On Sept. 13, 2011, Jeff Feingold went to work at his usual time, 6 a.m., sat down in the spot where he had been sitting for years, and started his day like any other. In many respects, nothing had changed -- save for his title, portfolio manager of Fidelity Magellan
“I’d be lying if I didn’t say there was some anxiety,” says Feingold, who started at Fidelity as an analyst in 1997 and has held many positions there, including co-director of research and manager of the Fidelity Trend fund.

Illo: John Kuczala for Barron’s

Fidelity Magellan (ticker: FMAGX) is in a league of its own. The fund, which Peter Lynch ran from 1977 until 1990, became a household name at a time when Americans were just learning about mutual funds and employers were starting to offer 401(k) plans. “One of the reasons that Fidelity became so dominant in the marketplace was Magellan,” says Morningstar’s director of mutual fund research, Russel Kinnel. “It was the firm’s calling card.”
Then began the long, slow decline, marked by lackluster returns, management changes, and the rise of index funds. At its peak in August 2000, with nearly $110 billion in assets, Magellan was the largest mutual fund in the country. By the time Feingold took the helm, it was a case study for the failures of active management, bloated funds, and poor succession planning. After more than 10 straight years of net outflows, assets had fallen to $16.9 billion.
Even under the best circumstances, changing a manager is risky for a fund company, the incoming manager -- and shareholders. An abrupt or choppy transition can spill over to other portfolios and send investors running for the life rafts.
When the change comes unexpectedly for a prominent fund with a prominent manager, the stakes are even higher. In the four months following Bill Gross’ sudden departure from Pimco last September, the firm’s flagship Pimco Total Return fund (PTTRX) saw nearly $70 billion in net outflows; its assets are now less than half of what they were at the fund’s $293 billion peak in April 2013.
Individual investors get nervous because the star manager they know is gone. Professionals -- financial advisors, institutions, and the consultants they pay for advice -- are also wary. “When there is a star system in place, any change is going to flag an immediate review,” says Sean Kane, a managing director with Cardinal Investment Advisors, which advises institutional clients.
THE BEST TRANSITIONS are transparent and announced years in advance, giving the incoming manager time to work alongside his predecessor and ease into the new role. For example, investors learned last June that Brian Rogers, who has run the T. Rowe Price Equity Income fund (PRFDX) for 30 years, will hand over the reins on Oct. 30. “You generally don’t have to worry too much about a big strategy shift,” Kinnel says of the Baltimore firm.
Still, surprises happen. When Kris Jenner, the star manager of the T. Rowe Price Health Sciences fund (PRHSX) left to start a hedge fund in early 2013, the move was sudden and made more jarring when two analysts went with him.
The transition at Janus Contrarian (JCNAX) was notable for a different reason. The fund isn’t the largest or oldest at Janus, but its value orientation makes it a standout at a firm best known for growth investing. When the fund’s only manager, David Decker, left in 2011 to start his own firm, Janus brought an alumnus back into the fold.
Investors have a right to be concerned when a star manager leaves. But in these four cases, the current manager has either turned the ship around or continued to steer it on an already successful course.
JEFF FEINGOLD Fidelity Magellan
Manager since: September 2011
Return on his watch: 18.8% avg annual
Assets: $16.9 billion

Jeff Feingold, 44, became Magellan’s fifth manager in 21 years, during which time the fund underwent many changes -- most of them unsuccessful. Its first two replacements for Peter Lynch lasted less than four years. Then, under Robert Stansky’s nine-year tenure, it got the reputation of being a closet indexer. Stansky’s replacement, Harry Lange, went in the other direction, taking on too much risk for a fund designed to be a core holding; in 2008, the fund plunged 49%.
Under Feingold’s watch, Magellan has bested its benchmark in each of the past three calendar years, and has a two-percentage-point lead this year, though inflows have yet to turn positive. “I know it’s tough to beat the market, but it is possible,” says Feingold, who was mentored by Lynch and still speaks with him regularly.
Feingold admits that he didn’t fully appreciate the depth of Fidelity’s analysis until the first time he applied for a job at the firm. He was in the second year of an analyst program with Morgan Stanley and prepared a stock recommendation as part of the interview process. “I did a one-page report and attached a sheet of sell-side research,” Feingold says, laughing. “They said, ‘No thank you’ and suggested I go to business school.”

Jeff Feingold, Fidelity Magellan

He took that advice and, after graduating from Harvard Business School, came back and got a job covering apparel and textiles, and later, transportation. “I would go home after work and call the Asian airlines to find out how many planes they planned to order from Boeing,” says Feingold, who eventually moved from analyst to sector fund manager, then co-director of research.
Though Feingold isn’t a household name, he has proven himself in numerous areas, says Brian Hogan, Fidelity’s equity-division president. Prior to taking over Magellan, Feingold “was running four products, and in all instances he was beating at least 88% of his peers,” says Hogan. “Jeff is a very good stockpicker.”

