
Net Assets | ||
Beginning of period | 91,111,436 | 231,007,677 |
End of period (including undistributed net investment income of $1,540,758 and distributions in excess of net | $ 14,934,554 | $ 91,111,436 |
Other Information Shares | ||
Sold | 243,512 | 36,697 |
Issued in reinvestment of distributions | 1,800,047 | 1,247,283 |
Redeemed | (9,410,214) | (12,661,334) |
Net increase (decrease) | (7,366,655) | (11,377,354) |
A Certain amounts have been reclassified. See Note 1 of the Notes to Financial Statements.
Financial Highlights
Years ended December 31, | 2003 | 2002 | 2001 | 2000 | 1999 |
Selected Per-Share Data | |||||
Net asset value, beginning of period | $ 9.70 | $ 11.12 | $ 11.11 | $ 9.43 | $ 10.12 |
Income from Investment Operations | |||||
Net investment income (loss) B | .488 | .562 F | .526 E, F | .719 C | .761 |
Net realized and unrealized gain (loss) | 2.574 | .012 F | .396 E, F | 1.710 | (.806) |
Total from investment operations | 3.062 | .574 | .922 | 2.429 | (.045) |
Distributions from net investment income | (.092) | (.384) | (.712) | (.749) | (.645) |
Distributions from net realized gain | (5.280) | (1.610) | (.200) | - | - |
Total distributions | (5.372) | (1.994) | (.912) | (.749) | (.645) |
Net asset value, end of period | $ 7.39 | $ 9.70 | $ 11.12 | $ 11.11 | $ 9.43 |
Total Return A | 32.24% | 5.89% | 8.43% | 25.83% | (.46)% |
Ratios to Average Net Assets D | |||||
Expenses before expense reductions | .97% | .86% | .83% | .85% | .85% |
Expenses net of voluntary waivers, if any | .97% | .86% | .83% | .85% | .85% |
Expenses net of all reductions | .95% | .80% | .79% | .83% | .79% |
Net investment income (loss) | 4.64% | 4.89% F | 4.58% E, F | 6.83% | 7.57% |
Supplemental Data | |||||
Net assets, end of period (000 omitted) | $ 14,935 | $ 91,111 | $ 231,008 | $ 418,923 | $ 321,641 |
Portfolio turnover rate | 46% | 29% | 19% | 31% | 41% |
A Total returns would have been lower had certain expenses not been reduced during the periods shown.
B Calculated based on average shares outstanding during the period.
C Investment income per share reflects a special dividend which amounted to $.07 per share.
D Expense ratios reflect operating expenses of the fund. Expenses before reductions do not reflect amounts reimbursed by the investment adviser or reductions from brokerage service arrangements or other expense offset arrangements and do not represent the amount paid by the fund during periods when reimbursements or reductions occur. Expenses net of any voluntary waivers reflect expenses after reimbursement by the investment adviser but prior to reductions from brokerage service arrangements or other expense offset arrangements. Expenses net of all reductions represent the net expenses paid by the fund.
E Effective January 1, 2001, the fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and discount on all debt securities. Per-share data and ratios for periods prior to adoption have not been restated to reflect this change.
F As a result of a revision to reflect accretion of market discount using the interest method and as a result of prior accretion of discount on a portfolio security, certain amounts for the years ended December 31, 2002 and December 31, 2001 have been reclassified from what was previously reported. The impact of these changes for the years ended December 31, 2002 and December 31, 2001 was a decrease to net investment income of $.059 and $.033 per share with a corresponding increase to net realized and unrealized gain (loss) per share, respectively. The ratio of net investment income to average net assets decreased from 5.40% and 4.87% to 4.89% and 4.58%, respectively. These reclassifications had no impact on the net assets of the fund.
See accompanying notes which are an integral part of the financial statements.
Annual Report
Notes to Financial Statements
For the period ended December 31, 2003
1. Significant Accounting Policies.
Fidelity Real Estate High Income Fund II (the fund) is a fund of Fidelity Covington Trust (the trust) and is authorized to issue an unlimited number of shares. The trust is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as an open-end management investment company organized as a Massachusetts business trust. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require management to make certain estimates and assumptions at the date of the financial statements. The following summarizes the significant accounting policies of the fund:
Security Valuation. Net asset value per share (NAV calculation) is calculated as of the close of business of the New York Stock Exchange, normally 4:00 p.m. Eastern time. Debt securities for which quotations are readily available are valued at their most recent bid prices (sales prices if the principal market is an exchange) in the principal market in which such securities are normally traded, as determined by recognized dealers in such securities, or securities are valued on the basis of information provided by a pricing service. Pricing services use valuation matrices that incorporate both dealer-supplied valuations and valuation models. Equity securities for which market quotations are available are valued at the last sale price or official closing price (closing bid price or last evaluated quote if no sale has occurred) on the primary market or exchange on which they trade. If an event that is expected to materially affect the value of a security occurs after the close of an exchange or market on which that security trades, but prior to the NAV calculation, then that security will be fair valued taking the event into account. Securities (including restricted securities) for which market quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Board of Trustees. Price movements in futures contracts and ADRs, market and trading trends, the bid/ask quotes of brokers and off-exchange institutional trading may be reviewed in the course of making a good faith determination of a security's fair value. Short-term securities with remaining maturities of sixty days or less for which quotations are not readily available are valued on the basis of amortized cost. Investments in open-end investment companies are valued at their net asset value each business day.
Foreign Currency. The fund uses foreign currency contracts to facilitate transactions in foreign-denominated securities. Losses from these transactions may arise from changes in the value of the foreign currency or if the counterparties do not perform under the contracts' terms.
Foreign denominated assets, including investment securities, and liabilities are translated into U.S. dollars at the exchange rate at period end. Purchases and sales of investment securities, income and dividends received and expenses denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date.
