Funds to Avoid

Fidelity Magellan (symbol FMAGX) once a leader, now a laggard.  As the graph below shows, the huge Magellan fund is now essentially a “closet” S&P 500 Index fund, but one with a relatively high expense ratio, which has resulted in a performance lagging the Vanguard 500 Fund constantly in recent years.  Is it any wonder that after twenty years, Fidelity recently dropped the 3% load on this fund?

Lesson:  When a great manager leaves a fund, it becomes in essence a new fund.  When Peter Lynch left Magellan, his stock selection skills and fame allowed the fund to continue to grow for years – but the successive follow-on managers have not added value over an index approach.  (Apparently Mr. Lynch, still affiliated with Fidelity, has not been successful in transmitting his “simple” stock selection techniques even to top pros?)

Among the many other "closet" index funds (over 95% correlation with the S&P 500 Index) are the following:

AIM Constellation
American Century Ultra
Fidelity Blue Chip Growth
Fidelity Destiny Plan
Fidelity Fund
MFS Investors
T. Rowe Price Equity Income
Putnam Investor
Putnam Voyager
Scudder Growth & Income

Janus Fund (JANSX), Janus Worldwide (JAWWX).  Certain personnel at Janus and several other fund companies have been accused by Elliott Spitzer, the New York Attorney General, and others of facilitating (perhaps with knowledge of senior management, perhaps not) various short-term “trading” tactics by large hedge fund investors, playing favorites by permitting large “flips” in and out (when other Janus investors were told they could not do this) and/or by informing the large players of current portfolio holdings so that they could arbitrage their moves in and out of the funds.

Morningstar recently took the unprecedented step of recommending blanket sales of all funds managed by Janus, reasoning that the company’s management does not appear committed to the best interests of the small shareholder.  In addition, a half dozen of Janus’ best portfolio managers have left the firm – so one cannot count on having top ongoing management talent even at this troubled company’s flagship funds.

For more Funds to Avoid - see www.FundAlarm.com - it's free.

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