Biggest U.S. Fund Gets New Manager : Criticism and Controversy Dogged Vinik
Following a bad bet on bonds, months of lagging performance and controversy, Jeffrey N. Vinik resigned Thursday as manager of Fidelity Investment’s Magellan Fund, by far the nation’s largest mutual fund.
The company immediately put its flagship fund in the hands of another veteran with a steadier track record. Boston-based Fidelity named Robert E. Stansky, 39, manager of the Fidelity’s highly successful Growth Company Fund since 1987, to succeed Vinik, 37, who has managed Magellan since 1992.
Like Vinik, Stansky had once been an assistant to Peter Lynch, the legendary stock picker who brought Magellan to prominence in the 1980s. Under Lynch, who ran the fund from 1977 through 1990, Magellan had an average annual return of 29.23%, compared with 15.81% for the Standard & Poor’s 500-stock index.
Fidelity executives and Vinik insisted that the decision to leave was Vinik’s own--even though he lately had become a lightning rod for bad publicity for the company, including a recent cover story in BusinessWeek magazine questioning whether Fidelity could retain its preeminence as the nation’s top mutual fund firm.
Highlighting Magellan’s importance, the announcement of Vinik’s departure was cited as a factor in Thursday’s drop in stock and bond prices. The drop reflected concerns, denied by Fidelity, that Magellan might move abruptly to sell off Vinik’s large investment in U.S. Treasury bonds.
Analysts and executives at other mutual fund companies said Vinik’s decision to leave now reflected the pressures that managers of major mutual funds face when they experience short-term drops in performance, particularly if they decide to depart from the stated goals of their funds.
Magellan, with $56 billion in assets, has long been the premier growth fund, seeking to make customers’ investments appreciate by buying stocks in promising companies. As the stock market has enjoyed unprecedented gains for well over a year, money poured into the fund, including growing amounts of pension and retirement money sent in with the expectation that it would go into stocks.
Vinik, who officially steps down June 3 but will remain until the end of June to aid in the transition, said that after 10 years with Fidelity he had decided to found a company that would manage money for institutions and wealthy individuals.
“Now seems like the right time,” he said in an interview, adding, “I’m very proud of my long-term record.”
Vinik said he had accomplished most of his goals, including outperforming the return of the Standard & Poor’s 500-stock index by about 6 percentage points since 1992. (The cumulative return on the Magellan Fund during his tenure was 83.7%, compared with 77.8% for the S&P; 500.)
“I always wanted to have my own money management company,” he said. “I do for myself what I think is in my own best interest.”
William J. Hayes, chief operating officer and head of Fidelity’s stock funds, said in an interview that the firm had unsuccessfully tried to persuade Vinik to remain as head of Magellan. “We were very pleased with the results he generated,” Hayes said.
Concerned that the stock market’s dizzying run-up in 1995 may have gone too far, Vinik late in the year began shifting billions of dollars from stocks into Treasury bonds and cash, with more than $20 billion going into bonds.
So far at least, the bet has failed. Magellan’s total return so far this year--its price gains plus dividends--is 3.29%, the worst record among the 10 largest equity funds in the nation, according to Lipper Analytical Services.
The announcement of Vinik’s departure prompted calls by some mutual fund experts for Fidelity to close Magellan to new investors until the transition has been completed and Stansky’s investment strategy is in place. But Hayes said Fidelity wouldn’t do that.
Under Stansky, the Growth Company Fund grew by 280% since 1987, compared with a 197% return on the S&P; 500. It has $7.5 billion in assets.
Statistics from other sources show that since 1987, the Growth Company Fund had an average annual return of 16%, compared with 14.6% for Magellan. Since the beginning of this year, the Growth Company Fund’s total return has been nearly 12%.
Jack Bowers, editor of Fidelity Monitor, an independent newsletter for Fidelity investors, said Stansky is likely to invest Magellan’s assets more aggressively in stocks and withdraw from bonds.
But he contended that Stansky “is not a gunslinger like Vinik” and is less likely to make big gambles on single industries or abruptly shift investment strategies.
According to Hayes, there were no signs Thursday that the announcement was having much effect on Magellan’s investors. He called it “a nonevent” and said the amount of new money coming into the fund closely matched the amount being withdrawn.
In addition to the bond investment, Vinik has stirred controversy in a number of ways. He had earlier bet an extraordinary 45% of Magellan’s assets in technology stocks. Then, late last year, as those stocks began to decline, questions were raised about favorable public comments Vinik had made about the stocks while Magellan was secretly selling them off.
The Securities and Exchange Commission investigated, and a Fidelity spokeswoman said it had received formal notice from the SEC on Thursday that the agency closed the investigation without filing any charges.
But the incident prompted more than a dozen shareholder lawsuits, including by holders of Micron Technology, one of the companies Vinik had spoken favorably of. The suits accuse Vinik of stock manipulation. Vinik has denied any wrongdoing and said Thursday that if given another chance he would not do anything differently.
According to Bowers, the Fidelity Monitor editor, “Vinik had to have seen the writing on the wall. He knew he was a public relations nightmare from the Micron [Technology] situation. He knew his bond bet had gone bad.”
Fidelity in recent months has made a number of changes in management of its stock funds. As more and more new investors have put money into stock funds, Fidelity’s assets have doubled in the last three years to $400 billion and the firm has been taking in about $5 billion a month.
Through new fund managers and changes in the way the funds are supervised, the company has moved to try to smooth out wide swings and assure a more reliable return. But in doing so, it has come in for criticism that it is changing the investment culture that made Fidelity so successful, encouraging managers to make bold moves and not necessarily follow the pack.
Hayes contended that fund managers, including Stansky, will continue to enjoy great freedom and that investment policies won’t be dictated from above. “Our fund managers have as much control over their investments in their funds as they ever have,” he said.
* THE NEW GUY
Analysts expect Robert Stansky will be able to get Magellan back on track. D5
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Giant Fund’s Odyssey
A chronology of Fidelity’s Magellan Fund, its managers and growth:
* May 2, 1963--Edward Johnson III founds Magellan Fund, then called Fidelity International Fund, with the goal of capital appreciation.
* January 1972--Johnson gives up management of Magellan to become president of Fidelity Investments. Dick Habermann takes over as portfolio manager and the fund’s assets stand at $9 million.
* June 1977--Peter Lynch takes over from Habermann. When Lynch arrives, Magellan’s assets stand at $22 million.
* June 1990--Lynch resigns as portfolio manager to spend more time with his family. When he leaves to become vice chairman of Fidelity, Magellan’s assets are $14 billion. Morris Smith is named to replace Lynch.
* June 1992--Smith resigns to take a sabbatical. In the two years he manages the fund, Magellan’s assets grow to $20.6 billion. Smith is now chief investment officer for Chestnut Hill Management Corp.
* July 1, 1992--Jeffrey N. Vinik is named Magellan’s portfolio manager. During his tenure, Magellan becomes the largest mutual fund in the U.S. In the less than four years he has managed the fund, shareholders received a total return on their money of 83.7%.
* May 23, 1996--Vinik resigns. Magellan’s assets stand at more than $56 billion. Robert Stansky is named his replacement.
COMPARING PERFORMANCE
Total return on Fidelity’s Magellan Fund and Growth Company Fund and Standard & Poor’s 500 stock index for the past 10 years:
Magellan
Growth Company
S&P; 500
Sources: Lipper Analytical Services, Associated Press. Researched by JENNIFER OLDHAM / Los Angeles Times
