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Fund in Focus: Fidelity Magellan

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There’ll be some changes made to the Fidelity Magellan Fund (FMAGX).

Harry Lange, who began running the fund on October 31, is expected to do things far differently than his predecessor, Robert Stansky, including making bigger sector bets, especially in technology, and adding more foreign flavor to the portfolio.

Philip Edwards, managing director of fund research at Standard & Poor’s, thinks Lange will be more willing to consider a broader range of stocks for Magellan than Stansky did. Edwards also believes Lange will be more likely than Stansky was to take more “contrarian positions,” that is, buying stocks when they are out of favor.

“Lange is cut from the classic cowboy cloth of the go-anywhere manager,” said Jim Lowell, the editor of Fidelity Investor, a newsletter. “He has demonstrated no sort of adherence to one style.”

Lange himself has said he invests in growing companies as well as stocks he thinks are undervalued.

Fidelity watchers note that Lange has a background in tech stocks and they envision him increasing Magellan’s exposure in that area. (Lange has served as a technology stock analyst for Fidelity, and he previously managed the Fidelity Select Computers Fund (FDCPX) and the Fidelity Select Electronics Fund (FSELX)).

Lowell pointed out that the Fidelity Capital Appreciation Fund (FDCAX) that Lange had run for nearly a decade before being reassigned had about 35% of its assets in technology at the end of September. By comparison, those companies made up about 15% of the S&P 500 index, and some 21% of Magellan, Lowell said.

To get cash to buy technology stocks, Lowell thinks Lange will sell some of Magellan’s holdings in the financial services sector.

Lowell believes Lange will also show more interest in foreign stocks than Stansky. To support that argument, Lowell said companies overseas accounted for nearly 26% of Capital Appreciation’s holdings at the end of the third quarter, compared to Magellan’s 4%.

Lange himself has said that he is willing to invest in companies of any size, but people familiar with Magellan doubt that its new manager will be able to add many small-cap stocks. The fund’s mandate, they explain, does not allow it to own more than 10% of any company, and that makes it difficult for a small stock, or even a collection of them, to significantly boost returns.

“From a practical standpoint, Magellan is locked out of small caps,” said Jack Bowers, the editor of Fidelity Monitor, another newsletter. At best, Lange might be able to invest in mid-sized companies that are growing into large ones, Bowers said.

Edwards echoed those thoughts. “The size of Magellan will be a significant handicap for Mr. Lange,” he said. “Even if he looks over the entire universe of stocks and selects broadly, it is still going to be primarily a large-cap portfolio.”

One of Magellan’s problems under Stansky, observers said, is that it shadowed the S&P 500 too closely. A key difference between the fund’s old and new pilots, Lowell said, is that sector weights under Lange will not mirror the index.

John Bonnanzio, group editor of the Fidelity Insight newsletter, expects Lange to “depart significantly” from the index’s sector allocations.

Lange’s investment style is, in his own words, “very flexible.” Speaking to reporters on the day he took over Magellan, Lange said he focuses on companies with “solid earnings growth and reasonable valuations,” although he has no qualms about paying a “premium price” for what he considers the best companies. He also prefers companies that improve earnings by increasing sales, not just by cutting costs.

The portfolio manager said he sees “a lot of great opportunities” in small-cap stocks, and plans to “really be aggressive” in running Magellan.

Lange had a successful track record at the Capital Appreciation Fund, which he began running in March 1996. The fund consistently topped its peers and the S&P 500 during his tenure. This year through September, the fund returned 3.9%, while the average large-cap blend fund gained 3.1%, and the index rose 2.8%.

By comparison, Magellan consistently lagged similar funds and the S&P 500 after Stansky began managing the large-cap blend fund in June 1966. This year, it was up 2.3% through September, versus a gain of 3.1% for its peers, and 2.7% for the index. “I think Mr. Stansky started strong with Magellan, but he made some bets that didn’t pay off,” Edwards said.

In part because investors have pulled money out of Magellan, its assets have shrunk to $52.4 billion from more than $110 billion at one point in 2000. It is now Fidelity’s second largest fund behind the $55-billion Fidelity Contrafund (FCNTX), which has been managed by Will Danoff for the last 15 years. Magellan is closed to new investors, but it continues to accept investments from current shareholders.

Although it has been hemorrhaging assets, Magellan remains a big fund, but most observers do not think its size will keep it from generating strong returns. They cite other huge funds at other companies as well as Contrafund as examples of funds that have done well despite their heft.

Edwards, however, said it will be hard for Lange to replicate his record at Capital Appreciation at Magellan because of Magellan’s size. Capital Appreciation has about $7 billion in assets. “This is not to say that Mr. Lange won’t do well,” Edwards said. “It’s just that he has a higher hurdle.”

The newsletters edited by Bonnanzio, Bowers and Lowell all raised their ratings on Magellan as a result of the change in portfolio managers.

Edwards, who is an investor in Magellan, said he would advise shareholders to hold the fund for a while to see how its new manager does. “It’s an interesting enough change to watch,” he said.

Contact Bob Keane with questions or comments at: [email protected].


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