Fidelity on lookout for new blood for Magellan Fund

NEW YORK — Having lost some business, the best-known club in the mutual fund industry is swapping its “members only” sign for a welcome mat.

Fidelity Investments’ decision to allow investors unfettered entry to its storied Magellan Fund for the first time in a decade offers a promising opportunity for those who missed out on its quiet success in recent years. But while fund openings can portend a coming run-up in performance as managers lay down new bets, investors shouldn’t buy into Magellan with an expectation that it is poised to take off.

A look past the well-known nameplate reveals a smart fund but one that, like any other investment, isn’t without risk and that should be just part of an overall investment plan.

The reopening of Magellan comes as aging investors have been tapping into savings and causing the fund’s assets to dwindle. It’s still a titan at $45 billion, but well off the unwieldy $105 billion in assets it saw at its peak in the late 1990s.

The weight-conscious Magellan still has critics who complain the fund is off its prime. From 1977 until 1990, when Peter Lynch made his name running Magellan, it saw annual returns of 29 percent a year. But the fund has posted a solid performance in recent years, analysts note, and they often give praise to Harry Lange, who took over as portfolio manager in October 2005.

In the past 10 years, Magellan has shown returns that outpaced those of the Standard &Poor’s 500 index by about a quarter percentage point per year.

“Perception lags reality. I think the general perception seems to be that this is a once-great fund that has fallen from glory,” said Dan Lefkovitz, lead Fidelity analyst at Morningstar Inc. “I actually think it is a pretty good fund in its current form.”

Still, he sees solid performances by other large-capitalization funds as well, so he doesn’t suggest investors necessarily rush into Magellan.

Funds focused on large companies could fare better than some other fund types in the coming months if the economy slows. Investors often regard big companies with overseas operations as more likely to skate by.

“Fund reopenings can be interesting opportunities,” said Lefkovitz. “They often happen when a manager is finding a lot to buy. When a manager is finding a lot of opportunities, that can mean it’s a good time for investors to jump in.”

In the case of Magellan, Lefkovitz contends it’s more an issue with cash flow. Fund managers want new cash coming in so they can avoid selling good stocks just to buy new ones or to hand over money to investors cashing out.

“Just to get a little bit of money in every month is sort of what portfolio managers dream of,” said Lefkovitz.

“This is just a fund that has been in redemption mode for years and years and has been steadily bleeding assets,” he said. “I just hope that Fidelity is much more vigilant about monitoring asset growth.”

Indeed, some investors are wary of funds that grow too large.

“Some people think that once you are in the multibillion dollar stage you are essentially a closet index fund. But it’s proven that it’s not,” Jeff Tjornehoj, an analyst at fund tracker Lipper Inc., said of Magellan.

“This puts Fidelity Magellan back on your list of funds for considering,” he said of many investors.

The fund, which is nearly 45 years old, isn’t the only one fund that Fidelity had closed but the company says it doesn’t have plans to reopen other big funds like the $81 billion Contrafund.

Not all fund managers try to avoid becoming huge. American Funds’ Growth Fund of America has assets of about $185 billion and often earns praise from analysts.

And small-cap funds are much more likely to close to investors because it can be too difficult for them to move in and out of positions if selling a stock, for example, would cause the remaining shares to plummet.

But with small-cap stocks having fallen out of favor after years of outpacing large caps, small-cap funds are also finding room to reopen. The Aston/RiverRoad Small Cap Fund in December began allowing existing investors to add money to its fund after a year of barring any added money.

“You’re seeing some of these funds start to ease back open,” said Andrew Beck, the fund’s manager, citing a recent pullback in small-cap stocks.