The most powerful brand icon in the mutual fund industry is in trouble.

Yes, we're talking about Magellan Fund, the flagship of the Fidelity armada. For years Magellan was the largest of all mutual funds. Magellan was (and remains) so large that it has more assets under management than many entire mutual fund firms.

While it is the second largest mutual fund today, with $68 billion in assets compared to the Vanguard 500 Index funds' $72 billion in assets, Magellan is still the largest of the managed funds. It's well ahead of the next largest managed fund, the $55 billion Investment Company of America. I would not be surprised, however, if Magellan slipped further down the list in the next few years.

Why?

Severe underperformance. Enduring underperformance.

If you visit www.fundalarm.com, one of the great independent websites, you'll see that Magellan is listed as a three-alarm fund. That means it has trailed its target index in three different time periods--- the last year, the last three years, and the last five years. To Roy Weitz, the creator and prime mover of this site, three alarms make a fund  "a strong candidate for sale."

In fact, the situation is worse than that. According to the year-end figures from Morningstar, Magellan trailed the S&P 500 Index in the preceding one-year, three years, five years, and ten years. You have to go back a full 15-year investing period before Magellan beats the index. Then it's only ahead by 0.24 percent a year.

Over shorter periods Magellan has trailed by a significant amount. In 2003, for instance, Magellan returned 24.82 percent, trailing the S&P 500 by 3.85 percent. That's more than enough to get your attention. Over the last three years it has trailed the index by 1.53 percent a year. And over the last five and ten years it has trailed the index by 0.51 percent and 1.89 percent, respectively.

Nor does the story end there. If you happened to hold Magellan in a taxable account, index fund investing did better over the last 15 and 20 years, as well.  Morningstar data shows that Magellan's after-tax return for the last 20 years was 11.74 percent, while the Vanguard 500 funds' after-tax return was 11.76 percent.  Perhaps it's just as well that Magellan is no longer available to taxable investors but is still actively used in Fidelity provided 401(k) plans.

While we haven't seen much of 2004 yet, Magellan isn't off to a good start. If you visit www.morningstar.com, click on "funds", and type in FMAGX you can get the most up to date calculation on how the fund is doing. As we go to press, it was trailing the S&P 500 index by 0.47 percent.

Why am I telling you this?

My purpose is not to beat up on Fidelity. Fidelity is a fine firm. It has terrific managers, great research depth, and a long-term commitment to delivering performance at below average cost. In more than thirty years of interviewing Fidelity managers, I've never found a dim bulb. As mutual fund firms go, Fido is a prince, not a dog.

The message here is much broader. Performance is fleeting. Performance has always has been fleeting. Performance will always be fleeting. If you want to be in the casino and catch some action, bet on performance.

Just remember the house always wins. While Magellan was surging to become the mother of all mutual funds, it was collecting investment fees that were at least four times the fees being collected by the nations leading index fund. Right now, after more than a decade of under performance, Magellan is generating about $516 million in annual fees for Fidelity from its $68 billion in assets. The Vanguard 500 Index fund, with an expense ratio of 0.18 percent and $72 billion in assets is generating "only" $129 million in annual fees for Vanguard.

The annual difference, nearly $400 million, isn't going into shareholder pockets.

It's going into management pockets.

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