Leveraged Fund Offers Unique Opportunity

09/23/2020 5:00 am EST

Focus: FUNDS

John Bonnanzio

Editor, Fidelity Monitor & Insight

Fidelity Leveraged Company Stock Fund (FLVCX) — a new addition to our "Unique Opportunities" model portfolio — mostly invests in the equity of businesses with distressed balance sheets, suggests fund expert John Bonnanzio, editor of Fidelity Monitor & Insight.

However, with the flexibility that its prospectus affords, its two managers are not averse from holding stocks whose balance sheets are just fine, thank you. Microsoft (MSFT) and Facebook (FB) come to mind.

Co-managed by Mark Notkin and more recently Brian Chang, high yield is very familiar territory for both. In fact, they also run Fidelity Capital & Income (FAGIX) which prioritizes the bonds of distressed companies. As such, the bonds, stocks or both are sometimes found in the two funds.

With respect to our Unique Opportunities portfolio, Leveraged Company’s relative volatility (the measure we use to gauge risk over the past 36 months) is substantially higher than that of Fidelity OTC (FOCPX), the fund it’s replacing: 1.42 vs. 1.17. Part of its elevated risk comes from Leveraged Company’s 37% stake in technology.

More broadly, its risk is a function of its focus on companies that are in the process of repairing their balance sheets (i.e., paying down their debt). That debt could be the result of M&A activity or something more ominous like declining business fundamentals.

Either way, Fidelity has the research chops to understand any company’s capital structure, though that doesn’t make this fund any less volatile. But with interest rates likely to stay low and the economy crawling its way toward recovery, the fund has solid upside potential.

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