by Dan Wiener | October 3, 2011 12:27 pm
Oh, how the mighty have fallen. Fidelity Magellan (MUTF:FMAGX) once was the world’s largest mutual fund, topping out at $110 billion in assets in 2000. After delivering subpar returns during the past 15 years, however, Magellan now ranks as only the ninth largest fund at Fidelity, with $17 billion in assets.
In Magellan’s heyday, photos of former star manager Peter Lynch graced the covers of personal finance magazines. Investors jammed Fidelity’s phone lines, eager to buy shares of what some called “that Fah-gellity fund.” Since Lynch’s retirement in 1990 at the ripe old age of 46, his successors have tried (but largely failed) to match Lynch’s results.
Given the mutual fund’s particularly disappointing results during the past decade — its average annual return of 0.54% trails the S&P 500’s 2.70% through the end of August) — Fidelity’s announcement last month that Jeffrey Feingold would be replacing Harry Lange as manager came as no great surprise.
Lange, who previously had enjoyed success as manager of Fidelity Capital Appreciation (MUTF:FDCAX), struggled at Magellan. Since taking the reins in October 2005, Magellan’s total return of -0.1% trailed the 14.1% gain in the S&P 500 (through Aug. 31). The mutual fund’s performance lagged 85% of its peers during the past five years, and assets shrank by $33 billion during Lange’s tenure.
Lange’s penchant for a more global approach to asset allocation did not help matters during the protracted downturn in established foreign markets over the past several years. Meanwhile, the fund never benefited from any meaningful exposure to emerging-markets stocks, which performed much better. An ill-timed decision to load up on financial stocks, including Wachovia and AIG (NYSE:AIG), led to a bruising loss of 49% in 2008.
At the end of last year, I speculated that Lange likely would be out of a job if the established foreign markets did not turn around soon. This year’s 18.7% decline (through Oct. 3) in the iShares MSCI EAFE Index Fund (NYSE:EFA) of developed international markets sealed Lange’s fate.
Fidelity now turns to Jeffrey Feingold to help restore some of Magellan’s lost luster. Feingold has achieved solid results as manager of the $1.04 billion portfolio at Fidelity Trend (MUTF:FTRNX), which he has managed since February 2007. He also has managed Fidelity Large Cap Growth (MUTF:FSLGX) since November 2009 and will continue to manage Advisor Strategic Growth and VIP Growth Stock Portfolio. Previously, Feingold managed several of Fidelity’s sector portfolios. He is a 1992 graduate of Brown University and earned his MBA at Harvard in 1997.
As manager of Trend, Feingold has shown himself to be a bottom-up stock picker. He favors U.S.-based multinationals with bigger, better balance sheets and global trading capabilities. He looks for companies that are growing their sales and earnings faster than the market and avoids large sector bets. While he has invested about half of Trend fund’s assets in traditional growth sectors like technology and consumer discretionary, he also is willing to look for growth in nontraditional sectors, such as consumer staples companies.
Over the past year, Feingold’s approach has served Trend well, as it beat 84% of its peers. As of Aug. 31, Trend’s top three sectors were information technology (29.4% of assets), consumer discretionary (14.1%) and energy (11.9%).
As Feingold shifts his attention to his new charge, I expect he will reposition Magellan away from an aggressive global growth fund to a more risk-managed growth fund that can capitalize better on domestic and global trends. His preference for large domestic multinationals should help lower Magellan’s overall risk profile, while also engaging better with the global markets (including the emerging market consumer base).
While I think Feingold’s strategy makes sense in the current economic climate, I would not advise new investors to buy into the mutual fund just yet, based more on the fund’s makeup than the new management. My top pick within Fidelity’s large-cap growth offerings remains Fidelity Mega-Cap Stock (MUTF:FGRTX). That said, current Magellan shareholders who have significant taxable gains might be better off sticking with the fund rather than selling.
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