Fidelity reopens flagship fund after a decade

Firm hoping '07 gain draws new clients with new cash

Fidelity Investments' Magellan fund has about $45 billion in assets, less than half the amount of money it held at its peak. Most of the assets are held in 401(k) accounts and similar retirement savings plans. (JB Reed/ Bloomberg News/File 2007)

Fidelity Investments is reopening its flagship Magellan mutual fund to new investors today, hoping to capitalize on the rejuvenated performance of the iconic fund to tap into a new generation of workers.

While Fidelity's mutual fund offerings posted strong performance in 2007, big competitors such as Vanguard Group Inc. and American Funds have been much more successful in recent years in attracting cash. Last year through November, for example, Vanguard took in $70.6 billion in new money, compared to just $2 billion for Fidelity. It's been six years since Fidelity ceded its crown to Vanguard as the world's largest manager of stock and bond funds.

One reason why: Until yesterday, half of Fidelity's largest, most popular funds were closed to new investors. Fund companies stop the flow of new money into funds when their size becomes too unwieldy for the manager to invest all that cash. Closing a fund can help its performance, but at the cost of shutting out new customers.

Magellan which has been closed to new investors since 1997, now has about $45 billion in assets, less than half the amount of money it held at its peak. About 85 percent of its assets are held in 401(k) ac counts and similar retirement savings plans. With the first wave of baby boomers reaching retirement age, many of the fund's investors are beginning to tap their retirement savings and redeem their shares. That has frustrated Magellan's manager, Harry Lange, by forcing him to sell shares to pay for those redemptions.

"I sold a lot of stocks I would have preferred not to," Lange said yesterday. "It was getting into the meat and bones" of the fund.

Reopening Magellan also is a declaration of confidence in Lange's performance, after Magellan returned 18.8 percent to investors last year versus just a 5.5 percent gain for the broader stock market, as measured by the Standard & Poor's 500 index. The performance is part of an overall improved record at Fidelity, following a push to beef up its stock research staff.

The boost comes at an important time for Fidelity, which was rocked by management changes last year as it responded to growing competition and uncertainty surrounding the future of the family-controlled company and its chief executive, 77-year-old Edward C. Johnson III.

Fidelity manages hundreds of funds, with varying investment philosophies, that it sells directly to consumers and through financial advisers. But Magellan captured the popular imagination in the 1980s, when it was managed by Peter Lynch. Lynch's folksy investment advice and spectacular results - he averaged returns of almost 30 percent a year during his 13-year tenure - turned him and the fund into a star. However, Lynch's record was not the best career performance turned in by a Magellan manager; that honor belongs to his boss, Johnson, who averaged returns of 30.5 percent when he ran the fund in the 1960s.

Fidelity equities chief Walter Donovan said yesterday it has no plans to reopen its $80.9 billion Contrafund, or another large product, Low-Priced Stock fund, with $35.2 billion, though it will continue to review both portfolios.

Analysts who follow Fidelity say Magellan is uniquely positioned to take new money compared to the other two, however. For one thing, Lange's aggressive investing style has kept just 1 percent of its total assets in cash, forcing him to sell shares more often to pay for redemptions. The other funds average closer to 10 percent, said Dan Lefkovitz, who follows Fidelity for Morningstar.com, a Chicago fund research company.

Also, Lefkovitz said he's often heard Lange grousing about the redemptions, but hasn't heard the same from other managers, like Contrafund's Will Danoff. Meanwhile Low-Priced Stock fund specializes in much smaller stocks than Magellan, which would make it harder for its manager, Joel Tillinghast, to find places to invest new money.

John Bonnanzio, editor of the Fidelity Insight newsletter, said reopening Magellan may be more important for symbolic reasons than in practice. For one thing, today's average investors have more choices and few would know of Lange in the way that investors once followed Lynch.

That may change soon as Fidelity starts to begin mentioning Magellan more often in its mutual fund advertising, said company communications chief Thomas Eidson, though he said the company wouldn't start pushing Magellan specifically. "You'll see it, but we're not going to hire a band and march down the road with it," Eidson said.

The fund is named after Ferdinand Magellan, the 16th-century Portuguese explorer who was the first to circumnavigate the Earth, which also serves as a reference to its mandate to invest in a go-anywhere mix of domestic and foreign stocks.

The managers who followed Lynch posted decent returns, but none matched his performance. Lange's predecessor, Robert Stansky, was at the helm when technology stocks crashed in 2001, then was criticized for adopting a cautious investment style that resembled an index fund.

Magellan now holds more midsize companies and has just more than 26 percent foreign stocks today. Among Lange's biggest positions today are shares in Finnish cellphone maker Nokia Corp., Google Inc., and Staples Inc.

Yesterday, Lange said he does not expect to go much deeper into foreign investments, but said he's still "very bullish" on the area since so many new consumers are emerging with the rise of the Indian and Chinese economies. He also mentioned seeing many new products at the recent Consumer Electronics Show in Las Vegas, which made him "still pretty optimistic about all that," he said.

Ross Kerber can be reached at kerber@globe.com.