Magellan is tribute to narrow focus

Playing to retirement funds has removed valuable spunk


News item: Fidelity Magellan, which long ago gave up its title as the world's largest mutual fund, isn't even the biggest fund at Fidelity anymore.

Magellan, which still invests $52.5 billion for its shareholders, recently took a back seat to Fidelity's Contrafund and its $55.7 billion under management.

Magellan shareholders should lose no sleep over their fund's declining status as an industry behemoth. Funds that grow too big generally find the bulk an impediment to delivering good investment returns.

But the shift in status between Magellan and Contrafund illustrates a compelling question for the entire mutual-fund industry. Do investment companies that narrow the focus of mutual funds to fit retirement account menus go too far for their own good?

Retirement account sponsors and their consultants want funds that offer specific types of investment styles, focusing on things like small-cap value stocks or large-cap growth shares. Investment firms began to comply by the later 1990s because they saw 401(k) plans and other retirement accounts as their main source of new business.

Fund managers were given clear orders and monitored by internal style police. Many of them chafed at restrictions they said made it harder to deliver superior returns.

This played out in dramatic fashion at Fidelity, where managers had been famously independent and investment stars were born. Bob Pozen, then president of Fidelity's investment arm, became the enforcer, and he made quick work of the old cowboy culture.

Magellan and its manager, Bob Stansky, are the clearest examples of how much things changed. Stansky, a skilled stock-picker in his earlier Fidelity career, has managed a Magellan portfolio that looks and acts strikingly like the S&P 500.

Fidelity and Stansky insist he never has been required to cling to the big stock index, but a long record consistently says otherwise.

The results are never terrible, just a little disappointing year after year. Magellan's performance ranks below industry averages for every commonly measured time period from one year to 10 years, according to Lipper Inc.

Meanwhile, Contrafund seemed to avoid most of the style restrictions. As its name implies, Contrafund was created to zig when the market zagged.

Contrafund did not go off wildly in different directions, but it did move around, and the portfolio reflected a broad investment selection. Fund manager Will Danoff's current top holding is cash, representing more than 8 percent of his portfolio. Top 10 stocks include older companies like 3M Corp., Exxon Mobil Corp., and Aetna Inc., alongside big positions in businesses like Genentech Inc., Google Inc., and Yahoo Inc. More than 15 percent of Contrafund is invested in foreign stocks.

Contrafund, now Fidelity's best-selling fund, ranks eighth this year among industry leaders in net sales, according to Financial Research Corp.

Investors have been pulling billions out of Magellan, which is fading as a retirement fund favorite and has been closed to new investors for a long time.

But the experience of Magellan and Contrafund illustrates this: Excessive portfolio restrictions intended to attract business become a self-defeating strategy when they damage performance. Investors offered every style of mediocre performance by active investment managers will soon discover index funds do the same job better.

Steven Syre is a columnist for The Boston Globe.

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