So Much for Theories--Magellan Gets Bigger Yet and Beats S&P; 500

Bob Stansky is making life harder for just about everybody else who manages a stock mutual fund.

With his success in the last 3 1/2 years running the world’s largest fund, Fidelity Magellan, Stansky is getting to be a headache for advocates of “passive” index funds who say you can’t beat the market consistently.

At the same time, he’s threatening to spoil some of the most popular excuses “active” fund managers give for their funds’ inability to keep up with market benchmarks.

Magellan produced a total return of 24% for 1999 even as its assets surpassed $100 billion for the first time. Its gain outpaced the Standard & Poor’s 500 index by 3 percentage points.

In 1998, Magellan earned 33.6% versus 28.6% for the S&P.;

The fund’s gains in ’99 and ’98 were enough to lift Magellan’s three-year total return above the S&P;’s as well.

Because of a setback in the mid-1990s, when previous manager Jeffrey Vinik moved a big chunk of the fund from stocks to bonds, Magellan’s five-year return still trails the S&P; by about 2 percentage points.

For the last 10 years, though, it has an edge, averaging 18.7% a year compared with 18.2% for the S&P.;

So much for the “too big” story--the idea that after a fund reaches a certain size it must inevitably bog down under its own weight.

Bigger chunks of stock are, in theory, harder to trade at good prices, and the conventional wisdom is that new additions to a big portfolio don’t produce the same impact on the fund’s results. But Stansky, who took over Magellan in June 1996, has managed to shine even with those handicaps.

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More than a decade ago, with the renowned Peter Lynch at the helm, critics said Magellan was starting to get in its own way at $5 billion in assets, then $10 billion. Even though the fund kept performing well for years after it passed those levels, Fidelity itself seemed to acknowledge a size problem when it closed Magellan to most new investors in 1997, with assets at about $60 billion. It remains closed to new investors.

Since then, remarkably enough, the fund’s assets have grown as fast as ever, thanks to soaring stock prices and continued flows of money from investors who already had accounts or who participate in 401(k) plans in which Magellan remains on the menu.

Stansky still claims not to worry about being too big. “The fund’s size is not something I spend time thinking about,” he said in the fund’s latest semiannual report.

So much too for the “narrow market” excuse--the argument that managed funds have had little chance to beat the S&P; 500 in the late 1990s because market strength was concentrated in a few dozen stocks heavily represented in the index.

Only about 1 of every 9 funds outperformed the S&P; over the last three years. But Magellan, with its money spread across 341 stocks at last report, managed to do it.

What’s more, Stansky beat the S&P; last year even though he was underweighted in technology stocks--the market’s hottest sector.

“Stansky is a superior stock picker,” said Jim Lowell, editor of Fidelity Investor, an independent newsletter that reports on Fidelity funds.

By all accounts, there’s nothing esoteric about Stansky’s methods. In the words of Scott Cooley, an analyst at fund tracker Morningstar Inc., “He likes to buy stocks on weakness, hold them for the long term, and then sell them on strength.”

Simple to say, not so easy to do.

Index-fund partisans maintain that you can’t count on anybody to pick stocks cleverly enough to beat the indexes. Index funds replicate their indexes at very low cost. A managed fund such as Magellan, by contrast, must bear the expenses of research and trading.

At last report from Morningstar, Magellan had an annual expense ratio of 0.60% of assets, compared with 0.18% for the Vanguard Index 500 fund, the largest fund modeled on the S&P; composite.

The average expense ratio for all funds with more than $5 billion in assets is 0.70%, according to the Investment Company Institute.

So Magellan charges less on a relative basis, though it still costs much more to run than the Vanguard index fund. Even with the cost disadvantage, Stansky still beat the index last year and in ’98.

Morningstar classifies Magellan as a “large blend” fund, “blend” meaning that it owns a mix of growth and value stocks. Magellan’s 24% return for ’99 compares with 19.5% for the average large blend fund.

Even so, Stansky may not have been happy with his performance: Fidelity’s latest data show Stansky increased his tech stock holdings in the fourth quarter, apparently believing he was too far underweighted in the sector.

He managed to catch the fourth-quarter surge in many tech shares. But given the amount of money he plowed into tech stocks, it can also be argued that Stansky was as much a force pushing those stocks higher as any other single fund manager.

Chet Currier writes for Bloomberg News. The Funds and 401(k)s column by Times staff writer Paul J. Lim returns next week.