History of the Magellan Fund
At the end of our last program, I mentioned the famed Magellan fund, owned by the Fidelity company. Since we have already started talking about this fund, why not discuss its history: it is a very interesting one.
Magellan was one of Fidelity’s first funds. It was founded in 1963. It was not particularly large or different from the others, even though it was initially managed by Edward Johnson 3rd – son of the Fidelity company founder, and subsequently its chairman. In 1977, he was replaced by Peter Lynch, who managed Magellan until 1990 and achieved phenomenal results. Over those years, the fund averaged gains of about 29 percent a year – every year. For comparison, the average annual return for the S&P 500 over the same period was 15 percent. Over that time, Magellan was out-performed by the S&P 500 just twice, while beating the broader index 11 times, and on average grew almost twice as fast. When Lynch came to head the fund, it managed $20 million. In 1990, the fund had $14 billion. Of course, most of this growth came from an infusion of new investor money, but nonetheless these investors came because of Lynch’s performance. The fund would continue to grow into the future and eventually become the largest fund in the world.
Peter Lynch had a very particular investment style, which he later described in his books. One of his main principles was to “invest money in what you know.” Peter Lynch invested money into those fields of industry and those companies that he understood well. He was governed by common sense and intuition: if he liked a certain product, he might have invested money in that company’s shares. For example, in the early 1980s, he liked a minivan released by Chrysler. Chrysler was in bad shape at the time, on the verge of bankruptcy. Still, Lynch bought Chrysler stock, which ended up tripling in price. Lynch bought up a huge variety of stocks. At a certain point, his portfolio comprised shares in more than 1,400 different companies. After leaving Magellan, Lynch liked to joke that if you remember the symbols of more than 2,000 companies but end up forgetting your own children’s birthdays, there is something wrong with you.
In 1990, Lynch left the Magellan managerial post but stayed on at Fidelity, where he now serves as Vice Chairman. He was replaced as Magellan manager by Morris Smith, who stayed on the job for two years before, being a practicing Jew, deciding to leave for Israel. Two years of Morris Smith’s work were also extremely productive: he came out ahead of the S&P 500 by nearly eight percent. And the fund continued to grow: by mid-1992, when Smith left Magellan, its size had reached $20 billion.
Smith was replaced by Jeff Vinik, who had previously worked with Peter Lynch and was highly respected on Wall Street. However, he ended up being less successful (or talented) than his predecessors. The first two years went well, and in one of them, Vinik outperformed the S&P 500 by nearly 10 percent. Vinik bought up lots of shares in technologies companies (something that Peter Lynch almost never did), and those started growing quickly in the mid-1990s. But by 1995, Vinik decided that the market had reached a certain peak and was ready for a correction. In order to avoid a sharp drop in the stock price of technologies companies, he sold them off and bought bonds in their place. But it turned out that he guessed wrong, and instead of falling, the market gained another 17 percent. Magellan, for its part, lost about three percent. Investors did not like this one bit: they grew used to the fact that Magellan outperformed the market as a whole. They started to withdraw money from Magellan and investing in other funds. Vinik left Magellan shortly thereafter, and was replaced by Robert Stansky. He worked at Magellan for 10 years. Stansky had an undistinguished career. The fund regularly under-performed the S&P 500 throughout these years. As a result, even though the fund had reached $100 billion in 2000, there were just $52 billion left in the fund by the end of Stansky’s career. The fund has been managed by Harry Lange since October 2005. His leadership has so far failed to produce much better results. In recent times, Magellan is being accused of practically turning into an Index Fund, i.e. its portfolio has almost the same assets, along the same proportions, as an index. And, as its critics charge, if this is the case, it is not at all clear why investors should pay its high management fees. Magellan has been closed to new investors since September 1997, although investors who hold IRA or 401(k) accounts may continue investing more money into them, which they do.
What conclusions may we draw from this story? Peter Lynch’s results cannot be questioned: they are phenomenal. But both Vinik and Stansky had worked with Lynch and were regarded as some of the best investment managers on Wall Street. So why were their results so far removed from those of Lynch? Perhaps Magellan had simply grown too large? After all, it is hard to even theoretically believe that it is possible to find enough “good” stocks to affect the performance of such a gigantic fund. Or were Vinik and Stansky simply not terribly good managers? On the other hand, it would have been very interesting to see what Peter Lynch would have accomplished had he remained in charge of Magellan. What was the role of luck in his results? How would he have invested money amid the market collapse of the early 2000s? None of these questions are likely to shake Peter Lynch’s reputation – his name is now enshrined in the Wall Street Hall of Fame. Investors, meanwhile, are trying to find the new Magellan.
With that, we will draw today’s program to a close. This was Sergey Zaks. Thank you for your attention and until next time.