HEI Exhibit 99.1
----------------
FIRST AMENDMENT TO TRUST AGREEMENT BETWEEN
HAWAIIAN ELECTRIC INDUSTRIES, INC. AND
FIDELITY MANAGEMENT TRUST COMPANY
THIS FIRST AMENDMENT TO TRUST AGREEMENT, is made and entered into August 1,
2000, by and between Fidelity Management Trust Company (the "Trustee") and
Hawaiian Electric Industries, Inc. (the "Sponsor");
WITNESSETH:
WHEREAS, the Trustee and the Sponsor heretofore entered into a trust
agreement dated February 1, 2000 (the "Trust Agreement"), with regard tofor the
Hawaiian Electric Industries Retirement Savings Plan (the "Plan") which restated
the existing trust agreement; and
WHEREAS, the Sponsor wishes to add Fidelity PortfolioPlanner(SM) as a
service under the Trust; and
WHEREAS, the Sponsor wishes to add the use of electronic media in providing
communications and services, and/or software products as a service under the
Trust; and
WHEREAS, in furtherance of the foregoing, the Trustee and the Sponsor
desire to amend said Trust Agreement as provided for in Section 13 thereunder;
NOW THEREFORE, in consideration of the above premises, the Trustee and the
Sponsor hereby amend the Trust Agreement by:
(1) Amending and restating Section 4(k) as follows:
(k) Non-Fidelity Mutual Funds. All transactions involving Non-
-------------------------
Fidelity Mutual Funds shall be done in accordance with the Operating
Procedures attached hereto as Schedule "H".
(2) Amending and restating Section 7(e), Indemnification of Sponsor as
--------------------------
follows:
(e) Indemnification of Sponsor. The Trustee agrees to
--------------------------
indemnify and hold harmless the Sponsor for (i) any loss incurred by
the Sponsor, a participant, or a beneficiary due to a trading error
caused by the Trustee on any investment option included on Schedule A
and (ii) any loss related to balance discrepancies between the
participant balances maintained by the Trustee and the balance
maintained by any outside fund provider for any Plan investment option
included on Schedule A. The Trustee agrees to compensate the Sponsor,
participant, or a beneficiary for the cost of any adjustments due to
any such error.
Special Indemnification for Fidelity PortfolioPlanner(SM). Without
limiting the generality of the foregoing paragraph of this Section
7(e), the Trustee shall indemnify the Sponsor against and hold the
Sponsor harmless from any and all such loss, damage, penalty,
liability, cost, and expense, including without limitation, reasonable
attorney's fees and disbursements, that may be incurred by, imposed
upon, or asserted against the Sponsor solely as a result of a) any
defects
in the investment methodology embodied in the target asset allocation
or model portfolio provided through Fidelity PortfolioPlanner(SM),
except to the extent that any such loss, damage, penalty, liability,
cost or expense arises from information provided by the participant,
the Sponsor or third parties; b) any prohibited transactions resulting
from the provision by the Trustee of Fidelity PortfolioPlanner(SM); or
c) Trustee's failure to perform its obligations under Section 14(c).
(3) Adding a new Section 14, Electronic Services, as follows, and
--------------------
renumbering all subsequent subsections accordingly:
Section 14. Electronic Services.
-------------------
(a) The Trustee may provide communications and services
("Electronic Services") and/or software products ("Electronic
Products") via electronic media, including, but not limited to
Fidelity Plan Sponsor WebStation and Fidelity PortfolioPlanner(SM).
(The Plan Sponsor Webstation Agreement, as the same may be amended or
terminated in accordance with its terms, is attached as Schedule "I".
The Fidelity PortfolioPlanner(SM) and Part II of the ADV for Strategic
Advisers, Inc., as the same may be amended from time to time on prior
notice by Trustee to Sponsor, is attached as Schedule "J".) The
Sponsor and its agents agree to use such Electronic Services and
Electronic Products only in the course of reasonable administration of
or participation in the Plan and to keep confidential and not publish,
copy, broadcast, retransmit, reproduce, commercially exploit or
otherwise redisseminate the Electronic Products or Electronic Services
or any portion thereof without the Trustee's written consent, except,
in cases where Trustee has specifically notified the Sponsor that the
Electronic Products or Services are suitable for delivery to Sponsor's
Plan participants, for non-commercial personal use by participants or
beneficiaries with respect to their participation in the Plan or for
their other retirement planning purposes.
(b) The Sponsor shall be responsible for installing and
maintaining all Electronic Products, (including any programming
required to accomplish the installation) and for displaying any and
all content associated with Electronic Services on its computer
network and/or Intranet so that such content will appear exactly as it
appears when delivered to Sponsor. All Electronic Products and
Services shall be clearly identified as originating from the Trustee
or its affiliate. The Sponsor shall promptly remove Electronic
Products or Services from its computer network and/or Intranet, or
replace the Electronic Products or Services with updated products or
services provided by the Trustee, upon written notification (including
written notification via facsimile) by the Trustee.
