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Margaret Kirch Cohenmargaret.cohen@morningstar.com
Will 'Pay for Performance' Mean a Pay Cut for Fidelity, Asks Morningstar

CHICAGO, Aug 23, 2001 – Fidelity Magellan's expenses may be on the verge of declining, which is good news for shareholders, and not-so-good news for Fidelity, writes Morningstar senior mutual fund analyst Scott Cooley in his article "Will Fidelity Magellan Take a Nine-Figure Pay Cut?" on Morningstar.com. 

If Fidelity Magellan posts higher returns than its a benchmark index over the trailing three years, then the fund gets paid more, up to 0.20 percentage points over the base expense ratio--a potential hefty sum for such a large mutual fund. Fidelity has long maintained performance-based fees on its retail mutual funds, the issue now is that Magellan's performance may cause Fidelity to lose a positive performance-based adjustment that it had been receiving, writes Cooley. 

Magellan's past three years' performance includes an exceptional gain of 36.6% after fund manager Bob Stansky bought shares of AOL, now part of AOL Time Warner, in the half year ending March 1999. The S&P 500, which serves as the benchmark index for the fund, only gained 27.3% during this period. Thanks to that outperformance, the fund still boasts a trailing three-year return that beats the index's. However, from April 1999 through August 17, 2001, the fund's returns have closely tracked those of the S&P 500--causing Fidelity to be at risk of losing much or all of its positive performance fees. The fees have amounted to 0.14% of assets, or a total of well over $100 million--big money, even for Fidelity's parent, FMR Corp.

"It's well worth pointing out that Stansky could still go on a tear. After all, he added a lot of value in just a few months in late 1998 and early 1999. He could do so again, or he could fall short of the index," said Cooley. "And, it's also true that Fidelity's finances are strong, and if Magellan loses its performance fees, it would be painful, but wouldn't come close to crippling FMR Corp."

"We applaud Fidelity for maintaining performance fees on so many of its funds. It's true that these fees add volatility to management companies' bottom lines, and that, along with the difficulty of consistently beating an index, is probably why most firms eschew performance adjustments. But as the Magellan example illustrates, they give the few companies that employ them a lot of incentive to produce strong longer-term returns," said Cooley.

For the complete article, "Will Fidelity Magellan Take a Nine-Figure Pay Cut?" go to: 


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