BOSTON -- Fidelity Investments is closing to new investors its flagship Magellan mutual fund, the world's biggest with $62.9 billion in assets, because the fund has become too big to manage.
The decision to close Magellan on Sept. 30 signals the end of an era for Fidelity and comes after three years of lagging behind the Standard & Poor's 500 index. Magellan's success in the 1980s and early 1990s attracted more investors than any other fund.
Fidelity, which said Magellan's size wasn't a reason for closing it, wants to reduce its reliance on mutual fund fees and get more revenue from brokerage services. In 1996, fees from Magellan alone accounted for $245.4 million, or about 5 percent of the company's $5.08 billion in total revenue.
"By closing Magellan, Fidelity is showing it's willing to take bold steps to go after a new audience of customers," said Geoff Bobroff, an independent industry consulting firm in East Greenwich, R.I.
Fidelity said Magellan will still be open to some investors after Sept. 30 -- those who already own shares of the fund and participants in most group retirement plans where the fund is an existing investment option. More than 60 percent of Magellan's 4.3 million shareholders own the fund in a retirement account.
"We expect this step will lead to a much more gradual expansion of the fund's size," said Robert Pozen, head of Fidelity's $500 billion mutual fund group.
Pozen made the decision to shut Magellan along with the fund's manager, Robert Stansky. He also said he consulted with the fund's former manager, Peter Lynch.
Magellan is up nearly 22 percent this year, as of Tuesday, ranking No. 264 of 675 "growth" stock funds tracked by Bloomberg Fund Performance. The S&P 500 -- a benchmark used to gauge the performance of U.S. equity funds -- was up 23.3 percent. The closest rival to Magellan in terms of assets is Vanguard Group's Index 500 Portfolio, which has about $45 billion in assets.
Closing Magellan isn't an attempt to divert customers to the brokerage services that Fidelity offers, Pozen said. "Most of the people who own Magellan aren't involved in online trading," he said. Magellan is being closed because "inflows have picked up noticeably within the past few weeks" so, by limiting new purchases, the fund's asset base should remain more stable, Pozen said.
Fidelity is closing Magellan because it's "just too large," said Eric Kobren, executive editor of Fidelity Insight, an independent newsletter that tracks the company's funds.
It's gotten harder to generate market-beating returns and "more difficult to maneuver in a volatile market," he said.
Most fund companies don't like to close funds because doing so limits the fees they can earn. Some analysts, customers and even former marketing executives have been calling on Fidelity to close Magellan.
Magellan's performance ranks No. 240 of 405 growth stock funds tracked by Bloomberg over the past three years, rising at an annual rate of 21.53 percent. That performance is down on a relative basis from its heyday in the 1980s when Lynch was managing the fund and its assets were much smaller.
When Lynch was named manager of Magellan in May 1977, the fund had $22 million in assets. By the time he left in mid-1990, it had $12.3 billion.
Since early 1996, some of Fidelity's best-known fund managers left for other jobs as the company lost ground in the $4 trillion mutual-fund business. Fidelity is still first in terms of market share, though Vanguard has been making inroads.
Lagging returns forced Fidelity to lower Magellan's management fees. The company said the fund's average management fee declined to $4.50 per $1,000 invested in the 12-month period ended March 31, down from $7.30 per $1,000 in the previous 12-month period.
Fidelity's statement said it would limit new purchases of Magellan "because we believe it is in the best interest of the fund's shareholders."
Stansky has been credited with revitalizing Magellan since taking control of the fund from Jeff Vinik in June 1996.
When Vinik stepped down as Magellan's manager, the fund's performance was below-average. Vinik had put 19.3 percent of Magellan's assets in bonds, mostly long-term Treasuries, and 8.5 percent in cash.
As of June 30, Magellan had none of its assets in bonds, 6 percent in cash and almost 94 percent invested in stocks, according to a company report.
The Magellan Fund has attracted net client cash inflows for the first time in almost 1 1/2 years, according to analysts. That's after almost $10 billion was pulled from the fund in the preceding 17 months, they said.
Pub Date: 8/28/97