Fidelity Magellan Reopens to Investors

Fidelity announced in a conference call Monday morning that the offering would start accepting money as soon as Tuesday. It will be the first opportunity investors have had to jump into the fund since Sept. 30, 1997. A new manager, a good performance last year and an aging shareholder base were the main reasons Fidelity cited for reopening Magellan. The fund has 2.7 million shareholders, most of whom are baby boomers investing through 401(k)s and individual retirement accounts.

"We believe that the time is right to make Magellan available to a new generation of investors," says Walter Donovan, president of Fidelity Management & Research Company's equity division.

The fund shot to fame when Peter Lynch, its legendary former manager, posted a total return of 2700% between 1977 and 1990, handily beating his competitors. It reached another milestone when it soared in size to over $100 billion during the late 1990s, making it one of the largest in the industry.

But that success ultimately played a part in the fund's downturn. Its sheer size made it difficult to build positions without influencing stock prices. Five straight years of poor performance between 2000 and 2004 brought on by bad stock picking and a bear market caused many shareholders to head for the exits. Before he relinquished control of the fund in 2005, manager Bob Stansky, once a highflier at the company, was roundly criticized for running what amounted to an overpriced index fund that was in the bottom of the large-cap category.

Harry Lange, who had successfully run the company's Capital Appreciation fund (FDCAX), took over and quickly revamped the portfolio. He sold large chunks of stocks that resulted in a $22-per-share capital gains hit that year. It was a painful whack for the loyal shareholders who had stuck with the fund through thick and thin. Lange chalked up a respectable 7% gain his first year. But he still trailed the broad market by almost nine percentage points.

In 2007, though, he hit his stride. He avoided poorly performing financials and went heavily into technology and foreign stocks. The moves were prescient. While other managers were dealing with the subprime fallout, Lange was posting big gains with top holdings like Nokia (NOK), Google (GOOG) and Corning (GLW). Magellan posted a 19% return, according to Morningstar, good enough to put it in the top quartile of the large-cap growth category. Investors can expect foreign stocks to be a major theme for Lange in 2008 as well. "I see a lot more growth outside the U.S.," he says. "I'm very bullish on foreign stocks."

However, despite the good year, Lange is still being burdened by one issue: redemptions. Magellan's shareholder base is aging. So as these retirees tap the money they saved in their retirement accounts, Lange has had to sell stocks in order to cash them out. "I wasn't having to sell into the meat and bones of the fund," he says. Nevertheless, it was handcuffing him. (The fund had $50 billion in assets when Lange took over; it now has around $45 billion.) By reopening, Fidelity is hoping to attract younger investors who will stay with the fund for decades.

Morningstar's Dan Lefkovitz thinks investors are well-served by jumping into the fund. He believes Lange's "go-anywhere" approach, which scours the globe for good growth stock ideas is working. And inside Fidelity, 120 new analysts have come on board, bringing the total to 400. This crew of researchers should provide Lange and other managers with a wealth of good investment ideas. Also, there's the fact that Fidelity has a history of doing well when growth stocks are in favor. "That is their sweet spot," adds Lefkovitz.

Don't expect other Fidelity funds to follow in Magellan's footsteps. Donovan added that Fidelity's other closed funds, namely Low-Priced Stock (FLPSX) and Contrafund (FCNTX), two funds that have long histories of posting good returns, have no plans to reopen their doors.