Prospectus - Investment Objective
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Fund
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Ticker
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Strategic
Advisers® Fidelity® International Fund |
FUSIX
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Fund
of Fidelity Rutland Square Trust II
STATEMENT
OF ADDITIONAL INFORMATION
April
29, 2023
Offered
exclusively to certain clients of Strategic Advisers LLC (Strategic Advisers) or
its affiliates - not available for sale to the general public.
This
Statement of Additional Information (SAI) is not a prospectus. Portions of the
fund's annual
report are
incorporated herein. The annual report(s) are supplied with this SAI.
To
obtain a free additional copy of a prospectus or SAI, dated April 29, 2023, or
an annual report, please call Fidelity at 1-800-544-3455 or visit Fidelity's web
site at www.fidelity.com.
For
more information on any Fidelity ®
fund,
including charges and expenses, call Fidelity at the number indicated above for
a free prospectus. Read it carefully before investing or sending money.
245
Summer Street, Boston, MA 02210
SIL-PTB-0423
1.912846.118
TABLE OF CONTENTS
INVESTMENT
POLICIES AND LIMITATIONS
The
following policies and limitations supplement those set forth in the prospectus.
Unless otherwise noted, whenever an investment policy or limitation states a
maximum percentage of the fund's assets that may be invested in any security or
other asset, or sets forth a policy regarding quality standards, such standard
or percentage limitation will be determined immediately after and as a result of
the fund's acquisition of such security or other asset. Accordingly, any
subsequent change in values, net assets, or other circumstances will not be
considered when determining whether the investment complies with the fund's
investment policies and limitations.
The
fund's fundamental investment policies and limitations cannot be changed without
approval by a "majority of the outstanding voting securities" (as defined in the
Investment Company Act of 1940 (1940 Act)) of the fund. However, except for the
fundamental investment limitations listed below, the investment policies and
limitations described in this Statement of Additional Information (SAI) are not
fundamental and may be changed without shareholder approval.
The
following are the fund's fundamental investment limitations set forth in their
entirety.
Diversification
The
fund may not with respect to 75% of the fund's total assets, purchase the
securities of any issuer (other than securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities, or securities of other
investment companies) if, as a result, (a) more than 5% of the fund's total
assets would be invested in the securities of that issuer, or (b) the fund would
hold more than 10% of the outstanding voting securities of that issuer.
Senior
Securities
The
fund may not issue senior securities, except in connection with the insurance
program established by the fund pursuant to an exemptive order issued by the
Securities and Exchange Commission or as otherwise permitted under the
Investment Company Act of 1940.
Borrowing
The
fund may not borrow money, except that the fund may borrow money for temporary
or emergency purposes (not for leveraging or investment) in an amount not
exceeding 33 1/3% of its total assets (including the amount borrowed) less
liabilities (other than borrowings). Any borrowings that come to exceed this
amount will be reduced within three days (not including Sundays and holidays) to
the extent necessary to comply with the 33 1/3% limitation.
Underwriting
The
fund may not underwrite securities issued by others, except to the extent that
the fund may be considered an underwriter within the meaning of the Securities
Act of 1933 in the disposition of restricted securities or in connection with
investments in other investment companies.
Concentration
The
fund may not purchase the securities of any issuer (other than securities issued
or guaranteed by the U.S. Government or any of its agencies or
instrumentalities) if, as a result, more than 25% of the fund's total assets
would be invested in the securities of companies whose principal business
activities are in the same industry (provided that investments in other
investment companies shall not be considered an investment in any particular
industry for purposes of this investment limitation).
For
purposes of the fund's concentration limitation discussed above, with respect to
any investment in repurchase agreements collateralized by U.S. Government
securities, Strategic Advisers LLC (Strategic Advisers) looks through to the
U.S. Government securities.
Real
Estate
The
fund may not purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
fund from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business).
Commodities
The
fund may not purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall not prevent the
fund from purchasing or selling options and futures contracts or from investing
in securities or other instruments backed by physical commodities).
Loans
The
fund may not lend any security or make any other loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties, but this limitation
does not apply to purchases of debt securities or to repurchase agreements, or
to acquisitions of loans, loan participations or other forms of debt
instruments.
The
acquisitions of loans and loan participations excluded from the fund's lending
limitation discussed above are only those loans and loan participations
considered securities within the meaning of the 1940 Act.
The
following investment limitations are not fundamental and may be changed without
shareholder approval.
Short
Sales
The
fund does not currently intend to sell securities short, unless it owns or has
the right to obtain securities equivalent in kind and amount to the securities
sold short, and provided that transactions in futures contracts and options are
not deemed to constitute selling securities short.
Margin
Purchases
The
fund does not currently intend to purchase securities on margin, except that the
fund may obtain such short-term credits as are necessary for the clearance of
transactions, and provided that margin payments in connection with futures
contracts and options on futures contracts shall not constitute purchasing
securities on margin.
Borrowing
The
fund may borrow money only (a) from a bank or from a registered investment
company or portfolio for which Strategic Advisers or an affiliate serves as
investment adviser or (b) by engaging in reverse repurchase agreements with any
party (reverse repurchase agreements are treated as borrowings for purposes of
the fundamental borrowing investment limitation).
Illiquid
Securities
The
fund does not currently intend to purchase any security if, as a result, more
than 15% of its net assets would be invested in securities that are deemed to be
illiquid because they are subject to legal or contractual restrictions on resale
or because they cannot be sold or disposed of in the ordinary course of business
at approximately the prices at which they are valued.
For
purposes of the fund's illiquid securities limitation discussed above, if
through a change in values, net assets, or other circumstances, the fund were in
a position where more than 15% of its net assets were invested in illiquid
securities, it would consider appropriate steps to protect liquidity.
To
the extent that the fund acquires the shares of an underlying fund in accordance
with Section 12(d)(1)(F) of the 1940 Act, the underlying fund is not obligated
to redeem its shares in an amount exceeding 1% of its shares outstanding during
any period of less than 30 days. Those underlying fund shares will not be
treated as illiquid securities for purposes of the fund's illiquid securities
limitation described above to the extent that the fund is able to dispose of
such securities by distributing them in kind to redeeming shareholders. (See
"Investment Policies and Limitations - Securities of Other Investment
Companies.")
Loans
The
fund does not currently intend to lend assets other than securities to other
parties, except by (a) lending money (up to 15% of the fund's net assets) to a
registered investment company or portfolio for which Strategic Advisers or an
affiliate serves as investment adviser or (b) assuming any unfunded commitments
in connection with the acquisition of loans, loan participations, or other forms
of debt instruments. (This limitation does not apply to purchases of debt
securities, to repurchase agreements, or to acquisitions of loans, loan
participations or other forms of debt instruments.)
In
addition to the fund's fundamental and non-fundamental investment limitations
discussed above:
In
order to qualify as a "regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986, as amended, the fund currently intends to comply
with certain diversification limits imposed by Subchapter M.
For
the fund's policies and limitations on futures and options transactions, see
"Investment Policies and Limitations - Futures, Options, and Swaps."
Notwithstanding
the foregoing investment limitations, the underlying funds in which the fund may
invest have adopted certain investment limitations that may be more or less
restrictive than those listed above, thereby permitting the fund to engage
indirectly in investment strategies that are prohibited under the investment
limitations listed above. The investment limitations of each underlying fund are
set forth in its registration statement.
In
accordance with its investment program as set forth in the prospectus, the fund
may invest more than 25% of its assets in any one underlying Fidelity
®
fund.
Although the fund does not intend to concentrate its investments in a particular
industry, the fund may indirectly concentrate in a particular industry or group
of industries through its investments in one or more underlying funds.
The
following pages contain more detailed information about types of instruments in
which the fund may invest, techniques the fund's adviser (or a sub-adviser) may
employ in pursuit of the fund's investment objective, and a summary of related
risks. The fund's adviser (or a sub-adviser) may not buy all of these
instruments or use all of these techniques unless it believes that doing so will
help the fund achieve its goal. However, the fund's adviser (or a sub-adviser)
is not required to buy any particular instrument or use any particular technique
even if to do so might benefit the fund.
Strategic
Advisers® Fidelity® International Fund may have exposure to instruments,
techniques, and risks either directly or indirectly through an investment in an
underlying fund. An underlying fund may invest in the same or other types of
instruments and its adviser may employ the same or other types of techniques.
Strategic Advisers® Fidelity® International Fund's performance will be affected
by the instruments, techniques, and risks associated with an underlying fund, in
proportion to the amount of assets that the fund allocates to that underlying
fund.
On
the following pages in this section titled "Investment Policies and
Limitations," and except as otherwise indicated, references to "a fund" or "the
fund" may relate to Strategic Advisers® Fidelity® International Fund or an
underlying fund, and references to "an adviser" or "the adviser" may relate to
Strategic Advisers (or its affiliates) or a sub-adviser of Strategic Advisers®
Fidelity® International Fund, or an adviser of an underlying fund.
Borrowing.
If
a fund borrows money, its share price may be subject to greater fluctuation
until the borrowing is paid off. If a fund makes additional investments while
borrowings are outstanding, this may be considered a form of leverage.
Cash
Management. A
fund may hold uninvested cash or may invest it in cash equivalents such as money
market securities, repurchase agreements, or shares of short-term bond or money
market funds, including (for Fidelity ®
funds
and other advisory clients only) shares of Fidelity ®
Central
funds. Generally, these securities offer less potential for gains than other
types of securities.
Commodity
Futures Trading Commission (CFTC) Notice of Exclusion. The
Adviser, on behalf of the Fidelity® fund to which this SAI relates, has filed
with the National Futures Association a notice claiming an exclusion from the
definition of the term "commodity pool operator" (CPO) under the Commodity
Exchange Act, as amended, and the rules of the CFTC promulgated thereunder, with
respect to the fund's operation. Accordingly, neither a fund nor its adviser is
subject to registration or regulation as a commodity pool or a CPO. As of the
date of this SAI, the adviser does not expect to register as a CPO of the fund.
However, there is no certainty that a fund or its adviser will be able to rely
on an exclusion in the future as the fund's investments change over time. A fund
may determine not to use investment strategies that trigger additional CFTC
regulation or may determine to operate subject to CFTC regulation, if
applicable. If a fund or its adviser operates subject to CFTC regulation, it may
incur additional expenses.
Common
Stock represents
an equity or ownership interest in an issuer. In the event an issuer is
liquidated or declares bankruptcy, the claims of owners of bonds and preferred
stock take precedence over the claims of those who own common stock, although
related proceedings can take time to resolve and results can be unpredictable.
For purposes of a Fidelity ®
fund's
policies related to investment in common stock Fidelity considers depositary
receipts evidencing ownership of common stock to be common stock.
Convertible
Securities are
bonds, debentures, notes, or other securities that may be converted or exchanged
(by the holder or by the issuer) into shares of the underlying common stock (or
cash or securities of equivalent value) at a stated exchange ratio. A
convertible security may also be called for redemption or conversion by the
issuer after a particular date and under certain circumstances (including a
specified price) established upon issue. If a convertible security held by a
fund is called for redemption or conversion, the fund could be required to
tender it for redemption, convert it into the underlying common stock, or sell
it to a third party.
Convertible
securities generally have less potential for gain or loss than common stocks.
Convertible securities generally provide yields higher than the underlying
common stocks, but generally lower than comparable non-convertible securities.
Because of this higher yield, convertible securities generally sell at prices
above their "conversion value," which is the current market value of the stock
to be received upon conversion. The difference between this conversion value and
the price of convertible securities will vary over time depending on changes in
the value of the underlying common stocks and interest rates. When the
underlying common stocks decline in value, convertible securities will tend not
to decline to the same extent because of the interest or dividend payments and
the repayment of principal at maturity for certain types of convertible
securities. However, securities that are convertible other than at the option of
the holder generally do not limit the potential for loss to the same extent as
securities convertible at the option of the holder. When the underlying common
stocks rise in value, the value of convertible securities may also be expected
to increase. At the same time, however, the difference between the market value
of convertible securities and their conversion value will narrow, which means
that the value of convertible securities will generally not increase to the same
extent as the value of the underlying common stocks. Because convertible
securities may also be interest-rate sensitive, their value may increase as
interest rates fall and decrease as interest rates rise. Convertible securities
are also subject to credit risk, and are often lower-quality securities.
Country
or Geographic Region. Various
factors may be considered in determining whether an investment is tied
economically to a particular country or region, including: whether the
investment is issued or guaranteed by a particular government or any of its
agencies, political subdivisions, or instrumentalities; whether the investment
has its primary trading market in a particular country or region; whether the
issuer is organized under the laws of, derives at least 50% of its revenues
from, or has at least 50% of its assets in a particular country or region;
whether the investment is included in an index representative of a particular
country or region; and whether the investment is exposed to the economic
fortunes and risks of a particular country or region.
Debt
Securities are
used by issuers to borrow money. The issuer usually pays a fixed, variable, or
floating rate of interest, and must repay the amount borrowed, usually at the
maturity of the security. Some debt securities, such as zero coupon bonds, do
not pay interest but are sold at a deep discount from their face values. Debt
securities include corporate bonds, government securities, repurchase
agreements, and mortgage and other asset-backed securities.
Disruption
to Financial Markets and Related Government Intervention. Economic
downturns can trigger various economic, legal, budgetary, tax, and regulatory
reforms across the globe. Instability in the financial markets in the wake of
events such as the 2008 economic downturn led the U.S. Government and other
governments to take a number of then-unprecedented actions designed to support
certain financial institutions and segments of the financial markets that
experienced extreme volatility, and in some cases, a lack of liquidity. Federal,
state, local, foreign, and other governments, their regulatory agencies, or
self-regulatory organizations may take actions that affect the regulation of the
instruments in which a fund invests, or the issuers of such instruments, in ways
that are unforeseeable. Reforms may also change the way in which a fund is
regulated and could limit or preclude a fund's ability to achieve its investment
objective or engage in certain strategies. Also, while reforms generally are
intended to strengthen markets, systems, and public finances, they could affect
fund expenses and the value of fund investments in unpredictable ways.
Similarly,
widespread disease including pandemics and epidemics, and natural or
environmental disasters, such as earthquakes, droughts, fires, floods,
hurricanes, tsunamis and climate-related phenomena generally, have been and can
be highly disruptive to economies and markets, adversely impacting individual
companies, sectors, industries, markets, currencies, interest and inflation
rates, credit ratings, investor sentiment, and other factors affecting the value
of a fund's investments. Economies and financial markets throughout the world
have become increasingly interconnected, which increases the likelihood that
events or conditions in one region or country will adversely affect markets or
issuers in other regions or countries, including the United States.
Additionally, market disruptions may result in increased market volatility;
regulatory trading halts; closure of domestic or foreign exchanges, markets, or
governments; or market participants operating pursuant to business continuity
plans for indeterminate periods of time. Further, market disruptions can (i)
prevent a fund from executing advantageous investment decisions in a timely
manner, (ii) negatively impact a fund's ability to achieve its investment
objective, and (iii) may exacerbate the risks discussed elsewhere in a fund's
registration statement, including political, social, and economic risks.
The
value of a fund's portfolio is also generally subject to the risk of future
local, national, or global economic or natural disturbances based on unknown
weaknesses in the markets in which a fund invests. In the event of such a
disturbance, the issuers of securities held by a fund may experience significant
declines in the value of their assets and even cease operations, or may receive
government assistance accompanied by increased restrictions on their business
operations or other government intervention. In addition, it remains uncertain
that the U.S. Government or foreign governments will intervene in response to
current or future market disturbances and the effect of any such future
intervention cannot be predicted.
Exchange
Traded Funds (ETFs) are
shares of other investment companies, commodity pools, or other entities that
are traded on an exchange. Typically, assets underlying the ETF shares are
stocks, though they may also be commodities or other instruments. An ETF may
seek to replicate the performance of a specific index or may be actively
managed.
Typically,
shares of an ETF that tracks an index are expected to increase in value as the
value of the underlying benchmark increases. However, in the case of inverse
ETFs (also called "short ETFs" or "bear ETFs"), ETF shares are expected to
increase in value as the value of the underlying benchmark decreases. Inverse
ETFs seek to deliver the opposite of the performance of the benchmark they track
and are often marketed as a way for investors to profit from, or at least hedge
their exposure to, downward moving markets. Investments in inverse ETFs are
similar to holding short positions in the underlying benchmark.
ETF
shares are redeemable only in large blocks of shares often called "creation
units" by persons other than a fund, and are redeemed principally in-kind at
each day's next calculated net asset value per share (NAV). ETFs typically incur
fees that are separate from those fees incurred directly by a fund. A fund's
purchase of ETFs results in the layering of expenses, such that the fund would
indirectly bear a proportionate share of any ETF's operating expenses. Further,
while traditional investment companies are continuously offered at NAV, ETFs are
traded in the secondary market (e.g., on a stock exchange) on an intra-day basis
at prices that may be above or below the value of their underlying
portfolios.
Some
of the risks of investing in an ETF that tracks an index are similar to those of
investing in an indexed mutual fund, including tracking error risk (the risk of
errors in matching the ETF's underlying assets to the index or other benchmark);
and the risk that because an ETF that tracks an index is not actively managed,
it cannot sell stocks or other assets as long as they are represented in the
index or other benchmark. Other ETF risks include the risk that ETFs may trade
in the secondary market at a discount from their NAV and the risk that the ETFs
may not be liquid. ETFs also may be leveraged. Leveraged ETFs seek to deliver
multiples of the performance of the index or other benchmark they track and use
derivatives in an effort to amplify the returns (or decline, in the case of
inverse ETFs) of the underlying index or benchmark. While leveraged ETFs may
offer the potential for greater return, the potential for loss and the speed at
which losses can be realized also are greater. Most leveraged and inverse ETFs
"reset" daily, meaning they are designed to achieve their stated objectives on a
daily basis. Leveraged and inverse ETFs can deviate substantially from the
performance of their underlying benchmark over longer periods of time,
particularly in volatile periods.
Exchange
Traded Notes (ETNs) are
a type of senior, unsecured, unsubordinated debt security issued by financial
institutions that combines aspects of both bonds and ETFs. An ETN's returns are
based on the performance of a market index or other reference asset minus fees
and expenses. Similar to ETFs, ETNs are listed on an exchange and traded in the
secondary market. However, unlike an ETF, an ETN can be held until the ETN's
maturity, at which time the issuer will pay a return linked to the performance
of the market index or other reference asset to which the ETN is linked minus
certain fees. Unlike regular bonds, ETNs typically do not make periodic interest
payments and principal typically is not protected.
ETNs
also incur certain expenses not incurred by their applicable index. The market
value of an ETN is determined by supply and demand, the current performance of
the index or other reference asset, and the credit rating of the ETN issuer. The
market value of ETN shares may differ from their intraday indicative value. The
value of an ETN may also change due to a change in the issuer's credit rating.
As a result, there may be times when an ETN's share trades at a premium or
discount to its NAV. Some ETNs that use leverage in an effort to amplify the
returns of an underlying index or other reference asset can, at times, be
relatively illiquid and, thus, they may be difficult to purchase or sell at a
fair price. Leveraged ETNs may offer the potential for greater return, but the
potential for loss and speed at which losses can be realized also are
greater.
Exposure
to Foreign and Emerging Markets. Foreign
securities, foreign currencies, and securities issued by U.S. entities with
substantial foreign operations may involve significant risks in addition to the
risks inherent in U.S. investments.
Foreign
investments involve risks relating to local political, economic, regulatory, or
social instability, military action or unrest, or adverse diplomatic
developments, and may be affected by actions of foreign governments adverse to
the interests of U.S. investors. Such actions may include expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. From time to time, a fund's adviser
and/or its affiliates may determine that, as a result of regulatory requirements
that may apply to the adviser and/or its affiliates due to investments in a
particular country, investments in the securities of issuers domiciled or listed
on trading markets in that country above certain thresholds (which may apply at
the account level or in the aggregate across all accounts managed by the adviser
and its affiliates) may be impractical or undesirable. In such instances, the
adviser may limit or exclude investment in a particular issuer, and investment
flexibility may be restricted. Additionally, governmental issuers of foreign
debt securities may be unwilling to pay interest and repay principal when due
and may require that the conditions for payment be renegotiated. There is no
assurance that a fund's adviser will be able to anticipate these potential
events or counter their effects. In addition, the value of securities
denominated in foreign currencies and of dividends and interest paid with
respect to such securities will fluctuate based on the relative strength of the
U.S. dollar.
From
time to time, a fund may invest a large portion of its assets in the securities
of issuers located in a single country or a limited number of countries. If a
fund invests in this manner, there is a higher risk that social, political,
economic, tax (such as a tax on foreign investments), or regulatory developments
in those countries may have a significant impact on the fund's investment
performance.
It
is anticipated that in most cases the best available market for foreign
securities will be on an exchange or in over-the-counter (OTC) markets located
outside of the United States. Foreign stock markets, while growing in volume and
sophistication, are generally not as developed as those in the United States,
and securities of some foreign issuers may be less liquid and more volatile than
securities of comparable U.S. issuers. Foreign security trading, settlement and
custodial practices (including those involving securities settlement where fund
assets may be released prior to receipt of payment) are often less developed
than those in U.S. markets, and may result in increased investment or valuation
risk or substantial delays in the event of a failed trade or the insolvency of,
or breach of duty by, a foreign broker-dealer, securities depository, or foreign
subcustodian. In addition, the costs associated with foreign investments,
including withholding taxes, brokerage commissions, and custodial costs, are
generally higher than with U.S. investments.
Foreign
markets may offer less protection to investors than U.S. markets. Foreign
issuers are generally not bound by uniform accounting, auditing, and financial
reporting requirements and standards of practice comparable to those applicable
to U.S. issuers. Adequate public information on foreign issuers may not be
available, and it may be difficult to secure dividends and information regarding
corporate actions on a timely basis. In general, there is less overall
governmental supervision and regulation of securities exchanges, brokers, and
listed companies than in the United States. OTC markets tend to be less
regulated than stock exchange markets and, in certain countries, may be totally
unregulated. Regulatory enforcement may be influenced by economic or political
concerns, and investors may have difficulty enforcing their legal rights in
foreign countries.
Some
foreign securities impose restrictions on transfer within the United States or
to U.S. persons. Although securities subject to such transfer restrictions may
be marketable abroad, they may be less liquid than foreign securities of the
same class that are not subject to such restrictions.
American
Depositary Receipts (ADRs) as well as other "hybrid" forms of ADRs, including
European Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs), are
certificates evidencing ownership of shares of a foreign issuer. These
certificates are issued by depository banks and generally trade on an
established market in the United States or elsewhere. The underlying shares are
held in trust by a custodian bank or similar financial institution in the
issuer's home country. The depository bank may not have physical custody of the
underlying securities at all times and may charge fees for various services,
including forwarding dividends and interest and corporate actions. ADRs are
alternatives to directly purchasing the underlying foreign securities in their
national markets and currencies. However, ADRs continue to be subject to many of
the risks associated with investing directly in foreign securities. These risks
include foreign exchange risk as well as the political and economic risks of the
underlying issuer's country.
The
risks of foreign investing may be magnified for investments in emerging markets.
Security prices in emerging markets can be significantly more volatile than
those in more developed markets, reflecting the greater uncertainties of
investing in less established markets and economies. In particular, countries
with emerging markets may have relatively unstable governments, may present the
risks of nationalization of businesses, restrictions on foreign ownership and
prohibitions on the repatriation of assets, and may have less protection of
property rights than more developed countries. The economies of countries with
emerging markets may be based on only a few industries, may be highly vulnerable
to changes in local or global trade conditions, and may suffer from extreme and
volatile debt burdens or inflation rates. Local securities markets may trade a
small number of securities and may be unable to respond effectively to increases
in trading volume, potentially making prompt liquidation of holdings difficult
or impossible at times.
Foreign
Currency Transactions. A
fund may conduct foreign currency transactions on a spot (i.e., cash) or forward
basis (i.e., by entering into forward contracts to purchase or sell foreign
currencies). Although foreign exchange dealers generally do not charge a fee for
such conversions, they do realize a profit based on the difference between the
prices at which they are buying and selling various currencies. Thus, a dealer
may offer to sell a foreign currency at one rate, while offering a lesser rate
of exchange should the counterparty desire to resell that currency to the
dealer. Forward contracts are customized transactions that require a specific
amount of a currency to be delivered at a specific exchange rate on a specific
date or range of dates in the future. Forward contracts are generally traded in
an interbank market directly between currency traders (usually large commercial
banks) and their customers. The parties to a forward contract may agree to
offset or terminate the contract before its maturity, or may hold the contract
to maturity and complete the contemplated currency exchange.
The
following discussion summarizes the principal currency management strategies
involving forward contracts that could be used by a fund. A fund may also use
swap agreements, indexed securities, and options and futures contracts relating
to foreign currencies for the same purposes. Forward contracts not calling for
physical delivery of the underlying instrument will be settled through cash
payments rather than through delivery of the underlying currency. All of these
instruments and transactions are subject to the risk that the counterparty will
default.
A
"settlement hedge" or "transaction hedge" is designed to protect a fund against
an adverse change in foreign currency values between the date a security
denominated in a foreign currency is purchased or sold and the date on which
payment is made or received. Entering into a forward contract for the purchase
or sale of the amount of foreign currency involved in an underlying security
transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar price
of the security. Forward contracts to purchase or sell a foreign currency may
also be used to protect a fund in anticipation of future purchases or sales of
securities denominated in foreign currency, even if the specific investments
have not yet been selected.
A
fund may also use forward contracts to hedge against a decline in the value of
existing investments denominated in a foreign currency. For example, if a fund
owned securities denominated in pounds sterling, it could enter into a forward
contract to sell pounds sterling in return for U.S. dollars to hedge against
possible declines in the pound's value. Such a hedge, sometimes referred to as a
"position hedge," would tend to offset both positive and negative currency
fluctuations, but would not offset changes in security values caused by other
factors. A fund could also attempt to hedge the position by selling another
currency expected to perform similarly to the pound sterling. This type of
hedge, sometimes referred to as a "proxy hedge," could offer advantages in terms
of cost, yield, or efficiency, but generally would not hedge currency exposure
as effectively as a direct hedge into U.S. dollars. Proxy hedges may result in
losses if the currency used to hedge does not perform similarly to the currency
in which the hedged securities are denominated.
A
fund may enter into forward contracts to shift its investment exposure from one
currency into another. This may include shifting exposure from U.S. dollars to a
foreign currency, or from one foreign currency to another foreign currency. This
type of strategy, sometimes known as a "cross-hedge," will tend to reduce or
eliminate exposure to the currency that is sold, and increase exposure to the
currency that is purchased, much as if a fund had sold a security denominated in
one currency and purchased an equivalent security denominated in another. A fund
may cross-hedge its U.S. dollar exposure in order to achieve a representative
weighted mix of the major currencies in its benchmark index and/or to cover an
underweight country or region exposure in its portfolio. Cross-hedges protect
against losses resulting from a decline in the hedged currency, but will cause a
fund to assume the risk of fluctuations in the value of the currency it
purchases.
Successful
use of currency management strategies will depend on an adviser's skill in
analyzing currency values. Currency management strategies may substantially
change a fund's investment exposure to changes in currency exchange rates and
could result in losses to a fund if currencies do not perform as an adviser
anticipates. For example, if a currency's value rose at a time when a fund had
hedged its position by selling that currency in exchange for dollars, the fund
would not participate in the currency's appreciation. If a fund hedges currency
exposure through proxy hedges, the fund could realize currency losses from both
the hedge and the security position if the two currencies do not move in tandem.
Similarly, if a fund increases its exposure to a foreign currency and that
currency's value declines, the fund will realize a loss. Foreign currency
transactions involve the risk that anticipated currency movements will not be
accurately predicted and that a fund's hedging strategies will be ineffective.
Moreover, it is impossible to precisely forecast the market value of portfolio
securities at the expiration of a foreign currency forward contract.
Accordingly, a fund may be required to buy or sell additional currency on the
spot market (and bear the expenses of such transaction), if an adviser's
predictions regarding the movement of foreign currency or securities markets
prove inaccurate.
A
fund may be required to limit its hedging transactions in foreign currency
forwards, futures, and options in order to maintain its classification as a
"regulated investment company" under the Internal Revenue Code (Code). Hedging
transactions could result in the application of the mark-to-market provisions of
the Code, which may cause an increase (or decrease) in the amount of taxable
dividends paid by a fund and could affect whether dividends paid by a fund are
classified as capital gains or ordinary income. There is no assurance that an
adviser's use of currency management strategies will be advantageous to a fund
or that it will employ currency management strategies at appropriate
times.
Options
and Futures Relating to Foreign Currencies. Currency
futures contracts are similar to forward currency exchange contracts, except
that they are traded on exchanges (and have margin requirements) and are
standardized as to contract size and delivery date. Most currency futures
contracts call for payment or delivery in U.S. dollars. The underlying
instrument of a currency option may be a foreign currency, which generally is
purchased or delivered in exchange for U.S. dollars, or may be a futures
contract. The purchaser of a currency call obtains the right to purchase the
underlying currency, and the purchaser of a currency put obtains the right to
sell the underlying currency.
The
uses and risks of currency options and futures are similar to options and
futures relating to securities or indexes, as discussed below. A fund may
purchase and sell currency futures and may purchase and write currency options
to increase or decrease its exposure to different foreign currencies. Currency
options may also be purchased or written in conjunction with each other or with
currency futures or forward contracts. Currency futures and options values can
be expected to correlate with exchange rates, but may not reflect other factors
that affect the value of a fund's investments. A currency hedge, for example,
should protect a Yen-denominated security from a decline in the Yen, but will
not protect a fund against a price decline resulting from deterioration in the
issuer's creditworthiness. Because the value of a fund's foreign-denominated
investments changes in response to many factors other than exchange rates, it
may not be possible to match the amount of currency options and futures to the
value of the fund's investments exactly over time.
Currency
options traded on U.S. or other exchanges may be subject to position limits
which may limit the ability of the fund to reduce foreign currency risk using
such options.
Foreign
Repurchase Agreements. Foreign
repurchase agreements involve an agreement to purchase a foreign security and to
sell that security back to the original seller at an agreed-upon price in either
U.S. dollars or foreign currency. Unlike typical U.S. repurchase agreements,
foreign repurchase agreements may not be fully collateralized at all times. The
value of a security purchased by a fund may be more or less than the price at
which the counterparty has agreed to repurchase the security. In the event of
default by the counterparty, a fund may suffer a loss if the value of the
security purchased is less than the agreed-upon repurchase price, or if the fund
is unable to successfully assert a claim to the collateral under foreign laws.
As a result, foreign repurchase agreements may involve higher credit risks than
repurchase agreements in U.S. markets, as well as risks associated with currency
fluctuations. In addition, as with other emerging markets investments,
repurchase agreements with counterparties located in emerging markets or
relating to emerging markets may involve issuers or counterparties with lower
credit ratings than typical U.S. repurchase agreements.
Funds
of Funds and Other Large Shareholders. Certain
Fidelity ®
funds
and accounts (including funds of funds) invest in other funds ("underlying
funds") and, as a result, may at times have substantial investments in one or
more underlying funds.
An
underlying fund may experience large redemptions or investments due to
transactions in its shares by funds of funds, other large shareholders, or
similarly managed accounts. While it is impossible to predict the overall effect
of these transactions over time, there could be an adverse impact on an
underlying fund's performance. In the event of such redemptions or investments,
an underlying fund could be required to sell securities or to invest cash at a
time when it may not otherwise desire to do so. Such transactions may increase
an underlying fund's brokerage and/or other transaction costs and affect the
liquidity of a fund's portfolio. In addition, when funds of funds or other
investors own a substantial portion of an underlying fund's shares, a large
redemption by such an investor could cause actual expenses to increase, or could
result in the underlying fund's current expenses being allocated over a smaller
asset base, leading to an increase in the underlying fund's expense ratio.
Redemptions of underlying fund shares could also accelerate the realization of
taxable capital gains in the fund if sales of securities result in capital
gains. The impact of these transactions is likely to be greater when a fund of
funds or other significant investor purchases, redeems, or owns a substantial
portion of the underlying fund's shares.
When
possible, Fidelity will consider how to minimize these potential adverse
effects, and may take such actions as it deems appropriate to address potential
adverse effects, including redemption of shares in-kind rather than in cash or
carrying out the transactions over a period of time, although there can be no
assurance that such actions will be successful. A high volume of redemption
requests can impact an underlying fund the same way as the transactions of a
single shareholder with substantial investments. As an additional safeguard,
Fidelity ®
fund
of funds may manage the placement of their redemption requests in a manner
designed to minimize the impact of such requests on the day-to-day operations of
the underlying funds in which they invest. This may involve, for example,
redeeming its shares of an underlying fund gradually over time.
Fund's
Rights as an Investor. Fidelity
®
funds
do not intend to direct or administer the day-to-day operations of any company.
A fund may, however, exercise its rights as a shareholder or lender and may
communicate its views on important matters of policy to a company's management,
board of directors, and shareholders, and holders of a company's other
securities when such matters could have a significant effect on the value of the
fund's investment in the company. The activities in which a fund may engage,
either individually or in conjunction with others, may include, among others,
supporting or opposing proposed changes in a company's corporate structure or
business activities; seeking changes in a company's directors or management;
seeking changes in a company's direction or policies; seeking the sale or
reorganization of the company or a portion of its assets; supporting or opposing
third-party takeover efforts; supporting the filing of a bankruptcy petition; or
foreclosing on collateral securing a security. This area of corporate activity
is increasingly prone to litigation and it is possible that a fund could be
involved in lawsuits related to such activities. Such activities will be
monitored with a view to mitigating, to the extent possible, the risk of
litigation against a fund and the risk of actual liability if a fund is involved
in litigation. No guarantee can be made, however, that litigation against a fund
will not be undertaken or liabilities incurred. A fund's proxy voting guidelines
are included in its SAI.
Futures,
Options, and Swaps. The
success of any strategy involving futures, options, and swaps depends on an
adviser's analysis of many economic and mathematical factors and a fund's return
may be higher if it never invested in such instruments. Additionally, some of
the contracts discussed below are new instruments without a trading history and
there can be no assurance that a market for the instruments will continue to
exist. Government legislation or regulation could affect the use of such
instruments and could limit a fund's ability to pursue its investment
strategies. If a fund invests a significant portion of its assets in
derivatives, its investment exposure could far exceed the value of its portfolio
securities and its investment performance could be primarily dependent upon
securities it does not own.
Strategic
Advisers® Fidelity® International Fund will not: (a) sell futures contracts,
purchase put options, or write call options if, as a result, more than 25% of
the fund's total assets would be hedged with futures and options under normal
conditions; (b) purchase futures contracts or write put options if, as a result,
the fund's total obligations upon settlement or exercise of purchased futures
contracts and written put options would exceed 25% of its total assets under
normal conditions; or (c) purchase call options if, as a result, the current
value of option premiums for call options purchased by the fund would exceed 5%
of the fund's total assets. These limitations do not apply to options attached
to or acquired or traded together with their underlying securities, and do not
apply to structured notes.
The
policies and limitations regarding the fund's investments in futures contracts,
options, and swaps may be changed as regulatory agencies permit.
The
requirements for qualification as a regulated investment company may limit the
extent to which a fund may enter into futures, options on futures, and forward
contracts.
Futures
Contracts. In
purchasing a futures contract, the buyer agrees to purchase a specified
underlying instrument at a specified future date. In selling a futures contract,
the seller agrees to sell a specified underlying instrument at a specified date.
Futures contracts are standardized, exchange-traded contracts and the price at
which the purchase and sale will take place is fixed when the buyer and seller
enter into the contract. Some currently available futures contracts are based on
specific securities or baskets of securities, some are based on commodities or
commodities indexes (for funds that seek commodities exposure), and some are
based on indexes of securities prices (including foreign indexes for funds that
seek foreign exposure). Futures on indexes and futures not calling for physical
delivery of the underlying instrument will be settled through cash payments
rather than through delivery of the underlying instrument. Futures can be held
until their delivery dates, or can be closed out by offsetting purchases or
sales of futures contracts before then if a liquid market is available. A fund
may realize a gain or loss by closing out its futures contracts.
The
value of a futures contract tends to increase and decrease in tandem with the
value of its underlying instrument. Therefore, purchasing futures contracts will
tend to increase a fund's exposure to positive and negative price fluctuations
in the underlying instrument, much as if it had purchased the underlying
instrument directly. When a fund sells a futures contract, by contrast, the
value of its futures position will tend to move in a direction contrary to the
market for the underlying instrument. Selling futures contracts, therefore, will
tend to offset both positive and negative market price changes, much as if the
underlying instrument had been sold.
The
purchaser or seller of a futures contract or an option for a futures contract is
not required to deliver or pay for the underlying instrument or the final cash
settlement price, as applicable, unless the contract is held until the delivery
date. However, both the purchaser and seller are required to deposit "initial
margin" with a futures broker, known as a futures commission merchant, when the
contract is entered into. If the value of either party's position declines, that
party will be required to make additional "variation margin" payments to settle
the change in value on a daily basis. This process of "marking to market" will
be reflected in the daily calculation of open positions computed in a fund's
NAV. The party that has a gain is entitled to receive all or a portion of this
amount. Initial and variation margin payments do not constitute purchasing
securities on margin for purposes of a fund's investment limitations. Variation
margin does not represent a borrowing or loan by a fund, but is instead a
settlement between a fund and the futures commission merchant of the amount one
would owe the other if the fund's contract expired. In the event of the
bankruptcy or insolvency of a futures commission merchant that holds margin on
behalf of a fund, the fund may be entitled to return of margin owed to it only
in proportion to the amount received by the futures commission merchant's other
customers, potentially resulting in losses to the fund.
Although
futures exchanges generally operate similarly in the United States and abroad,
foreign futures exchanges may follow trading, settlement, and margin procedures
that are different from those for U.S. exchanges. Futures contracts traded
outside the United States may not involve a clearing mechanism or related
guarantees and may involve greater risk of loss than U.S.-traded contracts,
including potentially greater risk of losses due to insolvency of a futures
broker, exchange member, or other party that may owe initial or variation margin
to a fund. Because initial and variation margin payments may be measured in
foreign currency, a futures contract traded outside the United States may also
involve the risk of foreign currency fluctuation.
There
is no assurance a liquid market will exist for any particular futures contract
at any particular time. Exchanges may establish daily price fluctuation limits
for futures contracts, and may halt trading if a contract's price moves upward
or downward more than the limit in a given day. On volatile trading days when
the price fluctuation limit is reached or a trading halt is imposed, it may be
impossible to enter into new positions or close out existing positions. The
daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses.
If
the market for a contract is not liquid because of price fluctuation limits or
other market conditions, it could prevent prompt liquidation of unfavorable
positions, and potentially could require a fund to continue to hold a position
until delivery or expiration regardless of changes in its value. These risks may
be heightened for commodity futures contracts, which have historically been
subject to greater price volatility than exists for instruments such as stocks
and bonds.
Because
there are a limited number of types of exchange-traded futures contracts, it is
likely that the standardized contracts available will not match a fund's current
or anticipated investments exactly. A fund may invest in futures contracts based
on securities with different issuers, maturities, or other characteristics from
the securities in which the fund typically invests, which involves a risk that
the futures position will not track the performance of the fund's other
investments.
Futures
prices can also diverge from the prices of their underlying instruments, even if
the underlying instruments match a fund's investments well. Futures prices are
affected by such factors as current and anticipated short-term interest rates,
changes in volatility of the underlying instrument, and the time remaining until
expiration of the contract, which may not affect security prices the same way.
Imperfect correlation may also result from differing levels of demand in the
futures markets and the securities markets, from structural differences in how
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. A fund may purchase or sell futures contracts with a
greater or lesser value than the securities it wishes to hedge or intends to
purchase in order to attempt to compensate for differences in volatility between
the contract and the securities, although this may not be successful in all
cases. If price changes in a fund's futures positions are poorly correlated with
its other investments, the positions may fail to produce anticipated gains or
result in losses that are not offset by gains in other investments.
In addition, the price of a commodity futures contract can reflect the
storage costs associated with the purchase of the physical commodity.
Futures
contracts on U.S. Government securities historically have reacted to an increase
or decrease in interest rates in a manner similar to the manner in which the
underlying U.S. Government securities reacted. To the extent, however, that a
fund enters into such futures contracts, the value of these futures contracts
will not vary in direct proportion to the value of the fund's holdings of U.S.
Government securities. Thus, the anticipated spread between the price of the
futures contract and the hedged security may be distorted due to differences in
the nature of the markets. The spread also may be distorted by differences in
initial and variation margin requirements, the liquidity of such markets and the
participation of speculators in such markets.
Options.
By
purchasing a put option, the purchaser obtains the right (but not the
obligation) to sell the option's underlying instrument at a fixed strike price.
In return for this right, the purchaser pays the current market price for the
option (known as the option premium). Options have various types of underlying
instruments, including specific assets or securities, baskets of assets or
securities, indexes of securities or commodities prices, and futures contracts
(including commodity futures contracts). Options may be traded on an exchange or
OTC. The purchaser may terminate its position in a put option by allowing it to
expire or by exercising the option. If the option is allowed to expire, the
purchaser will lose the entire premium. If the option is exercised, the
purchaser completes the sale of the underlying instrument at the strike price.
Depending on the terms of the contract, upon exercise, an option may require
physical delivery of the underlying instrument or may be settled through cash
payments. A purchaser may also terminate a put option position by closing it out
in the secondary market at its current price, if a liquid secondary market
exists.
The
buyer of a typical put option can expect to realize a gain if the underlying
instrument's price falls substantially. However, if the underlying instrument's
price does not fall enough to offset the cost of purchasing the option, a put
buyer can expect to suffer a loss (limited to the amount of the premium, plus
related transaction costs).
The
features of call options are essentially the same as those of put options,
except that the purchaser of a call option obtains the right (but not the
obligation) to purchase, rather than sell, the underlying instrument at the
option's strike price. A call buyer typically attempts to participate in
potential price increases of the underlying instrument with risk limited to the
cost of the option if the underlying instrument's price falls. At the same time,
the buyer can expect to suffer a loss if the underlying instrument's price does
not rise sufficiently to offset the cost of the option.
The
writer of a put or call option takes the opposite side of the transaction from
the option's purchaser. In return for receipt of the premium, the writer assumes
the obligation to pay or receive the strike price for the option's underlying
instrument if the other party to the option chooses to exercise it. The writer
may seek to terminate a position in a put option before exercise by closing out
the option in the secondary market at its current price. If the secondary market
is not liquid for a put option, however, the writer must continue to be prepared
to pay the strike price while the option is outstanding, regardless of price
changes. When writing an option on a futures contract, a fund will be required
to make margin payments to a futures commission merchant as described above for
futures contracts.
If
the underlying instrument's price rises, a put writer would generally expect to
profit, although its gain would be limited to the amount of the premium it
received. If the underlying instrument's price remains the same over time, it is
likely that the writer will also profit, because it should be able to close out
the option at a lower price. If the underlying instrument's price falls, the put
writer would expect to suffer a loss. This loss should be less than the loss
from purchasing the underlying instrument directly, however, because the premium
received for writing the option should mitigate the effects of the
decline.
Writing
a call option obligates the writer to sell or deliver the option's underlying
instrument or make a net cash settlement payment, as applicable, in return for
the strike price, upon exercise of the option. The characteristics of writing
call options are similar to those of writing put options, except that writing
calls generally is a profitable strategy if prices remain the same or fall.
Through receipt of the option premium, a call writer should mitigate the effects
of a price increase. At the same time, because a call writer must be prepared to
deliver the underlying instrument or make a net cash settlement payment, as
applicable, in return for the strike price, even if its current value is
greater, a call writer gives up some ability to participate in price increases
and, if a call writer does not hold the underlying instrument, a call writer's
loss is theoretically unlimited.
Where
a put or call option on a particular security is purchased to hedge against
price movements in a related security, the price to close out the put or call
option on the secondary market may move more or less than the price of the
related security.
There
is no assurance a liquid market will exist for any particular options contract
at any particular time. Options may have relatively low trading volume and
liquidity if their strike prices are not close to the underlying instrument's
current price. In addition, exchanges may establish daily price fluctuation
limits for exchange-traded options contracts, and may halt trading if a
contract's price moves upward or downward more than the limit in a given day. On
volatile trading days when the price fluctuation limit is reached or a trading
halt is imposed, it may be impossible to enter into new positions or close out
existing positions. If the market for a contract is not liquid because of price
fluctuation limits or otherwise, it could prevent prompt liquidation of
unfavorable positions, and potentially could require a fund to continue to hold
a position until delivery or expiration regardless of changes in its
value.
Unlike
exchange-traded options, which are standardized with respect to the underlying
instrument, expiration date, contract size, and strike price, the terms of OTC
options (options not traded on exchanges) generally are established through
negotiation with the other party to the option contract. While this type of
arrangement allows the purchaser or writer greater flexibility to tailor an
option to its needs, OTC options generally are less liquid and involve greater
credit risk than exchange-traded options, which are backed by the clearing
organization of the exchanges where they are traded.
Combined
positions involve purchasing and writing options in combination with each other,
or in combination with futures or forward contracts, to adjust the risk and
return characteristics of the overall position. For example, purchasing a put
option and writing a call option on the same underlying instrument would
construct a combined position whose risk and return characteristics are similar
to selling a futures contract. Another possible combined position would involve
writing a call option at one strike price and buying a call option at a lower
price, to reduce the risk of the written call option in the event of a
substantial price increase. Because combined options positions involve multiple
trades, they result in higher transaction costs and may be more difficult to
open and close out.
A
fund may also buy and sell options on swaps (swaptions), which are generally
options on interest rate swaps. An option on a swap gives a party the right (but
not the obligation) to enter into a new swap agreement or to extend, shorten,
cancel or modify an existing contract at a specific date in the future in
exchange for a premium. Depending on the terms of the particular option
agreement, a fund will generally incur a greater degree of risk when it writes
(sells) an option on a swap than it will incur when it purchases an option on a
swap. When a fund purchases an option on a swap, it risks losing only the amount
of the premium it has paid should it decide to let the option expire
unexercised. However, when a fund writes an option on a swap, upon exercise of
the option the fund will become obligated according to the terms of the
underlying agreement. A fund that writes an option on a swap receives the
premium and bears the risk of unfavorable changes in the preset rate on the
underlying interest rate swap. Whether a fund's use of options on swaps will be
successful in furthering its investment objective will depend on the adviser's
ability to predict correctly whether certain types of investments are likely to
produce greater returns than other investments. Options on swaps may involve
risks similar to those discussed below in "Swap Agreements."
Because
there are a limited number of types of exchange-traded options contracts, it is
likely that the standardized contracts available will not match a fund's current
or anticipated investments exactly. A fund may invest in options contracts based
on securities with different issuers, maturities, or other characteristics from
the securities in which the fund typically invests, which involves a risk that
the options position will not track the performance of the fund's other
investments.
Options
prices can also diverge from the prices of their underlying instruments, even if
the underlying instruments match a fund's investments well. Options prices are
affected by such factors as current and anticipated short-term interest rates,
changes in volatility of the underlying instrument, and the time remaining until
expiration of the contract, which may not affect security prices the same way.
Imperfect correlation may also result from differing levels of demand in the
options and futures markets and the securities markets, from structural
differences in how options and futures and securities are traded, or from
imposition of daily price fluctuation limits or trading halts. A fund may
purchase or sell options contracts with a greater or lesser value than the
securities it wishes to hedge or intends to purchase in order to attempt to
compensate for differences in volatility between the contract and the
securities, although this may not be successful in all cases. If price changes
in a fund's options positions are poorly correlated with its other investments,
the positions may fail to produce anticipated gains or result in losses that are
not offset by gains in other investments.
Swap
Agreements. Swap
agreements are two-party contracts entered into primarily by institutional
investors. Cleared swaps are transacted through futures commission merchants
that are members of central clearinghouses with the clearinghouse serving as a
central counterparty similar to transactions in futures contracts. In a standard
"swap" transaction, two parties agree to exchange one or more payments based,
for example, on the returns (or differentials in rates of return) earned or
realized on particular predetermined investments or instruments (such as
securities, commodities, indexes, or other financial or economic interests). The
gross payments to be exchanged between the parties are calculated with respect
to a notional amount, which is the predetermined dollar principal of the trade
representing the hypothetical underlying quantity upon which payment obligations
are computed.