Feingold keeps Magellan’s sector weightings within three or four percentage points of the benchmark, then looks for the best ideas across three different risk/reward profiles. Roughly a third of the fund is in high-growth stocks, such as Keurig Green Mountain (GMCR) and Chipotle Mexican Grill (CMG). He allocates a third of the portfolio to quality names with stable earnings and low volatility, such as Johnson & Johnson(JNJ) and TJX Cos. (TJX).
The final third is earmarked for companies that Feingold thinks the market has unfairly punished. Airlines, such as American Airlines Group (AAL) and JetBlue Airways  (JBLU), typify this group. The industry today has come a long way since he started covering it 15 years ago, he says, adding, “If you would have told me then that airlines would have the cash to declare dividends and do buybacks, I would have said that was impossible.”

SCOTT MATHER Pimco Total Return
Manager since: September 2014
Return on his watch: 3.3%
Assets: $125 billion

When the King of Bonds left Pimco last fall, investors had good reason to panic. Bill Gross was synonymous with the firm he had co-founded in 1971, and he was sole manager of Pimco Total Return from its 1987 inception until September 2014.
Today, the empire is overseen by a group of lieutenants who have risen through the ranks. The overall approach hasn’t changed, says Daniel Ivascyn, who is group chief investment officer. What is different: more continuity between analysts, portfolio managers, and chief investment officers, which translates to better execution of investment ideas, he says.
“Long ago, Bill decided he didn’t want to manage portfolio managers on a daily basis, and he didn’t want to be responsible for hiring them,” says Scott Mather, who is the lead manager of the now $125 billion Total Return fund. He is joined by Mark Kiesel, an expert in global credit and manager of Pimco Investment-Grade Corporate Bond (PIGIX), and Mihir Worah, who oversees multi-asset and real-return strategies. “The three of us have hired, managed, and directly trained the bulk of the portfolio managers who have come in over the past decade,” he adds. “There is now a degree of connectedness that wasn’t there before.”

Scott Mather, Pimco Total Return

While it’s still too early to say whether the team approach is working, it has had an auspicious start. The fund is up 2.2% this year, better than 96% of all intermediate-term bonds.
Pimco has always been a tightly run operation. Mather, 46, recalls his first interactions with the Newport Beach, Calif., firm when he was trading mortgage-backed securities for Goldman Sachs in New York.

“There were some desks at Goldman that didn’t like trading with them because it was so difficult to make money,” says Mather, an Oregonian who studied business and engineering at the University of Pennsylvania. In 1998, he moved west to trade mortgage-backed securities for Pimco, and was soon joined by Ivascyn. Eventually, Mather went on to head up all of Pimco’s global fixed-income operations, while Ivascyn took Pimco Income (PONAX) to the top of its category.
As was the case before Gross’ departure, Total Return is guided by the big-picture views of the firm’s 14-member investment committee, which typically meets four times a week. It isn’t unusual for the group to invite guests. In December, former Federal Reserve Chairman Ben Bernanke weighed in on the U.S. economy and monetary policy.
The investment committee’s current thesis: The Fed will raise short-term rates, but longer-term bonds will be pulled lower by global factors. In the shorter term, “the disconnect between what the Fed is saying and what the market is doing is huge,” says Mather, noting that Treasury inflation-protected securities are an inexpensive option to protect against rising inflation. The current 10-year break-even inflation, he says, was recently priced at 1.75%, which is unrealistic, even against the backdrop of low energy prices.
At the same time, the strengthening dollar and negative interest rates in Europe bode well for seven- to 10-year U.S. bonds. The net effect is an atypically flat yield curve. “The rates that matter most to the ‘real’ economy will be impacted less,” says Mather. To wit, the fund recently bumped up its exposure to nonagency mortgage-backed securities.

T. Rowe Price Health Sciences
Manager since: February 2013
Return on his watch: 41.6% avg annual
Assets: $13.6 billion

Taymour Tamaddon isn’t going to sugarcoat things. His transition from health-care analyst to manager of the T. Rowe Price Health Sciences fund wasn’t easy. The learning curve was steep, and the hours were long. “I wish I could say I had a magic formula, but we just worked harder,” says Tamaddon, 39, who took over in early 2013. “For that first year, I woke up early and read, and had cereal for dinner three or four times a week.”
Tamaddon had his work cut out for him. When the fund’s longtime manager, Kris Jenner, left to start his own hedge fund, the health-care team was effectively cut in half. “Jenner left pretty abruptly and took two analysts with him,” says Bill Stromberg, head of equity for the firm. “Within two hours, I asked Taymour to take over.”
Though Tamaddon was a rookie manager, he had covered health care for roughly a decade, and his recommendations -- which he managed for the T. Rowe Price U.S. Structured Research fund (TRISX) -- had contributed to the outperformance of the Health Sciences fund and other portfolios in the firm. Tamaddon’s work ethic and rapport with other analysts and managers were also key. “I knew this would be important in rebuilding the team,” Stromberg adds.
Taymour Tamaddon, T. Rowe Price Health Sciences

