open-end investment company

Case Study

Most research indicates a mutual fund's short-term performance is not an accurate indicator of long-term performance. In other words, it is generally a mistake to choose a mutual fund based on the fund's investment performance during the past quarter or the past year. Even consistent long-term performance may not be a fool-proof guide to selecting a fund. Fidelity's Magellan is considered the outstanding success story among the thousands of mutual funds that have been formed. Peter Lynch, the manager of Magellan for 13 years, became an almost mystical figure among institutional investors before voluntarily stepping down as manager in 1990. A reputation for excellent investment performance over many years caused the fund to grow to the point where, by mid-1996, it had 4.4 million shareholders and managed $56 billion in assets. Jeff Vinik, who took over the fund's reins following the departure of Lynch also produced some excellent results. In early 1996, however, Vinik turned bearish and placed nearly 30% of Magellan's assets in cash and long-term U.S. Treasury bonds. The conservative portfolio caused the fund to underperform in a market that exploded in initial public offerings and technology stocks. In May 1996, Fidelity announced Vinik would be leaving Magellan. His replacement was the manager of one of Fidelity's other mutual funds. Although Vinik apparently erred in becoming too conservative, many market watchers thought the real problem was that Magellan had become so large it was impossible to manage effectively.