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Fidelity Magellan fund manager is replaced after weak performance

  Fidelity-MattCampbell-EPA The famed Fidelity Magellan mutual fund did Tuesday what it does best: It dumped its manager after years of chronic underperformance.

Colossus fund family Fidelity Investments announced that Jeffrey S. Feingold was replacing Harry Lange at the helm of the fund.

Magellan was one of the best-known and most successful funds in the 1980s under legendary manager Peter Lynch. But it has run through a string of poorly performing skippers since Lynch’s retirement in 1991, and Lange ranked as one of the worst.

During his nearly six years managing Magellan, it ranked in the bottom 10% of large-cap growth funds, according to fund tracker Morningstar Inc. The fund lost 7.2% in that time, compared with a 7% gain for the Standard & Poor’s 500 index, according to data from Bloomberg.

Morningstar, which once gave Magellan its top grade of five stars, dropped the fund to an ignominious one-star rating in 2008.

Magellan’s performance “went from middling to terrible,” under Lange, said Morningstar analyst Christopher Davis.

Lange, who Fidelity spokesman said was unavailable for comment Tuesday, focused on foreign growth stocks, but many of his holdings were in developed markets such as Europe, which have stumbled, not in better-performing emerging markets such as China, said Jim Lowell, editor of the Fidelity Investor newsletter.

Lange also was plagued by some ill-timed bets, including a dive into financial stocks in mid-2008, shortly before the global financial crisis enveloped Wall Street, Davis said. He also bet heavily on Finland’s Nokia Corp., which sank from $41 in late 2007 to less than $6 today.

Magellan’s assets have shriveled to about $17 billion from $55 billion when Lange took over, Davis said. They peaked at $110 billion in early 2000, just before the tech bubble burst.

Feingold, Lange's successor, has a solid track record, including at the Fidelity Trend Fund, which he will continue to manage.

But Fidelity Trend is much smaller than Magellan, so Feingold must prove that he can thrive at a bigger, higher-profile fund, experts said.

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-- Walter Hamilton

Photo: A Fidelity Investments office. Credit: Matt Campbell / EPA

Once again, investors yank money from stock funds

NYSE5-Getty Images

Investors are selling stock mutual funds -- again.

After a one-week respite, individual investors pulled a net $3.2 billion from U.S. stock funds and $610 million from foreign funds in the week ended Aug. 24, according to the Investment Company Institute.

The outflow was nowhere near the frenetic selling seen earlier this month when the stock market plunged amid worries about the economy. Fund owners dumped a net $34 billion in U.S. equity funds in the first two weeks of August.

Still, the renewed selling pressure underscores the skittishness among small investors about the market. They had added a net $1.3 billion into U.S. equity funds in the previous week.

More than that, departing investors missed out on an inchoate uptick in stock prices. Through Tuesday, the Standard & Poor's 500 index gained 8% in the past week and a half, and the market is up again Wednesday morning.

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Photo: A bank of phones at the New York Stock Exchange; Credit: Getty Images

How Bill Gross' wrong call on bonds has cost his Pimco investors

Billgross68
Bond market guru Bill Gross is telling his investors what many of them already know: He made the wrong call on U.S. Treasury bond interest rates this year, and that has cost him dearly in his renowned Pimco Total Return bond fund.

Gross told the Financial Times on Monday that the U.S. economy has grown more slowly in 2011 than he had expected, which has pushed Treasury bond yields lower as investors have rushed for relative safety.

Because he kept the $245-billion Pimco fund largely out of Treasuries until recently, Gross missed out on the rising market value of older fixed-rate Treasuries as rates on new bonds fell.

“Do I wish I had more Treasuries? Yeah, that’s pretty obvious,” Gross told the FT.

The Wall Street Journal followed the FT report Monday with a story that had Gross saying he had “lost sleep” over his wrong-way bet on U.S. bonds.

In an interview with the Los Angeles Times on Aug. 18, Gross conceded that “we capitulated a few weeks ago, and we [now] have a fair amount of Treasuries” in Pimco Total Return. The Newport Beach-based fund also owns an array of other bonds, including corporate, mortgage and foreign issues.

