Magellan manager says he "underestimated"

Fidelity Investments' Harry Lange, whose Magellan Fund has lost more than half its value this year, said he misjudged the extent of the housing slump and its effect on financial markets.

The $18.6 billion Fidelity Magellan Fund declined 52 percent this year through Nov. 28, trailing 99 percent of competing funds, Bloomberg data show. Lange, who has run the fund since 2005, was hurt by bets on financial companies, which accounted for 12.8 percent of assets as of Oct. 31. Fidelity owned shares of American International Group Inc., the insurer that was taken over by the U.S. government in September.

"In the broadest sense, the fund struggled because I underestimated how much the housing bust and the accompanying credit crisis might disrupt the financial markets," Lange wrote in a shareholder update posted on Fidelity's Web site on Nov. 29.

Mutual-fund managers are coping with the biggest market losses since the Great Depression. The S&P 500 Stock Index has declined 44 percent this year after the housing slump led to greater mortgage defaults and a credit freeze. The U.S. economy started to shrink a year ago this month, the National Bureau of Economic Research, based in Cambridge, Mass., said last week.

Magellan, once Boston-based Fidelity's largest fund, has seen assets decline 83 percent since reaching a peak eight years ago because of investment declines and customer withdrawals. The fund has declined 5.8 percent in the past five years, trailing all but 7 percent of competing funds that invest in large-company stocks with above-average earnings growth, Bloomberg data show.

Lange declined to comment beyond his shareholder update, Adam Banker, a Fidelity spokesman, said in an interview.

"Harry is an experienced portfolio manager who has a proven track record of success," Banker said. "We are confident in his abilities."

Lange increased his stake in financial companies from 12.5 percent Sept. 30 by adding 500,000 shares of Pittsburgh-based bank PNC Financial Services Group, and 500,000 shares of Vornado Realty Trust, a real-estate investment trust. The fund's largest financial holdings include Bank of America, which is its sixth-biggest holding, and JPMorgan Chase & Co., the eighth-biggest.

Technology companies such as Nokia Oyj also hurt Magellan's returns, Lange said. Nokia shares have declined 65 percent this year as slowing economic growth has curbed sales of mobile phones.

"Stock selection in technology had a sizable negative impact on the fund's performance," Lange said.

In the month ended Oct. 31, Lange increased his holdings of technology companies to 31 percent from 29.3 percent. He added to Nokia and Corning, the top two holdings in the fund. The fund has 5.8 percent of assets in Espoo, Finland-based Nokia and 5 percent in the Corning, New York-based maker of glass for flat-screen televisions. Corning shares have declined 65 percent this year.

Fidelity in January opened Magellan to new investors for the first time in a decade. The fund's previous managers have included Fidelity Chairman Edward "Ned" Johnson III and Peter Lynch. It was the industry's biggest actively managed equity fund after assets climbed to $110 billion in 2000. Lange replaced Robert Stansky as the fund's manager in 2005.