The Magellan affair is a reminder that the stock market is becoming dangerously overheated

Nine days ago, a portly middle-aged man by the name of Jeff Vinik resigned from his job as manager of the Magellan mutual fund. Not only did this news make all the front pages in the US, but it also "stunned" the stock market, reported the Financial Times. Within an hour of the announcement being made, the share price of eight of the 10 largest holdings in Mr Vinik's fund had fallen sharply.

The Magellan fund has now reached the kind of size where outperformance becomes by definition harder and harder. The kind of huge portfolio shifts that Mr Vinik was making - moving billions of dollars into and out of a single sector in a matter of months in order to keep one step ahead of the latest fad on Wall Street - may have been necessary to keep his job. No doubt it required the skill and daring for which Mr Vinik was known among his peers.

But to call it investment is to stretch the meaning of that term to its limits. Institutionalised gambling seems nearer the mark. At a time when shares account for a higher proportion of US household assets than at any time in living memory, the Magellan affair is a reminder that the stock market is becoming dangerously overheated. No wonder many older heads on Wall Street think the mutual fund revolution and the associated cult of performance is a worrying development.

The circumstances of Mr Vinik's departure remain unclear. Some suspect that he may have been asked to leave by his employers, the Fidelity group, one of Boston's leading investment groups. The latter, however, was at pains to say that this was not the case. Mr Vinik himself said he was leaving to start his own investment management business. The Securities and Exchange Commission had earlier taken the unusual step of publicly repudiating another newspaper story which suggested it was investigating Mr Vinik's share-dealing activities.

It is hard for us in this country to comprehend how important mutual funds are to the American investment scene. The nearest equivalent in this country is the unit trust. But like most things in America, the mutual fund business is an order of magnitude bigger than anything we do over here. The total amount invested in mutual funds now tops $2,000bn. That is more than the capitalisation of the entire London stock market, and more than 10 times the amount of money managed by UK unit trusts.

The amount invested in mutual funds has been growing steadily for 30 years, but more recently the flow of money has turned from a tide into a torrent. As interest rates have fallen, millions of savers in America have taken their money out of their deposit accounts and, in a search for higher returns, invested them instead in mutual funds.

The Magellan fund has been one of the main beneficiaries. The pot of money formerly run by Mr Vinik is the largest mutual fund in the US. It has an estimated $56bn (pounds 37bn) of funds under management.

The man who put Magellan on the map was a remarkable fund manager called Peter Lynch. In little more than a decade, this ferocious stock-picker - he liked to have hundreds of stocks in his portfolio and turn the whole thing over at least once a year - turned an unknown backwater of the business into the hottest and most successful mutual fund of all time.

But when he retired, still in his forties and with his reputation intact, Mr Lynch left his successors not just a huge portfolio of stocks, but also a huge problem - how to sustain the momentum of a fund that had rapidly outgrown anything the mutual fund business had ever seen before.

Mr Vinik's track record doesn't look too bad, at least on the face of it. He was aggressive, and more than willing to take big bets. At one point last year, he had more than 40 per cent of the fund in technology stocks - a shrewd-looking move as technology stocks led Wall Street higher. But then late last year, he reversed tack, dumping nearly all his technology stocks and going overweight in cash and bonds instead.

That didn't look so smart as Wall Street continued to power ahead. In a business where performance is now measured quarterly, Magellan suddenly started to slip down the rankings. Combined with the poor publicity, the warning bells began to toll. Now Mr Vinik has gone. It is hard not to see him as, in part, a victim of an industry which has become increasingly competitive and in which the burden of meeting unrealistic expectations is beginning to take its toll.