The effects of exchange rate fluctuations on investments are included with the net realized and unrealized gain (loss) on investment securities. Other foreign currency transactions resulting in realized and unrealized gain (loss) are disclosed separately.
Investment Transactions and Income. Security transactions are accounted for as of trade date. Gains and losses on securities sold are determined on the basis of identified cost. Dividend income is recorded on the ex-dividend date, except for certain dividends from foreign securities where the ex-dividend date may have passed, which are recorded as soon as the fund is informed of the ex-dividend date. Non-cash dividends included in dividend income, if any, are recorded at the fair market value of the securities received. The fund estimates the components of distributions received from Real Estate Investment Trusts (REITs). Distributions received in excess of income are recorded as a reduction of cost of investments and/or as a realized gain. Interest income is accrued as earned. Interest income includes coupon interest and amortization of premium and accretion of discount on debt securities, which is accrued using the interest method. Investment income is recorded net of foreign taxes withheld where recovery of such taxes is uncertain. Debt obligations may be placed on non-accrual status and related interest income may be reduced by ceasing current accruals and writing off interest receivables when the collection of all or a portion of interest has become doubtful based on consistently applied procedures. A debt obligation is removed from non-accrual status when the issuer resumes interest payments or when collectibility of interest is reasonably assured.
Reclassification of Financial Information. As a result of a revision to reflect accretion of market discount using the interest method and as a result of prior accretion of discount on a portfolio security, certain amounts for the year ended December 31, 2002 have been reclassified from what was previously reported. Net investment income for the fund decreased by $903,277 with a corresponding increase (decrease) to realized and unrealized gain (loss) of $1,275,638 and $(372,361), respectively. These reclassifications had no impact on total net assets of the fund.
Expenses. Most expenses of the trust can be directly attributed to a fund. Expenses which cannot be directly attributed are apportioned among the funds in the trust.
Income Tax Information and Distributions to Shareholders. Each year, the fund intends to qualify as a regulated investment company by distributing all of its taxable income and realized gains under Subchapter M of the Internal Revenue Code. As a result, no provision for income taxes is required in the accompanying financial statements. Foreign taxes are provided for based on each fund's understanding of the tax rules and rates that exist in the foreign markets in which it invests. Dividends are declared daily and paid monthly from net investment income. Distributions from realized gains, if any, are recorded on the ex-dividend date.
Annual Report
Notes to Financial Statements - continued
1. Significant Accounting Policies - continued
Income Tax Information and Distributions to Shareholders - continued
Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. Capital accounts within the financial statements are adjusted for permanent and temporary book and tax differences. These adjustments have no impact on net assets or the results of operations. Temporary differences will reverse in a subsequent period. These differences are primarily due to foreign currency transactions, passive foreign investment companies (PFIC), prior period premium and discount on debt securities, market discount, and losses deferred due to wash sales.
The tax-basis components of distributable earnings and the federal tax cost as of period end were as follows:
Unrealized appreciation | $ 7,195,456 |
Unrealized depreciation | (1,339,897) |
Net unrealized appreciation (depreciation) | 5,855,559 |
Undistributed ordinary income | 2,532,034 |
Undistributed long-term capital gain | 10,537,723 |
Cost for federal income tax purposes | $ 23,329,598 |
The tax character of distributions paid was as follows:
December 31, 2003 | December 31, 2002 | |
Ordinary Income | $ 1,129,686 | $ 5,355,065 |
Long-term Capital Gains | 12,459,076 | 13,318,241 |
Total | $ 13,588,762 | $ 18,673,306 |
2. Operating Policies.
Repurchase Agreements. Fidelity Management & Research Company (FMR) has received an Exemptive Order from the Securities and Exchange Commission (the SEC) which permits the fund and other affiliated entities of FMR to transfer uninvested cash balances into joint trading accounts. These accounts are then invested in repurchase agreements that are collateralized by U.S. Treasury or Government obligations. The fund may also invest directly with institutions, in repurchase agreements that are collateralized by commercial paper obligations and corporate obligations. Collateral is held in segregated accounts with custodian banks and may be obtained in the event of a default of the counterparty. Collateral is marked-to-market daily and maintained at a value at least equal to the principal amount of the repurchase agreement (including accrued interest).
Restricted Securities. The fund may invest in securities that are subject to legal or contractual restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are registered. Disposal of these securities may involve time-consuming negotiations and expense, and prompt sale at an acceptable price may be difficult. Information regarding restricted securities is included at the end of the fund's Schedule of Investments.
3. Purchases and Sales of Investments.
Information regarding purchases and sales of securities is included under the caption "Other Information" at the end of the fund's Schedule of Investments.
4. Fees and Other Transactions with Affiliates.
Management Fee. FMR and its affiliates provide the fund with investment management related services for which the fund pays a monthly management fee. The management fee is the sum of an individual fund fee rate that is based on an annual rate of .60% of the fund's average net assets and a group fee rate that averaged .13% during the period. The group fee rate is based upon the average net assets of all the mutual funds advised by FMR. The group fee rate decreases as assets under management increase and increases as assets under management decrease. For the period, the total annual management fee rate was .73% of the fund's average net assets.
Transfer Agent Fees. Fidelity Investments Institutional Operations Company, Inc. (FIIOC), an affiliate of FMR, is the fund's transfer, dividend disbursing and shareholder servicing agent. FIIOC receives asset-based fees with respect to each account. FIIOC pays for typesetting, printing and mailing of all shareholder reports, except proxy statements. The fund pays a transfer agent fee equal to an annual rate of .015% of month end net assets.
Accounting Fees. Fidelity Service Company, Inc. (FSC), an affiliate of FMR, maintains the fund's accounting records. The fee is based on the level of average net assets for the month plus out-of-pocket expenses.
Annual Report
4. Fees and Other Transactions with Affiliates - continued
Brokerage Commissions. The fund placed a portion of its portfolio transactions with brokerage firms which are affiliates of the investment adviser. The commissions paid to these affiliated firms are shown under the caption "Other Information" at the end of the fund's Schedule of Investments.
