SOS for Magellan
Why is Fidelity Investments, Boston's most important money management company, having such a hard time generating sales for its mutual funds this year?
The problem, in a word: Magellan.
Once Fidelity's flagship mutual fund and a virtual money magnet, Magellan is losing business at an alarming pace. The impact of those losses, and the likelihood of more bleeding in the future, should be pressing Fidelity to take action to fix its Magellan problem now. Among other things, that means replacing longtime fund manager Bob Stansky.
Fidelity generated about $3 billion in net sales of long-term funds through the first five months of 2005, peanuts in relation to $674 billion it manages in stock and bond funds. The net sales figures, calculated by Financial Research Corp. of Boston, measures money customers send to fund companies and subtracts the amount they redeem from existing accounts.
Magellan, which manages $55 billion, has seen more customer money going out than coming in for a long time. Over the past five years, Magellan has generated positive net sales in just six calendar months, according to Financial Research.
But the pace of redemptions picked up dramatically beginning last fall. Over the past eight months, Magellan has suffered more than $10 billion of net redemptions.
Magellan is digging a deep sales hole for Fidelity while the rest of the company's fund roster produces few customer favorites. Contrafund is a big winner so far this year, attracting net sales of $2.8 billion, and two international funds added another $3.9 billion combined. A group of other Fidelity funds have sold well, but only one has come close to generating $1 billion of net sales through the first five months of 2005.
To be fair, Fidelity closed Magellan to new business nearly eight years ago. Sort of. The fund draws nearly 80 percent of its business from 401(k) plans and it has remained available for new cash from participants of those plans all along.
The real problem is Magellan's long track record of weak investment performance. The fund is up about 2.6 percent, a bit better than its benchmark Standard & Poor's 500. But Magellan's performance over one year, three years, five years and 10 years are all subpar.
Magellan earns just two stars from Morningstar in every rating category. The fund finds itself on embarrassing lemon lists. The real killer: Consultants advising big companies on their retirement plans look at performance like that and recommend the hook.
Magellan appears to be suffering a death by a thousand cuts in the 401(k) market. The increasingly open architecture of retirement plans, permitting sponsors to mix in funds from several different companies, threatens big but weak funds like Magellan.
Some clients, like the state of Michigan, just fire Magellan. Others, like manufacturer AstenJohnson Group, freeze the fund to new investments or put Magellan on a watch list as interim steps.
Despite its problems, Magellan is not beyond fixing as a product or an investment.
First, Fidelity should loosen the mandate that keeps Magellan hewing so close to the S&P 500 it acts as a closet index fund. Fidelity denies any such arrangement. But Magellan has looked, acted, and quacked like a duck for a long time. Set the duck free.
Second, Fidelity should replace Stansky with a new manager. I was once a big Stansky fan and remain a believer in his investing skills. But Magellan needs a clean break.
Finally, Fidelity should reopen Magellan to any new investor in time. The fund was closed years ago when it ballooned to nearly twice its current size. It remains closed today for the same reason you wouldn't throw a party knowing no one would come. Reopening Magellan would send a message of confidence.
Fidelity needs to solve its Magellan problem. Now is a good time to start.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com. 