But by missing the rally in Treasuries, the Pimco fund is up a modest 3.2% year to date, trailing the returns of about 70% of its peer funds and lagging the 5.6% return of its benchmark index, according to Bloomberg News data.

The Vanguard Intermediate-Term Bond index fund, which seeks to track another popular bond market index, is up 8.5% this year, more than twice the Pimco fund's return.

10yr829 Gross, 67, had railed against holding Treasury bonds in the first half of this year, warning repeatedly that he expected market interest rates on the securities to surge once the Fed finished its $600-billion bond-buying program June 30. Rising market rates would have devalued older Treasury bonds.

But the yield on the benchmark 10-year T-note (charted at left), which fell from 3.74% in February to 3.16% by June 30, has collapsed since then as the U.S. economy has shown more signs of weakness. The T-note yield was at 2.26% on Monday.

Gross now believes the chances are “better than 50-50” that the U.S. is headed for another recession.
He said on Aug. 18 that he had been buying Treasuries maturing in five to seven years, but that he still was avoiding longer-term issues. “I don’t want to buy 10-year Treasuries at 2% or 30-years at 3.45%,” he said, citing the risk that rising inflation over time could devour those returns.

The Pimco Total Return fund’s underperformance this year is a rare miss for Gross. The fund, a staple of many 401(k) retirement savings plans, still is up an average of 8.3% a year over the last five years, beating 98% of its peer funds.

-- Tom Petruno

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Photo: Pimco's Bill Gross speaking at a conference in June. Credit: Tim Boyle / Bloomberg News

Gundlach thought he could succeed Gross at Pimco, consultant testifies

Gundlachsohn
Former TCW Group Inc. investment chief Jeffrey Gundlach believed he was in the running to succeed bond guru Bill Gross at the Pimco funds, according to a consultant who worked with Gundlach in 2009.

Gundlach, who has become one of the biggest stars in the bond-fund world in the last few years, is embroiled in a bitter court fight with TCW, which fired him in December 2009.

TCW's lawyers have been trying to convince the jury in the case that Gundlach, 51, was plotting to leave TCW all through 2009, and that ousting him was a defensive move.

From a Reuters report Monday from the trial in L.A. County Superior Court:

Star bond fund manager Jeffrey Gundlach was in discussions to leave Trust Company of the West and succeed Bill Gross at Pacific Investment Management in 2009, according to court testimony.

"He had been in conversations with Pimco about joining them," said Roger Brossy, a consultant who worked with Gundlach in 2009.

Brossy, an outside management compensation consultant, was involved in separate talks between Gundlach and Western Asset Management Co. in mid-2009 -- dubbed "Project Artwork.”

As they negotiated Gundlach's possible move to Western Asset Management, Gundlach told Brossy of the Pimco negotiations, Brossy said on Monday.

"Pimco wants me to succeed Gross," Brossy recalled Gundlach saying in early 2009.

The 67-year-old Gross has given no indication publicly of wanting to step down as co-chief investment officer at Pimco, which he co-founded in 1971 in Newport Beach.

A Pimco spokesman had no comment on Brossy’s testimony.

Gundlach, who now heads DoubleLine Capital in L.A., has testified that he had no intention of leaving TCW, but that he believed the firm was trying to drive him out.

TCW sued Gundlach one month after firing him, alleging that he and key aides conspired against the firm and stole massive amounts of TCW proprietary information to quickly set up DoubleLine.

Gundlach then countersued, accusing TCW of firing him after 24 years at the firm to cheat him out of a huge chunk of promised income.

Each side is seeking hundreds of millions of dollars in damages from the other.

The civil trial, which began in late July, isn't expected to wrap up until after Labor Day.

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Did skipping the boss' parties at TCW cost Gundlach his job?