(c) The Electronic Services and Products shall perform the
functions of the Fidelity PortfolioPlanner(SM) and Part II of the ADV
for Strategic Advisers, Inc. without reproducible error. Except for
the express warranty of the preceding sentence, all Electronic
Products shall be provided to the Sponsor without warranties or
acceptance of legal liability by the Trustee, and all Electronic
Services shall be provided to the Sponsor without acceptance of legal
liability related to or arising out of the electronic
2
nature of the delivery or provision of such Services. Except as
otherwise stated in this Agreement, no rights are conveyed to any
property, intellectual or tangible, associated with the contents of
the Electronic Products or Services and related material. The Trustee
hereby grants to the Sponsor a non-exclusive, non-transferable
revocable right and license to use the Electronic Products and
Services in accordance with the terms and conditions of this
Agreement.
(d) To the extent that any Electronic Products or Services
utilize Internet services to transport data or communications, the
Trustee will take, and Sponsor agrees to follow, reasonable security
precautions, however, the Trustee disclaims any liability for
interception of any such data or communications. The Trustee reserves
the right not to accept data or communications transmitted via
electronic media by the Sponsor or a third party if it determines that
the media does not provide adequate data security, or if it is not
administratively feasible for the Trustee to use the data security
provided. The Trustee shall not be responsible for, and makes no
warranties regarding access, speed or availability of Internet or
network services, or any other service required for electronic
communication. The Trustee shall not be responsible for any loss or
damage related to or resulting from any changes or modifications to
the Electronic Products or Services after delivering it to the
Sponsor.
(4) Amending and restating the "Other" section of Schedule "A", in its
entirety, as attached hereto, to reflect the addition of employee
communications and Fidelity PortfolioPlanner(SM) under "Other"
section.
(5) Amending and restating Schedule "B", in its entirety, as attached
hereto, to reflect a revised "Other Fees" section.
(6) Adding a new Schedule "J" as attached.
3
IN WITNESS WHEREOF, the Trustee and the Sponsor have caused this First
Amendment to be executed by their duly authorized officers effective as of the
day and year first above written.
HAWAIIAN ELECTRIC INDUSTRIES, INC. FIDELITY MANAGEMENT TRUST COMPANY
BY: HAWAIIAN ELECTRIC INDUSTRIES,
INC. PENSION INVESTMENT COMMITTEE
By: /s/ Peter C. Lewis 7/24/00 By: /s/ Carolyn Redden 8/11/00
------------------------------ -----------------------------
Peter C. Lewis Date Vice President Date
Member
By: /s/ Edwina H. Kawamoto 7/24/00
-------------------------------
Edwina H. Kawamoto Date
Secretary and Member
4
Schedule "A"
ADMINISTRATIVE SERVICES
-----------------------
Administration
- --------------
* Establishment and maintenance of participant account and election
percentages.
* Maintenance of the following plan investment options:
- Fidelity Retirement Money Market Portfolio
- ASB Money Market Account
- HEI Common Stock Fund
- Fidelity Puritan Fund
- Fidelity Magellan Fund
- Fidelity Overseas Fund
- Fidelity Freedom 2000 Fund
- Fidelity Freedom 2010 Fund
- Fidelity Freedom 2020 Fund
- Fidelity Freedom 2030 Fund
- Fidelity Freedom Income Fund
- Spartan U.S. Equity Index Fund
- MAS Value Portfolio Adviser
- Neuberger Berman Partners Trust
- PBHG Emerging Growth Fund
- Fidelity U.S. Bond Index Fund
* Maintenance of the following money classifications:
- Salary Reduction
- Participant Voluntary
- Rollover
- HEI Diversified Plan
- Employer ASB
- Employer Supplemental
- IRA
- Voluntary HEISOP
- Employer HEISOP
* Processing of investment option trades.
The Trustee will provide only the recordkeeping and administrative services
set forth on this Schedule "A" and no others.
5
Processing
- ----------
* Weekly processing of contribution data and contributions
* Daily processing of transfers and changes of future allocations via the
telephone exchange system
* Daily processing of withdrawals
Other
- -----
* Monthly trial balance
* Monthly loan reports
* Quarterly administrative reports
* Quarterly participant statements
* 1099Rs
* Account segregation for Qualified Domestic Relations Orders ("QDRO") as
directed by Sponsor
* Excess contributions report
* Participant Loans
* Periodic meetings with Sponsor
* Educational services as needed and mutually agreed upon by the Trustee
and the Sponsor.
* Minimum Required Distribution ("MRD") service
* Provide employee communications describing available investment options,
including multimedia informational materials and group presentations.
* Fidelity PortfolioPlanner(SM), an internet-based educational service for
participants that generates target asset allocations and model portfolios
customized to investment options in the Plan(s) based upon methodology
provided by Strategic Advisers, Inc., an affiliate of the Trustee. The
Sponsor acknowledges that it has received the ADV Part II for Strategic
Advisers, Inc. more than 48 hours prior to executing the Trust amendment.