Swap
agreements can take many different forms and are known by a variety of names.
Depending on how they are used, swap agreements may increase or decrease the
overall volatility of a fund's investments and its share price and, if
applicable, its yield. Swap agreements are subject to liquidity risk, meaning
that a fund may be unable to sell a swap contract to a third party at a
favorable price. Certain standardized swap transactions are currently subject to
mandatory central clearing or may be eligible for voluntary central clearing.
Central clearing is expected to decrease counterparty risk and increase
liquidity compared to uncleared swaps because central clearing interposes the
central clearinghouse as the counterpart to each participant's swap. However,
central clearing does not eliminate counterparty risk or illiquidity risk
entirely. In addition depending on the size of a fund and other factors, the
margin required under the rules of a clearinghouse and by a clearing member
futures commission merchant may be in excess of the collateral required to be
posted by a fund to support its obligations under a similar uncleared swap.
However, regulators have adopted rules imposing certain margin requirements,
including minimums, on certain uncleared swaps which could reduce the
distinction.
A
total return swap is a contract whereby one party agrees to make a series of
payments to another party based on the change in the market value of the assets
underlying such contract (which can include a security or other instrument,
commodity, index or baskets thereof) during the specified period. In exchange,
the other party to the contract agrees to make a series of payments calculated
by reference to an interest rate and/or some other agreed-upon amount (including
the change in market value of other underlying assets). A fund may use total
return swaps to gain exposure to an asset without owning it or taking physical
custody of it. For example, a fund investing in total return commodity swaps
will receive the price appreciation of a commodity, commodity index or portion
thereof in exchange for payment of an agreed-upon fee.
In
a credit default swap, the credit default protection buyer makes periodic
payments, known as premiums, to the credit default protection seller. In return
the credit default protection seller will make a payment to the credit default
protection buyer upon the occurrence of a specified credit event. A credit
default swap can refer to a single issuer or asset, a basket of issuers or
assets or index of assets, each known as the reference entity or underlying
asset. A fund may act as either the buyer or the seller of a credit default
swap. A fund may buy or sell credit default protection on a basket of issuers or
assets, even if a number of the underlying assets referenced in the basket are
lower-quality debt securities. In an unhedged credit default swap, a fund buys
credit default protection on a single issuer or asset, a basket of issuers or
assets or index of assets without owning the underlying asset or debt issued by
the reference entity. Credit default swaps involve greater and different risks
than investing directly in the referenced asset, because, in addition to market
risk, credit default swaps include liquidity, counterparty and operational
risk.
Credit
default swaps allow a fund to acquire or reduce credit exposure to a particular
issuer, asset or basket of assets. If a swap agreement calls for payments by a
fund, the fund must be prepared to make such payments when due. If a fund is the
credit default protection seller, the fund will experience a loss if a credit
event occurs and the credit of the reference entity or underlying asset has
deteriorated. If a fund is the credit default protection buyer, the fund will be
required to pay premiums to the credit default protection seller.
If
the creditworthiness of a fund's swap counterparty declines, the risk that the
counterparty may not perform could increase, potentially resulting in a loss to
the fund. To limit the counterparty risk involved in swap agreements, a
Fidelity ®
fund
will enter into swap agreements only with counterparties that meet certain
standards of creditworthiness. This risk for cleared swaps is generally lower
than for uncleared swaps since the counterparty is a clearinghouse, but there
can be no assurance that a clearinghouse or its members will satisfy its
obligations.
A
fund bears the risk of loss of the amount expected to be received under a swap
agreement in the event of the default or bankruptcy of a swap agreement
counterparty. A fund would generally be required to provide margin or collateral
for the benefit of that counterparty. If a counterparty to a swap transaction
becomes insolvent, the fund may be limited temporarily or permanently in
exercising its right to the return of related fund assets designated as margin
or collateral in an action against the counterparty.
Swap
agreements are subject to the risk that the market value of the instrument will
change in a way detrimental to a fund's interest. A fund bears the risk that an
adviser will not accurately forecast market trends or the values of assets,
reference rates, indexes, or other economic factors in establishing swap
positions for a fund. If an adviser attempts to use a swap as a hedge against,
or as a substitute for, a portfolio investment, a fund may be exposed to the
risk that the swap will have or will develop imperfect or no correlation with
the portfolio investment, which could cause substantial losses for a fund. While
hedging strategies involving swap instruments can reduce the risk of loss, they
can also reduce the opportunity for gain or even result in losses by offsetting
favorable price movements in other fund investments. Swaps are complex and often
valued subjectively.
Hybrid
and Preferred Securities. A
hybrid security may be a debt security, warrant, convertible security,
certificate of deposit or other evidence of indebtedness on which the value of
the interest on or principal of which is determined by reference to changes in
the value of a reference instrument or financial strength of a reference entity
(e.g., a security or other financial instrument, asset, currency, interest rate,
commodity, index, or business entity such as a financial institution). Another
example is contingent convertible securities, which are fixed income securities
that, under certain circumstances, either convert into common stock of the
issuer or undergo a principal write-down by a predetermined percentage if the
issuer's capital ratio falls below a predetermined trigger level. The
liquidation value of such a security may be reduced upon a regulatory action and
without the need for a bankruptcy proceeding. Preferred securities may take the
form of preferred stock and represent an equity or ownership interest in an
issuer that pays dividends at a specified rate and that has precedence over
common stock in the payment of dividends. In the event an issuer is liquidated
or declares bankruptcy, the claims of owners of bonds generally take precedence
over the claims of those who own preferred and common stock.
The
risks of investing in hybrid and preferred securities reflect a combination of
the risks of investing in securities, options, futures and currencies. An
investment in a hybrid or preferred security may entail significant risks that
are not associated with a similar investment in a traditional debt or equity
security. The risks of a particular hybrid or preferred security will depend
upon the terms of the instrument, but may include the possibility of significant
changes in the value of any applicable reference instrument. Such risks may
depend upon factors unrelated to the operations or credit quality of the issuer
of the hybrid or preferred security. Hybrid and preferred securities are
potentially more volatile and carry greater market and liquidity risks than
traditional debt or equity securities. Also, the price of the hybrid or
preferred security and any applicable reference instrument may not move in the
same direction or at the same time. In addition, because hybrid and preferred
securities may be traded over-the-counter or in bilateral transactions with the
issuer of the security, hybrid and preferred securities may be subject to the
creditworthiness of the counterparty of the security and their values may
decline substantially if the counterparty's creditworthiness deteriorates. In
addition, uncertainty regarding the tax and regulatory treatment of hybrid and
preferred securities may reduce demand for such securities and tax and
regulatory considerations may limit the extent of a fund's investments in
certain hybrid and preferred securities.
Illiquid
Investments means
any investment that cannot be sold or disposed of in current market conditions
in seven calendar days or less without the sale or disposition significantly
changing the market value of the investment. Difficulty in selling or disposing
of illiquid investments may result in a loss or may be costly to a fund.
Illiquid securities may include (1) repurchase agreements maturing in more than
seven days without demand/redemption features, (2) OTC options and certain other
derivatives, (3) private placements, (4) securities traded on markets and
exchanges with structural constraints, and (5) loan participations.
Under
the supervision of the Board of Trustees, a Fidelity ®
fund's
adviser classifies the liquidity of a fund's investments and monitors the extent
of a fund's illiquid investments.
Various
market, trading and investment-specific factors may be considered in determining
the liquidity of a fund's investments including, but not limited to (1) the
existence of an active trading market, (2) the nature of the security and the
market in which it trades, (3) the number, diversity, and quality of dealers and
prospective purchasers in the marketplace, (4) the frequency, volume, and
volatility of trade and price quotations, (5) bid-ask spreads, (6) dates of
issuance and maturity, (7) demand, put or tender features, and (8) restrictions
on trading or transferring the investment.
Fidelity
classifies certain investments as illiquid based upon these criteria. Fidelity
also monitors for certain market, trading and investment-specific events that
may cause Fidelity to re-evaluate an investment's liquidity status and may lead
to an investment being classified as illiquid. In addition, Fidelity uses a
third-party to assist with the liquidity classifications of the fund's
investments, which includes calculating the time to sell and settle a specified
size position in a particular investment without the sale significantly changing
the market value of the investment.
Increasing
Government Debt. The
total public debt of the United States and other countries around the globe as a
percent of gross domestic product has grown rapidly since the beginning of the
2008 financial downturn. Although high debt levels do not necessarily indicate
or cause economic problems, they may create certain systemic risks if sound debt
management practices are not implemented.
A
high national debt level may increase market pressures to meet government
funding needs, which may drive debt cost higher and cause a country to sell
additional debt, thereby increasing refinancing risk. A high national debt also
raises concerns that a government will not be able to make principal or interest
payments when they are due. In the worst case, unsustainable debt levels can
decline the valuation of currencies, and can prevent a government from
implementing effective counter-cyclical fiscal policy in economic
downturns.
Standard
& Poor's Ratings Services has, in the past, lowered its long-term sovereign
credit rating on the United States. The market prices and yields of securities
supported by the full faith and credit of the U.S. Government may be adversely
affected by Standard & Poor's Ratings Services decisions to downgrade the
long-term sovereign credit rating of the United States.
Indexed
Securities are
instruments whose prices are indexed to the prices of other securities,
securities indexes, or other financial indicators. Indexed securities typically,
but not always, are debt securities or deposits whose values at maturity or
coupon rates are determined by reference to a specific instrument, statistic, or
measure.
Indexed
securities also include commercial paper, certificates of deposit, and other
fixed-income securities whose values at maturity or coupon interest rates are
determined by reference to the returns of particular stock indexes. Indexed
securities can be affected by stock prices as well as changes in interest rates
and the creditworthiness of their issuers and may not track the indexes as
accurately as direct investments in the indexes.
Indexed
securities may have principal payments as well as coupon payments that depend on
the performance of one or more interest rates. Their coupon rates or principal
payments may change by several percentage points for every 1% interest rate
change.
Mortgage-indexed
securities, for example, could be structured to replicate the performance of
mortgage securities and the characteristics of direct ownership.
Inflation-protected
securities, for example, can be indexed to a measure of inflation, such as the
Consumer Price Index (CPI).
Commodity-indexed
securities, for example, can be indexed to a commodities index such as the
Bloomberg Commodity Index.
Gold-indexed
securities typically provide for a maturity value that depends on the price of
gold, resulting in a security whose price tends to rise and fall together with
gold prices.
Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The
performance of indexed securities depends to a great extent on the performance
of the instrument or measure to which they are indexed, and may also be
influenced by interest rate changes in the United States and abroad. Indexed
securities may be more volatile than the underlying instruments or measures.
Indexed securities are also subject to the credit risks associated with the
issuer of the security, and their values may decline substantially if the
issuer's creditworthiness deteriorates. Recent issuers of indexed securities
have included banks, corporations, and certain U.S. Government agencies.
Insolvency
of Issuers, Counterparties, and Intermediaries. Issuers
of fund portfolio securities or counterparties to fund transactions that become
insolvent or declare bankruptcy can pose special investment risks. In each
circumstance, risk of loss, valuation uncertainty, increased illiquidity, and
other unpredictable occurrences may negatively impact an investment. Each of
these risks may be amplified in foreign markets, where security trading,
settlement, and custodial practices can be less developed than those in the U.S.
markets, and bankruptcy laws differ from those of the U.S.
As
a general matter, if the issuer of a fund portfolio security is liquidated or
declares bankruptcy, the claims of owners of bonds and preferred stock have
priority over the claims of common stock owners. These events can negatively
impact the value of the issuer's securities and the results of related
proceedings can be unpredictable.
If
a counterparty to a fund transaction, such as a swap transaction, a short sale,
a borrowing, or other complex transaction becomes insolvent, the fund may be
limited in its ability to exercise rights to obtain the return of related fund
assets or in exercising other rights against the counterparty. Uncertainty may
also arise upon the insolvency of a securities or commodities intermediary such
as a broker-dealer or futures commission merchant with which a fund has pending
transactions. In addition, insolvency and liquidation proceedings take time to
resolve, which can limit or preclude a fund's ability to terminate a transaction
or obtain related assets or collateral in a timely fashion. If an intermediary
becomes insolvent, while securities positions and other holdings may be
protected by U.S. or foreign laws, it is sometimes difficult to determine
whether these protections are available to specific trades based on the
circumstances. Receiving the benefit of these protections can also take time to
resolve, which may result in illiquid positions.
Interfund
Borrowing and Lending Program. Pursuant
to an exemptive order issued by the Securities and Exchange Commission (SEC), a
Fidelity ®
fund
may lend money to, and borrow money from, other funds advised by Fidelity
Management & Research Company LLC (FMR) or its affiliates. A Fidelity
®
fund
will borrow through the program only when the costs are equal to or lower than
the costs of bank loans. A Fidelity ®
fund
will lend through the program only when the returns are higher than those
available from an investment in repurchase agreements. Interfund loans and
borrowings normally extend overnight, but can have a maximum duration of seven
days. Loans may be called on one day's notice. A Fidelity ®
fund
may have to borrow from a bank at a higher interest rate if an interfund loan is
called or not renewed. Any delay in repayment to a lending fund could result in
a lost investment opportunity or additional borrowing costs.
Investment-Grade
Debt Securities. Investment-grade
debt securities include all types of debt instruments that are of medium and
high-quality. Investment-grade debt securities include repurchase agreements
collateralized by U.S. Government securities as well as repurchase agreements
collateralized by equity securities, non-investment-grade debt, and all other
instruments in which a fund can perfect a security interest, provided the
repurchase agreement counterparty has an investment-grade rating. Some
investment-grade debt securities may possess speculative characteristics and may
be more sensitive to economic changes and to changes in the financial conditions
of issuers. An investment-grade rating means the security or issuer is rated
investment-grade by a credit rating agency registered as a nationally recognized
statistical rating organization (NRSRO) with the SEC (for example, Moody's
Investors Service, Inc.), or is unrated but considered to be of equivalent
quality by a fund's adviser. For purposes of determining the maximum maturity of
an investment-grade debt security, an adviser may take into account normal
settlement periods.
Loans
and Other Direct Debt Instruments. Direct
debt instruments are interests in amounts owed by a corporate, governmental, or
other borrower to lenders or lending syndicates (loans and loan participations),
to suppliers of goods or services (trade claims or other receivables), or to
other parties. Direct debt instruments involve a risk of loss in case of default
or insolvency of the borrower and may offer less legal protection to the
purchaser in the event of fraud or misrepresentation, or there may be a
requirement that a fund supply additional cash to a borrower on demand. A fund
may acquire loans by buying an assignment of all or a portion of the loan from a
lender or by purchasing a loan participation from a lender or other purchaser of
a participation.
Lenders
and purchasers of loans and other forms of direct indebtedness depend primarily
upon the creditworthiness of the borrower and/or any collateral for payment of
interest and repayment of principal. If scheduled interest or principal payments
are not made, the value of the instrument may be adversely affected. Loans that
are fully secured provide more protections than an unsecured loan in the event
of failure to make scheduled interest or principal payments. However, there is
no assurance that the liquidation of collateral from a secured loan would
satisfy the borrower's obligation, or that the collateral could be liquidated.
Indebtedness of borrowers whose creditworthiness is poor involves substantially
greater risks and may be highly speculative. Different types of assets may be
used as collateral for a fund's loans and there can be no assurance that a fund
will correctly evaluate the value of the assets collateralizing the fund's
loans. Borrowers that are in bankruptcy or restructuring may never pay off their
indebtedness, or may pay only a small fraction of the amount owed. In any
restructuring or bankruptcy proceedings relating to a borrower funded by a fund,
a fund may be required to accept collateral with less value than the amount of
the loan made by the fund to the borrower. Direct indebtedness of foreign
countries also involves a risk that the governmental entities responsible for
the repayment of the debt may be unable, or unwilling, to pay interest and repay
principal when due.
Loans
and other types of direct indebtedness (which a fund may originate, acquire or
otherwise gain exposure to) may not be readily marketable and may be subject to
restrictions on resale. Some indebtedness may be difficult to dispose of readily
at what the Adviser believes to be a fair price. In addition, valuation of
illiquid indebtedness involves a greater degree of judgment in determining a
fund's net asset value than if that value were based on readily available market
quotations, and could result in significant variations in a fund's daily share
price. Some loan interests are traded among certain financial institutions and
accordingly may be deemed liquid. As the market for different types of
indebtedness develops, the liquidity of these instruments is expected to
improve.
Direct
lending and investments in loans through direct assignment of a financial
institution's interests with respect to a loan may involve additional risks. For
example, if a loan is foreclosed, the lender/purchaser could become part owner
of any collateral, and would bear the costs and liabilities associated with
owning and disposing of the collateral. In the event of a default by the
borrower, a fund may have difficulty disposing of the assets used as collateral
for a loan. In addition, a purchaser could be held liable as a co-lender. Direct
debt instruments may also involve a risk of insolvency of the lending bank or
other intermediary.
A
loan is often administered by a bank or other financial institution that acts as
agent for all holders. The agent administers the terms of the loan, as specified
in the loan agreement. Unless, under the terms of the loan or other
indebtedness, the purchaser has direct recourse against the borrower, the
purchaser may have to rely on the agent to apply appropriate credit remedies
against a borrower. If assets held by the agent for the benefit of a purchaser
were determined to be subject to the claims of the agent's general creditors,
the purchaser might incur certain costs and delays in realizing payment on the
loan or loan participation and could suffer a loss of principal or interest.
Direct loans are typically not administered by an underwriter or agent bank. The
terms of direct loans are negotiated with borrowers in private transactions.
Direct loans are not publicly traded and may not have a secondary market.
A
fund may seek to dispose of loans in certain cases, to the extent possible,
through selling participations in the loan. In that case, a fund would remain
subject to certain obligations, which may result in expenses for a fund and
certain additional risks.
Direct
indebtedness may include letters of credit, revolving credit facilities, or
other standby financing commitments that obligate lenders/purchasers, including
a fund, to make additional cash payments on demand. These commitments may have
the effect of requiring a lender/purchaser to increase its investment in a
borrower at a time when it would not otherwise have done so, even if the
borrower's condition makes it unlikely that the amount will ever be
repaid.
In
the process of originating, buying, selling and holding loans, a fund may
receive and/or pay certain fees. These fees are in addition to the interest
payments received and may include facility, closing or upfront fees, commitment
fees and commissions. A fund may receive or pay a facility, closing or upfront
fee when it buys or sells a loan. A fund may receive a commitment fee throughout
the life of the loan or as long as the fund remains invested in the loan (in
addition to interest payments) for any unused portion of a committed line of
credit. Other fees received by the fund may include prepayment fees, covenant
waiver fees, ticking fees and/or modification fees. Legal fees related to the
originating, buying, selling and holding loans may also be borne by the fund
(including legal fees to assess conformity of a loan investment with 1940 Act
provisions).
When
engaging in direct lending, if permitted by its investment policies, a fund's
performance may depend, in part, on the ability of the fund to originate loans
on advantageous terms. A fund may compete with other lenders in originating and
purchasing loans. Increased competition for, or a diminished available supply
of, qualifying loans could result in lower yields on and/or less advantageous
terms for such loans, which could reduce fund performance.
For
a Fidelity ®
fund
that limits the amount of total assets that it will invest in any one issuer or
in issuers within the same industry, the fund generally will treat the borrower
as the "issuer" of indebtedness held by the fund. In the case of loan
participations where a bank or other lending institution serves as financial
intermediary between a fund and the borrower, if the participation does not
shift to the fund the direct debtor-creditor relationship with the borrower, SEC
interpretations require a fund, in appropriate circumstances, to treat both the
lending bank or other lending institution and the borrower as "issuers" for
these purposes. Treating a financial intermediary as an issuer of indebtedness
may restrict a fund's ability to invest in indebtedness related to a single
financial intermediary, or a group of intermediaries engaged in the same
industry, even if the underlying borrowers represent many different companies
and industries.
A
fund may choose, at its expense or in conjunction with others, to pursue
litigation or otherwise to exercise its rights as a security holder to seek to
protect the interests of security holders if it determines this to be in the
best interest of the fund's shareholders.
If
permitted by its investment policies, a fund may also obtain exposure to the
lending activities described above indirectly through its investments in
underlying Fidelity ®
funds
or other vehicles that may engage in such activities directly.
Lower-Quality
Debt Securities. Lower-quality
debt securities include all types of debt instruments that have poor protection
with respect to the payment of interest and repayment of principal, or may be in
default. These securities are often considered to be speculative and involve
greater risk of loss or price changes due to changes in the issuer's capacity to
pay. The market prices of lower-quality debt securities may fluctuate more than
those of higher-quality debt securities and may decline significantly in periods
of general economic difficulty, which may follow periods of rising interest
rates.
The
market for lower-quality debt securities may be thinner and less active than
that for higher-quality debt securities, which can adversely affect the prices
at which the former are sold. Adverse publicity and changing investor
perceptions may affect the liquidity of lower-quality debt securities and the
ability of outside pricing services to value lower-quality debt
securities.
Because
the risk of default is higher for lower-quality debt securities, research and
credit analysis are an especially important part of managing securities of this
type. Such analysis may focus on relative values based on factors such as
interest or dividend coverage, asset coverage, earnings prospects, and the
experience and managerial strength of the issuer, in an attempt to identify
those issuers of high-yielding securities whose financial condition is adequate
to meet future obligations, has improved, or is expected to improve in the
future.
A
fund may choose, at its expense or in conjunction with others, to pursue
litigation or otherwise to exercise its rights as a security holder to seek to
protect the interests of security holders if it determines this to be in the
best interest of the fund's shareholders.
Low
or Negative Yielding Securities. During
periods of very low or negative interest rates, a fund may be unable to maintain
positive returns. Interest rates in the U.S. and many parts of the world,
including Japan and some European countries, are at or near historically low
levels. Japan and those European countries have, from time to time, experienced
negative interest rates on certain fixed income instruments. Very low or
negative interest rates may magnify interest rate risk for the markets as a
whole and for the funds. Changing interest rates, including rates that fall
below zero, may have unpredictable effects on markets, may result in heightened
market volatility and may detract from fund performance to the extent a fund is
exposed to such interest rates.
Precious
Metals. Precious
metals, such as gold, silver, platinum, and palladium, at times have been
subject to substantial price fluctuations over short periods of time and may be
affected by unpredictable monetary and political policies such as currency
devaluations or revaluations, economic and social conditions within a country,
trade imbalances, or trade or currency restrictions between countries. The
prices of gold and other precious metals, however, are less subject to local and
company-specific factors than securities of individual companies. As a result,
precious metals may be more or less volatile in price than securities of
companies engaged in precious metals-related businesses. Investments in precious
metals can present concerns such as delivery, storage and maintenance, possible
illiquidity, and the unavailability of accurate market valuations. Although
precious metals can be purchased in any form, including bullion and coins, a
Fidelity ®
fund
intends to purchase only those forms of precious metals that are readily
marketable and that can be stored in accordance with custody regulations
applicable to mutual funds. A fund may incur higher custody and transaction
costs for precious metals than for securities. Also, precious metals investments
do not pay income.
For
a fund to qualify as a regulated investment company under current federal tax
law, gains from selling precious metals may not exceed 10% of the fund's gross
income for its taxable year. This tax requirement could cause a fund to hold or
sell precious metals or securities when it would not otherwise do so.
Real
Estate Investment Trusts (REITs). Equity
REITs own real estate properties, while mortgage REITs make construction,
development, and long-term mortgage loans. Their value may be affected by
changes in the value of the underlying property of the trusts, the
creditworthiness of the issuer, property taxes, interest rates, and tax and
regulatory requirements, such as those relating to the environment. Both types
of trusts are dependent upon management skill, are not diversified, and are
subject to heavy cash flow dependency, defaults by borrowers, self-liquidation,
and the possibility of failing to qualify for tax-free status of income under
the Internal Revenue Code and failing to maintain exemption from the 1940
Act.
Repurchase
Agreements involve
an agreement to purchase a security and to sell that security back to the
original seller at an agreed-upon price. The resale price reflects the purchase
price plus an agreed-upon incremental amount which is unrelated to the coupon
rate or maturity of the purchased security. As protection against the risk that
the original seller will not fulfill its obligation, the securities are held in
a separate account at a bank, marked-to-market daily, and maintained at a value
at least equal to the sale price plus the accrued incremental amount. The value
of the security purchased may be more or less than the price at which the
counterparty has agreed to purchase the security. In addition, delays or losses
could result if the other party to the agreement defaults or becomes insolvent.
A fund may be limited in its ability to exercise its right to liquidate assets
related to a repurchase agreement with an insolvent counterparty. A
Fidelity ®
fund
may engage in repurchase agreement transactions with parties whose
creditworthiness has been reviewed and found satisfactory by the fund's
adviser.
Restricted
Securities (including Private Placements) are
subject to legal restrictions on their sale. Difficulty in selling securities
may result in a loss or be costly to a fund. Restricted securities, including
private placements of private and public companies, generally can be sold in
privately negotiated transactions, pursuant to an exemption from registration
under the Securities Act of 1933 (1933 Act), or in a registered public offering.
Where registration is required, the holder of a registered security may be
obligated to pay all or part of the registration expense and a considerable
period may elapse between the time it decides to seek registration and the time
it may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
the holder might obtain a less favorable price than prevailed when it decided to
seek registration of the security.
Reverse
Repurchase Agreements. In
a reverse repurchase agreement, a fund sells a security to another party, such
as a bank or broker-dealer, in return for cash and agrees to repurchase that
security at an agreed-upon price and time. A Fidelity ®
fund
may enter into reverse repurchase agreements with parties whose creditworthiness
has been reviewed and found satisfactory by the fund's adviser. Such
transactions may increase fluctuations in the market value of a fund's assets
and, if applicable, a fund's yield, and may be viewed as a form of leverage.
Under SEC requirements, a fund needs to aggregate the amount of indebtedness
associated with its reverse repurchase agreements and similar financing
transactions with the aggregate amount of any other senior securities
representing indebtedness (e.g., borrowings, if applicable) when calculating the
fund's asset coverage ratio or treat all such transactions as derivatives
transactions.
SEC
Rule 18f-4.
In
October 2020, the SEC adopted a final rule related to the use of derivatives,
short sales, reverse repurchase agreements and certain other transactions by
registered investment companies (the "rule"). Subject to certain exceptions, the
rule requires the funds to trade derivatives and certain other transactions that
create future payment or delivery obligations subject to a value-at-risk (VaR)
leverage limit and to certain derivatives risk management program, reporting and
board oversight requirements. Generally, these requirements apply to any fund
engaging in derivatives transactions unless a fund satisfies a "limited
derivatives users" exception, which requires the fund to limit its gross
notional derivatives exposure (with certain exceptions) to 10% of its net assets
and to adopt derivatives risk management procedures. Under the rule, when a fund
trades reverse repurchase agreements or similar financing transactions, it needs
to aggregate the amount of indebtedness associated with the reverse repurchase
agreements or similar financing transactions with the aggregate amount of any
other senior securities representing indebtedness (e.g., borrowings, if
applicable) when calculating the fund's asset coverage ratio or treat all such
transactions as derivatives transactions. The SEC also provided guidance in
connection with the final rule regarding the use of securities lending
collateral that may limit securities lending activities. In addition, under the
rule, a fund may invest in a security on a when-issued or forward-settling
basis, or with a non-standard settlement cycle, and the transaction will be
deemed not to involve a senior security (as defined under Section 18(g) of the
1940 Act), provided that (i) the fund intends to physically settle the
transaction and (ii) the transaction will settle within 35 days of its trade
date (the "Delayed-Settlement Securities Provision"). A fund may otherwise
engage in when-issued, forward-settling and non-standard settlement cycle
securities transactions that do not meet the conditions of the
Delayed-Settlement Securities Provision so long as the fund treats any such
transaction as a derivatives transaction for purposes of compliance with the
rule. Furthermore, under the rule, a fund will be permitted to enter into an
unfunded commitment agreement, and such unfunded commitment agreement will not
be subject to the asset coverage requirements under the 1940 Act, if the fund
reasonably believes, at the time it enters into such agreement, that it will
have sufficient cash and cash equivalents to meet its obligations with respect
to all such agreements as they come due. These requirements may limit the
ability of the funds to use derivatives, short sales, reverse repurchase
agreements and similar financing transactions, and the other relevant
transactions as part of its investment strategies. These requirements also may
increase the cost of the fund's investments and cost of doing business, which
could adversely affect investors.
Securities
Lending. A
Fidelity ®
fund
may lend securities to parties such as broker-dealers or other institutions,
including an affiliate, National Financial Services LLC (NFS). Fidelity
®
funds
for which Geode Capital Management, LLC (Geode) serves as sub-adviser will not
lend securities to Geode or its affiliates. Securities lending allows a fund to
retain ownership of the securities loaned and, at the same time, earn additional
income. The borrower provides the fund with collateral in an amount at least
equal to the value of the securities loaned. The fund seeks to maintain the
ability to obtain the right to vote or consent on proxy proposals involving
material events affecting securities loaned. If the borrower defaults on its
obligation to return the securities loaned because of insolvency or other
reasons, a fund could experience delays and costs in recovering the securities
loaned or in gaining access to the collateral. These delays and costs could be
greater for foreign securities. If a fund is not able to recover the securities
loaned, the fund may sell the collateral and purchase a replacement investment
in the market. The value of the collateral could decrease below the value of the
replacement investment by the time the replacement investment is purchased. For
a Fidelity ®
fund,
loans will be made only to parties deemed by the fund's adviser to be in good
standing and when, in the adviser's judgment, the income earned would justify
the risks.
The
Fidelity ®
funds
have retained agents, including NFS, an affiliate of the funds, to act as
securities lending agent. If NFS acts as securities lending agent for a fund, it
is subject to the overall supervision of the fund's adviser, and NFS will
administer the lending program in accordance with guidelines approved by the
fund's Trustees.
Cash
received as collateral through loan transactions may be invested in other
eligible securities, including shares of a money market fund. Investing this
cash subjects that investment, as well as the securities loaned, to market
appreciation or depreciation.
Securities
of Other Investment Companies ,
including shares of closed-end investment companies (which include business
development companies (BDCs)), unit investment trusts, and open-end investment
companies, represent interests in professionally managed portfolios that may
invest in any type of instrument. Investing in other investment companies
involves substantially the same risks as investing directly in the underlying
instruments, but may involve additional expenses at the underlying investment
company-level, such as portfolio management fees and operating expenses. Fees
and expenses incurred indirectly by a fund as a result of its investment in
shares of one or more other investment companies generally are referred to as
"acquired fund fees and expenses" and may appear as a separate line item in a
fund's prospectus fee table. For certain investment companies, such as BDCs,
these expenses may be significant. Certain types of investment companies, such
as closed-end investment companies, issue a fixed number of shares that trade on
a stock exchange or over-the-counter at a premium or a discount to their NAV.
Others are continuously offered at NAV, but may also be traded in the secondary
market.
The
securities of closed-end funds may be leveraged. As a result, a fund may be
indirectly exposed to leverage through an investment in such securities. An
investment in securities of closed-end funds that use leverage may expose a fund
to higher volatility in the market value of such securities and the possibility
that the fund's long-term returns on such securities will be diminished.
A
fund's ability to invest in securities of other investment companies may be
limited by federal securities laws. To the extent a fund acquires securities
issued by unaffiliated investment companies, the Adviser's access to information
regarding such underlying fund's portfolio may be limited and subject to such
fund's policies regarding disclosure of fund holdings.
Short
Sales .
Short sales involve the market sale of a security a fund has borrowed from a
prime broker with which it has a contractual relationship, with the expectation
that the security will underperform either the market or the securities that the
fund holds long. A fund closes a short sale by purchasing the same security at
the current market price and delivering it to the prime broker.
Until
a fund closes out a short position, the fund is obligated to pay the prime
broker (from which it borrowed the security sold short) interest as well as any
dividends that accrue during the period of the loan. While a short position is
outstanding, a fund must also pledge a portion of its assets to the prime broker
as collateral for the borrowed security. The collateral will be marked to market
daily.
Short
positions create a risk that a fund will be required to cover them by buying the
security at a time when the security has appreciated in value, thus resulting in
a loss to the fund. A short position in a security poses more risk than holding
the same security long. Because a short position loses value as the security's
price increases, the loss on a short sale is theoretically unlimited. The loss
on a long position is limited to what a fund originally paid for the security
together with any transaction costs. A fund may not always be able to borrow a
security the fund seeks to sell short at a particular time or at an acceptable
price. As a result, a fund may be unable to fully implement its investment
strategy due to a lack of available stocks or for other reasons. It is possible
that the market value of the securities a fund holds in long positions will
decline at the same time that the market value of the securities the fund has
sold short increases, thereby increasing the fund's potential volatility.
Because a fund may be required to pay dividends, interest, premiums and other
expenses in connection with a short sale, any benefit for the fund resulting
from the short sale will be decreased, and the amount of any ultimate gain will
be decreased or of any loss will be increased, by the amount of such
expenses.
A
fund may also enter into short sales against the box. Short sales "against the
box" are short sales of securities that a fund owns or has the right to obtain
(equivalent in kind or amount to the securities sold short). If a fund enters
into a short sale against the box, it will be required to set aside securities
equivalent in kind and amount to the securities sold short (or securities
convertible or exchangeable into such securities) and will be required to hold
such securities while the short sale is outstanding. A fund will incur
transaction costs, including interest expenses, in connection with opening,
maintaining, and closing short sales against the box.
Sources
of Liquidity or Credit Support. Issuers
may employ various forms of credit and liquidity enhancements, including letters
of credit, guarantees, swaps, puts, and demand features, and insurance provided
by domestic or foreign entities such as banks and other financial institutions.
An adviser and its affiliates may rely on their evaluation of the credit of the
issuer or the credit of the liquidity or credit enhancement provider in
determining whether to purchase or hold a security supported by such
enhancement. In evaluating the credit of a foreign bank or other foreign
entities, factors considered may include whether adequate public information
about the entity is available and whether the entity may be subject to
unfavorable political or economic developments, currency controls, or other
government restrictions that might affect its ability to honor its commitment.
Changes in the credit quality of the issuer and/or entity providing the
enhancement could affect the value of the security or a fund's share
price.
Sovereign
Debt Obligations are
issued or guaranteed by foreign governments or their agencies, including debt of
Latin American nations or other developing countries. Sovereign debt may be in
the form of conventional securities or other types of debt instruments such as
loans or loan participations. Sovereign debt of developing countries may involve
a high degree of risk, and may be in default or present the risk of default.
Governmental entities responsible for repayment of the debt may be unable or
unwilling to repay principal and pay interest when due, and may require
renegotiation or rescheduling of debt payments. In addition, prospects for
repayment of principal and payment of interest may depend on political as well
as economic factors. Although some sovereign debt, such as Brady Bonds, is
collateralized by U.S. Government securities, repayment of principal and payment
of interest is not guaranteed by the U.S. Government.
Special
Purpose Acquisition Companies ("SPACs"). A
fund may invest in stock, warrants, and other securities of SPACs or similar
special purpose entities that pool money to seek potential acquisition
opportunities. SPACs are collective investment structures formed to raise money
in an initial public offering for the purpose of merging with or acquiring one
or more operating companies (the "de-SPAC Transaction"). Until an acquisition is
completed, a SPAC generally invests its assets in US government securities,
money market securities and cash. In connection with a de-SPAC Transaction, the
SPAC may complete a PIPE (private investment in public equity) offering with
certain investors. A fund may enter into a contingent commitment with a SPAC to
purchase PIPE shares if and when the SPAC completes its de-SPAC
Transaction.
Because
SPACs do not have an operating history or ongoing business other than seeking
acquisitions, the value of their securities is particularly dependent on the
ability of the SPAC's management to identify and complete a profitable
acquisition. Some SPACs may pursue acquisitions only within certain industries
or regions, which may increase the volatility of their prices. An investment in
a SPAC is subject to a variety of risks, including that (i) an attractive
acquisition or merger target may not be identified at all and the SPAC will be
required to return any remaining monies to shareholders; (ii) an acquisition or
merger once effected may prove unsuccessful and an investment in the SPAC may
lose value; (iii) the values of investments in SPACs may be highly volatile and
may depreciate significantly over time; (iv) no or only a thinly traded market
for shares of or interests in a SPAC may develop, leaving a fund unable to sell
its interest in a SPAC or to sell its interest only at a price below what the
fund believes is the SPAC interest's intrinsic value; (v) any proposed merger or
acquisition may be unable to obtain the requisite approval, if any, of
shareholders; (vi) an investment in a SPAC may be diluted by additional later
offerings of interests in the SPAC or by other investors exercising existing
rights to purchase shares of the SPAC; (vii) the warrants or other rights with
respect to the SPAC held by a fund may expire worthless or may be repurchased or
retired by the SPAC at an unfavorable price; (viii) a fund may be delayed in
receiving any redemption or liquidation proceeds from a SPAC to which it is
entitled; and (ix) a significant portion of the monies raised by the SPAC for
the purpose of identifying and effecting an acquisition or merger may be
expended during the search for a target transaction.
Purchased
PIPE shares will be restricted from trading until the registration statement for
the shares is declared effective. Upon registration, the shares can be freely
sold, but only pursuant to an effective registration statement or other
exemption from registration. The securities issued by a SPAC, which are
typically traded either in the over-the-counter market or on an exchange, may be
considered illiquid, more difficult to value, and/or be subject to restrictions
on resale.
Structured
Securities (also
called "structured notes") are derivative debt securities, the interest rate on
or principal of which is determined by an unrelated indicator. The value of the
interest rate on and/or the principal of structured securities is determined by
reference to changes in the value of a reference instrument (e.g., a security or
other financial instrument, asset, currency, interest rate, commodity, or index)
or the relative change in two or more reference instruments. A structured
security may be positively, negatively, or both positively and negatively
indexed; that is, its value or interest rate may increase or decrease if the
value of the reference instrument increases. Similarly, its value or interest
rate may increase or decrease if the value of the reference instrument
decreases. Further, the change in the principal amount payable with respect to,
or the interest rate of, a structured security may be calculated as a multiple
of the percentage change (positive or negative) in the value of the underlying
reference instrument(s); therefore, the value of such structured security may be
very volatile. Structured securities may entail a greater degree of market risk
than other types of debt securities because the investor bears the risk of the
reference instrument. Structured securities may also be more volatile, less
liquid, and more difficult to accurately price than less complex securities or
more traditional debt securities. In addition, because structured securities
generally are traded over-the-counter, structured securities are subject to the
creditworthiness of the counterparty of the structured security, and their
values may decline substantially if the counterparty's creditworthiness
deteriorates.
Temporary
Defensive Policies. In
response to market, economic, political, or other conditions, a fund may
temporarily use a different investment strategy for defensive purposes. If a
fund does so, different factors could affect the fund's performance and the fund
may not achieve its investment objective.
Strategic
Advisers® Fidelity® International Fund reserves the right to invest without
limitation in preferred stocks and investment-grade debt instruments for
temporary, defensive purposes.
Transfer
Agent Bank Accounts. Proceeds
from shareholder purchases of a Fidelity ®
fund
may pass through a series of demand deposit bank accounts before being held at
the fund's custodian. Redemption proceeds may pass from the custodian to the
shareholder through a similar series of bank accounts.
If
a bank account is registered to the transfer agent or an affiliate, who acts as
an agent for the fund when opening, closing, and conducting business in the bank
account, the transfer agent or an affiliate may invest overnight balances in the
account in repurchase agreements. Any balances that are not invested in
repurchase agreements remain in the bank account overnight. Any risks associated
with such an account are investment risks of the fund. The fund faces the risk
of loss of these balances if the bank becomes insolvent.
Warrants.
Warrants
are instruments which entitle the holder to buy an equity security at a specific
price for a specific period of time. Changes in the value of a warrant do not
necessarily correspond to changes in the value of its underlying security. The
price of a warrant may be more volatile than the price of its underlying
security, and a warrant may offer greater potential for capital appreciation as
well as capital loss.
Warrants
do not entitle a holder to dividends or voting rights with respect to the
underlying security and do not represent any rights in the assets of the issuing
company. A warrant ceases to have value if it is not exercised prior to its
expiration date. These factors can make warrants more speculative than other
types of investments.
Zero
Coupon Bonds do
not make interest payments; instead, they are sold at a discount from their face
value and are redeemed at face value when they mature. Because zero coupon bonds
do not pay current income, their prices can be more volatile than other types of
fixed-income securities when interest rates change. In calculating a fund's
dividend, a portion of the difference between a zero coupon bond's purchase
price and its face value is considered income.
In
addition to the investment policies and limitations discussed above, a fund is
subject to the additional operational risk discussed below.
Considerations
Regarding Cybersecurity. With
the increased use of technologies such as the Internet to conduct business, a
fund's service providers are susceptible to operational, information security
and related risks. In general, cyber incidents can result from deliberate
attacks or unintentional events and may arise from external or internal sources.
Cyber attacks include, but are not limited to, gaining unauthorized access to
digital systems (e.g., through "hacking" or malicious software coding) for
purposes of misappropriating assets or sensitive information; corrupting data,
equipment or systems; or causing operational disruption. Cyber attacks may also
be carried out in a manner that does not require gaining unauthorized access,
such as causing denial-of-service attacks on websites (i.e., efforts to make
network services unavailable to intended users). Cyber incidents affecting a
fund's manager, any sub-adviser and other service providers (including, but not
limited to, fund accountants, custodians, transfer agents and financial
intermediaries) have the ability to cause disruptions and impact business
operations, potentially resulting in financial losses, interference with a
fund's ability to calculate its NAV, impediments to trading, the inability of
fund shareholders to transact business, destruction to equipment and systems,
violations of applicable privacy and other laws, regulatory fines, penalties,
reputational damage, reimbursement or other compensation costs, or additional
compliance costs. Similar adverse consequences could result from cyber incidents
affecting issuers of securities in which a fund invests, counterparties with
which a fund engages in transactions, governmental and other regulatory
authorities, exchange and other financial market operators, banks, brokers,
dealers, insurance companies and other financial institutions (including
financial intermediaries and service providers for fund shareholders) and other
parties. In addition, substantial costs may be incurred in order to prevent any
cyber incidents in the future.
While
a fund's service providers have established business continuity plans in the
event of, and risk management systems to prevent, such cyber incidents, there
are inherent limitations in such plans and systems including the possibility
that certain risks have not been identified. Furthermore, a fund cannot control
the cyber security plans and systems put in place by its service providers or
any other third parties whose operations may affect a fund or its shareholders.
A fund and its shareholders could be negatively impacted as a result.
SPECIAL
GEOGRAPHIC CONSIDERATIONS
Emerging
Markets. Emerging
markets include countries that have an emerging stock market as defined by MSCI,
countries or markets with low- to middle-income economies as classified by the
World Bank, and other countries or markets that the Adviser identifies as having
similar emerging markets characteristics. Emerging markets tend to have
relatively low gross national product per capita compared to the world's major
economies and may have the potential for rapid economic growth.
Investments
in companies domiciled in emerging market countries may be subject to
potentially higher risks than investments in developed countries. These risks
include less social, political, and economic stability and greater illiquidity
and price volatility due to smaller or limited local capital markets for such
securities, or low or non-existent trading volumes. Foreign exchanges and
broker-dealers may be subject to less oversight and regulation by local
authorities. Local governments may decide to seize or confiscate securities held
by foreign investors, restrict an investor's ability to sell or redeem
securities, suspend or limit an issuer's ability to make dividend or interest
payments, and/or limit or entirely restrict repatriation of invested capital,
profits, and dividends. Capital gains may be subject to local taxation,
including on a retroactive basis. Issuers facing restrictions on dollar or euro
payments imposed by local governments may attempt to make dividend or interest
payments to foreign investors in the local currency. Investors may experience
difficulty in enforcing legal claims related to the securities and shareholder
claims common in the United States may not exist in emerging markets.
Additionally, local judges may favor the interests of the issuer over those of
foreign investors. U.S. authorities may be unable to investigate, bring, or
enforce actions against non-U.S. companies and non-U.S. persons. Bankruptcy
judgments may only be permitted to be paid in the local currency. Infrequent
financial reporting, substandard disclosure, and differences in financial
reporting, audit and accounting requirements and standards may make it difficult
to ascertain the financial health of an issuer. Moreover, limited public
information regarding an issuer may result in greater difficulty in determining
market valuations of the securities.
In
addition, unlike developed countries, many emerging countries' economic growth
highly depends on exports and inflows of external capital, making them more
vulnerable to the downturns of the world economy. The enduring low growth in the
global economy has weakened the global demand for emerging market exports and
tightened international credit supplies, highlighting the sensitivity of
emerging economies to the performance of their trading partners. Developing
countries may also face disproportionately large exposure to the negative
effects of climate change, due to both geography and a lack of access to
technology to adapt to its effects, which could include increased frequency and
severity of natural disasters as well as extreme weather events such as
droughts, rising sea levels, decreased crop yields, and increased spread of
disease, all of which could harm performance of affected economies. Given the
particular vulnerability of emerging market countries to the effects of climate
change, disruptions in international efforts to address climate-related issues
may have a disproportionate impact on developing countries.
Many
emerging market countries suffer from uncertainty and corruption in their legal
frameworks. Legislation may be difficult to interpret or laws may be too new to
provide any precedential value. Laws regarding foreign investment and private
property may be weak, not enforced consistently, or non-existent. Sudden changes
in governments or the transition of regimes may result in policies that are less
favorable to investors such as the imposition of price controls or policies
designed to expropriate or nationalize "sovereign" assets. Certain emerging
market countries in the past have expropriated large amounts of private
property, in many cases with little or no compensation, and there can be no
assurance that such expropriation will not occur in the future.
The
United States, other nations, or other governmental entities (including
supranational entities) could impose sanctions on a country that limits or
restricts foreign investment, the movement of assets or other economic activity.
In addition, an imposition of sanctions upon certain issuers in a country could
have a materially adverse effect on the value of such companies' securities,
delay a fund's ability to exercise certain rights as security holder, and/or
impair a fund's ability to meet its investment objectives. A fund may be
prohibited from investing in securities issued by companies subject to such
sanctions and may be required to freeze its existing investments in those
companies, prohibiting the fund from selling or otherwise transacting in these
investments. Such sanctions, or other intergovernmental actions that may be
taken in the future, may result in the devaluation of the country's currency, a
downgrade in the country's credit rating, and/or a decline in the value and
liquidity of impacted company stocks.
Many
emerging market countries in which a fund may invest lack the social, political,
and economic stability characteristic exhibited by developed countries.
Political instability among emerging market countries can be common and may be
caused by an uneven distribution of wealth, governmental corruption, social
unrest, labor strikes, civil wars, and religious oppression. Economic
instability in emerging market countries may take the form of: (i) high interest
rates; (ii) high levels of inflation, including hyperinflation; (iii) high
levels of unemployment or underemployment; (iv) changes in government economic
and tax policies, including confiscatory taxation (or taxes on foreign
investments); and (v) imposition of trade barriers.
Currencies
of emerging market countries are subject to significantly greater risks than
currencies of developed countries. Some emerging market currencies may not be
internationally traded or may be subject to strict controls by local
governments, resulting in undervalued or overvalued currencies. Some emerging
market countries have experienced balance of payment deficits and shortages in
foreign exchange reserves, which has resulted in some governments restricting
currency conversions. Future restrictive exchange controls could prevent or
restrict a company's ability to make dividend or interest payments in the
original currency of the obligation (usually U.S. dollars). In addition, even
though the currencies of some emerging market countries may be convertible into
U.S. dollars, the conversion rates may be artificial relative to their actual
market values.
