TIME: Almanac 1993/TIME Almanac 1993.iso/time/040990/0409209.000

Text File | 1992-08-28 | 8.7 KB | 186 lines

                                                                                BUSINESS, Page 60

The Wizard Bows Out


America's top money manager leaves a rich legacy. Can anyone
fill his shoes?

By JOHN GREENWALD -- Reported by Thomas McCarroll/New York and
William McWhirter/Chicago


    To more than 1 million investors, Peter Lynch was a
magician, a modern alchemist who transmuted their modest
savings into solid wealth. Since Lynch began running the then
tiny Fidelity Magellan fund in 1977, its shares have surged
25-fold in value -- far more than the fourfold gain for the Dow
Jones industrial average during the same period or the increase
for any other mutual fund. Lynch, 46, built Boston-based
Magellan from a $22 million operation into a $13.3 billion
monster, the world's biggest and most celebrated fund. And he
did it the old-fashioned way, through 13-hour workdays and an
almost unerring eye for bargains that others seemed to miss.

    But the most successful money manager in America surprised
the financial world last week by disclosing that he will be
retiring from Magellan at the end of May. Lynch, who is
reportedly paid as much as $10 million a year, broke the news
at 9:30 a.m. last Wednesday to hushed staffers who had gathered
outside his office door. Citing a longing to spend more time
with his family and the fact that his father had died of cancer
at the age of 46, Lynch said he had decided it was time to
quit. He will be succeeded by Morris Smith, 32, who runs the
$700  million Fidelity OTC (over-the-counter) fund, one of the
fastest-growing parts of the Fidelity group's 180-fund empire.

    To brace for a possible rush to redeem Magellan shares in
the wake of his departure, Lynch had been quietly accumulating
a $1.8 billion cash hoard as part of the mutual fund's
portfolio of 1,400 stocks. At week's end nervous investors were
redeeming Magellan shares at a rate 75% faster than that of the
previous week.

    Lynch's importance to Magellan -- and to all of Wall Street
-- went far beyond the buying and selling of any one week. At
a time when heroes are few and many financial wizards have
seemed obsessed by greed and ambition, Lynch was a reassuring
presence, a homespun stock picker who disdained the pretensions
of the experts and regularly beat them all. His 1989 best
seller, One Up on Wall Street, made him almost a household
name. "Lynch was more than a great money manager," says Donald
Phillips, editor of the Chicago-based newsletter Mutual Fund
Values. "He was a credible and trustworthy spokesman for the
entire industry. There really isn't anyone who can fill his
shoes."

    Some experts view Lynch's departure as a by-product of
Magellan's astounding success. They contend that the fund had
become so large and unwieldy that it was no longer possible for
Lynch to outperform the market as consistently as he once had.
Says Maurice Weiner, a Florida-based investor who sits on the
board of a mutual fund:  "Every time you add another dollar to
manage, you are increasing the odds against you."

    Lynch has heard such criticism since the mid-1980s, when
Magellan was scoring some of its biggest gains. "It hurt when
people kept saying that Magellan had reached its peak, that it
was impossible for us to beat the market anymore," Lynch told
TIME's Boston bureau chief, Robert Ajemian, last week. "I
really wanted to prove them wrong. So I stayed on and did."

    A native of Boston, Lynch got his first taste of the
investment world when he caddied for executives at a local
country club. The duffers included D. George Sullivan, who at
the time was president of the Fidelity group. After earning an
M.B.A. at the Wharton School and serving two years in the Army,
Lynch joined Fidelity as a research analyst in 1969. His
ebullient pursuit of investment opportunities led to his 1977
appointment as head of Magellan, then one of Fidelity's smaller
funds.

    As he built the fund over the years, Lynch acquired a
prodigious reputation for doing his homework. Unlike most money
managers, Lynch has made a point of visiting companies before
he buys their stock. On a typical tour he would call on three
firms a day and take note of everything from the alertness of
secretaries to the cleanliness of parking lots. In one visit
to Chrysler he first met Chairman Lee Iacocca and then walked
into an auto plant to talk with workers. "People often ask me
to explain my strategy," he says. "When I tell them my strategy
is to learn which companies are likely to grow, they're usually
disappointed. That doesn't sound complicated enough."

