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Tickers in this Article: NASDAQ:FLVCX
Picking funds in today's economic environment is a lot like playing lawn darts blindfolded. You probably won't kill yourself, but you probably won't hit the target either. Odds are the dart will land somewhere in between the perfect shot and the puncture wound. That seems to be the case with mutual funds. You try to pick the ones that, on the surface, seem to be making all the right moves, short-term and long, but ultimately you end up with something that's neither dazzling nor disastrous. What's an investor to do? How about something a little contrarian?

In the existing economy most people would say investment in companies with lots of debt, much of it low-quality junk bonds, is crazy. But this might be just the right time to consider it. Go where no one else goes. Zig while everyone else zags. (To learn more about cashing in on corporate decline, check out Channel Your Inner Scavenger With Distressed Debt.)

All The Leverage You Could Ask For
Our contrarian target is the mutual fund Fidelity Leveraged Company Stock (FLVCX), managed since 2003 by 19-year Fidelity veteran, Thomas Soviero. As the name implies, Soviero invests a large portion in mid-cap companies - mostly in the United States - that either issue high-yield junk bonds or use aggressive leveraging in their capital structure.

With growth stocks, he's hoping a new product or management team can jump-start earnings. In the case of value stocks, Soviero hopes he buys them at attractive prices and then the company is able to produce free cash flow to retire debt, catapulting the stock into the atmosphere. If past returns are any indication, it's been a very successful strategy. Since its inception, the fund's annualized return is 20.38%; 30.05% in the last five years since Soviero took the reins. Lipper's five-year rating puts FLVCX second best out of 249 funds where capital appreciation is the primary investment objective. If that's not enough evidence, Morningstar gives it five stars in its five-year ratings.

What Drives The Fund
Soviero invests 41% of the fund in energy. Given the rising price of oil, this is clearly a sensible approach. There are 213 total holdings in the fund with the top-10 accounting for 28% of the overall assets. As mentioned previously, 86% of the fund is in American companies with no foreign country representing more than 6%. The stocks in the fund have an average market cap of $5.8 billion, putting it right in the middle of mid-cap blends. With a turnover rate of 20% and an expense ratio of 0.83%, this fund believes in the minimalist approach to investing - place your bets and let them ride. (For related reading on turnover and fees, check out Stop Paying High Fees.)

"Past performance is no guarantee of future returns," we hear this from mutual fund companies all the time. It's simply a warning not to base your decisions solely on past returns because funds, like stocks, tend to revert to the mean. This is a fancy way to say they will return to normal prices. Thus, if a fund is on a major long-term winning streak, as this one is, it's likely heading for an extended period of underperformance. Year-to-date the fund is down 12.50%, 3.5% worse than the S&P 500. Considering the fund's past performance, it would appear this phenomenon is taking hold here.

However, looking back over the past 28 quarters, the fund has experienced two quarters with negative returns greater than 10% and a worst one-year total return of -1.77% in 2002. Taking into account these previous drops, the current decline might not be a return to the mean at all.

Bottom Line
Would I make this fund my core holding? I doubt it. Do I think the Fidelity Leveraged Company Stock fund is a good investment? Absolutely. Tom Soviero has done a great job investing in mid-cap companies with a wrinkle or two in their balance sheets but with future earnings potential. The results speak for themselves.

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