A Unique Choice for Income-Seekers
Fidelity Real Estate Income's wide-ranging and eclectic strategy makes this fund stand out.
The following is our latest Fund Analyst Report for Fidelity Real Estate Income FRIFX
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Fidelity Real Estate Income FRIFX stands out within the real estate Morningstar Category for its unique structure and the resources Fidelity brings to the table. It earns a Morningstar Analyst Rating of Silver, as do the I and Z shares of the Fidelity Advisor version of the fund. The more expensive share classes are rated Bronze or Neutral. This fund aims to generate a higher yield than an all-equity real estate fund or an investment-grade bond fund, with much less volatility than other real estate funds. To do this, managers Mark Snyderman and Bill Maclay can range across the capital structures of the real estate companies they follow, so that in addition to REITs, the fund also holds real estate corporate bonds, commercial mortgage-backed securities, and REIT preferred securities. The allocations to these asset classes can vary within fairly wide ranges, based on where the managers see the best values and future returns. No other U.S. real estate fund does quite what this one does, and Fidelity is one of the few fund companies with the resources to effectively pull off such a wide-ranging, eclectic strategy. Snyderman has managed the fund since its 2003 inception, and while Maclay was named comanager in 2019, he has worked with Snyderman since 2001. They are supported by other teams at Fidelity from both the equity and fixed-income side that are generally strong and run funds such as Gold-rated Fidelity Total Bond FTBFX and Silver-rated Fidelity Mortgage Securities FMSFX. This fund's returns relative to the category don't look great at first glance, but that's not the best basis for comparison. Since inception, the fund's total returns have stayed even with a custom benchmark consisting of 20% REITs, 40% real estate bonds, and 40% REIT preferreds, and on a risk-adjusted basis it has handily beaten that benchmark. Its 12-month yield of 4.13% (as of Aug. 31, 2020) was well above the 3.09% category average and the 2.43% of the Bloomberg Barclays U.S. Aggregate Bond Index, consistent with the managers' goals. Process | Above Average This strategy's distinctive, income-oriented approach has been executed well by Snyderman for more than 15 years, earning it an Above Average Process rating. It aims to achieve a better yield than pure real estate equity funds and most bond funds, but with less volatility and interest-rate sensitivity. To achieve this, Snyderman and comanager Maclay invest in a diverse mix of commercial real estate security types ranging across the capital structure: common stock, preferred stock, CMBS, and real estate corporate bonds. Historically, 30% or less of the portfolio has been in REIT common stocks, with roughly 10%-30% in preferred stock, 15%-30% in CMBS, 25%-50% in corporate bonds, and 0%-10% in cash and other. With the help of Fidelity's research analysts and visits with company management, the managers keep track of all the major real estate firms in the fund's universe, thinking about their entire capital structures. Their fundamental research focuses on such factors as balance-sheet strength, property quality, cash flows, management quality, growth rates, debt/property value, debt yield, and covenants. When they find a fundamentally strong company, they determine which of its securities (common stock, preferred stock, bonds, and so on) is most attractive in terms of valuation, yield, or other fundamentals before deciding what to add to the portfolio. People | Above Average This fund earns an Above Average People rating thanks to its experienced managers backed by deep resources. Mark Snyderman has managed the fund since its February 2003 inception. He has also managed Fidelity Strategic Real Return FSRRX and its Fidelity Advisor version since that fund's September 2005 inception, and Fidelity Series Real Estate Income FSREX since its October 2011 inception. Prior to taking on this fund, Snyderman managed institutional CMBS and REIT accounts, as well as Fidelity Real Estate High-Income, an institutional open-end fund. He has been with Fidelity since 1994, managing real estate portfolios that whole time. Bill Maclay became comanager of this fund and its Fidelity Advisor version on March 1, 2019. Maclay is a longtime analyst and portfolio manager with Fidelity's high-yield real estate debt team, which Snyderman has headed up since this fund's launch in 2003. It includes seven investment professionals, including Snyderman and Maclay, who analyze high-yield CMBS. The managers also make use of Fidelity's