Fidelity's Magellan is so big, it overshadows competitors Observing the nation's largest mutual fund 'is a cottage industry'

August 25, 1996|By NEWSDAY

Judging by the plethora of newspaper stories, magazine articles and newsletters about Fidelity's Magellan Fund, fund manager Robert Stansky might find it smart to invest in paper company stocks.

Almost daily, somewhere there is published anticipation about what the new manager of the nation's largest mutual fund will do. Will he dump the huge bond holdings built up by his predecessor, Jeffrey Vinik? What stocks is he buying? Is he reducing the cash in the fund? When Fidelity releases its monthly figures, there is a sudden flood of what-ifs and second-guessing and explanations.

"Watching Magellan is a cottage industry," said Morningstar equity analyst and admitted Magellan watcher Russell Kinnel. "I was on television this morning being asked about the outflows from Magellan last month and what they meant."

In July, Magellan's assets dropped by $3.5 billion, to a little over $50 billion, about $1 billion of which was accounted for by investors moving money out of the fund. The other $2.5 billion was market losses that reduced the value of the shares in the fund. While everyone who follows the mutual funds knew of the 4.65 percent decline, few knew that Twentieth Century's Ultra fund dropped 8.8 percent in the same period -- almost double Magellan's. Or that Fidelity's $19 billion Contrafund was down 4.68 percent at the same time.

Hundreds of stories about Magellan have appeared this year in publications around the country, while there have probably been fewer than a dozen stories about the No. 2 stock fund, Investment Company of America, with $27 billion in assets, and the No. 3 fund, Vanguard's $23 billion 500 Stock Index Fund.

That's a lot of ink for a fund whose performance so far this year ranks 3,503rd out of 3,816 stock funds, and 620th out of 665 growth funds.

"Size, personalities and Fidelity," said A. Michael Lipper, president of Lipper Analytical Services Inc., a Summit, N.J., company that ranks mutual funds. "You could ask the vast majority of people what the second-largest equity mutual fund is, and they wouldn't know."

It is not only its size, which alone would make it one of the top 15 mutual fund families. Or its great historical performance, much of which was created by the fund's legendary former manager, Peter Lynch. Or even that it is the flagship of Fidelity's 236 funds. More than half the money in the fund now comes from retirement accounts, such as 401(k) plans, where it usually is the No. 1 choice of investors who have it available.

There are also more than 3 million shareholders in Magellan, and they create a potential readership that can help sell publications.

"I think there is a small cadre of professional camp followers who look at Magellan and use it as grist for their gossip mill," said Kurt Brouwer, who heads a San Francisco mutual-fund consulting service. "I think Fidelity would be just as happy if no one talked about Magellan. No news would be good news, but when it comes to Magellan, it is so big that everyone writes about it."

Fidelity spokeswoman Robyn Tice said, "We can't control all the information that is being thrown at investors and that is being used to make their investment decisions. We can provide information and a lot of educational tools for our customers so they can call us if they have questions about anything they read about Magellan."

"I think the coverage of Magellan is overdone," said Eric Kobren, editor of Fidelity Insights, which follows Fidelity's funds. "There are a lot of good funds, but it [Magellan] has done better than thousands of funds, so people make too much of its performance now. It's an easy mark."

Although Tice says Fidelity has not been marketing Magellan, one longtime observer and competitor at another fund company said, "They created this. There were television commercials featuring Peter Lynch. It was a terrific fund. It had a protracted period of brilliant performance, but now it's regressing to the mean," or become an average performer.

Kinnel said he thought all the publicity was a negative for Fidelity and the fund, but "I don't think it's an accident. They have had a fairly large turnover in managers, every three or four years. The manager is in a fishbowl, and there is immense pressure. Everyone is throwing stones at you."

Some worry that the emphasis on Magellan -- which is having a particularly bad year, up about 1.50 percent at a time when the market, volatile as it is, is up almost 10 percent -- can create a poor impression of what is happening to all mutual funds.

"It's a good story," said Avi Nachmany, executive vice president of Strategic Insights, a mutual-fund advisory service, "but it shouldn't be representative of the mutual-fund industry. It's only 3 percent of the money invested in stock funds, but people make more out of it than it is.

"If you call American Funds [the fund family that includes No. 2 Investment Company of America], they won't tell you anything."

But if investors are to take a long-term view, the short-term information Magellan releases, like monthly cash flows, is irrelevant.

"It does investors a disservice to the extent you want investors to think long-term," Nachmany said. "Magellan [coverage] is an exaggerated phenomenon and irrelevant to thinking about the investment process."

And yet, talking to Nachmany, Kobren, Kinnel and others makes it clear they are professionally fascinated by the fund and its inner workings.

Was Vinik right to build up a huge bond inventory?

Should Fidelity be giving everyone faster and more information about its stock trades?

When will the bond holdings be cut?

Magellan, it seems, might be a good fund, but it has become a great soap opera.

Pub Date: 8/25/96

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