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Leverage, or borrowed money, seems to be a way of life for many Americans -- corporations included. The question is: Should you invest in a fund that takes big bets on these borrowers?

Many young start-up companies rely on the debt markets to jump-start their businesses, while some companies even use debt to finance takeovers, called leveraged buyouts. Some of today's biggest companies, such as


(which would later be bought by




Turner Broadcasting

, now a part of the

AOL Time Warner


empire) got their start through high-yield financing.

Now that the

Federal Reserve

has started what is expected to be a series of interest rate cuts, a move that has already given the

junk bond market a boost and should continue to stimulate borrowing this year, Fidelity hopes the time is right for a leveraged fund.

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Fidelity Leveraged Company Stock, which the fund giant recently launched in December, is a new breed of fund that will buy the stocks of companies that are using leverage to boost growth.

The young fund, which had $9.1 million in assets under management at the end of 2000, is unique because it invests in the stocks of highly leveraged companies, whereas most funds that look at this segment of the market tend to invest in these companies' bonds or convertible securities rather than the stocks.

But several fund-industry watchers, including


director of fund analysis Russ Kinnel, say curious investors need to know the risks involved.

"Obviously a leveraged company tied to the economy will get tremendous bang for its buck when the economy starts to get going again," says Kinnel, who also warns that, "If we do slide into a recession, it's going to be a minefield if you pick the wrong ones."

Investing in the stock of leveraged companies is risky in part because if the company goes into bankruptcy, paying off the bondholders takes precedence over paying the equity investors. The flip side of that is that investing in bonds guarantees a steady stream of income at a fixed rate, while stocks can have unlimited upside. While many high-yield or junk-bond issuers (those companies that have a credit rating of less than triple-B) typically pay higher yields than U.S. Treasuries or investment-grade corporate bonds, their stocks can also yield high returns if their business are going full steam ahead.

David Glancy, portfolio manager of the Fidelity Leveraged Company Stock Fund, is a big proponent of that notion. He says the fund will focus on companies that have the lowest investment-grade debt rating of triple-B or lower and are using leverage to drive better equity returns.

Fidelity does not expect to release the holdings of the leveraged company fund until mid-April, but Glancy says that some attractive leveraged opportunities can be found in the areas of real estate investment trusts, or REITs, health care, chemicals, media and telecommunications companies.

"Over time, if you think you participate in leveraged situations well, the guy who's borrowing for the right reasons, you can make money participating as a lender in that situation," says Glancy. "But you're going to make a lot more money participating in an equity situation."

Glancy is no stranger to this strategy. He also invests around 20% of the


Fidelity Capital & Income portfolio in the stocks of high-yield issuers. Glancy has managed that high-yield fund since 1996 with respectable results. The fund has outperformed the high-yield fund category average in the year-to-date, one-year, three-year and five-year annualized time periods, according to Morningstar. Glancy also used this strategy when he managed the


Fidelity High-Income fund from 1993 to 1996.

One can also get a sense of the areas Glancy favors by looking at the Capital and Income Fund, which held 31% of its assets in telecommunications and almost 26% in the cable industry as of the end of 2000. That fund's top ten holdings as of June 30 included high-yield bonds of wireless company

Nextel Communications


, cable concern

TeleWest Communications


and broadband company

WinStar Communications


as well as the class A shares of satellite broadcasting company

EchoStar Communications



Fund watchers also note Fidelity's strength in the high yield area -- Glancy estimates that the fund company manages some $20 billion in high-yield funds with an army of analysts to support the fund managers -- is another strong point for the fund.

However, many fund pundits are taking a wait-and-see attitude on the leveraged company fund not only until the fund's holdings are known, but also until the outlook for the U.S. economy becomes a little clearer.

"I think it's a little early right now," says Don Dion, publisher and chief investment strategist of the Fidelity Adviser newsletter. "We're more comfortable in the high yield area than in the leveraged area right now."

Dion says he would recommend allocating a 5% to 7% portion of an investor's portfolio to the leveraged company fund once he felt comfortable that the economy were not headed for a dramatic slowdown.

"The advantage

of the fund would be that as the economy comes out of a recession and as rates fall, these companies will be able to refinance their high yield debt at lower rates, thereby increasing their earnings," says Dion. "The stocks should then appreciate substantially, and therefore the return for the investor would be higher owning a leveraged fund than a high yield fund."

Whether or not 2001 will bode well for leveraged companies remains to be seen.


Chief Economist John Lonski notes that the year 2000 saw a ratio of corporate credit downgrades to upgrades of 2.26, the highest ratio since 1991. However, he also noted that the total return for high-yield debt in 1991 was a hefty 39%, despite the high presence of downgrades, so declining credit quality doesn't necessarily mean low returns.

Still, Lonski cautions that leveraged companies are still a risky choice right now. He says investors considering these funds would want to see an economic environment with inflation under control and strong domestic spending while also keeping an eye on the affect that the dollar's strength has on domestic manufacturing.

"Until we have some firming of the U.S. economy and an end to the deceleration, there is every reason to be on guard," notes Lonski.