But last week, Magellan manager Jeffrey Vinik announced that he’s not only quitting the fund but is leaving Fidelity altogether to set up his own money-management company. Thus, Fidelity is installing its third new Magellan manager in less than six years. By contrast, Lynch ran the fund for 13 years. What’s going on here? Why has Magellan begun to devour managers at a rate seen only in professional sports teams? And, more important, do you want to put your money into Magellan? If your money is there now, should you leave it in?
To answer those questions, let’s emulate the fund’s namesake, Ferdinand Magellan, and take a voyage of discovery around the world of Fidelity. I don’t think Magellan’s problem is Vinik, who was chewed up and spat out by the job in less than four years. Or his predecessor, Morris Smith, who lasted only 25 months. But rather, as I wrote in March, I think the problem is Magellan itself. The fund is so big and its profile is so high that I doubt it’s sufficiently nimble to outperform the stock market by enough of a margin to make it worth your while. If Magellan isn’t going to be a star, who needs it? You can buy a boring, lowcost index fund instead.
Why shouldn’t you wait to see how Magellan’s new manager, Robert Stansky, performs? Isn’t he one of Fidelity’s brightest stars? Yes, but if you look at the fund’s post-Lynch record, you see a disturbing trend. The legendary Lynch outperformed the Standard & Poor’s 500 index by a whopping 13.6 percentage points a year. But his tenure began when Magellan was a private fund with only $6 million of assets. When he quit, the fund had $14 billion. Smith outperformed the S&P by 3.6 points, and the fund had $20.6 billion when he left. Vinik beat the S&P by less than a point, and the fund has $56 billion. See a pattern here?
To be fair, Vinik was going gangbusters until last fall: through Sept. 11, 1995, to be exact. Up to then, he had outperformed the S&P by 7.5 points a year, according to Morningstar Inc. Since September has underperformed the S&P by 20 points. That’s right, 20 points. He was an amazingly good 31st out of 363 growth funds during his up period, and an amazingly awful 812th out of 820 since then. Yech! In hindsight we can see that one of the reasons Vinik did so well at first was that he guessed right on technology stocks, and his co tinuing, massive purchases drove the price up, enhancing his performance. But when he began selling, it drove down prices hurting his perform as he continued to unload. Also, having guessed right on the techies, he guessed wrong by buying bonds, which have been stinko performers. This isn’t investing, it’s gambling.
Why did the controversial Vinik finally leave? He and Fidelity insist the firm asked him to stay, but that he felt the time had come to set up his own shop. I’m sure, though, that he and Fidelity had gotten on each other’s nerves, their denials notwithstanding. Not only was Vinik substantially underperforming the market, a major offense at Fidelity, but he kept running into problems. These started in November, when The Washington Post reported that Vinik was talking up one of Magellan’s biggest holdings, Micron Technology, at the same time Magellan was selling the the large amount of trading that Vinik was doing for his own account. This trading isn’t illegal, but guys like Vinik are paid very well to be full-time managers. It seems sort of tacky to be trading on the side, too. Fidelity and Vinik deny doing anything wrong.
Magellan can’t afford even a whiff of scandal. That’s because Fidelity uses Magellan’s reputation as a marketing tool when it pitches corporations looking for fund outfits to offer retirement accounts to their employees. Among the inducements: those employees can buy into Magellan without paying the 3 percent fee that Fidelity levies on new investors. If Magellan smells even a little bad, Corporations will shy away from it.
For his part, Vinik, 37, can’t have been having too much fun at the office lately. I suspect that things took a turn for the worse in January, when Fidelity chairman Edward (Ned) Johnson III told The Wall Street Journal, “I cannot tell you what went on inside his brain cells.” In a telephone interview with my colleague Daniel McGinn, Vinik said that remark had nothing to do with his leaving Fidelity. Vinik said Johnson " expressed sorrow that was printed, and told me all of the nice things he’d said that weren’t printed." Vinik said the public criticism didn’t bother him, either, and that “Every single day [at Magellan] has been fun and challenging.” Challenging, yes. Fun? Give me a break.
With any luck Vinik, who’s well regarded as a money manager, will earn much more money on his own than the estimated $5 million to $10 million a year he earned at Fidelity. And without the world’s looking over everything he does.
So Vinik has taken care of his problem. But what should you do about Magellan? For starters, there’s no reason to put any new money into this fund, which I think will continue to be hampered by its size. I don’t think Fidelity will break it up, even though it would help investors. If you already own Magellan shares, it gets complicated. If you own them in a tax-free account, there’s no reason not to switch to a find you like better. If you’ve got Magellan in a taxable account and have a big gain, selling would produce a big tax bill. Even if you find a better-performing fund, the capital-gains taxes you ship off to Uncle Sugar may leave you with fewer dollars than if you stayed in Magellan. However, you taxable types can start hedging your bets by taking dividend capital-gains payments in cash rather than reinvesting them in new shares.
Bob Stansky may beat the odds and make Magellan great again. But at this point, I sure wouldn’t bet on the fourth manager since 1990 thriving in the world’s biggest financial pressure cooker. Magellan is a great deal for Fidelity, generating more than $400 million a year in fees. But barring the unexpected, it sure doesn’t look like a great deal for you.
This canny stockpicker made Magellan a household name. And Magellan’s pehnomenal growth made Lyncy a legend. He took over the helm of the fund in May 1977,after it had been managed by Ned Johnson and Dick Habennann for 14 years. Over the next seven years, Magellan had its most successful run, outperforming the Standard & Poor’s 500 index by almost 26 points a year. By the time Lynch left in 1990, the fund’s assets had grown to $14 billion from just $6 milhon. Lynch, who said he was stepping down to more time with his family, is now vice chairman of Fidelity and an author of best-selling investment books. He serves on the boards of 17 charities.
Lynch was a tough act to follow but during his brief two-year stint, Smith delivered pretty good results, topping the S&P by 3.6 points annually. Magellan’s assets swelled to just over $20 billion during his tenure. Smith, an Orthodox Jew, stepped off the Magellan treadmill in 1992, saying he wanted to spend time in Israel with his family.
The onetime assistant to Lynch was considered a rising star when he took over in 1992. Vinik rode the high-tech boom successfully, topping the S&P by 7.5 points a year. But when he bombed on bonds, he slipped to 0.7. In recent months, Vinik came under fire for touting technology stocks at the same time he was dumping them.
A Lynch prtege, the manager of Fidelity’s Growth Company Fund is set to take the reins at Magellan next month. His track record is impressive-a 16.5 annual return for the Growth Fund since he took over in 1987, versus Magellan’s 14.6 percent for the same period. More conservative than Vinik, he is most likely to shine at Magellan if growth stocks perform well.