Governments
of many emerging market countries have become overly reliant on the
international capital markets and other forms of foreign credit to finance large
public spending programs that cause huge budget deficits. Often, interest
payments have become too overwhelming for these governments to meet, as these
payments may represent a large percentage of a country's total GDP. Accordingly,
these foreign obligations have become the subject of political debate within
emerging market countries, which has resulted in internal pressure for such
governments to not make payments to foreign creditors, but instead to use these
funds for social programs. As a result of either an inability to pay or
submission to political pressure, the governments have sought to restructure
their loan and/or bond obligations, have declared a temporary suspension of
interest payments, or have defaulted (in part or full) on their outstanding debt
obligations. These events have adversely affected the values of securities
issued by the governments and corporations domiciled in these emerging market
countries and have negatively affected not only their cost of borrowing but also
their ability to borrow in the future. Emerging markets have also benefited from
continued monetary policies adopted by the central banks of developed countries.
Recently, however, the U.S. Federal Reserve and other countries' central banks
have increased interest rates numerous times in response to global inflation. It
is unclear whether interest rates will continue to rise in the future. These
increases may have a disproportionately adverse effect on emerging market
economies.
In
addition to their continued reliance on international capital markets, many
emerging economies are also highly dependent on international trade and exports,
including exports of oil and other commodities. As a result, these economies are
particularly vulnerable to downturns of the world economy. In recent years,
emerging market economies have been subject to tightened international credit
supplies and weakened global demand for their exports and, as a result, certain
of these economies faced significant difficulties and some economies face
recessionary concerns. Over the last decade, emerging market countries, and
companies domiciled in such countries, have acquired significant debt levels.
Any additional increases in U.S. interest rates may further restrict the access
to credit supplies and jeopardize the ability of emerging market countries to
pay their respective debt service obligations. Although certain emerging market
economies have shown signs of growth and recovery, continued growth is dependent
on the uncertain economic outlook of China, Japan, the European Union, and the
United States. The reduced demand for exports and lack of available capital for
investment resulting from the European debt crisis, a slowdown in China, the
continued effects of the COVID-19 pandemic, and persistent low growth in the
global economy may inhibit growth for emerging market countries.
The
COVID-19 pandemic has presented significant challenges to the economies of
emerging markets, including, among others, rising inflation, food insecurity,
subdued employment growth, and economic setback caused by supply chain
disruption and the reduction in exports. Limited supplies of effective
vaccination and medical resources have undermined the productive activities in
emerging markets. The continually evolving variants of the COVID-19 virus have
constantly challenged the existing containment strategy, causing significant
human capital loss and social disturbances. The future direction of the pandemic
is difficult to predict, and emerging markets are more likely to suffer more
heavily from new developments in the virus due to their lack of sufficient
access to medical resources.
All
these economic setbacks have been exacerbated by the ongoing conflict in Ukraine
stemming from Russia's invasion into the country in early 2022, which is causing
higher global inflation and the significant rise in energy and food prices.
These problems may worsen if the war escalates or spreads into neighboring
countries or other regions.
Canada.
Canada
is generally politically stable; its banking system is relatively robust and its
financial market relatively transparent. Meanwhile, Canada is sensitive to
commodity price changes. It is a major producer of commodities such as forest
products, metals, agricultural products, and energy related products like oil,
gas, and hydroelectricity. Accordingly, events affecting the supply and demand
of base commodity resources and industrial and precious metals and materials,
both domestically and internationally, can have a significant effect on Canadian
market performance.
The
United States is Canada's largest trading partner and developments in economic
policy and U.S. market conditions have a significant impact on the Canadian
economy. The economic and financial integration of the United States, Canada,
and Mexico through the United States-Mexico-Canada Agreement
(USMCA) may make the Canadian economy and securities market more sensitive
to North American trade patterns. Any disruption in the continued operation
of USMCA may have a significant and adverse impact on Canada's
economic outlook and the value of a fund's investments in Canada.
Growth
has continued to slow in recent years for certain sectors of the Canadian
economy, particularly energy extraction and manufacturing. Forecasts on growth
remain modest. Oil prices have fluctuated greatly over time and the enduring
volatility in the strength of the Canadian dollar may also negatively impact
Canada's ability to export, which could limit Canada's economic growth. The
global pandemic and the conflict in Ukraine continue to negatively impact the
world economy including the Canadian market.
Europe.
The
European Union (EU) is an intergovernmental and supranational union of European
countries spanning the continent, each known as a member state. One of the key
activities of the EU is the establishment and administration of a common single
market consisting of, among other things, a common trade policy. In order to
further the integration of the economies of member states, member states
established, among other things, the European Economic and Monetary Union (EMU),
a collection of policies that set out different stages and commitments that
member states need to follow to achieve greater economic policy coordination and
monetary cooperation, including the adoption of a single currency, the euro.
While all EU member states participate in the economic union, only certain EU
member states have adopted the euro as their currency. When a member state
adopts the euro as its currency, the member state no longer controls its own
monetary policies. Instead, the authority to direct monetary policy is exercised
by the European Central Bank (ECB).
While
economic and monetary convergence in the EU may offer opportunities for those
investing in the region, investors should be aware that the success of the EU is
not wholly assured. European countries can be significantly affected by the
tight fiscal and monetary controls that the EU governing institutions may impose
on its members or with which candidates for EMU membership are required to
comply. Europe must grapple with a number of challenges, any one of which could
threaten the sustained economic growth, regulatory efficiency, or political
survival of the political and economic union. Countries adopting the euro must
adjust to a unified monetary system which has resulted in the loss of exchange
rate flexibility and, to some degree, the loss of economic sovereignty. Europe's
economies are diverse, governance is decentralized, and its cultures differ
widely. Unemployment in some European countries has historically been higher
than in the United States, and a number of countries continue to face abnormally
high unemployment levels, particularly for younger workers, which could pose a
political risk. Many EU nations are susceptible to the economic risks associated
with high levels of debt. The EU continues to face major issues involving its
membership, structure, procedures and policies, including the successful
political, economic and social integration of new member states, the EU's
resettlement and distribution of refugees, and the resolution of the EU's
problematic fiscal and democratic accountability. Efforts of the member states
to continue to unify their economic and monetary policies may increase the
potential for similarities in the movements of European markets and reduce the
benefit of diversification within the region.
Political.
From
the 2000s through the early 2010s, the EU extended its membership to Eastern
European countries. It has accepted several Eastern European countries as new
members and has engaged with several other countries regarding future
enlargement. Membership for these states is intended to, among other things,
cement economic and political stability across the region. For these countries,
membership serves as a strong political impetus to engage in regulatory and
political reforms and to employ tight fiscal and monetary policies.
Nevertheless, certain new member states, particularly former satellites of the
former Soviet Union, remain burdened to various extents by certain
infrastructural, bureaucratic, and business inefficiencies inherited from their
history of economic central planning. Further expansion of the EU has long-term
economic benefits for both member states and potential expansion candidates.
However, certain European countries are not viewed as currently suitable for
membership, especially countries further east with less developed economies. The
current and future status of the EU therefore continues to be the subject of
political controversy, with widely differing views both within and between
member states. The growth of nationalist and populist parties in both national
legislatures and the European Parliament may further threaten enlargement as
well as impede both national and supranational governance.
An
increasingly assertive Russia poses its own set of risks for the EU, as
evidenced by the Russian invasion of Ukraine in February 2022 and the ongoing
Russia-Ukraine conflict. Opposition to EU expansion to members of the former
Soviet bloc may prompt more intervention by Russia in the affairs of its
neighbors. This interventionist stance may carry various negative consequences,
including direct effects, such as export restrictions on Russia's natural
resources, Russian support for separatist groups or pro-Russian parties located
in EU countries, Russian interference in the internal political affairs of
current or potential EU members or of the EU itself, externalities of ongoing
conflict, such as an influx of refugees from Ukraine and Syria, or collateral
damage to foreign assets in conflict zones, all of which could negatively impact
EU economic activity.
It
is possible that, as wealth and income inequality grow both within and between
individual member states, socioeconomic and political tensions may be
exacerbated. The potential direct and indirect consequences of this growing gap
may be substantial.
The
transition to a more unified economic system also brings uncertainty.
Significant political decisions will be made that may affect market regulation,
subsidization, and privatization across all industries, from agricultural
products to telecommunications, that may have unpredictable effects on member
states and companies within those states.
The
influx of migrants and refugees seeking resettlement in the EU as a result of
ongoing conflicts around the world also poses certain risks to the EU.
Additionally, the conflict in Ukraine has caused significant humanitarian and
economic concerns for Europe. A protracted conflict would increase the number of
refugees coming into Europe, cause increase in commodity prices and supply-chain
disruptions, add pressure to inflation, and deepen output losses. Furthermore,
there is the risk that the conflict in Ukraine may spread to other areas of
Europe. All of these would adversely impact a fund's investment in
Europe.
The
COVID-19 pandemic has served to exacerbate need in unstable regions, leading to
increased numbers of refugees. Resettlement itself may be costly for individual
member states, particularly those border countries on the periphery of the EU
where migrants first enter. In addition, pressing questions over accepting,
processing and distributing migrants have been a significant source of
intergovernmental disagreements and could pose significant dangers to the
integrity of the EU.
Economic.
As
economic conditions across member states may vary widely, there is continued
concern about national-level support for the euro and the accompanying
coordination of fiscal and wage policy among EMU member states. Member states
must maintain tight control over inflation, public debt, and budget deficits in
order to qualify for participation in the euro. These requirements severely
limit EMU member states' ability to implement fiscal policy to address regional
economic conditions. Moreover, member states that use the euro cannot devalue
their currencies in the face of economic downturn, precluding them from stoking
inflation to reduce their real debt burden and potentially rendering their
exports less competitive.
The
United Kingdom (UK) left the European Union (EU) on January 31, 2020 under the
terms of a negotiated departure deal. A transition period, which kept most
pre-departure arrangements in place, ended on December 31, 2020, and the UK
entered into a new trading relationship with the EU under the terms of the EU-UK
Trade and Cooperation Agreement (TCA) which reflected the long-term,
post-transition landscape. Further discussions are to be held between the UK and
the EU in relation to matters not covered by the trade agreement, such as
financial services. Notwithstanding the TCA, significant uncertainty remains in
the market regarding the ramifications of the United Kingdom's withdrawal from
the European Union. Significant economic and regulatory uncertainty caused by
the UK's exit from the EU has resulted in volatile markets for the UK and
broader international financial markets. While the long-term effects of Brexit
remain unclear, in the short term, financial markets may experience, among other
things, greater volatility and/or illiquidity, currency fluctuations, and a
decline in cross-border investment between the UK and the EU. The effects of
Brexit are also being shaped by new trade deals that the UK is negotiating with
several other countries, including the United States. Brexit could lead to legal
and tax uncertainty and potentially divergent national laws and regulations as
the UK determines which EU laws to replicate or replace. The impact of Brexit,
and these new trade agreements, on the UK and in global markets as well as any
associated adverse consequences remains unclear, and the uncertainty may have a
significant negative effect on the value of a fund's investments. In addition to
managing the effects of Brexit, the United Kingdom is currently grappling with
financial crises. Uncertainty regarding the UK government's economic and
financial policies may have a negative effect on investors and the impact of
these crises may have a significant adverse effect on the value of a fund's
investments.
The
global financial crisis of 2008-2009 brought several small countries in Europe
to the brink of sovereign default. Many other economies fell into recession,
decreasing tax receipts and widening budget deficits. In response, many
countries of Europe have implemented fiscal austerity, decreasing discretionary
spending in an attempt to decrease their budget deficits. However, many European
governments continue to face high levels of public debt and substantial budget
deficits, some with shrinking government expenditures, which hinder economic
growth in the region and may still threaten the continued viability of the EMU.
Due to these large public deficits, some European issuers may continue to have
difficulty accessing capital and may be dependent on emergency assistance from
European governments and institutions to avoid defaulting on their outstanding
debt obligations. The availability of such assistance, however, may be
contingent on an issuer's implementation of certain reforms or reaching a
required level of performance, which may increase the possibility of default.
Such prospects could inject significant volatility into European markets, which
may reduce the liquidity or value of a fund's investments in the region.
Likewise, the high levels of public debt raise the possibility that certain
European issuers may be forced to restructure their debt obligations, which
could cause a fund to lose the value of its investments in any such
issuer.
The
legacy of the global financial crisis of 2008-2009, the European sovereign debt
crisis, and the ongoing recession in parts of Europe have left the banking and
financial sectors of many European countries weakened and, in some cases,
fragile. Many institutions remain saddled with high default rates on loans,
still hold assets of indeterminate value, and have been forced to maintain
higher capital reserves under new regulations. This has led to decreased returns
from finance and banking directly and has constricted the sector's ability to
lend, thus potentially reducing future returns and constricting economic growth.
The ECB has sought to spur economic growth and ward off deflation by engaging in
quantitative easing, lowering the ECB's benchmark rate into negative territory,
and opening a liquidity channel to encourage bank lending. Most recently, in
September 2019, the ECB announced a new bond-buying program and changed its
targeted long-term refinancing rate to provide more favorable bank lending
conditions. In response to the economic consequences of the COVID-19 pandemic,
the ECB significantly increased bond purchases, and only began slowing their
purchasing strategy in September 2021.
Ongoing
regulatory uncertainty could have a negative effect on the value of a fund's
investments in the region. Governments across the EMU are facing increasing
opposition to certain measures taken in response to the recent economic crises.
In light of such uncertainty, the risk that certain member states will abandon
the euro persists and any such occurrence would likely have wide-ranging effects
on global markets that are difficult to predict. These effects, however, would
likely have a negative impact on a fund's investments in the
region.
Although
some European economies have begun to show more sustained economic growth, the
ongoing debt crisis, political and regulatory responses to the financial crisis,
the effects of the COVID-19 pandemic, and uncertainty over the future of the EMU
and the EU itself may continue to limit short-term growth and economic recovery
in the region. Some countries have experienced prolonged stagnation or returns
to recession, raising the possibility that other European economies could follow
suit. Economic challenges facing the region include high levels of public debt,
significant rates of unemployment, aging populations, heavy regulation of
non-financial businesses, persistent trade deficits, rigid labor markets, and
inability to access credit. Although certain of these challenges may weigh more
heavily on some European economies than others, the economic integration of the
region increases the likelihood that an economic downturn in one country may
spread to others. Should Europe fall into another recession, the value of a
fund's investments in the region may be affected.
Currency.
Investing
in euro-denominated securities (or securities denominated in other European
currencies) entails risk of being exposed to a currency that may not fully
reflect the strengths and weaknesses of the disparate European economies. In
addition, many European countries rely heavily upon export-dependent businesses
and significant change in the exchange rate between the euro and the U.S. dollar
can have either a positive or a negative effect upon corporate profits and the
performance of EU investments. If one or more countries abandon the use of the
euro as a currency, the value of investments tied to those countries or to the
euro could decline significantly. In addition, foreign exchange markets have
recently experienced sustained periods of high volatility, subjecting a fund's
foreign investments to additional risks.
Nordic
Countries. The
Nordic countries - Iceland, Denmark, Finland, Norway, and Sweden - relate to
European integration in different ways. Norway and Iceland are outside the EU,
although they are members of the European Economic Area. Denmark, Finland, and
Sweden are EU members, but only Finland has adopted the euro as its currency,
whereas Denmark has pegged its currency to the euro. Generally, Nordic countries
have strong business environments, highly educated workforces, and relatively
stable financial markets and political systems. Faced with stronger global
competition in recent years, however, some Nordic countries have had to scale
down their historically generous welfare programs, resulting in drops in
domestic demand and increased unemployment. Economic growth in many Nordic
countries continues to be constrained by tight labor markets and adverse
European and global economic conditions, particularly the volatility in global
commodity demand. The Nordic countries' manufacturing sector has experienced
continued contraction due to outsourcing and flagging demand, spurring
increasing unemployment. Furthermore, the protracted recovery due to the ongoing
European debt crisis and persistent low growth in the global economy may limit
the growth prospects of the Nordic economies. The ongoing COVID-19 pandemic and
the conflict in Ukraine continue to pose economic risks to Nordic
countries.
Eastern
Europe. Investing
in the securities of Eastern European issuers may be highly speculative and
involves risks not usually associated with investing in the more developed
markets of Western Europe. Eastern European countries have different levels of
political and economic stability. Some countries have more integrated economies
and relatively robust banking and financial sectors while other countries
continue to be burdened by regional, political, and military conflicts. In many
countries in Eastern Europe, political and economic reforms are too recent to
establish a definite trend away from centrally planned economies and state-owned
industries. Investments in Eastern European countries may involve risks of
nationalization, expropriation, and confiscatory taxation. The ongoing
conflict in Ukraine poses great risk to Eastern European countries' economic
stability and the continued effects of the COVID-19 pandemic have an adverse
impact on the overall region.
Eastern
European countries continue to move towards market economies at different paces
with varying characteristics. Many Eastern European markets suffer from thin
trading activity, dubious investor protections, and often a lack of reliable
corporate information. Information and transaction costs, differential taxes,
and sometimes political, regulatory, or transfer risk may give a comparative
advantage to the domestic investor rather than the foreign investor. In
addition, these markets are particularly sensitive to social, political,
economic, and currency events in Western Europe and Russia and may suffer heavy
losses as a result of their trading and investment links to these economies and
their currencies. In particular, the disruption to the Russian economy as a
result of sanctions imposed by the United States and EU in connection with
Russia's invasion of Ukraine may hurt Eastern European economies with close
trade links to Russia. Russia may also attempt to directly assert its influence
in the region through coercive use of its economic, military, and natural
resources.
In
some of the countries of Eastern Europe, there is no stock exchange or formal
market for securities. Such countries may also have government exchange
controls, currencies with no recognizable market value relative to the
established currencies of Western market economies, little or no experience in
trading in securities, weak or nonexistent accounting or financial reporting
standards, a lack of banking and securities infrastructure to handle such
trading and a legal tradition without strongly defined property rights. Due to
the value of trade and investment between Western Europe and Eastern Europe,
credit and debt issues and other economic difficulties affecting Western Europe
and its financial institutions can negatively affect Eastern European
countries.
Eastern
European economies may also be particularly susceptible to the volatility of the
international credit market due to their reliance on bank related inflows of
foreign capital. Although many Eastern European economies have experienced
modest growth for several periods due, in part, to external demand, tighter
labor markets, and the attraction of foreign investment, major challenges
persist as a result of their continued dependence on Western European countries
for credit and trade. Accordingly, the European crisis may present serious risks
for Eastern European economies, which may have a negative effect on a fund's
investments in the region.
Several
Eastern European countries on the periphery of the EU have recently been the
destination for a surge of refugees and migrants fleeing global conflict zones,
particularly the civil wars in Syria and Afghanistan, the economic hardship
across Africa and the developing world, and the Russia-Ukraine conflict. While
these countries have borne many of the direct costs of managing the flow of
refugees and migrants seeking resettlement in Europe, they have also faced
significant international criticism over their treatment of migrants and
refugees which may affect foreign investor confidence in the attractiveness of
such markets.
Japan.
Japan
continues to recover from recurring recessionary forces that have negatively
impacted Japan's economic growth over the last decade. Japan's economic
strengths-low public external debt, relatively consistent currency, and highly
innovative industries-have helped combat these recurring recessionary forces.
Despite signs of economic growth in recent years, Japan is still vulnerable to
persistent underlying systemic risks, including massive government debt, an
aging and shrinking of the population, an uncertain financial sector, low
domestic consumption, and certain corporate structural weaknesses. Furthermore,
Japan's economic growth rate could be impacted by the Bank of Japan's monetary
policies, rising interest rates and global inflation, tax increases, budget
deficits, and volatility in the Japanese yen.
Overseas
trade is important to Japan's economy and its economic growth is significantly
driven by its exports. Meanwhile, Japan's aging and shrinking population
increases the cost of the country's pension and public welfare system and lowers
domestic demand, making Japan more dependent on exports to sustain its economy.
Therefore, any developments that negatively affect Japan's exports could present
risks to a fund's investments in Japan. For example, domestic or foreign trade
sanctions or other protectionist measures could harm Japan's economy. In
addition, currency fluctuations may also significantly affect Japan's economy,
as a stronger yen would negatively impact Japan's ability to export. Likewise,
any escalation of tensions in the region, including disruptions caused by
political tensions with North Korea or territorial disputes with Japan's major
trading partners, may adversely impact Japan's economic outlook. In particular,
Japan is heavily dependent on oil imports, and higher commodity prices could
have a negative impact on its economy. Japan is also particularly susceptible to
the effects of declining growth rates in China, Japan's largest export market.
Given that China is a large importer of Japanese goods and is a significant
source of global economic growth, a continued Chinese slowdown may negatively
impact Japanese economic growth both directly and indirectly. Moreover, the
animosity between Japan and other Asian countries, such as China and Korea, may
affect the trading relations between these countries. China's territorial
ambition over Taiwan may negatively impact Japan's relationship with China given
Japan's historical and economic interests in Taiwan. Similarly, the European
debt crisis, the effects of the COVID-19 pandemic, and persistent low growth in
the global economy could present additional risks to a fund's investments in
Japan.
Japan's
economic recovery has been affected by stress resulting from a number of natural
disasters, including disasters that caused damage to nuclear power plants in the
region, which have introduced volatility into Japan's financial markets. In
response to these events, the government has injected capital into the economy
and reconstruction efforts in disaster-affected areas in order to stimulate
economic growth. The risks of natural disasters of varying degrees, such as
earthquakes and tsunamis, continue to persist. The full extent of the impact of
recurring natural disasters on Japan's economy and foreign investment in Japan
is difficult to estimate.
Although
Japanese banks are stable, maintaining large capital bases, they continue to
face difficulties generating profits. In recent years, Japan has employed a
program of monetary loosening, fiscal stimulus, and growth-oriented structural
reform, which has generated limited success in raising growth rates. Although
Japan's central bank has continued its quantitative easing program, there is no
guarantee such efforts will be sufficient or that additional stimulus policies
will not be necessary in the future. Furthermore, the long-term potential of
this strategy remains uncertain, as the first of two planned increases in
Japan's consumption tax resulted in a decline in consumption and the effect of
the second increase remains to be seen. While Japan has historically kept
inflation in the country relatively low, global economic challenges such as
rising inflation and commodity shortages, worsened by the ongoing effects of the
COVID-19 pandemic and the conflict in Ukraine, may have a negative impact on
Japan's economy.
Asia
Pacific Region (ex Japan). While
the Asia Pacific region has substantial potential for economic growth, many
countries in the region have historically faced political uncertainty,
corruption, military intervention, and social unrest. Examples include military
threats on the Korean peninsula and along the Taiwan Strait, the ethnic,
sectarian, extremist, and/or separatist violence found in Indonesia and the
Philippines, and the nuclear arms threats between India and Pakistan. To the
extent that such events continue in the future, they can be expected to have a
negative effect on economic and securities market conditions in the region. In
addition to the regional military threats and conflicts, the effects of the
conflict in Ukraine may adversely impact the economies of countries in the
region. The recent global supply chain disruptions and rising inflation have
stressed the economies of countries in the region that rely substantially on
international trade. In addition, the Asia Pacific geographic region has
historically been prone to natural disasters. The occurrence of a natural
disaster in the region could negatively impact any country's economy in the
region. Natural disasters may become more frequent and severe as a result of
global climate change. Given the particular vulnerability of the region to the
effects of climate change, disruptions in international efforts to address
climate-related issues may have a disproportionate impact on a fund's
investments in the region.
Economic.
The
economies of many countries in the region are heavily dependent on international
trade and are accordingly affected by protective trade barriers and the economic
conditions of their trading partners, principally, the United States, Japan,
China, and the European Union. The countries in this region are also heavily
dependent on exports and are thus particularly vulnerable to any weakening in
global demand for these products. Many countries in the region are economically
reliant on a wide range of commodity exports. Consequently, countries in this
region have been adversely affected by the persistent volatility in global
commodity prices and are particularly susceptible to declines in growth rates in
China. The Australian and New Zealand economies are also heavily dependent on
the economies of China and other Asian countries. Countries in this region have
experienced high debt levels, an issue that is being compounded by weakened
local currencies. Although the economies of many countries in the region have
exhibited signs of growth, such improvements, if sustained, may be gradual.
Significantly, the Australian economy has declined in recent years and, in 2019,
the Reserve Bank of Australia cut interest rates to an all-time low in response
to a reduction in consumption brought on, in part, by a downturn in the property
market and rising levels in unemployment. The Reserve Bank of Australia cut
rates further in response to the economic effects of the COVID-19 pandemic.
However, rising global inflation in 2022 forced the Reserve Bank to raise
interest rates to combat the effects of the tightening of monetary policies in
most countries, Russia's invasion of Ukraine, and the COVID-19 containment
measures and other policy challenges in China. Furthermore, any future growth
experienced in the region may be limited or hindered by the reduced demand for
exports due to a continued economic slowdown in China, which could significantly
lower demand for the natural resources many Asia Pacific economies export. Since
China has been such a major source of demand for raw materials and a supplier of
foreign direct investment to exporting economies, the slowdown of the Chinese
economy could significantly affect regional growth. In addition, the trading
relationship between China and several Asia Pacific countries has been strained
by the geopolitical conflict created by competing territorial claims in the
South China Sea, which has created diplomatic tension in the region that may
adversely impact the economies of the affected countries. Regional growth may
also be limited by the lack of available capital for investment resulting from
the European debt crisis and by persistent low growth in the global economy, as
well as increases in interest rates and the tapering of other monetary policies
adopted by the central banks of developed countries.
The
Republic of Korea (South Korea) .
Investing in South Korea involves risks not typically associated with investing
in the U.S. securities markets. Investments in South Korea are, in part,
dependent on the maintenance of peaceful relations with North Korea, on both a
bilateral and global basis. Relations between the two countries remain tense, as
exemplified in periodic acts of hostility, and the possibility of serious
military engagement still exists. Any escalation in hostility, initiation of
military conflict, or collateral consequences of internal instability within
North Korea would likely cause a substantial disruption in South Korea's
economy, as well as in the region overall.
South
Korea has one of the more advanced economies and established democratic
political systems in the Asia-Pacific region with a relatively sound financial
sector and solid external position. South Korea's economic reliance on
international trade, however, makes it highly sensitive to fluctuations in
international commodity prices, currency exchange rates and government
regulation, and makes it vulnerable to downturns of the world economy. South
Korea has experienced modest economic growth in recent years. Such continued
growth may slow, in part, due to a continued economic slowdown in China. South
Korea is particularly sensitive to the economic volatility of its four largest
export markets (the European Union, Japan, United States, and China), which all
face varying degrees of economic uncertainty, including persistent low growth
rates. The economic weakness of South Korea's most important trading partners
could stifle demand for South Korean exports and damage its own economic growth
outlook. Notably, given that China is both a large importer of South Korean
goods and a significant source of global demand, a continued Chinese slowdown
may, directly or indirectly, negatively impact South Korean economic growth. The
South Korean economy's long-term challenges include a rapidly aging population,
inflexible labor market, dominance of large conglomerates, and overdependence on
exports to drive economic growth.
China
Region. The
China Region encompasses the People's Republic of China, Taiwan, and Hong Kong.
The region is highly interconnected and interdependent, with relationships and
tensions built on trade, finance, culture, and politics. The economic success of
China will continue to have an outsized influence on the growth and prosperity
of both Taiwan and Hong Kong.
Although
the People's Republic of China has experienced three decades of unprecedented
growth, it now faces a slowing economy that is due, in part, to China's effort
to shift away from an export-driven economy. Other contributing factors to the
slowdown include lower-than-expected industrial output growth, reductions in
consumer spending, a decline in the real estate market, which many observers
believed to be inflated, and most recently, the COVID-19 pandemic and China's
containment strategy. Further, local governments, which had borrowed heavily to
bolster growth, face high debt burdens and limited revenue sources. Demand for
Chinese exports by Western countries, including the United States and Europe,
may diminish because of weakened economic growth in those countries, resulting
from the European debt crisis and persistent low growth in the global economy.
Additionally, Chinese land reclamation projects, actions to lay claim to
disputed islands, and China's attempt to assert territorial claims in the South
China Sea have caused strains in China's relationship with various regional
trading partners and could cause further disruption to regional trade. In the
long term, China's ability to develop and sustain a credible legal, regulatory,
monetary, and socioeconomic system could influence the course of foreign
investment in China.
Hong
Kong is closely tied to China, economically and politically, following the
United Kingdom's 1997 handover of the former colony to China to be governed as a
Special Administrative Region. Changes to Hong Kong's legal, financial, and
monetary system could negatively impact its economic prospects. Hong Kong's
evolving relationship with the central government in Beijing has been a source
of political unrest and may result in economic disruption.
Although
many Taiwanese companies heavily invest in China, a state of hostility continues
to exist between China and Taiwan. Taiwan's political stability and ability to
sustain its economic growth could be significantly affected by its political and
economic relationship with China. Although economic and political relations have
both improved, Taiwan remains vulnerable to both Chinese territorial ambitions
and economic downturns.
In
addition to the risks inherent in investing in the emerging markets, the risks
of investing in China, Hong Kong, and Taiwan merit special
consideration.
People's
Republic of China. China's
economy has transitioned from a rigidly central-planned state-run economy to one
that has been only partially reformed by more market-oriented policies. Although
the Chinese government has implemented economic reform measures, reduced state
ownership of companies and established better corporate governance practices, a
substantial portion of productive assets in China are still owned or controlled
by the Chinese government. The government continues to exercise significant
control over the regulation of industrial development and, ultimately, over
China's economic growth, both through direct involvement in the market through
state owned enterprises, and indirectly by allocating resources, controlling
access to credit, controlling payment of foreign currency-denominated
obligations, setting monetary policy and providing preferential treatment to
particular industries or companies. China's continued hold on its economy,
coupled with a legal system less consistent and less comprehensive than
developed markets, poses a risk to foreign investors.
After
many years of steady growth, the growth rate of China's economy has declined
relative to prior years. Although this slowdown may have been influenced by the
government's desire to stop certain sectors from overheating, and to shift the
economy from one based on low-cost export manufacturing to a model driven more
by domestic consumption, it holds significant economic, social and political
risks. For one, the real estate market, once rapidly growing in major cities,
has slowed down and may prompt government intervention to prevent collapse.
Additionally, local government debt is still very high, and local governments
have few viable means to raise revenue, especially with continued declines in
demand for housing. Moreover, although China has tried to restructure its
economy towards consumption, it remains heavily dependent on exports and is,
therefore, susceptible to downturns abroad which may weaken demand for its
exports and reduce foreign investments in the country. The reduction in spending
on Chinese products and services, the institution of tariffs or other trade
barriers, or a downturn in any of the economies of China's key trading partners
may have an adverse impact on the securities of Chinese issuers. In particular,
the economy faces the prospect of prolonged weakness in demand for Chinese
exports as its major trading partners, such as the United States, Japan, and
Europe, continue to experience economic uncertainty stemming from the European
debt crisis, the effects of the COVID-19 pandemic, and persistent low growth in
the global economy, among other things. After a period of intensified concerns
about trade tariffs and the continued escalation of the trade war between China
and the United States, the two countries reached a trade agreement in January
2020. If the countries reinstitute tariffs, it may trigger a significant
reduction in international trade, the oversupply of certain manufactured goods,
substantial price reductions of goods and possible failure of individual
companies and/or large segments of China's export industry with a potentially
negative impact to a fund. These kinds of events and their consequences are
difficult to foresee, and it is unclear whether future tariffs may be imposed or
other escalating actions may be taken in the future. Over the long term, China's
aging infrastructure, worsening environmental conditions, rapid and inequitable
urbanization, and quickly widening urban and rural income gap, which all carry
political and economic implications, are among the country's major challenges.
China also faces problems of domestic unrest and provincial separatism.
Additionally, the Chinese economy may be adversely affected by diplomatic
developments, the imposition of economic sanctions, changes in international
trading patterns, trade barriers, and other protectionist or retaliatory
measures.
Chinese
territorial claims are another source of tension and present risks to diplomatic
and trade relations with certain of China's regional trade partners. Actions by
the Chinese government, such as its land reclamation projects, assertion of
territorial claims in the South China Sea, and the establishment of an Air
Defense Identification Zone over disputed islands, raise the fear of both
accidental military conflict and that Chinese territorial claims may result in
international reprisal. Such a reprisal may reduce international demand for
Chinese goods and services or cause a decline in foreign direct investment, both
of which could have a negative effect on a fund's investments in the securities
of Chinese issuers.
As
with all transition economies, China's ability to develop and sustain a credible
legal, regulatory, monetary, and socioeconomic system could influence the course
of outside investment. The Chinese legal system, in particular, constitutes a
significant risk factor for investors. Since the late 1970s, Chinese legislative
bodies have promulgated laws and regulations dealing with various economic
matters such as foreign investment, corporate organization and governance,
commerce, taxation, and trade. Despite the expanding body of law in China,
however, legal precedent and published court decisions based on these laws are
limited and non-binding. The interpretation and enforcement of these laws and
regulations are uncertain, and investments in China may not be subject to the
same degree of legal protection as in other developed countries.
China
continues to limit direct foreign investments generally in industries deemed
important to national interests. Foreign investment in domestic securities is
also subject to substantial restrictions, although Chinese regulators have begun
to introduce new programs through which foreign investors can gain direct access
to certain Chinese securities markets. For instance, Chinese regulators have
implemented a program that will permit direct foreign investment in permissible
products (which include cash bonds) traded on the China inter-bank bond market
(CIBM) in compliance with the relevant rules established by applicable Chinese
regulators. While CIBM is relatively large and trading volumes are generally
high, the market remains subject to similar risks as fixed income securities
markets in other developing countries. As foreign investment access to CIBM is
relatively new and its rules may be materially amended as the program continues
to develop, it is uncertain how this program will impact economic growth within
China.
Securities
listed on China's two main stock exchanges are divided into two classes. One of
the two classes is limited to domestic investors (and a small group of qualified
international investors), while the other is available to both international and
domestic investors (A-shares). Although the Chinese government has announced
plans to merge the two markets, it is uncertain whether, and to what extent,
such a merger will take place. The existing bifurcated system raises liquidity
and stability concerns.
Investments
in securities listed and traded through the Shanghai-Hong Kong Stock Connect and
Shenzhen-Hong Kong Stock Connect programs (Stock Connect Programs) involve
unique risks. The Stock Connect Programs are relatively new and there is no
guarantee that they will continue. Trading through Stock Connect Programs is
subject to daily quotas limiting the maximum daily net purchases as well as
daily limits on permitted price fluctuations. Trading suspensions are more
likely in these markets than in many other global equity markets. There can be
no assurance that a liquid market on an exchange will exist. In addition,
investments made through Stock Connect Programs are subject to comparatively
untested trading, clearance and settlement procedures. Stock Connect Programs
are available only on days when markets in both China and Hong Kong are open. A
fund's ownership interest in securities traded through the Stock Connect
Programs will not be reflected directly, and thus a fund may have to rely on the
ability or willingness of a third party to enforce its rights. Investments in
Stock Connect Program A-shares are generally subject to Chinese securities
regulations and listing rules, among other restrictions. Hong Kong investor
compensation funds, which protect against trade defaults, are unavailable when
investing through Stock Connect Programs. Uncertainties in Chinese tax rules
could also result in unexpected tax liabilities for the fund.
Currency
fluctuations could significantly affect China and its trading partners. China
continues to exercise control over the value of its currency, rather than
allowing the value of the currency to be determined by market forces. This type
of currency regime may experience sudden and significant currency adjustments,
which may adversely impact investment returns. One such currency adjustment
occurred in 2015, in which China purposefully devalued the yuan in an effort to
bolster economic growth. More recently, however, the government has taken steps
to internationalize its currency. This policy change is driven, in part, by the
government's desire for the yuan's continued inclusion in the basket of
currencies that comprise the International Monetary Fund's (IMF) Special Drawing
Rights.
Chinese
companies, particularly those located in China, may be smaller and less
seasoned. China may lack, or have different, accounting and financial reporting
standards, which may result in the unavailability of material information about
Chinese issuers. Moreover, the Public Company Accounting Oversight Board (PCAOB)
has warned that it lacks the ability to inspect audit work and practices of
PCAOB-registered auditing firms within China. The Chinese government has taken
positions that prevent PCAOB from inspecting the audit work and practices of
accounting firms in mainland China and Hong Kong for compliance with U.S. law
and professional standards. As such, under amendments to the Sarbanes-Oxley Act
enacted in December 2020, which requires that the PCAOB be permitted to inspect
the accounting firm of a U.S.-listed Chinese issuer, Chinese companies with
securities listed on U.S. exchanges may be delisted if the PCAOB is unable to
inspect the accounting firm. PCAOB's limited ability to oversee the operations
of auditing firms within China may result in inaccurate or incomplete financial
records of an issuer's operations within China, which may negatively impact a
fund's investments in such companies.
Additionally,
China's stock market has experienced tumult and high volatility, which has
prompted the Chinese government to implement several policies and restrictions
with regards to the securities market. While China may take actions aimed at
maintaining growth and stability in the stock market, investors in Chinese
securities may be negatively affected by, among other things, disruptions in the
ability to sell securities to comply with investment objectives or when most
advantageous given market conditions. It is not clear what the long-term effect
of such policies would be on the securities market in China or whether
additional actions by the government will occur in the future.
Hong
Kong. In
1997, the United Kingdom handed over control of Hong Kong to the People's
Republic of China. Since that time, Hong Kong has been governed by a
quasi-constitution known as the Basic Law, while defense and foreign affairs are
the responsibility of the central government in Beijing. The chief executive of
Hong Kong is appointed by the Chinese government. Hong Kong, however, is able to
participate in international organizations and agreements and continues to
function as an international financial center, with no exchange controls, free
convertibility of the Hong Kong dollar and free inward and outward movement of
capital. The Basic Law also guarantees existing freedoms, including the freedom
of speech, assembly, press, and religion, as well as the right to strike and
travel. Business ownership, private property, the right of inheritance and
foreign investment are also protected by law.
By
treaty, China has committed to preserve Hong Kong's high degree of autonomy in
certain matters until 2047. Despite this treaty, political uncertainty continues
to exist within Hong Kong, as demonstrated by Hong Kong protests in recent years
over political, economic, and legal freedoms, and the Chinese government's
response to them. For example, in June 2020, China adopted the Law of the PRC on
Safeguarding National Security, which severely limits freedom of speech in Hong
Kong and expands police powers to seize electronic devices and intercept
communications of suspects. Widespread protests were held in Hong Kong in
response to the new law, and the United States imposed sanctions on 11 Hong Kong
officials for cracking down on pro-democracy protests. Pro-democracy protests,
which have become increasingly violent over time, continued into 2021, although
the Hong Kong government's crackdown and the COVID-19 pandemic have contributed
to the reduction of large-scale protests. There is no guarantee, however, that
additional protests will not arise in the future, and it is uncertain whether
the United States will respond to such protests with additional
sanctions.
Hong
Kong has experienced strong economic growth in recent years in part due to its
close ties with China and a strong service sector, but Hong Kong still faces
concerns over overheating in certain sectors of its economy, such as its real
estate market, which could limit Hong Kong's future growth. In addition, due to
Hong Kong's heavy reliance on international trade and global financial markets,
Hong Kong remains exposed to significant risks as a result of the European debt
crisis and persistent low growth in the global economy. Likewise, due to Hong
Kong's close political and economic ties with China, a continued economic
slowdown on the mainland could continue to have a negative impact on Hong Kong's
economy.
Taiwan.
For
decades, a state of hostility has existed between Taiwan and the People's
Republic of China. China has long deemed Taiwan a part of the "one China" and
has made a nationalist cause of reuniting Taiwan with mainland China. In the
past, China has staged frequent military provocations off the coast of Taiwan
and made threats of full-scale military action. Tensions have lowered, however,
exemplified by improved relations, including the first official contacts between
the governments' leaders of China and Taiwan in 2015. Despite closer relations
in recent years, the relationship with China remains a divisive political issue
within Taiwan. Foreign trade has been the engine of rapid growth in Taiwan and
has transformed the island into one of Asia's great exporting nations. As an
export-oriented economy, Taiwan depends on a free-trade trade regime and remains
vulnerable to downturns in the world economy. Taiwanese companies continue to
compete mostly on price, producing generic products or branded merchandise on
behalf of multinational companies. Accordingly, these businesses can be
particularly vulnerable to currency volatility and increasing competition from
neighboring lower-cost countries. Moreover, many Taiwanese companies are heavily
invested in mainland China and other countries throughout Southeast Asia, making
them susceptible to political events and economic crises in the region.
Significantly, Taiwan and China have entered into agreements covering banking,
securities, and insurance. Closer economic links with mainland China may bring
greater opportunities for the Taiwanese economy but such arrangements also pose
new challenges. For example, foreign direct investment in China has resulted in
Chinese import substitution away from Taiwan's exports and a constriction of
potential job creation in Taiwan. Likewise, the Taiwanese economy has
experienced slow economic growth as demand for Taiwan's exports has weakened
due, in part, to declines in growth rates in China. Taiwan has sought to
diversify its export markets and reduce its dependence on the Chinese market by
increasing exports to the United States, Japan, Europe, and other Asian
countries by, in part, entering into free-trade agreements. In addition, the
lasting effects of the European debt crisis and persistent low growth in the
global economy may reduce global demand for Taiwan's exports. The Taiwanese
economy's long-term challenges include a rapidly aging population, low birth
rate, and the lingering effects of Taiwan's diplomatic isolation.
India.
The
value of a fund's investments in Indian securities may be affected by, among
other things, political developments, rapid changes in government regulation,
state intervention in private enterprise, nationalization or expropriation of
foreign assets, legal uncertainty, high rates of inflation or interest rates,
currency volatility, potential new, disruptive COVID-19 variants, uncertain
global economic conditions, possible additional increases in commodity prices,
and civil unrest. Moreover, the Indian economy remains vulnerable to natural
disasters, such as droughts and monsoons. Natural disasters may become more
frequent and severe as a result of global climate change. Given the particular
vulnerability of India to the effects of climate change, disruptions in
international efforts to address climate-related issues may have a
disproportionate impact on a fund's investments in the country. In addition, any
escalation of tensions with Pakistan may have a negative impact on India's
economy and foreign investments in India. Likewise, political, social and
economic disruptions caused by domestic sectarian violence or terrorist attacks
may also present risks to a fund's investments in India.
The
Indian economy is heavily dependent on exports and services provided to U.S. and
European companies and is vulnerable to any weakening in global demand for these
products and services. In recent years, rising wages have chipped away at
India's competitive advantage in certain service sectors. A large fiscal deficit
and persistent inflation have contributed to modest economic growth in India in
recent years. Increases in global oil and commodity prices due to the COVID-19
pandemic and the conflict in Ukraine have further contributed to India's rising
inflation and a widening of the current account deficit. While the economic
growth rate has risen more recently, the Indian economy continues to be
susceptible to a slowdown in the manufacturing sector, and it is uncertain
whether higher growth rates are sustainable without more fundamental governance
reforms.
India's
market has less developed clearance and settlement procedures and there have
been times when settlements have not kept pace with the volume of securities and
have been significantly delayed. The Indian stock exchanges have, in the past,
been subject to closure, broker defaults and broker strikes, and there can be no
certainty that these will not recur. In addition, significant delays are common
in registering transfers of securities and a fund may be unable to sell
securities until the registration process is completed and may experience delays
in the receipt of dividends and other entitlements. Furthermore, restrictions or
controls applicable to foreign investment in the securities of issuers in India
may also adversely affect a fund's investments within the country. The
availability of financial instruments with exposure to Indian financial markets
may be substantially limited by restrictions on foreign investors and subject to
regulatory authorizations. Foreign investors are required to observe certain
investment restrictions, including limits on shareholdings, which may impede a
fund's ability to invest in certain issuers or to fully pursue its investment
objective. These restrictions may also have the effect of reducing demand for,
or limiting the liquidity of, such investments. There can be no assurance that
the Indian government will not impose restrictions on foreign capital
remittances abroad or otherwise modify the exchange control regime applicable to
foreign investors in such a way that may adversely affect the ability of a fund
to repatriate their income and capital.
Shares
of many Indian issuers are held by a limited number of persons and financial
institutions, which may limit the number of shares available for investment.
Sales of securities by such issuer's major shareholders may also significantly
and adversely affect other shareholders. Moreover, a limited number of issuers
represent a disproportionately large percentage of market capitalization and
trading value in India. As a result, major shareholders' actions may cause
significant fluctuations in the prices of securities. Additionally, insider
trading may undermine both the market price accuracy of securities and
investors' confidence in the market. The illiquidity in the market may make it
difficult for a fund to dispose of securities at certain times.
Furthermore,
securities laws or other areas of laws may not be fully developed in India and
accounting and audit standards may not be as rigorous as those in the U.S.
market. Additionally, information about issuers may be less transparent, all of
which increases risk to foreign investors and makes it potentially difficult to
obtain and enforce court orders. The legal system may also favor domestic
investors over foreign investors.
The
Indian government has sought to implement numerous reforms to the economy,
including efforts to bolster the Indian manufacturing sector and entice foreign
direct investment. Such reformation efforts, however, have proven difficult and
there is no guarantee that such reforms will be implemented or that they will be
fully implemented in a manner that benefits investors.
Indonesia.
Over
the last decade, Indonesia has applied prudent macroeconomic efforts and policy
reforms that have led to modest growth in recent years, however many economic
development problems remain, including poverty and unemployment, corruption,
inadequate infrastructure, a complex regulatory environment, and unequal
resource distribution among regions. Although Indonesia's government has taken
steps in recent years to improve the country's infrastructure and investment
climate, these problems may limit the country's ability to maintain such
economic growth as Indonesia has begun to experience slowing growth rates in
recent years. Indonesia is prone to natural disasters such as typhoons,
tsunamis, earthquakes and flooding, which may also present risks to a fund's
investments in Indonesia. Natural disasters may become more frequent and severe
as a result of global climate change. Given the particular vulnerability of
Indonesia to the effects of climate change, disruptions in international efforts
to address climate-related issues may have a disproportionate impact on a fund's
investments in the country. In addition, Indonesia continues to be at risk of
ethnic, sectarian, and separatist violence.
In
recent periods, Indonesia has employed a program of monetary loosening through
reductions in interest rates and implemented a number of reforms to encourage
investment. Although Indonesia's central bank has continued to utilize monetary
policies to promote growth, there can be no guarantee such efforts will be
sufficient or that additional stimulus policies will not be necessary in the
future. Despite these efforts, Indonesia's relatively weak legal system
poses a risk to foreign investors. Indonesia's tax administration can be
inefficient, and a persistent informal market exists. Moreover, global inflation
and the shortage of certain commodities caused by the COVID-19 pandemic and the
conflict in Ukraine may continue to adversely affect Indonesia's economic
recovery.
Indonesia's
dependence on resource extraction and exports leaves it vulnerable to a slowdown
of the economies of its trading partners and a decline in commodity prices more
generally. Commodity prices have experienced significant volatility in recent
years, which has adversely affected the exports of Indonesia's economy.
Indonesia is particularly vulnerable to the effects of a continued slowdown in
China, which has been a major source of demand growth for Indonesia's commodity
exports. Indonesia is also vulnerable to further weakness in Japan, which
remains one of Indonesia's largest single export markets. Indonesia has recently
reversed several policies that restricted foreign investment by permitting
increased foreign ownership in several sectors and opening up sectors previously
closed to foreign investors. Failure to pursue internal reform, peacefully
resolve internal conflicts, bolster the confidence of international and domestic
investors, and weak global economic growth could limit Indonesia's economic
growth in the future.
Thailand.
Thailand
has well-developed infrastructure and a free-enterprise economy, which is both
conducive and enticing to certain foreign investment. Thailand's manageable
public and external debt burden as well as the country's acceptable fiscal and
monetary policy are also positive factors for foreign investors. While Thailand
experienced an increase in exports in recent years, the rate of export growth
has since slowed, in part due to domestic political turmoil, weakness in
commodity prices, and declines in growth rates in China. Moreover, Thailand has
pursued preferential trade agreements with a variety of partners in an effort to
boost exports and maintain high growth. Weakening fiscal discipline, separatist
violence in the south, the intervention by the military in civilian spheres, and
continued political instability, however, may cause additional risks for
investments in Thailand. The risk of political instability has proven
substantial as the protests, disputed election, government collapse, and coup of
2014 have led to short term declines in GDP, a collapse of tourism, and a
decrease in foreign direct investment. Following the coup, the military junta
formally controlled the government from 2014 until July 2019.