5. Committed Line of Credit.
The fund participates with other funds managed by FMR in a $3.5 billion credit facility (the "line of credit") to be utilized for temporary or emergency purposes to fund shareholder redemptions or for other short-term liquidity purposes. The fund has agreed to pay commitment fees on its pro rata portion of the line of credit. During the period, there were no borrowings on this line of credit.
6. Expense Reductions.
Many of the brokers with whom FMR places trades on behalf of the fund provided services to the fund in addition to trade execution. These services included payments of certain expenses on behalf of the fund totaling $14,822 for the period. In addition, through arrangements with the fund's custodian, credits realized as a result of uninvested cash balances were used to reduce the fund's expenses. During the period, these credits reduced the fund's custody expenses by $428.
7. Other Information.
At the end of the period, limited partnerships managed by FMR or its affiliates were the owners of record of 100% of the total outstanding shares of the fund.
8. Liquidation.
At its meeting on December 18, 2003 the Board of Trustees authorized the termination of the fund. Liquidation is expected to be complete on or about February 29, 2004. To satisfy the distribution requirements of a Regulated Investment Company (RIC) under the Internal Revenue Code and avoid a tax on its income, the fund must distribute all of its undistributed ordinary income and long-term capital gains. In order to enable the fund to pay the required distributions FMR Corp. made an additional investment in the fund of $15,000,000 on February 26, 2004. After the fund makes the required distributions, assets of the fund will be distributed to remaining shareholders in final liquidation of the fund.
Annual Report
Report of Independent Auditors
To the Trustees of Fidelity Covington Trust and the Shareholders of Fidelity Real Estate High Income Fund II:
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Fidelity Real Estate High Income Fund II (a fund of Fidelity Covington Trust) at December 31, 2003 and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fidelity Real Estate High Income Fund II's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 26, 2004
Annual Report
Trustees and Officers
The Trustees, Members of the Advisory Board, and executive officers of the trust and fund, as applicable, are listed below. The Board of Trustees governs the fund and is responsible for protecting the interests of shareholders. The Trustees are experienced executives who meet periodically throughout the year to oversee the fund's activities, review contractual arrangements with companies that provide services to the fund, and review the fund's performance. Except for William O. McCoy, each of the Trustees oversees 292 funds advised by FMR or an affiliate. Mr. McCoy oversees 294 funds advised by FMR or an affiliate.
The Trustees hold office without limit in time except that (a) any Trustee may resign; (b) any Trustee may be removed by written instrument, signed by at least two-thirds of the number of Trustees prior to such removal; (c) any Trustee who requests to be retired or who has become incapacitated by illness or injury may be retired by written instrument signed by a majority of the other Trustees; and (d) any Trustee may be removed at any special meeting of shareholders by a two-thirds vote of the outstanding voting securities of the trust. In any event, each non-interested Trustee shall retire not later than the last day of the calendar year in which his or her 72nd birthday occurs. The executive officers and Advisory Board Members hold office without limit in time, except that any officer and Advisory Board Member may resign or may be removed by a vote of a majority of the Trustees at any regular meeting or any special meeting of the Trustees. Except as indicated, each individual has held the office shown or other offices in the same company for the past five years.
The fund's Statement of Additional Information (SAI) includes more information about the Trustees. To request a free copy, call Fidelity at 1-617-563-6414.
Interested Trustees*:
Correspondence intended for each Trustee who is an "interested person" (as defined in the 1940 Act) may be sent to Fidelity Investments, 82 Devonshire Street, Boston, Massachusetts 02109.
Name, Age; Principal Occupation | |
Edward C. Johnson 3d (73)** | |
Year of Election or Appointment: 1995 Mr. Johnson is Chairman of the Board of Trustees. Mr. Johnson serves as Chief Executive Officer, Chairman, and a Director of FMR Corp.; a Director and Chairman of the Board and of the Executive Committee of FMR; Chairman and a Director of Fidelity Management & Research (Far East) Inc.; Chairman (1998) and a Director of Fidelity Investments Money Management, Inc.; and Chairman (2001) and a Director (2000) of FMR Co., Inc. | |
Abigail P. Johnson (42)** | |
Year of Election or Appointment: 2001 Senior Vice President of Real Estate High Income II (2001). Ms. Johnson also serves as Senior Vice President of other Fidelity funds (2001). She is President and a Director of FMR (2001), Fidelity Investments Money Management, Inc. (2001), FMR Co., Inc. (2001), and a Director of FMR Corp. Previously, Ms. Johnson managed a number of Fidelity funds. | |
Laura B. Cronin (49) | |
Year of Election or Appointment: 2003 Ms. Cronin is an Executive Vice President (2002) and Chief Financial Officer (2002) of FMR Corp. and is a member of the Fidelity Management Committee (2003). Previously, Ms. Cronin served as Vice President of Finance of FMR (1997-1999), and Chief Financial Officer of FMR (1999-2001), Fidelity Personal Investments (2001), and Fidelity Brokerage Company (2001-2002). | |
Robert L. Reynolds (51) | |
Year of Election or Appointment: 2003 Mr. Reynolds is a Director (2003) and Chief Operating Officer (2002) of FMR Corp. and is the head of the Fidelity Management Committee (2003). He also serves on the Board at Fidelity Investments Canada, Ltd. (2000). Previously, Mr. Reynolds served as President of Fidelity Investments Institutional Retirement Group (1996-2000). |
* Trustees have been determined to be "Interested Trustees" by virtue of, among other things, their affiliation with the trusts or various entities under common control with FMR.
** Edward C. Johnson 3d, Trustee, is Abigail P. Johnson's father.
Annual Report
Non-Interested Trustees:
Correspondence intended for each non-interested Trustee (that is, the Trustees other than the Interested Trustees) may be sent to Fidelity Investments, P.O. Box 55235, Boston, Massachusetts 02205-5235.
