While Fidelity Investments has reopened its famed Magellan Fund, advisers remain skeptical and are keeping a close eye on its performance.
While Fidelity Investments has reopened its famed Magellan Fund, advisers remain skeptical and are keeping a close eye on its performance.
Magellan, which reopened last Tuesday, is one of the best-known funds in the industry.
The fund achieved star status more than 30 years ago under the direction of Peter Lynch, whose average annualized returns during his 13-year tenure nearly doubled those of the Standard & Poor 500 stock index. But that may not be enough to ignite a rush of investors in today's retail environment.
At its peak in 1999, Magellan's assets totaled $105.9 billion, versus $44.8 billion today. The fund was closed to new investors by Boston-based Fidelity on Sept. 30, 1997.
While Magellan's performance turned around last year, the fund has lagged the S&P 500 four out of five years from 2002 to 2006. The fund beat the popular benchmark in 2005, but only by 1.5 percentage points.
Last year, Magellan trounced the S&P 500 with a gain of 18.8%, a whopping 13.3 percentage points above the index.
Even so, Magellan remains too big and unwieldy to crank out benchmark-beating returns consistently, according to some advisers.
TURNING THE TITANIC
"It is like trying to turn the Titanic around in the cul-de-sac in front of my home," said Don Patrick, managing director of Integrated Financial Group Inc. of Atlanta, which has $1 billion in assets under advisement. "Investors have a much higher probability of success with an S&P 500 index fund. I don't care how brilliant you are as a money manager; there's only so much you can do, because of the size."
Fidelity downplays any concerns about Magellan's size.
"Harry [Lange] is comfortable with the fund's size and the investment opportunities he is finding in the marketplace," said company spokeswoman Sophie Launay, referring to the fund's manager since October 2005.
"Magellan's performance has been quite strong over the past two-plus years. Harry is a very experienced portfolio manager with an excellent long-term track record on the Fidelity funds he has previously managed," Ms. Launay said.
Since assuming Magellan's reigns, Mr. Lange has bolstered performance by reducing the fund's overall number of holdings. He has also decreased its weighting in financial stocks, while increasing its weighting in technology.
Mr. Lange has also increased the fund's exposure to foreign stocks to 26%, from 2.35% at the end of 2005.
Still, Magellan remains plagued by redemptions. During the first 11 months of 2007, investors yanked $7.1 billion more out of the fund than they put in, compared with net outflows of $8.8 billion in 2006, according to Boston-based Financial Research Corp.
Fidelity blames those redemptions on the fact that some 85% of the fund's assets are parked in retirement plans and that investors — particularly baby boomers — are starting to tap those assets.
Magellan's reopening suggests that Mr. Lange sees a fresh batch of investment opportunities, Fidelity watchers said.
"I think it's good for investors," said Eric Kobren, executive editor of the independent newsletter Fidelity Insight of Wellesley Hills, Mass. "I don't think they would have opened it up if Harry didn't see opportunities both domestically and abroad. I think he wants to put more money to work. It's a good large-cap fund."
REASON TO PAUSE
Even so, the fund's long-term performance record is giving some advisers reason to pause.
"I'm not going to jump in on [Magellan]," said Kevin Brosious, president of Wealth Management Inc., a fee-only financial planning firm in Allentown, Pa. "If I buy index funds or [exchange traded funds] I know exactly what I'm getting and how to measure performance. Magellan is a very big fund with average performance."
Magellan will be evaluated against its peers, said D. Scott Neal, president of an eponymous financial planning firm in Lexington, Ky., which manages $100 million in assets. "If it passed the grade among its peers, then we would not hesitate to recommend or invest in it," he said. "However, if it is like most Fidelity funds today, there are plenty of funds that are likely to outperform."
"My fear, in the early months of reopening, is that there will be a rush to get into the fund by individual investors that are basing their decision on the Peter Lynch days — possibly putting undo pressure on the fund to make investments," said Patricia Hinds, personal-wealth manager with Granite Financial Inc. of Saint Cloud, Minn., which manages $96 million in assets.
That said, "Harry Lange is one of the more talented growth investors out there now," said Dan Lefkovitz, senior fund analyst at Chicago-based Morningstar Inc. "The fund has only had one outstanding year since Harry took over."
"The reputation has been sullied over the years," Mr. Lefkovitz said. "Bob Stansky had a long period of underperformance. It could be staying in people's minds that it was a great fund that fell from grace."
Even so, "Magellan still has a cachet," said Burton Greenwald, a Philadelphia-based mutual fund consultant. "The stars are lined up right to capture some real interest on the part of investors."
Sue Asci can be reached at sasci@crain.com.