-- Tom Petruno

Photo: DoubleLine Capital founder Jeffrey Gundlach, speaking at an investment conference in New York in May. Credit: Jessica Rinaldi / Reuters

Judge in TCW trial admonishes Gundlach for talking to jurors

Jeffrey Gundlach, the star L.A. bond fund manager on trial for allegedly plotting against his former employer, spoke to two jurors in the case while outside the courtroom on Tuesday.

Gundlach reported the interaction to his lawyers, who then went to presiding Judge Carl J. West with the information.

The judge admonished Gundlach but decided that the brief conversation did no harm in the case, according to a transcript of meetings held in West’s chambers.

Gundlach said he was just responding to what he thought was a pleasantry from one of jurors. “I wasn’t going to say anything to him, but -- these guys [his former firm] say I’m the meanest weirdo in the world -- I don’t want to stonewall the guy,” he told the judge, according to the transcript.

Jeg Gundlach and his former employer, TCW Group Inc., are in a bitter legal battle with potentially hundreds of millions of dollars in damages at stake. The civil trial began in Los Angeles County Superior Court on July 28.

TCW fired Gundlach in December 2009, then sued him, alleging that he and three lieutenants stole massive amounts of TCW's proprietary information and used it to launch a rival money manager, DoubleLine Capital.

Gundlach quickly countersued, alleging that TCW and its French bank parent, Societe Generale, terminated him to avoid sharing future fee income on the tens of billions of dollars in bond assets that he had managed at TCW.

Jurors in the case have to decide on both complaints.

In the meeting with the judge on Wednesday morning, Gundlach said he was in an elevator with two jurors. According to the transcript, Gundlach said that “I leaned against the elevator and one of the jurors said to me, ‘It must be tough getting through all this.’ And I said it must be tough sitting through all these days.”

After exiting the elevator, Gundlach said, he immediately told his lawyers what had happened.

The judge later requested that the juror who made the comment meet in the court chambers. The juror told West that he hadn’t made the comment to Gundlach, but to the other juror, who suffers from back pain. “I was really talking to him and I said, ‘I feel bad for you,’ and Mr. Gundlach turned around and said, ‘I feel bad for you guys,’ ” the juror said, according to the transcript.

Afterward, the juror said he thought, "Oh, my God I actually hope I don't get in trouble over this."

The judge told the juror that he believed the incident was “perfectly innocent.”

Steve Madison, an attorney for TCW, told the judge that he agreed that the situation didn’t warrant removal of the juror. But he said he was “really dismayed that the defendant would seek to make a comment to the juror like that.”

West reminded Gundlach that “even the most innocuous encounter seen from a distance can appear inappropriate. . . . You can’t have any encounter with a juror.”

-- Tom Petruno

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Photo: DoubleLine Capital CEO Jeffrey Gundlach in court in L.A. Credit: Reuters, from video fee

Did skipping the boss's parties at TCW cost Jeffrey Gundlach his job?

The bitter court battle between star L.A. bond fund manager Jeffrey Gundlach and his former employer, TCW Group Inc., has stung both sides with embarrassing revelations and allegations -- exactly why these cases almost always are settled rather than go to trial.

On Wednesday, jurors in the case heard Gundlach's long-time fund co-manager, Philip Barach, list what TCW founder Robert Day allegedly said were the reasons he fired Gundlach in December 2009 after 24 years at the money management firm.

At a meeting with Day just minutes after Gundlach had been ousted, Barach said he remembered the 67-year-old Day saying that three things were behind his decision to terminate Gundlach as TCW's chief investment officer.

Jeg One was that Gundlach did not attend Day's staff parties over the years, Barach said. He said he reminded Day that Gundlach "had gone to the last party."

A second reason was that Gundlach "did not call the lows in the stock market in March 2009," Day said, according to Barach.

And third, Day allegedly told Barach, Gundlach was making "way too much money."

The issue of Gundlach's compensation -- $40 million in 2009 alone -- is what he asserts is the real reason he was fired, as his spectacular performance managing TCW's bond assets made him a Wall Street star.

The trial was initially demanded by TCW, which sued Gundlach one month after ousting him, alleging that he and three lieutenants stole massive amounts of TCW's proprietary information and used it to launch a rival money manager, DoubleLine Capital, just 10 days after Gundlach was booted.