Name, Age; Principal Occupation | |
J. Michael Cook (61) | |
Year of Election or Appointment: 2001 Prior to Mr. Cook's retirement in May 1999, he served as Chairman and Chief Executive Officer of Deloitte & Touche LLP (accounting/consulting), Chairman of the Deloitte & Touche Foundation, and a member of the Board of Deloitte Touche Tohmatsu. He currently serves as a Director of Comcast (telecommunications, 2002), International Flavors & Fragrances, Inc. (2000), Rockwell Automation (2000), and The Dow Chemical Company (2000). He is a Member of the Diversity Advisory Council of Marakon (2003) and the Advisory Board of the Directorship Search Group, Chairman Emeritus of the Board of Catalyst (a leading organization for the advancement of women in business), and is Chairman of the Accountability Advisory Council to the Comptroller General of the United States. He also serves as a Member of the Advisory Board of the Graduate School of Business of the University of Florida, his alma mater. | |
Ralph F. Cox (71) | |
Year of Election or Appointment: 1995 Mr. Cox is President of RABAR Enterprises (management consulting for the petroleum industry). Prior to February 1994, he was President of Greenhill Petroleum Corporation (petroleum exploration and production). Until March 1990, Mr. Cox was President and Chief Operating Officer of Union Pacific Resources Company (exploration and production). He is a Director of CH2M Hill Companies (engineering), and Abraxas Petroleum (petroleum exploration and production, 1999). In addition, he is a member of advisory boards of Texas A&M University and the University of Texas at Austin. | |
Robert M. Gates (60) | |
Year of Election or Appointment: 1997 Dr. Gates is President of Texas A&M University (2002). He was Director of the Central Intelligence Agency (CIA) from 1991 to 1993. From 1989 to 1991, Dr. Gates served as Assistant to the President of the United States and Deputy National Security Advisor. Dr. Gates is a Director of NACCO Industries, Inc. (mining and manufacturing), and Parker Drilling Co., Inc. (drilling and rental tools for the energy industry, 2001). He also serves as a member of the Advisory Board of VoteHere.net (secure internet voting, 2001). Previously, Dr. Gates served as a Director of LucasVarity PLC (automotive components and diesel engines), a Director of TRW Inc. (automotive, space, defense, and information technology), and Dean of the George Bush School of Government and Public Service at Texas A&M University (1999-2001). Dr. Gates also is a Trustee of the Forum for International Policy. | |
George H. Heilmeier (67) | |
Year of Election or Appointment: 2004 Dr. Heilmeier is Chairman Emeritus of Telcordia Technologies (communication software and systems), where prior to his retirement, he served as company Chairman and Chief Executive Officer. He currently serves on the Boards of Directors of The Mitre Corporation (systems engineering and information technology support for the government), INET Technologies Inc. (telecommunications network surveillance, 2001) and Teletech Holdings (customer management services, 1998). He is Chairman of the General Motors Technology Advisory Committee and a Life Fellow of the IEEE (2000). Dr. Heilmeier is a member of the Defense Science Board and the National Security Agency Advisory Board. He is also a member of the National Academy of Engineering, the American Academy of Arts and Sciences and The Board of Overseers of the School of Engineering and Applied Science of the University of Pennsylvania. Previously, Dr. Heilmeier served as a Director of TRW Inc. (automotive, space, defense, and information technology, 1992-2002) and Compaq (1994-2002). | |
Donald J. Kirk (71) | |
Year of Election or Appointment: 1995 Mr. Kirk is a Governor of the American Stock Exchange (2001), a Trustee and former Chairman of the Board of Trustees of the Greenwich Hospital Association, a Director of the Yale-New Haven Health Services Corp. (1998), and a Director Emeritus and former Chairman of the Board of Directors of National Arts Strategies Inc. Mr. Kirk was an Executive-in-Residence (1995-2000) and a Professor (1987-1995) at Columbia University Graduate School of Business. Prior to 1987, he was Chairman of the Financial Accounting Standards Board. Previously, Mr. Kirk served as a Governor of the National Association of Securities Dealers, Inc. (1996-2002), a member and Vice Chairman of the Public Oversight Board of the American Institute of Certified Public Accountants' SEC Practice Section (1995-2002), a Director of General Re Corporation (reinsurance, 1987-1998) and as a Director of Valuation Research Corp. (appraisals and valuations). | |
Marie L. Knowles (57) | |
Year of Election or Appointment: 2001 Prior to Ms. Knowles' retirement in June 2000, she served as Executive Vice President and Chief Financial Officer of Atlantic Richfield Company (ARCO) (diversified energy, 1996-2000). From 1993 to 1996, she was a Senior Vice President of ARCO and President of ARCO Transportation Company. She served as a Director of ARCO from 1996 to 1998. She currently serves as a Director of Phelps Dodge Corporation (copper mining and manufacturing), URS Corporation (multidisciplinary engineering, 1999), and McKesson Corporation (healthcare service, 2002). Ms. Knowles is a Trustee of the Brookings Institution and the Catalina Island Conservancy and also serves as a member of the Advisory Board for the School of Engineering of the University of Southern California. | |
Ned C. Lautenbach (59) | |
Year of Election or Appointment: 2000 Mr. Lautenbach has been a partner of Clayton, Dubilier & Rice, Inc. (private equity investment firm) since September 1998. Previously, Mr. Lautenbach was with the International Business Machines Corporation (IBM) from 1968 until his retirement in 1998. He was most recently Senior Vice President and Group Executive of Worldwide Sales and Services. From 1993 to 1995, he was Chairman of IBM World Trade Corporation, and from 1994 to 1998 was a member of IBM's Corporate Executive Committee. Mr. Lautenbach serves as Chairman and as a Director (1998) of Acterna Corporation (communications test equipment). He is also Co-Chairman of Covansys, Inc. (global provider of business and technology solutions, 2000). In addition, he is a Director of Eaton Corporation (diversified industrial) and the Philharmonic Center for the Arts in Naples, Florida (1999). He also is a member of the Council on Foreign Relations. | |
