Fidelity Reopens Magellan Fund to New Investments

After closing ten years ago in 1997 to new investments, Fidelity reopens the Magellan fund on January 15th. If you did any investing in the 1980s or early 1990s, you are probably familiar with this fund. The Magellan fund put the now-famous Peter Lynch on the map as an investing superstar while he ran the fund from 1977 to 1990. During his tenure, he was able to produce 29% annual returns which was double what the S&P 500 did over the same period.

Lynch also coined the phrase “Invest in what you know.” This philosophy simply means that you should invest in companies that you personally know and understand. This led to a surge of investments headed into the retail and restaurant sectors where people invested in the companies they visited regularly.

Not the Same Fund

While Magellan crushed the market throughout the 80s, it became very popular and everyone wanted in. This allowed the fund to grow to over $45 billion in assets, making it the largest stock fund. This extremely large size created problems for moving money around, so in 1997 the fund closed to new investments.

In 2005 Harry Lange took over as manager, and things got off to a rough start. In 2006 the fund lagged over 8% behind the S&P. This was in part due to the size of the fund and the strong growth component, but that isn’t why the fund is reopening. Many of the investors still holding shares of this fund are baby boomers who will begin drawing money from this fund in the coming years. To match the outgoing money, the fund was reopened to allow new money to come in.

According to Forbes:

Lange pays little attention to indexes when assembling his portfolio. That ups the fund’s chances for differentiated returns,” writes Lefkowitz. That answers a familiar criticism of Magellan, that because of its size it’s nothing but a glorified index fund. That no longer seems to be the case. Lange points out that the median market cap of his holdings, around $30 billion, is about half the median market cap of a stock in the S&P 500. This is not the brontosaurus that Fidelity closed.

Worth Considering?

It is hard to ignore a flagship fund like this, even with sub-par performance in 2006, but I think it’s too early to tell for sure. Clearly this fund has an amazing track record, but with relatively new management and investment philosophy I’d be cautious to jump too soon. The good news is that for 2007 the fund appears to be back on track posting an annual return of over 11% compared to the S&P’s 5.5%. Much of this has to do with the more aggressive growth stance that the fund has taken over the past few years. Will this performance continue to pan out? I can’t answer that, but it is worth keeping an eye on.

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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.

4 comments
george nick
george nick

what is maggelan funds and is it a good investment?

Eric Toya
Eric Toya

I wrote about the same thing this morning.

It's interesting that the size of the fund is roughly the same as it was when they closed. I expect they had more redemptions than deposits with new accounts not being allowed to open.

So, with the expansion of world market capitalization and the new Lange's strategy of going beyond US large cap to investing in small cap and international, there are far more places for the money to be put to use.

But the problem is that it's a totally different fund from the one made famous by Lynch and even from what it was two years ago. What is an investor to expect? We have no idea.

Jeremy
Jeremy

It is a surprise to a lot of people I think. But, it certainly isn't the largest fund on wall street any more, but 45 billion is still huge. But you're right, funds that are so large have a hard time reacting to market changes with so much money changing hands.

I still own a bit of Franklin Income (FKINX) from years ago, and that fund is even bigger at $61 billion. Of course, with more fixed income it is a bit easier to manage that many assets. Even so, I'm not as comfortable in these mega sized funds.

Frugal Dad
Frugal Dad

I read this news today and had to do a double-take. I never thought Magellan would reopen. The fact it is so large is almost a turn-off for me...sometimes the bigger things are the longer it takes them to react to things. Sort of like trying to turn an aircraft carrier on a dime.

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