TO ALL ---- LOOK WHO IS # 2 ---The Wall Street Journal -- November 17, 1997
Fund Track:
Magellan Isn't Index Fund, Stansky Says
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By Robert McGough
Staff Reporter of The Wall Street Journal
The manager of the $64 billion Fidelity Magellan Fund, the largest mutual fund in the U.S., said the huge vehicle is more than a "glorified index fund."
The comments by Robert Stansky were published in Magellan's semiannual report, made public on Friday. In a portion of the report devoted to Mr. Stansky's comments, he mentioned the fund's performance turnaround since he took the reins in June 1996 from its prior skipper, Jeffrey Vinik, who left Fidelity.
Referring to the Standard & Poor's 500 index, which has beaten Magellan and most other stock funds in recent years, Mr. Stansky said, "I want to beat the index over time" by using extensive research on companies to pick stocks. Mr. Stansky said the fund's portfolio is quite different from the S&P 500, because it holds only 242 of the 500 stocks in the S&P 500, and he invests in various industries in different proportions to the index.
Some analysts aren't convinced, though, that the fund will look all that different from the index. John Bonnanzio, editor of FundsNet Insight, a Wellesley, Mass., newsletter, says there have been statistical signs in the past year that the fund's performance has looked more and more like the index.
In the 12 months through Sept. 30, Magellan's 35.81% return fell behind the 40.45% return for the S&P 500. But Mr. Stansky succeeded in his goal in the six months through September, as the fund's 27.81% return edged out the S&P 500's 26.3% return.
Magellan's recently improved performance wasn't enough to erase the hit Fidelity is taking in the fees it gets from investors to manage the enormous fund. Fidelity's "basic" fee of $174 million was reduced by $49 million in an adjustment for poor performance during the six months through Sept. 30. Unlike most mutual-fund firms, Fidelity's management fee gets adjusted up or down based on whether the funds beat certain benchmarks over a given period, often three years.
Since taking over Magellan, Mr. Stansky boosted the fund's performance by switching the bonds and cash Mr. Vinik had amassed into stocks. The biggest single stockholding at Sept. 30 was General Electric, at 3% of the fund's assets. The second-biggest, Compaq Computer, had grown to 1.8% of the fund from 0.7% six months earlier-but that may have mostly been due to price appreciation, because Mr. Stansky noted that the stock had more than doubled in price in the past six months.
One change in Magellan under Mr. Stansky that hasn't attracted much attention: He has cut way back on the fund's trading. In the six months through Sept. 30, the fund's "turnover," or the rate at which Magellan trades its holdings, had dropped to 31% a year. Under Mr. Vinik, Magellan's turnover was frequently well over 100% a year.
It's possible that Mr. Stansky is slowing Magellan's rate of trading stocks as a concession to the fund's enormous size. At his prior fund, Fidelity Growth Company, he frequently had turnover rates of more than 100% a year, and sometimes more than 200%, according to data from Lipper Analytical Services Inc. Many fund analysts argue that large funds that trade heavily trip over their own feet, in essence, because they distort the prices of the stocks they are buying or selling in volume.
In a clear concession to size, Fidelity closed Magellan to most new investors not in retirement plans on Sept. 30.
FIDELITY MANAGER CHANGE: Fidelity Investments replaced Bettina Doulton as portfolio manager of the Fidelity Advisor Balanced Fund and the Variable Insurance Products Fund III.
Ms. Doulton, 33 years old, will continue to manage two larger funds, the Puritan Fund and Equity Income II. John D. Avery, 33, was named portfolio manager for Advisor Balanced and the VIP fund. He will continue to manage the Select Regional Banks portfolio as well.
"It's an attempt to take a little bit of the load off of her back because she has been having trouble with Equity Income II," said David J. O'Leary, president of Alpha Equity Research, which follows Fidelity.
Equity Income II, with $16.2 billion in assets, is up 19.7% so far this year-below the 20.6% average increase in equityincome funds, Mr. O'Leary said. Moreover, $1.87 billion in cash has flowed out of the fund so far this year-making it second only to the Magellan Fund in terms of outflows.
The other funds, Puritan, with assets of $21.9 billion, Advisor Balanced, with assets of about $3 billion, and VIP, with about $200 million in assets, have all been performing well.
Alpha Equity Research previously said it expected seven managers overseeing 10 poorly performing Fidelity funds to be reassigned over the next three months. Mr. O'Leary, for instance, predicted Ms. Doulton would be replaced as manager of Equity Income II. A spokesman for Fidelity previously denied any such moves were coming, saying "there's just no basis to the speculation."
On Friday, the spokesman said the change "has absolutely nothing to do with performance," but it "has the benefit of lightening Bettina's workload." Asked if other portfolio-manager changes were coming, the spokesman said "not that I know of."
-- Dana Milbank
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