P
erformance Summary:
The Fidelity Real Estate Income Fund (FRIFX) has a gross expense ratio of 0.67%. Over the past year, it gained 19.22%, outperforming the ICE BofA US High Yield Constrained Index's 15.67% return and the Morningstar Fund Moderate Allocation's 21.99% gain. The fund ranked 82nd in its category over the past three months.
Market Review:
U.S. real estate investment trusts (REITs) gained 16.25% in Q3, outpacing the S&P 500's 5.89% advance. REITs benefited from a shift toward global monetary easing and lower interest rates. Real estate corporate bonds rose 5.58%, while commercial mortgage-backed securities added 4.30%.
Performance Review:
The fund gained 7.60% in Q3, trailing the Fidelity Real Estate Income Composite Index's 8.96% return. The preferred stock portfolio was a significant detractor from performance, as it trailed the MSCI REIT Preferred Index by 4.10 percentage points. The CMBS portfolio also underperformed, with an overweight position and security selection issues contributing to the decline.
Outlook and Positioning:
The fund seeks to achieve a reasonable absolute total return through investments in real estate stocks and bonds, aiming for higher yields and less volatility than REIT common stocks alone. The portfolio's allocation to investment-grade real estate corporate bonds decreased from 23% at midyear to 22% on September 30. The available cash grew to 8%, up from about 5% three months earlier.
The fund's allocations to real estate preferred stocks and high-yield real estate bonds remained consistent, finishing the quarter at about 14% and 10%, respectively. The overall weighting in fixed income represents about 57% of the portfolio, with bondholders being among the earliest to be repaid if issuers encounter financial difficulty.
The fund's managers are optimistic about the commercial real estate industry's potential for stabilizing property values, more available financing, and growing cash flow. They believe that real estate securities' currently attractive yields and appreciation potential make them a compelling investment opportunity.
