And in other news...
Fidelity Magellan, flagship fund of the behemouth Fidelity Fund Family, announces that it is reopening to new investors. My reaction to this?
Or infinitely more adorable...
C'mon, tell me you didn't just yawn. But I guess people are actually interested in this non-story. I searched for "Fidelity Magellan Reopen" in Google News, and found 62 stories. Not random blog posts like you found here, but the big boys. Bloomberg, Forbes, Reuters, MarketWatch, even the British paper, Financial Times.
So, the question is, why is this a story?
First a little history on the Fidelity Magellan fund. Or you can skip to the bottom if you all you want is my hyperbole.
Founding and Early Years
The Magellan fund was created in 1963, right in the early stages of a period on Wall Street that later came to be known as the "go-go years." A period lasting from the early 60s through the crash of the markets in '73-'74. It was a time of high volatility, with some huge winners and devastating losers. It was a period that saw three distinct bear markets, each followed by a full recovery. It was a period defined by the market timers and the stock pickers.
No one had even heard of Index Funds. And Fidelity Magellan was no exception. Their objective then, as it is now, was capital appreciation, investing in common stocks using fundamental analysis. In other words, pick good stocks, don't pick bad ones. And especially, don't get demolished in the bear markets that come along every three years or so.
Why is this important? It goes to the founding of the fund. The original intent. Active management is the way to go. Don't worry about turnover, you have to sell your bad stocks before they go bad, and get into good ones. It was also seven years before Eugene Fama wrote his groundbreaking article on efficient markets. In other words, they didn't know any better.
Magellan's returns reflected the era. They had skyrocketing returns of 115.96% in 1965 and 103.84% in 1967. They also had two back to back negative years, producing -17.34% in 1969 followed by -15.71% in 1970, and -42.14% in 1973 followed by -28.27% in 1974. (Data collected from a phone call to Fidelity's customer service. I suppose it's reliable, but certainly not verified.)
Peter Lynch Years
Then came The Guru. In May of 1977, a young (33 years old) analyst named Peter Lynch took over management of the Magellan Fund, which had $18 million in assets. In May 1990, Lynch stepped down from a fund that had grown to more than $14 billion. During his tenure, Magellan produced an average annual return of 29%, and beat the S&P 500 11 out of 13 years. (Again, this information was provided by someone on the phone at Fidelity.)
Lynch used an easy to understand style that can be described as "invest in what you know." He eschewed exotic stocks for names like the Gap Stores, because it's where his daughter and her friends were shopping. Since stepping down, Lynch has written several books on investing, made some Fidelity commercials and continues in some capacity at Fidelity.
Post Lynch
Succeeding Lynch was Morris Smith, who stuck around for only two years. Most remembered among Lynch's successors was Jeffrey Vinik. Vinik took over in 1992, at which time the fund stood at over $20 billion. By the time Vinik was replaced by Robert Stansky in June 1996, the Magellan fund managed over $50 billion of investor assets. It was closed to new investors in 1997, moderating growth of the fund.
Despite the phenomenal success of Lynch and his continued involvement in selecting and training his successors, Smith, Vinik and Stansky failed to live up to the high expectations set by The Guru. From 1990 through 2007, Magellan bested its self selected benchmark (the S&P 500) in only 8 of the 18 years.
2007 was the fund's best year relative to the index in the Post Lynch era. Current manager, Harry Lange, returned 18.83% versus 5.49% for the S&P 500. Is this the reason for the reopening? Perhaps Fidelity is looking to capitalize on last year's good numbers. Perhaps the expansion of the world's market capitalization means that there are now more places for Mr. Lange to employ investors' capital. At any rate, it is interesting that the fund was closed after two of their worst years relative to the index, and reopened after one of its best.
Well, I promised you hyperbole, so here it it. Magellan is an old fund with an above average history. Despite its recent decline, it manages a mountain of assets. Is Harry Lange the new savior to this legendary fund? The new Peter Lynch? I don't have any clue. And you know what? Neither does Peter Lynch.
This is a fund that has been all about star power. Peter Lynch is its poster child, and after Warren Buffet, is probably one of the most recognizable figures in stock picking. Did, or does, Lynch possess superior stock picking abilities? Maybe. Maybe he was insanely lucky. He had a style that he stuck with, and it delivered superior returns through the 80s. Maybe the luster would have come off if he stuck around through the 90s.
Was his success the result of a style that outperformed during his decade in the sun? I don't know, and it's not even a very important question. The real question when we are talking about superstar stock pickers is this: can you identify the superstar fund manager before they deliver their superstar numbers? Did you invest in Magellan in 1977, or even 1984 for that matter? Or did you wait until Lynch was had delivered big numbers like most people? Actually, what most people did was start investing AFTER Lynch was gone. Think about it. $14 billion when he stepped down is a lot of money, but six years later, lackluster performance by his successors and the fund stood at $50 billion, more than three and a half times the size of the fund that the The Guru left.
In short, Magellan has been about star power, specifically Peter Lynch. None of his successors have had the same success that he did. Lange just turned in the fund’s best year relative to the benchmarks since Lynch. He did so by completely changing the fund’s strategies. Now they reopen the fund? What is an investor to expect? We have no way of knowing. To invest in it would be a gamble, pure and simple.
Back to the question. Can you identify the superstar fund manager before they deliver their superstar numbers? I'll tell you this much. In his years of mentoring, training and hand picking fund managers, Peter Lynch has not been able to do so. If he can't, what makes you think you can?
When considering the success of Peter Lynch, one should note that the stock market in 1977 was relatively low.
The US was struggling with the recessionary forces of the post Vietnam War and the afterr effects of the first major energy crisis.
So the fund measures its performance form a verty low point.
Many common stocks purchased at he same time would have performed better OVER THE SAME PERIOD than MAGELLAN DID.
Posted by: jav | November 24, 2009 at 05:19 AM