Straits of Magellan : Results Lag at Fidelity Fund; Chief Feels Pinch

While the mutual fund industry has been exploding in size in recent years, one thing has remained constant: The best-known fund in America has been Fidelity Investments’ Magellan Fund.

But Magellan, which with $56 billion in assets is far and away the industry’s biggest stock fund, is struggling to remain a star performer.

Magellan has gone from being one of the best stock funds to, at least so far this year, one of the worst. The reason: Its 37-year-old manager, Jeffrey Vinik, boldly shifted billions of dollars away from stocks and into Treasury bonds and cash--a bet that has failed miserably.

Nonetheless, Fidelity released figures Friday that indicate Vinik has held his ground. Although he pared Magellan’s nonstock investments slightly since the start of the year, bonds and cash still amounted to nearly 30% of the fund’s portfolio as of March 31, up from only 5% a year ago.

Fidelity won’t comment on whether Vinik has since shaved Magellan’s nonstock investments further. And his bet on bonds might still pay off in the coming months; bond prices rallied sharply Friday.

But what is certain is that Magellan this year has earned a paltry total return--its price gains plus dividends--of 1.13%, the worst record among the 10 largest equity funds in the nation, according to the research firm Lipper Analytical Services.

Moreover, this month Magellan’s record for the trailing three years fell below that of the Standard & Poor’s 500 stock index--a benchmark indicator of the broader market--for only the second time in two decades.

Coming at a time when Fidelity is facing a host of other problems, ranging from lagging performances at a number of its other major funds to ethics questions about some of its top money managers, the troubles at its flagship Magellan Fund are focusing more attention than ever on Vinik.

Vinik took Magellan’s helm in mid-1992, and, although highly regarded for his earlier performance at two other Fidelity funds, his record at Magellan is mixed.

The fund has bested the S&P; 500 only one calendar year since he took over--1993--but that performance was enough to give Magellan a cumulative total return for the past four years that surpasses the S&P; 500.

But Vinik’s bold move away from stocks has hobbled Magellan this year. Bond prices have mostly tumbled, and the modest returns on cash have been no match for the continued rally in stocks. The total return on Dow Jones industrial average stocks, for instance, has been 7.8% so far in 1996.

“It’s proved to be a colossal mistake, for now,” said Kevin Kelleher, research director at Mutual Fund Trim Tabs, a newsletter published in Santa Rosa, Calif.

Vinik declined to be interviewed. But Peter Lynch, the legendary stock picker who ran Magellan for 13 years and remains Fidelity’s vice chairman, said Vinik’s critics are rushing to judgment.

“The definition of the [investing] game is not three months,” Lynch said, adding that Vinik has beaten 80% of other stock funds during the past three years.

He also said Fidelity “has absolutely no plans” to remove Vinik from Magellan. “Jeff Vinik is an extremely good fund manager,” Lynch said.

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To be sure, most stock fund managers struggle to match the S&P; 500, never mind surpass it, year after year. But investors put cash in Magellan expecting returns that are much better than average.

And now some of them are beginning to show their disaffection. In April, Magellan holders withdrew an estimated $450 million more from the fund than they invested, according to Fidelity Insight, an independent newsletter that tracks the company.

Though they are a fraction of Magellan’s assets, the withdrawals are nonetheless notable. “The Magellan Fund has had periods of net redemptions in its 33-year history, but it is rare in recent times,” said John Bonnanzio, the newsletter’s editor.

Fidelity itself does not comment on monthly cash flows in specific funds, a spokesman said. But he noted that more than two-thirds of Magellan’s assets are earmarked for 401(k) and other retirement plans whose owners are loath to move quickly from fund to fund. (The plans also provide Magellan a steady stream of cash through automatic contributions.)

The stakes in Magellan’s continuing preeminence are enormous. Magellan produces more than $200 million in administrative fees for the parent company each year, and the company also reaps millions more through the load, or fee, of 3% it charges investors to get into the fund. Magellan has also long been a magnet drawing investor cash to Fidelity’s whole range of other fund offerings.

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Observers said Magellan’s long record of success, particularly under Lynch, is a key reason Fidelity grew into the nation’s biggest fund family. Fidelity now has $400 billion in total assets and more than 200 different funds.

Stardom, however, has its perils as well as its rewards.

Magellan’s prominence has made household names of its managers, starting with Lynch, a peerless stock picker who ran the fund from 1977 to 1990. Lynch--in Fidelity’s tradition of letting its managers take an aggressive, independent approach to investing--also made bold moves with Magellan’s assets, and he routinely beat the market.

By the time Vinik took over, tracking the moves of Magellan’s manager as though he were under a microscope had become a Wall Street pastime. Inevitably, some outside observers have speculated that Fidelity might respond to Magellan’s poor recent performance by changing its top personnel.

Speculation about Vinik’s fate only intensified after Fidelity reassigned portfolio managers at 23 of its other funds in March.

Vinik was not among them, but some Fidelity followers have noted that his wrong bet on bonds is not the only move that has embarrassed the company. The Securities and Exchange Commission is examining whether Vinik improperly praised stocks, including Micron Technology, in news interviews at the same time his fund was selling them.

Fidelity spokesmen have said the timing was not simultaneous and that Vinik might have simply changed his mind between the interviews and the sales. Given Magellan’s power over the market, however, the SEC inquiry would turn on how whether Vinik deliberately tried to talk up the stocks in order to sell them at a higher price.

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For all that, many Fidelity watchers argue that Vinik is being unjustly maligned on the basis of a few bad months.

“His performance is still far superior to the vast majority of mutual fund managers out there,” said Eric Kobren, executive editor of Fidelity Insight.

Kobren and others noted that Vinik’s hallmark has always been to make heavy bets on certain market sectors, often well in advance of other investors. That necessarily means Magellan has suffered through other periods of underperformance.

“Vinik is stubborn,” said Jack Bowers, editor of Fidelity Monitor, another independent newsletter. “He doesn’t easily give up his losing positions.”

Some critics never tire of saying the Magellan Fund is simply too big to succeed year after year. They argue that Vinik will have to keep making hugely successful bets in order to generate stellar returns on $56 billion of assets.

Lynch scoffed at the suggestion. “It’s obviously not too big,” he said, noting that the New York Stock Exchange alone has a total market capitalization of about $6 trillion.

Jon Teall, an analyst at Lipper Analytical, agreed. “I’ve been listening to that argument for 15 years,” he said.

“Last year the fund, as it was growing from $36 billion [in assets] to $54 billion, managed out outperform 80% to 90% of all stock funds.”

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Magellan vs. the Market

Fidelity’s flagship Magellan Fund, with $56 billion in assets, has lagged the performance of the blue-chip Standard & Poor’s 500 stock index since 1993 and has trailed the S&P; in five of the last 10 years. Total returns:

1996

Magellan: 1.3%

S&P; 500: 5.6%

Magellan’s Mix

A huge shift out of stocks and into bonds and money-market (cash) securities since last summer has depressed Magellan’s returns.

AUG. 31, 1995

Stocks: 95.3%

Cash and other: 3.1%

Bonds: 1.6%

MARCH 31, 1996:

Stocks: 70.7%

Bonds: 19.2%

Cash and other: 10.1%

Fidelity’s Growth

Fidelity Investments has exploded in size since the 1980s as investors have flocked to mutual funds. Fidelity’s fund-asset growth compared with that of two key competitors, Vanguard Group and Capital Group’s American funds, in billions of dollars:

Fidelity: $399

Vaguard: $198

Capital Group: $163

Sources: Fund companies, Lipper Analytical Services