Marvin L. Mann (70) | |
Year of Election or Appointment: 1995 Mr. Mann is Chairman of the non-interested Trustees (2001). He is Chairman Emeritus of Lexmark International, Inc. (computer peripherals) where he served as CEO until April 1998 and retired as Chairman May 1999, and remains a member of the Board. Prior to 1991, he held the positions of Vice President of International Business Machines Corporation (IBM) and President and General Manager of various IBM divisions and subsidiaries. Mr. Mann is a Board member of Imation Corp. (imaging and information storage) and Acterna Corporation (communications test equipment, 1999). He is also a member of the Director Services Committee of the Investment Company Institute. In addition, Mr. Mann is a member of the President's Cabinet at the University of Alabama and the Board of Visitors of the Culverhouse College of Commerce and Business Administration at the University of Alabama. | |
William O. McCoy (70) | |
Year of Election or Appointment: 1997 Prior to his retirement in December 1994, Mr. McCoy was Vice Chairman of the Board of BellSouth Corporation (telecommunications) and President of BellSouth Enterprises. He is currently a Director of Liberty Corporation (holding company), Duke Realty Corporation (real estate), Progress Energy, Inc. (electric utility), and Acterna Corporation (communications test equipment, 1999). He is also a partner of Franklin Street Partners (private investment management firm) and a member of the Research Triangle Foundation Board. In addition, Mr. McCoy served as the Interim Chancellor (1999-2000) and a member of the Board of Visitors (1994-1998) for the University of North Carolina at Chapel Hill and currently serves on the Board of Directors of the University of North Carolina Health Care System and the Board of Visitors of the Kenan-Flagler Business School (University of North Carolina at Chapel Hill). He also served as Vice President of Finance for the University of North Carolina (16-school system, 1995-1998). | |
William S. Stavropoulos (64) | |
Year of Election or Appointment: 2002 Mr. Stavropoulos is Chairman of the Board, President and CEO (2002), and Chairman of the Executive Committee (2000) and a Director of The Dow Chemical Company. Since joining The Dow Chemical Company in 1967, Mr. Stavropoulos served in numerous senior management positions, including President (1993-2000) and Chief Executive Officer (1995-2000). Currently, he is a Director of NCR Corporation (data warehousing and technology solutions), BellSouth Corporation (telecommunications), Chemical Financial Corporation, and Maersk Inc. (industrial conglomerate, 2002). He also serves as a member of the Board of Trustees of the American Enterprise Institute for Public Policy Research. In addition, Mr. Stavropoulos is a member of The Business Council, J.P. Morgan International Council, World Business Council for Sustainable Development, and the University of Notre Dame Advisory Council for the College of Science. |
Annual Report
Advisory Board Members and Executive Officers:
Correspondence intended for Ms. Small may be sent to Fidelity Investments, P.O. Box 55235, Boston, Massachusetts 02205-5235. Correspondence intended for each executive officer and Mr. Lynch may be sent to Fidelity Investments, 82 Devonshire Street, Boston, Massachusetts 02109.
Name, Age; Principal Occupation | |
Peter S. Lynch (60) | |
Year of Election or Appointment: 2003 Member of the Advisory Board of Fidelity Convington Trust. Vice Chairman and a Director of FMR, and Vice Chairman (2001) and a Director (2000) of FMR Co., Inc. Previously, Mr. Lynch served as a Trustee of the Fidelity funds (1990-2003). Prior to May 31, 1990, he was a Director of FMR and Executive Vice President of FMR (a position he held until March 31, 1991), Vice President of Fidelity® Magellan® Fund and FMR Growth Group Leader, and Managing Director of FMR Corp. Mr. Lynch was also Vice President of Fidelity Investments Corporate Services. In addition, he serves as a Trustee of Boston College, Massachusetts Eye & Ear Infirmary, Historic Deerfield, John F. Kennedy Library, and the Museum of Fine Arts of Boston. | |
Cornelia M. Small (59) | |
Year of Election or Appointment: 2004 Member of the Advisory Board of Fidelity Convington Trust. Ms. Small is a member (2000) and Chairperson (2002) of the Investment Committee, and a member (2002) of the Board of Trustees of Smith College. Previously, she served as Chief Investment Officer (1999-2000), Director of Global Equity Investments (1996-1999), and a member of the Board of Directors (1998-1999) of Scudder Kemper Investments. In addition, Ms. Small served as Co-Chair (2000-2003) of the Annual Fund for the Fletcher School of Law and Diplomacy. | |
Bart A. Grenier (44) | |
Year of Election or Appointment: 2002 Vice President of Real Estate High Income II. Mr. Grenier also serves as Vice President of certain Equity Funds (2001), a position he previously held from 1999 to 2000, and Vice President of certain High Income Funds (2002). He is Senior Vice President of FMR (1999) and FMR Co., Inc. (2001), and President and Director of Strategic Advisers, Inc. (2002). He also heads Fidelity's Asset Allocation Group (2000), Fidelity's Growth and Income Group (2001), Fidelity's Value Group (2001), and Fidelity's High Income Division (2001). Previously, Mr. Grenier served as President of Fidelity Ventures (2000), Vice President of certain High Income Funds (1997-2000), High Income Division Head (1997-2000), Group Leader of the Income-Growth and Asset Allocation-Income Groups (1996-2000), and Assistant Equity Division Head (1997-2000). | |
Steven J. Buller (36) | |
