Monday, May. 26, 1997

HOW TO HANDLE $57 BILLION

By Sam Allis

Since taking over Fidelity Investments' struggling Magellan fund last June, Robert Stansky has been the most watched man in mutual funds. Magellan, with $54.7 billion in assets, is the biggest fund in the U.S. Stansky is trying to revive not only Magellan but also with it Fidelity's tarnished reputation as a money manager. He is making progress. Magellan's year-to-date return of 13% is better than that of 56% of its rivals but still trails major stock indexes. He talked recently with TIME'S Sam Allis.

TIME: The stock market has been all over the place lately. How nervous should we be?

Stansky: I'm not counting on a very smooth environment, or straight up or straight down. You get a lot of people with a shorter trigger these days. It's not like you can go in and buy every stock and just wait until you hit the right price, where your only risk is time. The stocks that come up short in performance numbers, at least in the near term, are the stocks that get hit very hard and very quickly.

TIME: So what kind of an investment strategy does this situation call for?

Stansky: It calls for a two-part strategy: No. 1, you take what the market gives you.

TIME: Meaning don't get greedy?

Stansky: Meaning you have to be careful in valuations. There are companies out there today that are selling at five- and 10-year highs on valuations.

TIME: So we should avoid these stocks?

Stansky: Not necessarily. It also calls for the same thing that I have done every day here, and that is worry about the company's fundamentals. I can't do anything about a war in Algeria. Let's look at the valuation of a stock relative to the companies in its group and then relative to the whole market.

TIME: The market has been led by big companies, and you own a number [see chart]. Will the FORTUNE 500 hold their strength?

Stansky: Well, why have they shown strength? They've delivered better earnings growth than the overall market. How did they do that? They improved the return on capital in the businesses. Expenses were held in control. They took cash out of the business. Bought back stock. Made acquisitions that hopefully will add to the revenue line. If they keep executing the way they have been, they'll be fine.

TIME: Small-company stocks took a beating in the past year. Is there hope?

Stansky: A lot of the small caps' earnings did not grow as fast because they didn't have exposure to the lower dollar [which spurs exports] and international business. The multinationals here have 60% of their business outside the U.S.

TIME: Let's talk about Magellan. Where are you invested now?

Stansky: Since the beginning of the year, it has been 95% in equities [stocks] and less than 5% cash, which is the way I planned to run the fund. Five percent or less cash.

TIME: You're comfortable with this?

Stansky: I'm comfortable that I'm there now with the fund. I own what is in the fund today because I want to own it. Not because I was left with it.

TIME: Your predecessor had huge holdings in bonds. How did you sell that position?

Stansky: I moved deliberately. I tried to pick times in the six-month period when people were thinking, Wow, everything is O.K. and I can get 6.7% or better on a yield, and I sold aggressively when the market gave me the chance to. I didn't want just to sell the bonds because they weren't mine. My money is in the fund. I want the best price for my sales and the best price for my purchases. Frankly, I think I did a pretty good job on it. I don't think I could have done a much better job.

TIME: Will you ever get into bonds again?

Stansky: Sure, if the opportunity was good. Magellan has had big investments in bonds. Look at what Peter Lynch did in the early '80s. Interest rates were in the mid-teens. He was as aggressive as you could have been. If bonds are yielding two times the long-term return of the equity market, that's good offense to me.

TIME: Lynch was famous as a stock picker. Your predecessor, Jeff Vinik, was seen as more of a sector player, right?

Stansky: No, I disagree. I think Jeff invested in the same manner as Peter. Why did Jeff have 40% in technology? It wasn't some sector bet. It was because he found 40% of his fund invested in companies that he really liked. Jeff didn't invest in some technology stocks he didn't like just to get this weighting, just because he thought he had a magic number.

TIME: Magellan is so huge. How do you hide your tracks from the competition?

Stansky: People disagree all day long in this business. You get five money managers around the table, and you'll probably get at least three different opinions. Everyone thinks they are smarter than the next guy. So just be judicious about letting your emotions get ahead of you.

TIME: Do you expect to beat the market at some point?

Stansky: I wouldn't be here if I thought it was unrealistic. There is no way I would have taken this on. There is no way I would have stayed.

TIME: So why are you still behind?

Stansky: Look at what the market has done. Would it have been easy to outperform the market without making huge, concentrated bets since last June? No. Without making an investment in those positions in which fundamentals may have been fine but the stock-price valuations were at five-year highs, and many of them for a while? [No.] So I'm trying to look out one or two years, not trying to play this game for a quarter.

TIME: Aren't you feeling a lot of pressure running Magellan?

Stansky: The pressure is no different from that on any other fund manager. Funds are in the newspaper every day. It doesn't matter how big you are. What's your performance? I ran $15 billion before Magellan. That's real money. I don't treat this any differently.

TIME: How do you treat it?

Stansky: One of the things I've tried to do is not get caught up in short-term performance. When I started running the growth-company fund in March 1987, I watched the fund price every day. After going through this a few times, I said, This is crazy. I'm going to watch the stocks. It is more important to me to start every day by asking, What should I do with these stocks? I don't care what I've paid for them. I don't care where they've been. I only care where they're going.