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UK equities for income and total return Fidelity MoneyBuilder Dividend Fund April 2017 Michael Clark Portfolio Manager For investment professional use only and not for general public distribution Michael Clark 30 years of investment experience Experience at Fidelity Portfolio Manager Michael Clark Portfolio Manager Based in: London Pan European Research Analyst FF European Dividend Fund 2010 – Present FIF Enhanced Income Fund 2009 – Present FIF MoneyBuilder Dividend Fund 2008 – Present Automotive and Mining 2005 – 2007 Construction and House building 2003 – 2005 Oil Services 2002 – 2003 Other experience Years of investment experience: 30 Equity research analyst, JP Morgan 1994 – 2002 Equity research analyst, Enskilda 1989 – 1994 Education: BA, Modern Languages, Cambridge University Equity research analyst, Morgan Grenfell 1986 – 1988 Awards Source: Fidelity International, as at 31 March 2017. UK portfolios managed by Michael are available to UK investors only. 1 1 | Fidelity MoneyBuilder Dividend Fund & Fidelity Enhanced Income Fund Contents Current environment for investors Finding opportunities in the UK market Appendix Key objectives Sustainable and growing income stream Lower risk in the form of lower drawdown and volatility Source: Fidelity International, as at 31 March 2017. 3 | Fidelity MoneyBuilder Dividend Fund & Fidelity Enhanced Income Fund Superior cross-cycle total returns Safety of Income at a Reasonable Price “SIRP” Safety Income Reasonable Price What we look for in companies Understanding the dividend stream Stock valuations Simple, understandable business models Attractive headline yields A clear valuation framework supported by Fidelity’s global research capability Predictable, consistent cashflows Industry structure Healthy dividend cover Positive dividend growth forecast Dividend sustainability Management who understand the importance of good capital allocation What is the projected Total Shareholder Return? Companies with pricing power Commitment to significant yield premium and dividend growth Source: Fidelity International, as at 31 March 2017. 4 | Fidelity MoneyBuilder Dividend Fund & Fidelity Enhanced Income Fund Current environment for investors Weakness of sterling Higher inflation 110 6.0% 105 5.0% 100 4.0% 95 3.0% 90 2.0% 85 GBP effective exchange rate Weaker pound driving UK inflation Source: Datastream, March 2017. Trade-weighted value of sterling 6 | Fidelity MoneyBuilder Dividend Fund & Fidelity Enhanced Income Fund Consumer Price Inflation Feb-17 Feb-16 Feb-15 Feb-14 Feb-13 Feb-12 Feb-11 -1.0% Feb-10 70 Feb-09 0.0% Feb-07 75 Feb-08 1.0% 80 UK GDP growth has remained strong 3.3% P/E Yield Legal & General 11.6x 5.8% 2.5% Lloyds Banking 9.3x 4.0% 2.3% Next 9.2x 3.9% Go Ahead 9.5x 5.6% 15.0x 3.9% 3.0% 2.8% 2.0% 1.8% FTSE All Share 1.5% 2014 2015 2016 UK GDP Growth 2017 (est) UK domestic stocks undervalued Source: GDP growth data, ONS 2014-2016; Bank of England 2017 estimate. P/E and yields from DataStream, as at 31 March 2017. 7 | Fidelity MoneyBuilder Dividend Fund & Fidelity Enhanced Income Fund Dividends are well supported by corporate cash flows UK payout ratio (ex oil and mining) is below 30-year average 80% 75% 70% 65% 60% 55% 50% 45% 40% 35% 30% Q3 1985 Q1 1989 Q3 1992 Q1 1996 Q3 1999 Payout ratio (ex oil and mining) Q1 2003 Q3 2006 Average payout ratio Corporate balance sheets are in good shape Source: HSBC Bank plc, as at 31 March 2017. Calculated on an accounting year basis. 8 | Fidelity MoneyBuilder Dividend Fund & Fidelity Enhanced Income Fund Q1 2010 Q3 2013 Q1 2017 The revolution in consumer staples The bid for Unilever Operating Margin (2017 est.) Kraft Heinz revolution drives up margins, and shareholder returns without raising prices or undermining the commercial strength of the business Margin gap was the reason for the bid for Unilever Unilever and Nestle will now follow Kraft Heinz. Margins, profits and dividends will rise Returns will therefore rise to shareholders 35% 30% 25% 20% 15% 10% 5% 0% Nestle Unilever Reckitt Benckiser Kraft Heinz Powerful effect of radical cost cutting in a strong non-cyclical business Source: Fidelity International, as at 31 March 2017. Reference in this document to specific securities is included for illustration only and should not be construed as a recommendation to buy or sell these securities. Performance of the security is not a representation of the Fund’s performance. Third party trademark, copyright and other intellectual property rights are and remain the property of their respective owners, and not by Fidelity International. 