Tamaddon took a somewhat unconventional route to investing. The Virginia native majored in applied physics at Cornell University, but ultimately found business more intriguing. After a stint in consulting and then in finance at Amazon.com, he headed to Tuck School of Business at Dartmouth College. “Other people were there to improve their Rolodex, but I really needed to learn accounting and economics,” says Tamaddon. “I wasn’t one of those guys who started reading The Wall Street Journal at age 15.”
It took some doing, but Tamaddon landed an internship with the health-care group -- an ideal post for the former physicist. “The human body makes the universe seem simple,” he says. It’s not just a matter of understanding whether the technology will succeed, but also looking at how it will be received -- and paid for -- in the marketplace.
More than a third of the fund is in established pharmaceutical, medical-device, and life-sciences companies with strong and predictable cash flow to anchor the portfolio; think Actavis (ACT) and Eli Lilly (LLY).

Another third of the portfolio is in biotechnology companies, including established players, such as top holding Gilead Sciences (GILD), best known for its roster of antiviral drugs, and newcomers, such as gene-therapy-product maker bluebird bio blue (BLUE). Roughly a quarter of the portfolio is in health-care management and information-technology companies. “There is money to be made in services that lower costs and improve patient care,” Tamaddon says, noting that companies such as Humana (HUM) and athenahealth (ATHN) provide both.
While many of the fund’s top holdings are vintage Jenner, Tamaddon has worked new holdings into the portfolio, and steered the $13.6 billion fund to the top of its health-sciences category. Investors who stuck with the fund have been rewarded with 41.6% annual returns under Tamaddon. Meanwhile, he has added four new people to his team, including a Ph.D. in pharmacology and a Ph.D. in immunology. He has also settled into his role as manager -- these days he’s down to eating Honey Bunches of Oats for dinner just one night a week.

DAN KOZLOWSKI Janus Contrarian
Manager since: July 2011
Return on his watch: 16% avg annual
Assets: $4.6 billion

Dan Kozlowski started at Janus in 1999, an exciting time to be at the thriving growth firm during the technology boom -- except that Kozlowski was covering insurance. He spent a lot of time with David Decker, the founding manager of the Janus Contrarian fund. “Working with David, I developed a comfort level to make investment decisions based on facts and analysis, as opposed to consensus,” says Kozlowski, whose early recommendations included Aflac (AFL) and Berkshire Hathaway (BRKA).
Eventually, Kozlowski wanted to manage his own contrarian portfolio, “and there was really only room for one manager” in this niche at Janus, he says. In early 2008, he moved to Chicago to launch a hedge fund.
When Decker left three years later, Janus reached out to Kozlowski with an offer to acquire his hedge fund and put him at the helm of Contrarian, which had been languishing. “Honestly, my first and only choice was Dan Kozlowski,” says head of growth equities and portfolio manager Jonathan Coleman, who was co-chief investment officer of equities at the time.
Dan Kozlowski, Janus Contrarian

Though Kozlowski, 43, stayed true to Decker’s vision, he pared back on debt-heavy companies and lightened up on emerging markets. He also streamlined the fund’s investment approach, focusing on three special situations: consolidation, spinoffs, and changes in management. Doing so, he says, has made it easier to articulate his process to investors and convey to the research team exactly what kinds of ideas to send his way. All told, only about a dozen new holdings make it into the portfolio each year. “In those rare moments when you find asymmetry in risk and reward, the position has to be of size to make it count,” says Kozlowski, whose fund has 44 stock holdings, with the top 10 accounting for half of its $4.6 billion in assets.
Consolidation makes it possible for previously lackluster industries to create pricing power. Such is the case for the airline industry, which has shrunk from 10 to four major U.S. carriers. While all of the major carriers have prospered, Kozlowski says one of his largest holdings, United Continental Holdings(UAL), is still flying under the radar. Its operations are improving, and its earnings are growing; yet, at $64 a share, it trades at just six times 2015 estimates, one of the lowest multiples in the industry.
Spinoffs are an opportunity for a newly independent entity to plot its own path and allocate its own capital.
One such holding is Mallinckrodt (MNK), a specialty pharmaceutical company that Kozlowski bought after it was spun out of Covidien (COV) in 2013. Against the backdrop of a consolidating drug industry, Mallinckrodt has managed to raise prices, make acquisitions, and expand its earnings, which were up 55.8% last year.
Another pharmaceutical outfit, Endo International (ENDP), came to Kozlowski’s attention as a value idea. “It had a good platform, but management was taking one step forward and two steps back,” he says. A few months later, when Endo recruited a Valeant Pharmaceuticals (VRX) executive to step in as CEO, Kozlowski took a position equal to 4% of the fund. Under new management, the company has improved its capital allocation, lowered its cost of funding, and tripled its stock price.
New management has also delivered favorable results for investors in the Contrarian fund. It is up an average of 21% a year over the past three years and ranks in the top 1% of its large-blend category.