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FMAGX is a storied name in the world of mutual funds. But the fund hasn’t been what it once was in a long time. It’s hardly a bad fund, and it may be turning itself around, but there may also be better options for you. The Fidelity Magellan Fund (MUTF: FMAGX ) has a hallowed place in the history of mutual funds. Former manager and mutual fund icon Peter Lynch is probably the name most associated with the fund. And while he led it to great success, he hasn’t been the manager for a long time… and performance has been less than inspiring for a long time, too. What’s it do? Fidelity Magellan’s objective is capital appreciation. It achieves this by investing in stocks. That may sound a bit simple, but that’s really what Fidelity puts out there. What this is basically explaining is that the fund owns stocks and doesn’t have specific style, region, or sector preferences. So it will own both growth and value names, invest in domestic and foreign stocks, and basically go where it thinks it can find opportunity. With an asset base of around $15 billion, however, you’ll want to keep in mind that it isn’t likely investing in too many small companies. So FMAGX is really a large cap style agnostic stock fund. Current manager Jeffrey Feingold is looking for companies with, “…accelerating earnings, improving fundamentals and a low valuation.” He believes these are the main drivers of performance, but admits that finding all three in one investment can be hard. So he works to find stocks with at least two of these factors going for them. Broadly speaking he also tries to diversify the holdings across aspects like type of company (fast growers, higher-quality growers, and cheap with improving fundamentals) and risk profile (for example, stocks with different leverage levels and earnings predictably). In the end, he explains, “…because of the way I manage the fund, security selection is typically going to be the primary driver of the fund’s performance relative to its benchmark.” How’s it done? Feingold has been at the helm of the fund since late 2011, putting his tenure at a little over three years. And in that span he’s proven pretty capable. For example, over the trailing three year period through August, the fund’s annualized total return was roughly 16.4%. The S&P 500’s annualized total return over that span was 14.3%. Assuming there was a bit of a transition period as he took over, that three period is probably a fair time frame over which to look at his performance. And its a big difference from longer periods. Despite the recent solid showing, the fund’s five-, 10-, and 15-year trailing returns all lag the index and similarly managed funds. Often by wide margins. So Feingold has been doing something right at a fund that’s been missing the mark for some time. However, there’s more to the story. The manager’s tenure has coincided with a mostly positive market. In fact, 2012 (the S&P advanced around 16%), 2013 (the S&P was up 32%), and 2014 (the S&P was up nearly 14%) were all fairly good for the market based on historical average returns. In other words, the manager has had a good backdrop in which to work. Looking to the future, however, it’s fair to say that he hasn’t been stress tested at this fund yet. So I wouldn’t get too excited by the recent performance. That said, so far this year, the fund has held up reasonably well. It’s lost less than the S&P and similarly managed funds. But I’d argue that this isn’t enough of a test to get a real feel for how the fund will handle a major market correction with Feingold at the helm. But it is at least encouraging. Not too expensive, lots of trading Looking a little closer at owning Fidelity Magellan, it’s got a reasonable expense ratio of 0.7%. Although you could argue that a fund with around $15 billion in assets could probably be run with a lower expense ratio, 70 basis points isn’t out of line with the broader fund industry. If you take the time to look at the fund’s annual report, though, you’ll notice that expenses have increased from around 0.5% in the last couple of fiscal years. But that’s really a statement to the improving performance. Magellan’s expense ratio is based on the cost of running the fund plus a performance adjustment. In other words, the expense ratio is going up because Magellan has been doing better. I think most would agree that this is reasonable. That said, Magellan’s 70% turnover looks fairly high to me based on the large cap names it’s pretty much forced into because of its large asset base. That number has been fairly constant over the manager’s tenure, as well, so this looks like a reasonable rate to expect year in and year out. There are a number of very good funds that manage to do well with turnovers in the 20% range, so the 70% figure is something I’d watch. For example, that level of trading in a falling market, as noted above, has yet to be tested at the fund. I make that comparison because a fund with a 20% turnover is clearly buying and holding companies it likes and knows well. Companies that it believes have solid long-term prospects. A fund that turns over 70% of its holdings in a year looks like it’s investing with a shorter time period in mind. You may be OK with that, but if you aren’t, then this may not be the right fund for you. If you’ve gone for the ride… Investors often buy funds and then forget they own them. If you have been in FMAGX for a long time it has probably served you reasonably well, overall. That said, you have also lived through some periods where management hasn’t lived up to the fund’s storied past. That appears to be turning a corner with a new manager running the show. However, the new manager has so far been running things in a good market. There are few solid clues as to what you might expect in a real downdraft. So improved performance is nice to see, but it’s too early to call an all clear-especially with the market turning so turbulent of late. In fact, Feingold might be on the verge of a true test of his abilities in a falling market. Only time will tell. In the end, if you own Magellan I wouldn’t be rushing for the exits. However, if complacency is what’s kept you in the fund I’d suggest looking around at other large cap funds. Magellan is hardly a stand out performer, despite the fund’s impressive history, and based on the management changes over time it may no longer be the fund you bought. So a little perspective on your options wouldn’t hurt, even if you decide to stick around. Scalper1 News
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