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Fidelity Bond Fund Buys Banks, REITs

Which industry sectors do you like?

Prothro: While the fund is new, Mike and I have been managing corporate bond portfolios for institutional investors and diversified mutual funds for quite some time. Some of the recent themes have included favoring financials, especially U.S. money-center banks that benefited from government support initiated during the heart of the crisis. As the spread for financials declined to more normal levels over the past year, we began to pare our overweight positioning to rotate into those financials that we believe are less likely to be affected by increasing regulation, such as life insurance and regional banks.

Plage: We also like REITs because they come with debt covenants that protect bondholders and offer attractive risk/return profiles. Other overweight positions relative to the index include telecommunications, cable, utilities and natural-gas pipelines. These sectors offer attractive yields relative to their fundamentals.

How do you make investment decisions?

Plage: Individual security selection is the hallmark of our investment process. As a result, we are very focused on selecting individual bonds that will ultimately drive performance. We choose bonds by balancing the index-risk characteristics with our analysts' best recommendations. We also seek to diversify our holdings across the credit spectrum of industries that comprise the index.

Prothro: It's truly a team effort. It begins with outstanding credit research, the hallmark of Fidelity's fixed-income strategy. Our research group consists of more than 30 top-notch analysts who perform fundamental analysis on hundreds of companies. The team has regular access to top management at the companies we follow, and also leverages the work of Fidelity's global equity research group.

We also have a very strong quantitative analytical team that helps us identify opportunities and assess risk factors at the individual security level, at the industry level and at the portfolio level. And, finally, we have a team of experienced traders who focus exclusively on corporate bonds and specialize in industry sectors. So, our investment decisions reflect multiple perspectives from a highly engaged investment-management team.

Why should an investor consider Fidelity Corporate Bond Fund compared with other bond funds?

Plage: This fund may be appropriate as a core holding for income-oriented investors who have a risk tolerance between equities and government bonds, but possibly do not want the credit risk associated with a high-yield bond fund. Corporate bonds allow investors to benefit from traditional fixed-income characteristics, such as coupon income and lower volatility relative to equities, while also providing potential upside through capital appreciation.
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