Fidelity Magellan lagging as Dow hits new highs

Fidelity Magellan Fund was the only one of the 10 largest U.S. stock mutual funds to lag behind the Dow Jones Industrial Average as the market index climbed to a record.

The Dow rose at an average annual rate of 15 percent since Oct. 9, 2002, when it fell to the lowest point since 1997. The $44.5 billion Magellan gained 13 percent a year in the same period, according to data compiled by Bloomberg.

Magellan trailed its peers partly because former manager Robert Stansky bet on growth stocks when value shares were doing better and new manager Harry Lange sold Dow stocks Pfizer and Exxon Mobil before they started to rally.

Since the Dow's trough, the $58 billion Dodge & Cox Stock Fund and Fidelity Investments' $36 billion Low-Priced Stock Fund each rose 23 percent a year, the best returns of the 10 largest funds.

"Most of the large funds have done well for investors, but Magellan hasn't been on the right side of the market," said Russel Kinnel, director of fund research at Chicago-based Morningstar.

Under Stansky, who ran Magellan from 1996 to 2005, the fund emphasized growth companies, whose sales or earnings rise faster than market averages. Returns suffered as value stocks, those deemed cheap relative to financial yardsticks such as profits, outperformed.

The Russell 1000 Value Index climbed 15 percent year from October 2002 to the end of October 2005, when Stansky resigned. The Russell 1000 Growth Index gained 11 percent in the same period.

Magellan's performance struggled this year after Stansky's successor, Lange, increased the fund's holdings of smaller companies and those outside the United States.

Lange made some winning calls. He reduced the fund's holdings of Microsoft, the world's largest software company, and American International Group, the world's biggest insurer, which went on to trail the market.

But other stocks he sold, including Pfizer, the world's No. 1 drug maker, and ExxonMobil, the biggest oil company, turned out to be big gainers.

"We take a long-term view on performance, and we believe in Harry Lange's ability" to lift the fund's returns, said Vin Loporchio, a spokesman for Boston-based Fidelity.

Magellan, formerly managed by the legendary Peter Lynch and then Jeffrey Vinik, was once the largest actively managed equity fund with $110 billion of assets. It now ranks sixth, according to data compiled by Boston-based Financial Research, which tracks the mutual-fund industry.

Fidelity is the world's largest mutual-fund company with $1.3 trillion of assets. Magellan was overtaken by Contrafund last September as the Boston-based firm's biggest fund. The $64 billion Contrafund, the fourth-largest U.S. stock fund, rose at an annual rate of 17 percent in the past four years.

Magellan has been closed to new investors since 1997.

The $143 billion Growth Fund of America, the biggest U.S. equity fund, advanced 19 percent. The fund, led by a team at Los Angeles-based Capital Group's American Funds, has been the best-selling fund for the past three years.

The team-managed Dodge & Cox Stock Fund, run by San Francisco-based Dodge & Cox, has benefited from its ownership of stocks in the Dow Jones average.

The fund's biggest investment at the end of the second quarter was Hewlett-Packard, the world's largest maker of printers whose shares jumped 15 percent in the past three months. The fund's No. 4 holding is Pfizer.