BOSTON - Defined contribution plan assets managed in Fidelity Investments' $53.8 billion Magellan Fund grew only about 4% last year, a drastic drop from the 50%-plus growth rates of previous years.
The barely perceptible growth suggests the most static and forbearing of investors - defined contribution plan participants - have turned away from the high-flying Magellan Fund.
The defined contribution plan investors apparently reacted quickly last year to Magellan's deep underperformance vs. the Standard & Poor's 500 Stock Index. Observers say they transferred assets and redirected future contributions from Magellan to other investment options.
The $53.8 billion fund returned 11.69% for the year ended Dec. 31, compared with 22.96% for the S&P 500 and 17.48% for the Growth Fund Index of Lipper Analytical Services Inc., New York.
Magellan also lagged the S&P 500 for the three- and five-year periods. The fund returned 13.25% and 14.4%, for the respective periods, against the S&P 500's 19.68% and 15.22%. (All returns of more than one year are annualized.)
Despite the slower growth, Magellan remains the most popular fund for defined contribution plan investors. (See related stories starting on page 22.)
According to data reported by the company for Pensions & Investments' fifth annual survey on mutual funds most used by defined contribution participants, Magellan dwarfed all other equity funds on the list. With more than $30 billion of defined contribution plan assets, Magellan had almost three times as much as the No. 2 fund, the Fidelity Growth & Income Fund.
But Magellan showed signs of weakness last year. Outflows from both retail and institutional investors totaled $2.5 billion last year, according to data from Financial Research Corp., Chicago.
Magellan's growth in defined contribution plan market share has been stellar for years. Defined contribution plan assets in the past five years swelled 270% from a base of $8.2 billion in 1992. Yearly defined contribution plan asset growth topped 50% in 1993, 1994 and 1995. But defined contribution plan assets only grew to $30.3 billion in 1996, up from $29.2 billion in 1995.
Other Fidelity equity funds showed more impressive growth last year. Fidelity Growth & Income Fund saw a 65.6% jump in assets from defined contribution plans in 1996; Contra Fund was up 83.7% from defined contribution plans; and Fidelity Equity Income Fund was up 40.8%.
"DC plan investors are much more reluctant (than retail investors) to move both future contributions and existing assets out of a mutual fund," said Stephen Butler, president of Pension Dynamics Corp., Lafayette, Calif.
"But even in a DC plan, some element of participants will chase hot returns, which would account for some of the exodus out of Magellan," he said.
As account balances rise, however, investors are seeking "diversification of their assets into different investment styles and asset classes. More DC investors are moving larger amounts of money. You may be able to say here that Magellan is not all that bad, but other funds are better," he added.
Peter Smail, president of Fidelity Institutional Retirement Services Co., Boston, acknowledged the Magellan Fund is "going through a cycle. The net number for defined contribution plan assets is positive. Over time, funds grow and shrink. They change. The one-year growth is not really relevant or fair to use in assessing a fund. Magellan is still being added as an investment options by 401(k) plans all the time. It is arguably the one mutual fund that has made the most money ever for DC plan participants."
Mr. Smail said the movement of assets from Magellan to other Fidelity funds is the result of increasing account balances and intensive investment education about diversification, especially during a bull market. Fidelity did not offer detailed information on asset flows from Magellan to its other equity funds. He also cited Magellan's recent performance.
