Fidelity Magellan Shows Signs of Life

Fidelity Magellan (FMAGX), once the largest mutual fund in the land, is trying for what seems like the umpteenth time to right the ship. It may have finally found the right skipper in Jeff Feingold, who assumed the managerial reins in September 2011 and guided Magellan to market-beating gains in his first two calendar years at the helm.

So is it time to invest in Magellan, which, with $16 billion in assets, should be far easier to run than it was in 2000, when assets peaked at $110 billion? Our answer: No, mainly because we think other large-company funds are more attractive, starting with Fidelity New Millennium (FMILX), which we recently added to the Kiplinger 25.

Magellan today is far from the fund of yore. From 1977 to 1990, under Peter Lynch, it drew investors like bees to honey with an annualized return of 29.1%. That crushed Standard & Poor’s 500-stock index by a stunning 13.5 percentage points per year, on average. After Lynch retired, the fund performed well for a time, but results sagged dramatically with the arrival of a new century. In the 12 years from 2000 through 2011, Magellan trailed the S&P 500 eight times.

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Maybe that’s why Feingold wasted little time putting his stamp on the fund when he took over what was then a $15 billion portfolio. In less than four months, Feingold says, he trimmed the number of stocks Magellan held from roughly 250 to about 225. And he steered the fund from one that held mostly fast-growing firms to one holding a more diversified mix of rapid growers (Google and Priceline, for instance). Plus, Feingold added what he calls quality growers, such as T.J. Maxx, and cheaply priced firms with improving results, such as airlines (American Airlines) and financial stocks (Bank of America). “I’m a diversified growth manager,” says Feingold. “I don’t make big sector bets.”

Given Feingold’s approach, investors shouldn’t bet on Magellan crushing the market. Feingold admits as much: “I want to outpace the S&P 500 by 1.5 to 2 percentage points per year.” In 2012 and 2013, the fund beat the index by 2.0 and 2.9 percentage points. In the first four months of 2014, the fund gained 0.9%, lagging the S&P by 1.7 points.

Feingold, 43, is a longtime Fidelity man. Since he joined the Boston-based behemoth in 1997, he has been a stock analyst, headed the firm’s research department, and managed five sector funds and four diversified funds, including Trend and Large Cap Growth. He’s no slouch: At every fund but one (the exception being Select Financial Services, which he ran from 2001 to 2004), Feingold outpaced the funds’ respective peer groups during his tenure.

Volatility concerns

The newsletter Fidelity Monitor & Insight rates Magellan “OK to Buy,” one notch below an outright “buy” rating. Editor John Bonnanzio says he wants to give Feingold a chance, but adds that he’s “a little uncomfortable” that Magellan has been about 20% more volatile than the S&P 500 over the past three years (a time frame that admittedly includes several months during which Feingold was not in charge).

One plus for Magellan is that it charges just 0.51% a year in fees. That’s among the lowest expense ratios for actively managed stock funds. The bargain price stems mainly from Fidelity’s philosophy (rare among sponsors) of basing some funds’ management fees on performance. Fees aside, we’d like to see another year or two of winning results before we would recommend Magellan.