9 | Fidelity MoneyBuilder Dividend Fund & Fidelity Enhanced Income Fund Diversified pharma with proven businesses Strong drug portfolio and focus on shareholder returns % of group turnover GSK is diversified: the focus is on vaccines, consumer products as well as prescription drugs Pharmaceuticals 26% Vaccines Consumer Healthcare 58% Both Developed Markets and Emerging Markets The valuation is low: 15 x earnings, 5% yield GSK share price (Total Returns) rebased to 100 (in pence) Group is cash generative, and pays a high dividend 16% 180 160 140 120 100 80 2012 2013 2014 2015 2016 2017 Good quality pharmaceuticals stock with stable income, IRR 7% Source: Fidelity International, as at 06 April 2017. Reference in this document to specific securities is included for illustration only and should not be construed as a recommendation to buy or sell these securities. Performance of the security is not a representation of the Fund’s performance. Third party trademark, copyright and other intellectual property rights are and remain the property of their respective owners, and not by Fidelity International. 10 | Fidelity MoneyBuilder Dividend Fund & Fidelity Enhanced Income Fund Finding opportunities in the UK market Finding opportunities in the UK market Additions Disposals Source: Fidelity International as at 28 February 2017. Stocks represent additions and disposals in Fidelity Moneybuilder Dividend over the last 12 months. 12 | Fidelity MoneyBuilder Dividend Fund & Fidelity Enhanced Income Fund Focus on sectors with dependable dividend growth Utilities Consumer Goods Industrials Regulated utilities should continue to outperform in anticipation of higher inflation Financials Health Care Utilities Financials Focus on insurance rather than banks Avoid the complex, opaque and highly geared Health Care Technology Fundamental characteristics lend themselves well to this strategy Telecommunications Consumer Services Oil & Gas Remain underweight Oil companies still in a difficult position Valuations still look attractive, esp. relative to wider market Basic Materials Oil & Gas -12% -6% 0% 6% 12% 18% 24% 30% Very little sales exposure to the UK Source: Fidelity International, as at 31 March 2017. Comparative index - FTSE All Share. Holdings can vary from those in the index quoted. For this reason the comparison index is used for reference only. 13 | Fidelity MoneyBuilder Dividend Fund & Fidelity Enhanced Income Fund Ensure underlying revenues are internationally diversified Regional weights by domicile (%) Regional weights by economic exposure (%) US 5% 1% 2% 1% 4% 6% 3% 2% EM 16% UK 2% 2% 42% UK 20% 89% Australia UK France USA US Germany Netherlands Japan Canada UK large caps have significant global exposure Source: Fidelity International, as at 31 March 2017. FactSet. 14 | Fidelity MoneyBuilder Dividend Fund & Fidelity Enhanced Income Fund Switzerland Italy Offset FX movements with high quality non-UK investments Non-UK exposure (maximum 20%) Kraft Heinz US, Consumer Goods: 2% 1% 5% 1% UK USA Switzerland France Germany Significant operating improvements expected post Heinz deal Dividend yield of 2.6% plus special dividend Roche Switzerland, Healthcare: Premier company in oncology Strong drug pipeline Dividend yield of 3.2% 89% Munich Re Germany, Financials: Strongest reinsurer globally Fortress balance sheet Dividend yield of 4.7% Source: Fidelity International, as at 31 March 2017. DataStream for dividend yield. 15 | Fidelity MoneyBuilder Dividend Fund & Fidelity Enhanced Income Fund Outlook Equities should remain a solid source of income and capital growth Returns should be in excess of inflation despite the devaluation of sterling Economic growth remains strong worldwide Some volatility to be expected as interest rates rise in the US to more normal levels Source: Fidelity International, as at 31 March 2017. 