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Fidelity Leveraged Company Stock (FLVCX) ranks as the top-performing diversified equity fund, a position it has held for the last 10 years, according to Morningstar. Its achievements are heralded in the press and investors are pouring into the fund. But if you are tempted to join the crowd, keep in mind that Fidelity Leveraged Company can be hazardous. Many shareholders have lost money in the fund.

To appreciate the danger, consider an indicator that is known as investor return. This is calculated by Morningstar, and it shows how much the typical investor actually made. The investor return can be very different from the widely quoted figures for total return.

If you invested in Fidelity Leveraged Stock a decade ago, your total annual return would have been 14.5%. But the typical shareholder had an investor return of only 4.0%. The reason for the gap is, most investors didn't buy and hold for the 10 years. Instead, the average dollar in the portfolio stayed invested for short periods.

In 2001, the portfolio was tiny, with only $60 million in assets. Then in 2003, the fund returned an eye-popping total of 96.3%. With investors racing to buy, assets reached $7.6 billion, in 2007. Unfortunately, most investors arrived too late at the party. In 2008, the fund lost 54.5%, and assets sank to $2.8 billion as investors sold at the trough.

Fidelity Leveraged Stock has such a poor investor return, partly because the fund is volatile. Holding shares of indebted companies, Fidelity sometimes soars in bull markets and then collapses in downturns. All too often, shareholders buy and sell at the wrong times.

Fidelity Leveraged Stock is hardly the only top-performing fund with a poor investor return.

RS Value


had a total annual return of 11.0% during the past 10 years, but only delivered an investor return of 4.5%.

Hotchkis and Wiley Mid-Cap Value


returned 10.6% annually, and produced an investor return of 2.9%.

Should you stay away from funds with poor investor returns? Not necessarily. But you should be aware of what you are buying. If you do buy a fund like Fidelity Leveraged Stock, keep your eyes open and be prepared for a rough ride. For investors who don't have strong stomachs, a better choice might be a fund like

Heartland Value Plus


, which returned 13.8% annually during the past decade and produced an investor return of 12.0%. Because Heartland delivered a relatively steady ride, shareholders were able to hold through downturns. Another fund that outdid more than 99% of diversified funds is



, which had total returns of 12.5% and an investor return of 11.0%.

Financial advisers sometimes argue that they can help to improve investor returns. Advisers can counsel clients to avoid panic and hold funds through downturns.

Does the advice help? Maybe not. To get some idea about the impact of professional advice, you can consider the returns of funds that offer two kinds of shares: share classes that are sold only with assistance of advisers and no-load shares that can be sold directly to do-it-yourself investors. You might expect that the adviser shares would produce better investor returns, but that is not always so. In the case of Fidelity Leveraged Stock, the investor return of the advisor share class lagged 4.0 percentage points behind the no-load shares.

Regardless of whether you work with an adviser, you should consider holding at least some funds for the long term. Many studies have shown that long-term shareholders receive the best returns. To demonstrate the value of holding funds for the long term, Morningstar recently compared the investor returns of various share classes of Vanguard funds. The study is particularly noteworthy because Vanguard had an unusual policy that favored long-term holders.

A decade ago, Vanguard announced that it would create special Admiral shares that came with lower expense ratios. A new investor could qualify for the low fees by investing at least $250,000. But if the account had been at Vanguard for 10 years, the minimum requirement was only $50,000. (Since then the account minimums have been lowered.) Shareholders who didn't qualify for the Admiral shares had to buy Investor shares, which came with higher expenses.

While not all Admiral investors were long-term holders, many had been in their funds for years. As a group, the Admiral shareholders stayed with their funds longer than typical shareholders owned the Investor share classes. The patience of the Admiral shareholders was rewarded with higher investor returns. During the past 10 years, the annual investor return of the Admiral shares of

Vanguard Total Stock Market Index


was 6.2%, compared to an investor return of 5.4% for

Vanguard Total Stock Market Index Investor Shares



Part of the gap can be explained by the expense ratios. The Admiral shares have an expense ratio of 0.07%, while the Investor shares charge 0.18%. But clearly, expenses cannot explain all the advantages of the Admiral shares. Morningstar concludes that typical Admiral investors got better results because they held shares patiently, sticking with the fund through up and down markets.

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Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.