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  • Home>Research & Insights>Fund Times>Among the High-Yield Category's Most Aggressive

    Among the High-Yield Category's Most Aggressive

    Silver-rated Fidelity Capital & Income is bold, holding lower-rated bonds and loans and shifting assets to equities. 

    Eric Jacobson, 09/30/2017

    The following is our latest Fund Analyst Report for Fidelity Capital & Income FAGIX.

    Manager Mark Notkin has demonstrated skill in security selection and managing Fidelity Capital & Income's FAGIX admittedly significant risks through a credit cycle, posting excellent returns. That record, low fees, and notable research resources support this fund's Morningstar Analyst Rating of Silver.

    During Notkin's tenure, which includes a sharp rebound in high yield from the depths of the credit crisis, the fund's willingness to hold significant stakes in the lower-quality tiers of the junk-bond market, as well as strong security selection, have boosted returns. The fund has often held a large equity allocation of up to 20%, and while that caused some drag in 2016 as high yield was even hotter, the feature has been helpful during other periods. For the year through August 2017, for example, the fund's stock sleeve blew past the high-yield sector and the S&P 500, according to Notkin. The fund posted an 8.6% gain, placing near the very top of its (distinct) high-yield Morningstar Category peers.

    Notkin's approach is not all offense. He built a 20% cash stake going into 2008, which provided dry powder coming out of the credit crisis. More recently, he has held an uncharacteristic underweighting to CCC rated bonds, including in 2015. That, along with a relatively small position in the struggling energy sector and strength in several equity names, held the fund to a 0.9% loss for that year, ahead of most peers. Notkin also pointed out in mid-2017 that he had been keeping the bond portfolio less aggressive based on valuations, which lent some risk balance to his stock allocation, then led by names such as Alphabet GOOGFacebook FB, and Alibaba BABA.

    The fund's high returns come with a hefty dose of risk. Even with Notkin's move to raise cash ahead of the crisis, the fund lost 32% in 2008, trailing most peers; it also lost a near-category-worst 11% in 2011's rocky third quarter. Notkin has seen better value in equities lately, but with stocks running at the high end of the fund's historic range, it's vulnerable to a sharp sell-off in the stock markets. For those with an aggressive bent, though, it remains a great choice.

    Process Pillar: Positive | Eric Jacobson 09/25/2017
    This fund is among the high-yield category's most aggressive. At times, manager Mark Notkin has had significant allocations in bonds and loans rated CCC and below, exposing it to greater default risk than many peers. By 2007, for example, he had built big positions in several large leveraged-buyout deals done during the 2005-07 boom, just as others were sounding alarm bells. When Notkin thinks high-yield valuations look comparatively rich--as he did in mid-2017--he'll shift assets into equities. Those stakes have typically included companies with a lot of debt on their balance sheets, though Notkin has noted that 50% have been companies with investment-grade-level credit in recent years, and he has owned notable growth names, too.

    Such boldness in the wrong hands can be disastrous. But Notkin has stayed nimble and has shown a keen sense of timing, which supports this fund's Positive Process rating. He uses cash as a buffer when the high-yield market sours, most notably when he packed 20% of the fund away there during 2008's painful second half; he quickly put that to work to take advantage of record-cheap prices in early 2009. He's also proved discerning in picking through the market's troubled names. Notkin has run the fund with a significant underweighting to energy during the past couple of years, for example, and has argued that valuations have not been compelling enough to offset the risk in many names.

    Coming out of the credit crisis, manager Mark Notkin astutely concluded that there were better deals in bonds and loans than stocks. So he added to some of the fund's aggressive leveraged buyouts, which proved to be survivors, such as real estate brokerage firm Realogy RLGY. He also successfully dabbled in distressed debt, including the senior loans of General Motors GM. The fund's stake in bonds and loans rated CCC or below topped out at close to a third of the portfolio in 2009.

    Eric Jacobson is Morningstar's director of fixed-income research and an editorial director for mutual fund content.