By WARREN BOROSON
(Morris County, N.J.) Daily Record

Fidelity Leveraged Company Stock Fund is the diversified no-load U.S. stock mutual fund that Sheldon Jacobs suspects will do mighty well this year.

The evidence is that that any diversified no-load fund that shoots out all the lights in Year 1 is likely to shoot out many lights (not necessarily all of them) in Year 2. And last year, that Fidelity fund returned a nifty 96.3 percent.

Since 1975, according to Jacobs, who edits the newsletter The No-Load Fund Investor, the top diversified no-load fund in Year 1 has gone on to return an average of 20.2 percent in Year 2, as opposed to only 13.8 percent for the average diversified no-load fund in Year 2.

No, this strategy - which Jacobs calls Persistency of Performance - doesn't always work. Last year, his choice was Royce Special Equity. Alas, it rose only 27.6 percent in 2003, while the average diversified no-load U.S. stock fund climbed 35.0 percent. Still, 27.6 percent ain't bad.

The worst Year 2 performance occurred in 2000, when Van Wagoner Emerging Growth - which had returned a dizzying 291.1 percent in 1999 - returned minus 20.9 percent. But Jacobs, a shrewd fellow, hadn't officially chosen that fund for 2000, because the fund wasn't really diversified. It was top-heavy in technology stocks.

One of the best Year 2 performances occurred in 1998, when Transamerica Premier Aggressive Growth returned 54.2 percent, whereas its rivals returned an average of only 33.5 percent.

Jacobs, thank heavens, doesn't follow the Persistency of Performance strategy mindlessly. He doesn't jump into the fire when the strategy suggests that self-immolation is the proper course. As mentioned, he didn't make an official choice in the year 2000 because technology dominated the portfolios of top-performing funds.

Last year, he refused to consider bear-market funds because he suspected that 2003 would be a bullish year. Besides which, he notes that "bear markets are less likely to persist than bull markets."

He also avoids specialized or sector funds, such as those that focus on precious metals or real estate. Their performances are "much more erratic," and "their portfolio managers can seldom overcome the drag of an out-of-favor sector."

This year, he eliminated top-performing funds that were filled to the gills with technology stocks. He also traditionally turns his back on foreign funds, funds closed to the public, load funds (of course) and little-known funds (those not followed by his newsletter).

Which prompts some interesting ideas. Why not try to invest in a closed-to-new-investors fund that did sensationally last year - assuming that you could wangle your way in? A candidate: Dreyfus Small Company Value, up 86.6 percent. But it gets one measly star from Morningstar, its lowest rating. Last year may have been an aberration. Still, it's already up 6 percent or so this year.

How about the best-performing diversified U.S. stock fund that carries a sale charge? Investors who use an intermediary to buy funds might consider Kopp Emerging Growth A, which has a 3.5 percent sales charge. It rose 75 percent last year, but lost 51.7 percent in 2002, lost 53.27 percent in 2001 and lost 1.27 percent in 2000, but in 1999 it soared 148.2 percent. It gets Morningstar's lowest rating, and Morningstar advises: "You can live without this fund." On the other hand, the fund has risen 14 percent this year already. For more information, call (888) 533-5677.

How about the second-best-performing diversified U.S. stock fund? One could buy both Fidelity Leveraged Company Stock and the Al Frank Fund, up 78.0 percent. While the second fund gets four stars from Morningstar, for "above average," it did terribly in 2002 (down 26 percent). Still, buying shares might diversify your choices a bit.

Obviously, the Persistency of Performance strategy has logic behind it. Momentum does work in the stock market - until, of course, it stops working. (Which happens, predictably, when you least expect it to.) Still, over just a one-year period, a fund may not have gotten flooded with new money - something that tends to severely handicap any fund. Besides which, Jacobs points out, the stock market tends to move in three- or four-year cycles, and if you buy a stock or stock fund based on only its one-year performance, you're less likely to be buying late in the cycle.

Now let's look at the Fidelity fund itself.

Its strategy is to invest in companies whose debt has been labeled "junk" - companies that, perhaps, are viewed more negatively than they deserve. I suspect that the fund therefore enjoys a low correlation with the stock market as a whole - that it will help diversify most portfolios.

In 2001, Leveraged Company ranked in the top 50 percent of similar funds (up 3.23 percent). In 2002, it was in the top 25 percent (with a loss of 1.77 percent).

The fund was just rated by Morningstar, and naturally it received a five-star rating.

The bad news: The fund's minimum first investment is $10,000, which is unusually high for Fidelity. Also, it's a fairly new fund, having started in December of 2000. Also, the original manager, David Glancy, left last year, and was succeeded by Thomas T. Soviero. A "wise choice," wrote Morningstar, "but he will be hard-pressed to match Glancy's success."

Morningstar argues that the fund is "appropriate only for aggressive investors. And even they may want to limit the fund to just a small slice of well-diversified portfolio." Call (800) 544-8888 for more information.