Gundlach quickly countersued, alleging that TCW and its French bank parent, Societe Generale, terminated him to avoid sharing future fee income on the the tens of billions of dollars in bond assets that he had managed at TCW.

Each side is seeking hundreds of millions of dollars in damages from the other in the civil jury trial in L.A. County Superior Court.

Gundlach on Wednesday was on the stand for a fourth and final day. TCW's lawyers have been trying to convince the jury that Gundlach had been disloyal to Day and Stern and had been plotting for more than a year to leave the firm. Gundlach has insisted that he merely had made tentative plans for a new company because he feared that TCW was trying to push him out.

On Thursday, TCW Chief Executive Marc Stern is expected to take the stand. Stern, 66, has been one of Day's closest associates for decades. Gundlach has said that he was outraged that Stern came out of retirement in June 2009 to take the CEO post, which the 51-year-old Gundlach believed should have gone to him or another younger TCW executive.

The press-shy Day also is expected to be called to testify at some point in the trial, which may last until after Labor Day.

-- Tom Petruno

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 Photo: DoubleLine Capital CEO Jeffrey Gundlach. Credit: Jessica Rinaldi / Reuters

Investor flight from stock funds accelerates

  NYSE1-Reuters

Small investors couldn’t seem to get out of stocks fast enough last week as the market was plunging.

In the week ended Aug. 10, individual investors yanked money out of stock mutual funds at the fastest pace since the dark days of the global financial crisis almost three years ago.

The selling came as the Dow Jones industrial average sank sharply following the downgrade of U.S. debt by Standard & Poor’s Corp. Investors also were spooked by fears of a potential double-dip recession hitting the world economy.

Investors withdrew a net $30 billion from stock funds in the week ended Aug. 10, including $23.5 billion from funds holding U.S. stocks, according to data released by the Investment Company Institute. That followed $13 billion in outflows the prior week, including $10.5 billion from U.S. funds.

The selling continued a trend that’s been in place for more than four years, as many investors seem to be souring on the long-term prospects for equities.

The Dow is down nearly 11% from its recent peak in late April.

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Photo: Reuters

In court, 'bond king' Gundlach bristles at TCW lawyer over fund risk comment

Attorneys for L.A. money management giant TCW Group Inc. briefly took their legal battle with former executive Jeffrey Gundlach onto new turf Wednesday, suggesting to jurors that the star bond fund manager incurred excessive risk to produce stellar portfolio returns.

The inference by TCW’s lead attorney, John Quinn, drew a sharp response from Gundlach in court.

“With respect, you don’t know what you’re talking about,” he told Quinn.

Gundlach, 51, was fired by TCW in December 2009 after 24 years at the firm. A month later TCW sued him and three lieutenants, alleging that they conspired against the company to steal its trade secrets and form a rival money manager, DoubleLine Capital.

Gundlach then countersued, accusing TCW of firing him to cheat him out of a huge chunk of promised income. Jurors in the civil trial are hearing both complaints in Los Angeles County Superior Court.

Gundlachtrial Gundlach, who had been TCW's chief investment officer, has built a reputation as one of the country's top investors in mortgage-backed bonds. His DoubleLine Total Return Bond mutual fund, which he launched in April 2010, has surged 25.5% since then, far exceeding all of its major rival funds. The portfolio has swelled to $9.5 billion in assets.

Barron's magazine this year crowned Gundlach "king of bonds."

Quinn, questioning Gundlach during his fourth day on the stand, suggested that the fund manager had “turbocharged” his DoubleLine portfolio by using high-risk types of bonds and so-called derivative securities. Quinn didn’t indicate to jurors why that assertion was relevant to TCW’s case alleging data theft and breach of fiduciary duty.

“These are much more complex” securities than straightforward mortgage bonds, Quinn said of some of DoubleLine's holdings.

“No -- they’re just different securities,” Gundlach said. “You either understand them or you don’t.”

