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Magellan is dethroned
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April 5, 2000: 2:02 p.m. ET
Vanguard's 500 Index Fund displaces Fidelity king as largest of mutuals
By Staff Writer Jeanne Sahadi
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NEW YORK (CNNfn) - The Vanguard 500 Index Fund has finally surpassed Fidelity's Magellan Fund as the largest U.S. fund, ending Magellan's 11-year reign as top dog in the industry, according to estimates Wednesday by fidelityinvestor.com.
By the end of trade Tuesday, assets for Vanguard 500, whose shares closed at $137.74, totaled $107.2 billion, above Magellan's $106.9 billion, or $140.57 per share, said David Pittelli, senior analyst at fidelityinvestor.com.
 Much like the legendary matches between tennis greats, the funds' competition raises the level of the game, which is good for investors, analysts said.
"Both have provided tremendous performance. It's good to see both of them doing so well. It's an indication the fund industry is doing well for shareholders," said Russ Kinnel, an analyst at fund-tracker Morningstar.
To index or not to index
If you are deciding whether to buy into an index fund or an actively managed one, Kinnel said, "I think a mix is what's best."
Wall Street has been anticipating the passing of the crown for months, especially since the actively managed Magellan Fund closed its doors to new investors in 1997 to limit its size.
And in some ways the event itself is like the first day of a new millennium -- a bit anticlimactic.
"I don't think (the dethroning) is too big a deal," Kinnel said. "But it does say indexing is the best strategy for huge asset bases."
 Large asset size narrows the investment choices of an actively managed fund and makes it harder for the fund to get in and out of positions easily. What's more, if a fund manager makes a bad bet, the consequences can be amplified.
Index funds, on the other hand, are not hindered by size since they track a stable lineup of stocks and don't do much buying in the course of a year -- adding perhaps no more than five or six stocks to their portfolio.
The trick to running a big fund
But that doesn't mean big funds can't continue to compete well. Kinnel noted that Magellan chief Robert Stansky has rewritten the rules for managing big funds, which has helped the Fidelity giant beat the S&P 500 for the past two years following lackluster performances in 1996 and 1997. Year to date, his record remains outstanding. Magellan was up 2.9 percent as of the close of trade April 4, while Vanguard 500 was up 1.8 percent.
"What Stansky has done by outperforming the S&P 500 is shown that while asset size is a handicap for an actively managed fund, it's not devastating. You have to be flexible. And you have to adopt a large-cap, low-turnover strategy," Kinnel said.
Magellan recently asked its investors to allow the fund to invest up to 25 percent of its assets in a single company, giving Magellan the option of overweighting its positions in market benchmarks.
V500 just trying crown on for size?
Although the Fidelity fund has been pushed off its throne for now, the top spot may not be a secure one for the Vanguard 500 Index Fund in the near-term.
"The significance (of the dethroning) is a little perverse. It's occurring as investors are beginning to flee the index fund," said Dan Wiener, editor of the Independent Adviser for Vanguard Investors.
In March, more than $740 million flowed out of the fund -- its first negative cash flow since August 1993. But those outflows very likely represent the kind of hot money that moves quickly in a volatile market and what money remains is likely to stay, Wiener said.
Since Magellan is closed to new investment, its net inflows are likely to be less than those of the Vanguard 500 going forward. And unless it can continue outperforming the S&P 500 every year, it may lose its shot at the crown in the long term. 
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