high-yield, investment-grade debt, and investment-grade CMBS analysts when necessary. They also use Fidelity's eight-person U.S. real estate securities research team led by Steve Buller, manager of Fidelity Real Estate Securities FRESX, as well as the firm's 180 U.S. and international equity research analysts, to provide research on key tenants and industries. Parent | Above Average Fidelity earns an Above Average Parent rating because of its ability to stay ahead of its competition. The firm's successful stock-picking mutual funds fueled its rise to prominence, and it has adapted well to investor preferences that have shifted markedly over the past two decades. Index funds and ETFs have garnered most of the industry's flows as money has gushed from actively managed products--Fidelity's included. Yet overall, the asset management division has continued to achieve positive organic growth by introducing or maintaining aggressive pricing on its own suite of passively managed funds and expanding its menu of client-demanded investment structures, such as managed accounts and collective investment trusts. These moves are made possible by the firm's strong distribution network, scale, established brand, and willingness to tolerate losses on some products in pursuit of broader strategic objectives. Fidelity continues to invest heavily in its active managers' analytical and technological resources. It is home to a handful of the industry's most talented equity managers and boasts a topnotch fixed-income division. Across asset-class teams, elevated levels of turnover within its leadership ranks bear watching. Overall, though, the firm has served fundholders well through its competitive capabilities and costs. Price It's critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category's second-cheapest quintile. Based on our assessment of the fund's People, Process and Parent pillars in the context of these fees, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Silver. Performance This fund's track record appears poor at first glance, but its returns look better once its unique exposures are considered. Through Aug. 31, 2020, the fund's total returns ranked in the real estate category's bottom quartile over the trailing 10 years and since the fund's 2003 inception. However, it has also posted several periods of topnotch short-term returns, resulting in feast-or-famine annual results. In 15 of 16 calendar years from 2004 through 2019, the fund ranked in either the category's top or bottom quartile, including six years in the top 10% and six years in the bottom 10%. However, the real estate category isn't a particularly good basis for comparison, given this fund's substantial holdings in preferred and fixed-income securities, which often perform differently from real estate common stocks. Fidelity compares this fund's returns to those of the Fidelity Real Estate Income Composite Index, a custom benchmark consisting of 20% real estate common stocks, 40% real estate corporate bonds, and 40% REIT preferred securities. The fund has slightly beaten that custom benchmark over the trailing 10 years through Aug. 31, 2020, and has stayed even with it since inception. The fund has been far less volatile than the average real estate fund, as measured by standard deviation, and has been modestly less volatile than the custom benchmark by the same measure. Portfolio As of June 30, 2020, this fund's portfolio consisted of 29% common stocks (primarily REITs), 23% preferred stock, 16% CMBS, 25% corporate bonds, and 8% cash and other. The common stock weighting, 86% of which is in the real estate sector, is about as high as it has been since the fund's 2003 inception and has stayed fairly steady since mid-2013. Snyderman thinks real estate stocks are currently cheap relative to real estate bonds and the value of the underlying securities, even though they're somewhat expensive relative to the broader stock market. Conversely, the fund's 25% weighting in corporate bonds is on the low side of its historical levels. The portfolio's preferred-stock weighting of 23% is up from 18.6% a year earlier and around 10% during the 2008 global financial crisis, but it's still lower than it was in 2004-06, when it was around 30%. REIT preferreds got very cheap in early 2020 relative to the managers' estimates of their fair value, so the managers bought quite a few of them. The portfolio's 17% weighting in CMBS is similar to what it has been for most of the fund's history except from 2010 to 2012, when it swelled above 20%. Snyderman has focused on pockets of opportunity within this asset class, such as conservatively underwritten seasoned deals, and he has avoided bonds containing mortgages dating from the pre-2007 bubble years.