Investors resist rushing into Magellan before it closes

Mutual funds

September 21, 1997|By NEWSDAY

Fidelity is finally closing Magellan to new investors while it is only a mere $62 billion, and growing. If you think you will be missing out on a legend, you have until Sept. 30 to jump in. But you may be alone in doing that: The legend is now more of a myth.

Most professional Magellan watchers don't think the giant fund is worth the 3 percent commission you'll pay for it. That's right: Magellan, the top-performing stock fund over the last 20 years, is not worth a lousy 3 percent load.

Investors seem to agree. Since the announcement last month, said Fidelity spokeswoman Robyn Tice, there has been no major inflow of new investors.

"Most retail investors already know there are lots of good no-load funds out there," said Jack Bowers, editor of Fidelity Monitor, a Rocklin, Calif., newsletter that follows the company.

Eric Kobren, executive editor of Fidelity Insights, a Wellesley Hills, Mass., newsletter for Fidelity shareholders, puts it this way: "Magellan is a matter of perception for a lot of people because it was the No. 1 fund over the last 20 years. But it isn't going to be No. 1 over the next 20."

While we're bursting bubbles, that No. 1 ranking as the best growth fund over 20 years bears some scrutiny. Most of that growth came before the 1987 crash.

Although the fund has had some excellent years since, Lipper Analytical Services Inc., a Summit, N.J., fund-ranking company, said Magellan ranked 32nd among all growth funds for the 10 years from Sept. 3, 1987, to Sept. 4 of this year, and 90th for the last five years.

Fidelity is also closing Magellan on an up note, the fund's watchers say, as the redemptions that troubled it for the past year have stopped. Money is slowly flowing back in.

New manager Robert Stansky has sold off the huge bond inventory left by predecessor Jeff Vinik and moved the fund more heavily into the big blue-chip arena where a fund of its size needs to play.

The resulting performance makes it looks like Fidelity is closing the fund from strength, not weakness.

Magellan started the year with about $54 billion in assets. After a 24 percent gain in its net asset value so far, the fund should have about $67 billion just from performance, even if no new money came in.

But it has only about $62 billion because shareholders pulled well over $5 billion out of the fund, even as cash continued to come in, mostly from retirement accounts.

Being closed is a relative term. It means that if you don't buy shares before Sept. 30, and you are not in a retirement plan that offers Magellan as an option by then, you won't be able to buy it.

But there are 4.3 million existing Fidelity accounts, many of them retirement accounts.

Participants in those accounts, even if they don't own Magellan now, will be able to buy it in the future.

In fact, Magellan already had become a retirement fund, since 73 percent of its assets are held in retirement accounts like 401(k) and 403(b) plans.

Cebra Graves, an analyst at Morningstar Inc., the Chicago company that rates mutual funds, pointed out in a recent assessment of the closing that "all current and future employees of General Motors, Intel, UAL (United Airlines), Fannie Mae and DuPont, to name a few" are or will be eligible to buy Magellan in the future.

Those 401(k)-type accounts are highly prized by fund companies because they provide a steady source of huge amounts of cash.

"A lot of companies were sold on Fidelity for their 401(k) plans because of Magellan," said William Daugherty, president of Kanon Bloch Carre, a Boston retirement-plan consulting firm.

"Magellan is a brand name that many people who don't know anything about investing know, and it gets them off their can to do something."

Daugherty thinks the closing is a good strategic move for Fidelity.

"They close the fund to protect their clients. It was a smart move to protect their biggest customers and keep them happy. All of that good will could have gone down the drain if Stansky began to get huge investment inflows again," he said.

Huge inflows, Daugherty and others said, make the fund harder to manage because it needs to buy the stocks of more, and larger, companies to make a dent in its performance.

Fidelity was seeking a slower, steadier asset growth for Magellan. But if the growth gets too slow, it can always reopen the fund. Closed funds reopen all the time.

Pub Date: 9/21/97

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