A recent piece in The Wall Street Journal focuses on the performance of the Fidelity® Magellan® Fund (FMAGX) under a new manager who started three years ago. This $16.7 billion no-load fund sports a relatively low 0.53% expense ratio but has a somewhat elevated turnover of 77%. According to the article

Magellan has posted average annual returns of 20.3% from Sept. 16, 2011, when Mr. Feingold took over, through the end of August, trailing its benchmark, the S&P 500, at 21.2%, while matching the Russell 1000 Growth Index, according to data from Morningstar. But its returns in that period are above the 18.7% annual average for its peer group, large-cap funds.

The fund’s longer-term record remains inferior. Magellan’s average annual return over the 15 years through August was 3%, lagging behind the 4.5% average for its peers, according to Morningstar.

Indeed, long-term returns of the fund have been dismal: in the bottom 5% of its category for the 10 years ended in August 2014. Alpholio™’s analysis shows this very clearly — here is a long-run cumulative RealAlpha™ chart for the fund:

Long-Run Cumulative RealAlpha™ for FMAGX

In that period, the annualized discounted cumulative RealAlpha™ for the fund was a negative 4.25%, while the lag one was a negative 3.25%. The fund’s was also quite volatile; its standard deviation was about 18.5% and RealBeta™ over 1.15.

The primary prospectus benchmark for Fidelity Magellan is the S&P 500® index. One of the practical implementations of this index is the SPDR® S&P 500® ETF (SPY). Alpholio™’s calculations show that the fund returned more than the ETF in less than 42% of all rolling 12-month periods in the past 10 years. The median underperformance was about 2% and the mean one about 1.2%.

However, in the much shorter time span under current management, the fund’s performance has been quite different. For one, the fund’s returns beat those of the ETF in about two-thirds of all rolling 12-month periods. The median outperformance was about 1.8% and the mean one about 1.4%.

The new manager undoubtedly made significant changes to the fund’s portfolio. Here is a cumulative RealAlpha™ chart for the fund, based on data since October 2011, the first full month after the management change:

Cumulative RealAlpha™ for FMAGX

In that period, the fund’s generated about 0.6% of regular and about 2.2% of lag annualized discounted RealAlpha™ (to learn more about the regular and lag RealAlpha™, please visit our FAQ). The fund also dialed down on risk: its standard deviation fell to 10.7% (about 0.4% above that of the reference ETF portfolio) and its RealBeta™ decreased to 1.02.

The final chart shows the changes of ETF weights in the fund’s reference portfolio over the same analysis period:

Reference Weights for FMAGX

The fund had top equivalent positions in the iShares Morningstar Large-Cap Growth ETF (JKE; average weight of 28.1%), iShares Core S&P Total U.S. Stock Market ETF (ITOT; 16.4%); Vanguard Consumer Discretionary ETF (VCR; 12.1%), iShares S&P Mid-Cap 400 Growth ETF (IJK; 11.5%), Vanguard Health Care ETF (VHT; 8.9%), and Vanguard Energy ETF (VDE; 5.7%). The Other component in the above chart collectively represents five additional ETFs with smaller average weights.

Over the past three years under new management, the Fidelity Magellan Fund has significantly improved its performance and lowered its risk. Unlike in the past, the fund has recently generated a modest amount of positive RealAlpha™. However, the fund’s substantial asset base coupled with a large number (currently 160) of holdings may make future outperformance difficult. It should also be noted that in the past year the fund generated a considerable amount of long- and short-term capital gains, totaling about 12.5% of the net asset value (NAV). Such a lack of tax efficiency makes the fund less suitable for taxable accounts.

To learn more about the Fidelity Magellan and other mutual funds, please register on our website.

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