Magellan is off course

Fidelity's once-thriving Magellan fund is stuck in a performance slump and manager Harry Lange is going down with the ship.

By Jon Birger, Fortune senior writer

(Fortune Magazine) -- The mutual fund biz can turn heroes into goats in a matter of months. Just ask Fidelity Magellan (Charts) manager Harry Lange.

Lange took the reins at Magellan in October 2005, and it wasn't long before he was being hailed as a savior for turning around Fidelity's flagging flagship.

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That was six months ago. Today Magellan is mired in its second-worst relative-performance slump in 30 years.

Through the first three quarters of 2006, Magellan's yearly return trailed the S&P 500 (Charts) by 6.5 percentage points; since 1977, only the nine-percentage-point lag of September 1996 was worse, according to fund tracker Morningstar.

Under Lange¹s predecessor, Robert Stansky, Magellan often operated like a glorified index fund, closely tracking the S&P 500. Lange promised to return the fund to its swashbuckling roots. ³I'm going to make it a go-for-it kind of fund," Lange told Fortune last November. "I really want to shoot the lights out."

At times, Lange seemed to be taking out of Peter Lynch¹s old buy-what-you-know playbook. A growth investor, Lange knew technology, and he knew Japanese stocks too, having once been Fidelity¹s research chief in Japan. He scored hits with stocks like Nomura Securities (Charts) and Nokia (Charts), with Magellan posting a hearty 13.5 percent gain over his first five months.

Problem is, the tech stocks and Japanese holdings that looked so good last spring have been in the doghouse since. Nomura is down 25 percent, Nokia 13 percent and Yahoo Japan - another Lange favorite - is down 25 percent.

Still, Morningstar analyst Dan Lefkovitz thinks investors should cut Lange some slack. "The nature of the way Lange invests is that he can make up a lot of ground in a hurry," Lefkovitz says. "I don't think it's a good idea for investors to bail now. They need to give him a chance."

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