Thomas Soviero unseated Ken Heebner as manager of the best-performing diversified U.S. stock fund over the past 10 years. His secret: Companies with poor credit.
Soviero's $4.2 billion Fidelity Advisor Leveraged Company Stock Fund averaged 15 percent annual returns through March 31, best among 3,617 peers tracked by Morningstar Inc. Heebner, whose CGM Focus Fund held the top position for the previous 11 quarters, slipped to ninth place with a return of 14 percent. Junk bonds climbed 8.4 percent a year in the span.
“Debt doesn't have to be a four-letter word,” Soviero, whose fund buys stocks of companies with speculative-grade debt, said in an interview at Fidelity's Boston offices. “When it works in your favor good things can happen.”
The 47-year-old is betting on more gains after a rally in junk bonds allowed companies to reduce borrowing costs, disagreeing with value investors such as Jeremy Grantham who say debt-laden companies may underperform as the economic rebound loses steam. Soviero took over in mid-2003 and helped guide Leveraged Company to a record 92 percent surge that year. It lost a record 54 percent in 2008 when he underestimated the global economic crisis.
When the economy levels off, bigger companies with stronger balance sheets can often increase earnings faster than weaker rivals, said David Joy, chief market strategist at Boston-based Columbia Management.
“Typically at this point in the cycle you want to migrate towards bigger, higher-quality companies,” Joy, who oversees $350 billion, said in a telephone interview.
Grantham, Yacktman
Grantham, chief investment strategist at Boston-based Grantham, Mayo, Van Otterloo & Co., and Donald Yacktman, president of Yacktman Asset Management Co. in Austin, Texas, say large companies with stable returns and low debt are the best place to put money now.
“U.S. quality stocks are the least overpriced equities,” Grantham wrote in a January newsletter.
Like junk bonds, the stocks Soviero owns have fared best when interest rates were low, the economy was improving and companies had easy access to credit. As companies paid down debt and refinanced at lower rates, they increased cash flow and attracted equity investors.
“The trade in these stocks has worked for years,” Margaret Patel, who manages more than $1 billion in junk bonds and stocks for
Wells Fargo & Co., said in a telephone interview. Patel said the “virtuous circle” that has supported stocks of indebted firms will continue unless interest rates soar or the economy slides back into
recession.
High-Yield Managers
The idea for a leveraged-stock fund came from managers in Fidelity's high-yield bond department, who noticed in the late 1990s that the equities of companies in which they invested often outperformed the junk bonds. Bond returns are limited by changes in interest rates and credit spreads, Soviero said, while “stocks can rise as much as the market drives them.”
Fidelity Advisor Leveraged Company Stock Fund, and the almost-identical Leveraged Company Stock Fund, were created in December 2000. Soviero, who earned a bachelor's degree in finance from Boston College, joined Fidelity in 1989 as a research analyst. He later worked on several high-yield bond funds before replacing David Glancy, Leveraged Company's original manager, who left the firm.
“High-yield research is one of Fidelity's unsung strengths,” James Lowell, editor of the independent Fidelity Investor newsletter in Needham, Massachusetts, said in a telephone interview.
--Bloomberg News--
