Fund in Focus: Fidelity Magellan

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].