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Morningstar Minute: A Good Fund Investors Have Used Poorly

Due to poor timing decisions, the typical investor in Fidelity Leveraged Company Stock has only captured half of the return of this potentially volatile fund.

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Shannon Zimmerman: The fund we are going to discuss is Silver-rated Fidelity Leveraged Company Stock. What investors need to know about this fund, is that it's a terrific fund that they may not be able to use very well. Most investors over the long haul have not been able to do that.

The fund has delivered an annualized return of 10.2% over the last decade, and all of that track record belongs to the same manager, Tom Soviero. However, the typical investor has done far worse than that based on the poor timing decisions they've made around buying and selling the fund's shares.

The central risk in a fund like this is baked into its name, Fidelity Leveraged Company Stock. These are companies that are held in the portfolio that have less-than-pristine balance sheets to say the least, higher debt/capital ratios. So when market heads south, the fund heads south in hurry. In 2008, it lost 54%. But in 2009, of course, when the market was rewarding risk, it shot up and gained about 59%.

But investors, again, because of that volatility, were making poor timing decisions about when to get in and when to get out. And so they earned about half of what the fund has delivered over the last 10 years.

The most important thing I would say is that investors really need to know themselves as investors and make sure that the risk profile they think they have is the one that they actually have.

I think 2008 was a very instructive year for a lot of investors, and if you come to the conclusion that, yes, you are an aggressive investor and, yes, you will be able to stick with this fund through thick and thin--and know that there will be thin--this could be a good fund for you to consider. However, only [consider it] in very small doses and in the context of a well-diversified portfolio focused on core holdings.

Shannon Zimmerman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.