HAWAIIAN ELECTRIC FIDELITY MANAGEMENT TRUST
INDUSTRIES, INC. COMPANY
BY: HAWAIIAN ELECTRIC
INDUSTRIES, INC. PENSION
INVESTMENT COMMITTEE
By: /s/ Peter C. Lewis 7/24/00 By: /s/ Carolyn Redden 8/11/00
------------------------------- ------------------------------
Peter C. Lewis Date Vice President Date
Member
By: /s/ Edwina H. Kawamoto 7/24/00
-------------------------------
Edwina H. Kawamoto Date
Secretary and Member
6
Schedule "B"
FEE SCHEDULE
------------
Recordkeeping Fees
- ------------------
* Annual Participation Fee $5.00 per participant** per year, billed
and payable quarterly.
* Minimum Required Distribution (MRD): $25.00 per MRD recipient per year.
* Plan Establishment Fee $2,500.00
* Loan Fee Establishment fee of $35.00 per loan
account; annual fee of $15.00 per loan
account.**
* Plan Sponsor WebStation (PSW): All User ID fees waived.
* NetBenefits All User ID fees waived.
* Other Fees: separate charges for optional non-discrimination testing,
extraordinary expenses resulting from large numbers of simultaneous manual
transactions, from errors not caused by Fidelity, reports not contemplated in
this Agreement, corporate actions, or the provision of communications materials
in hard copy which are also accessible to participants via electronic services
in the event that the provision of such material in hard copy would result in an
additional expense deemed to be material. The Administrator may withdraw
reasonable administrative fees from the Trust by written direction to the
Trustee.
** This fee will be imposed pro rata for each calendar quarter, or any part
--------
thereof, that it remains necessary to keep a participant's account(s) and/or
loans(s) as part of the Plan's records, e.g. vested, deferred, forfeiture, top-
heavy and terminated participants, if applicable, who must remain on file
through the calendar year-end for 1099R reporting.
Trustee Fee
- -----------
Investment Options
* Sponsor Stock: 0.10% per annum of such assets in the
Trust payable quarterly on the basis of
such assets as of the average market
value for each calendar quarter. In no
event will the fee be less than $10,000
nor more than $35,000 per year.
* Others: None.
7
HAWAIIAN ELECTRIC FIDELITY MANAGEMENT TRUST
INDUSTRIES, INC. COMPANY
BY: HAWAIIAN ELECTRIC
INDUSTRIES, INC. PENSION
INVESTMENT COMMITTEE
By: /s/ Peter C. Lewis 7/24/00 By: /s/ Carolyn Redden 8/11/00
------------------------------- -----------------------------
Peter C. Lewis Date Vice President Date
Member
By: /s/ Edwina H. Kawamoto 7/24/00
-------------------------------
Edwina H. Kawamoto Date
Secretary and Member
8
Schedule "J"
Fidelity PortfolioPlanner(SM)
-----------------------------
Important Legal Information
What is Fidelity PortfolioPlanner(SM)?
This product is an educational tool intended to help you meet your retirement
goal. The program is divided into three modules: a Savings Need or Retirement
Need module (depending on your lifestage) which will help you determine whether
you are savings enough to meet your retirement income needs; an Asset Allocation
module which uses an Investor Profile Questionnaire to help you assess your risk
tolerance, personal financial situation and time horizon and directs you to a
target asset mix; and a Model Portfolio module. The model portfolio is provided
as an example of an investment strategy consistent with the answers you provide
in the Investor Profile questionnaire. The recommended model portfolio
represents one of many combinations of investments that may help you reach your
retirement goals.
It is important for you to understand that this product does not give you
investment advice or recommendations or make any promises about investment
returns. Any investment decision that you make is your responsibility alone.
All models used in the program are hypothetical and you are solely responsible
for the accuracy of any data you input into the program. Be sure to review your
investment decisions from time to time to make sure they are still consistent
with your goals. You should also consider any assets you may have outside of
your employer's retirement plan when applying the model portfolio to your
investment decisions.
Are there special considerations for retirement investors?
Fidelity PortfolioPlanner(SM) presents you with one of several model portfolios
using investment options available to you through your workplace plan, to match
as closely as possible to a particular target asset mix. Fidelity
PortfolioPlanner(SM) should not serve as the primary basis for your investment
decision. Fidelity PortfolioPlanner(SM) is an educational tool and the model
portfolio represents one of several combinations of investments that may be
appropriate for you.
In addition, there may be other investments you may consider more appropriate to
satisfy your goals. A decision to invest in a particular investment option may
be based on a number of factors, including an investor's needs, savings through
work and outside a workplace plan, goals and comfort with risk.
Who provides the target asset mixes and model portfolio in Fidelity
PortfolioPlanner(SM)?
