Peter Lynch? Who's Peter Lynch?Geoffrey Smith
To contrast Morris Smith with famed investment guru Peter Lynch, whom he succeeded as manager of Fidelity Magellan, the nation's largest mutual fund, the best place to start is at the office. Lynch's quarters were a monument to chaos, with stacks of annual reports and analysts' treatises partially blocking the windows. Smith neatly files them away in cabinets. Gone are the yellow legal pads, with notes on hundreds of companies, that used to cover Lynch's desk. Except for the half-eaten remnants of a bran muffin, Smith's desk is pretty much empty.
And the changes go well beyond housekeeping. Nearly a year after taking over from Lynch, Smith has stamped his mold on Magellan's $15.4 billion portfolio. Smith has trimmed and reshaped Magellan in a distinctly un-Lynchlike way, paring the roster of stocks and trading them more frequently. And although he puts in slavish 80-hour workweeks--one of the reasons Lynch retired at 46--Smith is his own man. "It took a month or two to get out from under Peter's aura," says the 33-year-old Brooklyn native.
BEATING THE MARKET. But even as he has reshaped the fund, Smith has reassured the fund's 1 million-odd shareholders by upholding Lynch's record of superior performance (table). From June 1, 1990, to May 1, 1991, Smith produced the second-highest total return of the nation's 10 largest equity growth funds, according to Morningstar Inc. (Investment Co. of America came in first.) Magellan rose 7.5%, beating the average growth fund by 1.2 percentage points and outpacing the Standard & Poor's 500-stock index except in the third quarter of 1990, when Magellan was hit in the wartime sell-off. The fund was a particular standout in the first quarter of 1991, when it rose a breathtaking 20%--beating the market by nearly six percentage points and leaving most of its competitors in the dust. "Sounds Peter-like to me," says John Rekenthaler, an analyst at Morningstar.
SLIMMER. Actually, the Lynch mold was broken for good last August. In that month, more than half of the 1,300 stocks in Lynch's portfolio were sold and replaced with about 250 of Smith's top picks. Most of the ousted stocks were members of Lynch's "farm team" of small but promising stocks. Smith is replacing them with his own choices. But Smith emphasizes that there has been no dramatic departure from Lynch's basic investment principles. "It's not like I was taking over an injured product," he says.
Magellan is still an aggressive growth fund that stays fully invested in stocks, even in down markets--it now has about 2% cash. Smith's investment style is similar to Lynch's, too. Both like to examine companies first-hand and favor "good stories"--stocks that make intuitive and financial sense. As in the Lynch era, Smith is aided in his stock-picking by two assistants--managers of Fidelity's health care and biotechnology funds--as well as a continuous flow of ideas from Fidelity's 70 other stock-fund managers.
Magellan now is more heavily concentrated in high-technology stocks, which Lynch tended to avoid. Smith has also increased Magellan's holdings in health care stocks. He took a big stake in energy stocks, but it did not pay off. "That was my worst mistake last year," he says. Smith kept most of the fund's 20 largest holdings under Lynch but has boosted Magellan's stake in them so they now make up 30% of the fund's assets instead of 20% under Lynch.
Smith has also increased trading activity in a group of 100 or so smaller stocks, including many technology stocks he invested in while running the Fidelity OTC fund before taking over Magellan. Magellan's turnover rate--the amount of stock trading for the fund--is now almost twice what it was under Lynch. Smith's favorite health care stock is Pfizer Inc., whose line of upcoming drugs appeals to him. In technology, his top pick is IBM despite its disappointing first-quarter earnings. He slightly reduced Magellan's holdings in technology stocks after IBM's bombshell, but he still has some favorites in that sector: Sun Microsystems, Apple Computer, and Intel, all solid companies with good earnings potential.
FANNIE MAE AND GE. His largest holding is the Federal National Mortgage Assn.--Fannie Mae--which is shunned by some money managers because of the troubles in the real estate market. But according to Smith, it would take a disaster in residential real estate to hurt Fannie Mae, and the company has done a good job of hedging interest rates. Another Smith favorite is General Electric Co. Many are down on the stock--unwisely, in Smith's view--out of a belief that it's dangerously exposed to commercial real estate and other potential problem industries. But Smith observes that most of GE's businesses are growing faster than the gross national product.
Smith's overall outlook on the market is upbeat. He believes that investors will soon start focusing on 1992 earnings instead of subpar 1991 earnings. That's good for stocks, he says, because the Federal Reserve is doing everything it can to try to stimulate the economy before the next election. And that means the chances for an economic recovery are now much higher. "Over a longer time period, I get more and more optimistic," says Smith. Investors, likewise, will probably get more bullish on Smith as time goes on. If his management of Magellan stays on track, quarter after quarter, they may even forget about the man with the messy office.
SMITH'S PICKS FANNIE MAE BRISTOL MYERS-SQUIBB GENERAL ELECTRIC IBM INTEL PFIZER PHILIP MORRIS ROYAL DUTCH PETROLEUM SUN MICROSYSTEMS DATA: BW