Year of Election or Appointment: 2002 Vice President of Real Estate High Income II. Mr. Buller also serves as Vice President of other funds advised by FMR. Prior to assuming his current responsibilities, Mr. Buller managed a variety of Fidelity funds | |
Eric D. Roiter (55) | |
Year of Election or Appointment: 1998 Secretary of Real Estate High Income II. He also serves as Secretary of other Fidelity funds (1998); Vice President, General Counsel, and Clerk of FMR Co., Inc. (2001) and FMR (1998); Vice President and Clerk of FDC (1998); Assistant Clerk of Fidelity Management & Research (U.K.) Inc. (2001) and Fidelity Management & Research (Far East) Inc. (2001); and Assistant Secretary of Fidelity Investments Money Management Inc. (2001). Prior to joining Fidelity, Mr. Roiter was with the law firm of Debevoise & Plimpton, as an associate (1981-1984) and as a partner (1985-1997), and served as an Assistant General Counsel of the U.S. Securities and Exchange Commission (1979-1981). Mr. Roiter is an Adjunct Member, Faculty of Law, at Boston College Law School (2003). | |
Stuart Fross (44) | |
Year of Election or Appointment: 2003 Assistant Secretary of Real Estate High Income II. Mr. Fross also serves as Assistant Secretary of other Fidelity funds (2003) and is an employee of FMR. | |
Maria F. Dwyer (45) | |
Year of Election or Appointment: 2002 President and Treasurer of Real Estate High Income II. Ms. Dwyer also serves as President and Treasurer of other Fidelity funds (2002) and is a Vice President (1999) and an employee (1996) of FMR. | |
Timothy F. Hayes (53) | |
Year of Election or Appointment: 2002 Chief Financial Officer of Real Estate High Income II. Mr. Hayes also serves as Chief Financial Officer of other Fidelity funds (2002). Recently he was appointed President of Fidelity Service Company (2003) where he also serves as a Director. Mr. Hayes also serves as President of Fidelity Investments Operations Group (FIOG, 2002), which includes Fidelity Pricing and Cash Management Services Group (FPCMS), where he was appointed President in 1998. Previously, Mr. Hayes served as Chief Financial Officer of Fidelity Investments Corporate Systems and Service Group (1998) and Fidelity Systems Company (1997-1998). | |
John R. Hebble (45) | |
Year of Election or Appointment: 2003 Deputy Treasurer of Real Estate High Income II. Mr. Hebble also serves as Deputy Treasurer of other Fidelity funds (2003), and is an employee of FMR. Before joining Fidelity Investments, Mr. Hebble worked at Deutsche Asset Management where he served as Director of Fund Accounting (2002-2003) and Assistant Treasurer of the Scudder Funds (1998-2003). | |
John H. Costello (57) | |
Year of Election or Appointment: 1996 Assistant Treasurer of Real Estate High Income II. Mr. Costello also serves as Assistant Treasurer of other Fidelity funds and is an employee of FMR. | |
Francis V. Knox, Jr. (56) | |
Year of Election or Appointment: 2002 Assistant Treasurer of Real Estate High Income II. Mr. Knox also serves as Assistant Treasurer of other Fidelity funds (2002), and is a Vice President and an employee of FMR. Previously, Mr. Knox served as Vice President of Investment & Advisor Compliance (1990-2001), and Compliance Officer of Fidelity Management & Research (U.K.) Inc. (1992-2002), Fidelity Management & Research (Far East) Inc. (1991-2002), and FMR Corp. (1995-2002). | |
Mark Osterheld (48) | |
Year of Election or Appointment: 2002 Assistant Treasurer of Real Estate High Income II. Mr. Osterheld also serves as Assistant Treasurer of other Fidelity funds (2002) and is an employee of FMR. | |
Thomas J. Simpson (45) | |
Year of Election or Appointment: 2000 Assistant Treasurer of Real Estate High Income II. Mr. Simpson is Assistant Treasurer of other Fidelity funds (2000) and an employee of FMR (1996). Prior to joining FMR, Mr. Simpson was Vice President and Fund Controller of Liberty Investment Services (1987-1995). |
Annual Report
Distributions
The Board of Trustees of Fidelity Real Estate High Income Fund II voted to pay to shareholders of record at the opening of business on record date, the following distributions per share derived from capital gains realized from sales of portfolio securities.
Pay Date | Record Date | Capital Gains |
2/25/04 | 2/24/04 | $3.75000 |
2/26/04 | 2/25/04 | $0.05213 |
3/1/04 | 2/27/04 | $3.19000 |
Annual Report
Investment Adviser
Fidelity Management & Research Company
Boston, MA
Investment Sub-Advisers
FMR Co., Inc.
Fidelity Management & Research Company (U.K.) Inc.
Fidelity Management & Research Company (Far East) Inc.
Fidelity Investment Japan Limited
Fidelity International Investment Advisors
Fidelity International Investment Advisors (U.K.) Limited
General Distributor
Fidelity Distributors Corporation
Boston, MA
Transfer and Shareholder Servicing Agent
Fidelity Investments Institutional Operations Company, Inc.
Boston, MA
Custodian
The Bank of New York
New York, NY
Item 2. Code of Ethics
As of the end of the period, December 31, 2003, Fidelity Covington Trust (the trust) has adopted a code of ethics, as defined in Item 2 of Form N-CSR, that applies to its President and Treasurer and its Chief Financial Officer. A copy of the code of ethics is filed as an exhibit to this Form N-CSR.
Item 3. Audit Committee Financial Expert
The Board of Trustees of the trust has determined that Marie L. Knowles and Donald J. Kirk are each audit committee financial experts, as defined in Item 3 of Form N-CSR. Ms. Knowles and Mr. Kirk are each independent for purposes of Item 3 of Form N-CSR.
Item 4. Principal Accountant Fees and Services
(a) Audit Fees.
For the fiscal years ended December 31, 2003 and December 31, 2002, the aggregate Audit Fees billed by PricewaterhouseCoopers LLP (PwC) for professional services rendered for the audits of the financial statements, or services that are normally provided in connection with statutory and regulatory filings or engagements for those fiscal years, for the Fidelity Real Estate High Income Fund II (the fund) and for all funds in the Fidelity Group of Funds are shown in the table below.