Strategic Advisers, Inc., a registered investment adviser and a Fidelity
Investments(R) company provides the model portfolio recommendations and target
asset mixes, the investment methodology and certain other information in this
product. Fidelity Institutional Retirement Services Company and Fidelity
Investments Tax-Exempt Services Company, both divisions of Fidelity Investments
Institutional
9
Services Co., Inc. provide the workplace savings account information in Fidelity
PortfolioPlanner(SM) and access to Fidelity PortfolioPlanner(SM) by arrangement
with the plan sponsor.
The model portfolio represents Strategic Advisers' investment suggestion only as
of the date it is provided. You must return to this application periodically to
see if any changes have been made to the model portfolio. You will not be
contacted proactively to do so. The investments in the model portfolio, mutual
funds and non-mutual funds alike, are selected to provide a diversified
portfolio and a risk-adjusted return consistent with your target asset mix.
They are not selected to maximize return or predict the highest performing fund
or group of funds within each asset class in the model. Your circumstances are
unique so you should review your own situation at least annually and consult an
investment professional if you need additional information.
There are multiple products and services from Fidelity that provide asset
allocation and model portfolio suggestions.
Please note that Fidelity continues to review and may modify the investment
analysis that drives the asset allocation and the fund selection, which means
that services, products and model portfolios may change over time. These
products and services may yield different investment suggestions.
To obtain more information about Strategic Advisers, we provide you with the
Part II for Form ADV below.
What additional things should I keep in mind while using Fidelity
PortfolioPlanner(SM)?
Any information obtained should not be considered an offer to buy or sell, a
solicitation of an offer to buy, or a recommendation of any securities. Neither
Fidelity Investments nor its affiliates are responsible for losses incurred on
any investment nor does Fidelity guarantee the suitability or potential value of
any particular investment.
Past performance is no guarantee of future results. Share price, yield and
return may vary and you may have a gain or loss when you sell your shares. The
model portfolio may include investment options for which Fidelity will receive
payments if you decide to invest. Specifically, model portfolios may include
investment options for which Fidelity or its affiliates receive payment for
services such as investment management, distribution, transfer agency, or
administration. The model portfolios may also include non-Fidelity funds for
which Fidelity receives payment for certain recordkeeping or other shareholder
services.
Where can I get more information on the investments listed in Fidelity
PortfolioPlanner(SM)?
Fidelity Management & Research Company manages Fidelity mutual funds and some
non-mutual fund investments. Please be aware that investment managers other
than Fidelity Management & Research Company manage certain investment options.
Such investment options include, but may not be limited to managed income funds,
commingled pools, annuities and non-Fidelity mutual funds.
For more complete information on any mutual fund registered in your state,
including expenses and any application charges and fees, please order a free
prospectus through Net Benefits? or through your plan sponsor. Read the
prospectus carefully before you make your investment decision.
10
Who provides the investment data?
Fidelity PortfolioPlanner(SM) uses the following types of date about your
current investments and plan investment options: performance; underlying
holdings; Morningstar investment category; sector and geographic classification.
Performance information for publicly-available mutual funds is obtained monthly
from an independent third party vendor. For proprietary mutual funds and non-
mutual fund investment options, performance information is provided by Fidelity
affiliates, sponsors, or external money managers. Performance for individual
securities available through the plan is provided monthly from a separate third
party vendor.
Underlying holdings data (including industry sector and geographic
classifications) for publicly-available mutual funds is obtained monthly from an
independent third party vendor. For proprietary mutual funds and other pooled
investment options unique to plans (such as commingled pools, or separate
accounts), underlying holdings, if available, are provided by quarterly Fidelity
affiliates or plan sponsors or external money managers. On occasion, those
third parties will not provide detailed holdings, but may choose to provide
aggregate holdings information by asset class and, for stocks, by industry
sector and geographic classification.
Investment category for publicly-available mutual funds is provided by
Morningstar, Inc. and independent third party, on a monthly basis.
In the case of individual securities held within a plan, Fidelity
PortfolioPlanner(SM) determines the industry sector using the same parameters
used by the third party vendor providing underlying holdings data for publicly-
available mutual funds. In the rare instance where such data is not available
from Morningstar, Strategic Advisers, Inc. will determine the industry sector
using publicly-available information.
Investment information provided to Strategic Advisers, Inc. is not based on
contemporaneous data. Strategic Advisers is not responsible for the accuracy of
data provided by third parties.
Part II of ADV - More information about Strategic Advisers, Inc.
Service Overview
Methods of Analysis, Sources of Information, and Investment Strategies
Education and Business Background of Directors of Strategic Advisers, Inc.
Activities and Affiliations of the Adviser
Information on Protecting your Privacy
Investment Methodology
Service Overview
Strategic Advisers, Inc., a registered investment adviser and a Fidelity
Investments(R) company provides the model portfolios and target asset mixes, the
investment methodology and certain other information in Fidelity
PortfolioPlanner(SM). The product is designed to help individual investors
identify
11
and meet their retirement goals.
