Has Magellan Run Into A Head Wind?Geoffrey Smith
At Fidelity Magellan, the nation's largest equity mutual fund, the guiding principle could always be summed up thusly: Stocks are king. Through up and down markets alike, Magellan stayed nearly fully invested. But Jeffrey Vinik, who replaced Morris J. Smith as manager last April, has spent the past six months charting a dramatically different course. He has put one-quarter of Magellan into cash and bonds and overhauled the stock portfolio. The results? Hardly exciting. In the second half of 1992, Magellan rose 7.08%, vs. 8.35% for the Standard & Poor's 500-stock index and 12.05% for the average growth fund.
Vinik's unspectacular early showing raises a fundamental question about his management of the $22.6 billion fund, which turned in a stellar performance for 13 years under famed investment guru Peter Lynch and a respectable showing for two years under his successor, Morris Smith. If the fund wasn't broke, why fix it? Well, Vinik maintains that the structure of the fund that he inherited simply won't work in the market climate that lies ahead. Magellan, he says, needed to undergo a major tactical shift. And as he reconfigured the portfolio last year, he played it safe, in the belief that stocks were overpriced. As of Dec. 31, Magellan was 11.8% in cash, 14% in bonds, and 75% in stocks. Last March, by contrast, Smith's Magellan was 89% in stocks, 7.7% in cash, and 3.6% in bonds.
NEW GUARD. The cash horde hurt Magellan's performance--but only temporarily, the 33-year-old Vinik insists. "There's a changing of the guard in the long-term investment environment," says Vinik. And in the first few weeks of the year, at least, his strategy seems to be working. Through Jan. 22, Magellan is up 2.21%, vs. 0.09% for the S&P 500 and 1.46% for the average growth fund.
Vinik believes small and midsize stocks are the place to be for the next few years. But he's also buying some large-cap cyclicals that will benefit from a growing economy--Chrysler Corp. is the largest holding--and he's gambling on a resurgence of energy stocks and continued strength in technology. He has shed consumer stocks--such as Philip Morris Cos. and Coca-Cola Co.--that long dominated Magellan. "It will be easy to beat the S&P 500 because it will be bogged down by consumer nondurables," says Vinik. He's also sold off health-care stocks, reasoning that industry profits could be hurt by Clinton cost-controls, and has shed finance stocks, which he believes are overpriced.
In a sense, Vinik's strategy is comparable to the one that worked well for Lynch when he ran Magellan. Lynch invested in smaller stocks, even as the fund grew larger, and took big positions in industry sectors. Vinik is willing to take even bigger bets on industry groups. "When he sees something he likes, he backs the truck up to thedoor" and buys heavily, says Lynch, who has returned to Fidelity as a part-time adviser.
Even so, Vinik hasn't gone on a buying spree. Magellan now is made up of fewer than 700 stocks, down from 800 stocks under Smith and 1,300 under Lynch. And Vinik has slowed the pace of trading. His annual turnover rate is now about 100%--the dollar volume of trading is equal to the size of the portfolio. That's down from about 135% under Smith. His average stock is also smaller--though Magellan is hardly a small-cap fund. The average market capitalization is $3.42 billion, down from $4.7 billion at the end of March.
GAS AND CHIPS. Six of Magellan's top 10 holdings are energy stocks, with an emphasis on natural-gas companies. Vinik favors the gas companies in the belief that the Clinton Administration is leaning toward natural gas as an energy source. His favorite gas pick is Burlington Resources Inc., which he says is the "Wal-Mart of the natural-gas industry." In the technology sphere, Vinik is focusing on semiconductor and telecommunications stocks, including Texas Instruments, Compaq, and Sun Microsystems. His favorite techie is Motorola Inc., for which he predicts a harvest of positive earnings surprises in 1993 and 1994.
Chrysler is Vinik's favorite cyclical, despite a recent run-up in the stock. He's keen on its new sedans and its upcoming pickup. Chrysler "has the wind at its back," he says, with costs under control and the market in its favor. Magellan is also pouring money into bonds, mostly one- to five-year Treasuries. Vinik is betting bonds will perform at least as well as the S&P 500. This strategy was used at least once by Lynch, who sunk 20% of the portfolio into bonds in 1983 and profited when rates fell.
Vinik differs from his predecessors in one other way--he wants to see his family now and then. Lynch and Smith worked nights and weekends, but Vinik always leaves by 5:30 to spend evenings with his two children. "I'm not going to miss my kids growing up," he says.
Vinik's methodical, low-stress strategy may prevent fund-manager burnout. But unless he starts putting some wallop into his performance numbers, Magellan's customers may undertake a stress-relief strategy of their own. It's called "redemption."