Vinik, Like Citron, Had to Fold When Aces Stopped

If only he’d been allowed to hold on to his massive bet on long-term bonds, things might have turned out much differently for former Orange County Treasurer Robert Citron.

And so, someday, history may judge Jeff Vinik, who stepped down unexpectedly Thursday from the helm of the nation’s biggest mutual fund, Fidelity Magellan.

The once-proud Citron, whose own lawyers now paint him as a doddering old man with a limited grasp of finance, arguably drove Orange County into bankruptcy in 1994 with his bond investments. But for many years before then, Citron was crazy like a fox, earning hefty returns for the county with his eyebrow-raising style of investing.

Vinik, meanwhile, took over one of the financial world’s most difficult jobs in mid-1992, produced a 25% return in 1993 (more than double the market’s return), lost a mere 1.8% in the 1994 market downturn, then steered Magellan to a 37% gain in 1995, a performance better than three-fourths of all stock funds.

But since last fall, Vinik, like Citron before him, has viewed long-term bonds as a particularly good investment bet, boosting them to nearly 20% of Magellan’s $56 billion in assets. And like Citron before him, Vinik has so far been on the wrong side of long-term interest rates. As rates have surged this year, Magellan’s bonds have lost value, pulling down the fund’s performance.

For the year to date, Magellan is up just 4.2%, while the average stock fund is up 13.7%. In the mutual fund business, you can drive planets through a gulf that wide. And that is how money management careers often end.

Vinik, 37, says he wasn’t pressured to resign because of his bond bet, his performance or any other reason--presumably including the now-closed Securities and Exchange Commission probe into his own eyebrow-raising investment style. (He wasn’t shy about touting stocks in the media, then quietly dumping them.)

Yet it’s hard to imagine Vinik walking away from the highly lucrative Magellan job if he had been right about bonds this year, and was in the process of turning in another spectacular return on a fund that nearly everybody else believes is far too big to manage.

What is little discussed is that, given more time, Vinik’s bond bet may yet succeed brilliantly, just as Citron’s bond bet might have worked out OK if he had been given more time to wait for interest rates to reverse--which they did with a vengeance in 1995.

But the same things that made Citron and Vinik heroes when the market went their way--their conviction, willingness to take risks and willingness to maintain high public profiles (i.e., they were media stars)--quickly turned them into targets when their numbers began to look bad for only a relatively short period. How could they be so dumb? What do we pay these people for?

Citron’s world collapsed as the county’s incompetent supervisors panicked and pulled the plug on his portfolio. Vinik, at least, was able to simply walk away from what must have become absurd pressure, go home and play with his kids, and plot a new life as an independent money manager.

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For individual investors, the Magellan debate has seemed to focus on whether one should have money in such a big fund. That’s one issue. But the more relevant question may be: Are you more comfortable having your money with someone quietly effective, or with a star, someone who lets the world know exactly (or allegedly) what he or she is doing in the market--giving the media an easy target either for roses or brickbats?

William Gross, the 52-year-old chief bond strategist at giant Pacific Investment Management Co. (Pimco) in Newport Beach, knows too well what Jeff Vinik has been going through this year.

Gross, whose team manages $77 billion in bonds for clients, was expecting a weak economy in 1996, so his portfolio has been skewed toward longer-term bonds. So far, like Vinik, Gross has made a poor bet. And like Vinik, Gross’s public profile is huge: Eloquent and accessible, he is often quoted in the media about the bond market and about interest rates in general.

Which means that with every notch higher in rates this year, Gross has been called upon to defend his position in print. Has he made a mistake? reporters ask. Will he throw in the towel? What’s the problem?

“I can handle the client pressure and the market going against me,” Gross says. “But when you’re visible and take a position that is noted in the press, the pain is magnified.” It changes his temperament, he concedes, and not for the better. In times like this, “I am not an easy person to live with,” Gross admits.

But he also admits that the job is richly rewarding, and that he has clearly understood all along how the emotional stakes would be raised--for himself and perhaps for clients--by his public image.

“For me to say, ‘I don’t need this [profile],’ and give it all up would be career death,” Gross says.

At the opposite end of the money management spectrum is the American Funds group, part of Los Angeles-based Capital Group. Although Capital manages some of the country’s biggest stock funds, including the $28-billion-asset Investment Co. of America, no single manager ever speaks for its funds, for a simple reason: Each fund is run by a team of people, each of whom manages his or her chunk of the assets independently.

The Capital method was specifically designed to avoid the “star system” of fund management. No fund manager at Capital will ever attain Vinik’s stature. But by the same token, neither will any of them feel that kind of debilitating public pressure.

Star managers “are just like matadors,” opines Capital senior partner Robert Kirby. “Every time they go out there, they expect to step a little closer to the bull--until one time, finally, they get gored.”

Capital’s results speak for themselves: Its funds, publicly silent as they are, include some of the most consistently successful of the last few decades. Capital, Pimco and Fidelity all have made their fund management cultures work well enough over the last 10 years to attract fantastic sums of money. The question going forward is whether the companies’ legions of investors--and the companies themselves--will allow their fund managers to stay with their convictions in markets that may be far more punishing than what we have known for most of the last 16 years.

Vinik won’t say it, but it’s hard to imagine that he didn’t feel that the long knives were out for him, and quite unfairly after a few months of poor results. The potential advantage that non-star-system fund firms like Capital have is that their managers can never become a bigger issue than the funds themselves.