INVEstMENt OUtLooK

Fidelity Personal Investings market and investment view, January 2014

 As we enter 2014, my greatest worry is that few people areworried. Thatlevel of complacency about the investment outlook has at times in the past been a contrarian signal for investors. However, more of the same, perhaps less turbo-charged, remains my central view.
By Tom Stevenson, Investment Director
Positive market views are commonplace after a strong year because investors have a tendency to extrapolate the recent past into the future. On the back of a 30% rise in the S&P 500 index in 2013, it is hard to avoid the temptation to project further gains this year, however, more of the same in 2014 is, broadly speaking, my investment view today. There are risks to this view, as there always are, but overall this feels like a good time to remain fully invested. This investment outlook should not be viewed as advice or an invitation to purchase any specic fund or security. Itsimply represents our considered outlook for the next 12 months or so. To arrive at this market view I have tapped into the wealth of investment expertise within Fidelitys investment team, supplemented by wide reading of other views on the street. I present this view in the hope that you will nd it a helpful framework for your investment decisions in the year ahead. I intend to update the view each quarter, looking forward another 12 months at each review, although I expect changes to occur only gradually. At Fidelity, we have always promoted long-term investment and discouraged investors from chasing the latest investment fad.

US stock market in 2013

1900 1850 1800 1750 1700 1650 1600 1550 1500 1450 S&P 500 Composite Price Index

Jan Feb Mar Apr May Jun

Jul

Aug Sep

Oct

Nov Dec

Thomson Datastream, S&P 500 Price Index from 1.1.13 to 1.1.14

Past performance is not a guide to future returns. Wheninvesting in overseas markets, changes in currency exchange rates may affect the value of an investment. Performance over ve years
2009 S&P 500 12.6% 2010 18.7% 2011 2.9% 2012 10.9% 2013 29.9%

Source: Thomson Datastream, from 31.12.08 to 31.12.13 with income reinvested in terms.

Main investment themes for 2014

1. We prefer equities to bonds and commodities. Thereis selective value in commercial property. Residential property in the UK looks underpinned by policy and limited supply. 2. Within equities, the US and Japan are the most attractive markets. The UK looks better than the rest of Europe. Emerging markets are exposed to the eects of the Feds taper. 3. Within bonds, high yield looks most interesting for income seekers. Strategic bond funds are the best way of investing in xed income for mostinvestors. 4. China is the most interesting contrarian play this year, oering investors exposure to longterm growth at a historically cheap valuation.

CONTENTS
Asset classes . . . . . . . . . . . . . . . . . . . . . . . . 3 Equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Commodities . . . . . . . . . . . . . . . . . . . . . . . . 6 Equities a regional perspective . . . . . . . . 7 Bonds in focus . . . . . . . . . . . . . . . . . . . . 12 Investment risks in 2014 . . . . . . . . . . . . . . . 14

Important information: Please be aware that past performance is not a guide to what might happen in the future. The value of investments and the income from them can go down as well as up and investors may not get back the amount invested. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity does not give investment advice. If you are unsure about the suitability of an investment, you should speak to an adviser. Before you invest, please ensure you have read Doing Business with Fidelity and the Key Investor Information Document (KIID) and associated charges; or Fund Specic Information Document (FSI), relevant to your chosen fund(s). These documents give you all the information you need to know about Fidelity, including details of the objective, investment policy, risks, charges and past performance associated with the fund(s). Instructions on how to access these documents can be found at delity.co.uk/ importantinformation. If you do not have a computer or access to the internet please call Fidelity on 0800414161 to request a printed copy of the documents. The Full Prospectus is also available on request from Fidelity.

Asset classes
A key decision every investor needs to take when constructing a portfolio relates to the balance between dierent asset classes. With economic recovery underway, we have a preference for equities over bonds and commodities.