Parliamentary elections were held in May 2019 in which pro-military parties won
a slim majority and the former military junta leader became Prime Minister.
International watchdog groups, however, claimed the election was not free and
fair. Since the election there have been a number of attempts to unseat the
Prime Minister and protests challenging his leadership and the monarchy. An
election is due to take place before May 2023. Uncertainty regarding the
upcoming election could have a negative impact on economic
growth.
In
the long term, Thailand's economy faces challenges including an aging
population, outdated infrastructure, and an inadequate education system.
Thailand's cost of labor has risen rapidly in recent years, threatening its
status as a low-cost manufacturing hub. In addition, natural disasters may
affect economic growth in the country. Natural disasters may become more
frequent and severe as a result of global climate change. Given the particular
vulnerability of Thailand to the effects of climate change, disruptions in
international efforts to address climate-related issues may have a
disproportionate impact on a fund's investments in the country. Thailand
continues to be vulnerable to weak economic growth of its major trading
partners, particularly China and Japan. Additionally, Thailand's economy may be
limited by lack of available capital for investment resulting from the European
debt crisis and persistent slow growth in the global economy.
Philippines.
The
economy of the Philippines has benefitted from its relatively low dependence on
exports and high domestic rates of consumption, as well as substantial
remittances received from large overseas populations. Additionally, the
Philippines' solid monetary and fiscal policies, relatively low external debt,
and foreign exchange reserves support the country's economic stability. Although
the economy of the Philippines has grown quickly in recent years, there can be
no assurances that such growth will continue. Like other countries in the Asia
Pacific region, the Philippines' growth in recent years has been reliant, in
part, on exports to larger economies, notably the United States, Japan and
China. Given that China is a large importer and source of global demand, a
continued Chinese slowdown may, directly or indirectly, negatively impact
Philippine economic growth. Additionally, lower global economic growth may lead
to lower remittances from Filipino emigrants abroad, negatively impacting
economic growth in the Philippines. Furthermore, certain weaknesses in the
economy, such as inadequate infrastructure, high poverty rates, uneven wealth
distribution, low fiscal revenues, endemic corruption, inconsistent regulation,
unpredictable taxation, unreliable judicial processes, high-risk security
environment, high dependency on electronic exports and the tourism sector, and
the appropriation of foreign assets may present risks to a fund's investments in
the Philippines. In more recent years, poverty rates have declined; however,
there is no guarantee that this trend will continue. In addition, investments in
the Philippines are subject to risks arising from political or social unrest,
including governmental actions that strain relations with the country's major
trading partners, threats from military coups, terrorist groups and separatist
movements. Likewise, the Philippines is prone to natural disasters such as
typhoons, tsunamis, earthquakes and flooding, which may also present risks to a
fund's investments in the Philippines. Natural disasters may become more
frequent and severe as a result of global climate change. Given the particular
vulnerability of the Philippines to the effects of climate change, disruptions
in international efforts to address climate-related issues may have a
disproportionate impact on a fund's investments in the
country.
Latin
America. Latin
American countries have historically suffered from social, political, and
economic instability. For investors, this has meant additional risk caused by
periods of regional conflict, political corruption, totalitarianism,
protectionist measures, nationalization, hyperinflation, debt crises, sudden and
large currency devaluation, and intervention by the military in civilian and
economic spheres. In recent decades, certain Latin American economies have
experienced prolonged, significant economic growth, and many countries have
developed sustainable democracies and a more mature and accountable political
environment. Additionally, some Latin American countries have a growing middle
class and an increasingly diversified economy. In recent periods, however, many
Latin American countries have experienced persistent low growth rates and
certain countries have fallen into recessions. Specifically, the region has
recently suffered from the effects of Argentina's economic crisis. While the
region is experiencing an economic recovery, there can be no guarantee that such
recovery will continue or that Latin American countries will not face further
recessionary pressures. Furthermore, economic recovery efforts continue to be
weighed down by the costs of the COVID-19 pandemic. Rising global inflation,
supply chain disruptions, the tightening of monetary policies in other
countries, and high energy and food prices caused by the COVID-19 pandemic and
the conflict in Ukraine pose significant challenges to Latin American countries'
economies.
The
region's economies represent a spectrum of different levels of political and
economic development. In many Latin American countries, domestic economies have
been deregulated, privatization of state-owned companies had been undertaken and
foreign trade restrictions have been relaxed. There can be no guarantee,
however, that such trends in economic liberalization will continue or that the
desired outcomes of these developments will be successful. Nonetheless, to the
extent that the risks identified above continue or re-emerge in the future, such
developments could reverse favorable trends toward market and economic reform,
privatization, and removal of trade barriers, and result in significant
disruption in securities markets in the region. In addition, recent favorable
economic performance in much of the region has led to a concern regarding
government overspending in certain Latin American countries. Investors in the
region continue to face a number of potential risks. Certain Latin American
countries depend heavily on exports to the United States and investments from a
small number of countries. Accordingly, these countries may be sensitive to
fluctuations in demand, exchange rates and changes in market conditions
associated with those countries. The economic growth of most Latin American
countries is highly dependent on commodity exports and the economies of certain
Latin American countries, particularly Mexico and Venezuela, are highly
dependent on oil exports. These economies are particularly susceptible to
fluctuations in the price of oil and other commodities and currency
fluctuations. The prices of oil and other commodities are in the midst of a
period of high volatility driven, in part, by a continued slowdown in growth in
China, the effects of the COVID-19 pandemic, and the conflict in Ukraine. If
growth in China remains slow, or if global economic conditions worsen, Latin
American countries may face significant economic difficulties.
Certain
Latin American countries may experience significant and unexpected adjustments
to their currencies which may have an adverse effect on foreign investors.
Furthermore, some Latin American currencies have recently experienced steady
devaluations relative to the U.S. dollar and have had to make significant
adjustments in their currencies. Continued adjustments and devaluations of
currencies in certain countries may undermine a fund's investment
there.
Although
certain Latin American countries have recently shown signs of improved economic
growth, such improvements, if sustained, may be gradual. In addition, prolonged
economic difficulties may have negative effects on the transition to a more
stable democracy in some Latin American countries. Political risks remain
prevalent throughout the region, including the risk of nationalization of
foreign assets. Certain economies in the region may rely heavily on particular
industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers, and
other protectionist or retaliatory measures.
A
number of Latin American countries are among the largest debtors of developing
countries and have a long history of reliance on foreign debt and default. The
majority of the region's economies have become highly dependent upon foreign
credit and loans from external sources to fuel their state-sponsored economic
plans. Most countries have been forced to restructure their loans or risk
default on their debt obligations. In addition, interest on the debt is subject
to market conditions and may reach levels that would impair economic activity
and create a difficult and costly environment for borrowers. Accordingly, these
governments may be forced to reschedule or freeze their debt repayment, which
could negatively affect local markets. Most recently, Argentina defaulted on its
debt after a U.S. court ruled in 2014 that payments to a majority of bondholders
(who had settled for lower rates of repayment) could not be made so long as
holdout bondholders were not paid the full value of their bonds. The ruling
increases the risk of default on all sovereign debt containing similar clauses.
Although Argentina settled with its bondholders following the 2014 court ruling,
the country defaulted on its debt obligations again in May 2020. While Argentina
emerged from its 2020 default after negotiation with its bondholders, analysts
and investors are concerned that another default is inevitable given the
troubles with Argentina's bond market and soaring inflation.
As
a result of their dependence on foreign credit and loans, a number of Latin
American economies may be adversely affected by the increases in interest rates
by the U.S. Federal Reserve in recent months and by the rising global inflation.
While the region has recently had mixed levels of economic growth, recovery from
past economic downturns in Latin America has historically been slow, and such
growth, if sustained, may be gradual. The ongoing effects of the European debt
crisis, the effects of the COVID-19 pandemic, and persistent low growth in the
global economy may reduce demand for exports from Latin America and limit the
availability of foreign credit for some countries in the region. As a result, a
fund's investments in Latin American securities could be harmed if economic
recovery in the region is limited.
Russia.
Investing
in Russian securities is highly speculative and involves significant risks and
special considerations not typically associated with investing in the securities
markets of the United States and most other developed countries.
Political.
Over
the past century, Russia has experienced political and economic turbulence and
has endured decades of communist rule under which tens of millions of its
citizens were collectivized into state agricultural and industrial enterprises.
Since the collapse of the Soviet Union, Russia's government has been faced with
the daunting task of stabilizing its domestic economy, while transforming it
into a modern and efficient structure able to compete in international markets
and to respond to the needs of its citizens. To date, however, many of the
country's economic reform initiatives have floundered or been retrenched. In
this environment, political and economic policies could shift suddenly in ways
detrimental to the interest of foreign and private investors.
In
the last several years, as significant income from oil and commodity exports
boosted Russia's economic growth, the Russian government began to re-assert its
regional geopolitical influence, including most recently its military actions in
Ukraine and Syria. The conflict with Ukraine has increased tensions between
Russia and its neighbors and the West, resulting in the United States and EU
placing sanctions on the Russian financial, energy, and defense sectors, as well
as targeting top Russian officials. These sanctions, which include banning
Russia from global payments systems that facilitate cross-border payments,
combined with a collapse in energy and commodity prices, have slowed the Russian
economy, which has continued to experience recessionary trends. Economic
sanctions include, among others, prohibiting certain securities trades,
prohibiting certain private transactions in the energy sector, certain asset
freezes of Russian businesses and officials, and certain freezes of Russian
securities. As a result, Russian securities declined significantly in value, and
the Russian currency, ruble, has experienced great fluctuations. These sanctions
may also result in a downgrade in Russia's credit rating and/or a decline in the
value and liquidity of Russian securities, property, or interests. Furthermore,
these sanctions may impair the ability of a fund to buy, sell, hold, receive, or
deliver the affected securities. Further possible actions by Russia could lead
to greater consequences for the Russian economy.
Economic.
Many
Russian businesses are inefficient and uncompetitive by global standards due to
systemic corruption, regulatory favoritism for government-affiliated
enterprises, or the legacy of old management teams and techniques left over from
the command economy of the Soviet Union. Poor accounting standards, inept
management, pervasive corruption, insider trading and crime, and inadequate
regulatory protection for the rights of investors all pose a significant risk,
particularly to foreign investors. In addition, enforcement of the Russian tax
system is prone to inconsistent, arbitrary, retroactive, confiscatory, and/or
exorbitant taxation.
Compared
to most national stock markets, the Russian securities market suffers from a
variety of problems not encountered in more developed markets. There is little
long-term historical data on the Russian securities market because it is
relatively new and a substantial proportion of securities transactions in Russia
are privately negotiated outside of stock exchanges. The inexperience of the
Russian securities market and the limited volume of trading in securities in the
market may make obtaining accurate prices on portfolio securities from
independent sources more difficult than in more developed markets. Additionally,
there is little solid corporate information available to investors because of
less stringent auditing and financial reporting standards that apply to
companies operating in Russia. As a result, it may be difficult to assess the
value or prospects of an investment in Russian companies.
Because
of the recent formation of the Russian securities market as well as the
underdeveloped state of the banking and telecommunications systems, settlement,
clearing and registration of securities transactions are subject to significant
risks. Ownership of shares (except where shares are held through depositories
that meet the requirements of the Investment Company Act of 1940, as amended
(1940 Act) is defined according to entries in the company's share register and
normally evidenced by extracts from the register or by formal share
certificates. These services, however, are carried out by the companies
themselves or by registrars located throughout Russia. These registrars are not
necessarily subject to effective state supervision nor are they licensed with
any governmental entity, and it is possible for a fund to lose its registration
through fraud, negligence, or even mere oversight. While a fund will endeavor to
ensure that its interest continues to be appropriately recorded either itself or
through a custodian or other agent inspecting the share register and by
obtaining extracts of share registers through regular confirmations, these
extracts have no legal enforceability, and it is possible that subsequent
illegal amendment or other fraudulent act may deprive a fund of its ownership
rights or improperly dilute its interests. In addition, while applicable Russian
regulations impose liability on registrars for losses resulting from their
errors, it may be difficult for a fund to enforce any rights it may have against
the registrar or issuer of the securities in the event of loss of share
registration. Furthermore, significant delays or problems may occur in
registering the transfer of securities, which could cause a fund to incur losses
due to either a counterparty's failure to pay for securities the fund has
delivered or the fund's inability to complete its contractual obligations. The
designation of the National Settlement Depository (NSD) as the exclusive
settlement organization for all publicly traded Russian companies and investment
funds has enhanced the efficiency and transparency of the Russian securities
market. Additionally, agreements between the NSD and foreign central securities
depositories and settlement organizations have allowed for simpler and more
secure access for foreign investors as well.
The
Russian economy is heavily dependent upon the export of a range of commodities
including industrial metals, forestry products, oil, and gas. Accordingly, it is
strongly affected by international commodity prices and is particularly
vulnerable to any weakening in global demand for these products. Furthermore,
the sale and use of certain strategically important commodities, such as gas,
may be dictated by political, rather than economic, considerations.
Over
the long-term, Russia faces challenges including a shrinking workforce, high
levels of corruption, difficulty in accessing capital for smaller, non-energy
companies, and poor infrastructure in need of large investments.
The
sanctions imposed on Russia by the United States and the European Union, as well
as the threat of additional sanctions, could have further adverse consequences
for the Russian economy, including continued weakening of the ruble, additional
downgrades in the country's credit rating, and a significant decline in the
value and liquidity of securities issued by Russian companies or the Russian
government. The imposition of broader sanctions targeting specific issuers or
sectors could prohibit a fund from investing in any securities issued by
companies subject to such sanctions. In addition, these sanctions and/or
retaliatory action by Russia could require a fund to freeze its existing
investments in Russian companies. This could prohibit a fund from selling or
transacting in these investments and potentially impact a fund's
liquidity.
Currency.
Foreign
investors also face a high degree of currency risk when investing in Russian
securities and a lack of available currency hedging instruments. The Russian
ruble has recently been subject to significant fluctuations due to the conflict
in Ukraine and the sanctions imposed by the West. The Russian Central Bank has
spent significant foreign exchange reserves to maintain the value of the ruble.
Such reserves, however, are finite and, as exemplified by the recent rise in
inflation, the Russian Central Bank may be unable to properly manage competing
demands of supporting the ruble, managing inflation, and stimulating a
struggling Russian economy. Russia's foreign exchange reserves may be spent to
stabilize Russia's currency and/or economy in the future. Therefore, any
investment denominated in rubles may be subject to significant devaluation in
the future. Although official sovereign debt to GDP figures are low for a
developed economy, sovereign default remains a risk. Even absent a sovereign
default, foreign investors could face the possibility of further devaluations.
There is the risk that the government may impose capital controls on foreign
portfolio investments in the event of extreme financial or political crisis.
Such capital controls could prevent the sale of a portfolio of foreign assets
and the repatriation of investment income and capital. Such risks have led to
heightened scrutiny of Russian liquidity conditions which, in turn, creates a
heightened risk of the repatriation of ruble assets by concerned foreign
investors. The persistent economic turmoil in Russia caused the Russian ruble to
depreciate as unemployment levels increased and global demand for oil exports
decreased. In particular, the recent collapse in energy prices has shrunk the
value of Russian exports and further weakened both the value of the ruble and
the finances of the Russian state. The Russian economy has also suffered
following the conflict in Ukraine, due to significant capital flight from the
country. The pressure put on the ruble caused by this divestment has been
compounded by the sanctions from the United States and EU, leading to further
depreciation, a limitation of the ruble's convertibility, and an increase in
inflation.
The
Middle East and Africa. Investing
in Middle Eastern and African securities is highly speculative and involves
significant risks and special considerations not typically associated with
investing in the securities markets of the United States and most other
developed countries. For instance, changes in investment policies or shifts
in political climates in the region could result in changes to government
regulations such as price controls, export and import controls, income and other
taxes, foreign ownership restrictions, foreign exchange and currency controls,
and labor and welfare benefit policies. Any unexpected changes to these policies
or regulations may result in increased investment, operating or compliance
expenses for a fund and may have an adverse effect on a fund's business and
financial condition.
Political.
Many
Middle Eastern and African countries historically have suffered from political
instability. Despite the trend towards democratization in recent years,
especially in Africa, significant political risks continue to affect some Middle
Eastern and African countries. These risks may include substantial government
intervention in and control over the private sector, corrupt leaders, civil
unrest, suppression of opposition parties that can lead to further dissidence
and militancy, fixed elections, terrorism, coups, and war. In recent years,
several countries in the Middle East and North Africa have experienced
pro-democracy movements that resulted in swift regime changes. In some instances
where pro-democracy movements successfully toppled regimes, the stability of
successor regimes has proven weak, as evidenced by the political situation in
Egypt. In other instances, these changes have devolved into armed conflict
involving local factions, regional allies or international forces, and even
protracted civil wars, such as in Libya and Syria.
The
protracted civil war in Syria has given rise to numerous militias, terrorist
groups and, most notably, the proto-state of ISIS. The conflict has disrupted
oil production across Syria and Iraq, effectively destroying the economic value
of large portions of the region and has caused a massive exodus of refugees into
neighboring states, which further threatens government infrastructure of the
refuge countries.
Regional
instability has not been confined to the Middle East. In Nigeria, Africa's
largest economy, continued conflicts between the government and various
insurgent groups have caused grave humanitarian and economic consequences. In
addition, Africa has experienced a number of regional health crises in recent
years, which have demonstrated the vulnerabilities of political institutions and
health care systems in the face of crisis. African countries, particularly
in Eastern and sub-Saharan Africa, have struggled to access sufficient
quantities of COVID-19 vaccines to support their populations.
Continued
instability may slow the adoption of economic and political reforms and could
damage trade, investment, and economic growth going forward. Further, because
many Middle East and African nations have a history of dictatorship, military
intervention, and corruption, any successful reforms may prove impermanent. In
addition, there is an increasing risk that historical animosities, border
disputes, or defense concerns may lead to further armed conflict in the region.
Across the Middle East and Africa, such developments could have a negative
effect on economic growth and reverse favorable trends toward economic and
market reform, privatization, and the removal of trade barriers. Such
developments could also result in significant disruptions in securities
markets.
Although
geographically remote from the conflict in Ukraine, Middle Eastern and African
countries are subject to the adverse effect Russia's invasion of Ukraine brought
to the global economy. Surging oil and food prices are straining the external
and fiscal balances of commodity-importing countries and have increased food
security problems in these regions. These economic disruptions may undermine a
fund's investment in these countries.
Economic.
Middle
Eastern and African countries historically have suffered from underdeveloped
infrastructure, high unemployment rates, a comparatively unskilled labor force,
and inconsistent access to capital, which have contributed to economic
instability and stifled economic growth in the region. Furthermore, certain
Middle Eastern and African markets may face a higher concentration of market
capitalization, greater illiquidity and greater price volatility compared to
those found in more developed markets of Western Europe or the United States.
Additionally, certain countries in the region have a history of nationalizing or
expropriating foreign assets, which could cause a fund to lose the value of its
investments in those countries or could negatively affect foreign investor
confidence in the region. Despite a growing trend towards economic
diversification, many Middle Eastern and African economies remain heavily
dependent upon a limited range of commodities. These include gold, silver,
copper, cocoa, diamonds, natural gas and petroleum. These economies are greatly
affected by international commodity prices and are particularly vulnerable to
any weakening in global demand for these products. As a result, many countries
have been forced to scale down their infrastructure investment and the size of
their public welfare systems, which could have long-term economic, social, and
political implications.
South
Africa, Africa's second largest economy, is the largest destination for foreign
direct investment on the continent. The country has a two-tiered, developing
economy with one tier similar to that of a developed country and the second tier
having only the most basic infrastructure. Although South Africa has experienced
modest economic growth in recent years, such growth has been sluggish, hampered
by endemic corruption, ethnic and civil conflicts, labor unrest, the effects of
the HIV health crisis, and political instability. In addition, reduced demand
for South African exports due to the lasting effects of the European debt crisis
and persistent low growth in the global economy may limit any such recovery.
These problems have been compounded by worries over South African sovereign debt
prompted by an increasing deficit and rising level of sovereign debt. These
conditions led to tremendous downgrades in South Africa's credit ratings in
recent years. Although the ratings are slowly recovering, such downgrades in
South African sovereign debt and the likelihood of an issuer default could have
serious consequences for investments in South Africa.
The
securities markets in these countries are generally less developed. Financial
information about the issuers is not always publicly available, and these
issuers are not subjected to uniform accounting, auditing, and financial
reporting rules. Market volatility, lower trading volume, illiquidity, and
rising global inflation all create risks for a fund investing in these
countries. These shortcomings may undermine a fund's investment in these
countries.
Currency.
Certain
Middle Eastern and African countries have currencies pegged to the U.S. dollar
or euro rather than free-floating exchange rates determined by market forces.
Although intended to stabilize the currencies, these pegs, if abandoned, may
cause sudden and significant currency adjustments, which may adversely impact
investment returns. There is no significant foreign exchange market for certain
currencies, and it would be difficult for a fund to engage in foreign currency
transactions designed to protect the value of a fund's interests in securities
denominated in such currencies.
To
the extent that Strategic Advisers grants investment management authority over
an allocated portion of the fund's assets to a sub-adviser (see the section
entitled "Management Contract"), that sub-adviser is authorized to provide the
services described in the respective sub-advisory agreement, and in accordance
with the policies described in this section.
Orders
for the purchase or sale of portfolio securities are placed on behalf of the
fund by Strategic Advisers (either directly or through its affiliates) or a
sub-adviser, pursuant to authority contained in the management contract and the
respective sub-advisory agreement.
Strategic
Advisers or a sub-adviser may be responsible for the placement of portfolio
securities transactions for other investment companies and investment accounts
for which it has or its affiliates have investment discretion.
The
fund will not incur any commissions or sales charges when it invests in
affiliated mutual funds, but it may incur such costs when it invests directly in
other types of securities, including ETFs.
Purchases
and sales of equity securities on a securities exchange or OTC are effected
through brokers who receive compensation for their services. Generally,
compensation relating to securities traded on foreign exchanges will be higher
than compensation relating to securities traded on U.S. exchanges and may not be
subject to negotiation. Compensation may also be paid in connection with
principal transactions (in both OTC securities and securities listed on an
exchange) and agency OTC transactions executed with an electronic communications
network (ECN) or an alternative trading system. Equity securities may be
purchased from underwriters at prices that include underwriting fees.
Purchases
and sales of fixed-income securities are generally made with an issuer or a
primary market-maker acting as principal. Although there is no stated brokerage
commission paid by the fund for any fixed-income security, the price paid by the
fund to an underwriter includes the disclosed underwriting fee and prices in
secondary trades usually include an undisclosed dealer commission or markup
reflecting the spread between the bid and ask prices of the fixed-income
security. New issues of equity and fixed-income securities may also be purchased
in underwritten fixed price offerings.
The
Trustees of the fund periodically review Strategic Advisers' and its
affiliates' and each sub-adviser's performance of their respective
responsibilities in connection with the placement of portfolio securities
transactions on behalf of the fund. The Trustees also review the compensation
paid by the fund over representative periods of time to determine if it was
reasonable in relation to the benefits to the fund.
Strategic
Advisers.
The
Selection of Securities Brokers and Dealers
Strategic
Advisers or its affiliates generally have authority to select brokers (whether
acting as a broker or a dealer) to place or execute the fund's portfolio
securities transactions. In selecting brokers, including affiliates of Strategic
Advisers, to execute the fund's portfolio securities transactions, Strategic
Advisers or its affiliates consider the factors they deem relevant in the
context of a particular trade and in regard to Strategic Advisers' or its
affiliates' overall responsibilities with respect to the fund and other
investment accounts, including any instructions from the fund's portfolio
manager, which may emphasize, for example, speed of execution over other
factors. Based on the factors considered, Strategic Advisers or its affiliates
may choose to execute an order using ECNs including broker-sponsored
algorithmics, internal crossing, or by verbally working an order with one or
more brokers. Other possibly relevant factors include, but are not limited to,
the following: price; costs; the size, nature and type of order; the speed of
executions; financial condition and reputation of the broker; broker specific
considerations (e.g., not all brokers are able to execute all types of trades);
broker willingness to commit capital; the nature and characteristics of the
markets in which the security is traded; the trader's assessment of whether and
how closely the broker likely will follow the trader's instructions to the
broker; and the potential for information leakage; the nature or existence of
post-trade clearing, settlement, custody and currency convertibility mechanisms;
and the provision of additional brokerage and research products and services, if
applicable and where allowed by law.
The
trading desks through which Strategic Advisers or its affiliates may execute
trades are instructed to execute portfolio transactions on behalf of the fund
based on the quality of execution without any consideration of brokerage and
research products and services the broker or dealer may provide. The
administration of brokerage and research products and services is managed
separately from the trading desks, which means that traders have no
responsibility for administering soft dollar activities.
In
seeking best execution for portfolio securities transactions, Strategic Advisers
or its affiliates may from time to time select a broker that uses a trading
method, including algorithmic trading, for which the broker charges a higher
commission than its lowest available commission rate. Strategic Advisers or its
affiliates also may select a broker that charges more than the lowest commission
rate available from another broker. Occasionally, Strategic Advisers or its
affiliates execute an entire securities transaction with a broker and allocate
all or a portion of the transaction and/or related commissions to a second
broker where a client does not permit trading with an affiliate of Strategic
Advisers or in other limited situations. In those situations, the commission
rate paid to the second broker may be higher than the commission rate paid to
the executing broker. For futures transactions, the selection of a futures
commission merchant is generally based on the overall quality of execution and
other services provided by the futures commission merchant. Strategic Advisers
or its affiliates execute futures transactions electronically.
The
Acquisition of Brokerage and Research Products and Services
Strategic
Advisers does not maintain a soft dollar program. Some sub-advisers to the fund
use soft dollar or other commission-sharing arrangements in connection with
transactions effected for the fund. In those cases, sub-advisers could, pursuant
to their policies and procedures, allocate brokerage transactions of the fund to
brokers in exchange for research-related or brokerage-related goods or services,
provided that such arrangements meet the requirements of Section 28(e) of the
Securities Exchange Act of 1934. Strategic Advisers does not obtain products,
research, or services in connection with directing brokerage business to any
broker or dealer.
Commission
Recapture
Strategic
Advisers does not consider, in selecting or recommending brokers, whether
Strategic Advisers or a related person to Strategic Advisers receives client
referrals from a broker or third party. Strategic Advisers and its affiliates
are authorized to allocate brokerage transactions to brokers who are not
affiliates of Strategic Advisers who have entered into arrangements with
Strategic Advisers or its affiliates under which the broker, using predetermined
methodology, rebates a portion of the compensation paid by the fund to offset
that fund's expenses, which is paid to Strategic Advisers or its affiliates. Not
all brokers with whom the fund trades have agreed to participate in brokerage
commission recapture. Strategic Advisers expects that brokers from whom
Strategic Advisers or its affiliates purchase research products and services
with their own resources (referred to as "hard dollars") are unlikely to
participate in commission recapture.
Affiliated
Transactions
In
certain cases, Strategic Advisers and its delegates are authorized to place
portfolio transactions with affiliated registered brokers or transfer agents. In
particular, Strategic Advisers can place trades with NFS, through its Fidelity
Capital Markets (FCM) division, and Luminex Trading & Analytics LLC
(Luminex). Strategic Advisers will arrange for the execution of transactions
through those brokers or dealers if Strategic Advisers reasonably believes that
the quality of the execution of the transaction is comparable to what could be
obtained through other qualified brokers or dealers. In determining the ability
of a broker or dealer to obtain best execution, Strategic Advisers will consider
a number of factors, including the broker's or dealer's execution capabilities,
reputation, and access to the markets for the securities being traded.
Sub-advisers of the fund are authorized to place portfolio transactions with
Strategic Advisers' affiliated brokers in accordance with regulatory guidelines.
For certain funds trades are facilitated through FMR's trading desk and then
allocated to affiliated or unaffiliated executing brokers. In addition, from
time to time, Strategic Advisers or its affiliates may place trades with brokers
that use NFS or Fidelity Clearing Canada ULC (FCC) as a clearing agent and/or
use Level ATS, an alternative trading system that is deemed to be affiliated
with the Adviser, for execution services.
The
Trustees of the fund have approved procedures whereby a fund is permitted to
purchase securities that are offered in underwritings in which an affiliate of
the adviser or certain other affiliates participate. In addition, for
underwritings where such an affiliate participates as a principal underwriter,
certain restrictions may apply that could, among other things, limit the amount
of securities that the fund could purchase in the underwritings.
Non-U.S.
Transactions
To
facilitate trade settlement and related activities in non-United States
securities transactions, Strategic Advisers or its affiliates may effect spot
foreign currency transactions with foreign currency dealers. In certain
circumstances, due to local law and regulation, logistical or operational
challenges, or the process for settling securities transactions in certain
markets (e.g., short settlement periods), spot currency transactions may be
effected on behalf of funds by parties other than Strategic Advisers or its
affiliates, including funds' custodian banks (working through sub-custodians or
agents in the relevant non-U.S. jurisdiction) or broker-dealers that executed
the related securities transaction.
Trade
Allocation
Although
the Trustees and officers of the fund are substantially the same as those of
certain other funds managed by Strategic Advisers or its affiliates, investment
decisions for the fund are made independently from those of other funds or
investment accounts (including proprietary accounts) managed by Strategic
Advisers or its affiliates. The same security is often held in the portfolio of
more than one of these funds or investment accounts. Simultaneous transactions
are inevitable when several funds and investment accounts are managed by the
same investment adviser, or an affiliate thereof, particularly when the same
security is suitable for the investment objective of more than one fund or
investment account.
When
two or more funds or investment accounts are simultaneously engaged in the
purchase or sale of the same security or instrument, the prices and amounts are
allocated in accordance with procedures believed by Strategic Advisers to be
appropriate and equitable to each fund or investment account. In some cases this
could have a detrimental effect on the price or value of the security or
instrument as far as the fund is concerned. In other cases, however, the ability
of the fund to participate in volume transactions will produce better executions
and prices for the fund.
FIAM
LLC (FIAM).
The
Selection of Securities Brokers and Dealers
FIAM
or its affiliates generally have authority to select brokers (whether acting as
a broker or a dealer) with which to place the fund's portfolio securities
transactions. In selecting brokers, including affiliates of FIAM, to execute the
fund's portfolio securities transactions, FIAM or its affiliates consider the
factors they deem relevant in the context of a particular trade and in regard to
FIAM's or its affiliates' overall responsibilities with respect to the fund and
other investment accounts, including any instructions from the fund's portfolio
manager, which may emphasize, for example, speed of execution or use of specific
brokers over other factors. Based on the factors considered, FIAM or its
affiliates may choose to execute an order using electronic channels, including
broker-sponsored algorithms, internal crossing, or by verbally working an order
with one or more brokers. Other possibly relevant factors may include, but are
not limited to the following: price; costs; the size, nature and type of the
order; speed of execution, financial condition and reputation of the broker;
broker-specific considerations (e.g., not all brokers are able to execute all
types of trades); broker willingness to commit capital; the nature and
characteristics of the markets in which the security is traded; the trader's
assessment of whether and how closely the broker likely will follow the trader's
instructions to the broker; confidentiality and the potential for information
leakage; the nature of existence of post-trade clearing, settlement, custody and
currency convertibility mechanisms; and the provision of brokerage and research
products and services, if applicable and where allowed by law.
In
seeking best execution for portfolio securities transactions, FIAM and/or its
affiliates from time to time select a broker that uses a trading method,
including algorithmic trading, for which the broker charges a higher commission
than its lowest available commission rate. FIAM and/or its affiliates may also
select brokers that charge more than the lowest commission rate available from
another broker. Occasionally FIAM and/or its affiliates execute an entire
securities transaction with a broker and allocate ("step out") all or a portion
of the transaction and/or related commissions to a second broker where a client
does not permit trading with an affiliate of FIAM or in other limited
situations. In those situations, the commission rate paid to the second broker
may be higher than the commission rate paid to the executing broker. For futures
transactions, the selection of a futures commission merchant is generally based
on the overall quality of execution and other services provided by the futures
commission merchant. FIAM and/or its affiliates execute futures transactions
verbally and electronically.
The
Acquisition of Brokerage and Research Products and Services
To
the extent permitted by applicable law, brokers (who are not affiliates of FIAM)
that execute transactions for the fund managed outside of the European Union may
receive higher compensation from the fund than other brokers might have charged
the fund, in recognition of the value of the brokerage or research products and
services they provide to FIAM or its affiliates.
Research
Products and Services.
Products
and services that FIAM or its affiliates have received during the last fiscal
year include, when permissible under applicable law, but are not limited to:
economic, industry, company, municipal, sovereign (U.S. and non-U.S.), legal, or
political research reports; market color; company meeting facilitation;
compilation of securities prices, earnings, dividends and similar data;
quotation services, data, information and other services; analytical computer
software and services; and investment recommendations. In addition to receiving
brokerage and research products and services via written reports and
computer-delivered services, such reports may also be provided by telephone,
video and in-person meetings with securities analysts, corporate and industry
spokespersons, economists, academicians and government representatives and
others with relevant professional expertise. Brokers also provide brokerage and
research products and services in the form of a specific proprietary or
third-party product or service, upon request by FIAM or its affiliates. Some of
these brokerage and research products and services supplement FIAM's or its
affiliates' own research activities in providing investment advice to the
fund.
Execution
Services. In
addition, when permissible under applicable law, brokerage and research products
and services include those that assist in the execution, clearing, and
settlement of securities transactions, as well as other incidental functions
(including, but not limited to, communication services related to trade
execution, order routing and algorithmic trading, post-trade matching, exchange
of messages among brokers or dealers, custodians and institutions, and the use
of electronic confirmation and affirmation of institutional trades).
Mixed-Use
Products and Services. Although
FIAM or its affiliates do not use fund commissions to pay for products or
services that do not qualify as brokerage and research products and services or
eligible external research under MiFID II and FCA regulations (as defined
below), where allowed by applicable law, they may use commission dollars to
obtain certain products or services that are not used exclusively in their
investment decision-making process (mixed-use products or services). In those
circumstances, FIAM or its affiliates will make a good faith effort to evaluate
the various benefits and uses to which they intend to put the mixed-use product
or service, and will pay for that portion of the mixed-use product or service
that does not qualify as brokerage and research products and services or
eligible external research with their own resources (referred to as "hard
dollars").
Benefits
to FIAM. FIAM's
or its affiliates' expenses likely would be increased if they attempted to
generate these additional brokerage and research products and services through
their own efforts, or if they paid for these products or services with their own
resources. Therefore, an economic incentive exists for FIAM or its affiliates to
select or recommend a broker-dealer based on its interest in receiving the
brokerage and research products and services, rather than on FIAM's or its
affiliates' clients interest in receiving most favorable execution. FIAM and its
affiliates manage the receipt of brokerage and research products and services
and the potential conflicts through their Commission Uses Program. The
Commission Uses Program effectively "unbundles" commissions paid to brokers who
provide brokerage and research products and services, i.e., commissions consist
of an execution commission, which covers the execution of the trade (including
clearance and settlement), and a research charge, which is used to cover
brokerage and research products and services. Those brokers have client
commission arrangements (each a CCA) in place with FIAM and its affiliates (each
of those brokers is referred to as CCA brokers). In selecting brokers for
executing transactions on behalf of the fund, the trading desks through which
FIAM or its affiliates may execute trades are instructed to execute portfolio
transactions on behalf of the fund based on the brokers' quality of execution
and without any consideration of brokerage and research products and services
the CCA broker provides. Commissions paid to a CCA broker include both an
execution commission and either credits or transmits the research portion (also
known as "soft dollars") to a CCA pool maintained by each CCA broker. Soft
dollar credits ("credits") accumulated in CCA pools are used to pay research
expenses. In some cases, FIAM or its affiliates request that a broker that is
not a party to any particular transaction provide a specific proprietary or
third-party product or service, which would be paid with credits from the CCA
pool. The administration of brokerage and research products and services is
managed separately from the trading desks, and the traders have no
responsibility for administering the research program, including the payment for
research. FIAM or its affiliates, at times, use a third-party aggregator to
facilitate payments to research providers. Where an aggregator is involved, the
aggregator would maintain credits in an account that is segregated from the
aggregator's proprietary assets and the assets of its other clients ("segregated
account") and use those credits to pay research providers as instructed by FIAM
or its affiliates. Furthermore, where permissible under applicable law, certain
of the brokerage and research products and services that FIAM or its affiliates
receive are furnished by brokers on their own initiative, either in connection
with a particular transaction or as part of their overall services. Some of
these brokerage and research products or services are provided at no additional
cost to FIAM or its affiliates or might not have an explicit cost associated
with them.
FIAM's
Decision-Making Process. In
connection with the allocation of fund brokerage, FIAM or its affiliates make a
good faith determination that the compensation paid to brokers and dealers is
reasonable in relation to the value of the brokerage and/ or research products
and services provided to FIAM or its affiliates, viewed in terms of the
particular transaction for the fund or FIAM's or its affiliates' overall
responsibilities to that fund or other clients for which FIAM or its affiliates
have investment discretion; however, each brokerage and research product or
service received in connection with the fund's brokerage does not benefit the
fund and certain clients will receive the benefit of the brokerage and research
product or service obtained with other clients' commissions. As required under
applicable laws or client policy, commissions generated by certain clients may
only be used to obtain certain brokerage and research products and services. As
a result, certain client accounts will pay more proportionately of certain types
of brokerage and research products and services than others, while the overall
amount of brokerage and research products and services paid by each client
continues to be allocated equitably. Certain non-equity accounts that on rare
occasion may receive an equity security through an issuer restructuring or other
event and are required or determine to dispose of such equity security, subject
to applicable law and client policy, may trade at execution only rates outside
of the Commission Usage Program. While FIAM or its affiliates take into account
the brokerage and/or research products and services provided by a broker or
dealer in determining whether compensation paid is reasonable, neither FIAM, its
affiliates, nor the fund incur an obligation to any broker, dealer, or third
party to pay for any brokerage and research product or service (or portion
thereof) by generating a specific amount of compensation or otherwise.
Typically, these brokerage and research products and services assist FIAM or its
affiliates in terms of their overall investment responsibilities to the fund or
any other client accounts for which FIAM or its affiliates may have investment
discretion. Certain client accounts use brokerage commissions to acquire
brokerage and research products and services that also benefit other client
accounts managed by FIAM or its affiliates, and not every client account uses
the brokerage and research products and services that have been acquired through
that account's commissions.
Research
Contracts. FIAM
or its affiliates have arrangements with certain third-party research providers
and brokers through whom FIAM or its affiliates effect fund trades, whereby FIAM
or its affiliates pay with fund commissions or hard dollars for all or a portion
of the cost of research products and services purchased from such research
providers or brokers. If hard dollar payments are used, FIAM or its affiliates,
at times, will cause the fund to pay more for execution than the lowest
commission rate available from the broker providing research products and
services to FIAM or its affiliates, or that may be available from another
broker. FIAM's or its affiliates' potential determination to pay for research
products and services separately (e.g., with hard dollars) is wholly voluntary
on FIAM's or its affiliates' part and may be extended to additional brokers or
discontinued with any broker participating in this arrangement.
Funds
Managed within the European Union. FIAM
and its affiliates have established policies and procedures relating to
brokerage commission uses in compliance with the revised Markets in Financial
Instruments Directive in the European Union, commonly referred to as "MiFID II",
as implemented in the United Kingdom through the Conduct of Business Sourcebook
Rules of the UK Financial Conduct Authority (the "FCA"), where
applicable.
For
accounts that are managed within the United Kingdom, FIAM's affiliate FMR
Investment Management (UK) Limited (FMRIM (UK)) uses research payment accounts
(RPAs) to cover costs associated with equity and high income external research
that is consumed by those accounts in accordance with MiFID II and FCA
regulations. With RPAs, clients pay for external research through a separate
research charge that is generally assessed and collected alongside the execution
commission1. For clients that use an RPA, FMRIM (UK) establishes a research
budget. The budget is set by first grouping accounts by strategy (e.g., asset
allocation, blend, growth, etc.), and then determining what external research is
consumed to support the strategies and portfolio management services provided
within the European Union or the United Kingdom. In this regard, research
budgets are set by research needs and are not otherwise linked to the volume or
value of transactions executed on behalf of the account. For clients where
portions are managed both within and outside of the United Kingdom, external
research is paid using both a CCA and an RPA. Determinations of what is eligible
research and how costs are allocated are made in accordance with FIAM's and its
affiliates' policies and procedures. Costs for research consumed by accounts
that use an RPA are allocated among the accounts within defined strategies pro
rata based on the assets under management for each account. While the research
charge paid on behalf of any one client that uses an RPA varies over time, the
overall research charge determined at the client level on an annual basis will
not be exceeded.
FMRIM
(UK) is responsible for managing the RPA and may delegate its administration to
a third-party administrator for the facilitation of the purchase of external
research and payments to research providers. RPA assets are maintained in
accounts at a third-party depository institution, held in the name of FMRIM
(UK). FMRIM (UK) provides to client accounts, on request, a summary of: (i) the
providers paid from the RPA; (ii) the total amount they were paid over a defined
period; (iii) the benefits and services received by FMRIM (UK); and (iv) how the
total amount spent from the RPA compares to the research budget set for that
period, noting any rebate or carryover if residual funds remain in the
RPA.
Impacted
accounts, like those accounts that participate in CCA pools, at times, will make
payments to a broker that include both an execution commission and a research
charge, but unlike CCAs (for which research charges may be retained by the CCA
broker and credited to the CCA, as described above), the broker will receive
separate payments for the execution commission and the research charge and will
promptly remit the research charge to the RPA. Assets in the RPA are used to
satisfy external research costs consumed by the accounts.
If
the costs of paying for external research exceed the amount initially agreed in
relation to accounts in a given strategy, FIAM or its affiliates may continue to
charge those accounts beyond the initially agreed amount in accordance with
MiFID II, continue to acquire external research for the accounts using its own
resources, or cease to purchase external research for those accounts until the
next annual research budget. If assets for specific accounts remain in the RPA
at the end of a period, they may be rolled over to the next period to offset
next year's research charges for those accounts or rebated to those
accounts.
Accounts
managed by FIAM or its affiliates that trade only fixed income securities will
not participate in RPAs because fixed income securities trade based on spreads
rather than commissions, and thus unbundling the execution commission and
research charge is impractical. Therefore, FIAM and its affiliates have
established policies and procedures to ensure that external research that is
paid for through RPAs is not made available to FMRIM (UK) portfolio managers
that manage fixed income accounts in any manner inconsistent with MiFID II and
FCA regulations.
1
The
staff of the SEC addressed concerns that reliance on an RPA mechanism to pay for
research would be permissible under Section 28(e) of the Securities Exchange Act
of 1934 by indicating that they would not recommend enforcement against
investment advisers who used an RPA to pay for brokerage and research products
and services so long as certain conditions were met. Therefore, references to
"research charges" as part of the RPA mechanism to satisfy MiFID II requirements
can be considered "commissions" for Section 28(e) purposes.
Commission
Recapture
From
time to time, FIAM or its affiliates engage in brokerage transactions with
brokers who are not affiliates of FIAM who have entered into arrangements with
FIAM or its affiliates under which the broker will, at times, rebate a portion
of the compensation paid by a fund ("commission recapture"). Not all brokers
with whom the fund trades have been asked to participate in brokerage commission
recapture.
Affiliated
Transactions
FIAM
or its affiliates place trades with certain brokers, including NFS and Luminex,
with whom they are under common control or otherwise affiliated, provided FIAM
or its affiliates determine that these affiliates' trade execution abilities and
costs are comparable to those of non-affiliated, qualified brokerage firms, and
that such transactions be executed in accordance with applicable rules under the
1940 Act and procedures adopted by the Board of Trustees of the fund and subject
to other applicable law. In addition, from time to time, FIAM or its affiliates
place trades with brokers that use NFS or Fidelity Clearing Canada ULC (FCC) as
a clearing agent and/or use Level ATS, an alternative trading system that is
deemed to be affiliated with the Adviser, for execution services. Similarly,
equity trades may be executed through national securities exchanges in which
FIAM or its affiliates have an interest. Any decision to execute a trade through
an alternative trading system or exchange in which FIAM or its affiliates have
an interest are made in accordance with applicable law, including their
obligation to seek best execution. For trades placed on such a system or
exchange, FIAM or its affiliates may benefit in the form of increased
valuations(s) of its equity interest, or other renumeration, but it is not
possible to predict the likelihood of that occurring or quantify the amount of
any such benefit in advance.
The
Trustees of the fund have approved procedures whereby a fund is permitted to
purchase securities that are offered in underwritings in which an affiliate of
the adviser or certain other affiliates participate. In addition, for
underwritings where such an affiliate participates as a principal underwriter,
certain restrictions may apply that could, among other things, limit the amount
of securities that the fund could purchase in the underwritings.
Non-U.S.
Securities Transactions
To
facilitate trade settlement and related activities in non-U.S. securities
transactions, FIAM or its affiliates effect spot foreign currency transactions
with foreign currency dealers or may engage a third party to do so. Due to local
law and regulation, logistical or operational challenges, or the process for
settling securities transactions in certain markets (e.g., short settlement
periods), spot currency transactions are effected on behalf of funds by parties
other than FIAM or its affiliates, including funds' custodian banks (working
through sub-custodians or agents in the relevant non-U.S. jurisdiction) or
broker-dealers that executed the related securities transaction.
Trade
Allocation
Although
the Trustees and officers of the fund are substantially the same as those of
certain other Fidelity® funds, investment decisions for the fund are made
independently from those of other Fidelity® funds or investment accounts
(including proprietary accounts). The same security is often held in the
portfolio of more than one of these funds or investment accounts. Simultaneous
transactions are inevitable when several funds and investment accounts are
managed by the same investment adviser, or an affiliate thereof, particularly
when the same security is suitable for the investment objective of more than one
fund or investment account.
When
two or more funds or investment accounts are simultaneously engaged in the
purchase or sale of the same security or instrument, the prices and amounts are
allocated in accordance with procedures believed by FIAM to be appropriate and
equitable to each fund or investment account. In some cases this could have a
detrimental effect on the price or value of the security or instrument as far as
the fund is concerned. In other cases, however, the ability of the fund to
participate in volume transactions will produce better executions and prices for
the fund.
FIL
Investment Advisors (FIA) and FIL Investment Advisors (UK) Limited
(FIA(UK)).
The
Selection of Securities Brokers and Dealers
FIA
and FIA(UK) (together, for purposes of this section, "FIL") generally have
authority to select broker-dealers to place or execute portfolio securities
transactions for the fund. FIL has retained FIL Investments International
("FII"), FIL Investment Management (Hong Kong) Limited ("FIMHK"), FIL
Investments (Japan) Limited ("FIJ"), FIL (Luxembourg) Limited ("FILUX"), and
Fidelity Investments Canada ULC ("FIC"), affiliates of FIL, to make these
selections. In selecting a broker-dealer for a specific transaction, FIL or its
affiliates evaluate a variety of criteria and use their good faith judgment to
obtain execution of portfolio transactions at prices that they believe are
reasonable in relation to the benefits received.
When
executing securities transactions on behalf of the fund, FIL or its affiliates
will seek to obtain best execution. FIL and its relevant affiliates have in
place policies and supporting procedures which are designed to help them obtain
achieve this obligation. In selecting broker-dealers, including affiliates of
FIL, to execute the fund's portfolio securities transactions, FIL or its
affiliates consider the factors they deem relevant in the context of a
particular trade and in regard to FIL's overall responsibilities with respect to
the fund and its other client accounts, including any instructions from the
fund's portfolio manager. Relevant factors may include the context of a
particular trade, the nature of the order, the priorities associated with the
order and the nature and conditions of the market in question. The diversity of
markets, instruments and the kind of orders placed mean that relevant factors
will be assessed differently depending upon the circumstances of execution.