16 | Fidelity MoneyBuilder Dividend Fund & Fidelity Enhanced Income Fund Appendix Fidelity MoneyBuilder Dividend Fund Performance over tenure 250 Down Market Up Market` Up Market Down Market Up Market Down Market Down Market Down Up Market Market Up Market Down Market Up Market +123.4 +102.7 Indexed Return 200 +91.0 150 100 50 Jun-08 Sep-09 Dec-10 Fidelity MoneyBuilder Dividend Y Inc Mar-12 Jun-13 FTSE All Share Sep-14 Dec-15 IA UK Equity Income Sector Average Mar-17 Fund (%) Index (%) Relative (%) Quartile ranking 3 months 5.3 4.0 1.3 1st 1 year 13.4 22.0 -8.6 3rd 3 years 25.4 123.4 24.9 91.0 0.5 2nd 32.4 1st Tenure Source: Morningstar Workstation, as at 31 March 2017. Tenure performance and quartile ranking data as of 31 March 2017. data Basis: Bid-Bid net income reinvested at UK basic rate of tax in GBP. Fidelity Enhanced Income is based on the Fidelity MoneyBuilder Dividend Fund which is also managed by Michael Clark. The track record of Fidelity MoneyBuilder Dividend is displayed above as Michael Clark has a longer track record on this fund than Fidelity Enhanced Income (which was launched on 2 February 2009). Down Market, Up Market is defined by performance of the FTSE All Share Index. 18 | Fidelity MoneyBuilder Dividend Fund & Fidelity Enhanced Income Fund Fidelity MoneyBuilder Dividend Fund Limited drawdown vs. the market and sector Maximum drawdown (%) Up / down capture vs. largest competitors 5 years 0 -2 -4 -6 -8 -10 -12 -14 -16 120 UK Equity Income Sector Average FTSE All Share 110 Up Capture Ratio Fidelity MoneyBuilder Dividend -7.3 100 Fidelity MoneyBuilder Dividend Y Inc 90 80 IA UK Eq Inc Sector Avg FTSE All Share Fidelity Enhanced Income W Acc 70 60 -11.9 -14.5 Emphasis on capital preservation 30 50 70 90 Down Capture Ratio 110 Low down capture indicates relative outperformance in down markets Source: Morningstar Workstation, as at 31 March 2017. Basis: Bid-Bid net income reinvested at UK basic rate of tax in GBP. Each bar represents the maximum drawdown since launch of Fidelity Enhanced Income. i.e. largest peak to trough based on month end performance. Source: Morningstar Direct. Basis: bid-bid, income reinvested in GBP to 31/03/2017, net of fees. Up/down capture measured vs. FTSE All Share. Up/Downside Capture Ratio measures manager's performance in up/down markets. A down-market is defined as those months in which market return is less than 0. In essence, it tells you what percentage of the up/down-market was captured by the manager. For example, if the down ratio is 110%, the manager has captured 110% of the down-market and therefore underperformed the market on the downside. Primary share classes according the IA are shown. 19 | Fidelity MoneyBuilder Dividend Fund & Fidelity Enhanced Income Fund Fidelity MoneyBuilder Dividend Fund A healthy yield underpinned by a diverse and resilient income stream MBD - Income by sector FTSE All Share - Income by sector Consumer Discretionary Consumer Staples Energy Financials Funds Health Care Industrials Information Technology Materials Real Estate Telecommunication Services Utilities Consumer Discretionary Consumer Staples Energy Financials Funds Health Care Industrials Information Technology Materials Real Estate Telecommunication Services Utilities Cumulative distribution of yield Breakdown of portfolio by yield 100% 35% 30% 25% 20% 15% 10% 5% 0% 80% 60% 40% 20% 0% 1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 Number of stocks Source: Fidelity International, as at December 2016. FactSet. 20 | Fidelity MoneyBuilder Dividend Fund & Fidelity Enhanced Income Fund Sub 3% 3-4% 4-5% 5-6% 6% and above Fidelity MoneyBuilder Dividend Fund Top ten holdings Portfolio weight (%) Dividend yield (%) Date position initiated GlaxoSmithKline 5.2 4.8 Jun-08 Imperial Brands 5.1 4.0 Jun-08 British American Tobacco 4.7 3.2 Jun-08 AstraZeneca 4.5 4.5 Jun-08 HSBC 4.3 4.9 Jun-08 BAE Systems 3.9 3.3 Jun-08 Altria 3.5 3.4 Aug-10 Unilever 3.4 2.8 Jul-08 Reckitt Benckiser 3.2 2.1 Sep-09 Legal & General 3.1 5.8 Nov-15 A high quality portfolio with international exposure Source: Fidelity International, as at 31 March 2017. DataStream for dividend yield. For the purposes of illustration only and should not be construed as a recommendation to buy or sell the mentioned security. Top security holdings are those securities in which the largest percentage of the fund’s total assets are invested. Holdings in different securities issued by the same company are listed separately and any exposure achieved by derivatives is not shown. This means that the data may not always represent the total exposure of the portfolio to any given company. A full list of holdings, including derivatives, can be found in the fund’s annual and/or semi-annual report and accounts. 