Select List funds

Mixed Assets Balanced
Architas Multi Asset Active Intermediate F&C Multi Manager Navigator Distribution Henderson Cautious Managed Investec Cautious Managed

UK GDP growth (quarter-on-quarter)

2.0% 1.5% 1.0% 0.5% 0% -0.5% -1.0% -1.5% -2.0% -2.5% -3.0%

Mixed Assets Defensive

AXA Defensive Distribution Jupiter Distribution Prudential Managed Defensive
2009 2010 2011 2012 2013

Threadneedle Defensive Equity and Bond

Source: Thomson Datastream, 9.1.14

Mixed Assets Flexible

CF Miton Strategic Portfolio Invesco Perpetual Managed Growth Investec Managed Growth Jupiter Merlin Growth Portfolio

Past performance is not a guide to future returns. We see selective opportunities within commercial property. For investors who are nervous after 2013s strong run in equities, cash is the safest haven despite its still negligibleyield. Some investors will have the condence to use my comments as a framework for making their own asset allocation decisions, perhaps using Fidelitys Select List to narrow the search to a shortlist of funds which our experts particularly like. For those who prefer to leave asset allocation to professional managers, there is a wide range of multi-asset or balanced funds. Important information on The Select List: The funds on TheSelect List are hand picked from the range available on our fund supermarket. The funds featured in this brochure are from the December 2013 update. For more information on how these funds are selected visit delity.co.uk/select. We believe that The Select List provides an excellent choice of funds for anyone constructing their own investment portfolio, although it is not a recommendation to buy. Equally, if a fund you own already is not on The Select List we are not recommending that you sell it the list represents funds and managers that our experts particularly rate.

Mixed Assets Growth

Aberdeen Multi Asset AXA Framlington Managed Balanced Investec Diversified Growth Jupiter Merlin Balanced Portfolio Threadneedle Global Equity and Bond

Mixed Assets Income

Aberdeen Managed Distribution Aviva Investors Distribution SC1 Fidelity Multi Asset Income Premier Multi Asset Monthly Income

Equities
GlObal EQUiTY
The backdrop for equity investors is generally positive with a global recovery underway, untroubled yet by rising ination. This should keep monetary policy loose over a one year timehorizon.

GlObal EQUiTY INcOmE

Income remains in short supply in an environment of generally low interest rates around the world. Re-invested income is a major contributor to total returns from many investments and it can help to smooth returns as well as being a sign of corporate strength and prudent management. I believe equity income investing will continue to be a theme as long as interest rates remain at todays historically low levels.

Falling ination enables interest rates to remain lowerforlonger

5.5% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 3.0% 2.5% 2.0% 1.0% 1.5% 1.0% 2.0% 4.0% 6.0%

The benet of re-investing dividends

220 200 180 160 140 120 100 FTSE 100 (without income reinvested) FTSE 100 (with income reinvested)

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

0.0%

80 60

UK Consumer Prices (left hand scale) UK Bank of England base rate (right hand scale)

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: Thomson Datastream, 14.1.14

Past performance is not a guide to future returns. Despite the strong performance of many markets in 2013, valuations do not yet look excessive and sentiment is not overly positive. This is good news because it suggests that some investors remain on the side-lines, ready to enter the market when they are condent that the economy is on a clear upward trajectory. A further positive for the market is an increase in mergers and acquisitions activity, another sign of improving sentiment. The recovery from the low reached in early 2009 is nearly ve years old but previous bull markets have lasted longer than this and I believe stock markets look capable of continuing to climb a wall of worry. Important information: When investing in overseas markets, changes in currency rates may aect the value of your investment. Investments in small and emerging markets can be more volatile than those in other overseas markets.

Source: Thomson Datastream. 14.1.14

Past performance is not a guide to future returns. Performance over ve years

2009 FTSE 100 (without income reinvested) FTSE 100 (with income reinvested) 22.1% 27.3% 2010 9.0% 12.6% 2011 -5.6% -2.2% 2012 5.8% 10.0% 2013 14.4% 18.7%

Source: Thomson Datastream, 31.12.08 to 31.12.13. Performance of the FTSE 100 index, with and without income reinvested.