Each Fidelity PortfolioPlanner(SM) session is a one-time, non-discretionary
service which means that any model portfolio is based only on the market
information obtained by PortfolioPlanner(SM) at that time and it is up to
investors to implement the model if they so choose. We suggest that investors
re-visit the service from time to time and, in particular, if their financial
circumstances change. Strategic Advisers will review the various model
portfolios and may update them quarterly. Strategic Advisers will not however,
contact investors to inform them that the suggestions have changed.
Fidelity PortfolioPlanner(SM) is made available to individual investors through
various Fidelity Investments channels and through participating institutional
workplace plan sponsors who use Fidelity's recordkeeping services for their
employee savings plans. These Fidelity channels include Fidelity Institutional
Retirement Services Company and Fidelity Investments Tax-Exempt Services
Company, both divisions of Fidelity Investments Institutional Services Co., Inc.
Fidelity PortfolioPlanner(SM) service fees are negotiated with institutional
plan sponsors and made payable in arrears.
Methods of Analysis, Sources of Information, and Investment Strategies
Strategic Advisers generally uses both fundamental and technical investment
strategies in creating long term investment model portfolios. The model
portfolios provided in Fidelity PortfolioPlanner(SM) are based on the user's
risk profile and are built using a four-step process.
The investment approach begins with the completion of an Investor Profile
Questionnaire which provides an assessment of an investor's time horizon, risk
tolerance and financial experience. Through a scoring algorithm, these
attributes are mapped to one of four target asset mixes with pre-specified asset
class allocations for stocks, bonds and short-term investments. The assigned
asset mix becomes the target to which the construction process attempts to match
risk levels (volatility), asset class weights (stocks, bonds, and short-term),
sector weights (technology, cyclicals, etc.) and foreign stock holdings.
(Foreign stock targets are a part of the stock allocation).
The portfolio construction process is comprised of a series of well-defined
steps that lead to model portfolios. These steps include: i) fund screening, ii)
fund performance evaluation and ranking, iii) additional screening (if
necessary), iv) optimization and portfolio construction and v) treatment of
stable value securities. Selected investments typically include mutual fund
shares but may include equity securities or annuities in a workplace savings
plan such as a 401(k) or 403(b) plan or retail investments in a taxable, tax-
deferred or tax-free account. This methodology is described in full detail
within the PortfolioPlanner(SM) application.
Education and Business Background of Directors of Strategic Advisers, Inc.
Robert M. Gervis is Managing Director and Chief Administrative Officer of
Strategic Advisers and has been with Fidelity Investments since July 1994.
Previously, Mr. Gervis was a partner with the law firm of Weil, Gotshal & Manges
in New York from 1993 to 1994. Born in 1960, Mr. Gervis received his J.D. in
1985 from the National Law Center of George Washington University and his B.S.
in Industrial Engineering from Lehigh University in 1982.
William V. Harlow III is a Director, President and Chief Investment Officer of
Strategic Advisers and
12
has been with Fidelity Investments since 1991. Born in 1956, Mr. Harlow holds a
Ph.D. in Financial Economics (1986) and a MBA (1980) from the University of
Texas as well as a B.A. in Physics (1978) from Rice University. Mr. Harlow is
also a CFA.
In addition, the principal officers of Strategic Advisers also may serve as
officers or employees of affiliated companies that are engaged in various
aspects of the financial services industry.
Activities and Affiliations of the Adviser
Strategic Advisers engages in three general areas of business. First, Strategic
provides discretionary investment advisory services to individuals, trusts,
investment companies and charitable and other business organizations. Second,
Strategic provides non-discretionary advisory services to individuals and
financial intermediaries and develops and maintains asset allocation and
portfolio modeling methodologies for use by affiliates. Last, Strategic offers
educational products concerning investment and personal finance.
Strategic Advisers is a wholly owned subsidiary of FMR Corp. Various direct or
indirect subsidiaries of FMR Corp. are engaged in investment advisory,
brokerage, banking or insurance businesses. From time to time, Strategic
Advisers may have material business relationships with Fidelity Distributors
Corporation, Fidelity Trust Company, Fidelity Management Trust Company, Fidelity
Management & Research Company, Fidelity Brokerage Services, Inc., Fidelity
Investments Institutional Services Co., Inc., Fidelity Investments Institutional
Operations Company, Inc. and National Financial Services Corporation. While no
economic benefit is received by Strategic Advisers from affiliated or
unaffiliated entities in connection with providing advice to clients, Fidelity
Management & Research Company (FMR) and various affiliates of FMR are
compensated for providing services to one or more of the funds: FMR as the
investment adviser for the Fidelity funds, Fidelity Distributors Corporation as
the underwriter of the funds, Fidelity Service Co. and Fidelity Investments
Institutional Operations Company, Inc. as the funds' transfer agent, Fidelity
Management Trust Company as the custodian for certain funds. In addition, one or
more broker-dealer affiliates of the funds may execute portfolio transactions
for the funds. The funds' investment advisers may obtain brokerage or research
services, consistent with Section 28(e) of the Securities Exchange Act of 1934,
from broker-dealers in connection with the execution of the funds' portfolio
security transactions.
