Fidelity Magellan: You Can Be Too Rich

Bob Stansky is the guy responsible for Fidelity Investments' Magellan Fund, which at $96 billion and counting threatens soon to make him Earth's first $100 billion man. Despite the size of his portfolio, he's extremely adept. In 1998, and so far this year, Stansky has shown up the analysts, pundits, and financial writers who dissed the world's biggest fund as too big to beat the market ever again. Last year, he slayed it--by more than five percentage points.

That success is drawing lots of new cash to the fund. But would I send any of my money to Magellan? No way.

Why not I'll explain in a minute, but first let me say that my thinking has nothing to do with Stansky. At 43, and after 16 years at Fidelity, he is plainly at the top of his game. I spoke with him recently in one of the few interviews he has given since taking Magellan's helm nearly three years ago. He was informed. He was thoughtful. He was ironic. When I asked him why Fidelity hasn't highlighted Magellan in recent ads naming funds with potential to outpace the indexes, he said: "I need to do better, I guess." Also, with the fund closed to new investors except those in 401(k) plans and such, ads might be pointless.

TOP 20. Stansky had what I call PPP--perfect portfolio-manager pitch. It's a confidence-inspiring tone balancing conviction in himself with humility before the market's unpredictability. "We're paid to make a bet, and if you're right you get to keep playing," he told me. "I think I had some luck in identifying the companies that would be the successful ones," among them AOL, Home Depot, Wal-Mart, and Citigroup. "Fidelity wouldn't let me stay in this fund if they didn't think that it had a chance to beat the market," he added. "Forget the name of the fund. Just look at the top 10 or 20 stocks: Did you get most of your top 20 stocks right?"

This sounded perfectly sensible, as did his description of how and why he moved a bunch of money into energy stocks this year. His bigger bets on such stocks as Chevron and Schlumberger already have paid off as the oil market and industry mergers have heated up.

So Stansky is not why I would steer clear of Magellan. But the odds against him keep growing. Even if he gives the issue short shrift, most fund managers swear size matters. The more money you have to invest, the harder it gets to beat the market. Your trading pushes up the price of stocks you are buying while depressing prices you get on stocks you sell. A recent statistical analysis of fund size and performance by Boston-based Financial Research Corp. found small funds beat large ones 80% of the time. And, while citing Magellan's long-term record as an exception to the rule, the same study noted that as the fund grew, "its ability to sustain multiyear periods of outperformance diminished." Stansky's handicap only worsens: In 1999, he has had to invest more fresh cash than any of his Fidelity peers.

A more acute, if less certain, danger is the prospect that market sentiment will one day turn away from the megacaps Magellan must favor. It buys such zippy names as Autobytel.com and Priceline.com, but the fund is too big to get much kick out of any but mammoth stocks. It's no accident that its top two holdings (table), GE and Microsoft, have the biggest market caps.

Stansky knows this better than anyone. He named a turn in market sentiment toward small stocks as the single biggest risk facing Magellan holders. When I asked how he would cope with this, his confidence seemed to dip. "Even if small-cap stocks did well, I could probably find at least a handful of big-cap stocks that I expect to continue to generate solid returns," he said. "I do not bat 1,000%, though. Let's be realistic: I will make mistakes."

Your mistake would be to picture Stansky as a superhero who, against the odds, can keep beating the market. For that, I'd rather bet on a stock picker who has more ways to win.