Fidelity Magellan Fund (FMAGX) is a household name in the mutual fund universe. The fund has been in existence since 1963 and currently has assets under management of more than $19 billion. In mid-January of 2008, Fidelity announced that the fund would be reopened to new investors for the first time in over a decade. Magellan’s expense ratio is 0.75%, which compares favorably to the Growth Fund peer average of about 1.30%. This is partly due to the fund’s immense size, which gives it a leg up on many of its competitors as it can spread costs over a larger asset base. What’s more, the portfolio turnover (holdings that are bought and sold in a year) was only 39% annualized through August 6, 2010, which compared favorably to the Growth peer group average of more than 105%. The minimal initial investment required in the Magellan Fund is $2,500.
The fund currently has 252 holdings, while the top-10 selections account for 29% of assets. This is a good amount of diversification, as the fund doesn’t have too many eggs in one basket. Equities constitute nearly 99% of total assets, while cash and convertibles make up the rest. The majority (nearly 80%) of the fund’s securities are domestic, while an even larger percentage (nearly 90%) is dollar-denominated. This lessens the fund’s exposure to foreign currency fluctuations. Of the fund’s top-10 holdings, many are well-known, established names including: Applied Materials (AMAT), Corning (GLW), Staples (SPLS), Apple (AAPL), and Nokia (NOK).
Lange prefers companies that have achieved healthy year-over-year share-net gains and have also benefited from positive industry trends. He targets companies that are trading at a reasonable price-to-earnings multiple, and typically scales back his weighting when that factor becomes too expensive for his screens. He focuses on companies that have a competitive edge, which allows them to post above-average annual earnings growth relative to their peers. He chooses stocks strictly on their own merits, but does adjust the size of the portfolio’s holdings based on his view of the economy and broader stock market valuations. He intends to keep a decent portion of the portfolio in foreign stocks over the next several months, as many international markets have a stronger outlook than the United States does, in his view.
Although Lange has broadened the portfolio over the past few years, it is currently heavily weighted in the technology, financial, and industrial sectors. For example, Information Technology currently comprises about 30% of assets (as of June 30, 2010), which is about the same level as at the beginning of this year. Also, Consumer Discretionary, Healthcare, Materials, and Financials each account for 10%-12% of the total pie. In all, these five sectors, most of which are economically sensitive, account for over 60% of net assets. This would result in subpar fund performance should the domestic economy go into a prolonged tailspin.
Magellan Fund has been a weak performer relative to the broader market, as measured by the S&P 500 Index. For the five-year period ended July 31, 2010, the fund had an annualized loss of 1.9% compared to the S&P 500’s reported annualized loss of 0.3%. The fund didn’t fare any better over the trailing three-year period (ended July 31, 2010) as it lost 9.1%, while the S&P 500 fell 6.9%. During the past year, Magellan Fund reported a gain of 7.7%, as of July 31, 2010, compared to a gain of 13.8% for the S&P 500.
The fund has also not fared that well against its Growth mutual fund peers since Lange has taken the reins. For the five-year period ended July 31, 2010, the fund has underperformed the peer group on an annualized basis by 1.7 percentage points. The fund didn’t fare any better over the trailing three-year period (ended July 31, 2010), as its performance was 2.8 percentage points below the group’s average. During the past year, Magellan has been nearly six percentage points shy of its peers.
The Magellan Fund has underperformed both the S&P 500 Index and its Growth mutual fund peers over the nearly five years that Lange has been at the helm (though 2007 and 2009 showed promise as Magellan’s performance was in the top quintile of its peer group). What’s more, the fund has a Risk Rank of 4, which is lower than average. We believe that there are better mutual fund options available in the Growth category at this time.