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Fidelity Strategic Income Message Board

  • farb.dannon farb.dannon Oct 4, 2008 2:57 PM Flag

    Why this fund is performing poorly: An analysis of recent losses

    The reasons why this fund is loosing value are quite simple.

    The fund has increased its positions in cash and U.S. government securities over the last year, but minor gains from U.S. treasuries can not possibly offset the dramatic losses the fund has experienced in the value of it's domestic high yield, foreign developed market, and foreign emerging market debt.

    A number of factors have emerged in the past several months, having a synergistic effect to drive this fund's asset value down. The first and most obvious is the flight to quality away from high yield bonds and into treasuries. As economic conditions have deteriorated in the U.S., investors have left high yield instruments for the safety of U.S. treasuries. While this has led to a small appreciation of government securities, it has led to a significant devaluation of risky corporate high yield debt. Approximately 30% of the fund was invested in high yield debt as of August 31, 2008.

    The global economic slowdown has also weakened foreign bond markets, causing decreased bond prices throughout the world. Emerging markets have been especially hard hit by stagnant economic growth, dramatic inflation, and extraordinary losses in equity markets. This has caused investors to shy away from holding corporate or government debt from emerging markets. While U.S. corporate bonds have suffered devaluation, the devaluation in emerging markets is perhaps 3 or 4 times greater in scale. Just in the last week, European bond markets have been especially damaged, and their markets will likely follow the U.S. down. As of August 31, the fund held 26% of its assets in foreign bonds (14% developed, 12% emerging).

    Finally, the increasing dollar has adversely affected the fund's foreign holdings. As the dollar continues to rise, bonds issued in foreign currency will become less and less valuable in U.S. dollars. Currency risk is always a risk of international investing, and after 7 years of a sinking dollar, further downside currency risk can be expected.

    U.S. high yield debt, foreign developed debt, and foreign emerging debt combined made up 56% of the fund's assets as of August 31. As these securities have lost value, the NAV (net asset value) of the fund has continued to decline in a proportionate manner.

    Lastly, I noticed a few comments in previous posts suggesting that Fidelity was engaged in fraudulent accounting, causing this fund's value to decline. Just like everyone else, I hate to see myself losing money in this fund, but a careful analysis of the fund's holdings show why it is losing value.

    While bond funds invested in U.S. government debt and AAA, AA, and A corporate bonds have held up fairly well in this market, it's important to remember that this is a risky bond fund, and its asset allocation and prospectus made its risk perfectly clear: 60% of assets invested in high risk debt, foreign developed market debt, and foreign emerging market debt.

    I sold my entire position in this fund on Thursday. I'd advise other investors to do the same since we have no way of knowing just how far this fund will fall.

    That having been said, for some long term investors you might want to ride this out. This fund will eventually regroup and could even rebound, making up for the decline and maybe even outperforming other bond funds when the global economy revives in within 3 to 5 years. But if you're looking for a safe bond fund, this is not the place to be.

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