Information on Protecting Your Privacy
Throughout this portfolio planning session you will notice that some fields are
already filled in. Because you are a valued Fidelity customer, answers to some
questions are provided based on your account information. Please note that
Fidelity respects your privacy and has provided you with a secure server while
you are using this portfolio planner. Your data will not be sold for any
purposes. Fidelity recognizes the importance of Internet security. To this end,
Fidelity has adopted certain secure measures designed to ensure that personal
financial information transmitted for use with Fidelity PortfolioPlanner(SM) is
both secure and confidential. First, the Fidelity PortfolioPlanner(SM) has been
designed for use with an Internet browser that has 128-bit encryption. While we
cannot guarantee that transmissions over the Internet are completely free of
risk of interception, Fidelity PortfolioPlanner(SM) has been designed to use a
high grade of encryption in order to meet our stringent security standards.
Second, personal financial information submitted by a user of Fidelity
13
PortfolioPlanner(SM) will not be made available to third-parties except Fidelity
Investments affiliates. Finally, Fidelity will store your most recent completed
Investor Profile Questionnaire in a secure electronic file for five years in
order to comply with certain record keeping requirements under the federal
securities laws.
Investment Methodology
Overview
The primary objective of Fidelity PortfolioPlanner(SM) is to provide retirement
plan participants with a disciplined, risk-controlled approach to their
investment decisions. Fidelity PortfolioPlanner(SM) provides participants one of
four target asset allocations and a model portfolio customized to the investment
options in the plan. In constructing the model portfolio, PortfolioPlanner(SM)
employs a process that is independent with respect to fund family. The process
aims to build a model portfolio using investments that have demonstrated, over
time, consistency in risk characteristics and security selection capabilities.
The model portfolio uses a "look-through" methodology to most closely match the
risk characteristics of a target asset mix while at the same time providing an
opportunity for enhanced returns.
The investment approach begins with the completion of an Investor Profile
Questionnaire (IPQ) which provides an assessment of an investor's time horizon,
risk tolerance and financial experience. Through a scoring algorithm, these
attributes are mapped to one of four target asset mixes with pre-specified asset
class allocations for stocks, bonds and short-term investments. Strategic
Advisers, Inc. has created these target asset mixes based on historical risk and
return characteristics for the asset classes listed in the table below. The
target asset mixes are four significantly different allocations that offer good
risk/return trade-offs for each of the four different investor types listed
below on the investment spectrum.
The assigned asset mix becomes the target to which the construction process
attempts to match risk levels (volatility), asset class weights (stocks, bonds,
and short-term), sector weights (technology, cyclicals, etc.) and foreign stock
holdings. (Foreign stock targets are a part of the stock allocation).
The Wilshire 5000 is used to determine the target sector weights and other stock
risk and return characteristics. The MSCI EAFE Index is used as the foreign
stock benchmark. The Lehman Aggregate Index is the bond asset class benchmark
and the 3-Month U.S. Treasury Bill Index is the short-term asset class
benchmark.
The portfolio construction process is comprised of a series of well-defined
steps that lead to model portfolios. These steps include: i) screening of
investment options, ii) performance evaluation and ranking, iii) additional
screening (if necessary), and iv) optimization and portfolio construction. Each
of these steps is discussed below.
Step I: Screening of Investment Options
The first step in the portfolio construction process is the identification of
those investment options that are appropriate for use as building blocks for the
model portfolio. PortfolioPlanner(SM) uses the following criteria:
For mutual funds
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. Funds with at least 3 years of return history
. Funds classified according to Morningstar as adhering to a core
investment objective:
. Morningstar core investment objectives include Equity Income, Growth &
Income, Growth, Aggressive Growth, Small Company, Balanced, Government
Bond, Corporate Bond, Foreign Stock and World Stock.
These objectives are further classified by the type of Morningstar category to
which the fund belongs.
For domestic stock funds, these categories are: Large Value, Large Blend, Large
Growth, Mid-Cap Value, Mid-Cap Blend, Mid-Cap Growth, Small Value, Small Blend
and Small Growth.
For the Balanced objective, the fund must belong to the Domestic Hybrid
category.
For fixed-income objectives, these categories are: Short Government,
Intermediate Government, Long Government, Short-term Bond, Intermediate-term
Bond, Long-term Bond and High Yield Bond.
Finally, for the Foreign Stock and World Stock objectives, the fund must also
belong to Foreign Stock and World Stock categories.
Separate classes of shares in a mutual fund are generally evaluated separately
for length of performance history. For certain funds that do not meet the above
criteria (such as a new institutional class of shares, a new index fund or a
clone of an established fund), Fidelity may substitute the characteristics of a
very similar fund (such as the retail class of shares in the same fund, the
index that a new fund seeks to track, or the established fund which the clone
seeks to emulate). In this way, the fund can be evaluated for potential
inclusion in the model portfolio.
