Fidelity Is Wild About Harry
By Aaron Pressman
Harry Lange's first day at Fidelity Investments was one of the firm's worst -- Black Monday in October, 1987, when the Dow Jones industrial average dropped more than 500 points. But after that rough start, Lange has consistently been one of the Boston-based firm's best money managers. So the announcement on Oct. 31 that Lange is taking over the Fidelity Magellan Fund (FMAGX ), a $52 billion underperforming behemoth, from Robert Stansky should come as a great relief to the fund's remaining shareholders.
Stansky, 49, says he's retiring from Fidelity and will take some time to relax after almost 10 years at Magellan's helm. He and his boss, Stephen Jonas, were adamant that the decision to depart was the manager's alone, though Magellan, which once totaled more than $100 billion, has frequently lagged behind the market and similar funds at competitors for the past five years.
A star at Fidelity before taking over Magellan from Jeffrey Vinik in 1996, Stansky didn't rule out coming back eventually in some other capacity. "There's always something interesting coming up at Fidelity," he said on a conference call with reporters.
"EATS YOU ALIVE."
Shareholders have been looking for a change at Magellan for a long time. The fund gained an average of 9.50% a year over the past three years, trailing the S&P 500-stock index by almost 3 percentage points annually. Plus, it performed worse than four out of five similar funds, according to Morningstar.
Stansky's mistakes included focusing the fund on the largest-capitalization stocks -- his top holdings, Microsoft (MSFT ), General Electric (GE ), and ExxonMobil (XOM ) are the three biggest stocks in the market. He also neglected non-U.S. stocks. Small-cap and midcap stocks, along with foreign issues, have outperformed since the end of the Internet bubble.
The pressure of running what was long the biggest stock fund in the U.S. "eats you alive," says Eric Kobren, president of Kobren Insight Group in Wellesley, Mass., and a long-time Fidelity watcher (see BW, 8/1/05, "A Green Light for Blue-Chip Funds").
BIG TECH BET.
Lange, 53, brings a broader investment style and is well-suited to improve performance, analysts say. Early in his Fidelity career as an analyst and sector-fund manager, he was a mentor to Abigail Johnson, daughter of chairman Edward "Ned" Johnson III.
Since 1996, Lange has run the Fidelity Capital Appreciation Fund (FDCAX ), which has gained an average of 9.7% a year during his tenure, beating the S&P 500 by more than 1 percentage point a year. In the past three years, Lange has been averaging 18.42% annually, almost 6 percentage points better than the S&P 500 and better than 97% of similar funds, according to Morningstar.
More important, his fund's three-year average annual return is double Fidelity Magellan's even though both funds have similar "go-anywhere" investment styles. Fidelity said J. Fergus Shiel, a former Fidelity manager who returned to the firm in September after two years at his own hedge fund, will take over for Lange on Fidelity Capital Appreciation.
Lange sometimes makes big bets on sectors and has 35% of his current fund invested in technology stocks. His top three holdings as of July 31 were Genentech (DNA ) , Nokia (NOK ), and Yahoo Japan. He can also be nimble, recently upping his allocation in energy companies to 15% of the fund, vs.10%, in just two months.
Lange turned over almost three-quarters of the stocks in his portfolio last year, while Stansky swapped only about 1 in 20. "Harry Lange couldn't be a better pick to run Magellan," says Jim Lowell, editor of the Jim Lowell's Fidelity Investor newsletter, who changed his rating on the fund from sell to buy.
Stansky's departure could also be good news for Fidelity's company fortunes, since the outfit has seen its performance-linked fees for Magellan plummet. Last year, Fidelity had to give back $89 million of the $359 million it could have collected thanks to performance penalties built into its Magellan management contract. If Lange can turn around the performance, he should also be able to halt the exodus of customers from Magellan, which has seen customers pull out a net $23 billion in just the last three years, according to Financial Research, a Boston-based market-research firm.
But Lange's ability to get new money will be limited as Fidelity says it has no plans to reopen Magellan. With the fund closed since September 30, 1997, only current investors and those who can invest through a workplace retirement plan that includes Magellan can put new money in the fund. (see BW, 5/31/99, "Fidelity Magellan: You Can Be Too Rich").
At the very least, Lange's management style will help Fidelity refute the charge that Magellan had become little more than an overpriced S&P 500-stock index fund. Under Stansky, Magellan resembled the index so closely that its beta, a measure of how much its share price moved in comparison to the index, was 1 -- meaning the fund moved in virtual lockstep with the index on a day-to-day basis (see BW, 9/6/04, "How to Spot a Closet Index Fund"). (Magellan has underperformed the index on an average annual basis due to poor stock picks, fees, and trading costs.)
Lange's style -- which includes more foreign and smaller companies -- has resulted in a portfolio that doesn't track the S&P so closely, and his beta was 1.23. "No one would accuse Lange as a closet indexer," says Russel Kinnel, director of fund research at Morningstar. "He's done an awesome job at Capital Appreciation."
There are a few skeptics. Magellan's two best-performing managers were Ned Johnson and Peter Lynch, the 1980s poster boy for great stock-picking. But much has changed since Lynch stepped down in 1990, and Magellan has chewed up some of Fidelity's finest since then. "Stansky had a great reputation before he took over Magellan [but] he was overmatched by the fund," says Roy Weitz, publisher of FundAlarm. "It's more than any human being can do. The odds are against [Lange]."
The task could be easier than in the past, however, since Magellan isn't as huge as it once was. At Fidelity, Contrafund (FCNTX ) -- run by Will Danoff -- is now larger. Lange's style of including small and midcap stocks, along with non-U.S. companies, compares more similarly to Danoff's style than Stansky's.
"RARE OLD BIRD."
Lange, a tall man with a deep voice and a Midwestern accent, is hardly a typical fund manager. He came to Fidelity from across town at Wellington Management. But before that, he worked at as a senior research engineer at General Motors (GM ). Buried under layers of bureaucracy at the giant carmaker, Lange has said the first time he met GM's chief executive wasn't until soon after he joined Fidelity.
Fidelity's managers increasingly come from Ivy League backgrounds, but Lange earned his 1975 undergraduate degree in mechanical engineering from the General Motors Institute, now called Kettering University. He obtained an Ivy diploma in 1983, with an MBA from Harvard Business School. Among his many younger colleagues, Lange has called himself a "rare old bird." For Fidelity Magellan shareholders, an experienced hand may be just what's needed.
Pressman is a correspondent in BusinessWeek's Boston bureau
with Lauren Young in New York
Edited by Phil Mintz