Select List funds

Global Equity
BNY Mellon Long Term Global Equity Ecclesiastical Amity International F&C Stewardship International Fidelity MoneyBuilder World Index* M&G Global Growth Rathbone Global Opportunities Schroder Global Climate Change Templeton Growth

Global Equity Income

Aberdeen World Equity Income Lazard Global Equity Income Newton Global Higher Income Sarasin Global Higher Dividend
*This fund replicates the performance of the MSCI World Index

Bonds

Bonds underperformed equities signicantly in 2013. I expect more of the same in2014. While bonds continue to provide useful diversication and can be a good source of income, investors would be unwise to view them as risk-free now that the next move in interest rates is, at some point, likely to beupwards. With the unemployment rate approaching the threshold set by Bank of England governor Mark Carney last summer, the turn in rates may be sooner than some investors have expected. He has made it clear that the 7% jobless rate is merely a way station on the road to higher interest rates but higher yields remain a threat to xed-income investors.

Investors who wish to have some xed income in their portfolios should look to strategic bond funds, which can move investments between dierent types of bond government, corporate, high yield and ination linked. There are a number of general global and strategic bond funds available on the The Select List which are listed below.

Select List funds

Global Aggregate
M&G Global Macro Bond Newton Global Dynamic Bond Threadneedle Global Bond

UK unemployment falling towards Bank of Englandthreshold

8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% UK unemployment rate

Strategic Bond
Henderson Preference and Bond Legal & General Dynamic Bond Trust M&G Optimal Income

UK Aggregate
Fidelity Strategic Bond
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Henderson Sterling Bond

Source: Thomson Datastream, 14.1.14

Past performance is not a guide to future returns. Important information: For funds that invest in bonds, please be aware that the price of bonds is influenced by movements in interest rates, changes in the credit rating of bond issuers, and other factors such as inflation and market dynamics. In general, as interest rates rise the price of a bond will fall. The risk of default is based on the issuer's ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between different government issuers as well as between different corporate issuers. The investment policy of Fidelity Strategic Bond Fund means it can be more than 35% invested in government and public securities. These can be issued of guaranteed by other countries and governments. For a full list please refer to the fund's prospectus.

Property
Within commercial property, we see a marked difference in the value offered by prime real estate and properties in less fashionable locations. In a generally risk-averse environment, investors have preferred to shelter in perceived safe havens and this has resulted in yields falling (and so prices rising) for prime properties and higher yields (and so lower prices) for secondary sites. Duringthe second half of 2013, the yields on secondary property began to fall back a little but we believe this process has some way to run.

Residential property only back to 2007 level

190
UK House Price Index

180

170

160

Secondary property yields have a long way to fall

10 8 6 UK Corporate Bonds UK Secondary Property UK Prime Property

150

140

% spread over UK 10 year Gilts

130

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: ONS, Thomson Datastream, 14.1.14

4 2 0 -2 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13

Past performance is not a guide to future returns.

Select List funds

Property - Listed
Aberdeen Property Share Fidelity Global Property M&G Global Real Estate Securities

Source: Fidelity, CBRE, 29.11.13

Past performance is not a guide to future returns. Within the residential market, there is increasing talk of a bubble forming. Outside the most popular areas of central London this probably overstates the position, with prices in many cases still no higher than at the previous peak before the nancial crisis. With government policy likely to remain supportive ahead of an election in 2015, house prices will remain well underpinned over the next year.

Property - Physical
HSBC Open Global Property Ignis UK Property

Important information: Some funds in the property sector invest in property and land. These can be difficult to sell so you may not be able to cash in this investment when you want to. There may be long delays in acting on your instructions to sell your investment. The value of property is generally a matter of a valuer's opinion rather than fact. When investing in overseas markets, changes in currency rates may affect the value of your investment.

Commodities
While it is unwise to generalise about an asset class which includes such diverse investments as energy and both precious and industrial metals, we believe commodities as a whole remain unattractive. A rising dollar, which looks likely in 2014, is generally bad for assets priced in the US currency; demand from China, an important factor, looks likely to moderate as the Chinese economy rebalances away from investment and exports towards domestic consumption; and there remains an overhang of excessive investment in new capacity by the mining majors which new management in all the largest companies is only beginning to unwind. Gold has proved that it cannot be relied on as a safe haven. With no income to underpin its value, gold is best left to specialists.