In
selecting the most appropriate venue or approved counterparty for a portfolio
transaction, FIL or its affiliates generally consider a range of quantitative
and qualitative factors, including, but not limited to, price, transaction
costs, speed and certainty of execution, availability of liquidity, ease of
connectivity, size and nature of the transaction, nature and characteristics of
the other venues in which the security may be traded, nature of post-trade
settlement, and custody and foreign exchange structures. FIL or its affiliates
also consider other factors, as deemed relevant, such as the ability of the
venue or counterparty to manage complex orders, the speed of execution, the
financial condition of the counterparty, and the creditworthiness and the
quality of any related clearing and settlement facilities.
In
seeking best qualitative execution for portfolio transactions, FIL or its
affiliates may select a broker using a trading method for which the broker may
charge a higher commission than its lowest available commission rate. FIL or its
affiliates also may select a broker that charges more than the lowest available
commission rate available from another broker. FIL or its affiliates may execute
an entire transaction with a broker and allocate all or a portion of the
transaction and/or related commissions to a second broker where a client does
not permit trading with an affiliate of FIL or in other limited situations. In
those situations, the commission rate paid to the second broker may be higher
than the commission rate paid to the executing broker.
The
Acquisition of Brokerage and Research Products and Services
FIL
or its affiliates may execute portfolio transactions with broker-dealers that
provide brokerage or research products and services that assist FIL or its
affiliates in fulfilling their investment management responsibilities in
accordance with applicable law. These products and services may include, but are
not limited to: economic, industry, company, municipal, sovereign (U.S. and
non-U.S.), legal and political research reports or investment recommendations.
In addition to receiving these products and services via written reports and
computer-delivered services, they may also be provided by telephone and
in-person meetings with securities analysts, corporate and industry
spokespersons, economists, academicians and government representatives and
others with relevant professional expertise. FIL or its affiliates may request
that a broker provide a specific proprietary or third-party product or service.
Some of these brokerage and research products and services supplement FIL's or
its affiliates' own research activities in providing investment advice to the
fund.
Brokerage
and research products and services may also include those that assist in the
execution, clearing, and settlement of securities transactions, as well as other
incidental functions (including, but not limited to, communication services
related to trade execution, order routing and algorithmic trading, post-trade
matching, exchange of messages among brokers or dealers, custodians and
institutions, and the use of electronic confirmation and affirmation of
institutional trades). In addition, FIL or its affiliates may obtain from
broker-dealers certain products or services that are not used exclusively in
FIL's or its affiliates' investment decision-making process (mixed-use products
or services).
For
trades placed by FII, FIJ, FILUX, or FIMHK, no commissions on fund portfolio
transactions are used by FIL or its affiliates to pay for brokerage or research
products and services. All such products and services received from
broker-dealers are paid for by FIL or its affiliates from their own resources
(referred to as "hard dollars").
For
trades placed by FIC, subject to the requirements of Section 28(e) of the
Securities Exchange Act of 1934, brokers that execute transactions may receive
higher compensation from the fund than other brokers might have charged the
fund, in recognition of the value of the brokerage or research products and
services they provide to FIC or its affiliates. In those circumstances where the
products or services are mixed-use items, FIC will make a good faith judgment to
evaluate the various benefits and uses to which they intend to put the mixed-use
product or service, and FIC or its affiliates will pay for that portion of the
mixed-use product or service that does not qualify as brokerage and research
products and services or eligible external research with their own resources.
FIC may use the fund's brokerage commissions to acquire brokerage and research
products and services that may also benefit other funds or accounts managed by
FIC or its affiliates. In an effort to minimize the potential for conflicts of
interest, the trading desks through which FIC may execute trades are instructed
to execute portfolio transactions on behalf of the fund based on the quality of
execution without any consideration of brokerage and research products and
services the broker or dealer may provide.
Affiliated
Transactions
FIL
or its affiliates may place trades with certain brokers, including National
Financial Services LLC, through its Fidelity Capital Markets (FCM) division,
with whom they or FMR are affiliated, provided FIL or the applicable affiliate
determines that these affiliates' trade-execution abilities and costs are
comparable to those of non-affiliated, qualified brokerage firms, and that such
transactions be executed in accordance with applicable rules under the 1940 Act
and procedures adopted by the Trustees of the fund and subject to other
applicable law. In addition, FIL or its affiliates may place trades with brokers
that use a clearing agent in whom FIL or its affiliates have a financial
interest.
FIL
or its affiliates may execute transactions between the fund and other mutual
funds or other client accounts FIL manages or sub-advises, as well as with
certain funds or client accounts managed by the fund's manager. All cross trade
transactions may only be executed in accordance with applicable rules under the
Investment Company Act and the procedures approved by the Trustees of the fund.
The
Trustees of the fund have approved procedures whereby the fund may purchase
securities that are offered in underwritings in which an affiliate of the
adviser, sub-adviser or certain other affiliates participate. In addition, for
underwritings where such an affiliate participates as a principal underwriter,
certain restrictions may apply that could, among other things, limit the amount
of securities that the fund could purchase in the underwritings.
Trade
Allocation
FIL
or its relevant affiliates have established policies designed to ensure that
trade allocations are fair and appropriate, taking into account the investment
objectives of the relevant clients and other considerations. These policies
apply to initial public and secondary offerings and secondary market trades.
For
fixed income and equity trades, when, in FIL's or its affiliates' opinion, the
supply/demand is insufficient under the circumstances to satisfy all outstanding
trade orders, the amount executed generally is distributed among participating
client accounts based on order size. For both fixed income and equity trades,
trades are executed by traders based on orders or indications of interest for
clients, which are established prior to or at the time of a transaction.
The
trade allocation policies generally provide for minimum allocations. If a
standard allocation would result in an account receiving a very small allocation
(for example, because of its small asset size), depending upon the
circumstances, the account may receive an increased allocation to achieve a more
meaningful allocation or the account may receive no allocation. The policies
also provide for the execution of short sales, provided that consideration is
given to whether the short sale might have a material effect on other active
orders on the trading desk.
The
trading systems used by FIL and its applicable affiliates contain rules that
allocate trades on an automated basis, in accordance with the trade allocation
policies. Generally, any exceptions to the trade allocation policies (for
example, a special allocation) must be approved by senior trading and compliance
personnel and documented. The trade allocation policies identify certain
circumstances under which it may be appropriate to deviate from the general
allocation criteria, and describe the alternative procedures in those
circumstances.
Geode.
The
Selection of Brokers
In
selecting brokers or dealers (including affiliates of Strategic Advisers) to
execute the fund's portfolio transactions, Geode considers factors deemed
relevant in the context of a particular trade and in regard to Geode's overall
responsibilities with respect to the fund and other investment accounts,
including any instructions from the fund's portfolio manager, which may
emphasize, for example, speed of execution over other factors. The factors
considered will influence whether it is appropriate to execute an order using
ECNs, electronic channels including algorithmic trading, or by actively working
an order. Other factors deemed relevant may include, but are not limited to:
price; the size and type of the transaction; the reasonableness of compensation
to be paid, including spreads and commission rates; the speed and certainty of
trade executions; the nature and characteristics of the markets for the security
to be purchased or sold, including the degree of specialization of the broker in
such markets or securities; the availability of liquidity in the security,
including the liquidity and depth afforded by a market center or market-maker;
the reliability of a market center or broker; the degree of anonymity that a
particular broker or market can provide; the potential for avoiding market
impact; the execution services rendered on a continuing basis; the execution
efficiency, settlement capability, and financial condition of the firm;
arrangements for payment of fund expenses, if applicable; and the provision of
additional brokerage and research products and services, if applicable. In
seeking best qualitative execution, Geode may select a broker using a trading
method for which the broker may charge a higher commission than its lowest
available commission rate. Geode also may select a broker that charges more than
the lowest commission rate available from another broker. For futures
transactions, the selection of a futures commission merchant is generally based
on the overall quality of execution and other services provided by the futures
commission merchant.
The
Acquisition of Brokerage and Research Products and Services
Brokers
(who are not affiliates of Strategic Advisers) that execute transactions for the
fund may receive higher compensation from the fund than other brokers might have
charged the fund, in recognition of the value of the brokerage or research
products and services they provide to Geode.
Research
Products and Services. These
products and services may include, when permissible under applicable law:
economic, industry, company, municipal, sovereign (U.S. and non-U.S.), legal, or
political research reports; market color; company meeting facilitation;
compilation of securities prices, earnings, dividends and similar data;
quotation services, data, information and other services; analytical computer
software and services; and investment recommendations. In addition to receiving
brokerage and research products and services via written reports and
computer-delivered services, such reports may also be provided by telephone and
in person meetings with securities analysts, corporate and industry
spokespersons, economists, academicians and government representatives and
others with relevant professional expertise. Geode may request that a broker
provide a specific proprietary or third-party product or service. Some of these
products and services supplement Geode's own research activities in providing
investment advice to the fund.
Execution
Services. In
addition, products and services may include, when permissible under applicable
law, those that assist in the execution, clearing, and settlement of securities
transactions, as well as other incidental functions (including, but not limited
to, communication services related to trade execution, order routing and
algorithmic trading, post-trade matching, exchange of messages among brokers or
dealers, custodians and institutions, and the use of electronic confirmation and
affirmation of institutional trades).
Mixed-Use
Products and Services. Geode
may use commission dollars to obtain certain products or services that are not
used exclusively in Geode's investment decision-making process (mixed-use
products or services). In those circumstances, Geode will make a good faith
judgment to evaluate the various benefits and uses to which they intend to put
the mixed-use product or service, and will pay for that portion of the mixed-use
product or service that does not qualify as brokerage and research products and
services with their own resources (referred to as "hard dollars").
Benefit
to Geode. Geode's
expenses would likely be increased if it attempted to generate these additional
products and services through its own efforts, or if it paid for these products
or services itself. Certain of the brokerage and research products and services
Geode receives are furnished by brokers on their own initiative, either in
connection with a particular transaction or as part of their overall services.
Some of these products or services may not have an explicit cost associated with
such product or service.
Geode's
Decision-Making Process. Before
causing the fund to pay a particular level of compensation, Geode will make a
good faith determination that the compensation is reasonable in relation to the
value of the brokerage and/or research products and services provided to Geode,
viewed in terms of the particular transaction for the fund or Geode's overall
responsibilities to the fund or other investment companies and investment
accounts. While Geode may take into account the brokerage and/or research
products and services provided by a broker in determining whether compensation
paid is reasonable, neither Geode nor the fund incur an obligation to any
broker, dealer, or third party to pay for any product or service (or portion
thereof) by generating a specific amount of compensation or otherwise.
Typically, these products and services assist Geode in terms of its overall
investment responsibilities to the fund and other investment companies and
investment accounts; however, each product or service received may not benefit
the fund. Certain funds or investment accounts may use brokerage commissions to
acquire brokerage and research products and services that may also benefit other
funds or accounts managed by Geode.
Affiliated
Transactions
Geode
may place trades with certain brokers, including NFS, through its Fidelity
Capital Markets (FCM) division, and Luminex, with whom Strategic Advisers is
under common control, provided it determines that these affiliates' trade
execution abilities and costs are comparable to those of non-affiliated,
qualified brokerage firms.
The
Trustees of the fund have approved procedures whereby a fund is permitted to
purchase securities that are offered in underwritings in which an affiliate of
the adviser or certain other affiliates participate. In addition, for
underwritings where such an affiliate participates as a principal underwriter,
certain restrictions may apply that could, among other things, limit the amount
of securities that the fund could purchase in the underwritings.
Trade
Allocation
Although
the Trustees and officers of the fund are substantially the same as those of
certain other Fidelity ®
funds,
investment decisions for the fund are made independently from those of other
Fidelity ®
funds
or investment accounts (including proprietary accounts).The same security is
often held in the portfolio of more than one of these funds or investment
accounts. Simultaneous transactions are inevitable when several funds and
investment accounts are managed by the same investment adviser, particularly
when the same security is suitable for the investment objective of more than one
fund or investment account.
When
two or more funds or investment accounts are simultaneously engaged in the
purchase or sale of the same security or instrument, the prices and amounts are
allocated in accordance with procedures believed to be appropriate and equitable
to each fund or investment account. In some cases this could have a detrimental
effect on the price or value of the security or instrument as far as the fund is
concerned. In other cases, however, the ability of the fund to participate in
volume transactions will produce better executions and prices for the
fund.
Orders
for funds and investment accounts are not typically combined or "blocked".
However, Geode may, when feasible and when consistent with the fair and
equitable treatment of all funds and investment accounts and best execution,
block orders of various funds and investment accounts for order entry and
execution.
Geode
has established allocation policies for its various funds and investment
accounts to ensure allocations are appropriate given its clients' differing
investment objectives and other considerations. When the supply/demand is
insufficient to satisfy all outstanding trade orders, generally the amount
executed is distributed among participating funds and investment accounts based
on account asset size (for purchases and short sales), and security position
size (for sales and covers), or otherwise according to the allocation policies.
These policies also apply to initial public and secondary offerings. Generally,
allocations are determined by traders, independent of portfolio managers, in
accordance with these policies. Allocations are determined and documented on
trade date.
Geode's
trade allocation policies identify circumstances under which it is appropriate
to deviate from the general allocation criteria and describe the alternative
procedures. For example, if a standard allocation would result in a fund or
investment account receiving a very small allocation (e.g., because of its small
asset size), the fund or investment account may receive an increased allocation
to achieve a more meaningful allocation, or it may receive no allocation.
Generally, any exceptions to Geode's policies (i.e., special allocations) must
be approved by senior investment or trading personnel, reviewed by the
compliance department, and documented.
Commissions
Paid
A
fund may pay compensation including both commissions and spreads in connection
with the placement of portfolio transactions. The amount of brokerage
commissions paid by a fund may change from year to year because of, among other
things, changing asset levels, shareholder activity, and/or portfolio
turnover.
The
following table shows the fund's portfolio turnover rate for the fiscal
period(s) ended February 28, 2023 and 2022. Variations in turnover rate may be
due to a fluctuating volume of shareholder purchase and redemption orders,
market conditions, and/or changes in Strategic Advisers' investment
outlook.
|
Turnover
Rates |
2023
|
2022
|
|
Strategic
Advisers® Fidelity® International Fund |
16%
|
17%
|
|
|
|
|
During
the fiscal year ended February 28, 2023, the following fund(s) held
securities issued by one or more of its regular brokers or dealers or a parent
company of its regular brokers or dealers. The following table shows the
aggregate value of the securities of the regular broker or dealer or parent
company held by the fund as of the fiscal year ended February 28, 2023.
|
Fund
|
Regular
Broker or Dealer |
|
Aggregate
Value of
Securities
Held |
|
Strategic
Advisers® Fidelity® International Fund |
Macquarie
Group Ltd. |
$
|
58,559,458
|
|
|
UBS
AG |
$
|
63,306,616
|
The
following table shows the total amount of brokerage commissions paid by the
following fund(s), comprising commissions paid on securities and/or futures
transactions, as applicable, for the fiscal year(s) ended February 28, 2023,
2022, and 2021. The total amount of brokerage commissions paid is stated as a
dollar amount and a percentage of the fund's average net assets.
|
Fund
|
Fiscal
Year
Ended
|
|
Dollar
Amount
|
Percentage
of
Average
Net
Assets |
|
Strategic
Advisers® Fidelity® International Fund |
2023
|
$
|
4,381,362
|
0.02%
|
|
|
2022
|
$
|
5,100,738
|
0.02%
|
|
|
2021
|
$
|
1,951,249
|
0.02%
|
Brokerage
commissions may vary significantly from year to year due to a variety of
factors, including the types of investments selected by the sub-adviser(s),
changes in transaction costs, and market conditions. During the fiscal year(s)
ended February 28, 2023, 2022, and 2021, the following brokerage commissions
were paid to affiliated brokers:
|
Fiscal
Year
End |
Broker
|
Affiliated
With |
Transaction
Initiated
By |
|
Commissions
|
Percentage
of
Aggregate
Brokerage
Commissions
|
Percentage
of
Aggregate
Dollar
Amount
of
Brokerage
Transactions
|
|
2023
|
FCM
|
FMR
LLC / Strategic Advisers |
FIAM
LLC |
$
|
1,004
|
0.02%
|
0.05%
|
|
2023
|
Luminex
|
FMR
LLC / Strategic Advisers |
FIAM
LLC |
$
|
110
|
0.00%
|
0.01%
|
|
2022
|
FCM
|
FMR
LLC / Strategic Advisers |
FIAM
LLC |
$
|
755
|
|
|
|
2022
|
Luminex
|
FMR
LLC / Strategic Advisers |
FIAM
LLC |
$
|
0
|
|
|
|
2021
|
FCM
|
FMR
LLC / Strategic Advisers |
FIAM
LLC |
$
|
0
|
|
|
|
2021
|
Luminex
|
FMR
LLC / Strategic Advisers |
FIAM
LLC |
$
|
0
|
|
|
The
following table shows the dollar amount of brokerage commissions paid to firms
that may have provided research or brokerage services and the approximate dollar
amount of the transactions involved for the fiscal year ended February 28,
2023.
|
Fund
|
Fiscal
Year
Ended
|
|
$
Amount of
Commissions
Paid
to Firms
for
Providing
Research
or
Brokerage
Services
|
|
$
Amount of
Brokerage
Transactions
Involved
|
|
Strategic
Advisers® Fidelity® International Fund |
2023
|
$
|
4,064,379
|
$
|
4,775,247,367
|
The
NAV is the value of a single share. NAV is computed by adding the value of a
fund's investments, cash, and other assets, subtracting its liabilities, and
dividing the result by the number of shares outstanding.
The
Board of Trustees has designated the fund's investment adviser as the valuation
designee responsible for the fair valuation function and performing fair value
determinations as needed. The adviser has established a Fair Value Committee
(the Committee) to carry out the day-to-day fair valuation responsibilities and
has adopted policies and procedures to govern the fair valuation process and the
activities of the Committee. The Committee may rely on information and
recommendations provided by affiliates of Strategic Advisers in fulfilling its
responsibilities, including the fair valuation of securities.
Shares
of underlying funds held by a fund are valued at their respective NAVs. The
Board of Trustees of each underlying Fidelity ®
fund
has designated the underlying fund's investment adviser as the valuation
designee responsible for that fund's fair valuation function and performing fair
value determinations as needed. References below to the Committee refer to the
Fair Value Committee of the fund's adviser or an underlying Fidelity
®
fund's
adviser, as applicable.
Generally,
other portfolio securities and assets held by a fund, as well as portfolio
securities and assets held by an underlying Fidelity ®
non-money
market fund, are valued as follows:
Most
equity securities are valued at the official closing price or the last reported
sale price or, if no sale has occurred, at the last quoted bid price on the
primary market or exchange on which they are traded.
Debt
securities and other assets for which market quotations are readily available
may be valued at market values in the principal market in which they normally
are traded, as furnished by recognized dealers in such securities or assets. Or,
debt securities and convertible securities may be valued on the basis of
information furnished by a pricing service that uses a valuation matrix which
incorporates both dealer-supplied valuations and electronic data processing
techniques.
Short-term
securities with remaining maturities of sixty days or less for which market
quotations and information furnished by a pricing service are not readily
available may be valued at amortized cost, which approximates current
value.
Futures
contracts are valued at the settlement or closing price. Options are valued at
their market quotations, if available. Swaps are valued daily using quotations
received from independent pricing services or recognized dealers.
Prices
described above are obtained from pricing services that have been approved by
the Committee. A number of pricing services are available and a fund may use
more than one of these services. A fund may also discontinue the use of any
pricing service at any time. Strategic Advisers through the
Committee engages in oversight activities with respect to the fund's
pricing services, which includes, among other things, testing the prices
provided by pricing services prior to calculation of a fund's NAV, conducting
periodic due diligence meetings, and periodically reviewing the methodologies
and inputs used by these services.
Foreign
securities and instruments are valued in their local currency following the
methodologies described above. Foreign securities, instruments and currencies
are translated to U.S. dollars, based on foreign currency exchange rate
quotations supplied by a pricing service as of the close of the New York Stock
Exchange (NYSE), which uses a proprietary model to determine the exchange rate.
Forward foreign currency exchange contracts are valued at an interpolated rate
based on days to maturity between the closest preceding and subsequent
settlement period reported by the third party pricing service.
Other
portfolio securities and assets for which market quotations, official closing
prices, or information furnished by a pricing service are not readily available
or, in the opinion of the Committee, are deemed unreliable will be fair valued
in good faith by the Committee in accordance with applicable fair value pricing
policies. For example, if, in the opinion of the Committee, a security's value
has been materially affected by events occurring before a fund's pricing time
but after the close of the exchange or market on which the security is
principally traded, that security will be fair valued in good faith by the
Committee in accordance with applicable fair value pricing policies. In fair
valuing a security, the Committee may consider factors including, but not
limited to, price movements in futures contracts and ADRs, market and trading
trends, the bid/ask quotes of brokers, and off-exchange institutional trading.
The frequency that portfolio securities or assets are fair valued cannot be
predicted and may be significant.
Portfolio
securities and assets held by an underlying Fidelity ®
money
market fund are valued on the basis of amortized cost. This technique involves
initially valuing an instrument at its cost as adjusted for amortization of
premium or accretion of discount rather than its current market value. The
amortized cost value of an instrument may be higher or lower than the price a
money market fund would receive if it sold the instrument.
At
such intervals as they deem appropriate, the Trustees of an underlying
Fidelity ®
money
market fund consider the extent to which NAV calculated using market valuations
would deviate from the $1.00 per share calculated using amortized cost
valuation. If the Trustees believe that a deviation from a money market fund's
amortized cost per share may result in material dilution or other unfair results
to shareholders, the Trustees have agreed to take such corrective action, if
any, as they deem appropriate to eliminate or reduce, to the extent reasonably
practicable, the dilution or unfair results. Such corrective action could
include selling portfolio instruments prior to maturity to realize capital gains
or losses or to shorten average portfolio maturity; withholding dividends;
redeeming shares in kind; establishing NAV by using available market quotations;
and such other measures as the Trustees may deem appropriate.
In
determining the fair value of a private placement security for which market
quotations are not available, the Committee generally applies one or more
valuation methods including the market approach, income approach and cost
approach. The market approach considers factors including the price of recent
investments in the same or a similar security or financial metrics of comparable
securities. The income approach considers factors including expected future cash
flows, security specific risks and corresponding discount rates. The cost
approach considers factors including the value of the security's underlying
assets and liabilities.
The
fund's adviser reports to the Board information regarding the fair valuation
process and related material matters.
BUYING
AND SELLING INFORMATION
Shares
of the fund are offered only to certain clients of Strategic Advisers or its
affiliates that have granted Strategic Advisers discretionary investment
authority. If you are not currently a client in a discretionary investment
program offered by Strategic Advisers or its affiliates, please call
1-800-544-3455 for more information.
Investors
participating in a discretionary investment program are charged an annual
advisory fee based on a percentage of the average market value of assets in
their account. The stated fee is then reduced by a credit reflecting the amount
of fees, if any, received by Strategic Advisers LLC or its affiliates from
mutual funds for investment management or certain other services.
The
fund may make redemption payments in whole or in part in readily marketable
securities or other property pursuant to procedures approved by the Trustees if
Strategic Advisers determines it is in the best interests of the fund. Such
securities or other property will be valued for this purpose as they are valued
in computing the NAV of a fund or class, as applicable. Shareholders that
receive securities or other property will realize, upon receipt, a gain or loss
for tax purposes, and will incur additional costs and be exposed to market risk
prior to and upon the sale of such securities or other property.
The
fund, in its discretion, may determine to issue its shares in kind in exchange
for securities held by the purchaser having a value, determined in accordance
with the fund's policies for valuation of portfolio securities, equal to the
purchase price of the fund shares issued. The fund will accept for in-kind
purchases only securities or other instruments that are appropriate under its
investment objective and policies. In addition, the fund generally will not
accept securities of any issuer unless they are liquid, have a readily
ascertainable market value, and are not subject to restrictions on resale. All
dividends, distributions, and subscription or other rights associated with the
securities become the property of the fund, along with the securities. Shares
purchased in exchange for securities in kind generally cannot be redeemed for
fifteen days following the exchange to allow time for the transfer to
settle.
Dividends.
Because
the fund may invest significantly in foreign securities and/or in underlying
funds that invest significantly in foreign securities, corporate shareholders
should not expect fund dividends to qualify for the dividends-received
deduction. However, a portion of the fund's dividends, when distributed to
individual shareholders, may qualify for taxation at long-term capital gains
rates (provided certain holding period requirements are met). Short-term capital
gains are taxable at ordinary income tax rates. Distributions by the fund to
tax-advantaged retirement plan accounts are not taxable currently (but you may
be taxed later, upon withdrawal of your investment from such account).
Capital
Gain Distributions. Unless
your shares of the fund are held in a tax-advantaged retirement plan, the fund's
long-term capital gain distributions, including amounts attributable to an
underlying fund's long-term capital gain distributions, are federally taxable to
shareholders generally as capital gains.
The
following table shows the fund's aggregate capital loss carryforward as of
February 28, 2023, which is available to offset future capital gains. A fund's
ability to utilize its capital loss carryforwards in a given year or in total
may be limited.
|
Fund
|
|
Capital
Loss Carryforward (CLC) |
|
Strategic
Advisers® Fidelity® International Fund |
$
|
1,011,741,848
|
Returns
of Capital. If
the fund's distributions exceed its taxable income and capital gains realized
during a taxable year, all or a portion of the distributions made in the same
taxable year may be recharacterized as a return of capital to shareholders. A
return of capital distribution will generally not be taxable, but will reduce
each shareholder's cost basis in the fund and result in a higher reported
capital gain or lower reported capital loss when those shares on which the
distribution was received are sold in taxable accounts.
Foreign
Tax Credit or Deduction. Foreign
governments may impose withholding taxes on dividends and interest earned by the
fund with respect to foreign securities held directly by the fund. Foreign
governments may also impose taxes on other payments or gains with respect to
foreign securities held directly by the fund. As a general matter, if, at the
close of its fiscal year, more than 50% of the fund's total assets is invested
in securities of foreign issuers, the fund may elect to pass through eligible
foreign taxes paid and thereby allow shareholders to take a deduction or, if
they meet certain holding period requirements with respect to fund shares, a
credit on their individual tax returns. In addition, if at the close of each
quarter of its fiscal year at least 50% of the fund's total assets is
represented by interests in other regulated investment companies, the same rules
will apply to any foreign tax credits that underlying funds pass through to the
fund. Special rules may apply to the credit for individuals who receive
dividends qualifying for the long-term capital gains tax rate.
Tax
Status of the Fund. The
fund intends to qualify each year as a "regulated investment company" under
Subchapter M of the Internal Revenue Code so that it will not be liable for
federal tax on income and capital gains distributed to shareholders. In order to
qualify as a regulated investment company, and avoid being subject to federal
income or excise taxes at the fund level, the fund intends to distribute
substantially all of its net investment income and net realized capital gains
within each calendar year as well as on a fiscal year basis (if the fiscal year
is other than the calendar year), and intends to comply with other tax rules
applicable to regulated investment companies.
Fund
of Funds. Because
the fund is expected to invest in underlying funds in a fund of funds structure,
the fund's realized losses on sales of shares of an underlying fund may be
indefinitely or permanently deferred as "wash sales." Distributions of
short-term capital gains by an underlying fund will be recognized as ordinary
income by the upper-tier fund and would not be offset by the upper-tier fund's
capital loss carryforwards, if any. Capital loss carryforwards of an underlying
fund, if any, would not offset net capital gains of the upper-tier fund or of
any other underlying fund.
Other
Tax Information. The
information above is only a summary of some of the tax consequences generally
affecting the fund and its shareholders, and no attempt has been made to discuss
individual tax consequences. It is up to you or your tax preparer to determine
whether the sale of shares of the fund resulted in a capital gain or loss or
other tax consequence to you. In addition to federal income taxes, shareholders
may be subject to state and local taxes on fund distributions, and shares may be
subject to state and local personal property taxes. Investors should consult
their tax advisers to determine whether the fund is suitable to their particular
tax situation.
The
Trustees, Members of the Advisory Board (if any), and officers of the trust and
fund, as applicable, are listed below. The Board of Trustees governs the fund
and is responsible for protecting the interests of shareholders. The Trustees
are experienced executives who meet periodically throughout the year to oversee
the fund's activities, review contractual arrangements with companies that
provide services to the fund, oversee management of the risks associated with
such activities and contractual arrangements, and review the fund's performance.
If the interests of the fund and an underlying Fidelity ®
fund
were to diverge, a conflict of interest could arise and affect how the Trustees
and Members of the Advisory Board fulfill their fiduciary duties to the affected
funds. Strategic Advisers has structured the fund to avoid these potential
conflicts, although there may be situations where a conflict of interest is
unavoidable. In such instances, Strategic Advisers, the Trustees, and Members of
the Advisory Board would take reasonable steps to minimize and, if possible,
eliminate the conflict. Each of the Trustees oversees 14 funds.
The
Trustees hold office without limit in time except that (a) any Trustee may
resign; (b) any Trustee may be removed by written instrument, signed by at least
two-thirds of the number of Trustees prior to such removal; (c) any Trustee who
requests to be retired or who has become incapacitated by illness or injury may
be retired by written instrument signed by a majority of the other Trustees; and
(d) any Trustee may be removed at any special meeting of shareholders by a
two-thirds vote of the outstanding voting securities of the trust. Each Trustee
who is not an interested person (as defined in the 1940 Act) of the trust and
the fund is referred to herein as an Independent Trustee. Each Independent
Trustee shall retire not later than the last day of the calendar year in which
his or her 75th birthday occurs. The Independent Trustees may waive this
mandatory retirement age policy with respect to individual Trustees. Officers
and Advisory Board Members hold office without limit in time, except that any
officer or Advisory Board Member may resign or may be removed by a vote of a
majority of the Trustees at any regular meeting or any special meeting of the
Trustees. Except as indicated, each individual has held the office shown or
other offices in the same company for the past five years.
Experience,
Skills, Attributes, and Qualifications of the Trustees. The
Governance and Nominating Committee has adopted a statement of policy that
describes the experience, qualifications, attributes, and skills that are
necessary and desirable for potential Independent Trustee candidates (Statement
of Policy). The Board believes that each Trustee satisfied at the time he or she
was initially elected or appointed a Trustee, and continues to satisfy, the
standards contemplated by the Statement of Policy. The Governance and Nominating
Committee may also engage professional search firms to help identify potential
Independent Trustee candidates with experience, qualifications, attributes, and
skills consistent with the Statement of Policy. Additional criteria based on the
composition and skills of the current Independent Trustees, as well as
experience or skills that may be appropriate in light of future changes to board
composition, business conditions, and regulatory or other developments, may be
considered by the professional search firms and the Governance and Nominating
Committee. In addition, the Board takes into account the Trustees' commitment
and participation in Board and committee meetings, as well as their leadership
of standing and ad hoc committees throughout their tenure.
In
determining that a particular Trustee was and continues to be qualified to serve
as a Trustee, the Board has considered a variety of criteria, none of which, in
isolation, was controlling. The Board believes that, collectively, the Trustees
have balanced and diverse experience, qualifications, attributes, and skills,
which allow the Board to operate effectively in governing the fund and
protecting the interests of shareholders. Information about the specific
experience, skills, attributes, and qualifications of each Trustee, which in
each case led to the Board's conclusion that the Trustee should serve (or
continue to serve) as a trustee of the fund, is provided below.
Board
Structure and Oversight Function. Kathleen
Murphy is an interested person and currently serves as Chair. The Trustees
have determined that an interested Chair is appropriate and benefits
shareholders because an interested Chair has a personal and professional stake
in the quality and continuity of services provided to the fund. Independent
Trustees exercise their informed business judgment to appoint an individual of
their choosing to serve as Chair, regardless of whether the Trustee happens to
be independent or a member of management. The Independent Trustees have
determined that they can act independently and effectively without having an
Independent Trustee serve as Chair and that a key structural component for
assuring that they are in a position to do so is for the Independent Trustees to
constitute a substantial majority for the Board. The Independent Trustees also
regularly meet in executive session. Mary C. Farrell serves as the lead
Independent Trustee and as such (i) acts as a liaison between the Independent
Trustees and management with respect to matters important to the Independent
Trustees and (ii) with management prepares agendas for Board meetings.
Fidelity
®
funds
are overseen by different Boards of Trustees. The fund's Board oversees asset
allocation funds. Other Boards oversee Fidelity's alternative investment,
investment-grade bond, money market, and asset allocation funds, and Fidelity's
equity and high income funds. The fund may invest in Fidelity ®
;
funds overseen by such other Boards. The use of separate Boards, each with its
own committee structure, allows the Trustees of each group of Fidelity
®
funds
to focus on the unique issues of the funds they oversee, including common
research, investment, and operational issues.
The
Trustees primarily operate as a full Board, but also operate in committees, to
facilitate the timely and efficient consideration of all matters of importance
to the Trustees, the fund, and fund shareholders and to facilitate compliance
with legal and regulatory requirements and oversight of the fund's activities
and associated risks. The Board has charged Strategic Advisers and its
affiliates with (i) identifying events or circumstances the occurrence of which
could have demonstrably adverse effects on the fund's business and/or
reputation; (ii) implementing processes and controls to lessen the possibility
that such events or circumstances occur or to mitigate the effects of such
events or circumstances if they do occur; and (iii) creating and maintaining a
system designed to evaluate continuously business and market conditions in order
to facilitate the identification and implementation processes described in (i)
and (ii) above. Because the day-to-day operations and activities of the fund
are carried out by or through Strategic Advisers, its
affiliates and other service providers, the fund's exposure to risks is
mitigated but not eliminated by the processes overseen by the Trustees. Board
oversight of different aspects of the fund's activities is exercised primarily
through the full Board, but also through the Audit and Compliance Committee.
Appropriate personnel, including but not limited to the fund's Chief Compliance
Officer (CCO), FMR's internal auditor, the independent accountants, the fund's
Treasurer and portfolio management personnel, make periodic reports to the
Board's committees, as appropriate. The responsibilities of each standing
committee, including their oversight responsibilities, are described further
under "Standing Committees of the Trustees."
Interested
Trustees*:
Correspondence
intended for a Trustee who is an interested person may be sent to Fidelity
Investments, 245 Summer Street, Boston, Massachusetts 02210.
Name,
Year of Birth; Principal Occupations and Other Relevant Experience+
Charles
S. Morrison (1960)
Year
of Election or Appointment: 2020
Trustee
Mr.
Morrison also serves as Trustee of other funds. Previously, Mr. Morrison served
as President (2017-2018) and Director (2014-2018) of Fidelity SelectCo, LLC
(investment adviser firm), President of Fidelity Management & Research
Company (FMR) (investment adviser firm, 2016-2018), a Director of Fidelity
Investments Money Management, Inc. (investment adviser firm, 2014-2018),
President, Asset Management (2014-2018), Trustee of the Fidelity Equity and High
Income Funds (283 funds as of December 2018) (2014-2018), and was an employee of
Fidelity Investments. Mr. Morrison also previously served as Vice President of
Fidelity's Fixed Income and Asset Allocation Funds (2012-2014), President, Fixed
Income (2011-2014), Vice President of Fidelity's Money Market Funds (2005-2009),
President, Money Market Group Leader of FMR (2009), and Senior Vice President,
Money Market Group of FMR (2004-2009). Mr. Morrison also served as Vice
President of Fidelity's Bond Funds (2002-2005), certain Balanced Funds
(2002-2005), and certain Asset Allocation Funds (2002-2007), and as Senior Vice
President (2002-2005) of Fidelity's Bond Division.
Kathleen
Murphy (1963)
Year
of Election or Appointment: 2022
Trustee
Chair
of the Board of Trustees
Ms.
Murphy also serves as Trustee of other funds. Ms. Murphy serves as a Senior
Adviser to the Chief Executive Officer of Fidelity Investments (2022-present),
member of the Board of Directors of Snyk Technologies (cybersecurity technology,
2022-present), member of the Advisory Board of FliptRX (pharmacy benefits
manager, 2022-present), member of the Board of Directors of Fidelity Investments
Life Insurance Company (2009-present)), and member of the Board of Directors of
Empire Fidelity Investments Life Insurance Company (2009-present). Previously,
Ms. Murphy served as President of Personal Investing at Fidelity Investments
(2009-2021), Chief Executive Officer of ING U.S. Wealth Management (2003-2008),
and Deputy General Counsel, General Counsel and Chief Compliance Officer
(1997-2003) of Aetna. Ms. Murphy also serves as Vice Chairman of the Board of
Directors of the National Football Foundation (2013-present).
*
Determined to be an "Interested Trustee" by virtue of, among other things, his
or her affiliation with the trust or various entities under common control with
Strategic Advisers.
+
The information includes the Trustee's principal occupation during the last five
years and other information relating to the experience, attributes, and skills
relevant to the Trustee's qualifications to serve as a Trustee, which led to the
conclusion that the Trustee should serve as a Trustee for the fund.
Independent
Trustees:
Correspondence
intended for an Independent Trustee may be sent to Fidelity Investments, P.O.
Box 55235, Boston, Massachusetts 02205-5235.
Name,
Year of Birth; Principal Occupations and Other Relevant Experience+
Peter
C. Aldrich (1944)
Year
of Election or Appointment: 2006
Trustee
Mr.
Aldrich also serves as Trustee of other funds. Mr. Aldrich is an independent
Director of BLPF GP LLC (general partner of a private fund, 2006-present) and
BlackRock US Core Property Fund, Inc. (real estate investment trust,
2006-present). Previously, Mr. Aldrich served as a Managing Member of Poseidon,
LLC (foreign private investment, 1998-2004), and Chairman and Managing Member of
AEGIS, LLC (foreign private investment, 1997-2004). Mr. Aldrich previously was a
founder, Chief Executive Officer, and Chairman of AEW Capital Management, L.P.
(then, Aldrich, Eastman and Waltch, L.P.). Mr. Aldrich also served as a Director
of LivelyHood, Inc. (private corporation, 2013-2020), a Trustee for the Fidelity
Rutland Square Trust (2005-2010), a Director of Zipcar, Inc. (car sharing
services, 2001-2009) and as Faculty Chairman of The Research Council on Global
Investment of The Conference Board (business and professional education
non-profit, 1999-2004). Mr. Aldrich is a Member Emeritus of the Board of
Directors of the National Bureau of Economic Research and the Board of Trustees
of the Museum of Fine Arts Boston.
Mary
C. Farrell (1949)
Year
of Election or Appointment: 2013
Trustee
Ms.
Farrell also serves as Trustee of other funds. Ms. Farrell is a Director of the
W.R. Berkley Corporation (insurance provider) and Director (2006-present) and
Chair (2021-present) of the Howard Gilman Foundation (charitable
organization). Previously, Ms. Farrell was Managing Director and Chief
Investment Strategist at UBS Wealth Management USA and Co-Head of UBS Wealth
Management Investment Strategy & Research Group (2003-2005) and
President (2009-2021) of the Howard Gilman Foundation (charitable organization).
Ms. Farrell also served as Investment Strategist at PaineWebber (1982-2000) and
UBS PaineWebber (2000-2002). Ms. Farrell serves as Chairman of the Board of
Trustees of Yale-New Haven Hospital and Vice Chairman of the Yale New Haven
Health System Board and previously served as Trustee on the Board of Overseers
of the New York University Stern School of Business.
Karen
Kaplan (1960)
Year
of Election or Appointment: 2006
Trustee
Ms.
Kaplan also serves as Trustee of other funds. Ms. Kaplan is Chair (2014-present)
and Chief Executive Officer (2013-present) of Hill Holliday (advertising and
specialized marketing). Ms. Kaplan is a Member of the Board of Governors of the
Chief Executives' Club of Boston (2010-present), Member of the Executive
Committee and past Chair of the Greater Boston Chamber of Commerce
(2006-present), Advisory Board Member of the National Association of Corporate
Directors Chapter (2012-present), Member of the Board of Trustees of the Post
Office Square Trust (2012-present), Trustee of the Brigham and Women's Hospital
(2016-present), Overseer of the Boston Symphony Orchestra (2014-present), Member
of the Board of Directors of The Advertising Council, Inc. (2016-present),
Member of the Ron Burton Training Village Executive Board of Advisors
(2017-present), Member of the Executive Committee of The Ad Council, Inc.
(2019-present), and Member of the Board of Directors of The Ad Club of Boston
(2020-present). Previously, Ms. Kaplan served as an Advisory Board Member of
Fidelity Rutland Square Trust (2006-2010), Director of The Michaels Companies,
Inc. (specialty retailer, 2015-2021), a member of the Clinton Global
Initiative (2010-2015), Director of DSM (dba Delta Dental and DentaQuest)
(2004-2014), Formal Appointee of the 2015 Baker-Polito Economic Development
Council, Director of Vera Bradley Inc. (designer of women';s accessories,
2012-2015), Member of the Board of Directors of the Massachusetts Conference for
Women (2008-2015), Member of the Board of Directors of Jobs for Massachusetts
(2012-2015), President of the Massachusetts Women's Forum (2008-2010), Treasurer
of the Massachusetts Women's Forum (2002-2006), and Vice Chair of the Board of
the Massachusetts Society for the Prevention of Cruelty to Children
(2003-2010).
Christine
Marcks (1955)
Year
of Election or Appointment: 2020
Trustee
Ms.
Marcks also serves as Trustee of other Funds. Prior to her retirement, Ms.
Marcks served as Chief Executive Officer and President - Prudential Retirement
(2007-2017) and Vice President for Rollover and Retirement Income Strategies
(2005-2007), Prudential Financial, Inc. (financial services). Previously, Ms.
Marcks served as a Member of the Advisory Board of certain Fidelity ®
funds
(2019-2020), was Senior Vice President and Head of Financial Horizons
(2002-2004) and Vice President, Strategic Marketing (2000-2002) of Voya
Financial (formerly ING U.S.) (financial services), held numerous positions at
Aetna Financial Services (financial services, 1987-2000) and served as an
International Economist for the United States Department of the Treasury
(1980-1987). Ms. Marcks also serves as a member of the Board of Trustees, Audit
Committee and Benefits & Operations Committee of the YMCA Retirement Fund
(2018-present), a non-profit organization providing retirement plan benefits to
YMCA staff members, and as a member of the Board of Trustees of Assumption
College (2019-present).
Heidi
L. Steiger (1953)
Year
of Election or Appointment: 2017
Trustee
Ms.
Steiger also serves as Trustee of other funds. Ms. Steiger serves as Managing
Partner of Topridge Associates, LLC (consulting, 2005-present) and a member of
the Board of Directors (2022-present) of Live Current Media, Inc. Previously,
Ms. Steiger served as a member of the Board of Directors (2013-2021) and member
of the Membership and Executive Committee (2017-2021) of Business Executives for
National Security (nonprofit), a member of the Board of Directors Chair of
the Remuneration Committee of Imagine Intelligent Materials Limited (2019-2021)
(technology company), a member of the Advisory Board of the joint degree program
in Global Luxury Management at North Carolina State University (Raleigh, NC) and
Skema (Paris) (2018-2021), a Non-Executive Director of CrowdBureau Corporation
(financial technology company and index provider, 2018-2021), a member of the
Global Advisory Board and Of Counsel to Signum Global Advisors (international
policy and strategy, 2018-2020), Eastern Region President of The Private Client
Reserve of U.S. Bancorp (banking and financial services, 2010-2015), Advisory
Director of Berkshire Capital Securities, LLC (financial services, 2009-2010),
President and Senior Advisor of Lowenhaupt Global Advisors, LLC (financial
services, 2005-2007), and President and Contributing Editor of Worth Magazine
(2004-2005) and held a variety of positions at Neuberger Berman Group, LLC
(financial services, 1986-2004), including Partner and Executive Vice President
and Global Head of Private Asset Management at Neuberger Berman (1999-2004). Ms.
Steiger also served as a member of the Board of Directors of Nuclear Electric
Insurance Ltd (insurer of nuclear utilities, 2006-2017), a member of the Board
of Trustees and Audit Committee of the Eaton Vance Funds (2007-2010), a member
of the Board of Directors of Aviva USA (formerly AmerUs) (insurance, 2004-2014),
and a member of the Board of Trustees and Audit Committee and Chair of the
Investment Committee of CIFG (financial guaranty insurance, 2009-2012), and a
member of the Board of Directors of Kin Group Plc (formerly, Fitbug Holdings)
(health and technology, 2016-2017).
+
The information includes the Trustee's principal occupation during the last five
years and other information relating to the experience, attributes, and skills
relevant to the Trustee's qualifications to serve as a Trustee, which led to the
conclusion that the Trustee should serve as a Trustee for the fund.
Advisory
Board Members and Officers:
Correspondence
intended for a Member of the Advisory Board (if any) may be sent to Fidelity
Investments, P.O. Box 55235, Boston, Massachusetts 02205-5235. Correspondence
intended for an officer or Howard E. Cox, Jr. may be sent to Fidelity
Investments, 245 Summer Street, Boston, Massachusetts 02210. Officers appear
below in alphabetical order.
Name,
Year of Birth; Principal Occupation
Howard
E. Cox, Jr. (1944)
Year
of Election or Appointment: 2009
Member
of the Advisory Board
Mr.
Cox also serves as a Member of the Advisory Board of other funds. Mr. Cox is a
Partner of Greylock (venture capital, 1971-present) and a Director of Stryker
Corporation (medical products and services, 1974-present). Previously, Mr. Cox
served as an Advisory Board Member of Fidelity Rutland Square Trust (2006-2010).
Mr. Cox also serves as a Member of the Secretary of Defense's Business Board of
Directors (2008-present), a Director of Business Executives for National
Security (1997-present), a Director of the Brookings Institution (2010-present),
a Director of the World Economic Forum's Young Global Leaders Foundation
(2009-present), and is a Member of the Harvard Medical School Board of Fellows
(2002-present).
Craig
S. Brown (1977)
Year
of Election or Appointment: 2019
Assistant
Treasurer
Mr.
Brown also serves as an officer of other funds. Mr. Brown serves as Assistant
Treasurer of FIMM, LLC (2021-present) and is an employee of Fidelity Investments
(2013-present). Previously, Mr. Brown served as Assistant Treasurer of certain
Fidelity ®
funds
(2019-2022).
John
J. Burke III (1964)
Year
of Election or Appointment: 2018
Chief
Financial Officer
Mr.
Burke also serves as Chief Financial Officer of other funds. Mr. Burke serves as
Head of Investment Operations for Fidelity Fund and Investment Operations
(2018-present) and is an employee of Fidelity Investments (1998-present).
Previously Mr. Burke served as head of Asset Management Investment Operations
(2012-2018).
Margaret
Carey (1973)
Year
of Election or Appointment: 2023
Assistant
Secretary
Ms.
Carey also serves as an officer of other funds and as CLO of certain other
Fidelity entities. She is a Senior Vice President and Deputy General Counsel of
FMR LLC (diversified financial services company, 2019-present), and is an
employee of Fidelity Investments.
Jonathan
Davis (1968)
Year
of Election or Appointment: 2010
Assistant
Treasurer
Mr.
Davis also serves as an officer of other funds. Mr. Davis serves as Assistant
Treasurer of FIMM, LLC (2021-present), FMR Capital, Inc. (2017-present), FD
Funds GP LLC (2021-present), FD Funds Holding LLC (2021-present), and FD Funds
Management LLC (2021-present); and is an employee of Fidelity Investments.
Previously, Mr. Davis served as Vice President and Associate General Counsel of
FMR LLC (diversified financial services company, 2003-2010).
Laura
M. Del Prato (1964)
Year
of Election or Appointment: 2018
Assistant
Treasurer
Ms.
Del Prato also serves as an officer of other funds. Ms. Del Prato serves as
Assistant Treasurer of FIMM, LLC (2021-present) and is an employee of Fidelity
Investments (2017-present). Previously, Ms. Del Prato served as President and
Treasurer of The North Carolina Capital Management Trust: Cash Portfolio and
Term Portfolio (2018-2020). Prior to joining Fidelity Investments, Ms. Del Prato
served as a Managing Director and Treasurer of the JPMorgan Mutual Funds
(2014-2017). Prior to JPMorgan, Ms. Del Prato served as a partner at Cohen Fund
Audit Services (accounting firm, 2012-2013) and KPMG LLP (accounting firm,
2004-2012).
