Lessons From Fidelity's Struggles with Magellan Fund
Fidelity announced this week that it was replacing Harry Lange, the manager of its Magellan fund. Lange, who took over the fund's reins in 2005, had a relatively disappointing tenure, reflected in the fund's one-star ranking from Morningstar.
That's bad news for Magellan's investors, but there are lessons to be learned by all investors from Fidelity's ongoing attempts to recapture its former glory.
Some thirty years after Peter Lynch stepped down after compiling a remarkable record running Magellan, the fund remains one of most widely known funds in the industry. That's far more a testament to Lynch's legend than it is to anything that the fund has done since Lynch departed. Since 1990, when Lynch retired, Magellan fund has lagged the S&P 500 by more than one percent annually.
Robert Stansky took over Magellan's reins from Jeff Vinik in 1996, shortly after Vinik took enormous heat for moving the fund into bonds. Stansky's record as a growth stock investor -- along with his training under Lynch -- seemed perfectly suited for the times. And for the first couple of years, Stansky did fairly well, as growth stocks continued to soar through the end of the decade.
But after the internet bubble burst, Stansky and Magellan struggled, trailing the S&P 500 by more than 1.5 percent annually for the five years ended 2004.
Fidelity's solution was to bring in Lange, who had garnered a strong track record and a reputation as an aggressive, go-anywhere investor in the wake of the tech bubble's burst. There was a bit of concern that his track record -- which had been built on small- and mid-cap stocks at his previous fund -- would be tough to replicate at Magellan, which, given its size, was for essentially restricted to investing in large-cap stocks. Nonetheless, Fidelity newsletter writer Jim Lowell endorsed Lange's hire, saying that he didn't think "there's a more capable or seasoned stock picker than Harry Lange."
Be that as it may, we all know how it ended up working out.
At Magellan, Lange tried to essentially replicate the strategy that had served him so well before, swooping in during a bear market and scooping up stocks that he believed were undervalued. Unfortunately, Lange couldn't catch lightning in a bottle twice, and his ill-timed bets on financial stocks in 2008 caused the fund to lose nearly 50 percent for the year.
In April of this year, Lange was confident that he had finally positioned the fund for success, claiming that "six months from now, I'll look like I'm a genius." But, with the fund trailing the S&P 500 by more than 11 percent through August, Fidelity wasn't willing to wait any longer for the payoff.
And now in comes Lange's replacement, Jeff Feingold. Like his predecessors, Feingold comes armed with a strong near-term record. With a risk-averse style, his Fidelity Trend fund has outperformed the S&P 500 by six percent over the past three years.
So will Feingold succeed where his predecessors failed? It's impossible to say, but if Fidelity's track record of choosing managers is any indication, there's little reason for hope.
It seems as if, in selecting Magellan's managers over the years, Fidelity has fallen into the same trap that ensnares so many investors.
Growth stocks are soaring? Hire a manager who's shown an ability to pick growth stocks. But when the growth stock run inevitably stops, all of a sudden that doesn't seem like such a great idea. So next, hire a manager who timed the ensuing market bust superbly. Unfortunately, when he tries to apply that same skill to the next market bust, you find that all bear markets are different, and that success in one has little correlation to success in another.
So now, in a depressed market, hire a manager who's shown an ability to navigate the most recent bear market. How will he fare during the inevitable bull market that we'll see at some point in the coming years? Here's a wild guess: He'll end up lagging the market, finding that his risk-averse style has suddenly become passé.
And at that point, if the past is any indication, the cycle will begin anew, and we'll hear about how well Feingold's inevitable replacement did in picking stocks that soared during the bull market.
Sound familiar? Does it sound like the same mistakes so many fund investors have made over the past decade, as the market's shifted violently from soaring bull markets to crushing bear markets?
As Fidelity's experience with Magellan has shown over the past thirty years, it's enormously difficult to find a manager who can outperform the market. And if Fidelity -- with all of their resources and their tremendous financial motivation to "fix" the problem plaguing the world's most identifiable mutual fund -- is unable to halt a thirty year losing streak, it's hard to believe that an investor at his computer will fare much better.
Yet another illustration of the enormous odds facing actively managed funds.
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