Will Fidelity Magellan bounce back?

After losing nearly half its value in 2008, Fidelity Magellan (FMAGX) is finally regaining its stride. Since the start of the year through May 21, Manager Harry Lange has steered the $21 billion fund to a 13% gain. That return beats the Standard & Poor's 500 index by a whopping 13.5 percentage points, according to Morningstar, which places Magellan in the 10% of its peers.

These are short-term numbers, of course, but the comeback says a lot about Lange's dedication to his strategy. A growth- style investor, he seeks out stocks that are likely to deliver rapidly increasing earnings, but he prefer to buy them at bargain prices. So last year, when the market slammed many of his favorite technology stocks, such as Corning (GLW) and Cisco (CSCO), he saw an opportunity.

"I felt the market had overreacted," said Lange in a recent interview. "These were industry leaders that were selling products that people wanted, so I doubled up as the market went down." So far this year, Cisco has gained 11% and Corning has soared 44%.

Lange still likes tech—the industry recently accounted for a hefty 24% of the fund's portfolio. In addition to Corning and Cisco, the fund's other top tech holdings include Apple (AAPL) and Nokia (NOK). Says Lange. "People around the globe are still buying the latest smartphones and gadgets."

A go-anywhere investor, Lange recently began venturing into an asset you might not expect to find in a growth fund: gold, which recently made up 7% of the portfolio. Among the larger stakes: Newmont Mining (NEM) and Goldcorp (GG). "The money being pumped into the economy as a result of the economic stimulus is likely to lead to inflation," says Lange, "or certainly a lot of inflation fears."

Over the past year Lange has cut back on some former favorites, such as alternative energy—"it's hard to see strength in this sector near term, given the deficit and the lower cost of conventional energy"—and financials. Last year his bets on AIG and Wachovia helped drag down the fund to a 49% loss.

But Lange isn't cutting out financials completely—the fund still holds a 10% stake, with J.P. Morgan (JPM) among the top picks. In 2009 these stocks have helped returns, Lange says, adding, "The surviving investment banks will gain market share, and they will earn better spreads than when there was lots of competition."

Will Lange's strategy continue to work? That's impossible to say. But it's clear that Lange is doing what he was assigned to do—restore Magellan to the adventurous growth fund it was under Peter Lynch. Previous manager Roger Stansky had turned the fund into an index-hugger, which led to mediocre returns.

Magellan shareholders aren't the only ones with a lot riding on the Lange's success. Fidelity Investments does too. Magellan, after all, was once Fidelity's flagship fund, with more than $100 billion in assets. That was back in 2000. The current flagship fund, Fidelity Contrafund (FCNTX), run by Will Danoff, is up less than 2% this year; and its assets have fallen from more than $80 billion in 2007 to just $48 billion.

All of which has led to a big loss of market share for Fidelity. And it casts doubt on the future of its gun-slinging stock-picking style, which worked so well in the '80s and '90s. Meanwhile, investors have been pouring money into rivals Vanguard, the champion of indexing, and American Funds, with its anonymous team mangement—not to mention today's hottest-selling investment, exchange-traded funds.

Back in 2004, Fidelity ranked second in long-term assets, just behind Vanguard, according to Financial Research Corp. Now it ranks third. In response, Fidelity has launched a series of changes to its investment process, as well as an overhaul among its top executives.

These moves may help—but a long-term market rally that gives its managers a chance to shine would help even more.