Fidelity Leveraged: A High Yield Idea

05/15/2017 2:50 am EST

Focus: BONDS

Jack Bowers

Editor, Fidelity Monitor & Insight

In September 2016, veteran high yield bond manager Mark Notkin took over the specialized stock fund Fidelity Leveraged Company Stock (FLVCX), notes fund expert Jack Bowers, editor of Fidelity Monitor & Insight.

As its name suggests, the fund targets the equity of highly leveraged/indebted companies. In other words, rather than buy a company’s below-investment-grade (junk) bonds, it invests in their equity.

In theory, at least, playing a company’s turnaround through their equity, rather than through their bonds, has much greater upside potential.

Interestingly, Fidelity’s high yield fund managers and analysts work alongside their stock fund managers — not other bond managers. Both groups’ research, including interviews with corporate management, is shared.

With that in mind, Mark’s great record running the junk bond fund Fidelity Capital & Income (FAGIX) is a natural fit for his new charge at Fidelity Leveraged Company.

Indeed, about 20% of Capital & Income’s assets are in stocks. And, not surprisingly, there’s some overlap in holdings. Among the most prominent are stocks whose balance sheets are anything but “distressed.”

These include Facebook (FB), and Google’s parent Alphabet (GOOGL); they are part of Leveraged Company’s 20% allocation to non-high-yield issuers.

In fact, the fund’s investments in those names and others has moved the fund away from its mid-cap blend/value “style box,” and towards large growth.

As we’re wary of high-yield bonds, we applaud Mark’s move to significantly diversify this fund and strike a better balance between risk and potential reward.

So while we’ve lowered our ratings on high-yield bond funds in general, this specific high-yield stock fund remains "OK to Buy".

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