In situations where there is more than one fund representing short-term/money
market securities, a single fund will be selected, and if available, a money
market fund offered by Fidelity Investments will be used. This is the only bias
for any specific Fidelity Investments product in the Fidelity
PortfolioPlanner(SM).
For other investment options
Often employer sponsored workplace savings plans include non-mutual fund
investments. These investments, for instance separately managed accounts,
managed income pools, fixed annuities, and proprietary funds, are not reported
by Morningstar so we rely on the information provided by Fidelity affiliates,
third party sources, or the plan sponsor to evaluate the underlying holdings.
Generally, the returns history screening criteria stated for mutual funds above
also gets applied to these non-mutual fund investments.
Company Stock: 401(k) investors
We do not make recommendations on company stock in your 401(k) portfolio. Rather
the model portfolio is constructed taking the company stock holdings into
account, and is solely for the portion of your savings outside of your company
stock holdings. We analyze the volatility, historical performance (a minimum of
24 months of data) and industry sector of the company stock you hold in
conjunction with the other savings in your workplace savings plan. We do this in
order to help diversify the holdings in your overall workplace plan portfolio.
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Exclusions
Certain investments are automatically excluded from the model portfolios (for
example investment strategies). These "Ready-Mix" investment solutions, such as
asset allocation funds and "lifestyle" funds, are designed for investors who
want to diversify their savings through a single investment vehicle.
Consequently, we do not include them in the investment universe for model
portfolios. We also exclude specialty-type funds like sector or regional funds,
as defined by Morningstar or separately managed accounts with similar investment
objectives.
Lastly, the investment methodology does not look for extraordinary circumstances
which might rule out a certain investment. However, to the extent Strategic
Advisers becomes aware of these circumstances and believes they may have
possible deleterious effects on the portfolio, the methodology will consider
them.
Step II. Performance Evaluation and Ranking
Once the universe of plan investment options (or "investments") has been
screened, PortfolioPlanner(SM) evaluates the historical performance of the
investments. Through a proprietary statistical approach in which Strategic
Advisers uses the last three years of monthly return data, each investment's
total return is adjusted based on its exposure to the overall market and
different types of securities and risks within the market. In this way, the
investment's "alpha" or "excess return" can be identified. In other words, the
investment's return is adjusted for the performance of the average security in
the market, and any return left over, positive or negative, is a measure of the
risk-adjusted return. The alpha, or risk-adjusted excess return, is used as the
best assessment of the ability of a particular investment to enhance returns
over time through security selection. Depending on the weights of the asset
classes in the investment, Fidelity PortfolioPlanner(SM) uses one of three
different multifactor analysis engines to evaluate the three years of
performance.
Each of these models produces a number of specific evaluations for each
investment. Specifically,
. Alpha (risk-adjusted excess return)
. Factor loadings for risk exposures
. Significance tests on all alphas and parameters
. Consistency of risk characteristics
These parameters are used in the subsequent screening and portfolio construction
steps of the methodology.
Step III. Additional Screening (if necessary)
With a large plan investment universe, a screening process further narrows the
set of candidate investment options to a workable number of approximately 50 to
60. To accomplish this and to further focus the analysis on investment options
with the most potential of adding value, the following screening criteria are
employed:
. Information from the returns-based performance evaluation (Alpha, Risk
Exposure Factors, Significance Tests)
. Holdings-based characteristics (equity sector, foreign stock
weighting, price-to-book, price-to-cashflow, price-to-equity)
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. Investment management data (Morningstar fund core objective,
Morningstar sub-category classification, asset class percents,
portfolio turnover, median market capitalization).
Additional screening identifies those investment options having the most
consistent risk characteristics over the last three years. This allows the
building of a model portfolio that is diversified with investment options which
tend to consistently focus their investments within a specific segment of the
market or use a consistent type of investment discipline or approach to security
selection. Consistent investment management reduces the likelihood that the
investment options selected for the model portfolio will change from month to
month or from quarter to quarter.
The screening criteria designed to meet this objective are:
. Consistency of risk characteristics as measured by an R2 of greater
than 90% from the performance evaluation models
. Historical and current cash levels for domestic and global stock
investments of no more than 10%
Step IV. Optimization & Portfolio Construction
The portfolio construction process uses an optimization approach to select and
weight a set of candidate investment options whose overall risk characteristics,
when viewed as a portfolio, are similar to those of the target asset mix. After
applying the techniques above, the optimization process identifies the portfolio
of investments which has the best risk-adjusted return for the least amount of
tracking error relative to the benchmark. All performance and risk evaluations
for all candidate investment options are considered simultaneously in the
decision process. The model's tracking error is judged relative to the target
asset mix.
