Fidelity Bond Mortgage
2007 was a difficult year
for Fidelity’s bond funds.
Returns were significantly lower
then competitor and industry
benchmarks. This under-performance
was linked to similarly weakness
in not-Treasury
bonds and the emergence
of the subprime mortgage crisis
which led to a lot of mortgage
backed bonds to underperform.
However Fidelity’s bond
funds faired fairly poorly in
terms of volume and positioning
in the corporate sector, ABS
and mortgage backed securities
sector including both commercial
and subprime residential bonds.
Bonds were valued lower then
what most investors had picked
them up for.
However despite this, Fidelity’s
portfolio was not completely
lagging as their municipal
and government bond funds
performed fairly well. In fact
all of Fidelity’s municipal
bonds managed to beat industry
averages (Lipper test).
The capital
market was still very chaotic
in year 2007 as many investment
bond sectors experienced extreme
lows when kept next to government
treasuries. All bonds across
the board had suffered with
even the top rated bonds and
securities being hit hard on
prices.
This unforeseeable turbulence
can all be originated back to
the subprime mortgage division.
Hence the hardest hit securities
in Fidelity’s portfolio
were its mortgage bonds and
other mortgage backed securities.
Mortgage backed securities
are bonds that are secured by
collective groups of mortgages
and whose yield and principal
were being paid off through
mortgage payments. Fidelity
had invested large amounts in
subprime mortgages which represent
mortgages to those with less
then stellar credit ratings
or no proper documentation.
Their loans which were bundled
together and sold as mortgage
bonds are now being hit as these
subprime loans are becoming
delinquent and resulting in
foreclosures. Other factors
hitting Fidelity’s mortgage
backed securities was the drop
in the housing market which
further pushed down the value
of the bonds. This had shaken
new investors and had scared
them off the mortgage
bond market resulting in
difficulties for mortgage lender
to get funding through issuing
new bonds on their mortgages.
Lending institutions were
hit on both sides by delinquent
loans and vary investors and
are today experiencing stellar
drops in their funds. Even prime
mortgage fund values have dropped
as a result as most investors
don’t see the situation
getting better until without
getting worst first.
This has spread weakness across
all sectors consequently hurting
the performance of Fidelity’s
bond funds. Even though Fidelity’s
mortgage bond funds performed
the highest in within its segment
the fund was still Fidelity’s
biggest underperformer and had
pulled other related funds down
with it.
This trend that subprime mortgage
funds are experiencing is expected
to continue through 2008 proving
a very chaotic time for investors
and fund managers in the market.
However analysts expect AA and
AAA subprime holdings to eventually
pickup and honor its bondholders
with full payments on principal
and interest. Fidelity currently
only have AA and AAA rated subprime
mortgages under its management.
Lower rated mortgage
bonds that have subprime
securities that are rated A
or BBB are expected to experience
loss of principal according
to Fidelity’s research.
http://personal.fidelity.com
http://quote.morningstar.com/Quote.html?ticker=FBIDX
http://www.surs.com/pdfs/SMP/funds/F-USBoInFu.pdf
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Copyright
2008