James
D. Gryglewicz (1972)
Year
of Election or Appointment: 2015
Chief
Compliance Officer
Mr.
Gryglewicz also serves as Chief Compliance Officer of other funds. Mr.
Gryglewicz serves as Compliance Officer of Strategic Advisers LLC (investment
adviser firm, 2015-present), Senior Vice President of Asset Management
Compliance (2009-present), and is an employee of Fidelity Investments
(2004-present). Previously, Mr. Gryglewicz served as Compliance Officer of
Fidelity SelectCo, LLC (investment adviser firm, 2014-2019), and as Chief
Compliance Officer of certain Fidelity® funds (2014-2018).
Colm
A. Hogan (1973)
Year
of Election or Appointment: 2016
Assistant
Treasurer
Mr.
Hogan also serves as an officer of other funds. Mr. Hogan serves as Assistant
Treasurer of FIMM, LLC (2021-present) and FMR Capital, Inc. (2017-present) and
is an employee of Fidelity Investments (2005-present). Previously, Mr. Hogan
served as Deputy Treasurer of certain Fidelity ®
funds
(2016-2020) and Assistant Treasurer of certain Fidelity ®
funds
(2016-2018).
Christina
H. Lee (1975)
Year
of Election or Appointment: 2020
Secretary
and Chief Legal Officer
Ms.
Lee also serves as Secretary and CLO of other funds. Ms. Lee serves as Vice
President, Associate General Counsel (2014-present) and is an employee of
Fidelity Investments (2007-present). Previously, Ms. Lee served as Assistant
Secretary of certain funds (2018-2019).
Chris
Maher (1972)
Year
of Election or Appointment: 2016
Assistant
Treasurer
Mr.
Maher also serves as an officer of other funds. Mr. Maher serves as
Assistant Treasurer of FIMM, LLC (2021-present) and FMR Capital, Inc.
(2017-present), and is an employee of Fidelity Investments (2008-present).
Previously, Mr. Maher served as Assistant Treasurer of certain funds
(2013-2020); Vice President of Asset Management Compliance (2013), Vice
President of the Program Management Group of FMR (investment adviser firm,
2010-2013), and Vice President of Valuation Oversight (2008-2010).
Brett
Segaloff (1972)
Year
of Election or Appointment: 2021
Anti-Money
Laundering (AML) Officer
Mr.
Segaloff also serves as an AML Officer of other funds and other related
entities. He is Director, Anti-Money Laundering (2007-present) of FMR LLC
(diversified financial services company) and is an employee of Fidelity
Investments (1996-present).
Stacie
M. Smith (1974)
Year
of Election or Appointment: 2020
President
and Treasurer
Ms.
Smith also serves as an officer of other funds. Ms. Smith serves as Assistant
Treasurer of FIMM, LLC (2021-present) and FMR Capital, Inc. (2017-present), is
an employee of Fidelity Investments (2009-present), and has served in other fund
officer roles. Prior to joining Fidelity Investments, Ms. Smith served as Senior
Audit Manager of Ernst & Young LLP (accounting firm, 1996-2009). Previously,
Ms. Smith served as Assistant Treasurer (2013-2019) and Deputy Treasurer
(2013-2016) of certain Fidelity ®
funds.
Jim
Wegmann (1979)
Year
of Election or Appointment: 2019
Assistant
Treasurer
Mr.
Wegmann also serves as an officer of other funds. Mr. Wegmann serves as
Assistant Treasurer of FIMM, LLC (2021-present) and is an employee of Fidelity
Investments (2011-present). Previously, Mr. Wegmann served as Assistant
Treasurer of certain Fidelity ®
funds
(2019-2021).
Standing
Committees of the Trustees. The
Board of Trustees has established two committees to supplement the work of the
Board as a whole. The members of each committee are Independent Trustees.
The
Audit and Compliance Committee is composed of all of the Independent Trustees,
with Ms. Steiger currently serving as Chair. All committee members must be able
to read and understand fundamental financial statements, including a company's
balance sheet, income statement, and cash flow statement. The committee
determines whether at least one member of the committee is an "audit committee
financial expert" as defined in rules promulgated by the SEC under the
Sarbanes-Oxley Act of 2002. The committee normally meets in conjunction with in
person meetings of the Board of Trustees, or more frequently as called by the
Chair or a majority of committee members. The committee meets separately
periodically with the fund's Treasurer, the fund's Chief Financial Officer, the
fund's CCO, personnel responsible for the internal audit function of FMR LLC,
and the fund's outside auditors. The committee has direct responsibility for the
appointment, compensation, and oversight of the work of the outside auditors
employed by the fund for the purpose of preparing or issuing an audit report or
related work. The committee assists the Trustees in overseeing and monitoring:
(i) the systems of internal accounting and financial controls of the fund and
the fund's service providers, (ii) the financial reporting processes of the fund
, (iii) the independence, objectivity and qualification of the auditors to the
fund, (iv) the annual audits of the fund's financial statements, and (v) the
accounting policies and disclosures of the fund. The committee considers and
acts upon (i) the provision by any outside auditor of any non-audit services for
any fund, and (ii) the provision by any outside auditor of certain non-audit
services to fund service providers and their affiliates to the extent that such
approval (in the case of this clause (ii)) is required under applicable
regulations (auditor independence regulations) of the SEC. It is responsible for
approving all audit engagement fees and terms for the fund and for resolving
disagreements between the fund and any outside auditor regarding any fund's
financial reporting, and has sole authority to hire and fire any auditor.
Auditors of the fund report directly to the committee. The committee will obtain
assurance of independence and objectivity from the outside auditors, including a
formal written statement delineating all relationships between the auditor and
the fund and any service providers consistent with Public Company Accounting
Oversight Board (PCAOB) Ethics and Independence Rule 3526, Communication with
Audit Committees Concerning Independence. The committee will discuss with the
outside auditors any such disclosed relationships and their impact on the
auditor's independence and objectivity. The committee will receive reports of
compliance with provisions of the auditor independence regulations relating to
the hiring of employees or former employees of the outside auditors. It oversees
and receives reports on the fund's service providers' internal controls and
reviews with management, internal audit personnel of FMR LLC, and outside
auditors the adequacy and effectiveness of the fund's and service providers'
accounting and financial controls, including: (i) any significant deficiencies
or material weaknesses in the design or operation of internal controls over
financial reporting that are reasonably likely to adversely affect the fund's
ability to record, process, summarize, and report financial data; (ii) any
change in the fund's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the fund's
internal control over financial reporting; and (iii) any fraud, whether material
or not, that involves management or other employees who have a significant role
in the fund's or service provider's internal controls over financial reporting.
The committee will review with counsel any legal matters that may have a
material impact on the fund's financial statements and any material reports or
inquiries received from regulators or governmental agencies. The committee
reviews at least annually a report from the outside auditor describing (i) any
material issues raised by the most recent internal quality control review, peer
review, or PCAOB examination of the auditing firm and (ii) any material issues
raised by any inquiry or investigation by governmental or professional
authorities of the auditing firm since the most recent report and in each case
any steps taken to deal with such issues. The committee will oversee and receive
reports on the fund's financial reporting process from the fund's Treasurer and
outside auditors and will receive reports from any outside auditor relating to
(i) critical accounting policies and practices used by the fund, (ii)
alternative accounting treatments that the auditor has discussed with Strategic
Advisers, and (iii) other material written communications between the auditor
and Strategic Advisers (as determined by the auditor). The committee will
discuss with Strategic Advisers, the fund's Treasurer, outside auditors and, if
appropriate, internal audit personnel of FMR LLC, their qualitative judgments
about the appropriateness and acceptability of accounting principles and
financial disclosure practices used or proposed for adoption by the fund. The
committee will review with Strategic Advisers, the fund's Treasurer, outside
auditors, and internal audit personnel of FMR LLC (to the extent relevant) the
results of audits of the fund's financial statements. The committee will discuss
regularly and oversee the review of the fund's major internal controls
exposures, the steps that have been taken to monitor and control such exposures,
and any risk management programs relating to the fund. The committee also
oversees the administration and operation of the compliance policies and
procedures of the fund and fund's service providers as required by Rule 38a-1 of
the 1940 Act. The committee is responsible for the review and approval of
policies and procedures relating to (i) provisions of the Code of Ethics, (ii)
anti-money laundering requirements, (iii) compliance with investment
restrictions and limitations, (iv) privacy, (v) recordkeeping, and (vi) other
compliance policies and procedures which are not otherwise delegated to another
committee of the Board of Trustees or reserved to the Board itself. The
committee has responsibility for recommending to the Board the designation of a
CCO of the fund. The committee serves as the primary point of contact between
the CCO and the Board, it oversees the annual performance review and
compensation of the CCO and, if required, makes recommendations to the Board
with respect to the removal of the appointed CCO. The committee receives reports
on significant correspondence with regulators or governmental agencies, employee
complaints or published reports which raise concerns regarding compliance
matters, and copies of significant non-routine correspondence with the SEC. The
committee receives reports from the CCO including the annual report concerning
the fund's compliance policies as required by Rule 38a-1 and quarterly reports
in respect of any breaches of fiduciary duty or violations of federal securities
laws.
The
Governance and Nominating Committee is composed of all of the Independent
Trustees, with Ms. Farrell currently serving as Chair. The committee meets as
called by the Chair. With respect to fund governance and board administration
matters, the committee periodically reviews procedures of the Board of Trustees
and its committees (including committee charters) and periodically reviews
compensation of Independent Trustees. The committee monitors corporate
governance matters and makes recommendations to the Board of Trustees on the
frequency and structure of the Board of Trustee meetings and on any other aspect
of Board procedures. It reviews the performance of legal counsel employed by the
funds and the Independent Trustees. On behalf of the Independent Trustees, the
committee will make such findings and determinations as to the independence of
counsel for the Independent Trustees as may be necessary or appropriate under
applicable regulations or otherwise. The committee is also responsible for Board
administrative matters applicable to Independent Trustees, such as expense
reimbursement policies and compensation for attendance at meetings, conferences
and other events. The committee monitors compliance with, acts as the
administrator of, and makes determinations in respect of, the provisions of the
Statement of Policy Relating to Personal Investing by the Independent Trustees
and Independent Advisory Board Members. The committee monitors the functioning
of each Board committee and makes recommendations for any changes, including the
creation or elimination of standing or ad hoc Board committees. The committee
monitors regulatory and other developments to determine whether to recommend
modifications to the committee's responsibilities or other Trustee policies and
procedures in light of rule changes, reports concerning "best practices" in
corporate governance and other developments in mutual fund governance. The
committee recommends that the Board establish such special or ad hoc Board
committees as may be desirable or necessary from time to time in order to
address ethical, legal, or other matters that may arise. The committee also
oversees the annual self-evaluation of the Board of Trustees and establishes
procedures to allow it to exercise this oversight function. In conducting this
oversight, the committee shall address all matters that it considers relevant to
the performance of the Board of Trustees and shall report the results of its
evaluation to the Board of Trustees, including any recommended amendments to the
principles of governance, and any recommended changes to the fund's or the Board
of Trustees' policies, procedures, and structures. The committee reviews
periodically the size and composition of the Board of Trustees as a whole and
recommends, if necessary, measures to be taken so that the Board of Trustees
reflects the appropriate balance of knowledge, experience, skills, expertise,
and diversity required for the Board as a whole and contains at least the
minimum number of Independent Trustees required by law. The committee makes
nominations for the election or appointment of Independent Trustees and for
membership on committees. The committee shall have authority to retain and
terminate any third-party advisers, including authority to approve fees and
other retention terms. Such advisers may include search firms to identify
Independent Trustee candidates and board compensation consultants. The committee
may conduct or authorize investigations into or studies of matters within the
committee's scope of responsibilities, and may retain, at the fund's expense,
such independent counsel or other advisers as it deems necessary. The committee
will consider nominees to the Board of Trustees recommended by shareholders
based upon the criteria applied to candidates presented to the committee by a
search firm or other source. Recommendations, along with appropriate background
material concerning the candidate that demonstrates his or her ability to serve
as an Independent Trustee of the fund, should be submitted to the Chair of the
committee at the address maintained for communications with Independent
Trustees. If the committee retains a search firm, the Chair will generally
forward all such submissions to the search firm for evaluation.
During
the fiscal year ended February 28, 2023, each committee held the number of
meetings shown in the table below:
|
COMMITTEE
|
NUMBER
OF MEETINGS HELD |
|
Audit
Committee |
5
|
|
Governance
and Nominating Committee |
3
|
The
following table sets forth information describing the dollar range of equity
securities beneficially owned by each Trustee in the fund and in all funds in
the aggregate within the same fund family overseen by the Trustee for the
calendar year ended December 31, 2022.
Interested
Trustees
|
DOLLAR
RANGE OF
FUND
SHARES |
Charles
S Morrison |
Kathleen
Murphy |
|
|
|
Strategic
Advisers® Fidelity® International Fund |
none
|
none
|
|
|
|
AGGREGATE
DOLLAR RANGE OF
FUND
SHARES IN ALL FUNDS
OVERSEEN
WITHIN FUND FAMILY |
over
$100,000 |
over
$100,000 |
|
|
Independent
Trustees
|
DOLLAR
RANGE OF
FUND
SHARES |
Peter
C Aldrich |
Mary
C Farrell |
Karen
Kaplan |
Christine
Marcks |
|
Strategic
Advisers® Fidelity® International Fund |
none
|
none
|
none
|
none
|
|
AGGREGATE
DOLLAR RANGE OF
FUND
SHARES IN ALL FUNDS
OVERSEEN
WITHIN FUND FAMILY |
over
$100,000 |
none
|
over
$100,000 |
none
|
|
DOLLAR
RANGE OF
FUND
SHARES |
Heidi
L Steiger |
|
|
|
|
Strategic
Advisers® Fidelity® International Fund |
none
|
|
|
|
|
AGGREGATE
DOLLAR RANGE OF
FUND
SHARES IN ALL FUNDS
OVERSEEN
WITHIN FUND FAMILY |
over
$100,000 |
|
|
|
The
following table sets forth information describing the compensation of each
Trustee and Member of the Advisory Board (if any) for his or her services for
the fiscal year ended February 28, 2023, or calendar year ended December 31,
2022, as applicable.
Compensation
Table (A)
|
AGGREGATE
COMPENSATION
FROM
A FUND |
|
Peter
C Aldrich
|
|
Mary
C Farrell
|
|
Karen
Kaplan
|
|
Christine
Marcks
|
|
Strategic
Advisers® Fidelity® International Fund |
$
|
20,150
|
$
|
23,189
|
$
|
20,150
|
$
|
20,150
|
|
TOTAL
COMPENSATION
FROM
THE FUND COMPLEX (B)
|
$
|
297,500
|
$
|
342,500
|
$
|
297,500
|
$
|
297,500
|
|
AGGREGATE
COMPENSATION
FROM
A FUND |
|
Heidi
L Steiger
|
|
|
|
|
|
|
|
Strategic
Advisers® Fidelity® International Fund |
$
|
23,519
|
|
|
|
|
|
|
|
TOTAL
COMPENSATION
FROM
THE FUND COMPLEX (B)
|
$
|
347,500
|
|
|
|
|
|
|
|
(A)
Charles S. Morrison, Kathleen Murphy, and Howard E. Cox, Jr. are
interested persons and are compensated by Strategic Advisers or an
affiliate (including FMR).
|
|
|
|
(B)
Reflects compensation received for the calendar year ended December 31,
2022, for 14 funds of one trust. Compensation figures include cash and may
include amounts elected to be deferred.
|
|
|
As
of February 28, 2023, the Trustees, Members of the Advisory Board (if any), and
officers of the fund owned, in the aggregate, less than 1% of each class's total
outstanding shares, with respect to the fund.
CONTROL
OF INVESTMENT ADVISERS
FMR
LLC, as successor by merger to FMR Corp., is the ultimate parent company of
Strategic Advisers, FIAM, FMR Investment Management (UK) Limited (FMR UK),
Fidelity Management & Research (Hong Kong) Limited (FMR H.K.), and Fidelity
Management & Research (Japan) Limited (FMR Japan). The voting common shares
of FMR LLC are divided into two series. Series B is held predominantly by
members of the Johnson family, including Abigail P. Johnson, directly or through
trusts, and is entitled to 49% of the vote on any matter acted upon by the
voting common shares. Series A is held predominantly by non-Johnson family
member employees of FMR LLC and its affiliates and is entitled to 51% of the
vote on any such matter. The Johnson family group and all other Series B
shareholders have entered into a shareholders' voting agreement under which all
Series B shares will be voted in accordance with the majority vote of Series B
shares. Under the 1940 Act, control of a company is presumed where one
individual or group of individuals owns more than 25% of the voting securities
of that company. Therefore, through their ownership of voting common shares and
the execution of the shareholders' voting agreement, members of the Johnson
family may be deemed, under the 1940 Act, to form a controlling group with
respect to FMR LLC.
At
present, the primary business activities of FMR LLC and its subsidiaries are:
(i) the provision of investment advisory, management, shareholder, investment
information and assistance and certain fiduciary services for individual and
institutional investors; (ii) the provision of securities brokerage services;
(iii) the management and development of real estate; and (iv) the investment in
and operation of a number of emerging businesses.
FIAM
is a registered investment adviser. FMR LLC is the ultimate parent company of
FIAM. Information regarding the ownership of FMR LLC is disclosed above.
FIL
Limited, a Bermuda company formed in 1968, is the ultimate parent company of FIA
and FIA(UK). Abigail P. Johnson, other Johnson family members, and various
trusts for the benefit of the Johnson family own, directly or indirectly, more
than 25% of the voting common stock of FIL Limited. At present, the primary
business activities of FIL Limited and its subsidiaries are the provision of
investment advisory services to non-U.S. investment companies and private
accounts investing in securities throughout the world.
Geode,
a registered investment adviser, is a subsidiary of Geode Capital Holdings LLC.
Geode was founded in January 2001 to develop and manage quantitative investment
strategies and to provide advisory and sub-advisory services.
Strategic
Advisers, the sub-adviser(s), the sub-subadviser(s) (if any), (the Investment
Advisers), Fidelity Distributors Company LLC (FDC), and the fund have adopted
codes of ethics under Rule 17j-1 of the 1940 Act that set forth employees'
fiduciary responsibilities regarding the fund, establish procedures for personal
investing, and restrict certain transactions. Employees subject to the codes of
ethics, including the Investment Advisers' investment personnel, may invest in
securities for their own investment accounts, including securities that may be
purchased or held by the fund.
The
fund has entered into a management contract with Strategic Advisers, pursuant to
which Strategic Advisers furnishes investment advisory and other
services.
The
fund's initial shareholder approved a proposal permitting Strategic Advisers to
enter into new or amended sub-advisory agreements with one or more unaffiliated
sub-advisers without obtaining shareholder approval of such agreements, subject
to conditions of an exemptive order that has been granted by the SEC (Exemptive
Order). One of the conditions of the Exemptive Order requires the Board of
Trustees to approve any such agreement. Subject to oversight by the Board of
Trustees, Strategic Advisers has the ultimate responsibility to oversee the
fund's sub-advisers and recommend their hiring, termination, and replacement. In
the event the Board of Trustees approves a sub-advisory agreement with a new
unaffiliated sub-adviser, shareholders will be provided with information about
the new sub-adviser and sub-advisory agreement within ninety days of
appointment.
Strategic
Advisers has retained FIAM LLC, FIL Investment Advisors, and Geode Capital
Management, LLC to serve as sub-advisers for the fund.
FIA,
in turn, has retained FIA(UK) to serve as a sub-subadviser for the fund.
FIAM,
in turn, has retained FMR UK, FMR H.K., and FMR Japan to serve as
sub-subadvisers for the fund.
The
sub-advisers do not sponsor the fund.
It
is not possible to predict the extent to which the fund's assets will be
invested by a particular sub-adviser at any given time and one or more
sub-advisers may not be managing any assets for the fund at any given
time.
Management
and Sub-Advisory Services. Under
the terms of its management contract with the fund, Strategic Advisers acts as
investment adviser and, subject to the supervision of the Board of Trustees,
directs the investments of the fund in accordance with its investment objective,
policies and limitations. Strategic Advisers is authorized, in its discretion,
to allocate the fund's assets pursuant to its investment strategy. Strategic
Advisers or its affiliates provide the fund with all necessary office facilities
and personnel for servicing the fund's investments, compensate all officers of
the fund and all Trustees who are interested persons of the trust or of
Strategic Advisers, and compensate all personnel of the fund or Strategic
Advisers performing services relating to research, statistical and investment
activities.
In
addition, Strategic Advisers or its affiliates, subject to the supervision of
the Board of Trustees, provide the management and administrative services
necessary for the operation of the fund. These services include providing
facilities for maintaining the fund's organization; supervising relations with
custodians, transfer and pricing agents, accountants, underwriters and other
persons dealing with the fund; preparing all general shareholder communications
and conducting shareholder relations; maintaining the fund's records and the
registration of the fund's shares under federal securities laws and making
necessary filings under state securities laws; developing management and
shareholder services for the fund; and furnishing reports, evaluations and
analyses on a variety of subjects to the Trustees.
Under
its respective sub-advisory agreement, and subject to the supervision of the
Board of Trustees, each sub-adviser directs the investment of its allocated
portion of the fund's assets in accordance with the fund's investment objective,
policies and limitations.
Management-Related
Expenses. In
addition to the management fee payable to Strategic Advisers, the fund pays all
of its expenses that are not assumed by Strategic Advisers or its affiliates.
Under the terms of separate agreements between Strategic Advisers and the fund's
transfer agent and service agent, Strategic Advisers or an affiliate is
responsible for the payment of any fees associated with the transfer agent and
service agent agreements. The fund pays for the typesetting, printing, and
mailing of its proxy materials to shareholders, legal expenses, and the fees of
the custodian, auditor, and Independent Trustees. The fund's management contract
further provides that the fund will pay for typesetting, printing, and mailing
prospectuses, statements of additional information, notices, and reports to
shareholders. Other expenses paid by the fund include interest, taxes, brokerage
commissions, fees and expenses associated with the fund's securities lending
program, if applicable, the fund's proportionate share of insurance premiums and
Investment Company Institute dues, and the costs of registering shares under
federal securities laws and making necessary filings under state securities
laws. The fund is also liable for such non-recurring expenses as may arise,
including costs of any litigation to which the fund may be a party, and any
obligation it may have to indemnify its officers and Trustees with respect to
litigation.
Management
Fee.
For
the services of Strategic Advisers under the management contract, the fund pays
Strategic Advisers a monthly management fee calculated by adding the annual rate
of 0.25% of the fund's average daily net assets throughout the month plus the
total fees payable monthly to the fund's sub-advisers, if any, pursuant to the
applicable investment sub-advisory agreement(s); provided, however, that the
fund's maximum aggregate annual management fee will not exceed 1.00% of the
fund's average daily net assets.
In
addition, Strategic Advisers has contractually agreed to waive a portion of the
fund's management fee in an amount equal to 0.25% of the average daily net
assets of the fund until September 30, 2025. The fee waiver will increase
returns.
The
following table shows the amount of management fees paid by the fund to
Strategic Advisers for the fiscal year(s) ended February 28, 2023, 2022, and
2021. In addition, the table shows the amount of waivers reducing management
fees.
|
Fund(s)
|
Fiscal
Years
Ended
|
|
Amount
of Waivers Reducing Management Fees
|
|
Management
Fees Paid to
Investment
Adviser |
Management
Fees Paid as a % of Average Net Assets of
the Fund |
|
Strategic
Advisers® Fidelity® International Fund |
2023
|
$
|
50,971,849
|
$
|
13,447,658
|
0.07%
|
|
|
2022
|
$
|
55,446,853
|
$
|
9,371,635
|
0.04%
|
|
|
2021
|
$
|
30,572,027
|
$
|
2,489,199
|
0.02%
|
Strategic
Advisers may, from time to time, voluntarily reimburse all or a portion of a
fund's or, in the case of a multiple class fund, a class's operating expenses.
Strategic Advisers retains the ability to be repaid for these expense
reimbursements in the amount that expenses fall below the limit prior to the end
of the fiscal year.
Expense
reimbursements will increase returns, and repayment of the reimbursement will
decrease returns.
Sub-Adviser
- FIAM. The
fund and Strategic Advisers have entered into a sub-advisory agreement with FIAM
pursuant to which FIAM may provide investment advisory services for the fund.
Under the terms of the sub-advisory agreement, for providing investment
management services to the fund, Strategic Advisers pays FIAM fees based on the
net assets of the portion of the fund managed by FIAM pursuant to a separately
negotiated investment mandate (a "Strategy"). The fees are calculated using the
effective rate applicable to Aggregated Assets managed by FIAM under a
particular Strategy. Aggregated Assets for a particular Strategy means the
assets of all registered investment companies managed by Strategic Advisers that
are managed by FIAM pursuant to that Strategy.
The
following fee rate schedules apply to
the mandates below.
Emerging
Markets :
0.99% of the first $150 million in assets and 0.95% on any amount in excess of
$150 million in assets.
International
Equity Value :
0.34% on all assets.
Select
Emerging Markets Equity :
0.30% on all assets.
Select
International :
0.24% on all assets.
Select
International Plus :
0.24% on all assets.
On
behalf of the fund, FIAM, in turn, has entered
into sub-subadvisory agreement(s) with FMR UK, FMR H.K., and FMR
Japan. Pursuant to the sub-subadvisory agreement, FIAM may receive from the
sub-subadviser investment research and advice on issuers outside the United
States (non-discretionary services) and FIAM may grant the
sub-subadviser investment management authority and the authority to buy and
sell securities if FIAM believes it would be beneficial to the fund
(discretionary services). FIAM, not the fund, pays
the sub-subadviser(s).
Sub-Adviser
- FIA. The
fund and Strategic Advisers have entered into a sub-advisory agreement with FIA
pursuant to which FIA may provide investment advisory services for the fund.
Under the terms of the sub-advisory agreement, for providing investment
management services to the fund, Strategic Advisers pays FIA fees based on the
net assets of the portion of the fund managed by FIA pursuant to a separately
negotiated Strategy. The fees are calculated using the effective rate applicable
to Aggregated Assets managed by FIA under a particular Strategy. Aggregated
Assets for a particular Strategy means the assets of all registered investment
companies managed by Strategic Advisers that are managed by FIA pursuant to that
Strategy.
The
following fee rate schedule applies to
the mandate below.
Regiona
l:
0.55% of the first $100 million in assets; 0.52% on the next $200 million in
assets; 0.50% on the next $200 million in assets; and 0.40% on any amount in
excess of $500 million in assets.
On
behalf of the fund, FIA, in turn, has entered into a
sub-subadvisory agreement with FIA(UK). Pursuant to the
sub-subadvisory agreement, FIA may receive from the
sub-subadviser investment research and advice on issuers outside the United
States (non-discretionary services) and FIA may grant the
sub-subadviser investment management authority and the authority to buy and
sell securities if FIA believes it would be beneficial to the fund
(discretionary services). FIA, not the fund, pays FIA(UK).
Sub-Adviser
- Geode. The
fund and Strategic Advisers have entered into a sub-advisory agreement with
Geode pursuant to which Geode may provide investment advisory services for the
fund. Under the terms of the sub-advisory agreement, for providing investment
management services to the fund, Strategic Advisers pays Geode fees based on the
net assets of the portion of the fund managed by Geode pursuant to a separately
negotiated Strategy. The fees are calculated using the effective rate applicable
to Aggregated Assets managed by Geode under a particular Strategy. Aggregated
Assets for a particular Strategy means the assets of all registered investment
companies managed by Strategic Advisers that are managed by Geode pursuant to
that Strategy.
The
following fee rate schedules apply to
the mandates below.
International
Factor-Based :
0.15% of the first $500 million in assets; 0.125% of the next $500 million in
assets; and 0.10% on any amount in excess of $1 billion in assets.
International
Put Spread :
0.175% of the first $500 million in assets; 0.15% of the next $500 million in
assets; and 0.125% on any amount in excess of $1 billion in assets.
The
following table shows the amount of sub-advisory fees paid by Strategic
Advisers, on behalf of the fund, to FIAM for the fiscal year(s) ended
February 28, 2023, 2022, and 2021.
|
Fund
|
Fiscal
Years
Ended
|
|
Sub-Advisory
Fees
Paid to
FIAM
|
Sub-Advisory
Fees
Paid
to
FIAM
as
a % of
Average
Net
Assets
of the
Fund
|
|
Strategic
Advisers® Fidelity® International Fund |
2023
|
$
|
13,449,113
|
0.07%
|
|
|
2022
|
$
|
9,368,222
|
0.04%
|
|
|
2021
|
$
|
2,490,653
|
0.02%
|
No
sub-advisory fees were paid by Strategic Advisers, on behalf of the fund, to FIA
or Geode for the fiscal years ended February 28, 2023, 2022, and 2021.
Expense
estimates, which are accrued in the period to which they relate and adjusted
when actual amounts are known, will cause differences between the amount of the
management fees paid by the fund to Strategic Advisers and the aggregate amount
of the sub-advisory fees paid by Strategic Advisers, on behalf of the fund, to
the sub-adviser(s).
Wilfred
Chilangwa and John Curtin are employees of Strategic Advisers, a subsidiary of
FMR LLC and an affiliate of FMR. Strategic Advisers is the adviser to the fund.
Mr.
Chilangwa is Lead Portfolio Manager of the fund and receives compensation for
those services. Mr. Curtin is Co-Portfolio Manager of the fund and receives
compensation for those services. As of February 28, 2023, portfolio manager
compensation generally consists of a fixed base salary determined periodically
(typically annually), a bonus, and in certain cases, participation in several
types of equity-based compensation plans. A portion of each portfolio manager's
compensation may be deferred based on criteria established by Strategic Advisers
or at the election of the portfolio manager.
Each
portfolio manager's base salary is determined by level of responsibility and
tenure at Strategic Advisers or its affiliates. The primary components of each
portfolio manager's bonus are based on (i) the pre-tax investment performance of
the portfolio manager's fund(s) and account(s) measured against a benchmark
index and a defined peer group assigned to each fund or account, and (ii) the
investment performance of a broad range of Strategic Advisers® funds and
accounts, including the fund. Accounts may include model portfolios designed for
asset allocation, retirement planning, or tax-sensitive goals. The pre-tax
investment performance of each portfolio manager's fund(s) and account(s) is
weighted according to the portfolio manager's tenure on those fund(s) and
account(s), and the average asset size of those fund(s) and account(s) over the
portfolio manager's tenure. Each component is calculated separately over a
measurement period that initially is contemporaneous with the portfolio
manager's tenure, but that eventually encompasses rolling periods of up to five
years for the comparison to a benchmark index and peer group. A smaller
subjective component of the bonus is based on each portfolio manager's overall
contribution to management of Strategic Advisers. The portion of each portfolio
manager's bonus that is linked to the investment performance of the portfolio
manager's fund is based on the fund's pre-tax investment performance measured
against the MSCI EAFE Index (net MA tax), and the pre-tax investment performance
of the fund measured against the Morningstar® Foreign Large Blend Category. Each
portfolio manager may be compensated under equity-based compensation plans
linked to increases or decreases in the net asset value of the stock of FMR LLC,
Strategic Advisers' parent company. FMR LLC is a diverse financial services
company engaged in various activities that include fund management, brokerage,
retirement, and employer administrative services.
A
portfolio manager's compensation plan may give rise to potential conflicts of
interest. Although investors in the fund may invest through either tax-deferred
accounts or taxable accounts, a portfolio manager's compensation is linked to
the pre-tax performance of the fund, rather than its after-tax performance. A
portfolio manager's base pay tends to increase with additional and more complex
responsibilities that include increased assets under management and a portion of
the bonus relates to marketing efforts, which together indirectly link
compensation to sales. When a portfolio manager takes over a fund or an account,
the time period over which performance is measured may be adjusted to provide a
transition period in which to assess the portfolio. The management of multiple
funds and accounts (including proprietary accounts) may give rise to potential
conflicts of interest if the funds and accounts have different objectives,
benchmarks, time horizons, and fees as a portfolio manager must allocate time
and investment ideas across multiple funds and accounts. In addition, a fund's
trade allocation policies and procedures may give rise to conflicts of interest
if the fund's orders do not get fully executed due to being aggregated with
those of other accounts managed by Strategic Advisers or an affiliate. A
portfolio manager may execute transactions for another fund or account that may
adversely impact the value of securities held by a fund. Securities selected for
other funds or accounts may outperform the securities selected for the fund.
Portfolio managers may be permitted to invest in the funds they manage, even if
a fund is closed to new investors. Trading in personal accounts, which may give
rise to potential conflicts of interest, is restricted by a fund's Code of
Ethics.
The
following table provides information relating to other accounts managed by
Wilfred Chilangwa as of February 28, 2023:
|
|
Registered
Investment Companies
*
|
|
Other
Pooled
Investment
Vehicles
|
|
Other
Accounts**
|
|
Number
of Accounts Managed |
4
|
|
none
|
|
41
|
|
Number
of Accounts Managed with Performance-Based Advisory Fees |
none
|
|
none
|
|
none
|
|
Assets
Managed (in millions) |
$52,000
|
|
none
|
|
$52,496
|
|
Assets
Managed with Performance-Based Advisory Fees (in millions)
|
none
|
|
none
|
|
none
|
*
Includes Strategic Advisers ®
Fidelity
®
International
Fund ($20,318 (in millions) assets managed). The amount of assets managed of the
fund reflects trades and other assets as of the close of the business day prior
to the fund's fiscal year-end.
**
Includes assets invested in registered investment companies managed by the
portfolio manager.
As
of February 28, 2023, the dollar range of shares of Strategic Advisers
®
Fidelity
®
International
Fund beneficially owned by Mr. Chilangwa was $50,001 - $100,000.
The
following table provides information relating to other accounts managed by John
Curtin as of February 28, 2023:
|
|
Registered
Investment Companies
*
|
|
Other
Pooled
Investment
Vehicles
|
|
Other
Accounts**
|
|
Number
of Accounts Managed |
1
|
|
none
|
|
32
|
|
Number
of Accounts Managed with Performance-Based Advisory Fees |
none
|
|
none
|
|
none
|
|
Assets
Managed (in millions) |
$20,318
|
|
none
|
|
$5,750
|
|
Assets
Managed with Performance-Based Advisory Fees (in millions)
|
none
|
|
none
|
|
none
|
*
Includes Strategic Advisers ®
Fidelity
®
International
Fund ($20,318 (in millions) assets managed). The amount of assets managed of the
fund reflects trades and other assets as of the close of the business day prior
to the fund's fiscal year-end.
**
Includes assets invested in registered investment companies managed by the
portfolio manager.
As
of February 28, 2022, the dollar range of shares of Strategic Advisers
®
Fidelity
®
International
Fund beneficially owned by Mr. Curtin was $50,001 - $100,000.
|
Proxy
Voting - Strategic Advisers.
On
behalf of the fund, the Board of Trustees of the trust has delegated proxy
voting authority to Strategic Advisers. Strategic Advisers has established
the following Proxy Voting Guidelines.
I.
General Principles
A.
Strategic Advisers generally intends to vote shares of underlying funds
held by a fund using echo voting procedures (that is, in the same
proportion as the holders of all other shares of the particular underlying
fund).
B.
Any proposals not covered by paragraph A above or other special
circumstances will be voted pursuant to the Proxy Voting Guidelines
included as Attachment A.
Attachment
A
I.
Introduction
These
guidelines are intended to help Fidelity's customers and the companies in
which Fidelity invests understand how Fidelity votes proxies to further
the values that have sustained Fidelity for over 75 years. Our core
principles sit at the heart of our voting philosophy; putting our
customers' and fund shareholders' long-term interests first and investing
in companies that share our approach to creating value over the long-term
guides everything we do. Fidelity generally adheres to these guidelines in
voting proxies and our Stewardship Principles serve as the foundation for
these guidelines. Our evaluation of proxies reflects information from many
sources, including management or shareholders of a company presenting a
proposal and proxy voting advisory firms. Fidelity maintains the
flexibility to vote individual proxies based on our assessment of each
situation.
In
evaluating proxies, Fidelity considers factors that are financially
material to individual companies and investing funds' investment
objectives and strategies in support of maximizing long-term shareholder
value. This includes considering the company's approach to financial and
operational, human, and natural capital and the impact of that approach on
the potential future value of the business.
Fidelity
will vote on proposals not specifically addressed by these guidelines
based on an evaluation of a proposal's likelihood to enhance the long-term
economic returns or profitability of the company or to maximize long-term
shareholder value. Fidelity will not be influenced by business
relationships or outside perspectives that may conflict with the interests
of the funds and their shareholders.
II.
Board
of Directors and Corporate Governance
Directors
of public companies play a critical role in ensuring that a company and
its management team serve the interests of its shareholders. Fidelity
believes that through proxy voting, it can help ensure accountability of
management teams and boards of directors, align management and shareholder
interests, and monitor and assess the degree of transparency and
disclosure with respect to executive compensation and board actions
affecting shareholders' rights. The following general guidelines are
intended to reflect these proxy voting principles.
A.
Election of Directors
Fidelity
will generally support director nominees in elections where all directors
are unopposed (uncontested elections), except where board composition
raises concerns, and/or where a director clearly appears to have failed to
exercise reasonable judgment or otherwise failed to sufficiently protect
the interests of shareholders.
Fidelity
will evaluate board composition and generally will oppose the election of
certain or all directors if, by way of example:
1.
Inside or affiliated directors serve on boards that are not composed of a
majority of independent directors.
2.
There are no women on the board or if a board of ten or more members has
fewer than two women directors.
3.
There are no racially or ethnically diverse directors.
4.
The director is a public company CEO who sits on more than two
unaffiliated public company boards.
5.
The director, other than a CEO, sits on more than five unaffiliated public
company boards.
Fidelity
will evaluate board actions and generally will oppose the election of
certain or all directors if, by way of example:
1.
The director attended fewer than 75% of the total number of meetings of
the board and its committees on which the director served during the
company's prior fiscal year, absent extenuating circumstances.
2.
The company made a commitment to modify a proposal or practice to conform
to these guidelines, and failed to act on that commitment.
3.
For reasons described below under the sections entitled Compensation and
Anti-Takeover Provisions and Director Elections.
B.
Contested Director Elections
On
occasion, directors are forced to compete for election against outside
director nominees (contested elections). Fidelity believes that strong
management creates long-term shareholder value. As a result, Fidelity
generally will vote in support of management of companies in which the
funds' assets are invested. Fidelity will vote its proxy on a case-by-case
basis in a contested election, taking into consideration a number of
factors, amongst others:
1.
Management's track record and strategic plan for enhancing shareholder
value;
2.
The long-term performance of the company compared to its industry peers;
and
3.
The qualifications of the shareholder's and management's nominees.
Fidelity
will vote for the outcome it believes has the best prospects for
maximizing shareholder value over the long-term.
C.
Cumulative Voting Rights
Under
cumulative voting, each shareholder may exercise the number of votes equal
to the number of shares owned multiplied by the number of directors up for
election. Shareholders may cast all of their votes for a single nominee
(or multiple nominees in varying amounts). With regular (non-cumulative)
voting, by contrast, shareholders cannot allocate more than one vote per
share to any one director nominee. Fidelity believes that cumulative
voting can be detrimental to the overall strength of a board. Generally,
therefore, Fidelity will oppose the introduction of, and support the
elimination of, cumulative voting rights.
D.
Classified Boards
A
classified board is one that elects only a percentage of its members each
year (usually one-third of directors are elected to serve a three-year
term). This means that at each annual meeting only a subset of directors
is up for re-election. Fidelity believes that, in general, classified
boards are not as accountable to shareholders as declassified boards. For
this and other reasons, Fidelity generally will oppose a board's adoption
of a classified board structure and support declassification of existing
boards.
E.
Independent Chairperson
In
general, Fidelity believes that boards should have a process and criteria
for selecting the board chair, and will oppose shareholder proposals
calling for, or recommending the appointment of, a non-executive or
independent chairperson. If, however, based on particular facts and
circumstances, Fidelity believes that appointment of a non-executive or
independent chairperson appears likely to further the interests of
shareholders and promote effective oversight of management by the board of
directors, Fidelity will consider voting to support a proposal for an
independent chairperson under such circumstances.
F.
Majority Voting in Director Elections
In
general, Fidelity supports proposals calling for directors to be elected
by a majority of votes cast if the proposal permits election by a
plurality in the case of contested elections (where, for example, there
are more nominees than board seats). Fidelity may oppose a majority voting
shareholder proposal where a company's board has adopted a policy
requiring the resignation of an incumbent director who fails to receive
the support of a majority of the votes cast in an uncontested election.
G.
Proxy Access
Proxy
access proposals generally require a company to amend its by-laws to allow
a qualifying shareholder or group of shareholders to nominate directors on
a company's proxy ballot. Fidelity believes that certain safeguards as to
ownership threshold and duration of ownership are important to assure that
proxy access is not misused by those without a significant economic
interest in the company or those driven by short term goals. Fidelity will
evaluate proxy access proposals on a case-by-case basis, but generally
will support proposals that include ownership of at least 3% (5% in the
case of small-cap companies) of the company's shares outstanding for at
least three years; limit the number of directors that eligible
shareholders may nominate to 20% of the board; and limit to 20 the number
of shareholders that may form a nominating group.
H.
Indemnification of Directors and Officers
In
many instances there are sound reasons to indemnify officers and
directors, so that they may perform their duties without the distraction
of unwarranted litigation or other legal process. Fidelity generally
supports charter and by-law amendments expanding the indemnification of
officers or directors, or limiting their liability for breaches of care
unless Fidelity is dissatisfied with their performance or the proposal is
accompanied by anti-takeover provisions (see Anti-Takeover Provisions and
Shareholders Rights Plans below).
III.
Compensation
Incentive
compensation plans can be complicated and many factors are considered when
evaluating such plans. Fidelity evaluates such plans based on protecting
shareholder interests and our historical knowledge of the company and its
management.
A.
Equity Compensation Plans
Fidelity
encourages the use of reasonably designed equity compensation plans that
align the interest of management with those of shareholders by providing
officers and employees with incentives to increase long-term shareholder
value. Fidelity considers whether such plans are too dilutive to existing
shareholders because dilution reduces the voting power or economic
interest of existing shareholders as a result of an increase in shares
available for distribution to employees in lieu of cash compensation.
Fidelity will generally oppose equity compensation plans or amendments to
authorize additional shares under such plans if:
1.
The company grants stock options and equity awards in a given year at a
rate higher than a benchmark rate ("burn rate") considered appropriate by
Fidelity and there were no circumstances specific to the company or the
compensation plans that leads Fidelity to conclude that the rate of awards
is otherwise acceptable.
2.
The plan includes an evergreen provision, which is a feature that provides
for an automatic increase in the shares available for grant under an
equity compensation plan on a regular basis.
3.
The plan provides for the acceleration of vesting of equity compensation
even though an actual change in control may not occur.
As
to stock option plans, considerations include the following:
1.
Pricing: We believe that options should be priced at 100% of fair market
value on the date they are granted. We generally oppose options priced at
a discount to the market, although the price may be as low as 85% of fair
market value if the discount is expressly granted in lieu of salary or
cash bonus.
2.
Re-pricing: An "out-of-the-money" (or underwater) option has an exercise
price that is higher than the current price of the stock. We generally
oppose the re-pricing of underwater options because it is not consistent
with a policy of offering options as a form of long-term compensation.
Fidelity also generally opposes a stock option plan if the board or
compensation committee has re-priced options outstanding in the past two
years without shareholder approval.
Fidelity
generally will support a management proposal to exchange, re-price or
tender for cash, outstanding options if the proposed exchange, re-pricing,
or tender offer is consistent with the interests of shareholders, taking
into account a variety of factors such as:
1.
Whether the proposal excludes senior management and directors;
2.
Whether the exchange or re-pricing proposal is value neutral to
shareholders based upon an acceptable pricing model;
3.
The company's relative performance compared to other companies within the
relevant industry or industries;
4.
Economic and other conditions affecting the relevant industry or
industries in which the company competes; and
5.
Any other facts or circumstances relevant to determining whether an
exchange or re-pricing proposal is consistent with the interests of
shareholders.
B.
Employee Stock Purchase Plans
These
plans are designed to allow employees to purchase company stock at a
discounted price and receive favorable tax treatment when the stock is
sold. Fidelity generally will support employee stock purchase plans if the
minimum stock purchase price is equal to or greater than 85% (or at least
75% in the case of non-U.S. companies where a lower minimum stock purchase
price is equal to the prevailing "best practices" in that market) of the
stock's fair market value and the plan constitutes a reasonable effort to
encourage broad based participation in the company's stock.
IV.
Advisory
Vote on Executive Compensation (Say on Pay) and Frequency of Say on Pay
Vote
Current
law requires companies to allow shareholders to cast non-binding votes on
the compensation for named executive officers, as well as the frequency of
such votes. Fidelity generally will support proposals to ratify executive
compensation unless the compensation appears misaligned with shareholder
interests or is otherwise problematic, taking into account:
-
The actions taken by the board or compensation committee in the previous
year, including whether the company re-priced or exchanged outstanding
stock options without shareholder approval; adopted or extended a golden
parachute without shareholder approval; or adequately addressed concerns
communicated by Fidelity in the process of discussing executive
compensation;
-
The alignment of executive compensation and company performance relative
to peers; and
-
The structure of the compensation program, including factors such as
whether incentive plan metrics are appropriate, rigorous and transparent;
whether the long-term element of the compensation program is evaluated
over at least a three-year period; the sensitivity of pay to below median
performance; the amount and nature of non-performance-based compensation;
the justification and rationale behind paying discretionary bonuses; the
use of stock ownership guidelines and amount of executive stock ownership;
and how well elements of compensation are disclosed.
When
presented with a frequency of Say on Pay vote, Fidelity generally will
support holding an annual advisory vote on Say on Pay.
A.
Compensation Committee
Directors
serving on the compensation committee of the Board have a special
responsibility to ensure that management is appropriately compensated and
that compensation, among other things, fairly reflects the performance of
the company. Fidelity believes that compensation should align with company
performance as measured by key business metrics. Compensation policies
should align the interests of executives with those of shareholders.
Further, the compensation program should be disclosed in a transparent and
timely manner.
Fidelity
will oppose the election of directors on the compensation committee if:
1.The compensation appears misaligned
with shareholder interests or is otherwise problematic and results in
concerns with:
a)The alignment of executive compensation
and company performance relative to peers; and
b)The structure of the compensation
program, including factors outlined above under the section entitled
Advisory Vote on Executive Compensation (Say on Pay) and Frequency of Say
on Pay Vote.
2.
The company has not adequately addressed concerns communicated by Fidelity
in the process of discussing executive compensation.
3.
Within the last year, and without shareholder approval, a company's board
of directors or compensation committee has either:
a)
Re-priced outstanding options, exchanged outstanding options for equity,
or tendered cash for outstanding options; or
b)
Adopted or extended a golden parachute.
B.
Executive Severance Agreements
Executive
severance compensation and benefit arrangements resulting from a
termination following a change in control are known as "golden
parachutes." Fidelity generally will oppose proposals to ratify golden
parachutes where the arrangement includes an excise tax gross-up
provision; single trigger for cash incentives; or may result in a lump sum
payment of cash and acceleration of equity that may total more than three
times annual compensation (salary and bonus) in the event of a termination
following a change in control.
V.
Environmental
and Social Issues
Grounded
in our Stewardship Principles, these guidelines outline our views on
corporate governance. As part of our efforts to maximize long-term
shareholder value, we incorporate consideration of human and natural
capital issues into our evaluation of a company, particularly if we
believe an issue is material to that company and the investing fund's
investment objective and strategies.
