Magellan’s woes: It isn’t easy to beat the index

Once upon a time there was a mutual fund named Fidelity Magellan that seemed to do no wrong. Under the leadership of its dynamic portfolio manager, Peter Lynch, the fund racked up an eye-popping average annual gain of 29% over 13 years. Investors took notice and poured billions of dollars into the fund, making it the largest stock mutual fund at one point.

Today Fidelity Magellan can seem to do nothing right. It is on its third manager since Lynch wisely retired at the top of his game in 1990. Rather than the market beating returns of Lynch’s tenure, the subsequent three managers have had trouble keeping up with the market. Over the 10 years ended in March, the average annual return was 9.5% a year, respectable but lagging the Standard & Poor’s 500 Index by 2.2 percentage points per year. 

The investors who still have some $67 billion in the fund may wonder what happened and whether they should stick it out or get out. What they are getting is an expensive lesson in the active vs. passive investing debate. Someone who invested $10,000 in an S&P 500 Index fund, such as the Vanguard 500 Fund, over the past 10 years would have done better than risking money in the Magellan fund. The Vanguard fund investment would have grown to $29,994 vs. $24,782 in Magellan. 

Should investors be mad at current manager Bob Stansky? Not really: Stansky is doing a decent job considering the handicaps he faces. Stansky can no longer take big gambles in the small and mid-cap stocks that helped boost Lynch’s portfolios. He has so much money to invest he has to stick to the big, well-known names in the S&P 500 Index, such as Citigroup, General Electric, and Microsoft. He also has the headwind of the costs associated with active portfolio management.  Finally, he has the risks associated with active investment decisions. For instance, Stansky held down the fund’s investments in technology stocks last year because he was worried about valuations. That move helped put the fund behind the S&P 500 again by almost 4 percentage points.

Stansky wants to beat the S&P 500 by 3 to 5 percentage points a year. Whether he can remains to be seen.