    Lynch has shunned scientific market analysis and short-term
speculation. He has often held stocks for many years, as long
as the companies remained healthy. By the same token, he has
been quick to sell when he recognized that a stock was going
bad. As he notes in his book, "You won't improve results by
pulling out the flowers and watering the weeds."

    He believes great stock tips come from everyday life, so he
pays close attention to the buying habits of his wife Carolyn
and their three daughters. When Carolyn began bringing L'eggs
panty hose home from the supermarket in the 1970s, Lynch
recognized a winning product. Magellan bought stock in Hanes,
the panty-hose maker, and saw the value of its shares grow some
600%.

    Earlier this year Lynch began to feel the pace of two
decades of workdays that began at 6:45 a.m. and lasted long
past dark. Adding to the load was his position as head of the
Fidelity group of nine growth funds. A devout Roman Catholic,
Lynch found that he was working not only six-hour Saturdays but
also early Sunday mornings before attending Mass. "Alarm bells
began to go off," he recalls. But when Lynch told Fidelity
Chairman Edward Johnson III that he wanted to leave, Johnson
urged his star fund manager to stay on in a less demanding
post.

    Lynch wavered for several weeks before making up his mind.
On March 25, a Sunday, Lynch telephoned Fidelity President Gary
Burkhead to say he definitely planned to retire. Over the
course of three phone calls, the two men picked Morris Smith
to be Lynch's successor. Smith could barely contain his
excitement when informed the next morning. "I had to make sure
my knees weren't knocking when I stood up," he recalls.

    While Smith faces a daunting task as Lynch's replacement,
many fund watchers are confident he will succeed. If Lynch had
a weakness, such experts note, it was his tendency to keep
Magellan fully invested in stocks. That made the fund highly
profitable when the market surged but also vulnerable to sudden
slumps. Magellan lost $4 billion -- nearly a third of its total
value -- during the 1987 crash. By contrast, Smith likes to
keep about 20% of his fund's assets in cash to cushion the
impact of a market fall. "Smith will do a better job in a down
market," predicts Michael Lipper, head of Lipper Analytical
Services, which follows mutual funds.

    Smith will also inherit a cadre of Magellan managers trained
by Lynch. "A lot of the decision making on that fund was being
made by a team of individuals," says Gerald Perritt, editor of
the Chicago-based Mutual Fund Letter. Some 15 assistants helped
Lynch keep abreast of the stocks in the gargantuan fund.

    As for Lynch, he has already begun to savor the benefits of
retirement. Says he: "I have a personal transmission of only
two gears -- overdrive and park. I either work extremely hard
or turn things off. Now I'll apply my overdrive instincts to
different targets." Moreover, he vows, "I'm not going to run
money again. I could probably sell a Lynch Mutual Fund, but I'm
not going to do that." Yet even as he embarks on a more
tranquil life, Lynch's integrity, zest and diligence will stand
as his legacy to a Wall Street that sorely needs such
old-fashioned virtues.


____________________________________________________________ HIS
BEST PICKS [Prices adjusted for stock splits.]


    CHRYSLER AND FORD: Believing in a comeback, Lynch bought
Chrysler shares in 1982 at about $2.25 and started selling in
1986 at nearly $40. He invested in Ford in late 1981 at $4 and
began taking profits about six years later at $50.

    LA QUINTA MOTOR INNS: The Southwest chain offered a pleasing
combination of low rates and quality rooms. Lynch bought shares
in 1978 at $2. When he began selling them four years later, the
stock had passed $18.

    STOP & SHOP: Lynch liked the chain's new jumbo supermarkets
in 1978, so he bought stock at $3. By 1986 it had reached $30.

    ZAYRE: The company's youth-oriented T.J. Maxx clothing
stores showed promise. Lynch bought in 1978 at $1.50 and sold
between 1985 and 1987, after the price topped $30.