Did Magellan Make a Titanic Call Against Tech at the Wrong Time?

It took (FMAGX)Fidelity Magellan skipper Bob Stansky six months to turn his massive vessel around amid a tech-stock monsoon, just in time for it to stop raining. Now that tech has revived, the big question is: Did he start turning the ship around in time to ride the wind?

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The manager of the $87.2 billion fund, the largest actively managed mutual fund in the nation, gradually pared his sprawling portfolio's tech stake from 28.6% at the end of September to 11.6% at the end of March, according to a shareholder report filed with regulators this week. Since Stansky's comments on earnings and valuations were somewhat negative back in September, some might wonder why it took him so long to trim the fund's tech bet. The same question can be asked of fellow growth Janus, which sharply sold tech in the first quarter.

The answer is simple: A mountain of assets does slow fund managers down. Though some Fidelity-watchers think Stansky may be moving back into his tech favorites, the fund's size sometimes means that the storm has passed by the time he's finished taking evasive action.

"In his shareholder report six months ago [Stansky] said corporate earnings stink and tech spending is down, but it seems like it took him six months to react to that," says Morningstar senior fund analyst Scott Cooley, who covers the fund, which is closed to new investors.

Fido and the Tech Bottom

The tech sector has seen an eye-popping bounce since Stansky and Janus's managers dumped millions of sagging shares in tech bellwethers such as networker Cisco Systems(CSCO), software concern Oracle(ORCL) and data-storage shop EMC(EMC). Market watchers often say that a beleaguered sector won't recover until massive shops like these throw in the towel, since their slow-footed moves can indicate a bottom.

"Last fall, lots of Fidelity managers told me they saw significant weakness in tech, but you didn't see them repositioning their portfolios as quickly as you might expect," says Cooley. "That's kind of curious, to have all that good information and act on it so slowly."

Indeed, Stansky was methodical as he raised cash in the tech sector and put it to work in more defensive areas like financial services and health care stocks. Between Sept. 30 and the end of last year, Stansky cut the high-profile fund's tech weighting from 28.6% to 19.3%. Despite the selling, technology still had more of the fund's billions than any other sector at that point.

But between the end of January and the end of March, Stansky cut the fund's tech stake from 18.8% to 11.6%, according to back issues of Fidelity's monthly Mutual Fund Guide. The move dropped tech from first to fourth on the fund's list of top sectors and left the fund's tech holdings six percentage points below a market-weighting, using the S&P 500 as a yardstick.

Low-Tech Fidelity Magellan Bob Stansky gutted his sprawling fund's tech stake over the past six months.
Sector	March 31, 2001	Sept. 30, 2000
Financial Services	20.5%	14.5%
Consumer Discretionary	16.3	15.4
Health Care	13.1	10.5
Technology	11.6	28.6
Industrials	11.2	10.2
Source: Fidelity

A look at the 10 tech stocks that comprise the biggest percentage of the S&P 500 shows that his selling was as diverse as it was deep. Aside from Microsoft(MSFT), he significantly cut his share balance in the biggest tech shops in the index his fund is stacked up against. In the six months ending March 31 the fund's share balance in EMC, for instance, fell from 21 million to 9.3 million. The fund's Texas Instruments (TXN) stake fell from 29.2 million shares to 10 million.

The giant fund's massive share balances show why it can be difficult to move into and out of stocks. At then at the end of September, for instance, the fund alone owned more than 5% of the outstanding shares of five companies, according to bigdough.com, a Web site that tracks institutional stock ownership.

Hello, I Must Be Going . . . Among the 10 biggest tech stocks in the S&P 500, Stansky reduced his position in all but Microsoft. Shares in millions.
	March 31 Share Balance	Sept. 30 Share Balance
Microsoft	28	27.1
Intel	33.4	43.1
America Online Time Warner	36.9	45.4
IBM	11.2	12.7
Cisco Systems	36.4	55
Oracle	26.1	39.4
EMC	9.3	21
Nortel Networks	8.5	16.7
Sun Microsystems	29.1	31.6
Texas Instruments	10.1	29.2
Source: Fidelity and bigdough.com.

All of the tech bellwethers Stansky sold took off after the end of the first quarter. Since March 31, shares of EMC and Texas Instruments, for instance, are up 36.1% and 33.3%, respectively, according to Baseline/Thomson Financial.

"Many of the stocks they've sold have had a spectacular bounce," says Jim Lowell, editor of the independent newsletter FidelityInvestor.com. "If you let the tech out of your bag before this run, you've felt the consequences of poor performance."

Missing the Boat? Investors who bought what Stansky sold would've made a pretty penny.
	12-Month Return Through March 31	Return Since March 31
Microsoft	-48.5%	28.6%
Intel	-60.1	12.2
America Online Time Warner	-40.8	42.6
IBM	-18.5	22.7
Cisco Systems	-79.5	48.5
Oracle	-61.6	17.4
EMC	-52	36.1
Nortel Networks	-77.7	11
Sun Microsystems	-67.2	48.1
Texas Instruments	-61.3	33.3
Source: Fidelity and Baseline/Thomson Financial. Returns through May 22.

Interestingly, however, there is some evidence that Stansky has recently moved back into some of his tech favorites. Given the fund's tech-light position relative to its benchmark S&P 500 Index, you'd expect it to be lagging over the past month or so because it's been a bonnie time for tech. But since March 31, the fund is up 14.5%, slightly leading the index, according to Baseline/Thomson Financial.

The Reverse Midas Touch Stansky's tech selling preceded a sharp run-up for the mercurial sector.
	12-month return on March 31	Return Since March 31
Nasdaq 100	-64.2%	36.1%
Nasdaq Composite	-59.8	29.8
(FMAGX) Fidelity Magellan	-27.1	14.5
S&P 500	-22.6	14.3
Source: Baseline/Thomson Financial. Returns through May 22.

This might not have been too hard to do. After all, the fund's tech stake is well whittled from its previous highs, but not too far from the S&P 500's tech stake.

"His recent performance suggests that he's probably been buying precisely the names he said he was selling in this shareholder report," says Lowell. "I think he's doing what he's always done, which is to tack very closely to the market whichever way the wind is blowing."

As usual, the tight-lipped folks at Fidelity won't comment on what Stansky is doing with the fund, but his recent performance makes at least a modest case for renewed interest in the mercurial sector. With such a massive fund he's managed to use modest moves to stay ahead of his peers and benchmark since taking over the then-sputtering fund in 1996. He's posted an average annual return of 8.7% over the past three years, beating 80% of his big-cap growth fund peers and leading the S&P 500 by more than two percentage points, according to Morningstar.

The same can't be said for Janus, where only six of the firm's 17 direct-sold stock funds have led their peers over the past month by Morningstar's tally.

It might be comforting to own a giant fund whose manager is known far and wide, but sometimes that manager will feel like an aging outfielder: They know where the ball is going, but it'll take them a while to get there.

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