The changes at the Fidelity Magellan Fund raise a number of issues for 401(k) sponsors and participants.
The changes suggest pension plan sponsors need to offer participants more investment choices, tighten monitoring of funds, and be cautious in the lure of a big-name mutual fund, especially as investors cannot tailor the investment limits of a manager of a mutual fund the way they can for the manager of a separate account.
Typical 401(k) sponsors face a key problem: There is no easy way to quickly replace an investment choice because of dissatisfaction over an abrupt resignation of a portfolio manager, a portfolio's underperformance, or big allocation switches to, say, fixed income and derivatives, all of which have occurred with the Magellan fund.
The sponsor of a defined benefit fund can drop a manager and, perhaps, park the assets temporarily in equity index futures to maintain stock market exposure while searching for a replacement.
But 401(k) sponsors tend to act more slowly in replacing investment choices or even adding other choices. Because participants choose the investment portfolios in which to invest, sponsors cannot move the money out of any fund in question. And it's difficult for sponsors to quickly inform participants of problems with a fund, or to drop a particular fund as an investment option, without alarming them.
The Magellan fund isn't collapsing, so there is no need for 401(k) sponsors or others invested in it to panic. Far from it, the fund's long-term performance has been good, though not over the past year.
But Robert E. Stansky, who replaced Jeffrey N. Vinik as the Magellan Fund portfolio manager, faces a challenge that surpasses even that of the renowned investor Warren E. Buffett. He must run a $56 billion fund. That's close to double the total market capitalization of Berkshire Hathaway Inc., the heralded holding company run by Mr. Buffett. Mr. Stansky has the Herculean task of trying to consistently beat the market benchmark with the world's largest mutual fund. Mr. Vinik, despite underperforming in 1995 and the first quarter of 1996, has outperformed the Standard & Poor's 500 Stock Index over his nearly four-year tenure. But Peter Lynch, the renowned former Magellan portfolio manager, has said a number of times he would as an ordinary investor look for other mutual funds or stocks over the Magellan fund because of its size.
Ordinary investors appear to be doing just that. Much of the recent growth of the Magellan fund has come from defined contribution plans, a somewhat captive audience.
Executives at defined benefit funds and industry experts generally steer away from huge investment portfolios, outside of passive funds, because of the difficulty such active funds have in outperforming the market.
The Magellan fund's large bets recently in bonds, where it has had more than 30% of its assets, and derivatives should raise questions among 401(k) sponsors and investors. Is this what 401(k) plan participants expected then they invested in Magellan? Some consultants and plan sponsors suggest there is potential liability for sponsors from participants for providing investment choices perceived as one style but actually having wide investment latitude.
The implications of the changes at Magellan should cause executives of defined contribution plans to reconsider their attitudes toward large, "brand name" mutual funds.