Select List funds

Commodities - General
First State Global Resources Martin Currie Global Resources

Commodities - Precious Metals

BlackRock Gold and General Investec Global Gold

Equities a regional perspective

US
We remain positive on the outlook for US shares, despite a 30% rise in the value ofthe S&P 500 during 2013. Arguably the US economy is in a healthier position than for many years. and a source of increased competitiveness for American industry. Other clear positives include an improving housing market and rising employment levels. While US shares are quite highly valued compared to other major markets, momentum is behind the market. Shares do not usually rise to fair value and then stop. Historically they have tended to carry on until they are obviously overvalued and we remain some way o that position today.

US share valuations below peak levels

35
US Price/Earnings

30

Price/Earnings Ratio

25 20 15 10

Select List funds

North America
84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

AXA Framlington American Growth Fidelity Funds America HSBC American Index JPM US Select Old Mutual North American Equity Schroder QEP US Core

Source: Thomson Datastream, 14.1.14

Past performance is not a guide to future returns. When investing in overseas markets, changes in currency exchange rates may aect the value of an investment. The gap between tax revenues and government spending (the budget decit) and between imports and exports (the trade decit) has diminished rapidly. This is a positive for the US dollar, which in turn makes US assets more attractive as a store of value for investors. One of the reasons for the improving economic position is the positive inuence of the energy revolution driven by the discovery and exploitation of Shale oil and gas. This is a key driver of the USs improving trade balance

North America Small/Mid Cap

BlackRock US Opportunities JPM US Smaller Companies

JapaN
The importance of the exchange rate to the Japanesemarket
125 120 115 110 105 100 95 90 85 80 75 800 600 1200 1000 1600 1400 2000 1800

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Japanese Yen to US$ TOPIX Price Index (right hand scale)

Source: Thomson Datastream, 14.1.14

Past performance is not a guide to future returns. Wheninvesting in overseas markets, changes in currency exchange rates may aect the value of an investment. Performance over ve years
2009 TOPIX Index -6.7% 2010 19.5% 2011 -11.8% 2012 2.8% 2013 24.6%

Source: Thomson Datastream, 31.12.08 to 31.12.13, with income reinvested in terms

Although there remain some residual concerns about the impact of the forthcoming hike in Japans sales tax in April, we remain condent that the Government will do what is necessary to return the country to growth. With so many international investors on the side-lines, the potential exists for a rise in Japanese share prices to become self-fullling.

We are positive about the outlook for Japan in 2014. Japan has long been a frustrating market for investors almost the denition of a false dawn. However, that changed with the election in late 2012 of Prime Minister Shinzo Abe, who promised to restore Japans fortunes through a combination of monetary and scal easing and structural reforms known collectively as his three arrows. The rst two of these have already started to exert a positive inuence on the Japanese economy and they were largely responsible for the strong rally in the Nikkei index in the rst half of 2013. The pause for breath in the second half of the year reected concern that the third arrow structural reforms such as reducing import taris and increasing female participation in the workforce would prove to be tougher nuts to crack. However, rising business condence, increasing property prices and higher wages are signs that the long ght against deation may be winnable. Investors including the Governments own pension fund are starting to encourage companies to focus on improving shareholder returns. A weakening yen is supporting Japans big exporters and looks likely to continue doing so this year.

