Fidelity Watcher: Magellan's Still a Buy

Fidelity's storied Magellan fund has turned out some pretty ugly results this year. So far in 2008, it's down 54 percent, 14 percentage points behind the S&P. It's also getting walloped by 97 percent of its peers.

Despite those results, Eric Kobren, who writes the independent newsletter Fidelity Insight, says investors should stick with Magellan on account of its manger, Harry Lange (he currently rates the fund "OK to Buy.")

Back in the 70's and 80's, Magellan rose to fame under the direction of legendary investor Peter Lynch, who achieved astounding annualized returns of 29 percent using a buy-what-you-know strategy. Lynch's immediate successors continued to outrun the market, but the fund's next manager, Robert Stansky, failed to keep the ball rolling.

Under Stansky's management, Fidelity had come to be known in investing circles as a "closet index fund" for mimicking the S&P 500.

When Lange took over in late 2005, Magellan became a different animal entirely. According to Kobren, Lange more than doubled the fund's foreign exposure, and added to energy, financials, and health care. The changes led to underperformance in 2006; however, value investing was still trumping growth at that time. His new portfolio paid off in 2007.

This year, Lange's growthy stocks haven't faired so well. Technology has been his largest sector bet; recently, nearly 30 percent ofthe fund's assets resided in that industry. Financial stocks also hobbled its performance.

In the fund's most recent shareholder update, Lange says he underestimated how much the housing bust and credit crisis would rock the financial markets. "Given my basic confidence in the global financial system, I continued to pursue a growth-oriented strategy and shunned defensive stocks, which hurt the fund," he wrote.

Today, the assets of Magellan, which was the first fund in history to surpass $100 billion, stands at roughly $22 billion--a level it last saw in 1992, says Kobren.

But investors should stay the course, he says. Kobren's overall take: "While this market has been painful for all stock funds, we still think Harry's the right man to steer Magellan over the long term," he says.