The Straits Of Magellan
He may seem mild-mannered on the surface, but Edward C. "Ned" Johnson III, chairman of Fidelity Investments, certainly has a knack for the dramatic. On Mar. 11 he demoted or reassigned 18 of Fidelity's top fund managers running $60 billion of Fidelity's $386 billion. The changes left a crucial question: What is the fate of Jeffrey N. Vinik, manager of Fidelity's $55 billion Magellan fund?
Vinik has underperformed the market for two of the three full years he has run the fund and is behind again this year. His fund took a roller-coaster ride last year, and Johnson may be getting queasy. Fidelity watchers are betting Vinik may be snared in another round. "Phase II will come this summer," predicts David J. O'Leary, a former Fidelity executive who runs Alpha Equity Research Inc., which tracks Fidelity funds.
ANGRY INVESTORS. To be sure, Vinik produced a solid 36.8% return last year, just a hair behind the 37% gain in the Standard & Poor's 500-stock index. But he achieved it only after giving shareholders a wild and risky ride. After putting nearly half of Magellan in technology stocks last year, the fund soared 42% through September, vs. 27% for the S&P 500. Then, while the overall market continued to zoom, Vinik's tech stocks plunged in the fourth quarter and his huge lead vanished. In 1996 he poured cash into short-term instruments and bonds, making Magellan one of Fidelity's poorest-performing growth funds this year, with a paltry 0.6% return through Mar. 12, vs. 3.4% for the S&P 500.
The gyrations have some investors steaming mad. "The public doesn't want that kind of volatility," says James B. Kruzan, who runs Investment Management & Research in Clarkston, Mich. Kruzan is advising his General Motors Corp. 401(k) clients not to invest their retirement money in Magellan. Eric M. Kobren, a veteran Fidelity watcher who cut his investment rating on Magellan to "hold" two weeks ago, thinks Vinik's job is secure but says: "If he underperforms for another year, all bets are off." Fidelity would not make Vinik or other managers available for comment.
Fidelity's chief of equities, William Hayes, dismisses Vinik's critics. "He's done an excellent job," he says, adding: "We're hoping that Jeff will run Magellan for years to come." To be sure, Vinik has kept Magellan in the top 25% of all growth funds and is still considered by many to be one of the country's premier investors.
As billed by Fidelity, peformance had little to do with many of the transfers. For example, according to Hayes, Blue Chip Growth Fund manager Michael S. Gordon was transferred to a post more suited to his style and insists that there was no problem with the way the fund was managed. However, Gordon had come under fire for filling the fund with midcap stocks instead of blue chips, and the fund lagged the market by nine points last year.
TEAM APPROACH. The most high-profile trip to the woodshed was taken by Asset Manager Fund chief Robert A. Beckwitt. The former star had built an $18 billion empire of three asset-allocation funds that were once heavily promoted by Fidelity. But Beckwitt was removed after barely 18 months of lackluster results. Another manager drubbed for poor performance was John R. Hickling, who ran three international funds totaling $4.8 billion. His largest fund, the $2.6 billion Overseas Fund, produced an average 5.5% return for the past two years, vs. 9.5% for global stocks generally. Another manager, Robert D. Haber, was made director of equity research, with no direct money-management duties, after his $4.7 billion Balanced Fund significantly underperformed the market for two years.
Amid the management turmoil is a new approach to running money that some outsiders think might become more common at Fidelity in the future: team management. The team approach is being used on six Asset Manager funds, plus Balanced and Puritan. Some Fidelity watchers have predicted that Fidelity's huge size will ultimately require it to divide up fund assets among more managers. But Hayes says teams will be used only in funds whose charter requires investments in multiple asset classes, such as stocks and bonds.
Magellan may be spared the team approach, because its charter doesn't mandate multiple asset classes. But if subpar performance or flamboyant risk-taking continues, Ned Johnson may have to haul out his broom yet again.
By Geoffrey Smith in Boston