Venerable Fidelity Magellan reopens for new investors

ShareThis

Fidelity Magellan, which has been closed to new investors for more than a decade, is reopening this week. About 85 percent of Magellan's assets are in retirement accounts, and Fidelity says it wants to get new money into its flagship fund to replace withdrawals by Baby Boomers.In both size and reputation, Magellan -- once the nation's largest mutual fund -- is a shadow of its former self. Nevertheless, some fund experts say investors should give the fund a fresh look given its recently improved performance."I have been calling on Fidelity to reopen Magellan for two years," says James Lowell, editor of Fidelity Investor, an independent newsletter for Fidelity fund shareholders. "Ever since we saw Harry Lange take the helm in 2005, I knew Magellan was back in the hands of a global growth-stock picker who would deliver performance once again to the patient shareholders."Under renowned manager Peter Lynch, Magellan grew into the nation's best-known mutual fund. Lynch retired from the fund in 1990 and although his successors never had the same phenomenal success, the fund -- which had become a staple in many 401(k) plans -- continued to grow.Size can be a liability for mutual funds because the manager can adversely affect the price of a stock when he buys or sells large stakes in companies. Also, large influxes of cash can be difficult to invest quickly in a measured, rational manner. Size is mainly a problem for funds that invest in smaller companies, but it can affect funds -- like Magellan -- that invest in large companies as well.In November 1997, Fidelity closed Magellan to new investors but allowed existing investors to continue putting in money. By the end of 1999, it had grown to a whopping $106 billion in assets.As did most stock funds, Magellan lost a lot of money during the bear market that started in 2000. When the market started to recover in 2003, then-manager Robert Stansky failed to beat his benchmark, the Standard & Poor's 500 index.Stanksy was accused of being a "closet indexer" who followed a conservative strategy that hewed too closely to the S&P 500.Disappointed investors began withdrawing their money -- in droves. Many large companies removed Magellan from their 401(k) plans, including Microsoft in August 2005.In October 2005, Fidelity replaced Stansky with Lange, who had been beating the S&P 500 as manager of the Fidelity Capital Appreciation fund.Lange started to make changes, but Magellan didn't improve immediately. It lagged the S&P 500 by a wide margin in 2006, and investors continued to leave. Ford Motor removed its 401(k) from the fund in October 2006.But in 2007, Lange's moves started to pay off. Last year, it returned 18.8 percent, beating the index by 13.3 percentage points.Lowell, the editor, says Lange made three big moves that paid off:-- He moved nearly one-third of Magellan's assets into foreign stocks, compared with 4 percent under Stansky.-- He over-weighted technology, which means he put 27 percent of Magellan into tech stocks compared with 17 percent for the S&P 500.-- And he underweighted financial stocks, putting only 12 percent in that sector versus 19 percent for the S&P 500.Those moves "came together to really be the trinity that delivered significant outperformance," Lowell says. "He's not a one-trick pony. He's nimble and quick."Despite its recent performance, Magellan has failed to win many converts. Its assets now are around $45 billion. There are 23 U.S. stock or bond funds that are bigger than Magellan, including three Fidelity funds, according to Morningstar.Lowell says Magellan is reopening to new investors now "because it has a performance story Fidelity can crow about."Lowell says he would consider Magellan "as a core holding if I was a growth or aggressive growth investors with at least a 10-year time horizon."The Magellan skippers How the Fidelity Magellan fund fared under its seven managers.Magellan manager Tenure Cumulative return Average annual return Edward C. Johnson III 1963 to 12/1971 910.4% 30.3% Richard Haberman 1/1972 to 5/1977 11.5 2.0 Peter Lynch 5/1977 to 5/1990 2,703.1 29.2 Morris Smith 5/1990 to 7/1992 29.5 13.2 Jeffrey Vinik 7/1992 to 6/1996 84.4 16.5 Robert Stansky 6/1996 to 10/2005 88.9 7.1 Harry Lange 10/2005 to present 34.3 14.6 Source: Fidelity Investor newsletter E-mail Kathleen Pender at kpender(at)sfchronicle.com.(Distributed by Scripps Howard News Service, www.scrippsnews.com.)