Rebounding Magellan on Pace to Beat the S&P;

The Fidelity Magellan fund, after four years of subpar performance, is back.

Magellan, the world’s largest mutual fund, is on pace to record a higher annual return than the stocks in the Standard & Poor’s 500 index for the first time since 1993. With less than a month left in 1998, the $76.3-billion portfolio is up 20.8% year to date, outpacing the benchmark index’s 20.2% advance. (Both figures signify total return, including reinvested dividends.)

“Magellan’s manager, Bob Stansky, deserves credit,” said David O’Leary, who runs Alpha Equity Research Inc. in New Hampshire and is one of Fidelity Investments’ most outspoken critics. “Stansky is beating the market, and that’s the name of the game.”

Just two of America’s 10 biggest stock funds are beating the S&P; 500 this year. The other is American Century Ultra Investors fund, up 22.6%.

Magellan regularly outdistanced the benchmark index under famed stock picker Peter Lynch, who ran the fund for 13 years until mid-1990. Since Lynch’s departure, Magellan has only beaten the S&P; in 1991 and 1993.

Computer stocks have been a “critical factor” in explaining the fund’s results this year, said Robert Pozen, the head of Fidelity’s mutual fund unit and Stansky’s boss. Magellan was lagging the S&P; 500 until last month, when its stake in Intel Corp., Microsoft Corp. and Cisco Systems Inc. each surged more than 15%.

Stansky, 42, wrote in a recent letter to fund shareholders that he used the market decline in September to buy stocks that he expects to report steady earnings improvement over the next few years. The fund’s holdings in computer-related companies rose to 21.6% of assets on Sept. 30 from 15.3% on March 31.

At the end of September, Magellan’s top 10 holdings included Microsoft, Intel, Cisco, Lucent Technologies and America Online Inc. The others were General Electric Co., Merck & Co., Wal-Mart Stores Inc., Home Depot Inc. and MCI WorldCom Inc.

While increasing the fund’s stake in technology stocks, he also cut the number of stocks held to 350 from 470 on March 31, according to the shareholder report.

“Magellan is a little more concentrated, but it’s still an extremely diversified fund,” Pozen said.