Others Would Do Well to Follow Magellan
Fidelity Investments’ decision last week to close its Magellan Fund to new investors is a welcome if belated development, akin to shutting the barn door long after the horses have escaped.
Mutual funds often lose their sparkle when they grow too big. They may find it harder to beat the broad market if they must spread their assets among so many stocks that they come to resemble the market. Also, they may face rising transaction costs.
But most fund groups are reluctant to turn away new investors because it means curbing their own income, in the form of management fees charged as a percentage of assets.
At $63 billion in assets and more than 400 stock holdings, Magellan clearly has put on too much weight. Yet other funds that haven’t nearly reached Magellan’s size or stature might be better off closing as well--or at least their shareholders might be better off if they did so.
Here are four candidates:
* PBHG Growth. This fund has managed to miss 1997’s huge rally after also lagging in 1996. Manager Gary Pilgrim says the fund’s performance has been hurt because the types of stocks in which it specializes--small and medium-sized growth companies--have not kept pace with blue chips.
In absolute terms, the fund’s recent results are a far cry from what it achieved from 1991 through 1995, when it posted an average annual gain of 35%--fully 18 percentage points a year better than the Standard & Poor’s 500.
But 1995 also was the year when PBHG Growth broke above $2 billion for the first time. In 1996, it nearly tripled in size beyond that.
Pilgrim says he’s aware of the potential for asset growth to hurt performance. But he insists that it isn’t necessary to shutter PBHG Growth, because he still is able to invest in the desired types of stocks, in the desired quantities.
“We don’t believe assets under management are an issue until you begin to over-diversify, or own [too] many stocks,” he said. Time will tell if he’s right. In any case, reflecting the dismal performance of the last year and a half, PBHG Growth has seen its asset base stabilize at about $6 billion.
* American Century’s Twentieth Century Ultra Fund. This portfolio has grown so much that its personality has changed. Ultra used to buy small, obscure aggressive-growth stocks. It still uses the aggressive-growth label and claims to be investing in small and medium-sized companies, yet its top holdings imply otherwise. Ultra’s nine biggest positions are classic blue chips, led by the likes of Merck, Intel and Johnson & Johnson. It also holds many more stocks than it used to.
Ultra surged 86% in 1991, far exceeding the S&P; 500. But that same year, assets swelled to $3 billion from $500 million.
Since then, the fund has slightly trailed the market as assets have climbed to $23 billion. A spokesman says the company has no plans to close Ultra.
* John Hancock Special Equities. This fund focuses exclusively on small stocks, for which a fund’s size is even more critical than with big stocks. Because of their tremendous buying power, large mutual funds can push around the price of a thinly traded small stock if they try to take a meaningful position in the shares.
John Hancock last year pledged to shutter Special Equities when assets hit $2.5 billion. But that target just might be too high. As a rule, small-stock funds seem to lose their edge when assets top $1 billion or so. Sure enough, Special Equities, with nearly $2 billion, has started to lag its peers.
* Janus Fund. This fund beat the market from 1988 through 1991. But assets over that stretch also climbed, from less than $400 million to nearly $3 billion. Since then, Janus has lagged the S&P; 500.
Janus ranks among the top 3% of growth funds based on its 10-year record, Morningstar says. But it’s in the bottom 30% over the last five years and the bottom 20% over the last three years.
Janus now counts $19 billion in assets, with no plans to close. The fund owns roughly 140 stocks today, compared with fewer than 50 in ’90.
Russ Wiles is a financial writer for the Arizona Republic.
