Holders of Huge Magellan Must Be Patient With Subpar Results

The new boss of Fidelity Investments’ flagship Magellan Fund is trying to reverse the giant fund’s dismal performance by shaving its bond holdings and plowing more cash into energy and technology stocks.

But investors hoping for a quick turnaround at Magellan, the nation’s biggest mutual fund, are likely to be disappointed.

Magellan’s sheer size--it has $50.6 billion in assets--precludes the new manager, Robert Stansky, from making any rapid wholesale changes in the fund’s portfolio.

The fund is the equivalent of an oil tanker at sea, which means it can’t turn on a dime. To dump its enormous holdings of one stock on the market risks collapsing its price before the sale can be completed; to heavily buy another security risks sending its price soaring.

So few analysts were surprised after Fidelity disclosed Tuesday that Stansky is “proceeding deliberately” in overhauling Magellan. The fund has only slightly reduced its holdings in bonds and only slightly boosted its portfolio in technology and energy stocks.

“He’s taken it very cautiously, and he’s interested in not disrupting the liquidity of the market” by buying or selling huge amounts of stocks or bonds, said Eric Kobren, publisher of Fidelity Insight, an independent newsletter.

Nonetheless, there is pressure on Stansky to improve Magellan quickly, not only to prevent further withdrawals from the fund itself, but because Magellan has acted as a magnet to draw investor money into other funds of Fidelity. Assets in the company’s funds now total $452 billion, making it by far the nation’s largest fund group.

For now, Magellan’s holders are going to have to be patient with subpar results. Indeed, as of last Friday, Magellan still had the worst total return--that is, price gains plus dividends--among the nation’s 10 largest funds, according to the research firm Lipper Analytical Services.

Magellan’s negative 0.5% return not only trailed the 6.9% year-to-date return of the benchmark Standard & Poor’s 500-stock index, it also was the only fund among the 10 largest to show a loss, Lipper said.

Moreover, investors have to pay a 3% load, or sales charge, to invest in Magellan. So they’re effectively doing even worse than their counterparts in no-load funds.

None of this was expected when 1996 began. But in just a few months, Magellan went from being one of the industry’s perennial best performers to among its worst.

The culprit: a disastrous bet by Stansky’s predecessor, 37-year-old Jeffrey Vinik, who put nearly 30% of Magellan’s cash into bonds and cash, as opposed to Magellan’s typical habit of investing nearly all of its assets in growth stocks.

Returns on bonds and cash badly trailed stock prices as the year unfolded, and Magellan’s fortunes sank.

Amid intense public scrutiny, Vinik resigned in May and was replaced by Stansky. But if anyone thought Stansky would quickly throw Vinik’s formula out the window, he or she was proved wrong.

Stansky is not yet publicly commenting on his investment decisions, a Fidelity spokesman said.

But in his first two months on the job, Stansky had shaved Magellan’s bond holdings only slightly, to 18.6% as of June 30 from 19.3% on May 31, according to a report Fidelity issued Tuesday on the Internet’s World Wide Web.

Fidelity also noted that Magellan’s investment profile continues to include “utilizing the broad spectrum of security types” to find hefty returns, whether they be stocks, bonds or something else.

As for stocks, Stansky increased Magellan’s holdings of energy issues--the industry where the fund has its biggest exposure--to 13.5% from 12.4%, the report said.

He also nudged up technology holdings up to 3.6% of the portfolio from 2.6% a month earlier. But as Fidelity pointed out, that’s still far less than the 11.7% weighting that technology issues have in the S&P; 500.

Michael Lipper, Lipper Analytical’s president, said that if Magellan continues to founder, there is concern that the fund won’t be able to keep attracting substantial assets.

“It should see reasonable gains in assets, as long as its performance is acceptable,” if only because Magellan gets a steady stream of new funds from 401(k) employee-retirement plans, Lipper said.

But as Magellan’s investors wait for improvement, their patience is being tested.

In May and June, they yanked $1.5 billion out of Magellan, a mere 2.7% drop in its total assets but still a record dollar withdrawal for a single fund in such a short period.

Fidelity’s figures for July aren’t yet available for Magellan.