Fidelity's Magellan: from model fund to lemon

[HenryTo]

This is pretty interesting - no doubt because large cap growth has totally underperformed since early 2000. I am RELATIVELY bullish on large cap growth right now (witness the huge outflows from large cap growth mutual funds by retail investors over the last couple of years) but that will only mean that when the market goes down, large cap growth will decline RELATIVELY less.

And I don't see how Fabian is adding value to his subscribers - shouldn't he warned against buying the Magellan fund five years ago? If anything, Magellan should be a buy now given that I believe large cap growth should now outperform during the next five to six years.
-------------------------------------------------------------

Fidelity's Magellan: from model fund to lemon
Thu Apr 28, 2005 03:28 PM ET
By Mark Wilkinson

BOSTON, April 28 (Reuters) - Once the poster child of mutual funds, Fidelity Investments' Magellan fund has turned into something of an ugly duckling.

Performance at the fund made famous by star manager Peter Lynch has faltered in the last five years, sending investors fleeing in throngs and leaving analysts with few kind words. On Monday, the portfolio even made its first appearance on a fund "Lemon List."

"The fund isn't having a bad month or a bad year," said Doug Fabian, who runs Fabian Wealth Strategies and publishes a list of worst performing mutual funds. "It's having a bad one, three and five years and there is no evidence showing that investors should hold on to it."

Fidelity defended its flagship portfolio, pointing to challenging market conditions.

"The fund has a bias toward growth and that market is battling headwinds on two fronts: small-cap outperforming large and value outperforming growth," said spokesman Vin Loporchio.

Manager Robert "Stansky feels at some point soon the market will rotate back in favor of large cap and is confident about the fund's recent positioning," he said.

Loporchio added Magellan had beaten 63 percent of its large cap core fund peers under Stansky, who took over from Lynch in June 1996.

Morningstar analyst Christine Benz agreed that "in a market more favorable for its style, Magellan will do relatively better. Some managers believe that market trend has already begun."

Earlier this week, Fabian added Magellan (FMAGX.O: Quote, Profile, Research) to its Lemon List of mutual funds, which also included three other Fidelity portfolios: the Blue Chip Growth fund, the Aggressive Growth fund and the Select Biotechnology Fund.

Magellan has lagged behind its peers in four of the past five years, trailed the Standard & Poor's 500 Index by 3 percent in 2003 and 2004 and lost 27 percent of its net asset value since 1999, according to research firm Morningstar Inc.

Last year, poor performance at companies including media conglomerate Viacom Inc. (VIAb.N: Quote, Profile, Research) (VIA.N: Quote, Profile, Research) and American International Group Inc. (AIG.N: Quote, Profile, Research) weighed on the portfolio.

Unimpressed with the fund's returns, investors pulled money. Magellan's assets, which almost reached $106 billion in 1999, fell $49 billion to $57.4 billion as of April 27, according to Morningstar data.

"Magellan is just too large and that makes it difficult to manage," Fabian said. "I don't see any evidence of it getting back on track."

While the portfolio has been closed to new investors since 1997, Benz agreed the mammoth's size made it difficult for manager Robert Stansky to have much of a presence in small- and mid-sized stocks.

"It's not a nimble fund in any way, which makes it not particularly flexible," Benz said. "It's too large to even delve into smaller large cap stocks."

Magellan's top holdings included General Electric (GE.N: Quote, Profile, Research) , AIG, Microsoft Corp. (MSFT.O: Quote, Profile, Research) and Citigroup Inc. (C.N: Quote, Profile, Research) as of the end of 2004.