Fidelity's Magellan Fees Slide
By 38% Amid Fund Troubles
Its Subpar Performance, Shrinking Size
Took a Toll in Management Firm's Half
By JOHN HECHINGER
Staff Reporter of THE WALL STREET JOURNAL
BOSTON -- Fidelity Magellan Fund shareholders aren't the only ones licking their wounds in the bear market. Its management company, Fidelity Investments, collected $118.4 million -- or 38% -- less in fees during its most recent six months of overseeing the giant fund.
The reason: the shrinking size and subpar performance of Magellan, the biggest stock fund that is managed actively -- that is, not on autopilot to track the performance of a market index.
Fidelity, the nation's largest mutual-fund firm, disclosed the sharp fee decline in Magellan's semiannual report, which detailed operations for the six-month period ended Sept. 30. The document disclosed the company received $190.3 million for managing Magellan in that period, its fiscal first half, down from $308.8 million in the year-earlier period.
Fidelity receives management fees based largely on the size of the fund, which declined 25%, to $53.4 billion from $71.6 billion a year earlier. Magellan's assets have shrunk amid the declining stock market and billions of dollars in investor withdrawals.
But Fidelity's drop in fee income was especially severe because Fidelity also gets paid for its stock-picking prowess. The company receives a bonus when Magellan beats the Standard & Poor's 500-stock index, a broad measure of the market, over a trailing three-year period, and realizes a penalty when it falls behind.
In the past, Robert Stansky, the fund's manager, has beaten that benchmark. But in the three-year period ended Sept. 30, 2002, Magellan posted an annualized loss of 12.94%, just slightly behind the S&P 500, according to research firm Morningstar Inc. So Fidelity gave up all of the $69 million bonus it had earned in the year-earlier first half, and was penalized an additional $388,000.
Fidelity spokeswoman Anne Crowley noted the company is one of the few in the industry that gets paid less for poorer performance. "We believe it aligns our interests with those of shareholders," she said. Ms. Crowley added that Mr. Stansky, who wasn't available to comment, was "an excellent manager" whose five-year returns were better than the overall market. Fidelity's 2001 revenues were $9.8 billion, and its net income was $1.33 billion.
Still, the decline comes at a humbling time for Magellan, which had been the largest mutual fund of any kind until April 2000, when it was surpassed by Vanguard 500 Index Fund. Recently, with investors fleeing equities, a bond fund, Pimco Total Return Fund, eclipsed first Magellan, then Vanguard 500. As of Sept. 30, Pimco had become the largest stock or bond fund, according to Morningstar, when all shares classes are counted.
Analysts said the lower fees from Magellan and other funds show why closely held Fidelity, which has tried hard to diversify its business into fields apart from money management, recently said it was laying off 1,695 employees, or 5% of its work force. In its fiscal year ended March 31, 2001, Magellan raked in an eye-popping $710.3 million for managing Magellan, during a period when the fund's assets topped $100 billion.
Jim Lowell, editor of newsletter Fidelity Investor, said Magellan's drop in fees "makes my jaw drop" and likely suggests the fund industry is headed for more layoffs. "If I were in the mutual-fund industry today, I would be polishing off my résumé," Mr. Lowell said. "Today, the bell tolls for Magellan; tomorrow it tolls for every other mutual fund."
But Eric Kobren, executive editor of newsletter Fidelity Insight, pointed out the Magellan still receives far higher management fees than Vanguard does for managing its index fund and Pimco for overseeing its bond pool. "It's still the most profitable fund in the country," Mr. Kobren said.
In the six months ended Sept. 30, Magellan posted a loss of 27.8%, slightly ahead of the S&P 500. In the report to shareholders, Mr. Stansky said bets on media company Viacom Inc. and health-care stocks, such as United Health Group Inc., a health-maintenance organization, helped performance. But picks such as retailers Home Depot Inc. and Best Buy Co. hurt, as investors worried about a slowdown in consumer spending. So did a bet on Tyco International Ltd.
Mr. Stansky appears to like financial stocks, the largest holdings of the fund, making up almost a quarter of Magellan, including Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. The manager said he wanted to position the fund with stocks that would benefit most from an economic upturn, while being cautious about the most volatile companies, especially in technology.
"I don't see concrete signs of economic improvement yet," Mr. Stansky said. In particular, he said: "I just haven't yet seen any sign of a resumption of corporate spending on new technology, which is a key catalyst for any potential recovery in that sector."
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FUNDS VS. INDEXES: U.S.-stock mutual funds generally trailed market benchmarks in the five years through September, according to a new analysis by S&P comparing fund results with various S&P indexes. But the funds have been more competitive with the indexes since the bear market began, albeit typically by losing less money, S&P said in the first of what it says will be quarterly editions of its Standard & Poor's Indices Versus Active Funds Scorecard.
In three categories of large-stock funds, the percentage of actively managed funds trailing the relevant S&P indexes in the past five years ranged from 50.8% to 65.4%. In the past three years -- a period encompassing the bear market that began in 2000 -- the percentages of active funds trailing the benchmarks declined to between 37% and 42.1%. However, a majority of actively managed midcap and small-cap funds trailed S&P benchmarks in both the five-year and three-year periods, S&P said. |
