The Wall Street Journal-20080115-Fidelity Reopening Magellan Fund
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Fidelity Reopening Magellan Fund
Fidelity Investments is reopening its Magellan Fund to all investors after a decade of restricted access, in an attempt to draw new cash into the mutual fund and highlight its performance.
Although Magellan, with about $45 billion in assets, has been beating the overall market for some time, it has been suffering from investor selling. Fidelity attributes that to the large number of Baby Boomers in the fund who have begun tapping their retirement assets. To help Magellan grow, Fidelity says it plans to aim its marketing at a younger crowd.
Boston-based Fidelity closed Magellan, once among the topmost fund performers, to new retail investors in 1997 as a way to control cash flows. Many analysts thought the $60 billion fund was too unwieldy to sustain good investment performance. Since then, new shares in the fund could always be bought by customers who had Magellan in their retirement plans.
Fidelity says the fund is now too lean and that it needs more investors so that Harry Lange, Magellan's portfolio manager, has enough cash to seize on investment opportunities and to continue boosting performance.
In a conference call yesterday, Mr. Lange -- who's up 11% over the past 12 months, and beating about 80% of his peers, according to fund watcher Morningstar Inc. -- said he finds himself having to sell stocks -- even ones he likes -- "to get cash for new ideas."
According to fund-flow experts Financial Research Corp., Magellan has suffered net redemptions, or outflows, consistently since 2002, including about $30 billion in the 32 months ended August 2007.
Mr. Lange, who has done well by investing in foreign stocks and technology -- and by going light on financials -- said that having access to more cash would not only make his job "somewhat easier," but it would be best for shareholders if he didn't have to start "selling into the meat and bone" of the fund to offset future redemptions.
Closely held Fidelity's highlighting of Magellan, arguably its best- known brand name, is also part of a move by the company to rekindle sales companywide. The once-dominant Fidelity is losing market share and now ranks third in stock- and bond-fund assets under management, behind rivals Vanguard Group and Capital Research and Management's American Funds. Moody's Investors Service downgraded the long-term senior unsecured debt rating of FMR, the parent of Fidelity, to A1 from Aa3 last week partly because of the "loss of dominating market share lead that the company formerly enjoyed."
James Lowell, editor of Fidelity Investor, an independent newsletter, said the re-opening of Magellan is a recognition by Fidelity that "most investors -- individual and institutional -- think that as goes Magellan so goes their whole fleet." Under new president Rodger Lawson, a marketing specialist who joined Fidelity in the summer, the company has been running more advertisements focusing on individual mutual funds.
Fidelity said it plans to promote Magellan to a younger demographic, which can tolerate more risk and theoretically should be attracted to growth-company funds. "It's a return to marketing their products," Mr. Lowell said. "They wrote the book on growth-fund investing, and Magellan is the poster child for actively-managed funds."
Magellan, whose success in the 1980s helped popularize mutual funds, continued to grow after it was partially closed and reached $100 billion in 1999. But its mediocre performance after that caused many investors to flee. Mr. Lange isn't sure the slow of new cash could be turned soon if the fund remains closed. "There have been net outflows since I took over and I don't see that improving," he said.
Mr. Lange, who became manager on November 2005, has many Magellan watchers excited again. A former auto engineer whose hobbies include weight-lifting, Mr. Lange promptly dumped many of the U.S. household names acquired by predecessor Robert Stansky for what he calls the next generation of blue chips -- companies including Botox maker Allergan Inc.
He is increasing foreign holdings to 28% from 4% -- and said yesterday that he believes when the economy and consumer spending is weak, some of the best investment opportunities are companies that cater to China's and India's middle class.
Magellan is an example of the challenge facing asset managers -- such as Fidelity -- who've relied heavily on 401(k) plans for growth. While 401(k)s are still experiencing net cash inflows, a growing pool of money is being distributed from these retirement plans as Baby Boomers enter retirement and "those numbers are expected to climb," says Luis Fleites, an analyst of retirement markets at Financial Research Corp.