Gundlach, a math whiz, has said that his expertise with mortgage bonds stems from his ability to perceive the relative risks and opportunities in individual securities better than the rest of Wall Street. He has referred to himself in interviews as “amazingly brilliant analytically.”

Quinn also raised questions about Gundlach’s role in TCW’s management of “collateralized debt obligations.” CDOs were a notorious example of Wall Street alchemy during the housing boom, seeming to turn bonds backed by subprime mortgages into AAA-rated securities. When the housing market collapsed, CDOs were among the biggest casualties.

TCW under Gundlach became the world's largest manager of CDOs, which typically were bought by institutional investors such as pension funds.

“You managed billions of dollars in CDOs that had subprime mortgages,” Quinn told Gundlach. But Gundlach said the CDO portfolios were managed by a deputy, Louis Lucido, who now is an executive at DoubleLine.

Quinn then asked Gundlach whether he had no responsibility for CDOs when he was at TCW. “I’m not saying I had no responsibility,” Gundlach said. “I’m saying I didn’t do day-to-day trading.”

Reiterating a comment he has made in the past about losses in CDOs, Gundlach said investors in the securities “knew what they signed up for” in terms of the potential risk.

Gundlach completed his testimony on Wednesday. TCW Chief Executive Marc Stern, who fired Gundlach in 2009, may be called to the stand on Thursday.

-- Tom Petruno

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Photo: DoubleLine CEO Jeffrey Gundlach in court in L.A. Credit: Reuters, from video feed

Gundlach to take the stand in trial vs. TCW Group

Star L.A. bond fund manager Jeffrey Gundlach was expected to be called to testify Thursday for the first time in the high-stakes court battle with his former employer, money management giant TCW Group.

Since the civil trial began July 28 in Los Angeles County Superior Court, the jury has heard plenty about Gundlach's personality. Lawyers for TCW, which fired Gundlach in December 2009, have described him as arrogant, greedy, disrespectful and bent on destroying the company.

GundlachGundlach's lawyers, in turn, have told the jury that TCW orchestrated a campaign to oust him so it could keep for itself the fees on tens of billions of dollars in client assets he drew to the firm because of his stellar track record in the bond market.

Gundlach launched his own firm, DoubleLine Capital, 10 days after he was fired by TCW. He was quickly joined by most of his team members at TCW, and has attracted $13 billion from investors in just 19 months.

TCW, which manages about $120 billion, sued Gundlach in January 2010, alleging that he and key aides conspired to steal massive amounts of TCW proprietary information to set up DoubleLine.

Gundlach, 51, has denied TCW's allegations and has countersued. He accuses TCW and its parent firm, the French bank Societe Generale, of firing him after 24 years at the firm to cheat him out of a huge chunk of promised income.

Each side is seeking hundreds of millions of dollars in damages from the other.

Gundlach, who has unabashedly referred to himself as “amazingly brilliant analytically,” has become a well-known figure on Wall Street because of his expertise investing in complex mortgage-backed securities. Barron's magazine this year dubbed him "king of bonds."

After everything the jury has heard about Gundlach, his demeanor on the stand could be critical in shaping their views of the case.

Over the last week the jury heard testimony from three of Gundlach's lieutenants at DoubleLine who also are co-defendants in the case: Barbara VanEvery, Cris Santa Ana and Jeffrey Mayberry.

-- Tom Petruno

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Photo: DoubleLine Capital CEO Jeffrey Gundlach. Credit: Jessica Rinaldi / Reuters

Some hopeful signs in otherwise grim markets

A few snippets of good news even as stock markets remained in meltdown mode Wednesday:

--- Eurozone bond yields fall: While European stock markets were pummeled, interest rates continued to fall on Italian and Spanish government bonds Wednesday as the European Central Bank again stepped into the market to buy the debt.

Italy10 The yield on 10-year Italian bonds (charted at left) fell to 5.10%, down from 5.18% on Tuesday and the lowest since July 5. Spanish 10-year bond yields fell to 5.03%, down from 5.08% Tuesday and the lowest since November.

