Magellan to Close to New Investors

NEW YORK — Fidelity Investments, signaling a major strategic change, said Wednesday that it will close its flagship Magellan fund--the nation’s largest mutual fund--to most new investors Sept. 30.

Experts said Boston-based Fidelity wants to switch the spotlight away from the $63-billion fund and refocus it on the firm’s long-term goal of building its brokerage business to compete with Charles Schwab and Merrill Lynch.

Although Magellan is a powerful brand name and a major source of management-fee revenue for Fidelity, the fund has also attracted negative attention over the last two years, as its performance lagged the overall stock market.

Questions about Magellan “became a distraction to their efforts to grow the brokerage,” said Geoff Bobroff, an industry consultant in East Greenwich, R.I.

Robert Pozen, chief of Fidelity’s mutual fund operation, and Robert Stansky, Magellan’s manager, said closing the fund will stabilize flows of cash into and out of the fund, making it easier to manage the fund and to improve performance for its 4 million-plus current holders.

But the closing has a big asterisk attached: Shares will continue to be sold to current Magellan holders and to people whose 401(k) or other retirement plans offer Magellan among their investment choices.

With retirement accounts representing more than 60% of Magellan’s assets, that is a major exception.

Even so, analysts said, Fidelity risks losing the “bigness” title to rival Vanguard Group’s $45-billion Vanguard Index 500 fund, which doesn’t pick stocks based on research but simply tries to mirror the Standard & Poor’s 500-stock index.

Fidelity watchers said the firm has long considered closing Magellan to new investors as it grew larger and more unwieldy.

“Everybody has long known that $50 billion or $60 billion is too much to manage with any degree of competence,” said Robert Markman of Markman Capital Management in Minneapolis.

“This was an opportune time for them to close the fund without it being seen as a defensive, back-on-your-heels move,” he added.

The closing announcement comes just as Magellan’s monthly cash flows have finally turned positive after well over a year of net outflows.

The fund has experienced $11 billion of net outflows since April 1996, according to David J. O’Leary, president of Alpha Equity Research in Portsmouth, N.H., which tracks Fidelity funds.

Magellan’s performance has perked up in recent months, leading to the turnaround in flows. The fund is up nearly 22% this year. Although that trails the S&P; 500’s nearly 25% gain (including dividends), the gap has been narrowing.

Pozen said there are “no present plans” to clone Magellan or create a new fund with the same investment style, as other fund companies have done after closing a popular fund.

Stansky denied that sheer size is an obstacle to Magellan’s performance, but he said large inflows and outflows of cash are a problem. A fast cash buildup can pressure him to invest when he may not see anything he likes, or when a stock he does like is overpriced.

On the other hand, large redemptions could force him to sell stock, although Stansky said that has never happened in the 14 months he has managed Magellan.

In short, stabilizing cash flows puts the timing of investments more firmly in his hands, Stansky said.

Aside from how it affects Magellan’s performance, the closing is designed to take Magellan off the table as a topic of discussion and to put Fidelity’s marketing focus on the brokerage business, said Alpha Research’s O’Leary.

He said Fidelity is about to launch a “major blitz” of advertisements touting its electronic trading business.

Just last week, Fidelity dropped its online fee for trading up to 1,000 shares of stock to $28.95, or $1 below the fee charged by Schwab’s e-Schwab service.

Fidelity will also play up the alliance it struck in January with Salomon Bros., under which electronic-trading customers will get access to Salomon’s highly regarded stock research.

Closing Magellan will cause a substantial reduction in Fidelity’s management fees, but O’Leary said retail commissions have been declining anyway. Fidelity plans to replace that revenue with fees from a broader array of services than just mutual funds.

“The idea is to get the account,” O’Leary said. Once a customer relationship is established, he said, Fidelity eventually will provide not only complete brokerage services, but also--following the lead of such competitors as Citicorp--mortgages, insurance and other services.

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Trimmed Sails

The Fidelity Magellan fund’s performance has trailed that of the Vanguard Index 500 Trust--which replicates the Standard & Poor’s 500-stock index--since 1994. The wide disparity in 1996 brought Fidelity major PR problems. Total returns for Magellan and Vanguard Index 500 since 1991 and year-to-date:

1997

Vanguard Index 500: 24.6%

Magellan: 21.7%

Source: Lipper Analytical Services