21 | Fidelity MoneyBuilder Dividend Fund & Fidelity Enhanced Income Fund Fidelity MoneyBuilder Dividend Fund Portfolio characteristics Fund yield* c.110% benchmark Typically 60 – 80 holdings Number of holdings 79 Max. stock position Up to 10% Max. sector position Up to 25% Active money** Benchmark - FTSE All Share Index Stock weightings typically between 1% and 10% of NAV. Sector positions are an outcome of stock selection. Normally expect a max of 25% in any one sector Typical active money of between 60 – 70% 59.9% Beta 0.80 Expect beta to be significantly <1 Tracking error 4.2% Monitored but no formal target Annual turnover 14% Low turnover Fund Index GBP 37.1bn GBP 37.1bn Volatility 11.49% 13.79% Expect fund volatility to be below Index ROE 21.9% 16.6% Bias towards quality companies Median market cap Focus on large cap stocks The right balance of conviction and diversification Source: Fidelity International, as at 31 March 2017. *The yield is net of withholding tax and charges taken from income. As a result of the annual management charge being taken from capital, the distributable income may be higher but the fund’s capital value may be eroded, which will affect future performance. The yield is not guaranteed and will fluctuate in line with the yield available from the market. The fund should only be considered as a long term investment. **Active money includes cash. 22 | Fidelity MoneyBuilder Dividend Fund & Fidelity Enhanced Income Fund Important information This information is for Investment Professionals only and should not be relied upon by private investors. It must not be reproduced or circulated without prior permission. This communication is not directed at, and must not be acted upon by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Research professionals include both analysts and associates. Fidelity/Fidelity International means FIL Limited and its subsidiary companies. Unless otherwise stated, all views are those of Fidelity. Top security holdings are those securities in which the largest percentage of the fund’s total assets are invested. Holdings in different securities issued by the same company are listed separately and any exposure achieved by derivatives is not shown. This means that the data may not always represent the total exposure of the portfolio to any given company. A full list of holdings, including derivatives is available on request. Reference in this document to specific securities should not be construed as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. The research and analysis used in this documentation is gathered by Fidelity for its use as an investment manager and may have already been acted upon for its own purposes. Fidelity only offers information on its own products and services and does not provide investment advice based on individual circumstances. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. The Authorised Corporate Director of Fidelity Investment Funds and Fidelity Investment Funds IV OEIC, and the Manager of Fidelity Unit Trusts is FIL Investment Services (UK) Limited. Please note Fidelity Unit Trusts are not registered for sale in Jersey or Guernsey. Holdings can vary from those in the index quoted. For this reason the comparison index is used for reference only. This document may not be reproduced or circulated without prior permission. No statements or representations made in this document are legally binding on Fidelity or the recipient. Past performance is not a reliable indicator of future results. The figures refer to simulated past performance and that past performance should not be used as a guide for future performance. The value of investments can go down as well as up and investors may not get back the amount invested. For funds that invest in overseas markets, changes in currency exchange rates may affect the value of an investment. Foreign exchange transactions may be effected on an arms length basis by or through Fidelity companies from which a benefit may be derived by such companies. Data Source - © 2013 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Copyright - © 2013 Morningstar Inc. All Rights Reserved. Third party trademark, copyright and other intellectual property rights are, and remain, the property of their respective owners. Issued by FIL Investments International (FCA registered number 122170) a firm authorised and regulated by the Financial Conduct Authority. FIL Investments International is a member of the Fidelity International group of companies and is registered in England and Wales under the company number 1448245. The registered office of the company is Oakhill House, 130 Tonbridge Road, Hildenborough, Tonbridge, Kent TN11 9DZ, United Kingdom. Fidelity International’s VAT identification number is 395 3090 35. EQINC223-0717 23 | Fidelity MoneyBuilder Dividend Fund & Fidelity Enhanced Income Fund