THERE'S AN UPPER

echelon in the mutual fund world, where a select few funds swell with cash as their 8,500 competitors fight for even a slim slice of your nest egg. Gaining entry isn't easy. These famous funds got that way by first posting excellent long-term performance. Then their marketing departments and armies of brokers took over, luring in legions of investors and their billions of dollars in retirement savings.

But over the last five years putting money in one of the industry's best-known behemoths has been a bad bet. Four flagship funds Magellan, American Century Ultra, Janus Fund and Putnam Voyager returned an average 42% in 1999 and combined held a whopping $220 billion. But since then, this group has an average annual return that lags the S&P 500 index by four percentage points, and their assets have shriveled by $140 billion.

If you own one of these funds, those track records should have you wondering: What should I do? If you sell now possibly triggering a tax bill, depending on how you invest you could be bailing on a fund whose prospects are turning a corner. Not smart, especially since large company stocks are in the midst of a rebound. Then again, there is no telling if things will get better.

Posting lackluster returns is particularly disappointing with big funds, because if anything, the cards seem stacked in their favor. The additional fees they collect allow them to hire more analysts to scour the market for good stock buys. Shareholders get in on the good times too since big funds lower their expense ratios as assets climb past certain benchmarks. Our four funds charge an average $88 per $10,000 invested; the typical actively run mutual fund charges almost twice that amount.

But as big funds grow in size, researchers at Stanford, Syracuse and University of Southern California found that their performance quickly weakens. One reason: As assets roll in the manager has to spend that money. He can't load up on his favorite picks rules prevent him from owning more than 5% of a firm so he's forced to buy names that he might not like as much. "You wind up getting his B List and his C List instead of just his A picks," says Adam Bold, founder of the Mutual Fund Store. During 1999 and 2000 the portfolio of American Century Ultra ballooned from 68 stocks to 193 as assets soared to $36 billion. Did the manager really have conviction about all those new picks? Another problem: placing bets. Over the last year Fidelity Magellan has bought 14 million shares of Schlumberger. It's hard to do that without popping the price or incurring big brokerage costs.

Despite the string of bad years our four funds have put together, their parent companies have tried to put them back on track. Three fund companies changed managers, which in turn, lead to different portfolios or stock picking strategies. The Mutual Fund Store's Bold hopes that will also happen at Ultra.

Magellan
Magellan is arguably the most talked about mutual fund in the world. Unfortunately, not much of that talk lately has been good. Robert Stansky ran this fund for almost 10 years, rarely beating the broad market by a sizable margin. Last year Harry Lange took over the fund, selling millions of shares of blue-chip stocks and replacing them with faster-growing names like Google. So far the plan hasn't worked. He's trailing the S&P 500 by 5% thanks to an options scandal that tainted UnitedHealth Group and a pullback in Asian stocks earlier this year.

But Lange's track record at Fidelity is impressive. As manager of Capital Appreciation, he turned in results between 2000 and 2005 that only 2% of his peers matched. "He's an independent thinker," says Jim Lowell, editor of the Fidelity Investor newsletter. "He's the classic go-anywhere stock picker." Although the fund is closed to new investors, Lowell thinks existing shareholders who can still buy in should do just that.

Janus Fund
Tom Bailey began selling shares of the Janus Fund by knocking on the doors of Denver-area doctors. Thirty years later the fund was the poster child for the tech boom and its subsequent bust. Its current $11 billion in assets is just a third of the amount it once enjoyed. Buying overhyped stocks, a market-timing scandal, an average annual return three percentage points behind the S&P 500 and fleeing shareholders are the causes for that drastic decrease.

In February David Corkins took over the fund. Corkins made a name for himself by racking up good numbers running two other Janus funds, Growth & Income and Mercury. At Janus Fund he's trimmed the number of holdings to around 80 from 130 and increased the number of "strong buys" a term used by Janus to describe the firm's best stock-picking ideas to 90% of the portfolio from 70% under his predecessor. The average market capitalization has increased and turnover has dropped by two-thirds to around 30% a year. His top holdings now include Boeing, Procter & Gamble, JP Morgan and Exxon Mobil. Since taking control of the fund, Corkins is beating the Russell 1000 Growth Index by 2% but trails the S&P by 3%.

Morningstar's Dan McNeela is sold on the new strategy. "The changes Corkins is implementing are designed to address the fund's previous shortcomings," he says.

Voyager
After losing an average 22% during the bear market, several managers have tried to put Voyager back on solid footing. The current team finds their picks by combining computer formulas with traditional research. But the same tactic has been employed by other Putnam funds, with spotty success. There is no indication that it's helping here. Year-to-date the new managers are trailing the S&P by 10%.

Ultra
Ultra's top holding is Wal-Mart Stores, but bets on Yahoo, eBay and Amazon.com have landed this fund in the bottom 10% of its peers over the trailing 36-month period. That's nothing new here. The managers haven't beaten the broader market since 2000, according to Morningstar. "It's just a bad fund," says Bold. "If this fund were a horse it would be glue."