Magellan Missing Out on Rally
Fidelity Investments’ flagship Magellan Fund is missing much of this year’s stock market rally because of huge investments in U.S. Treasury bonds.
The $55.5-billion fund increased its bond holdings to 18.9% of its portfolio in January from 16.6% in December, according to a report released Tuesday by the nation’s biggest mutual fund group. Manager Jeffrey Vinik also boosted the fund’s cash position to 15.8% in January from 15.5% in December.
Vinik’s bond purchases came just before Treasury prices plunged, driving yields on the benchmark 30-year government bond to six-month highs this week. The 30-year bond yield averaged 6.05% in January. Since then, the yield has averaged 6.32%, and on Tuesday it rose to 6.66%.
“The fund’s bond and cash positions have really been hurting the fund so far this year,” said John Bonnanzio, editor of Fidelity Insight, an independent newsletter that tracks the group.
Overall, Magellan had less money invested in the stock market at the end of January--65.3% --than at any point since former fund manager Peter Lynch took control of the fund in 1977, Fidelity said.
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Some analysts said Fidelity is straying from its mission by making such a big wager on the direction of interest rates.
“Fidelity’s forte isn’t making macroeconomic bets, it’s picking stocks,” said Don Phillips, president of Chicago’s Morningstar Inc.
The investment in bonds is “a contrarian approach for the fund that’s designed to maximize capital appreciation,” said Robyn Tice, a Fidelity spokeswoman. “The fund has frequently taken a contrarian approach,” she said.
The approach has depressed the fund’s performance. Magellan Fund was up 0.9% this year on a total-return basis as of the close of trading Monday, compared with 4.37% for the Standard & Poor’s 500 index.
The performance is in sharp contrast with the previous three years, when Magellan returned an average 18.75% a year, placing it in the top 6% of all growth stock funds, according to Morningstar. Vinik was not available for comment.
Other big Fidelity funds also are lagging, partly because of their bond and cash positions.
“Only six of Fidelity’s 23 actively managed growth stock funds are keeping pace or exceeding the S&P; 500 right now,” Bonnanzio said. Fidelity Dividend Growth Fund is recording the biggest advance. It’s up 6.4% this year, he said.
Fidelity said Monday that it will change managers of 26 equity mutual funds in a move that analysts saw as an attempt to improve investment performance. Vinik was not affected by the changes.
