Biggest U.S. Fund Gets New Manager : This Departure Holds Lessons for Investors
During his tenure as manager of the behemoth Fidelity Magellan Fund, Jeffrey N. Vinik raised eyebrows.
At one point, nearly half the equity fund’s assets were invested in just one industry: technology. Later it was nearly 20% invested in bonds. Vinik also came under fire for recommending stocks that his fund was selling. And he was always under extreme pressure to beat the market, even as Magellan’s size made this increasingly more difficult.
Thus, Vinik’s departure, and the appointment of Robert E. Stansky to replace him, raise some important questions for fund investors. What are the constraints on how funds can invest your money? What possible conflicts of interest confront fund managers? Is it realistic that a big fund can beat the market? What questions should you ask about a new fund manager?
Here are some answers to those and other questions:
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Q: Why should I care about Vinik?
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A: As manager of the nation’s largest mutual fund, Vinik had a place in the investment portfolios of 4 million Americans. Magellan, with $56 billion in assets, was big enough to move markets. For those reasons alone, Wall Street watched Vinik like a hawk.
However, for individual investors, Vinik’s main importance may be that he illuminated the vast discretion mutual fund managers have when investing fund assets. Although he ran a broad-based equity fund, he often made huge bets on specific industries.
Although few managers are as well-known, many are willing and able to place the same type of bets. That means individual investors need to be more aware about who is managing their mutual funds.
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Q: Vinik’s huge play in bonds seemed unusual for a fund that was supposed to be in stocks. How do you know if you’re getting stocks when you invest in a stock fund?
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A: You can’t know on a day-to-day basis, but you can know on an overall level by checking the investment objectives and policies in fund prospectuses, says John Collins, a spokesman for the Investment Company Institute, trade group for the fund industry.
The investment objectives--generally found on the front cover of a prospectus--are likely to be simple: “Growth of principal through investments in U.S. stocks” or “Current income and preservation of principal through investments in government bonds,” for example.
The “investment policies” section, buried in the middle of these lengthy and dense documents, are usually a bit more specific. Here is where you’ll find out if the manager can buy global stocks, derivatives, options or futures contracts, for example, as a way of achieving the fund’s investment goals. You should always read this section carefully to be sure that the fund isn’t allowing risks or strategies you can’t tolerate.
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Q: How do I check up on a fund manager?
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A: Mutual funds send out detailed reports twice annually, which show just what the fund owns and what the manager has been doing over the last six months. In addition, some fund companies will provide more current information if you ask.
Fidelity, for example, makes monthly investment reports on all its funds available online at its World Wide Web site at https:www.fid-inv.com. Even fund companies that don’t have personal Web pages usually have toll-free investor services lines.
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Q: What about a fund manager’s conflicts of interest? Vinik was criticized for making bullish comments about Micron Technologies when it appeared his fund was selling the stock. Is that illegal?
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A: Market manipulation involves making statements that affect a company’s stock price and then using that temporary market swing for personal or professional profit.
Although it was clear that Vinik made some positive comments about companies his fund sold or was selling, it was unclear whether his comments were designed to, or capable of, affecting the market price of these stocks.
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Q: What about his personal trading? Wasn’t there also some scandal about how he traded in his personal account?
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A: At one point, the Washington Post reported that he was being investigated for “front-running,” a process where fund insiders trade in their personal accounts before buying or selling stock on behalf of the fund, a charge Fidelity and Vinik flatly deny. Front-running is prohibited because it can allow fund insiders to profit at the expense of fund shareholders.
Most fund companies, including Fidelity, have strict policies on any personal trading by fund managers. In Fidelity’s case, fund managers are not allowed to buy or sell stock for their own account within seven days of buying or selling the same shares on behalf of the fund.
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Q: With a fund as big as Magellan, it’s pretty hard to beat the market and yet that’s what fund managers are expected to do. Isn’t it possible that Vinik took risky bets, such as investing disproportionately on technology stocks, because that was his only hope of beating the stock averages?
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A: Certainly, says Donald Phillips, publisher of Morningstar Mutual Funds in Chicago. In fact, many an industry pundit has opined that to beat the market, you’ve got to be different from the market. Both Vinik and his famous predecessor, Peter Lynch, were willing to take big gambles on particular stocks or industry groups that they like.
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Q: The appointment of Stansky as new manager of Magellan makes me wonder if I should stay in the fund. How do I find out about new fund managers?
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A: Stansky, who has been with Fidelity for 13 years, is considered to be a little more traditional than Vinik, more likely to stick strictly to stocks and less likely to make huge bets on individual industries.
However, the best way to check him out is to look at his performance record over long periods of time. These records are available through Fidelity. In addition, investors can look up the particulars of the funds--including the percentage holdings in specific asset classes--by picking up a copy of Morningstar’s mutual fund reports at a brokerage firm or library.
