Tom Soviero should be having a miserable holiday.
Soviero is the manager of a big mutual fund that owns stocks in the midst of a terrible stock market. Even worse, much worse in fact, he manages a portfolio that targets companies carrying around plenty of debt as they try to do business. In this sour economy, those kinds of stocks should be especially unpopular.
None of that has seemed to matter much. Soviero's $8.6 billion Fidelity Leveraged Company Fund may not be shooting the lights out, but it has actually made money for investors this year, advancing by 3.2 percent for 2008 through Wednesday. More importantly, he's beating the broad stock market by about 17 percentage points.
Numbers like those have helped Soviero emerge as Fidelity's best diversified stock fund manager in recent times. That's a certifiable fact this year. I'd come to the same conclusion about Fidelity's top stock fund manager over the past three years.
“This is a star manager if there ever was one,” said Jim Lowell, publisher of the Fidelity Investor newsletter.
Soviero has had a remarkably good run at Fidelity Leveraged Company since he took over the fund five years ago this month. The fund has produced a whopping average annual return of 23 percent over those five years. But this year's relatively modest gain may represent its best performance, considering the degree of difficulty built into the 2008 market.
So how has Fidelity Leveraged Company managed to make money this year?
“A lot of it is $130 oil,” said Soviero.
Translation: His fund is loaded to the gills with energy-related stocks that have performed well this year as the price of a barrel of oil spiked. Among the top holdings: Exterran Holdings, an oil and gas service company, Forest Oil Corp., and Range Resources Corp. Overall, energy stocks make up about a third of Fidelity Leveraged Company's portfolio.
A few of those companies have disappointed. (Exterran is down 16 percent this year.) But many others like Forest Oil (up 43 percent) and Chesapeake Energy Corp. (up 70 percent) have generated most of the fund's firepower.
Soviero has squeezed a lot out of his energy holdings over the last couple of years, but that can't last forever. “The question is, what's next?” says Scott Berry, a Morningstar analyst who follows the Fidelity Leveraged Company Fund. “Oil's really fueled the fund's returns lately, but when does he start moving off that trade? That's the big question.”
Fidelity created the Leveraged Company Fund, which requires a minimum $10,000 investment, when interest rates began to fall sharply seven years ago. It struggled for its first two years but soared in 2003 when companies carrying heavy debt loads refinanced to improve their financial positions.
Today, Soviero enjoys no such thematic edge. Many of the companies in his portfolio are not heavily loaded with debt, but he points out that most have borrowed much more money than your typical company in the Standard & Poor's 500 index.
It's unlikely his portfolio would stray very far from its debt-oriented roots (though it is allowed to invest as much as a third of its money in stocks that don't fit the theme). Soviero comes from a junk-bond background and looks at stocks through that debt prism. He works from an office surrounded by high-yield managers and analysts, not other stock fund managers.
Soviero also manages two other funds with related mandates, the $3.4 billion Fidelity Convertible Securities (up 1.4 percent this year) and the $3.8 billion Fidelity Advisor High Income Advantage Fund (down 4.2 percent in 2008).
He is most closely identified with Fidelity Leveraged Company thanks to its record of regularly beating the broader market. But Berry points out that the year-to-year consistency is misleading. Look closer and you will see big swings up and down along the way. “The returns have been pretty volatile from one period to the next,” says Berry.
This is also a point Soviero emphasizes. His fund's performance so far this year looks good, but alarm bells were ringing at the very beginning of 2008. Fidelity Leveraged Company had lost 15 percent of its value in just the first three weeks of the year.
“Occasionally you're going to get that from the concentration” of the portfolio, he says. “You know some high-yield names are going to be down when there's a flight to quality.”
Soviero has given his shareholders a lot to be happy about over five years, a long time in his line of work. But a bumpy ride was part of the story, and it's surely part of the future, too.