The drop in yields at least relieves some of the fear that Spain and Italy could quickly go the way of Greece, Ireland and Portugal in needing European Union bailouts.

Yields also fell on French government bonds, despite rumors that France could lose its AAA credit rating. The 10-year French bond yield fell to 3.07% from 3.23% on Tuesday.

All three major credit-rating firms said they had no plans to downgrade France.

--- Most U.S. stock indexes end above Monday's lows: As noted in this post from Monday, U.S. small- and mid-size stock indexes are in new bear markets, based on the rule of thumb that a 20% drop ends a bull market.

But those indexes, and most major U.S. indexes except the Dow, ended on Wednesday above their closing levels on Monday. In other words, after Monday’s dive, Tuesday’s rebound and Wednesday’s renewed sell-off, many stocks did not set new 2011 lows.

Rty The Russell 2,000 small-stock index (charted at right) sank 5.2% on Wednesday to 660.21, but that was above Monday’s close of 650.96.

Still, the indexes may just have been saved by the closing bell: They all were in fast retreat in the last few minutes of the session.

If they can hold above their Monday lows on Thursday that may give investors more hope that we’ve reached at least a short-term bottom.

--- Cash flows back into money funds: U.S. money market mutual funds took in a net $61.3 billion in new cash in the seven days ended Tuesday, boosting total assets to $2.59 trillion, according to iMoneyNet.

Why is that important? It recoups about 60% of what the funds lost in the previous week, when investors yanked a net $103.2 billion as Congress continued to battle over extending the federal debt ceiling.

Some investors fled the funds, worried that the portfolios could suffer losses if the Treasury defaulted on some of its debts. That raised fears of a continuing exodus that could force the funds to dump securities, which could pose a serious threat to the financial system.

With investors returning to money funds, that’s one less worry for financial regulators.

-- Tom Petruno

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CalPERS portfolio has lost $18 billion in value since July 1

 

After posting its best annual performance in 14 years, the California Public Employees' Retirement System is giving back a sizable portion of the 20.7% investment return it reported for the fiscal year that ended June 30.  Joe Dear 2

The value of the country's largest public pension fund was $220 billion at market's close on Monday, down 7.6% or about $18 billion, CalPERS said Tuesday.

"It's bad, but it's not 2008," said Joseph Dear, CalPERS' chief investment officer, in an interview on CNBC. "We have a crisis induced by lack of confidence in the U.S. and European political systems, combined with gloomier and gloomier economic growth forecasts."

Wall Street's massive stock sell-off that began last week "is a tipping point," Dear said, "but it's not a time to panic and run with fear out of the market."

CalPERS was underweight in its stock portfolio at the close of the last fiscal year and now is "considering whether we can go back in" to make long-term investments, Dear said.

Though Dear said he didn't expect the U.S. economy to fall into a double-dip recession, he conceded that the outlook for short-term growth was not rosy.

Those comments contrasted with Dear's enthusiasm for the 20.7% investment return that CalPERS announced on July 18, covering the 2010-11 fiscal year.

"The portfolio is quite healthy with positive benchmark-beating gains for nearly all of our assset classes over the past year," Dear said at the time. "Global equity [public stocks], private equity, fixed income, inflation-linked and cash equivalents all did well, and our real estate portfolio is back in positive territory after reversals during the financial crisis and recession."

CalPERS' portfolio value dropped from a historic high of $260.4 billion in October 2007 to $160 billion in March 2009. It has since risen to a high of $237.5 billion on June 30 before dropping to $220 billion on Monday.

CalPERS' gains during the year ending June 30 were roughly in line with other large institutional investors, according to a report issued Tuesday by the Wilshire Trust Universe Comparison Service, which serves as a performance benchmark for similar investors.

The median return for all large institutional investors was 20.12%, the best showing since 1986, the report said. Public plans such as CalPERS posted a median return of 21.1%, corporate plans 20.4%, nonprofits 20% and labor union plans 19.9%, the report said.

-- Marc Lifsher in Sacramento

Photo: CalPERS Chief Investement Officer Joseph Dear. Credit: Los Angeles Times photo

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