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Mutual Funds
Battle of the $100B funds
July 20, 1999: 11:25 a.m. ET

Vanguard's 500 Index Fund set to catch up to Fidelity Magellan Fund
By Staff Writer Martine Costello
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NEW YORK (CNNfn) - Fidelity Investments' flagship Magellan Fund passed a milestone recently when its assets topped $100 billion, but another mutual fund is poised to push it off its throne as the giant of the industry.
     Vanguard 500 Index Fund is closing in on $93 billion in assets and could pass Magellan within the next few months as the nation's largest mutual fund, market watchers said.
     "It's a healthy sign of the industry," said Russ Kinnel, an analyst at fund-tracker Morningstar. "You see the average investor is being treated well by the industry."
     Besides size, the two funds could not be more different.
     Magellan's returns have soared under the direction of famed stock picker Robert Stansky since he took the helm in 1996 amid suffering returns. Many analysts said his success helped chip away at the argument that size always hurts an actively managed fund. It has reigned as the largest mutual fund throughout the decade, analysts said.
     Magellan owns both growth and value stocks, with top holdings as of June 30 in General Electric (GE), Microsoft (MSFT) and Home Depot (HD). It closed to most new investors in September 1997. The fund is up 16.67 percent year to date as of Monday, Morningstar said. Assets as of Monday were roughly $100.1 billion, Fidelity said.
     "When we closed (Magellan), we were aware of the fact that it was likely some day another fund would surpass it, but that wasn't a concern of ours," said Fidelity spokeswoman Anne Crowley. "Growth in and of itself has never been our goal."
     The Vanguard fund, managed by Gus Sauter, mirrors the S&P 500, owning comparable weightings of Microsoft, GE, IBM (IBM), Wal-Mart (WMT) and all the other companies in the index. The fund, with $92.64 billion in assets, is up 15.25 percent year to date as of Monday, Morningstar said.
     "One-hundred billion is a big number but that's all it is," Sauter said. "I don't pay much attention to bragging rights. That's not what investors are concerned about. Investors are concerned with returns."
     But what does it all mean for investors? Is big better or worse? Is indexing going to trounce actively-managed funds?
     "You've got two low-cost, high performance funds," said Morningstar's Kinnel. "I would rather own a big fund than a tiny, no-name fund. Look at the resources behind Fidelity or Vanguard. You have a bunch of very talented people."
     Magellan's passage of the $100 billion benchmark is noteworthy considering how poorly the fund was doing before Stansky took the helm from Jeffrey Vinik, Kinnel said.
     "It means actively managed funds can adapt to big asset bases," Kinnel said. But at the same time, a big actively managed fund operates under restraints. For example, a big fund can't get in and out of positions very easily. So making unusual bets can backfire.
     Kinnel recalled that Vinik in 1995 sold off some semiconductors and tech stocks and moved into bonds and large-cap value companies. His timing couldn't have been worse. When the market rebounded and growth stocks started to move, Vinik had to watch from the sidelines.
     "You just can't jump back into the market with $15 billion when it rallies," Kinnel said.
     One of Stansky's strategies has been to slide into a position as prices are falling. Last summer, when technology stocks were getting hammered, Stansky went shopping and returns soared.
    
To index or not to index?

     But even though Wall Street pays attention to Magellan's moves, Kinnel said he's seen more interest on Morningstar's message boards about the Vanguard fund.
     "There's constant discussion about the Vanguard Index 500 Fund," Kinnel said. "If you say, 'I want a great index fund,' you think of the Vanguard 500 Index Fund. If you say, 'I want a great actively-managed fund,' there are many different names."
     Kinnel said the Vanguard fund can be a good core holding for an investor.
     A key difference with an index fund is that size does not really make a difference, said Lou Stanasolovich, a certified financial planner at Legend Financial Advisors in Pittsburgh.

"As long as it follows the index, size isn't an issue," Stanasolovich said.
     Stanasolovich said he prefers building a portfolio around actively managed funds, but he thinks Magellan is too large. He wouldn't recommend it even if the fund were open for new investors.
     Bill Dougherty, an analyst at Boston fund researcher Kanon Bloch Carre, pointed out that indexing is still a relatively small phenomenon on Wall Street among retail investors.
     While 40 percent of the "defined benefit" pension plans -- the old-fashioned pension plans your parents had -- are indexed, it's a small chunk on the retail side of mutual funds, Dougherty said.
     "Everybody is saying it's a big deal," Dougherty said of Vanguard 500 Index Fund hitting $100 billion. "But it's not. (Indexing) is not a saturated market. There's a lot of room for growth."
     A good deal of that $90-plus billion in the Vanguard fund is from asset growth thanks to the meteoric rise of the S&P 500, Dougherty said.
     And while indexing is growing more popular, there are signs that active managers are starting to win against the S&P 500 again, Dougherty said.
     In 1993, 65 percent of active managers beat the S&P 500. The percentage started falling, and by 1997, only 10 percent of active managers beat the benchmark. But then things turned around. In 1998, 18 percent of active managers beat the benchmark, and in the second quarter of 1999 alone, 67 percent edged ahead of the index.
     "Size as it relates to an index fund means nothing, but size as it relates to Magellan does mean something," Dougherty said. "The question is, is it all over for the index fund and do active managers have the edge? I don't know the answer to that."Back to top

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