Some signs of staleness at Magellan

Your Funds

March 28, 2004|By CHARLES JAFFE

FIDELITY MAGELLAN, arguably the most recognized mutual fund in the entire investment world, is a bit like a grand old restaurant that's past its prime.

You can come away from the table satisfied, but you're no longer thrilled with the experience.

As the flagship of the world's biggest fund company, Magellan is one of the most popular funds for retirement investors and savers worldwide. As the first "brand name" fund, Magellan was the cornerstone upon which the company was built, at the heart of its sales of retirement programs, the fund every corporate benefits executive could feel good about offering employees in a 401(k) plan.

Today, however, it's hard to find anyone who thinks much of Magellan.

Instead, most observers think it's a dinosaur.

For the bulk of Magellan's shareholders - retirement savers - the distant past and the present create a quandary.

No matter how badly Magellan has aged, it remains a landmark name that's hard to give up. (Full disclosure: Magellan was one of my first fund investments, though I sold it when I joined The Boston Globe in 1994, in order to avoid potential conflicts of interest in covering the company.)

Magellan has lagged behind its benchmark index, the Standard & Poor's 500, over the past one-, three-, five- and 10-year periods.

The last time it slew the index was 1998; the fund has grown increasingly tied to the index since then, so much so that if the S&P were to move by 1 percent tomorrow, you'd expect Magellan to move 0.99 percent in the same direction.

Manager Robert Stansky appears to have become increasingly conservative, even as the bear market eased.

Magellan's holdings make it look like Stansky missed most of the technology rally of 2003, loading up instead on more staid, less risky issues.

That may make for decent returns, but it won't beat the market, which is Magellan's target.

Critics suggest that Stansky's hands are tied by top brass, that he's not allowed to steer such an important fund in a high-risk way.

Stansky, after all, took over for Jeff Vinik, whose tenure at Magellan included great numbers but also disappointment over some of his investment decisions.

Stansky generally doesn't say much about his fund, but he has always maintained he can steer Magellan in any direction he wants and he has never shied away from claiming responsibility for performance, even the bad stuff.

"Magellan is indistinguishable from an S&P 500 index fund in terms of how it actually behaves," says Jim Lowell of the Fidelity Investor newsletter.

"It has much fewer holdings and different weightings, but correlation doesn't lie and it tells you that the fund is quacking like an index fund.

"If you're a retirement investor and you're expecting something more than index performance, you're not going to be satisfied with Magellan."

And therein lies the problem for retirement investors.

If they have a retirement plan that offers a lot of choices, Magellan is probably not their best option. They can get exposure to the S&P 500 through an index fund for a lot less money, and if they want to take a shot at beating the market, they'll have a better shot with other large-cap blend funds, including several other issues run by Fidelity.

If they have only a few retirement offerings, however, Magellan is a fund that, though far past its prime, is a safe choice.

"If you have to have a big, bloated, weighed-down fund, where you don't want an index fund and want some slim hope of beating the S&P occasionally, Magellan is probably the best one to have," says Roy Weitz, founder of the Web site, which provides sell signals on mutual funds and which gives Magellan its lowest, "three-alarm" rating. "But for most people, I'd expect that it's a fund that has outlived its usefulness.

"If this were the only choice in your 401(k), you would not necessarily worry about reaching your retirement goals, but you might wind up with a lot more money at the end of the road if you weren't in a fund that appears so profoundly and permanently mediocre."

Stansky, for his part, isn't talking. He has long said Magellan will not be the fastest runner in the pack, and has maintained that if he's capable of underperforming the index by a few percentage points - as he did last year - that he's equally capable of beating it by that much in the future. His goal with Magellan has always been to beat the benchmark by three to five percentage points per year.

Like that grand old restaurant, Stansky and Magellan may again be able to give investors a taste of the past, but investors who have been comfortable with the fund for years need to decide whether it still has the flavor they want, or whether recent numbers and changed expectations have made them bitter enough to move on.

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