Fidelity
generally considers management's recommendation and current practice when
voting on shareholder proposals concerning human and natural capital
issues because it generally believes that management and the board are in
the best position to determine how to address these matters. Fidelity,
however, also believes that transparency is critical to sound corporate
governance. Fidelity evaluates shareholder proposals concerning natural
and human capital topics. To engage and vote more effectively on the
growing number of submitted proposals on these topics, we developed a
four-point decision-making framework. In general, Fidelity will more
likely support proposals that:
•Address a topic that our research has
identified as financially material;
•Provide disclosure of new or additional
information to investors, improving transparency;
•Provide value to the business or
investors by improving the landscape of investment-decision relevant
information or contributing to our understanding of a company's processes
and governance of the topic in question; and
•Are realistic or practical for the
company to comply with.
VI.
Anti-Takeover
Provisions and Shareholders Rights Plans
Fidelity
generally will oppose a proposal to adopt an anti-takeover provision.
Anti-takeover
provisions include:
-
classified boards;
-
"blank check" preferred stock (whose terms and conditions may be expressly
determined by the company's board, for example, with differential voting
rights);
-
golden parachutes;
-
supermajority provisions (that require a large majority (generally between
67-90%) of shareholders to approve corporate changes as compared to a
majority provision that simply requires more than 50% of shareholders to
approve those changes);
-
poison pills;
-
restricting the right to call special meetings;
-
provisions restricting the right of shareholders to set board size; and
-
any other provision that eliminates or limits shareholder rights.
A.
Shareholders Rights Plans ("poison pills")
Poison
pills allow shareholders opposed to a takeover offer to purchase stock at
discounted prices under certain circumstances and effectively give boards
veto power over any takeover offer. While there are advantages and
disadvantages to poison pills, they can be detrimental to the creation of
shareholder value and can help entrench management by deterring
acquisition offers not favored by the board, but that may, in fact, be
beneficial to shareholders.
Fidelity
generally will support a proposal to adopt or extend a poison pill if the
proposal:
1.
Includes a condition in the charter or plan that specifies an expiration
date (sunset provision) of no greater than five years;
2.
Is integral to a business strategy that is expected to result in greater
value for the shareholders;
3.
Requires shareholder approval to be reinstated upon expiration or if
amended;
4.
Contains a mechanism to allow shareholders to consider a bona fide
takeover offer for all outstanding shares without triggering the poison
pill; and
5.
Allows the Fidelity funds to hold an aggregate position of up to 20% of a
company's total voting securities, where permissible.
Fidelity
generally also will support a proposal that is crafted only for the
purpose of protecting a specific tax benefit if it also believes the
proposal is likely to enhance long-term economic returns or maximize
long-term shareholder value.
B.
Shareholder Ability to Call a Special Meeting
Fidelity
generally will support shareholder proposals regarding shareholders' right
to call special meetings if the threshold required to call the special
meeting is no less than 25% of the outstanding stock.
C.
Shareholder Ability to Act by Written Consent
Fidelity
generally will support proposals regarding shareholders' right to act by
written consent if the proposals include appropriate mechanisms for
implementation. This means that proposals must include record date
requests from at least 25% of the outstanding stockholders and consents
must be solicited from all shareholders.
D.
Supermajority Shareholder Vote Requirement
Fidelity
generally will support proposals regarding supermajority provisions if
Fidelity believes that the provisions protect minority shareholder
interests in companies where there is a substantial or dominant
shareholder.
VII.
Anti-Takeover
Provisions and Director Elections
Fidelity
will oppose the election of all directors or directors on responsible
committees if the board adopted or extended an anti-takeover provision
without shareholder approval.
Fidelity
will consider supporting the election of directors with respect to poison
pills if:
-
All of the poison pill's features outlined under the Anti-Takeover
Provisions and Shareholders Rights section above are met when a poison
pill is adopted or extended.
-
A board is willing to consider seeking shareholder ratification of, or
adding the features outlined under the Anti-Takeover Provisions and
Shareholders Rights Plans section above to, an existing poison pill. If,
however, the company does not take appropriate action prior to the next
annual shareholder meeting, Fidelity will oppose the election of all
directors at that meeting.
-
It determines that the poison pill was narrowly tailored to protect a
specific tax benefit, and subject to an evaluation of its likelihood to
enhance long-term economic returns or maximize long-term shareholder
value.
VIII.
Capital
Structure and Incorporation
These
guidelines are designed to protect shareholders' value in the companies in
which the Fidelity funds invest. To the extent a company's management is
committed and incentivized to maximize shareholder value, Fidelity
generally votes in favor of management proposals; Fidelity may vote
contrary to management where a proposal is overly dilutive to shareholders
and/or compromises shareholder value or other interests. The guidelines
that follow are meant to protect shareholders in these respects.
A.
Increases in Common Stock
Fidelity
may support reasonable increases in authorized shares for a specific
purpose (a stock split or re-capitalization, for example). Fidelity
generally will oppose a provision to increase a company's authorized
common stock if such increase will result in a total number of authorized
shares greater than three times the current number of outstanding and
scheduled to be issued shares, including stock options.
In
the case of real estate investment trusts (REITs), however, Fidelity will
oppose a provision to increase the REIT's authorized common stock if the
increase will result in a total number of authorized shares greater than
five times the current number of outstanding and scheduled to be issued
shares.
B.
Multi-Class Share Structures
Fidelity
generally will support proposals to recapitalize multi-class share
structures into structures that provide equal voting rights for all
shareholders, and generally will oppose proposals to introduce or increase
classes of stock with differential voting rights. However, Fidelity will
evaluate all such proposals in the context of their likelihood to enhance
long-term economic returns or maximize long-term shareholder value.
C.
Incorporation or Reincorporation in another State or Country
Fidelity
generally will support management proposals calling for, or recommending
that, a company reincorporate in another state or country if, on balance,
the economic and corporate governance factors in the proposed jurisdiction
appear reasonably likely to be better aligned with shareholder interests,
taking into account the corporate laws of the current and proposed
jurisdictions and any changes to the company's current and proposed
governing documents. Fidelity will consider supporting these shareholder
proposals in limited cases if, based upon particular facts and
circumstances, remaining incorporated in the current jurisdiction appears
misaligned with shareholder interests.
IX.
Shares
of Fidelity Funds or other non-Fidelity Funds
When
a Fidelity fund invests in an underlying Fidelity fund with public
shareholders or a non-Fidelity investment company or business development
company, Fidelity will generally vote in the same proportion as all other
voting shareholders of the underlying fund (this is known as "echo
voting"). Fidelity may not vote if "echo voting" is not operationally
practical or not permitted under applicable laws and regulations. For
Fidelity fund investments in a Fidelity Series Fund, Fidelity generally
will vote in a manner consistent with the recommendation of the Fidelity
Series Fund's Board of Trustees on all proposals, except where not
permitted under applicable laws and regulations.
X.
Foreign
Markets
Many
Fidelity funds invest in voting securities issued by companies that are
domiciled outside the United States and are not listed on a U.S.
securities exchange. Corporate governance standards, legal or regulatory
requirements and disclosure practices in foreign countries can differ from
those in the United States. When voting proxies relating to non-U.S.
securities, Fidelity generally will evaluate proposals under these
guidelines and where applicable and feasible, take into consideration
differing laws, regulations and practices in the relevant foreign market
in determining how to vote shares.
In
certain non-U.S. jurisdictions, shareholders voting shares of a company
may be restricted from trading the shares for a period of time around the
shareholder meeting date. Because these trading restrictions can hinder
portfolio management and could result in a loss of liquidity for a fund,
Fidelity generally will not vote proxies in circumstances where such
restrictions apply. In addition, certain non-U.S. jurisdictions require
voting shareholders to disclose current share ownership on a fund-by-fund
basis. When such disclosure requirements apply, Fidelity generally will
not vote proxies in order to safeguard fund holdings information.
XI.
Securities
on Loan
Securities
on loan as of a record date cannot be voted. In certain circumstances,
Fidelity may recall a security on loan before record date (for example, in
a particular contested director election or a noteworthy merger or
acquisition). Generally, however, securities out on loan remain on loan
and are not voted because, for example, the income a fund derives from the
loan outweighs the benefit the fund receives from voting the security. In
addition, Fidelity may not be able to recall and vote loaned securities if
Fidelity is unaware of relevant information before record date, or is
otherwise unable to timely recall securities on loan.
XII.
Avoiding
Conflicts of Interest
Voting
of shares is conducted in a manner consistent with the best interests of
the Fidelity funds. In other words, securities of a company generally will
be voted in a manner consistent with these guidelines and without regard
to any other Fidelity companies' business relationships.
Fidelity
takes its responsibility to vote shares in the best interests of the funds
seriously and has implemented policies and procedures to address actual
and potential conflicts of interest.
XIII.
Conclusion
Since
its founding more than 75 years ago, Fidelity has been driven by two
fundamental values: 1) putting the long-term interests of our customers
and fund shareholders first; and 2) investing in companies that share our
approach to creating value over the long-term. With these fundamental
principles as guideposts, the funds are managed to provide the greatest
possible return to shareholders consistent with governing laws and the
investment guidelines and objectives of each fund.
Fidelity
believes that there is a strong correlation between sound corporate
governance and enhancing shareholder value. Fidelity, through the
implementation of these guidelines, puts this belief into action through
consistent engagement with portfolio companies on matters contained in
these guidelines, and, ultimately, through the exercise of voting rights
by the funds.
Glossary
- Burn
rate means the total number of stock option and full value equity awards
granted as compensation in a given year divided by the weighted average
common stock outstanding for that same year.
-
For a large-capitalization company, burn rate higher than 1.5%.
-
For a small-capitalization company, burn rate higher than 2.5%.
-
For a micro-capitalization company, burn rate higher than 3.5%.
- Golden
parachute means employment contracts, agreements, or policies that
include an excise tax gross-up provision; single trigger for cash
incentives; or may result in a lump sum payment of cash and acceleration
of equity that may total more than three times annual compensation
(salary and bonus) in the event of a termination following a change in
control.
- Large-capitalization
company means a company included in the Russell 1000® Index or the
Russell Global ex-U.S. Large Cap Index.
- Micro-capitalization
company means a company with market capitalization under US $300
million.
- Poison
pill refers to a strategy employed by a potential takeover / target
company to make its stock less attractive to an acquirer. Poison pills
are
- generally
designed to dilute the acquirer's ownership and value in the event of a
takeover.
- Small-capitalization
company means a company not included in the Russell 1000® Index or the
Russell Global ex-U.S. Large Cap Index that is not a
Micro-Capitalization Company.
Sub-Adviser(s):
Proxy
voting policies and procedures are used by a sub-adviser to determine how
to vote proxies relating to the securities held by its allocated portion
of the fund's assets. The proxy voting policies and procedures used by a
sub-adviser are described below. |
|
Proxy
Voting - FIAM
I.
Introduction
These
guidelines are intended to help Fidelity's customers and the companies in
which Fidelity invests understand how Fidelity votes proxies to further
the values that have sustained Fidelity for over 75 years. Our core
principles sit at the heart of our voting philosophy; putting our
customers' and fund shareholders' long-term interests first and investing
in companies that share our approach to creating value over the long-term
guides everything we do. Fidelity generally adheres to these guidelines in
voting proxies and our Stewardship Principles serve as the foundation for
these guidelines. Our evaluation of proxies reflects information from many
sources, including management or shareholders of a company presenting a
proposal and proxy voting advisory firms. Fidelity maintains the
flexibility to vote individual proxies based on our assessment of each
situation.
In
evaluating proxies, Fidelity considers factors that are financially
material to individual companies and investing funds' investment
objectives and strategies in support of maximizing long-term shareholder
value. This includes considering the company's approach to financial and
operational, human, and natural capital and the impact of that approach on
the potential future value of the business.
Fidelity
will vote on proposals not specifically addressed by these guidelines
based on an evaluation of a proposal's likelihood to enhance the long-term
economic returns or profitability of the company or to maximize long-term
shareholder value. Fidelity will not be influenced by business
relationships or outside perspectives that may conflict with the interests
of the funds and their shareholders.
II.
Board
of Directors and Corporate Governance
Directors
of public companies play a critical role in ensuring that a company and
its management team serve the interests of its shareholders. Fidelity
believes that through proxy voting, it can help ensure accountability of
management teams and boards of directors, align management and shareholder
interests, and monitor and assess the degree of transparency and
disclosure with respect to executive compensation and board actions
affecting shareholders' rights. The following general guidelines are
intended to reflect these proxy voting principles.
A.
Election of Directors
Fidelity
will generally support director nominees in elections where all directors
are unopposed (uncontested elections), except where board composition
raises concerns, and/or where a director clearly appears to have failed to
exercise reasonable judgment or otherwise failed to sufficiently protect
the interests of shareholders.
Fidelity
will evaluate board composition and generally will oppose the election of
certain or all directors if, by way of example:
1.
Inside or affiliated directors serve on boards that are not composed of a
majority of independent directors.
2.
There are no women on the board or if a board of ten or more members has
fewer than two women directors.
3.
There are no racially or ethnically diverse directors.
4.
The director is a public company CEO who sits on more than two
unaffiliated public company boards.
5.
The director, other than a CEO, sits on more than five unaffiliated public
company boards.
Fidelity
will evaluate board actions and generally will oppose the election of
certain or all directors if, by way of example:
1.
The director attended fewer than 75% of the total number of meetings of
the board and its committees on which the director served during the
company's prior fiscal year, absent extenuating circumstances.
2.
The company made a commitment to modify a proposal or practice to conform
to these guidelines, and failed to act on that commitment.
3.
For reasons described below under the sections entitled Compensation and
Anti-Takeover Provisions and Director Elections.
B.
Contested Director Elections
On
occasion, directors are forced to compete for election against outside
director nominees (contested elections). Fidelity believes that strong
management creates long-term shareholder value. As a result, Fidelity
generally will vote in support of management of companies in which the
funds' assets are invested. Fidelity will vote its proxy on a case-by-case
basis in a contested election, taking into consideration a number of
factors, amongst others:
1.
Management's track record and strategic plan for enhancing shareholder
value;
2.
The long-term performance of the company compared to its industry peers;
and
3.
The qualifications of the shareholder's and management's nominees.
Fidelity
will vote for the outcome it believes has the best prospects for
maximizing shareholder value over the long-term.
C.
Cumulative Voting Rights
Under
cumulative voting, each shareholder may exercise the number of votes equal
to the number of shares owned multiplied by the number of directors up for
election. Shareholders may cast all of their votes for a single nominee
(or multiple nominees in varying amounts). With regular (non-cumulative)
voting, by contrast, shareholders cannot allocate more than one vote per
share to any one director nominee. Fidelity believes that cumulative
voting can be detrimental to the overall strength of a board. Generally,
therefore, Fidelity will oppose the introduction of, and support the
elimination of, cumulative voting rights.
D.
Classified Boards
A
classified board is one that elects only a percentage of its members each
year (usually one-third of directors are elected to serve a three-year
term). This means that at each annual meeting only a subset of directors
is up for re-election. Fidelity believes that, in general, classified
boards are not as accountable to shareholders as declassified boards. For
this and other reasons, Fidelity generally will oppose a board's adoption
of a classified board structure and support declassification of existing
boards.
E.
Independent Chairperson
In
general, Fidelity believes that boards should have a process and criteria
for selecting the board chair, and will oppose shareholder proposals
calling for, or recommending the appointment of, a non-executive or
independent chairperson. If, however, based on particular facts and
circumstances, Fidelity believes that appointment of a non-executive or
independent chairperson appears likely to further the interests of
shareholders and promote effective oversight of management by the board of
directors, Fidelity will consider voting to support a proposal for an
independent chairperson under such circumstances.
F.
Majority Voting in Director Elections
In
general, Fidelity supports proposals calling for directors to be elected
by a majority of votes cast if the proposal permits election by a
plurality in the case of contested elections (where, for example, there
are more nominees than board seats). Fidelity may oppose a majority voting
shareholder proposal where a company's board has adopted a policy
requiring the resignation of an incumbent director who fails to receive
the support of a majority of the votes cast in an uncontested election.
G.
Proxy Access
Proxy
access proposals generally require a company to amend its by-laws to allow
a qualifying shareholder or group of shareholders to nominate directors on
a company's proxy ballot. Fidelity believes that certain safeguards as to
ownership threshold and duration of ownership are important to assure that
proxy access is not misused by those without a significant economic
interest in the company or those driven by short term goals. Fidelity will
evaluate proxy access proposals on a case-by-case basis, but generally
will support proposals that include ownership of at least 3% (5% in the
case of small-cap companies) of the company's shares outstanding for at
least three years; limit the number of directors that eligible
shareholders may nominate to 20% of the board; and limit to 20 the number
of shareholders that may form a nominating group.
H.
Indemnification of Directors and Officers
In
many instances there are sound reasons to indemnify officers and
directors, so that they may perform their duties without the distraction
of unwarranted litigation or other legal process. Fidelity generally
supports charter and by-law amendments expanding the indemnification of
officers or directors, or limiting their liability for breaches of care
unless Fidelity is dissatisfied with their performance or the proposal is
accompanied by anti-takeover provisions (see Anti-Takeover Provisions and
Shareholders Rights Plans below).
III.
Compensation
Incentive
compensation plans can be complicated and many factors are considered when
evaluating such plans. Fidelity evaluates such plans based on protecting
shareholder interests and our historical knowledge of the company and its
management.
A.
Equity Compensation Plans
Fidelity
encourages the use of reasonably designed equity compensation plans that
align the interest of management with those of shareholders by providing
officers and employees with incentives to increase long-term shareholder
value. Fidelity considers whether such plans are too dilutive to existing
shareholders because dilution reduces the voting power or economic
interest of existing shareholders as a result of an increase in shares
available for distribution to employees in lieu of cash compensation.
Fidelity will generally oppose equity compensation plans or amendments to
authorize additional shares under such plans if:
1.
The company grants stock options and equity awards in a given year at a
rate higher than a benchmark rate ("burn rate") considered appropriate by
Fidelity and there were no circumstances specific to the company or the
compensation plans that leads Fidelity to conclude that the rate of awards
is otherwise acceptable.
2.
The plan includes an evergreen provision, which is a feature that provides
for an automatic increase in the shares available for grant under an
equity compensation plan on a regular basis.
3.
The plan provides for the acceleration of vesting of equity compensation
even though an actual change in control may not occur.
As
to stock option plans, considerations include the following:
1.
Pricing: We believe that options should be priced at 100% of fair market
value on the date they are granted. We generally oppose options priced at
a discount to the market, although the price may be as low as 85% of fair
market value if the discount is expressly granted in lieu of salary or
cash bonus.
2.
Re-pricing: An "out-of-the-money" (or underwater) option has an exercise
price that is higher than the current price of the stock. We generally
oppose the re-pricing of underwater options because it is not consistent
with a policy of offering options as a form of long-term compensation.
Fidelity also generally opposes a stock option plan if the board or
compensation committee has re-priced options outstanding in the past two
years without shareholder approval.
Fidelity
generally will support a management proposal to exchange, re-price or
tender for cash, outstanding options if the proposed exchange, re-pricing,
or tender offer is consistent with the interests of shareholders, taking
into account a variety of factors such as:
1.
Whether the proposal excludes senior management and directors;
2.
Whether the exchange or re-pricing proposal is value neutral to
shareholders based upon an acceptable pricing model;
3.
The company's relative performance compared to other companies within the
relevant industry or industries;
4.
Economic and other conditions affecting the relevant industry or
industries in which the company competes; and
5.
Any other facts or circumstances relevant to determining whether an
exchange or re-pricing proposal is consistent with the interests of
shareholders.
B.
Employee Stock Purchase Plans
These
plans are designed to allow employees to purchase company stock at a
discounted price and receive favorable tax treatment when the stock is
sold. Fidelity generally will support employee stock purchase plans if the
minimum stock purchase price is equal to or greater than 85% (or at least
75% in the case of non-U.S. companies where a lower minimum stock purchase
price is equal to the prevailing "best practices" in that market) of the
stock's fair market value and the plan constitutes a reasonable effort to
encourage broad based participation in the company's stock.
IV.
Advisory
Vote on Executive Compensation (Say on Pay) and Frequency of Say on Pay
Vote
Current
law requires companies to allow shareholders to cast non-binding votes on
the compensation for named executive officers, as well as the frequency of
such votes. Fidelity generally will support proposals to ratify executive
compensation unless the compensation appears misaligned with shareholder
interests or is otherwise problematic, taking into account:
-
The actions taken by the board or compensation committee in the previous
year, including whether the company re-priced or exchanged outstanding
stock options without shareholder approval; adopted or extended a golden
parachute without shareholder approval; or adequately addressed concerns
communicated by Fidelity in the process of discussing executive
compensation;
-
The alignment of executive compensation and company performance relative
to peers; and
-
The structure of the compensation program, including factors such as
whether incentive plan metrics are appropriate, rigorous and transparent;
whether the long-term element of the compensation program is evaluated
over at least a three-year period; the sensitivity of pay to below median
performance; the amount and nature of non-performance-based compensation;
the justification and rationale behind paying discretionary bonuses; the
use of stock ownership guidelines and amount of executive stock ownership;
and how well elements of compensation are disclosed.
When
presented with a frequency of Say on Pay vote, Fidelity generally will
support holding an annual advisory vote on Say on Pay.
A.
Compensation Committee
Directors
serving on the compensation committee of the Board have a special
responsibility to ensure that management is appropriately compensated and
that compensation, among other things, fairly reflects the performance of
the company. Fidelity believes that compensation should align with company
performance as measured by key business metrics. Compensation policies
should align the interests of executives with those of shareholders.
Further, the compensation program should be disclosed in a transparent and
timely manner.
Fidelity
will oppose the election of directors on the compensation committee if:
1.The compensation appears misaligned
with shareholder interests or is otherwise problematic and results in
concerns with:
a)The alignment of executive compensation
and company performance relative to peers; and
b)The structure of the compensation
program, including factors outlined above under the section entitled
Advisory Vote on Executive Compensation (Say on Pay) and Frequency of Say
on Pay Vote.
2.
The company has not adequately addressed concerns communicated by Fidelity
in the process of discussing executive compensation.
3.
Within the last year, and without shareholder approval, a company's board
of directors or compensation committee has either:
a)
Re-priced outstanding options, exchanged outstanding options for equity,
or tendered cash for outstanding options; or
b)
Adopted or extended a golden parachute.
B.
Executive Severance Agreements
Executive
severance compensation and benefit arrangements resulting from a
termination following a change in control are known as "golden
parachutes." Fidelity generally will oppose proposals to ratify golden
parachutes where the arrangement includes an excise tax gross-up
provision; single trigger for cash incentives; or may result in a lump sum
payment of cash and acceleration of equity that may total more than three
times annual compensation (salary and bonus) in the event of a termination
following a change in control.
V.
Environmental
and Social Issues
Grounded
in our Stewardship Principles, these guidelines outline our views on
corporate governance. As part of our efforts to maximize long-term
shareholder value, we incorporate consideration of human and natural
capital issues into our evaluation of a company, particularly if we
believe an issue is material to that company and the investing fund's
investment objective and strategies.
Fidelity
generally considers management's recommendation and current practice when
voting on shareholder proposals concerning human and natural capital
issues because it generally believes that management and the board are in
the best position to determine how to address these matters. Fidelity,
however, also believes that transparency is critical to sound corporate
governance. Fidelity evaluates shareholder proposals concerning natural
and human capital topics. To engage and vote more effectively on the
growing number of submitted proposals on these topics, we developed a
four-point decision-making framework. In general, Fidelity will more
likely support proposals that:
•Address a topic that our research has
identified as financially material;
•Provide disclosure of new or additional
information to investors, improving transparency;
•Provide value to the business or
investors by improving the landscape of investment-decision relevant
information or contributing to our understanding of a company's processes
and governance of the topic in question; and
•Are realistic or practical for the
company to comply with.
VI.
Anti-Takeover
Provisions and Shareholders Rights Plans
Fidelity
generally will oppose a proposal to adopt an anti-takeover provision.
Anti-takeover
provisions include:
-
classified boards;
-
"blank check" preferred stock (whose terms and conditions may be expressly
determined by the company's board, for example, with differential voting
rights);
-
golden parachutes;
-
supermajority provisions (that require a large majority (generally between
67-90%) of shareholders to approve corporate changes as compared to a
majority provision that simply requires more than 50% of shareholders to
approve those changes);
-
poison pills;
-
restricting the right to call special meetings;
-
provisions restricting the right of shareholders to set board size; and
-
any other provision that eliminates or limits shareholder rights.
A.
Shareholders Rights Plans ("poison pills")
Poison
pills allow shareholders opposed to a takeover offer to purchase stock at
discounted prices under certain circumstances and effectively give boards
veto power over any takeover offer. While there are advantages and
disadvantages to poison pills, they can be detrimental to the creation of
shareholder value and can help entrench management by deterring
acquisition offers not favored by the board, but that may, in fact, be
beneficial to shareholders.
Fidelity
generally will support a proposal to adopt or extend a poison pill if the
proposal:
1.
Includes a condition in the charter or plan that specifies an expiration
date (sunset provision) of no greater than five years;
2.
Is integral to a business strategy that is expected to result in greater
value for the shareholders;
3.
Requires shareholder approval to be reinstated upon expiration or if
amended;
4.
Contains a mechanism to allow shareholders to consider a bona fide
takeover offer for all outstanding shares without triggering the poison
pill; and
5.
Allows the Fidelity funds to hold an aggregate position of up to 20% of a
company's total voting securities, where permissible.
Fidelity
generally also will support a proposal that is crafted only for the
purpose of protecting a specific tax benefit if it also believes the
proposal is likely to enhance long-term economic returns or maximize
long-term shareholder value.
B.
Shareholder Ability to Call a Special Meeting
Fidelity
generally will support shareholder proposals regarding shareholders' right
to call special meetings if the threshold required to call the special
meeting is no less than 25% of the outstanding stock.
C.
Shareholder Ability to Act by Written Consent
Fidelity
generally will support proposals regarding shareholders' right to act by
written consent if the proposals include appropriate mechanisms for
implementation. This means that proposals must include record date
requests from at least 25% of the outstanding stockholders and consents
must be solicited from all shareholders.
D.
Supermajority Shareholder Vote Requirement
Fidelity
generally will support proposals regarding supermajority provisions if
Fidelity believes that the provisions protect minority shareholder
interests in companies where there is a substantial or dominant
shareholder.
VII.
Anti-Takeover
Provisions and Director Elections
Fidelity
will oppose the election of all directors or directors on responsible
committees if the board adopted or extended an anti-takeover provision
without shareholder approval.
Fidelity
will consider supporting the election of directors with respect to poison
pills if:
-
All of the poison pill's features outlined under the Anti-Takeover
Provisions and Shareholders Rights section above are met when a poison
pill is adopted or extended.
-
A board is willing to consider seeking shareholder ratification of, or
adding the features outlined under the Anti-Takeover Provisions and
Shareholders Rights Plans section above to, an existing poison pill. If,
however, the company does not take appropriate action prior to the next
annual shareholder meeting, Fidelity will oppose the election of all
directors at that meeting.
-
It determines that the poison pill was narrowly tailored to protect a
specific tax benefit, and subject to an evaluation of its likelihood to
enhance long-term economic returns or maximize long-term shareholder
value.
VIII.
Capital
Structure and Incorporation
These
guidelines are designed to protect shareholders' value in the companies in
which the Fidelity funds invest. To the extent a company's management is
committed and incentivized to maximize shareholder value, Fidelity
generally votes in favor of management proposals; Fidelity may vote
contrary to management where a proposal is overly dilutive to shareholders
and/or compromises shareholder value or other interests. The guidelines
that follow are meant to protect shareholders in these respects.
A.
Increases in Common Stock
Fidelity
may support reasonable increases in authorized shares for a specific
purpose (a stock split or re-capitalization, for example). Fidelity
generally will oppose a provision to increase a company's authorized
common stock if such increase will result in a total number of authorized
shares greater than three times the current number of outstanding and
scheduled to be issued shares, including stock options.
In
the case of REITs, however, Fidelity will oppose a provision to increase
the REIT's authorized common stock if the increase will result in a total
number of authorized shares greater than five times the current number of
outstanding and scheduled to be issued shares.
B.
Multi-Class Share Structures
Fidelity
generally will support proposals to recapitalize multi-class share
structures into structures that provide equal voting rights for all
shareholders, and generally will oppose proposals to introduce or increase
classes of stock with differential voting rights. However, Fidelity will
evaluate all such proposals in the context of their likelihood to enhance
long-term economic returns or maximize long-term shareholder value.
C.
Incorporation or Reincorporation in another State or Country
Fidelity
generally will support management proposals calling for, or recommending
that, a company reincorporate in another state or country if, on balance,
the economic and corporate governance factors in the proposed jurisdiction
appear reasonably likely to be better aligned with shareholder interests,
taking into account the corporate laws of the current and proposed
jurisdictions and any changes to the company's current and proposed
governing documents. Fidelity will consider supporting these shareholder
proposals in limited cases if, based upon particular facts and
circumstances, remaining incorporated in the current jurisdiction appears
misaligned with shareholder interests.
IX.
Shares
of Fidelity Funds or other non-Fidelity Funds
When
a Fidelity fund invests in an underlying Fidelity fund with public
shareholders or a non-Fidelity investment company or business development
company, Fidelity will generally vote in the same proportion as all other
voting shareholders of the underlying fund (this is known as "echo
voting"). Fidelity may not vote if "echo voting" is not operationally
practical or not permitted under applicable laws and regulations. For
Fidelity fund investments in a Fidelity Series Fund, Fidelity generally
will vote in a manner consistent with the recommendation of the Fidelity
Series Fund's Board of Trustees on all proposals, except where not
permitted under applicable laws and regulations.
X.
Foreign
Markets
Many
Fidelity funds invest in voting securities issued by companies that are
domiciled outside the United States and are not listed on a U.S.
securities exchange. Corporate governance standards, legal or regulatory
requirements and disclosure practices in foreign countries can differ from
those in the United States. When voting proxies relating to non-U.S.
securities, Fidelity generally will evaluate proposals under these
guidelines and where applicable and feasible, take into consideration
differing laws, regulations and practices in the relevant foreign market
in determining how to vote shares.
In
certain non-U.S. jurisdictions, shareholders voting shares of a company
may be restricted from trading the shares for a period of time around the
shareholder meeting date. Because these trading restrictions can hinder
portfolio management and could result in a loss of liquidity for a fund,
Fidelity generally will not vote proxies in circumstances where such
restrictions apply. In addition, certain non-U.S. jurisdictions require
voting shareholders to disclose current share ownership on a fund-by-fund
basis. When such disclosure requirements apply, Fidelity generally will
not vote proxies in order to safeguard fund holdings information.
XI.
Securities
on Loan
Securities
on loan as of a record date cannot be voted. In certain circumstances,
Fidelity may recall a security on loan before record date (for example, in
a particular contested director election or a noteworthy merger or
acquisition). Generally, however, securities out on loan remain on loan
and are not voted because, for example, the income a fund derives from the
loan outweighs the benefit the fund receives from voting the security. In
addition, Fidelity may not be able to recall and vote loaned securities if
Fidelity is unaware of relevant information before record date, or is
otherwise unable to timely recall securities on loan.
XII.
Avoiding
Conflicts of Interest
Voting
of shares is conducted in a manner consistent with the best interests of
the Fidelity funds. In other words, securities of a company generally will
be voted in a manner consistent with these guidelines and without regard
to any other Fidelity companies' business relationships.
Fidelity
takes its responsibility to vote shares in the best interests of the funds
seriously and has implemented policies and procedures to address actual
and potential conflicts of interest.
XIII.
Conclusion
Since
its founding more than 75 years ago, Fidelity has been driven by two
fundamental values: 1) putting the long-term interests of our customers
and fund shareholders first; and 2) investing in companies that share our
approach to creating value over the long-term. With these fundamental
principles as guideposts, the funds are managed to provide the greatest
possible return to shareholders consistent with governing laws and the
investment guidelines and objectives of each fund.
Fidelity
believes that there is a strong correlation between sound corporate
governance and enhancing shareholder value. Fidelity, through the
implementation of these guidelines, puts this belief into action through
consistent engagement with portfolio companies on matters contained in
these guidelines, and, ultimately, through the exercise of voting rights
by the funds.
Glossary
- Burn
rate means the total number of stock option and full value equity awards
granted as compensation in a given year divided by the weighted average
common stock outstanding for that same year.
-
For a large-capitalization company, burn rate higher than 1.5%.
-
For a small-capitalization company, burn rate higher than 2.5%.
-
For a micro-capitalization company, burn rate higher than 3.5%.
- Golden
parachute means employment contracts, agreements, or policies that
include an excise tax gross-up provision; single trigger for cash
incentives; or may result in a lump sum payment of cash and acceleration
of equity that may total more than three times annual compensation
(salary and bonus) in the event of a termination following a change in
control.
- Large-capitalization
company means a company included in the Russell 1000® Index or the
Russell Global ex-U.S. Large Cap Index.
- Micro-capitalization
company means a company with market capitalization under US $300
million.
- Poison
pill refers to a strategy employed by a potential takeover / target
company to make its stock less attractive to an acquirer. Poison pills
are generally designed to dilute the acquirer's ownership and value in
the event of a takeover.
- Small-capitalization
company means a company not included in the Russell 1000® Index or the
Russell Global ex-U.S. Large Cap Index that is not a
Micro-Capitalization Company.
|
Fidelity
International's Proxy Voting Guidelines.
1
General principles and application
1.1
Voting authority and decision-making
1.1.1
Voting execution and oversight: The
Sustainable Investing Team of Fidelity International ("Fidelity") is responsible
for the execution of voting, the oversight, decision-making and application of
Fidelity's policies on voting.
1.1.2
Non-routine investment proposals and special circumstances: Where
necessary, non-routine investment proposals or other special circumstances are
evaluated, in conjunction with the Sustainable Investing Team, by the
appropriate Fidelity investment research analysts or portfolio managers.
1.1.3
SIOC authority: All
votes are subject to the authority of the Global Head of Stewardship and
Sustainable Investing and the Sustainable Investing Operating Committee (SIOC).
1.2
Voting approach
1.2.1
Voting coverage: We
seek to vote all equity securities where possible. In certain special
situations, we may determine not to submit a vote where the costs outweigh the
associated benefits. Fixed income managers are consulted on voting matters
related to bondholder meetings.
1.2.2
Routine proposals: Except
as set forth in these guidelines, we will usually vote in favour of the
recommendations set out by company management and routine proposals.
1.2.3
Abstentions: We
will vote to abstain on proposals if doing so is deemed to be in the best
interests of investors or in some cases where the necessary information has not
been provided. In certain limited circumstances, we may also vote to abstain in
order to send a cautionary message to a company.
1.2.4
Voting policy application: We
make voting decisions on a case-by-case basis and take account of the specific
company, sector considerations, prevailing local market standards and best
practice, and our voting principles and guidelines. The application of our
approach will also vary regionally based on factors including relevant agenda
items, current expectations and phased implementation of policies. Where voting
differently to our general approach is in the best interests of our clients, we
will address these instances on a case- by-case basis. We seek to ensure that
our approach to voting is aligned to our principles and in the best interests of
our clients. Our voting application will also take into account our engagement
strategy, focus areas and current prioritisation criteria.
1.2.5
Issues not covered by principles or guidelines: We
will assess where necessary on a case-by-case basis items or issues not clearly
covered by our voting principles or guidelines.
1.2.6
Voting application to agenda items: We
will generally vote against items that directly correlate to any concern we
have. Where there is no corresponding agenda item, we may vote against other
proposals to signal our view and in more severe situations may vote against all
agenda items to express our dissatisfaction.
1.2.7
Engagement: We
assess the merits of each proposal using company disclosure and internal as well
as external research. When deemed necessary, we engage with companies to seek a
better understanding of the proposal in order to make a more informed voting
decision. We will also endeavour to engage with relevant stakeholders if needed
to achieve a comprehensive and fair view of the item under review.
1.3
Voting integration with sustainable investing factors
1.3.1
Sustainability-related proposals: We
evaluate proposals that relate to sustainability issues on a case-by-case basis,
guided by our sustainable investing policy, our investment approach and
policies, and widely accepted sustainable principles and frameworks such as the
UN Sustainable Development Goals (SDGs). We also reference standards from
organisations including the Sustainability Accounting Standards Board (SASB),
the Global Reporting Initiative (GRI), and the CDP (formerly the Carbon
Disclosure Project).
1.3.2
Escalation of ESG concerns to voting: We
seek to integrate voting as a tool to signal our concerns, and promote positive
change, in relation to ESG issues that have been identified and discussed with
the company but have seen no sign of improvement over a prolonged period. We
will consider voting against the re- election of the chair or directors that are
considered most accountable in this case.
1.4
Conflicts of interest
1.4.1
Conflicts of interest: In
instances where there may be a conflict, we will either vote in accordance with
the recommendation of our principal third-party research provider or, if no
recommendation is available, we will either not vote or abstain in accordance
with local regulations.
1.4.2
Votes on our funds: Fidelity's
Sustainable Investing Team will not vote at shareholder meetings of any Fidelity
funds unless specifically instructed by a client.
2
Shareholder rights and authority
2.1
Multiple voting rights: We
support the principle of one share, one vote and will vote against the
authorisation of stock with differential voting rights if the issuance of such
stock would adversely affect the voting rights of existing shareholders.
2.2
Transfer of authority from shareholders to directors: We
will generally vote against any limitation on shareholder rights or the transfer
of authority from shareholders to directors. Furthermore, we will typically
always support proposals that enhance shareholder rights or maximise shareholder
value.
2.3
Anti-takeover measures: We
will vote against anti-takeover proposals including share authorities that can
be used as a control-enhancing mechanism.
2.4
Poison pill without approval: We
will consider voting against senior management if a poison pill has been
implemented without shareholder approval in the last year.
2.5
Cumulative voting: We
will support cumulative voting rights when it is determined they are favourable
to the interests of minority shareholders.
2.6
Voting by poll and disclosure of results: We
support proposals to adopt mandatory voting by poll and full disclosure of
voting outcomes.
2.7
Voting practice: We
will support proposals to adopt confidential voting and independent vote
tabulation practices.
2.8
Detailed documentation provided in a timely manner: We
expect companies to provide adequate detail in shareholder meeting materials and
for these materials to be made public sufficiently in advance of the shareholder
meeting to enable all investors to make informed decisions.
2.9
Conversion of stock: We
will consider conversion of stock on a case-by-case basis.
2.10
Shareholder ownership enhanced disclosure: We
generally support enhanced shareholder ownership disclosure. However, we may
vote against it where, in our view, the threshold obligations are unreasonably
onerous.
2.11
Shareholder ownership disclosure thresholds: We
review proposals to reduce ownership percentage disclosure thresholds on a
case-by-case basis.
2.12
Other business: We
will vote against proposals that request approval of non-specific items under a
request for approval of other business.
3
Corporate culture and conduct
3.1
Board composition and independence
3.1.1
Board independence: We
favour robust independent representation on boards and may not support proposals
relating to the election of directors where we deem there is an insufficient
independence level on the board.
3.1.2
Board committee independence: We
support boards establishing audit, remuneration and nomination committees to
enhance the management and scrutiny of these governance areas but will vote
against election of directors where we feel the objectivity of these committees
is compromised.
3.1.3
Director independence: We
will vote against the election of nominees as independent directors,
supervisors, and statutory auditors if, in our view, they lack sufficient
independence from the company, its management or its controlling shareholders.
3.1.4
CEO and chair separation: We
favour a separation of the roles of chair and chief executive and will vote in
favour of this outcome when the opportunity arises. In markets where there is
established separation of the two roles, we will consider voting against
nominees deviating from best practice.
3.1.5
Nominee disclosure: We
will vote against director elections in cases where the names of the nominees
are not disclosed to shareholders on a timely basis.
3.1.6
Board renewal: We
support periodic and orderly board refreshment and may vote against directors
where, in our view, a significant proportion of the board is comprised of
directors with excessively long tenures.
3.2
Board effectiveness, conduct, diversity, inclusion and expertise
3.2.1
Board effectiveness: Companies
should articulate how the board is undertaking its role and functions and
demonstrate this by providing key information on material issues. The board
should also comment on the skill set, diversity and experience of its members.
3.2.2
Director attendance: We
will vote against the re-election of directors with poor attendance records at
previous board or committee meetings without clear justification for the
absence.
3.2.3
Outside directorships on public company boards: We
do not support directors serving on a significant number of boards because this
may compromise their capacity to fully meet their board responsibilities. The
assessment will consider the type of role they undertake at the company and will
take into account the positions at related companies and the nature of their
business and the differences in market development.
3.2.4
Tenure of independent directors: We
recognise that the independence of directors can diminish over time and we may
not support the re-election of directors to independent director roles if their
tenure is excessive. Where deemed valuable to the board, we may support a
candidate's re-election to the board in a non-independent non-executive role.
3.2.5
Board size: We
will not support changes to increase a company's board size, or the election of
directors, where we deem the size of the board is excessive. We will also not
support reductions in board size that could compromise board effectiveness.
3.2.6
Contested elections: We
will review contested elections on a case-by-case basis.
3.2.7
Diversity and inclusion: We
support enhancing board effectiveness through diversity and inclusion of
necessary talents and skill sets on a company board. This includes our support
for gender, racially and ethnically diverse boards. Companies that fall short of
market or sector best practice with respect to board gender, race and ethnic
diversity are expected to adopt objectives for improvement and demonstrate
progress over time. In circumstances where we conclude that a board is not
addressing this issue with the seriousness or urgency it deserves, additional
measures may be considered, including, where appropriate, voting against the
re-election of members of the board, which may include the chairman or the
chairman of the nomination committee.
3.2.8
Gender-balanced boards: We
support gender diversity on a company's board and will vote against the election
of directors where boards do not have at least 30% female representation at
companies in the most developed markets (including the UK, EU, USA and
Australia) and 15% female representation in all other markets where standards on
gender diversity are still developing. We may also take into account factors
including the board size, industry and corporate structure.
3.2.9
Racially and ethnically diverse and inclusive boards: We
support racial and ethnic diversity on a company's board and will consider
voting against the election of accountable directors where there are serious
concerns relating to racial or ethnic underrepresentation on the board, or the
number is inadequate, based on factors including the board size, industry, and
market.
3.2.10
Mandatory retirement age: We
are generally not supportive of mandatory retirement ages for directors and
employees.
3.3
Conduct and accountability
3.3.1
Corporate culture and conduct: We
believe that companies should foster a culture across their organisations of
acting lawfully, ethically and responsibly, including enforcing anti-corruption
and anti-bribery policies and processes, and where it is clear that there has
been serious conduct to the contrary, we will vote against the election of the
accountable directors.
3.3.2
Integrity and competence: We
will vote against the election of directors if, in our view, they lack the
necessary integrity, competence or capacity to carry out their duties as
directors. Relevant factors which may lead us to conclude that a director's
election should not be supported include but are not limited to: involvement in
material failures of governance or risk oversight that call into question the
nominee's fitness to serve as a fiduciary; qualifications and experience; and
abuse of minority shareholder rights.
3.3.3
Whistleblowing and risk practice: We
support companies meeting minimum legal protection standards with regard to
whistleblowing and risk management practices and will vote against directors
where we have been made aware that there have been clear significant breaches of
expected standards.
3.3.4
Contingency planning and accountability: We
encourage companies to undertake comprehensive contingency planning, taking into
account ESG factors, and we may vote against the election of directors where we
assess this has been clearly inadequate.
3.3.5
Majority shareholder abuse: We
will vote against board members, where appropriate, in cases where there have
been abuses to minority shareholder interests by the company's controlling
shareholder.
3.3.6
Bundled voting items: Shareholder
approval for the election of each director should be sought under individual
agenda items. We will generally vote against bundled elections or bundled
proposals where we are not supportive of any one or more components of the
proposal.
3.3.7
Local governance codes: We
support companies following their local market corporate governance code for
best practice and may vote against items where there is a material failing to
meet basic local practice.
4
Audit and financial reporting
4.1
Audit committee independence: We
will vote against members of the audit committee where the committee is not
fully composed of non-executive directors and/ or a majority is not independent.
4.2
Qualified or delayed audit: We
will vote against relevant proposals where the audit report is either qualified,
we have concerns about its integrity, or it is delayed without sufficient
rationale.
4.3
Auditor independence: We
will vote against the appointment of an auditor where there are concerns in
relation to their independence based on tenure and remuneration or controversies
related to the audit firm.
4.4
Auditor rotation: We
will vote against the auditor appointment where the auditor's tenure has, in our
view, become excessive.
4.5
Auditor fees: We
will consider voting against the auditor appointment and the chairman of the
audit committee where non-audit related service fees appear excessive relative
to audit fees.
4.6
Audit independence: We
will vote against members of the audit committee where there are concerns in
relation to the independence or quality of the audit report or the auditor.
4.7
Financial reporting: We
will vote against financial statements where we have concerns about the content
or accuracy of a company's financial position and reporting.
4.8
Financial reporting and adherence to accounting practices: We
will vote against financial statements where we believe the statements have
failed to meet required levels of accounting practice.
4.9
Financial reporting transparency: We
will not support financial statements where we have concerns about the
transparency of key issues including material weaknesses and fairness in the
company's tax policies.
5
Remuneration
5.1
Approach, alignment and outcomes
5.1.1
Alignment of interests: We
aim to vote against remuneration-related proposals or appropriate directors
where we believe there is a clear misalignment between a company's remuneration
structure and the interests of shareholders. Remuneration committees must remain
mindful of ensuring that variable pay outcomes broadly reflect shareholders'
experience, and appropriate discretion should be applied when this is not
reflected in formulaic outcomes.
5.1.2
Poor transparency and complexity: We
support simple and clear remuneration arrangements and believe these factors
help make the expectations placed on participants clearer.
5.1.3
Votes on remuneration: We
will support proposals to give shareholders the right to vote on executive pay
practices.
5.1.4
Remuneration concerns: We
will generally vote against remuneration proposals when payments made to
executives are considered excessive, overly short-term in nature, or not
reflective of company performance.
5.1.5
Ongoing remuneration concerns: In
markets that provide shareholders with the opportunity to vote on a company's
remuneration report, we will consider voting against the re-election of the
chairman of the remuneration committee if we vote against the report of the
remuneration committee for the second year in a row (assuming no change in
personnel in the interim).
5.1.6
Remuneration committee independence: We
do not support the presence of executive directors on the remuneration committee
(or its equivalent) of the companies which employ them, and we will consider
voting against directors or the remuneration report in these instances when
given an opportunity to do so.
5.1.7
Independent non-executive director pay: We
will vote against remuneration granted to independent non-executive directors if
the payment may compromise the directors' objectivity, although the
circumstances of individual companies and rationale for pay structure will be
considered. We will generally not support arrangements where independent and
non-executive directors receive significant fee increases, share options, or
payments in cash or shares that are subject to performance targets.
5.2
Practice and implementation
5.2.1
Misalignment of remuneration outcomes: We
will vote against remuneration proposals where we believe there is a clear
misalignment between executive pay and the experience of shareholders, or where
material negative outcomes for stakeholders are not appropriately taken into
consideration for pay outcomes.
5.2.2
Pay quantum: We
will vote against remuneration proposals where the size of pay or increases in
executive pay levels are in our view excessive.
5.2.3
Aggregate compensation ceiling: We
will vote against proposals that seek to make adjustment to an aggregate
compensation ceiling for directors where we believe this is excessive or we
believe it is not necessary.
5.2.4
Share ownership: We
strongly encourage the long-term retention of shares, and we will consider
voting against remuneration proposals if the company lacks policies requiring
executives to build up a significant share ownership within a reasonable
timeframe. In some markets, we expect share ownership guidelines to require the
retention of shares for a period after the director's mandate has ended. We
encourage the use of broad-based share incentive plans for executives and
rank-and-file staff. For shares awarded to executives as part of a long-term
incentive plan, we will have particular regard for minimum required retention
periods. Practice in this regard differs globally but over time we expect all
companies to move towards a minimum guaranteed share retention period of at
least five years from the date of grant.
5.2.5
Dilution: We
will vote against incentive arrangements if the dilutive effect of shares
authorised under the plan is excessive.
