) -- Thomas Soviero manages the

Fidelity Select Convertible Securities

(FCVSX) - Get Report


Fidelity Leveraged Company Stock

(FLVCX) - Get Report

, two funds that benefited from the recovery in credit markets, financials and natural resources.

Normally, convertible bonds are a less volatile way to gain exposure to equity. Yields on the bonds pay less, but if the stock price doesn't rise, investors at least get their principal back. During the panic of 2008, many investors questioned whether these firms would be able to repay their bonds, and with their stocks well below conversion price, there was no help from the equity stub.

The recovery was just as swift. An improvement in credit markets and a sharp rebound in stock prices made convertible bonds attractive once again. Meanwhile, the stocks of many leveraged companies rebounded sharply as the specter of bankruptcy dissipated.

Materials and Financials drive FCVSX and FLVCX

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The funds use some overlapping strategies, since companies with convertible bonds are leveraged. For instance, both funds hold assets from copper miner


(FCX) - Get Report

in their top 10, as well as coal miner

Peabody Energy

(BTU) - Get Report


Bank of America

(BAC) - Get Report


ON Semiconductor


, and chemical producer




These companies were a hindrance in 2008, when materials and financials were hammered by falling asset prices. Fidelity Convertible Securities lost 47.8 percent last year, while Fidelity Leveraged Stock sank 54.5 percent. Leveraged companies were hard hit by the credit crisis because an inability to roll over debt could send an otherwise healthy company into bankruptcy. Nevertheless, the strategy has paid off in 2009. Through August 31, Convertible Securities gained 49.10 percent and Leveraged Stock advanced 41.97 percent.


To learn more about what's driving Freeport-McMoRan and Bank of America, see my video.

Peabody Energy has been a far less volatile stock in 2009. It fell sharply in 2008, losing 63 percent. Its 50 percent gain in 2009 is impressive, but that's about half the broader coal sector's return. Energy prices recovered this year, with oil climbing above $70 a barrel during the summer, but questions remain about the impact of pending legislation designed to restrict carbon dioxide emissions.

Celanese was another big winner for the portfolios, as it has gained more than 100 percent thus far in 2009. The company raised the prices for some of its products in August as market conditions improved, but it still has a long way to go before it can reach its old highs. In early August, the company laid off 100 employees at one plant in North Carolina due to weak demand from the automotive industry.

Semiconductor stocks were particularly hard hit last year, and they staged an equally impressive rally in 2009. A sign of strength for some mining and technology stocks such as ON Semiconductor was that it did not make a new low along with the broader indexes in March, but rather bottomed in mid-November.




spin-off has been paying down debt this year, a move that has increased the book value of the firm even as assets stay flat. The company has also been aggressively cost cutting to improve earnings at lower revenue points. ON Semiconductor has gained nearly 150 percent this year.

Improving balance sheets is a must for leveraged companies until the credit environment fully recovers. Here is what Morningstar analyst Miriam Sjoblom said of Soviero's approach to Leveraged Company Stock: "While maintaining his concentrated style, he's shown flexibility during the downturn. He's taking a closer look at whether companies are committed to improving their balance sheets, and top holdings like Freeport-McMoRan Copper & Gold and

El Paso


have already started down that road."

These are two volatile funds in a volatile period for the markets. Investors should be prepared to see returns take large swings at times, but the larger trend of economic recovery and balance-sheet improvement will strengthen the holdings.

Soviero, like almost all managers, was hit by the financial panic last year, and he suffered for being in asset classes most hurt during the panic. As we come out of recession, however, these are the asset classes that have some of the best chances for appreciation.

-- Written by Don Dion in Williamstown, Mass.

At the time of publication, Dion held no positions in the funds and stocks mentioned.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.