This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Mutual Funds That Get High Returns From Low-Quality Companies

NEW YORK ( TheStreet) -- Plenty of mutual funds focus on high-quality stocks. Their portfolios include familiar names such as Coca-Cola (KO) and Johnson & Johnson (JNJ), companies with rock-solid balance sheets.

But Aquila Three Peaks Opportunity Growth (ATGAX) takes a different approach. The fund specializes in stocks with below-investment grade ratings. Buying low-quality names has proved to be a winning formula lately. This year Aquila has returned 16.5%, outdoing the S&P 500 by 6 percentage points and topping 99% of competitors in the mid-cap growth category, according to Morningstar.

Aquila is not the only investor to prosper by buying companies with heavy debt burdens and shaky balance sheets. According to a study by Morningstar, companies with above-average debt levels outdid those with below-average debt by 2 percentage points this year.

Part of the reason for the strong showing of low-quality investments has been a rally in high-yield bonds, which are issued by below-investment grade companies. Desperate for income, investors have been racing to buy high-yield bonds, which yield more than 6%. That has provided easy financing for low-quality companies. In addition, low-quality companies have climbed this year as optimistic investors have looked to boost returns by taking on more equity risk.
>>> On Tuesday, November 20 at 6pm ET, TheStreet will host a Trade Credit Insurance webinar with Todd Lynady, Senior Underwriter for Zurich in North America and Mike DeLuca, Senior Partner of One Source. Register now.

Among the top-performing low-quality funds this year is Putnam Capital Spectrum (PVSAX), which returned 18.2% this year, outdoing all its peers in the moderate allocation category. Putnam Equity Spectrum (PYSAX) returned 16.1% and outdid 95% of peers in the mid-cap value category.

Perhaps the most notable low-quality fund is Fidelity Leveraged Company Stock (FLVCX), which returned 18.4% this year. During the past 10 years, the Fidelity fund returned 15.4% annually, ranking as the top-performing domestic equity fund tracked by Morningstar.

Seeing the numbers, you may be eager to buy one of the low-quality funds. But keep in mind that low-quality companies tend to have weaker profits and grow more slowly than average businesses. Because of their shaky profiles, heavily indebted companies can fall hard in downturns as investors worry about the risk of bankruptcies.

During the turmoil of 2008, Fidelity Leveraged Company dropped 54% and trailed 98% of its peers. Still, a low-quality fund can make an intriguing holding, providing extra gains in bull markets and helping to diversify a portfolio.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $109.88 0.27%
FB $92.64 1.90%
GOOG $626.91 2.56%
TSLA $248.00 3.40%
YHOO $30.71 6.23%


Chart of I:DJI
DOW 16,472.37 +200.36 1.23%
S&P 500 1,951.36 +27.54 1.43%
NASDAQ 4,707.7750 +80.6910 1.74%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs