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Medco Deal a Rare Win for Magellan

Plus, Schwab changes up target-date series.

Susan Daker, editorial assistant, 07/21/2011

Express Scripts' ESRX more than $29 billion purchase of Medco Health Solutions MHS is a rare bit of good news for Fidelity Magellan FMAGX, which has defied the family's efforts to shake the fund out of its years-long torpor.

The pharmacy benefit manager's shares rose 14% Thursday on the news that St. Louis-based Express Scripts agreed to buy it in a cash and stock deal. If the gains hold, Magellan, which, with 3.29% of Medco's shares, is the company's biggest mutual fund owner, is sure to benefit. (Magellan was up 1.6% Thursday versus a gain of 1.4% for the S&P 500.) Morningstar data showed Magellan manager Harry Lange had been adding to the stock in recent quarters, making it his top holding as of the end of May. Medco fits with Lange's penchant for fast-growing companies that benefit from larger trends, in this case an aging population that will need more prescription drugs and health-care reforms that will extend insurance coverage to more Americans.

Medco has long been a big holding in Fidelity Select Health Care FSPHX and Fidelity Select Medical Delivery FSHCX, which devoted more than 5% and 9% of assets, respectively, to the company as of the end of May. This could indicate that Lange was betting heavily on a stock that Fidelity's analysts, who normally run the family's sector funds, rated highly.

Magellan has struggled to mount a sustained comeback since Lange took over in October 2005 from Bob Stansky, who also lagged the S&P 500 Index during his tenure. Some of Magellan's recent misfires include Nokia NOK and buying financial stocks too early in mid-2008. While many of Lange's financial picks rebounded, some, such as American International Group AIG and Wachovia, didn't survive, contributing to the fund's 49% loss in 2008.

It will take more than a one-day pop by one stock or even a broader rally to right Magellan, though. The fund ranks in the bottom fourth of the category for most short- and long-term trailing periods.

American Funds Growth Fund of America AGTHX is the second-largest Medco shareholder, with about 2.4% of the firm's shares, but it was a less-than-0.40% position in the sprawling fund at the end of the first quarter. Janus Twenty JAVLX, Janus JDGAX, and Janus Forty JDCAX are likely to feel more of an impact; they each had about 2.5% or more of assets in the stock as of the most recent disclosures. Medco also is a big holding in Columbia Select Large Cap Growth's UMLGX portfolio, at 3.7% of assets.

Schwab Shakes Up Its Target-Date Series Again
Dan Kern, the lead portfolio manager for Schwab's Target Funds, the firm's target-date retirement lineup, has left the company in a move that could result in another overhaul of the firm's series.

Schwab is in the process of selecting a new permanent manager and reassessing the series' glide paths, asset allocations, and underlying investments. The shop's new chief investment officer, Omar Aguilar, is also looking to build out the asset-allocation research team.

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