Select List funds

Japan
Aberdeen Japan Growth Baillie Gifford Japanese HSBC Japan Index Jupiter Japan Income Old Mutual Japanese Select Schroder Tokyo

Asia-Pacic incl Japan

Aberdeen Asia Pacific and Japan Fidelity Funds Pacific Smith & Williamson Far Eastern Growth Trust

UK
We like the UK but not as much as the US or Japan. The outlook for the UK stock market is confused by the fact that it is a notoriously poor reection of the state of the UK economy. Wereit more closely linked to the health of UK plc then the outlook for UK shares would be unequivocally good. The British economy has surprised most observers on the upside over the past year and yet the outlook for interest rates remains benign a powerful combination. That Goldilocks scenario looks likely to persist, with ination in check and economic growth expected to match that in the US and outpace the rest of Europe by a healthy margin. The extent to which this will be reected in the stock market is limited by the relatively high overseas exposure of UK-listed companies. The prices of the biggest companies are governed as much by global growth prospects as the UK outlook. Also, for the more domestically-focused mid- and small-cap companies the good news is already fairly well reected in valuations the FTSE 250 has outperformed the FTSE 100 by a large margin in recent years.

Select List funds

UK Equity
AXA Framlington UK Select Opportunities Ecclesiastical Amity UK Fidelity UK Select HSBC UK FTSE 100 HSBC FTSE All-Share Jupiter UK Special Situations Kames Ethical Equity Liontrust UK Growth

UK Equity Income
Artemis Income Fidelity MoneyBuilder Dividend Henderson UK Equity Income JOHCM UK Equity Income Liontrust Macro Equity Income

UK mid-caps have outperformed the blue-chips

280 260 240 220 200 180 160 140 120 100 80 60

UK Small/Mid-cap Equity
HSBC FTSE 250 Marlborough Special Situations Old Mutual Smaller Companies Royal London UK Mid-Cap Growth Threadneedle UK Mid 250

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
FTSE 100 Price Index FTSE 250 Price Index

Source: Thomson Datastream, 14.1.14

Past performance is not a guide to future returns. Performance over ve years

2009 FTSE 100 FTSE 250 27.3% 50.6% 2010 12.6% 27.4% 2011 -2.2% -10.1% 2012 10.0% 26.1% 2013 18.7% 32.3%

Source: Thomson Datastream, 31.12.08 to 31.12.13 with income reinvested

A further drag on UK earnings could be caused by any appreciation of the pound against the euro, which seems possible given the likely easier monetary policy in the Eurozone over the medium term. Investment in the UK should focus on larger companies. Their valuations have some catching up to do and blue-chip shares are well supported by attractive dividend yields in many cases.

EUrOpE
Shares in Europe enjoyed a strong year without the obvious positive economic drivers seen in the US and Japan. Therally was not driven by better earnings so much as relief that the worst of the Eurozone crisis appeared to be in the past and the anticipation of improved economic conditions to come. The long-term outlook for Europe remains dicult, however, as the slow drift towards greater political and economic integration continues. Moreover, because prots in the region held up pretty well during the nancial and sovereign debt crisis (thanks to a high proportion of sales outside Europe and eective costcutting) there is arguably less scope for earnings to rise sharply from here. Poor demographics and, potentially, a resurgent competitive threat from Japan and the US (thanks to Shale) are further elements in the negative case against Europe. So,too, are signs of a slowdown in demand in some key emerging markets. It is foolish to generalise about such a diverse group of countries and there are clearly pockets of value and very many worldclass companies for stock-pickers to focus on. However, the region as a whole does not look particularly compelling after last years gains.

Select List funds

Europe (excl UK)
BlackRock Continental European Henderson European Special Situation HSBC European Index Jupiter European Special Situations Schroder European Alpha Plus Threadneedle European Select

Single Country Europe

Baring German Growth Fidelity Funds Germany Fidelity Funds Italy

ChiNa
China has been a powerful reminder over the past few years that economic growth and stock market performance are not necessarily closely correlated. The Shanghai market has underperformed sharply even as growth has continued to outstrip that in the worlds other large economies. Chinahas fallen out of favour with investors, both at home and internationally, and its shares now trade well below their longterm average valuation. There remain plenty of things to worry about in China, but many of these, such as the prospect of a Western-style banking crisis are almost certainly overdone. The new leadership in Beijing has put in place a number of reforms which point China in the right direction on a number of social, economic and nancial fronts. In the longer-term it is engaged in an important rebalancing of its economy away from exports and investment towards domestic consumption which will improve the quality and sustainability of its growth. Taking a longer-term view, it is hard not to argue for a reasonable exposure to the worlds fastest-growing major economy, a country with a powerful entrepreneurial spirit and a determined Government. The current historically low valuations make this a good contrarian moment to invest in China. Important information: When investing in overseas markets, changes in currency exchange rates may aect the value of an investment. Investing in small and emerging markets can be more volatile than those in other overseas markets.

