Our first idea today is a mutual fund whose top five holdings are: Adobe Inc (ADBE, 4.28% of assets); Microsoft Corp (MSFT, 3.81%); T-Mobile US Inc (TMUS, 3.30%); Global Payments Inc (GPN, 3.13%); and IQVIA Holdings Inc IQV (3.04%). Our second recommendation is a sale to rebalance the contributor’s portfolio.
Buy: Fidelity Leveraged Company Stock Fund (FLVCX)
From Fidelity Monitor & Insight
Fidelity Leveraged Company Stock Fund mostly invests in the equity of businesses with distressed balance sheets. 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 and Facebook 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 Fund (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 the Unique Opportunities Model trade, Leveraged Company’s relative volatility (the measure we use to gauge risk over the past 36 months) is substantially higher than OTC’s, the fund it’s replacing: 1.42 vs. 1.17. Part of its elevated risk comes from Leveraged Company’s 37% stake in tech. 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.
Jack Bowers, John M. Boyd and John Bonnanzio, Fidelity Monitor & Insight, fidelitymonitor.com, 800-397-3094, September 2020