Fund | 2003A | 2002A |
Fidelity Real Estate High Income Fund II | $75,000 | $44,000 |
All funds in the Fidelity Group of Funds audited by PwC | $10,600,000 | $7,900,000 |
A | Aggregate amounts may reflect rounding. |
(b) Audit-Related Fees.
In each of the fiscal years ended December 31, 2003 and December 31, 2002 the aggregate Audit-Related Fees billed by PwC for services rendered for assurance and related services to the fund that are reasonably related to the performance of the audit or review of the fund's financial statements, but not reported as Audit Fees, are shown in the table below.
Fund | 2003A,B | 2002A,B |
Fidelity Real Estate High Income Fund II | $0 | $0 |
A | Aggregate amounts may reflect rounding. |
B | Includes amounts related to non-audit services prior to May 6, 2003 that would have been subject to pre-approval if the SEC rules relating to the pre-approval of non-audit services had been in effect at that time. |
In each of the fiscal years ended December 31, 2003 and December 31, 2002, the aggregate Audit-Related Fees that were billed by PwC that were required to be approved by the Audit Committee for services rendered on behalf of Fidelity Management & Research Company (FMR) and entities controlling, controlled by, or under common control with FMR (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser) that provide ongoing services to the fund ("Fund Service Providers") for assurance and related services that relate directly to the operations and financial reporting of the fund that are reasonably related to the performance of the audit or review of the fund's financial statements, but not reported as Audit Fees, are shown in the table below.
Billed By | 2003A,B | 2002A,B |
PwC | $50,000 | $0 |
A | Aggregate amounts may reflect rounding. |
B | Includes amounts related to non-audit services prior to May 6, 2003 that would have been subject to pre-approval if the SEC rules relating to the pre-approval of non-audit services had been in effect at that time. |
Fees included in the audit-related category comprise assurance and related services (e.g., due diligence services) that are traditionally performed by the independent accountant. These audit-related services include due diligence related to mergers and acquisitions, accounting consultations and audits in connection with acquisitions, internal control reviews, attest services that are not required by statute or regulation and consultation concerning financial accounting and reporting standards.
(c) Tax Fees.
In each of the fiscal years ended December 31, 2003 and December 31, 2002, the aggregate Tax Fees billed by PwC for professional services rendered for tax compliance, tax advice, and tax planning for the fund is shown in the table below.
Fund | 2003A,B | 2002A,B |
Fidelity Real Estate High Income Fund II | $2,200 | $2,000 |
A | Aggregate amounts may reflect rounding. |
B | Includes amounts related to non-audit services prior to May 6, 2003 that would have been subject to pre-approval if the SEC rules relating to the pre-approval of non-audit services had been in effect at that time. |
In each of the fiscal years ended December 31, 2003 and December 31, 2002, the aggregate Tax Fees billed by PwC that were required to be approved by the Audit Committee for professional services rendered on behalf of the Fund Service Providers for tax compliance, tax advice, and tax planning that relate directly to the operations and financial reporting of the fund is shown in the table below.
Billed By | 2003A,B | 2002A,B |
PwC | $0 | $0 |
A | Aggregate amounts may reflect rounding. |
B | Includes amounts related to non-audit services prior to May 6, 2003 that would have been subject to pre-approval if the SEC rules relating to the pre-approval of non-audit services had been in effect at that time. |
Fees included in the Tax Fees category comprise all services performed by professional staff in the independent accountant's tax division except those services related to the audit. Typically, this category would include fees for tax compliance, tax planning, and tax advice. Tax compliance, tax advice, and tax planning services include preparation of original and amended tax returns, claims for refund and tax payment-planning services, assistance with tax audits and appeals, tax advice related to mergers and acquisitions and requests for rulings or technical advice from taxing authorities.
(d) All Other Fees.
In each of the fiscal years ended December 31, 2003 and December 31, 2002, the aggregate Other Fees billed by PwC for all other non-audit services rendered to the fund is shown in the table below.
Fund | 2003A,B | 2002A,B |
Fidelity Real Estate High Income Fund II | $1,200 | $1,200 |
A | Aggregate amounts may reflect rounding. |
B | Includes amounts related to non-audit services prior to May 6, 2003 that would have been subject to pre-approval if the SEC rules relating to the pre-approval of non-audit services had been in effect at that time. |
In each of the fiscal years ended December 31, 2003 and December 31, 2002, the aggregate Other Fees billed by PwC that were required to be approved by the Audit Committee for all other non-audit services rendered on behalf of the Fund Service Providers that relate directly to the operations and financial reporting of the fund is shown in the table below.
Billed By | 2003A,B | 2002A,B |
PwC | $190,000 | $150,000 |
A | Aggregate amounts may reflect rounding. |
B | Includes amounts related to non-audit services prior to May 6, 2003 that would have been subject to pre-approval if the SEC rules relating to the pre-approval of non-audit services had been in effect at that time. |
Fees included in the All Other Fees category include services related to internal control reviews, strategy and other consulting, financial information systems design and implementation, consulting on other information systems, and other tax services unrelated to the fund.
(e) (1) | Audit Committee Pre-Approval Policies and Procedures: |
The trust's Audit Committee must pre-approve all audit and non-audit services provided by the independent accountant relating to the operations or financial reporting of the fund. Prior to the commencement of any audit or non-audit services to a fund, the Audit Committee reviews the services to determine whether they are appropriate and permissible under applicable law.
The trust's Audit Committee has adopted policies and procedures to, among other purposes, provide a framework for the Committee's consideration of non-audit services by the audit firms that audit the Fidelity funds. The policies and procedures require that any non-audit service provided by a fund audit firm to a Fidelity Fund and any non-audit service provided by a fund auditor to a Fund Service Provider that relates directly to the operations and financial reporting of a Fidelity fund (Covered Service) are subject to approval by the Audit Committee before such service is provided. Non-audit services provided by a fund audit firm for a Fund Service Provider that do not relate directly to the operations and financial reporting of a Fidelity fund (Non-Covered Service) but that are expected to exceed $50,000 are also subject to pre-approval by the Audit Committee.