Chinas valuation advantage

18 16 14

Price/Earnings Ratio

12 10 8 6 4 2 0

China

Korea

Japan

US

UK

Source: Macquarie, Fidelity, December 2013

Select List funds

Emerging Markets Regional Equity (China)
Fidelity Funds Greater China Schroder ISF Greater China

10

ASia Ex-ChiNa, Ex-JapaN

If it is dicult to sensibly generalise about Europe, it is even more so in Asia. At the moment there appears to be a divide between northern Asia, where the outlook looks better than valuations would suggest and the ASEAN countries in the south of the region where more is already priced in and the outlook is clouded by the likely continued tapering of monetary stimulus by the Federal Reserve. South Korean shares have been undermined by the posturing of its neighbour in the north and the perceived threat of a weaker yen in Japan. The country is home to some of the worlds best brands in electronics and the automotive sector and it stands to be a big beneciary of recovery in the West. Despite this valuations are low. Taiwan, technological workshop of the world, is also well placed for a period of innovation and growth in developed markets. In the south of the region, the ASEAN growth story is real but it is well known, in particular to foreign investors. In addition to higher valuations, the Feds taper means that money will increasingly look to return to the US from Asia, which could expose those countries most in need of foreign liquidity. A good long term story, but 2014 might not be the best year to beinvested in the region.

Select List funds

Asia-Pacic ex-Japan
Aberdeen Asia Pacific Fidelity South East Asia First State Asia Pacific Leaders HSBC Pacific Index M&G Asian Newton Asian Income Schroder Asian Alpha Plus

OThEr EmErgiNg markETS

Emerging markets fell out of favour in the second half of 2013 after it became clear that the US was considering a reduction in its programme of monetary stimulus via quantitative easing. Investors worried in particular about those countries that were most dependent on external investors to fund their economies and those which had raised debts in foreign currencies. With the US taper now underway, those fears are likely to persist through 2014, providing a headwind for emerging market equities and currencies. Weaker currencies are not necessarily a bad thing, if they increase the competitiveness of a countrys exports. But not all emerging markets will benet from this, especially those dependent on selling commodities, and weaker currencies will reduce the ability of consumers to buy imported goods. There remain good opportunities for stockpicking in emerging markets, with strong growth in particular areas and industry winners that are able to capitalise on that growth. Overall,however, 2014 is likely to be another challenging year for many emerging markets.

Select List funds

Emerging Markets
BlackRock Emerging Markets Equity Tracker Fidelity Funds Emerging Markets JPM Emerging Markets Lazard Emerging Markets Threadneedle Global Emerging Markets

Emerging Markets Regional Equity (exclChina)

Fidelity Funds Latin America Franklin India Schroder ISF BRIC Threadneedle Latin America

11

Bonds in focus
The dog that didnt bark in 2013 was the widely expected Great Rotation from bonds to equities. Bond prices held up better than pessimists predicted and they could continue to do so in 2014. What is extremely unlikely, however, is that the capital value of most bonds will rise this year so the risks for investors are unbalanced the upside is probably limited to a return driven almost wholly by income while the downside could include price falls if there is a rapid withdrawal of money from the asset class. We prefer strategic bond funds, which are best placed to protect investors from losses and to secure the best returns from the higher-yielding parts of the xed income universe.

GOVErNmENT bONdS
Highly-rated Government bonds had a dicult 2013, with yields rising after the Federal Reserve hinted that monetary stimulus would start to be unwound. They may rise a bit further, but in the absence of either much stronger growth or ination there is no reason to believe that they will increase sharply in 2014. Governments look unwilling to tolerate a material rise in yields, and interest rates will therefore stay low, so this year should see Government bonds tread water.

