Fidelity Magellan Encounters Rough Straits

It's an ignominious time for the mighty Fidelity (FMAGX Quote)Magellan.

The fund's cash position in July fell to its lowest level since the boom years as investors withdrew $1.3 billion more than they put into the behemoth fund. The fund had 0.5% of its assets in cash as of July 31, according to Fidelity's Web site, down from 3.2% at the end of June.

Stock funds faced massive redemptions across the board in July, though. July's equity outflows of $40.9 billion were the largest since September 2001, according to AMG Data Services.

February 2000 and July 2002 were the only months that Magellan had net outflows greater than $1 billion since 1998. In February 2000, Magellan's cash position was negative 0.2%, indicating that manager Robert Stansky borrowed cash to meet redemptions.

It's no secret where investors are putting their money these days: Taxable bond funds reported record inflows of $17.6 billion for July.

July's activity enabled Magellan's kingpin counterpart in the bond world, (PTTAX Quote)Pimco Total Return, to strip Magellan of its title as the largest actively managed mutual fund and second-largest mutual fund of any type.

In March 2000, Magellan was the 800-pound gorilla with more than $109 billion in assets. Since then, investor redemptions and market depreciation have shrunk Magellan's assets by 45% to $60.3 billion.

Over the same time period, though, Pimco Total Return, run by Bill Gross, more than doubled its asset base from $31 billion to $64 billion.

The Vanguard 500 Index fund remains the industry's largest mutual fund, with $77 billion in assets. Vanguard 500 took the industry's crown as the largest fund in April 2000. Its assets peaked at more than $110 billion in August 2000.

Magellan has been closed to new investors since 1997, not counting new 401(k) investors, who can still enter the fund if their plans offer it. If today's high levels of redemptions continue, though, the fund will likely reopen, says Morningstar senior fund analyst Scott Cooley.

"In the past, Fidelity has reopened funds in an effort to stabilize cash flows," Cooley says. For instance, Fidelity's (FLPSX Quote)Low-Priced Stock fund, a small-cap value-oriented offering, saw massive outflows in 1999 and 2000. Fidelity reopened the fund to draw in new money to stabilize cash flows. The fund currently has $15.5 billion in assets.

Magellan's reopening -- if it happens -- isn't necessarily to be heralded. Certainly the fund has a long and storied history. Founder Ned Johnson is something of a legend, and of course Peter Lynch grew increasingly famous as he managed the fund from 1977 to 1990. Mid-'90s manager Jeff Vinik was lauded until some misinterpreted remarks prompted price-manipulation lawsuits -- which subsequently silenced Fidelity's fund managers on the subject of any publicly traded companies.

Current manager Bob Stansky has done a fine job with a fund that has significant overlap with the S&P 500. Such a large fund can only really invest in large-cap stocks, which have done abysmally of late. Indeed, Pimco's total return might soon surpass the Vanguard 500 Index fund. The size of any fund, though, doesn't necessarily indicate anything about the investment's suitability for an individual.

The mystique of the Magellan fund may be just its size, and it may not be indicative of any superiority, Cooley says. "Other funds in Fidelity's family are at least equally attractive," he says, noting Fidelity's (FGRIX Quote)Growth and Income fund. "That's held up better than Magellan in recent years and is still open to new investors."