Fund Highlight Q and A: Fidelity Convertible Securities Fund
Fidelity Convertible Securities Fund (FCVSX),
What is the Fidelity Convertible Securities Fund’s Objective?
Established in 1987, Fidelity Convertible Securities Fund, with some $2.5 billion in total net assets, seeks a high level of total return through a combination of current income and capital appreciation. It will normally invest at least 80% of assets in convertible securities, which are often lower-quality debt securities. (Convertibles tend to perform more like a stock when the underlying share price is high -- since it is assumed that it will be converted into the stock -- and more like a bond when the underlying share price is low -- because it is assumed that it will mature without being converted.) The portfolio may also invest in other types of securities, including common stocks. In addition to domestic issuers, the fund can purchase securities of foreign companies.
How does the fund meet its Objective?
When selecting investments for the portfolio, management uses fundamental analysis, which involves a ``bottom-up’’ assessment of a company’s potential for success in light of factors such as its financial condition, earnings prospects, industry position, as well as the economic and financial market environment.
The fund may also employ other strategies, including buying and selling futures contracts and exchange traded funds, to increase or decrease the portfolio’s exposure to fluctuating securities prices or other factors that affect the value if securities.
How has the Fund performed?
For 2009, the Fund boasted a total return of 64.1% (the highest in its history), as a substantial rebound in stock prices and an improvement in the credit markets made convertible securities quite appealing to investors. As a result, the Fund enjoyed good performances across a variety of sectors, including healthcare, technology, and financials. Top individual contributors included Freeport-Mc-MoRan Copper & Gold (FCX), Bank of America (BAC), Peabody Energy (BTU), and ON Semiconductor (ONNN).
That stellar performance marked a major turnaround from the previous year, when the portfolio’s total return plunged 47.8% (the worst drop in its history). Indeed, during that time period, the financial markets encountered considerable volatility, stemming partially from the crisis in the banking industry, which made it quite a challenge for companies to fund their operations.
From a longer-term standpoint, the Fund’s average annual total returns, over the five- and ten-year periods through the end of April, 2010, compare favorably with those of its benchmark, the Merrill Lynch All U.S. Convertible Securities Index. That is quite an accomplishment.
How much does it cost to own the Fund?
Shareholders incur two types of costs: transaction costs, including sales charges on purchase payments or redemption proceeds, and ongoing costs, such as management fees, distribution and/or service fees, plus miscellaneous fund expenses. Still, with an expense ratio of 0.70%, the portfolio’s expenses seem reasonable, relative to other convertible securities funds. Note that the minimum initial investment for this portfolio is $2,500.
What type of investor should consider the Fund?
The Fund would not be appropriate for conservative investors. That is primarily because the portfolio invests heavily in lower-quality debt securities (those of less than - investment-grade quality), which have a greater risk of default or price fluctuations due to changes in the credit quality of the issuer. Consequently, total returns may be erratic, as evidenced by the Fund’s widely varying performance in 2008 and 2009.