5.2.6
Discounted awards: We
will generally vote against options offered with an exercise price of less than
100% of fair market value at the date of grant. Employee share-save schemes may
be supported provided the offering price of shares is not less than 80% of the
fair market value on the date of grant.
5.2.7
Re-pricing: We
do not support the re- pricing of stock options and will vote against proposals
that seek approval for this practice.
5.2.8
Uncapped awards: We
do not favour non-routine remuneration arrangements where the potential awards
are uncapped or provide no clarity on the quantum of awards, such as those found
in certain value creation plans.
5.2.9
Re-testing of performance criteria: We
do not support arrangements where performance re-testing is permitted. In our
view, if performance targets for a given year are not met, then awards for that
year should be foregone.
5.2.10
Material changes to remuneration arrangements: We
are not supportive of remuneration arrangements that provide discretion to
permit material changes without shareholder approval.
5.2.11
Holding period: We
believe companies should put in place longer holding periods for share awards
and our preference is for a minimum retention period of five years for shares
granted to top executives. We will vote against arrangements where we deem the
holding period too short.
5.2.12
Performance hurdles reduced: We
will generally vote against proposals where performance hurdles attached to
remuneration arrangements have been reduced.
5.2.13
Incentive arrangement criteria: Subject
to local market standards, we will generally vote against incentive arrangements
where any of the following are met:
•
No performance conditions: We will vote against proposals where there are no
performance conditions attached to any of the incentive awards.
•
No disclosure of performance conditions: We will vote against proposals where
there is no disclosure of the performance measures to be used.
•
Insufficiently challenging targets: We will vote against proposals where the
performance targets are insufficiently challenging.
•
Inadequate proportion of award subject to targets: We will vote against
proposals where the proportion of the performance targets attached to the
incentive is insufficient.
•
Inadequate vesting period: We will vote against proposals where there is an
inadequate vesting period attached to the awards.
•
Vesting on change of control: We will vote against proposals where there is full
vesting on a change of control.
5.2.14
Non-standard incentive arrangements: We
will review non-standard features relating to incentive arrangements on a
case-by-case basis.
5.2.15
No long-term incentive plan: In
certain markets, based on local practices, we may vote against proposals such as
the election of directors or the remuneration report, where there is no
long-term incentive plan in place at the company.
5.2.16
Severance packages: We
will generally vote against severance packages that are contrary to best
practice.
5.2.17
Non-financial criteria: We
will assess the use of non-financial performance criteria in long-term incentive
arrangements on a case-by-case basis. Non-financial considerations, either
directly linked with strategy implementation or focused on positive stakeholder
outcomes, should be integrated into the remuneration policy as appropriate,
either through the use of specific targets, modifiers, gateways/ underpins, or
in the context of the ex- post review of formulaic remuneration outcomes by the
board or remuneration committee. We will consider voting against proposals where
we believe companies are not taking non-financial factors adequately into
consideration.
5.2.18
Board and management contracts: We
will consider voting against the election of directors or remuneration-related
proposals where executive director service contracts do not meet local market
best practice.
5.2.19
Remuneration-related employee loans: We
will not support companies providing loans to facilitate participation in their
remuneration plans. Employees should access required credit from banks or other
third parties.
5.2.20
Ex gratia payment: We
will not generally support ex gratia payments to directors of the company.
5.2.21
Authority to omit executive compensation disclosure: We
will vote against proposals that seek to omit or reduce executive compensation
disclosure.
6
Articles and charter amendments
6.1
Articles of association: We
will vote against changes to a company's articles of association that are not in
the interests of shareholders.
6.2
Lower quorum requirement: We
will vote against amendments to reduce the quorum level for special resolutions
and changes to articles of incorporation.
6.3
Limit number of shareholder representatives at meetings: We
do not support proposals that have the potential to restrict or result in a
detrimental effect on shareholder rights.
6.4
Amend provisions on number of directors (increase or decrease maximum board
size): We
do not support proposals seeking to make changes in board size that would result
in the board being too small or too large to function effectively.
6.5
Require supermajority vote to remove director: We
do not support the introduction of provisions that increase the potential
difficulty in the removal of a director.
6.6
Extend directors' terms: We
do not support article amendments seeking to extend directors' terms.
6.7
Takeover defence provisions: We
do not support anti-takeover devices and accordingly would vote against
proposals seeking to add or change provisions to adopt control- enhancing
mechanisms.
7
Investment-related matters
7.1
Mergers, acquisitions and disposals: We
will consider mergers, acquisitions and disposals on a case-by-case basis and
vote against where we are not supportive of the transactions.
7.2
Reorganisations and restructuring: We
vote on a case-by-case basis with regard to company reorganisations and
restructuring.
7.3
Takeover bids: We
review takeover bids on a case- by-case basis and although usually supportive of
current management, where management has failed consistently to deliver on
reasonable expectations for shareholder returns and the bid fully recognises the
prospects of the company, we may support the proposal.
7.4
Management buyouts: We
review management buyouts on a case-by-case basis and review the opportunity to
deliver value to shareholders along with potential conflicts of interest among
other factors.
7.5
Re-incorporation and changes in listings venue: Where
a company seeks to make changes to re-incorporate or change its place of
listing, we will review these on a case-by-case basis and assess the rationale
for the change. We will vote against where there is no merit to the change or it
appears contrary to the long-term interests of shareholders.
8
Capital management
8.1
Capital allocation: We
encourage efficient capital allocation measures but where, in our view, excess
cash should be returned to shareholders, we may vote against dividend-related
items, directors or in support of shareholder proposals that facilitate
improvement.
8.2
Authority to increase share capital: We
will vote against unusual or excessive requests to increase share capital,
particularly in respect of proposed increases for companies in jurisdictions
without assured pre-emptive rights or where this is to facilitate an
anti-takeover device.
8.3
Issuances with and without pre-emptive rights: We
will vote against issuance requests with or without pre-emptive rights that we
believe are excessive.
8.4
Private placements: We
will consider voting against board members where private placements have been
made with limited offering or contrary to the interests of minority
shareholders.
8.5
Debt issuance: We
are generally supportive of companies seeking approval for the issuance of debt
providing the terms are not contrary to the interests of existing shareholders.
8.6
Borrowing powers: We
evaluate proposals related to the approval of company borrowing on a
case-by-case basis.
8.7
Share repurchase plans: We
are generally supportive of companies seeking to repurchase shares but evaluate
these considering broader factors related to the capital allocation.
8.8
Reissuance of repurchased shares: We
consider companies reissuing repurchased shares on a case-by-case basis and may
vote against relevant proposals where this is deemed unnecessary or egregious.
8.9
Corporate guarantees and loan agreements: We
evaluate proposals related to the approval of corporate guarantees and loan
agreements on a case-by-case basis.
8.10
Investment of company funds into financial products: We
are generally supportive of proposals seeking approval to use idle funds to
invest in financial instruments for cash management or capital preservation
unless, in our view, the investment would expose shareholders to unnecessary
risk.
8.11
Pledging of assets for debt: We
assess proposals seeking the pledging of assets for debt on a case-by-case
basis.
9
Related-party transactions
9.1
Related-party transactions: We
believe that all material related- party transactions should be put to a
shareholder vote. We will vote against related-party transactions that are not
aligned with the interests of the company's minority shareholders.
9.1.1
Conflicted related-party transactions: We
will vote against where the terms of a related-party transaction are not
equivalent to those that would prevail in an arm's-length transaction.
9.1.2
Transaction disclosures: We
will vote against where there is inadequate disclosure of key information or
supporting evidence including the review of independent directors or financial
advisors.
9.1.3
Transaction pricing: We
will not support related-party transactions where there are any concerns about
the pricing of the transactions.
9.1.4
Transaction rationale and timing: We
will not support a transaction if the company has not provided adequate detail
on the rationale for the transaction and its timing.
10
Governance of climate change oversight, practice and action
10.1
Minimum standards of climate change oversight and practice: We
aim to vote against the election of members of a company's board, including the
chairman and CEO, and other relevant proposals where, in our view, the company
has not met our expectations of standards of climate change oversight and
practice. We will take into consideration factors including the markets and
industries in which the company is operating.
10.1.1
We will vote against directors at companies that do not adequately meet our
climate change-related expectations, taking into account if they are within
industries most affected by climate change and the degree of urgency, where we
believe they should be addressing these issues. We believe that all companies
should be disclosing:
•
A stated policy on climate change
•
Emissions data
•
Confirmation of discussion and oversight of climate change at the board level
10.1.2
For companies we believe should be addressing climate change-related issues most
urgently, including those within industries most affected by climate change, we
believe that they should be undertaking and disclosing:
•
Targets for reducing greenhouse gas emissions
•
Description of the impacts of climate-related risks and opportunities on their
businesses, strategy and financial planning
•
Scenario planning including multiple scenarios
•
Impact scenario referencing a 1.5 °
C
limit
10.2
Financing climate change: We
will vote against directors where there are material concerns or failures with
practices related to financing climate change.
10.3
Climate change and engagement: In
relation to ESG engagements on climate practices with company management, we
will vote against the election of members of a company's board or other
appropriate agenda items where the company has not adequately addressed our
concerns.
10.4
Climate action plans ('Say on Climate'): We
support companies setting out climate action plans and improvements that result
in votes at AGMs to act as accountability mechanisms for the execution of these
plans.
10.5
Climate change-related shareholder proposals: Our
firm-wide positioning on climate, including support of the Paris Agreement,
informs our climate voting approach both on holding boards accountable for not
meeting minimum standards and on supporting shareholder proposals that improve
climate-related corporate behaviours and disclosures. Climate- related
shareholder proposal votes are evaluated on the merits of the proposal. In all
cases however we take a holistic view of factors when determining our final
decision.
10.6
Climate change-related shareholder proposals on improved disclosure:
We
support shareholder proposals that call for enhanced disclosure on
climate-related reporting and practice, encouraging this to be in accordance
with the Task Force on Climate- related Financial Disclosures (TCFD)
recommendations, and will consider supporting all shareholder proposals that
promote this objective and are reasonable for the company to implement.
10.7
Climate change-related and lobbying-related shareholder proposals: We
support enhanced disclosure and best practice in relation to company practices
on climate-related lobbying and will support all shareholder proposals that are
reasonable for the company to implement and are aligned with their commitments
and future development.
10.8
Climate change-related shareholder proposals on the management of greenhouse gas
emissions: We
believe it is critical that all companies properly take into account and manage
their greenhouse gas emissions and targets and will support, where reasonable,
shareholder proposals seeking to improve these practices.
11
Environmental and social responsibilities
11.1
Environmental and social responsibility engagement: We
will vote against directors that we consider accountable for major corporate
failures in relation to their duties to manage relationships with stakeholders
on material environmental or social concerns.
11.2
Waste and pollution: We
will vote against directors where it is clear there have been material failings
by a company to minimise the negative externalities caused by its businesses or
failure to monitor product quality and the chemical safety of its products for
the environment and human health upon disposal.
11.3
Water and aquaculture: We
will vote against directors where a company has clearly failed to properly
manage the sourcing of water, failed to mitigate potential water scarcity risks,
or are accountable for failings resulting in material pollution or
contamination.
11.4
Sustainable protein: We
will vote against directors where there are material concerns or failures with
practices related to sustainable protein.
11.5
Biodiversity: We
will vote against directors where they have clearly failed to manage or
implement the capabilities to monitor and assess material environmental risks
related to biodiversity matters and reduce the ecological impact of their
operations.
11.6
Responsible palm oil: We
will vote against directors where there are material concerns or failures with
practices related to responsible palm oil.
11.7
Supply chain sustainability, human rights, labour rights, and modern slavery:
We
will vote against the election of members of a company's board of directors,
including the chair and CEO, and other appropriate proposals where, in our view,
the company has not met the minimum standards of monitoring and overseeing
itself and its suppliers with regard to human rights and minimising the risk of
modern slavery or human rights violations occurring within its organisation or
supply chain.
11.8
Health and safety: We
will vote against directors where there are failings in the provision of safe
working conditions and managing health and safety risks.
11.9
Data privacy, cyber security and digital ethics: Where
a company has failed to meet our expectations on matters of data privacy,
cybersecurity or digital ethics, we will vote against directors we view as
accountable.
11.10
Political donations and lobbying: We
support robust disclosures on corporate political lobbying activities. We will
consider voting against management, typically on shareholder proposals, where
there is a misalignment between involvement with political donations and
lobbying activities and a company's own stated strategy or commitments or such
lobbying activity is in conflict with the interests of stakeholders.
11.11
Corporate sustainability reporting: We
will vote against directors where there are material issues or inaccuracies
included within a company's sustainability reporting or the reporting level is
significantly below expected standards.
12
Shareholder-sponsored proposals
12.1
Shareholder proposals: We
evaluate shareholder proposals on a case-by-case basis and our consideration
includes the company's perspective and response to the proposal, the proponents'
case and the proposal's intention, whether the proposal is binding or advisory
in nature, current market best practices, impact on shareholder value, and
Fidelity's sustainable investing policies.
12.2
Voting in favour of reasonable shareholder proposals: We
aim to support ESG shareholder proposals that address and improve issues of
material importance to the company and its stakeholders. Shareholder proposals
are evaluated based on the merit of the proposal.
12.3
Shareholder proposals seeking environmental and social improvement: We
will support all shareholder proposals we deem reasonable that relate to
improvements in the practices, disclosure and management of environmental and
social impacts of company operations which include areas of our thematic
engagement and general focus areas including:
•
Climate change
•
Diversity and inclusion
•
Waste and pollution
•
Water and aquaculture
•
Sustainable protein
•
Biodiversity
•
Responsible palm oil
•
Deforestation
•
Supply chain sustainability, human rights, labour rights, and modern slavery
•
Health and safety
•
Data privacy, cyber security and digital ethics
•
Political donations and lobbying
•
Corporate sustainability reporting
12.4
Failure to implement previously approved shareholder proposals: If
a shareholder proposal receives majority support but is not implemented by the
company, we will consider voting against board members at subsequent shareholder
meetings.
|
Geode
Proxy Voting Policies
As
an investment adviser, Geode holds voting authority for securities in many
of the client accounts that it manages. Geode takes seriously its
responsibility to monitor events affecting securities in those client
accounts and to exercise its voting authority with respect to those
securities in the best interests of its clients (as well as shareholders
of mutual funds for which it serves as adviser or sub-adviser). The
purposes of these proxy voting policies are to (1) establish a framework
for Geode's analysis and decision-making with respect to proxy voting and
(2) set forth operational procedures for Geode's exercise of proxy voting
authority.
Overview
Geode
anticipates that, based on its current business model, it will manage the
vast majority of assets under its management using passive investment
management techniques, such as indexing. Geode also manages funds and
separate accounts using active investment management techniques, primarily
employing quantitative investment strategies.
Geode
will engage established commercial proxy advisory firms for comprehensive
analysis, research and voting recommendations, particularly for matters
that may be controversial or require additional analysis under these proxy
voting policies.
Geode
may determine to follow or reject any recommendation based on the research
and analysis provided by proxy advisory firms or on any independent
research and analysis obtained or generated by Geode. However, Geode has
retained a third-party proxy voting service (the "Agent") to affect votes
based on the customized policies established by Geode and maintain records
of all of Geode's proxy votes. In limited instances where the proxy voting
policies do not address the specific matter, the Agent will refer the
ballot back to Geode. For ballots related to proxy contests, mergers,
acquisitions and other organizational transactions, Geode may determine it
is appropriate to conduct a company specific evaluation. In cases of
proxies not voted by the Agent, the ultimate voting decision and
responsibility rests with Geode Proxy. Geode's Operations Committee
oversees the exercise of voting authority under these proxy voting
policies.
Due
to its focused business model and the number of investments that Geode
will make for its clients (particularly pursuant to its indexing
strategy), Geode does not anticipate that actual or potential conflicts of
interest are likely to occur in the ordinary course of its business.
However, Geode believes it is essential to avoid having conflicts of
interest affect its objective of voting in the best interests of its
clients. Therefore, in the event that members of the Operations Committee,
the Agent or any other person involved in the analysis or voting of
proxies has knowledge of, or has reason to believe there may exist, any
potential relationship, business or otherwise, between the portfolio
company subject to the proxy vote and Geode (or any affiliate of Geode) or
their respective directors, officers, employees or agents, such person
shall notify the other members of the Operations Committee. Geode will
analyze and address such potential conflict of interest, consulting with
outside counsel, as appropriate. In the case of an actual conflict of
interest, on the advice of counsel, Geode expects that the independent
directors of Geode will consider the matter and may (1) determine that
there is no conflict of interest (or that reasonable measures have been
taken to remedy or avoid any conflict of interest) that would prevent
Geode from voting the applicable proxy, (2) abstain, (3) cause authority
to be delegated to the Agent or a similar special fiduciary to vote the
applicable proxy or (4) recommend other methodology for mitigating the
conflict of interest, if deemed appropriate (e.g., echo voting).
Geode
has established the specific proxy voting policies that are summarized
below to maximize the value of investments in its clients' accounts, which
it believes will be furthered through (1) accountability of a company's
management and directors to its shareholders, (2) alignment of the
interests of management with those of shareholders (including through
compensation, benefit and equity ownership programs), and (3) increased
disclosure of a company's business and operations. Geode reserves the
right to override any of its proxy voting policies with respect to a
particular shareholder vote when such an override is, in Geode's best
judgment, consistent with the overall principle of voting proxies in the
best long-term economic interests of Geode's clients.
Policies
All
proxy votes shall be considered and made in a manner consistent with the
best interests of Geode's clients (as well as shareholders of mutual fund
clients) without regard to any other relationship, business or otherwise,
between the portfolio company subject to the proxy vote and Geode or its
affiliates. As a general matter, (1) proxies will be voted FOR incumbent
members of a board of directors and FOR routine management proposals,
except as otherwise addressed under these policies; (2) shareholder and
non-routine management proposals addressed by these policies will be voted
as provided in these policies; and (3) shareholder and non-routine
management proposals not addressed by these policies will be evaluated by
Geode Proxy based on fundamental analysis and/or research and
recommendations provided by the Agent and other third-party proxy advisory
firms.
When
voting the securities of non-US issuers, Geode will evaluate proposals in
accordance with these policies but will also take local market standards
and best practices into consideration. Geode may also limit or modify its
voting at certain non-US meetings (e.g., if shares are required to be
blocked or reregistered in connection with voting).
Geode's
specific policies are as follows:
I.
Election of Directors
Geode
will generally vote FOR incumbent members of a board of directors
except:
•
Attendance.
The
incumbent board member failed to attend at least 75% of meetings in the
previous year and does not provide a reasonable explanation.
•
Independent
Directors. Nominee
is not independent and full board comprises less than a majority of
independents. Nominee is not independent and sits on the audit,
compensation or nominating committee.
•
Director
Responsiveness. The
board failed to act on shareholder proposals that received approval by
Geode and a majority of the votes cast in the previous year. The board
failed to act on takeover offers where Geode and a majority of
shareholders tendered their shares. At the previous board election,
directors opposed by Geode received more than 50 percent withhold/against
votes of the shares cast, and the company failed to address the issue(s)
that caused the high withhold/against vote.
•
Golden
Parachutes. Incumbent
members of the compensation committee adopted or renewed an excessive
golden parachute within the past year.
•
Gender
Diversity. If
there are no women on the Board unless the Board has made a firm
commitment to return to a gender-diverse status when there was a woman on
the Board at the preceding annual meeting.
•
Overboarding.
The
Director is a CEO and sits on the Board of more than two public companies
besides his or her own; or a non-CEO Director who sits on more than five
public company boards.
•
In Other
Circumstances when
a member of the board has acted in a manner inconsistent with the
interests of shareholders of a company whose securities are held in client
accounts.
II.
Majority Election. Unless
a company has a policy achieving a similar result, Geode will generally
vote in favor of a proposal calling for directors to be elected by a
majority of votes cast in a board election provided that the plurality
vote applies when there are more nominees than board seats.
III.
Say on Pay (non-binding).
•
Advisory
Vote on Executive Compensation. Geode
will generally vote AGAINST advisory vote when: (1) there is a significant
misalignment between executive pay and company performance; (2) the
company maintains significant problematic pay practices; or (3) the board
exhibits a significant level of poor communication and responsiveness to
shareholders.
•
Frequency
Vote. Geode
will generally vote FOR having an advisory vote on executive compensation
every year.
•
Advisory
Vote on Golden Parachute. Geode
will vote AGAINST excessive change-in-control severance payments.
IV.
Vote AGAINST Anti-Takeover
Proposals ,
including:
•
Addition
of Special Interest Directors to
the board.
•
Authorization
of "Blank Check" Preferred Stock. Geode
will vote FOR proposals to require shareholder approval for the
distribution of preferred stock except for acquisitions and raising
capital in the ordinary course of business.
•
Classification
of Boards, Geode
will vote FOR proposals to de-classify boards.
•
Fair
Price Amendments, other
than those that consider only a two-year price history and are not
accompanied by other anti-takeover measures.
•
Golden
Parachutes, that
Geode deems to be excessive in the event of change-in-control.
•
Poison
Pills. Adoption
or extension of a Poison Pill without shareholder approval will result in
our voting AGAINST the election of incumbents or a management slate in the
concurrent or next following vote on the election of directors, provided
the matter will be considered if (a) the board has adopted a Poison Pill
with a sunset provision; (b) the Pill is linked to a business strategy
that will result in greater value for the shareholders; (c) the term is
less than three years; (d) the Pill includes a qualifying offer clause; or
(e) shareholder approval is required to reinstate the expired Pill. Geode
will vote FOR shareholder proposals requiring or recommending that
shareholders be given an opportunity to vote on the adoption of poison
pills.
•
Reduction
or Limitation of Shareholder Rights (
e.g.
,
action by written consent, ability to call meetings, or remove directors).
•
Reincorporation
in
another state (when accompanied by Anti-Takeover Provisions, including
increased statutory anti-takeover provisions). Geode will vote FOR
reincorporation in another state when not accompanied by such
anti-takeover provisions.
•
Requirements
that the Board Consider Non-Financial Effects of
merger and acquisition proposals.
•
Requirements
regarding Size, Selection and Removal of the Board that
are likely to have an anti-takeover effect (although changes with
legitimate business purposes will be evaluated).
•
Supermajority
Voting Requirements (i.e.,
typically 2/3 or greater) for boards and shareholders. Geode will vote FOR
proposals to eliminate supermajority voting requirements.
•
Transfer
of Authority from Shareholders to Directors.
V.
Vote FOR proposed
amendments to a company's certificate of incorporation or by-laws that
enable the company to Opt
Out
of the Control Shares Acquisition Statutes.
VI.
Vote AGAINST the
introduction of new classes of Stock
with Differential Voting Rights.
VII.
Vote AGAINST introduction
and FOR elimination of Cumulative
Voting Rights, except
in certain instances where it is determined not to enhance shareholders'
interests.
VIII.
Vote FOR elimination
of Preemptive
Rights.
IX.
Vote FOR Anti-Greenmail
proposals
so long as they are not part of anti-takeover provisions (in which case
the vote will be AGAINST).
X.
Vote FOR charter
and by-law amendments expanding the Indemnification
of Directors to
the maximum extent permitted under Delaware law (regardless of the state
of incorporation) and vote AGAINST
charter
and by-law amendments completely Eliminating
Directors' Liability for Breaches of Care.
XI.
Vote FOR proposals
to adopt Confidential
Voting and Independent Vote Tabulation practices.
XII.
Vote FOR Open-Market
Stock
Repurchase Programs ,
unless there is clear evidence of past abuse of the authority; the plan
contains no safeguards against selective buybacks, or the authority can be
used as an anti-takeover mechanism.
XIII.
Vote FOR management
proposals to implement a Reverse
Stock Split when
the number of authorized shares will be proportionately reduced or the
Reverse Stock Split is necessary to avoid de-listing.
XIV.
Vote FOR management
proposals to Reduce
the Par Value of
common stock unless the proposal may facilitate an anti-takeover device or
other negative corporate governance action.
XV.
Vote FOR the
Issuance
of Large Blocks of Stock if
such proposals have a legitimate business purpose and do not result in
dilution of greater than 20%. However, a company's specific circumstances
and market practices may be considered in determining whether the proposal
is consistent with shareholders' interests.
XVI.
Vote AGAINST Excessive
Increases in Common Stock. Vote
AGAINST increases in authorized common stock that would result in
authorized capital in excess of three times the company's shares
outstanding and reserved for legitimate purposes. For non-U.S. securities
with conditional capital requests, vote AGAINST issuances of shares with
preemptive rights in excess of 100% of the company's current shares
outstanding. Special requests will be evaluated, taking company-specific
circumstances into account.
XVII.
Vote AGAINST the
adoption of or amendment to authorize additional shares under a
Stock
Option Plan if:
•
The stock
option plan includes
evergreen
provisions, which
provides for an automatic allotment of equity compensation every year.
•
The dilution
effect of
the shares authorized under the plan (including by virtue of any
"evergreen" or replenishment provision), plus the shares reserved for
issuance pursuant to all other option or restricted stock plans, is
greater
than 10%. However,
dilution may be increased to 15% for small capitalization companies, and
20% for micro capitalization companies, respectively. If the plan fails
this test, the dilution effect may be evaluated relative to any unusual
factor involving the company.
•
The offering
price of options is less than 100% of fair market value on
the date of grant, except that the offering price may be as low as 85% of
fair market value if the discount is expressly granted in lieu of salary
or cash bonus, except that a modest number of shares (limited to 5% for a
large capitalization company and 10% for small and micro capitalization
companies) may be available for grant to employees and directors under the
plan if the grant is made by a compensation committee composed entirely of
independent directors (the "De Minimis Exception").
•
The
plan is administered by (1)
a compensation
committee not comprised entirely of independent directors or
(2) a board
of directors not comprised of a majority of independent directors,
provided
that a plan is acceptable if it satisfies the De Minimis Exception.
•
The plan's
terms allow repricing of underwater options, or the board/committee has
repriced options outstanding under the plan in the past two years without
shareholder approval, unless
by the express terms of the plan or a board resolution such repricing is
rarely used (and then only to maintain option value due to extreme
circumstances beyond management's control) and is within the limits of the
De Minimis Exception.
•
Liberal
Definition of Change in Control: the
plan provides that the vesting of equity awards may accelerate even though
an actual change in control may not occur.
XVIII.
Vote AGAINST the
election of incumbent members of the compensation committee or a
management slate in the concurrent or next following vote on the election
of directors if, within the last year and without shareholder approval,
the company's board of directors or compensation committee has
repriced
outstanding options .
XIX.
Evaluate proposals to Reprice
Outstanding Stock Options ,
taking
into account such factors as: (1) whether the repricing proposal excludes
senior management and directors; (2) whether the options proposed to be
repriced exceeded the dilution thresholds described in these current proxy
voting policies when initially granted; (3) whether the repricing proposal
is value neutral to shareholders based upon an acceptable options pricing
model; (4) the company's relative performance compared to other companies
within the relevant industry or industries; (5) economic and other
conditions affecting the relevant industry or industries in which the
company competes; and (6) other facts or circumstances relevant to
determining whether a repricing proposal is consistent with the interests
of shareholders.
XX.
Vote AGAINST adoption
of or amendments to authorize additional shares for Restricted
Stock Awards ("RSA")
if:
•
The dilution
effect of
the shares authorized under the plan, plus the shares reserved for
issuance pursuant to all other option or restricted stock plans, is
greater
than 10%. However,
dilution may be increased to 15% for small capitalization companies, and
20% for micro capitalization companies, respectively. If the plan fails
this test, the dilution effect may be evaluated relative to any unusual
factor involving the company.
XXI.
Vote AGAINST Omnibus
Stock Plans if
one or more component violates any of the criteria applicable to Stock
Option Plans or RSAs under these proxy voting policies, unless such
component is de minimis. In the case of an omnibus stock plan, the
dilution limits applicable to Stock Option Plans or RSAs under these proxy
voting policies will be measured against the total number of shares under
all components of such plan.
XXII.
Vote AGAINST Employee
Stock Purchase Plans if
the plan violates any of the relevant criteria applicable to Stock Option
Plans or RSAs under these proxy voting policies, except that (1) the
minimum stock purchase price may be equal to or greater than 85% of the
stock's fair market value if the plan constitutes a reasonable effort to
encourage broad based participation in the company's equity, and (2) in
the case of non-U.S. company stock purchase plans, the minimum stock
purchase price may be equal to the prevailing "best practices," as
articulated by the Agent, provided that the minimum stock purchase price
must be at least 75% of the stock's fair market value.
XXIII.
Vote AGAINST Stock
Awards (other
than stock options and RSAs) unless it is determined they are identified
as being granted to officers/directors in lieu of salary or cash bonus,
subject to number of shares being reasonable.
XXIV.
Vote AGAINST equity vesting acceleration programs or
amendments to authorize additional shares under such programs if the
program provides for the acceleration of vesting of equity awards even
though an actual change in control may not occur.
XXV.
Vote FOR Employee
Stock Ownership Plans ("ESOPs")
of non-leveraged ESOPs, and
in the case of leveraged ESOPs, giving consideration to the company's
state of incorporation, existence of supermajority vote rules in the
charter, number of shares authorized for the ESOP, and number of shares
held by insiders. Geode may also examine where the ESOP shares are
purchased and the dilution effect of the purchase. Geode will vote AGAINST
a leveraged ESOP if all outstanding loans are due immediately upon a
change in control.
XXVI.
Vote AGAINST management or shareholder proposals
on other Compensation
Plans or Practices if
such plans or practices are Inconsistent
with the Interests of Shareholders. In
addition, Geode may vote AGAINST the election of incumbents or a
management slate in the concurrent or next following vote on the election
of directors if Geode believes a board has approved executive compensation
arrangements inconsistent with the interests of shareholders.
XXVII.
Environmental and Social Proposals .
Evaluate each proposal related to environmental and social issues
(including political contributions). Generally, Geode expects to vote with
management's recommendation on shareholder proposals concerning
environmental or social issues, as Geode believes management and the board
are ordinarily in the best position to address these matters. Geode may
support certain shareholder environmental and social proposals that
request additional disclosures from companies which may provide material
information to the investment management process, or where Geode otherwise
believes support will help maximize shareholder value. Geode may take
action against the re-election of board members if there are serious
concerns over ESG practices or the board failed to act on related
shareholder proposals that received approval by Geode and a majority of
the votes cast in the previous year.
XXVIII.
Geode will generally vote AGAINST shareholder proposals seeking to
establish proxy access. Geode
will evaluate management proposals on proxy access. Geode will evaluate
shareholder proposals seeking to amend an existing proxy access right.
XXIX.
Shares of Investment Companies.
•
For institutional accounts, Geode will generally vote in favor of
proposals recommended by the underlying funds' Board of Trustees, unless
voting is not permitted under applicable laws and regulations.
•
For retail managed accounts, Geode will employ echo voting when voting
shares. To avoid certain potential conflicts of interest, if an investment
company has a shareholder meeting, Geode would vote their shares in the
investment company in the same proportion as the votes of the other
shareholders of the investment company. |
|
To
view a fund's proxy voting record for the most recent 12-month period
ended June 30, if applicable, visit www.fidelity.com/proxyvotingresults or
visit the SEC's web site at www.sec.gov. |
The
fund has entered into a distribution agreement with Fidelity Distributors
Company LLC (FDC) , an affiliate of Strategic Advisers. The principal business
address of FDC is 900 Salem Street, Smithfield, Rhode Island 02917. FDC is a
broker-dealer registered under the Securities Exchange Act of 1934 and a member
of the Financial Industry Regulatory Authority, Inc.
The
fund's distribution agreement calls for FDC to use all reasonable efforts,
consistent with its other business, to secure purchasers for shares of the fund,
which are continuously offered.
Promotional
and administrative expenses in connection with the offer and sale of shares are
paid by Strategic Advisers.
The
Trustees have approved a Distribution and Service Plan with respect to shares of
the fund (the Plan) pursuant to Rule 12b-1 under the 1940 Act (the Rule).
The
Rule provides in substance that a fund may not engage directly or indirectly in
financing any activity that is primarily intended to result in the sale of
shares of the fund except pursuant to a plan approved on behalf of the fund
under the Rule.
The
Plan, as approved by the Trustees, allows shares of the fund and/or Strategic
Advisers to incur certain expenses that might be considered to constitute
indirect payment by the fund of distribution expenses.
The
Plan adopted for the fund or class, as applicable, is described in the
prospectus.
Under
the Plan, if the payment of management fees by the fund to Strategic Advisers is
deemed to be indirect financing by the fund of the distribution of its shares,
such payment is authorized by the Plan.
The
Plan specifically recognizes that Strategic Advisers may use its management fee
revenue, as well as its past profits or its other resources, to pay FDC for
expenses incurred in connection with providing services intended to result in
the sale of shares of the fund and/or shareholder support services. In addition,
the Plan provides that Strategic Advisers, directly or through FDC, may pay
significant amounts to intermediaries that provide those services.
Currently,
the Board of Trustees has authorized such payments for shares of the
fund.
Prior
to approving the Plan, the Trustees carefully considered all pertinent factors
relating to the implementation of the Plan, and determined that there is a
reasonable likelihood that the Plan will benefit the fund or class, as
applicable, and its shareholders.
In
particular, the Trustees noted that the Plan does not authorize payments by
shares of the fund other than those made to Strategic Advisers under its
management contract with the fund.
To
the extent that the Plan gives Strategic Advisers and FDC greater flexibility in
connection with the distribution of shares, additional sales of shares or
stabilization of cash flows may result.
Furthermore,
certain shareholder support services may be provided more effectively under the
Plan by local entities with whom shareholders have other relationships.
TRANSFER
AND SERVICE AGENT AGREEMENTS
The
fund has entered into a transfer agent agreement with Fidelity Investments
Institutional Operations Company LLC (FIIOC), an affiliate of Strategic
Advisers, which is located at 245 Summer Street, Boston, Massachusetts 02210.
Under the terms of the agreement, FIIOC (or an agent, including an affiliate)
performs transfer agency services.
For
providing transfer agency services, FIIOC receives no fees from the fund;
however, each underlying Fidelity® fund pays its respective transfer agent
(either FIIOC or an affiliate of FIIOC) fees based, in part, on the number of
positions in and/or assets of the fund invested in such underlying Fidelity®
fund. Strategic Advisers or an affiliate of Strategic Advisers will bear the
costs of the transfer agency services with respect to assets managed by one or
more sub-advisers and assets invested in non-affiliated ETFs under the terms of
an agreement between Strategic Advisers and FIIOC.
FIIOC
may collect fees charged in connection with providing certain types of services
such as exchanges, closing out fund balances, maintaining fund positions with
low balances, checkwriting, wire transactions, and providing historical account
research, as applicable.
FIIOC
bears the expense of typesetting, printing, and mailing prospectuses, statements
of additional information, and all other reports, notices, and statements to
existing shareholders, with the exception of proxy statements.
The
fund has entered into a service agent agreement with Fidelity Service Company,
Inc. (FSC), an affiliate of Strategic Advisers
(or
an agent, including an affiliate). Under the terms of the agreement, FSC
calculates the NAV and dividends for shares, maintains the fund's portfolio and
general accounting records, and administers the fund's securities lending
program.
For
providing pricing and bookkeeping services, FSC receives a monthly fee based on
the fund's average daily net assets throughout the month.
Strategic
Advisers or its affiliate bears the cost of pricing and bookkeeping services
under the terms of an agreement between Strategic Advisers and FSC.
During
the fiscal year, the securities lending agent, or the investment adviser (where
the fund does not use a securities lending agent) monitors loan opportunities
for the fund, negotiates the terms of the loans with borrowers, monitors the
value of securities on loan and the value of the corresponding collateral,
communicates with borrowers and the fund's custodian regarding marking to market
the collateral, selects securities to be loaned and allocates those loan
opportunities among lenders, and arranges for the return of the loaned
securities upon the termination of the loan. Income and fees from securities
lending activities for the fiscal year ended February 28, 2023, are shown in the
following table:
|
Security
Lending Activities |
|
Fund(s)
|
|
|
|
Strategic
Advisers® Fidelity® International Fund |
|
Gross
income from securities lending activities |
$
|
2,407,118
|
|
Fees
paid to securities lending agent from a revenue split |
$
|
0
|
|
Administrative
fees |
$
|
0
|
|
Rebate
(paid to borrower) |
$
|
1,230,419
|
|
Other
fees not included in the revenue split (lending agent fees to NFS)
|
$
|
113,774
|
|
Aggregate
fees/compensation for securities lending activities |
$
|
1,344,193
|
|
Net
income from securities lending activities |
$
|
1,062,925
|
|
|
|
|
A
fund does not pay cash collateral management fees, separate indemnification
fees, or other fees not reflected above.
Trust
Organization.
Strategic
Advisers® Fidelity® International Fund is a fund of Fidelity Rutland Square
Trust II, an open-end management investment company created under an initial
trust instrument dated March 8, 2006.
On
April 28, 2018, Strategic Advisers ®
Fidelity
®
International
Fund changed its name from Strategic Advisers ®
International
II Fund to Strategic Advisers ®
Fidelity®
International Fund.
The
Trustees are permitted to create additional funds in the trust and to create
additional classes of a fund.
The
assets of the trust received for the issue or sale of shares of each fund and
all income, earnings, profits, and proceeds thereof, subject to the rights of
creditors, are allocated to such fund, and constitute the underlying assets of
such fund. The underlying assets of each fund in the trust shall be charged with
the liabilities and expenses attributable to such fund. Any general expenses of
the trust shall be allocated between or among any one or more of the
funds.
Shareholder
Liability. The
trust is a statutory trust organized under Delaware law. Delaware law provides
that, except to the extent otherwise provided in the Trust Instrument,
shareholders shall be entitled to the same limitations of personal liability
extended to stockholders of private corporations for profit organized under the
general corporation law of Delaware. The courts of some states, however, may
decline to apply Delaware law on this point. The Trust Instrument contains an
express disclaimer of shareholder liability for the debts, liabilities,
obligations, and expenses of the trust. The Trust Instrument provides that the
trust shall not have any claim against shareholders except for the payment of
the purchase price of shares and requires that each agreement, obligation, or
instrument entered into or executed by the trust or the Trustees relating to the
trust or to a fund shall include a provision limiting the obligations created
thereby to the trust or to one or more funds and its or their assets. The Trust
Instrument further provides that shareholders of a fund shall not have a claim
on or right to any assets belonging to any other fund.
The
Trust Instrument provides for indemnification out of a fund's property of any
shareholder or former shareholder held personally liable for the obligations of
the fund solely by reason of his or her being or having been a shareholder and
not because of his or her acts or omissions or for some other reason. The Trust
Instrument also provides that a fund shall, upon request, assume the defense of
any claim made against any shareholder for any act or obligation of the fund and
satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which Delaware law does not apply, no contractual limitation of liability was
in effect, and a fund is unable to meet its obligations. Strategic Advisers LLC
believes that, in view of the above, the risk of personal liability to
shareholders is extremely remote.
Voting
Rights. The
fund's capital consists of shares of beneficial interest. Shareholders are
entitled to one vote for each dollar of net asset value they own. The voting
rights of shareholders can be changed only by a shareholder vote. Shares may be
voted in the aggregate, by fund, and by class.
The
shares have no preemptive or conversion rights. Shares are fully paid and
nonassessable, except as set forth under the heading "Shareholder Liability"
above.
The
trust or a fund or a class may be terminated upon the sale of its assets to, or
merger with, another open-end management investment company, series, or class
thereof, or upon liquidation and distribution of its assets. The Trustees may
reorganize, terminate, merge, or sell all or a portion of the assets of a trust
or a fund or a class without prior shareholder approval. In the event of the
dissolution or liquidation of a trust, shareholders of each of its funds are
entitled to receive the underlying assets of such fund available for
distribution. In the event of the dissolution or liquidation of a fund or a
class, shareholders of that fund or that class are entitled to receive the
underlying assets of the fund or class available for distribution.
Custodians.
State
Street Bank and Trust Company, 1 Lincoln Street, Boston, Massachusetts, is
custodian of the assets of the fund.
The
custodian is responsible for the safekeeping of the fund's assets and the
appointment of any subcustodian banks and clearing agencies.
The
Bank of New York Mellon, headquartered in New York, also may serve as special
purpose custodian of certain assets in connection with repurchase agreement
transactions.
From
time to time, subject to approval by a fund's Treasurer, a Fidelity® fund may
enter into escrow arrangements with other banks if necessary to participate in
certain investment offerings.
Strategic
Advisers, its officers and directors, its affiliated companies, Members of the
Advisory Board (if any), and Members of the Board of Trustees may, from time to
time, conduct transactions with various banks, including banks serving as
custodians for certain funds advised by Strategic Advisers. Transactions that
have occurred to date include mortgages and personal and general business loans.
In the judgment of the fund's adviser, the terms and conditions of those
transactions were not influenced by existing or potential custodial or other
fund relationships.
Independent
Registered Public Accounting Firm.
PricewaterhouseCoopers
LLP, 101 Seaport Boulevard, Boston, Massachusetts, independent registered public
accounting firm, audits financial statements for the fund and provides other
audit, tax, and related services.
FUND
HOLDINGS INFORMATION
The
fund views holdings information as sensitive and limits its dissemination. The
Board authorized Strategic Advisers, in consultation with FMR, to establish and
administer guidelines for the dissemination of fund holdings information, which
may be amended at any time without prior notice. FMR's Disclosure Policy
Committee (comprising executive officers of FMR) evaluates disclosure policy
with the goal of serving the fund's best interests by striking an appropriate
balance between providing information about the fund's portfolio and protecting
the fund from potentially harmful disclosure. The Board reviews the
administration and modification of these guidelines and receives reports from
the fund's chief compliance officer periodically.
Other
registered investment companies that are advised or sub-advised by Strategic
Advisers or a sub-adviser may be subject to different portfolio holdings
disclosure policies, and neither Strategic Advisers nor the Board exercises
control over such policies or disclosure. In addition, separate account clients
of Strategic Advisers and the sub-advisers have access to their portfolio
holdings and are not subject to the fund's portfolio holdings disclosure
policies. Some of the funds that are advised or sub-advised by Strategic
Advisers or a sub-adviser and some of the separate accounts managed by Strategic
Advisers or a sub-adviser have investment objectives and strategies that are
substantially similar or identical to the fund's and, therefore, potentially
substantially similar, and in certain cases nearly identical, portfolio holdings
as the fund.
The
fund will provide a full list of holdings monthly on www.fidelity.com 30 days
after the month-end (excluding high income security holdings, which generally
will be presented collectively monthly and included in a list of full holdings
60 days after month-end).
The
fund will provide its top mutual fund positions (if any) on Fidelity's web site
(i) monthly, 30 days after month-end, and (ii) quarterly, 15 or more days after
the quarter-end.
Unless
otherwise indicated, this information will be available on the web site until
updated for the next applicable period.
The
fund may also from time to time provide or make available to the Board or third
parties upon request specific fund level performance attribution information and
statistics. Third parties may include fund shareholders or prospective fund
shareholders, members of the press, consultants, and ratings and ranking
organizations. Nonexclusive examples of performance attribution information and
statistics may include (i) the allocation of the fund's portfolio holdings and
other investment positions among various asset classes, sectors, industries, and
countries, (ii) the characteristics of the stock and bond components of the
fund's portfolio holdings and other investment positions, (iii) the attribution
of fund returns by asset class, sector, industry, and country and (iv) the
volatility characteristics of the fund.
FMR's
Disclosure Policy Committee may approve a request for fund level performance
attribution and statistics as long as (i) such disclosure does not enable the
receiving party to recreate the complete or partial portfolio holdings of any
Fidelity ®
fund
prior to such fund's public disclosure of its portfolio holdings and (ii)
Fidelity has made a good faith determination that the requested information is
not material given the particular facts and circumstances. Fidelity may deny any
request for performance attribution information and other statistical
information about a fund made by any person, and may do so for any reason or for
no reason.
Disclosure
of non-public portfolio holdings information for a Fidelity ®
fund's
portfolio may only be provided pursuant to the guidelines below.
The
Use of Holdings In Connection With Fund Operations. Material
non-public holdings information may be provided as part of the activities
associated with managing Fidelity ®
funds
to: entities which, by explicit agreement or by virtue of their respective
duties to the fund, are required to maintain the confidentiality of the
information disclosed; other parties if legally required; or persons Strategic
Advisers believes will not misuse the disclosed information. These entities,
parties, and persons include, but are not limited to: the fund's trustees; the
fund's manager, its sub-advisers, if any, and their affiliates whose access
persons are subject to a code of ethics (including portfolio managers of
affiliated funds of funds); contractors who are subject to a confidentiality
agreement; the fund's auditors; the fund's custodians; proxy voting service
providers; financial printers; pricing service vendors; broker-dealers in
connection with the purchase or sale of securities or requests for price
quotations or bids on one or more securities; securities lending agents; counsel
to the fund or its Independent Trustees; regulatory authorities; stock exchanges
and other listing organizations; parties to litigation; third parties in
connection with a bankruptcy proceeding relating to a fund holding; and third
parties who have submitted a standing request to a money market fund for daily
holdings information. Non-public holdings information may also be provided to an
issuer regarding the number or percentage of its shares that are owned by the
fund and in connection with redemptions in kind.
Other
Uses Of Holdings Information. In
addition, the fund may provide material non-public holdings information to (i)
third parties that calculate information derived from holdings for use by
Strategic Advisers, a sub-adviser, or their affiliates, (ii) ratings and
rankings organizations, and (iii) an investment adviser, trustee, or their
agents to whom holdings are disclosed for due diligence purposes or in
anticipation of a merger involving the fund. Each individual request is reviewed
by the Disclosure Policy Committee which must find, in its sole discretion that,
based on the specific facts and circumstances, the disclosure appears unlikely
to be harmful to the fund. Entities receiving this information must have in
place control mechanisms to reasonably ensure or otherwise agree that, (a) the
holdings information will be kept confidential, (b) no employee shall use the
information to effect trading or for their personal benefit, and (c) the nature
and type of information that they, in turn, may disclose to third parties is
limited. Strategic Advisers relies primarily on the existence of non-disclosure
agreements and/or control mechanisms when determining that disclosure is not
likely to be harmful to the fund.
At
this time, the entities receiving information described in the preceding
paragraph are: Factset Research Systems Inc. (full or partial holdings daily, on
the next business day) and MSCI Inc. and certain affiliates (full or partial
fund holdings daily, on the next business day).
Strategic
Advisers, its affiliates, or the fund will not enter into any arrangements with
third parties from which they derive consideration for the disclosure of
material non-public holdings information. If, in the future, such an arrangement
is desired, prior Board approval would be sought and any such arrangements would
be disclosed in the fund's SAI.
There
can be no assurance that the fund's policies and procedures with respect to
disclosure of fund portfolio holdings will prevent the misuse of such
information by individuals and firms that receive such information.
The
fund's financial statements and financial highlights for the fiscal year ended
February 28, 2023, and report of the independent registered public accounting
firm, are included in the fund's annual
report and
are incorporated herein by reference.
Total
annual operating expenses as shown in the prospectus fee table may differ from
the ratios of expenses to average net assets in the financial highlights because
total annual operating expenses as shown in the prospectus fee table include any
acquired fund fees and expenses, whereas the ratios of expenses in the financial
highlights do not, except to the extent any acquired fund fees and expenses
relate to an entity, such as a wholly-owned subsidiary, with which a fund's
financial statements are consolidated. Acquired funds include other investment
companies in which the fund has invested, if and to the extent it is permitted
to do so.
Total
annual operating expenses in the prospectus fee table and the financial
highlights do not include any expenses associated with investments in certain
structured or synthetic products that may rely on the exception from the
definition of "investment company" provided by section 3(c)(1) or 3(c)(7) of the
1940 Act.
Fidelity,
the Fidelity Investments Logo and all other Fidelity trademarks or service marks
used herein are trademarks or service marks of FMR LLC. Any third-party marks
that are used herein are trademarks or service marks of their respective owners.
© 2023 FMR LLC. All rights reserved.
