Investors continue to bail as Harry W. Lange celebrates his two-year anniversary as the manager of the Fidelity Magellan Fund on Wednesday, although it's clear that the fund's performance is on the mend.
Year-to-date through Oct. 22, the $45.35 billion fund climbed 17.60%, versus 7.76% for the Standard & Poor's 500 index.
That performance put it ahead of 73% of its peers, according to investment research firm Morningstar Inc. of Chicago.
But investors continue to yank money out of the fund, with outflows totaling $6.05 billion during the first eight months of 2007. That comes on the heels of $8.78 billion in net outflows last year, according to Financial Research Corp. of Boston.
"The outflows are a result of prior performance," said John Bonnanzio, group editor at the Mutual Fund Investors Association of Wellesley Hills, Mass., which publishes the independent newsletter Fidelity Insight. "Institutions look at the three-year record. The performance for that period and longer has been mediocre."
The fund did beat the S&P 500 in 2005, but only by a small margin, and it also underperformed in 2003 and 2004. "The declines had a significant impact on the assets in terms of depreciation of value," Mr. Bonnanzio said. "During the decade prior, the fund had a largely unimpressive record."
Greg Carlson, fund analyst at Morningstar, agreed with that assessment.
"The fund lagged the S&P 500 four out of five years from 2002 to 2006," Mr. Carlson said. "That would include the early tenure of Harry Lange. People were looking for improvement and didn't see it immediately. I think a number of people decided to throw in the towel."
Magellan has been closed to new investors for 10 years.
"Given that all funds have some degree of inflows and outflows, it is not surprising that a fund closed to new investors since 1997 would have outflows," said Sophie Launay, a
Fidelity Investments spokeswoman.
With more than $396 billion in 401(k) assets, Boston-based Fidelity is the leader in the retirement arena. Many 401(k) and 403(b) plans have assets in the Magellan fund, said Mr. Bonnanzio. "The plan sponsors tend to look at trailing three-year performance."
"I think the outflow is more of a result of institutions leaving the fund and taking out large amounts of money," he said. "Magellan has been around for so long, many of the individual investors have had lots of gains. They want to stay in there."
Changes occurred when Mr. Lange took over, but outflows continued in 2006. "They were just the wrong bets last year," Mr. Bonnanzio said. "That also fed into people's worst fears. He's a very talented manager. People thought it was a fund that couldn't be turned around."
This year, those bets are paying off.
"Harry has tried to find opportunities where they exist. And we believe that investors have already begun to benefit from these moves," said Ms. Launay. "We're very confident in Harry's abilities. He is an experienced portfolio manager with a proven track record of performance."
One of the changes that Mr. Lange introduced included reducing the number of holdings. "He made it a bit more growth-oriented. He increased the fund's exposure to foreign stocks, with about 25% invested outside the U.S.," Mr. Bonnanzio said.
And the sector choices are benefiting the fund. "He has put more in technology," Mr. Bonnanzio said. "And it certainly helped that he underweighted in financials. The big bet has been his tech investments."
About 31.78% of the portfolio is invested in technology, according to Morningstar.
"He is more growth-oriented, and growth stocks have made a comeback this year," said Mr. Carlson. "He has made some very good picks, too."
Whether the fund reopens in the future remains unknown. "You can still get it through a 401(k) program. I don't think Fidelity will reopen it anytime soon," Mr. Bonnanzio said.
"I would expect that performance will continue at this pace, and for outflows to slow down," said Mr. Carlson, adding he is optimistic about the fund and its manager.
Prior to taking over Magellan, Mr. Lange managed the Fidelity Capital Appreciation Fund for a decade and the Fidelity Advisor Small Cap Fund for nearly seven years.
Sue Asci can be reached at [email protected].
