Originally created 08/08/99

Big funds -- too big, or just right?



NEW YORK -- The Fidelity Magellan fund has become the first mutual fund to reach $100 billion in assets, but for investors, the milestone is more than just another record high and round number -- it offers them an opportunity to reflect on big funds and whether it's smart to be in them.

Magellan made it past $100 billion in July, as the stock market itself soared to record levels and investors poured billions of dollars into mutual funds. The market's declines since then brought Magellan's assets down to $95 billion at the end of July, but the next big upturn is likely to send the fund's assets climbing again.

There actually are relatively few mutual funds -- 24 out of 10,801 -- with $20 billion or more in assets, according to Morningstar Inc., which tracks mutual fund size and performance. The vast majority of funds have less than $1 billion.

In second place behind Magellan is Vanguard Index Trust 500 fund, with assets of $92.6 billion as of June 30. No. 3 is Washington Mutual Investors Fund, with $58.6 billion.

For many investors, whether or not to buy into Magellan is moot -- Fidelity closed the fund to most new accounts in September 1997 because it was getting too unwieldy with $63 billion in assets at that time. But other big funds are open and continue to grow.

"If (a fund is) done well, people invest in it and it becomes self-fulfilling," said Glenn Hubbard, a professor of economics at Columbia University's graduate business school.

But the biggest funds may not deliver the biggest returns.

Magellan had a cumulative return of 194.14 percent over the past five years, according to Lipper Inc., which also follows fund performance. Vanguard Index Trust 500, which tracks the Standard & Poor's 500 Index, has returned 225.31 percent. Washington Mutual Investors fund returned 193.67 percent.

By contrast, the biggest cumulative return over the past five years, 701.75 percent, was achieved by the Firsthand Technology Value fund, with $326 million in assets. In second place was the Rydex OTC Investor Class fund, with a return of 542.47 percent and $1.4 billion in assets. No. 3 was the Fidelity Select Electronics fund, with a 532.44 percent return and $3.9 billion in assets.

As funds grow, they may become more diversified, and that can mean a lower return over time. With money pouring in from investors, big fund managers buy hundreds of different stocks -- as opposed to smaller sector funds that focus on a smaller number of issues.

"A fund of that size is going to reflect pretty much the stock market," said Burton Greenwald, a mutual fund consultant with the firm B.J. Greenwald Associates in Philadelphia.

One of the problems faced by portfolio managers of big funds is that federal law limits how big a position they can take in a particular stock. That means they must keep finding new issues as people invest more in the fund.

But it's obvious by the amount of money going into these funds that they work for many investors.

The big funds "tend to be middle-of-the-road funds that are pretty good and probably should be core positions in everyone's portfolio," Mr. Greenwald said. "What you won't get is a shoot-the-lights-out performance in a particular year."

Mr. Hubbard said most small investors probably want to be in a big fund. But "if you want an actively-managed fund, then avoid the real giants. Stick to ones in the middle, and smaller ones too."

Another plus for investors, Mr. Greenwald noted, is that these large funds are prominent -- and subject to outside scrutiny -- simply because they are so big.

"Sponsors have a huge interest that they don't underperform -- you can be sure, they'll pay particular attention to these particular funds," he said.

Because of their diversity, they can also be a cushion when the market drops.

Magellan was guided to prominence and stellar returns by manager Peter Lynch in the 1980s. He retired in 1990, and the fund's returns lagged behind the S&P 500 under Mr. Lynch's successor, Jeffrey Vinik.

But it has improved under current manager Robert Stansky, and over the past year has had a cumulative return of 24.18 percent, compared to 18.95 percent for the S&P 500.

Investors can open a new Magellan account only through a group retirement plan, such as 401(k), 403(b) and 457 plans, only if Magellan was an established plan option as of Sept. 30, 1997.