Government bonds have already corrected

6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% UK Government Bond Yield

Select List funds

UK Government Bond
Allianz Gilt Yield Henderson Institutional UK Gilt HSBC UK Gilt Index Royal London UK Government

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Thomson Datastream, 14.1.14

Past performance is not a guide to future returns.

High YiEld bONdS

This looks the most interesting part of the xed income universe due to the higher yields available from the slightly less blue-chip companies issuing these bonds and the support provided by a healthier economic backdrop. Income seekers will continue to chase yield in 2014, osetting any upward pressure on yields that might be passed on from higher Government bond yields.

INflaTiON-liNkEd bONdS
The longer that quantitative easing continues, the greater the risk of a policy error leading to resurgent ination. This is not an issue at the moment, and may well not be during the whole of 2014. However, as the tail-risk of a price spiral increases, ination-linkers look more interesting.

Select List funds

European High Yield
Fidelity Funds European High Yield Invesco Perpetual European High Yield M&G European High Yield

Select List funds

Global Ination-Linked
Fidelity Global Inflation-Linked Bond Standard Life Global Index Linked Bond

UK Ination-Linked
Henderson Index-Linked Bond Legal & General All Stocks Index Linked Gilt Index M&G Index-Linked Bond

Global High Yield

Baring High Yield Investec Monthly High Income JPM Global High Yield

12

INVESTmENT gradE bONdS

The gap between Government bond yields and those oered by higher-quality corporate bonds provides enough compensation for the extra default risk taken by investors. However, the expectation of further falls in yields (and so rises in corporate bond prices) looks unrealistic. This means income will be the major contributor to total returns and investors will rightly question whether they cannot achieve a similar yield from higher-yielding equities which also oer the prospect of dividend increases over time.

The narrowing gap between corporate and governmentbond yields

45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

High Yield Bonds Investment Grade Bonds

Select List funds

European Corporate Bond
Fidelity Funds Euro Corporate Bond M&G European Corporate Bond

UK Corporate Bond
Baillie Gifford Corporate Bond
2009 2010 2011 2012 2013

BlackRock Corporate Bond Tracker Henderson Strategic Bond M&G Strategic Corporate Bond

Source: Thomson Datastream, 14.1.14

Past performance is not a guide to future returns.

13

Investment risks in 2014

With growth underway, valuations reasonable, sentiment cautious, policy supportive and ination under control, the investment outlook is positive. The principal risk in such a benign scenario is for markets to be unsettled by an unexpected geopolitical event. Obvious candidates include an escalation of tension between Japan and China, excessive posturing by North Korea or a ashpoint in the Middle East. The nancial risks look less likely: perhaps an escalation of the Eurozone crisis from an unexpected quarter such as France. Interest rates could begin to rise more quickly than anticipated in either the UK or US. The proposed sales tax hike in Japan could disrupt retail sales as an earlier tightening did in 1997. Ination could accelerate. None of these seems particularly likely at this stage but that is the nature of tail risks. They come out of nowhere. In fact, I think the greatest risk to my outlook is the most mundane of all that investors simply decide that company prots are not rising quickly enough to justify todays highervaluations.

Select List funds

Select List funds not mentioned in this quarters Investment Outlook Global Real Assets
Fidelity Funds Global Real Asset Securities First State Global Listed Infrastructure Sarasin Agrisar

Emerging Markets Local Currency Bonds

Investec Emerging Markets Local Currency Debt Pictet Emerging Local Currency Debt Templeton Emerging Markets Bond

14

Trust us to go further:
Fidelity analysts: over 350 experts in13countries Fidelity: over 300 actively managed investment funds worldwide Over 160bn of investors assets managedworldwide Fidelity looks after 1.2m UK investors Detailed investment approach including direct company interviews Clearer, low cost pricing

Source: Fidelity as at 31.12.13

For more information

please call 0800 41 41 61 or visit delity.co.uk

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