All Covered Services, as well as Non-Covered Services that are expected to exceed $50,000, must be approved in advance of provision of the service either: (i) by formal resolution of the Audit Committee, or (ii) by oral or written approval of the service by the Chair of the Audit Committee (or if the Chair is unavailable, such other member of the Audit Committee as may be designated by the Audit Committee to act in the Chair's absence). The approval contemplated by (ii) above is permitted where the Treasurer determines that action on such an engagement is necessary before the next meeting of the Audit Committee. Neither pre-approval nor advance notice of Non-Covered Service engagements for which fees are not expected to exceed $50,000 is required; such engagements are to be reported to the Audit Committee monthly.
(e) (2) | Services approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X: |
Audit-Related Fees:
There were no amounts that were approved by the Audit Committee pursuant to the de minimis exception for the fiscal years ended December 31, 2003 and December 31, 2002 on behalf of the fund. These percentages include amounts related to non-audit services prior to May 6, 2003 that would have been subject to pre-approval if the SEC rules relating to the pre-approval of non-audit services had been in effect at that time.
There were no amounts that were required to be approved by the Audit Committee pursuant to the de minimis exception for the fiscal years ended December 31, 2003 and December 31, 2002 on behalf of the Fund Service Providers that relate directly to the operations and financial reporting of the fund. These percentages include amounts related to non-audit services prior to May 6, 2003 that would have been subject to pre-approval if the SEC rules relating to the pre-approval of non-audit services had been in effect at that time.
Tax Fees:
There were no amounts that were approved by the Audit Committee pursuant to the de minimis exception for the fiscal years ended December 31, 2003 and December 31, 2002 on behalf of the fund. These percentages include amounts related to non-audit services prior to May 6, 2003 that would have been subject to pre-approval if the SEC rules relating to the pre-approval of non-audit services had been in effect at that time.
There were no amounts that were required to be approved by the Audit Committee pursuant to the de minimis exception for the fiscal years ended December 31, 2003 and December 31, 2002 on behalf of the Fund Service Providers that relate directly to the operations and financial reporting of the fund. These percentages include amounts related to non-audit services prior to May 6, 2003 that would have been subject to pre-approval if the SEC rules relating to the pre-approval of non-audit services had been in effect at that time.
All Other Fees:
There were no amounts that were approved by the Audit Committee pursuant to the de minimis exception for the fiscal years ended December 31, 2003 and December 31, 2002 on behalf of the fund. These percentages include amounts related to non-audit services prior to May 6, 2003 that would have been subject to pre-approval if the SEC rules relating to the pre-approval of non-audit services had been in effect at that time.
There were no amounts that were required to be approved by the Audit Committee pursuant to the de minimis exception for the fiscal years ended December 31, 2003 and December 31, 2002 on behalf of the Fund Service Providers that relate directly to the operations and financial reporting of the fund. These percentages include amounts related to non-audit services prior to May 6, 2003 that would have been subject to pre-approval if the SEC rules relating to the pre-approval of non-audit services had been in effect at that time.
(f) According to PwC for the fiscal year ended December 31, 2003, the percentage of hours spent on the audit of the fund's financial statements for the most recent fiscal year that were attributed to work performed by persons who are not full-time, permanent employees of PwC is as follows:
Fund | 2003 |
Fidelity Real Estate High Income Fund II | 0% |
(g) For the fiscal years ended December 31, 2003 and December 31, 2002, the aggregate fees billed by PwC of $1,900,000A and $1,550,000A for non-audit services rendered on behalf of the fund, FMR (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser) and Fund Service Providers relating to Covered Services and Non-Covered Services are shown in the table below.
2003A | 2002A | |
Covered Services | $250,000 | $150,000 |
Non-Covered Services | $1,650,000 | $1,400,000 |
A | Aggregate amounts may reflect rounding. |
(h) The trust's Audit Committee has considered Non-Covered Services that were not pre-approved that were provided by PwC to Fund Service Providers to be compatible with maintaining the independence of PwC in its audit of the fund, taking into account representations from PwC, in accordance with Independence Standards Board Standard No.1, regarding its independence from the fund and its related entities.
Item 5. Audit Committee of Listed Registrants
Not applicable.
Item 6. Reserved
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies
Not applicable.
Item 8. Reserved
Item 9. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 10. Controls and Procedures
(a)(i) The President and Treasurer and the Chief Financial Officer have concluded that the trust's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act) provide reasonable assurances that material information relating to the trust is made known to them by the appropriate persons, based on their evaluation of these controls and procedures as of a date within 90 days of the filing date of this report.
(a)(ii) There was no change in the trust's internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act) that occurred during the trust's second fiscal half-year that has materially affected, or is reasonably likely to materially affect, the trust's internal control over financial reporting.
Item 11. Exhibits
(a) | (1) | Code of Ethics pursuant to Item 2 of Form N-CSR is filed and attached hereto as EX-99.CODE ETH. |
(a) | (2) | Certification pursuant to Rule 30a-2(a) under the Investment Company Act of 1940 (17 CFR 270.30a-2(a)) is filed and attached hereto as Exhibit 99.CERT. |
(b) | Certification pursuant to Rule 30a-2(b) under the Investment Company Act of 1940 (17 CFR 270.30a-2(b)) is furnished and attached hereto as Exhibit 99.906CERT. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Fidelity Covington Trust
By: | /s/Maria Dwyer |
Maria Dwyer | |
President and Treasurer | |
Date: | February 27, 2004 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: | /s/Maria Dwyer |
Maria Dwyer | |
President and Treasurer | |
Date: | February 27, 2004 |
By: | /s/Timothy F. Hayes |
Timothy F. Hayes | |
Chief Financial Officer | |
Date: | February 27, 2004 |