We require that the weight of any one pooled stock investment is no more than
25% and is no less than 5% of a participant's total assets. The 25% maximum
stock weight constraint provides portfolio manager and investment option
diversification. The 5% minimum limits the total number of investment options in
a model portfolio so each position has a meaningful impact on the recommended
model portfolio. A similar philosophy applies to the bond asset class. However,
since bonds historically have been less volatile than stocks, Strategic Advisers
does not consider it necessary to diversify in the same way. Furthermore, often
there are only one or two bond investment options available in the plan. This
makes diversification all the more difficult within the bond asset class.
Therefore, the amount allocated to investment options in the bond asset class
must be at least 5% of a participant's total assets, and generally may not
exceed 50%, depending on plan options.
Risk control is integrated into the portfolio construction process using two
important and different data dimensions - returns-based and holdings-based.
These two alternative types of risk control provide critical cross checks.
Returns-based risk control is conducted using tracking error and alpha. Tracking
error, based on periodic returns, provides a full covariance matrix control of
all underlying systematic risk factors. Alpha and its tradeoffs with risk are
directly incorporated into the portfolio construction process.
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Holdings-based risk control is conducted using asset, foreign equity and equity
industry sector analysis coupled with investment style analysis. Asset
allocation is the percentage of holdings in stock, bond and short-term
investments. Foreign equity holdings is the percentage of foreign stocks held in
the fund. Equity industry sector weightings are the percentage of the stock
holdings in certain industry sectors (utilities, energy, financial, industrial
cyclicals, consumer durables, services, retail, health and technology). Finally,
investment style analysis allows diversification along value-growth and small-
large cap dimensions.
Treatment of Stable Value Investments (if available)
Stable value investment options are generally analyzed in the same way as other
investment options, with three important differences: 1) instead of using a
look-through analysis for a stable value option, the investment methodology
makes certain assumptions about the nature and character of the underlying
assets; 2) unique fund screening criteria are applied to stable value options;
and 3) the methodology provides a limited preference to appropriate stable value
options, through the use of minimum allocations ("floors").
Assumptions about underlying holdings. The return volatility of stable value
investment options is not observable because of book-value accounting and
insurance wrap guarantees on the principal and interest of the underlying
investments. Thus, Fidelity PortfolioPlanner(SM) makes the following assumptions
about stable value investment options:
. A stable value investment option is comprised of 20% short-term instruments
and 80% investment-grade bonds
. The alpha of a stable value option is zero (neutral)
. Stable value investment options have the volatility characteristics of the
Lehman 1-3 Year Government/Corporate Index.
Fund screening. The investment methodology will apply two screening criteria to
stable value options. First, although we will not apply look-through methodology
to the underlying holdings, we will exclude the stable value option from
consideration if we have information that the quality and characteristics of
underlying holdings are not consistent with the investment-grade assumption for
the bond portion. For example, a stable value option will be screened out if the
investment policy permits, or any holdings include equities or high-yield bonds.
Second, as with any other investment option, we will exclude the stable value
option if we learn of any extraordinary circumstances which may, in our
judgment, have possible deleterious effects on the overall portfolio.
Minimum Allocations ("Floors"). Fidelity PortfolioPlanner(SM) gives a limited
preference to stable value options for two reasons. First, it is important to
achieve some consistency in allocations to stable value options in order to
avoid unfavorable impacts on participant pricing. Second, it is important that
the stable value option not be unduly disadvantaged by the use of assumptions
concerning alpha and volatility. For these reasons, Fidelity
PortfolioPlanner(SM) employs the minimum allocations or "floors". If a stable
value option meets the screening criteria, Fidelity PortfolioPlanner(SM) will
construct a model portfolio for the Growth, Balanced and Conservative target
asset mixes that includes a minimum allocation to the stable value option. For
the Growth target asset mix, the minimum allocation to the stable value option
will be 5% of the total portfolio; for Balanced, 25% of the total portfolio; and
for Conservative, 50% of the total portfolio. There is no minimum allocation to
the stable value option for the Aggressive Growth target asset mix.
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As with any portfolio construction, Fidelity PortfolioPlanner(SM) will attempt
to come as close as possible to the target asset mix, but may not meet the
target asset mix exactly. In general, the tolerance for the two categories of
fixed-income investments is greater than the tolerance for stocks. For example,
in the Conservative target asset mix, the program seeks to allocate 20% to
stocks, 50% to bonds and 30% to short-term investments. In a plan that has no
short-term option (other than a stable value investment option), there is likely
to be relatively more allocated to bonds and relatively less allocated to short-
term investments in the Conservative model portfolio, because the stable value
option will be divided in a 4-to-1 ratio across those two asset classes.
Updates to the Models
The model portfolios are reviewed, and if warranted, updated quarterly. They may
be reviewed more often if Strategic Advisers determines in its discretion that
more frequent reviews are necessary.
Note for investors in employer sponsored retirement plans: Changes in the
options available in your plan will cause Fidelity to review and update the
recommended model portfolios associated with that plan. Fidelity however will
not proactively contact you about any such changes.
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