Magellan Raised Bet on Bonds in February

Fidelity Investments’ Magellan Fund increased its controversial bet on U.S. bonds in February, just before the market suffered its worst one-day rout in more than eight years, a monthly report to holders Wednesday shows.

Magellan manager Jeff Vinik raised the fund’s bond holdings to 19.4% of the $56.2-billion portfolio at the end of February from 18.9% in January, the report says.

The timing could not have been much worse. On March 8, the Treasury bond market suffered its worst rout since 1987 as a report of a surge in job creation fanned concern that the economy might be growing fast enough to accelerate inflation. For the month, the decline in Treasury prices drove the yield on the benchmark 30-year bond to 6.67% from 6.47%.

Vinik’s decision to load up on bonds has made Magellan, the nation’s largest stock fund, one of the worst performers this year. Through April 4, the fund ranked 1,896th of 1,994 general equity funds tracked by Lipper Analytical Services Inc.

Some investors are calling for Vinik and Magellan to get back to picking stocks rather than making wagers on interest rates.

“We’re moving some of our clients’ money out of Magellan because of the fund’s big holdings in bonds,” said Doug Wilson, who oversees about $116 million in retirement plan assets for executives at General Motors Corp.

“Magellan has always been a large equity fund, and now it seems more interested in timing changes in the financial markets,” Wilson said. “It’s just not performing with the market right now.”

Magellan Fund was up just 1.33% this year at Tuesday’s closing price. In contrast, the benchmark Standard & Poor’s 500 index rose 4.3% and the average U.S. stock fund was up 5.7%.

Fidelity said it is wrong to focus on Magellan’s short-term returns. “You have to focus on the fund’s long-term performance,” spokeswoman Robyn Tice said. Vinik declined to comment.

Magellan has risen at an annual rate of 16.21% over the past three years, putting it in the top 25% of all growth stock funds tracked by Morningstar Inc.

Since taking over the fund in July 1992, Vinik has been known as a trader, devoting large portions of the fund to areas he thinks will take off. Last April, he devoted almost half the fund to technology stocks.

“It’s too early to say that [Vinik] missed the boat this year,” said Jack Bowers, editor of Fidelity Monitor, an independent newsletter that tracks the mutual fund giant.