One of the interesting things about mutual funds is that they tend to retain the halo effect of the mutual fund superstars even after those fund superstars are no longer around. One such case is the Fidelity Magellan Fund. It built up all of this brand equity when Peter Lynch was running it for thirteen years and giving investors returns of 29.3% annually. Lynch ran it from May of 1977 to May of 1990, and the fund increased in size from $20 million to $13 billion by the time that Lynch let go of the reins.
The fund fell apart under the management of Robert Stansky and Harry Lange. Under Stansky, the fund peaked at $100 billion in 1999, before losing half of his assets under management by the time that he left in 2005. Stansky made the mistake of going into bonds way too soon; investors during the late 1990s started to get displeased with years in which Stansky grew their wealth by 11% while the S&P 500 grew by 21%. And when Lange took over, things did not get much better. In 2008, Lange chose to practice value investing by purchasing the wrong stocks—large stakes in Wachovia, AIG, Nokia, and a little bit of Lehman Brothers. You can guess how that worked out. Shareholders bolted when Fidelity lost just shy of 50% of its value in 2008, and Lange’s outperformance of the S&P 500 by fifteen percentage points in 2009 did little to shake the perception among its investors that the Fidelity Magellan Fund was no longer a “safe” place to put your money due to the substantial capital impairment caused by Lange’s investments.
Personally, I think that purchasing Wachovia stock was one of the most intelligent ways someone could lose 90% plus in the stock market. I know we’re limited by the fact that we are interacting online and you cannot see my face or pick up on my tone, but I’m saying this with sincerity. Wachovia’s book value was around $40 per share; if it survived its liquidity crisis (perhaps by unlocking funds, getting a bailout from Buffett like GE or Goldman Sachs did, or getting a lifeline from the US government), it could be one of the super-successful comeback stories of the decade like General Electric and Wells Fargo (as an aside, if seeing a venerable institution over a century old like Wachovia fail due to a liquidity crisis doesn’t encourage you to keep a huge amount of cash in your portfolio, I’ve got nothing).
But the stories about Lynch, Stansky, and Lange are neither here nor there. When contemplating a prospective investment, what matters is who is running it now, and whether you like the particular stocks that the person picks with your money (as well as the reasonableness of the fees).
As of now, the fund is being run by Jeffrey Feingold. He took over in 2011.It’s way too early in his tenure to make a determination about whether he is a good manager or not; what can you really learn from the fact that Fidelity Magellan has gone up 33% this year while the S&P 500 has gone up 30%? That kind of information is just background static—it will take at least until 2016 or 2017 at a minimum before we can start evaluating the wisdom of Feingold’s decision-making process at the Magellan Fund.
Right now, the fees at Fidelity Magellan are 0.53% annually, which is the kind of reason why I don’t own mutual funds (why give someone else $530 each year on every $100,000 invested when you can just buy the large stocks and own them outright), but in the realm of large-cap mutual fund investing, these fees are quite reasonable. Most mutual funds that invest in large-cap stocks charge over 1% annually (according to Morningstar), and so a 0.53% fee is pretty reasonable in comparison to its peers.
And when you look at Feingold’s top ten holdings in the Magellan Fund, he has some interesting. The fund’s largest holding is Google, which is 3.86% of assets (meaning every $1,000 you invest into the Magellan Fund is allocated to $38.60 worth of Google stock). Considering that Google is growing earnings per share at a rate of 13.5% annually, that looks like a reasonably intelligent pick to lead the portfolio.
About 6% of the fund is divvied up into JP Morgan, Citigroup, and Bank of America, which is looks like a bold pick on dividend recovery. Although it is informal, there is something to be said about “dividend support theory.” Generally, this subjective theory argues that a growing dividend puts an increasing floor on the price of a stock. With Bank of America and Citigroup looking like they are finally going to start opening up the treasury and returning some of their profits back to shareholders now that they have adequate Tier 1 Ratio coverage for their operations, these bank stocks might be set to take off over the next few years.
Additionally, Feingold has bought big blocks of Berkshire Hathaway, General Electric, Microsoft and Apple. General Electric is currently in a golden era of dividend growth well supported by earnings growth, and the “value” in the price is that some investors are still jilted from the 2008 dividend cut, and this colors their analysis of GE going forward. That makes the GE pick intriguing. As far for Berkshire Hathaway, it’s hard to see how you can go wrong owning a company with $35 billion in cash, with blocks of stock in the bluest of blue chips, run by the most legendary manager of all time, and with 80 separately distinct businesses that are pumping out $12 billion in profits per year to send to headquarters. The Microsoft and Apple picks are interesting in that both companies are complete cash machines, but are selling at discounted valuations relative to the current cash they generate.
All in all, I’m somewhat impressed with Feingold’s work at Magellan so far. He has some bold picks for future growth by buying names that are not currently popular due to management blunders during the financial crisis, and this could position Magellan shareholders well as earnings growth and dividend growth at these firms gradually erase the memories of their past transgressions. The fee of 0.53% is quite manageable for a mutual fund. If someone told me I had to own a portfolio constructed similar to the current holdings in the Fidelity Magellan Fund, I would not be displeased. Feingold seems like to big names with big earnings power that do not currently enjoy reputations commensurate with the future profits they will be generating; this is a rational strategy to pursue for someone trying to beat the S&P 500.
To examine the Fidelity Magellan Fund yourself, click here.