Whatever Happened to the Fidelity Magellan Fund?

Fidelity Magellan grew to be the largest mutual fund ever, and has also declined in size more than any other fund. The story of how this came about may help our readers see what went wrong.

The Fidelity Magellan Fund started in 1963, and was originally named the Fidelity International Fund. The SEC eventually made Fidelity change the name, because the fund didn’t actually own any foreign assets. Peter Lynch began running the fund in 1977 and invested very successfully in growth stocks until he left the fund in 1990. The fund was turned over to Morris Smith, who had a short but successful 2-year run. Jeff Vinik was the next manager in ’92 and promptly altered the character of the fund. At the end of 1995, instead of owning growth stocks, Mr. Vinik had invested 32% of the fund’s assets in bonds and cash. Mr. Vinik’s strategy was not successful, and in 1996 Fidelity replaced Vinik with the current manager, Bob Stansky. Mr. Stansky has also not kept pace with the market, and now the fund is on the lemon list, having under-performed the market over 1, 3, and 5 years.

After peaking at $106 billion in early 2000, the famed Fidelity Magellan Fund now stands at about half that value: $55 billion. What happened to $51 billion (equivalent to $175 per US resident) of investors’ money? Part of it evaporated in losses; the remainder went elsewhere.

Last year, when the market returned about 10%, $9.15 billion left the Magellan Fund. And in 2003, when the market returned a blazing 26%, $2.4 billion left Magellan. In an attempt to stem outflows and improve performance, the fund took aggressive positions in several stocks, including AIG (the big insurance company with serious governance problems) and Viacom, the entertainment company. So far this year, AIG is down 16% and Viacom has lost 8%.

When investors flee funds, the funds are forced to sell assets and pass taxable gains on to investors. That hurts, particularly when the funds are also losing value.

Very large size is a disadvantage to mutual fund investors. In 1995 the Magellan Fund owned 5% or more of 266 companies! This places a staggering responsibility on the fund and severely limits what a fund manager can do. The fund manager must move very slowly, and quietly, (how quiet can an elephant be?) when you have such a large position in so many large firms. Even small trades or irrelevant comments by anyone connected with the fund about the fund’s holdings are quickly reflected in the price of the fund’s holdings.

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As Fidelity Magellan illustrates, size oftentimes has little to do with success, and good funds don’t necessarily stay that way. Other large funds are subject to these same risks. The important thing for investors to do is learn as much as they can about their investments, or, hire someone who will do it for them. Your investments are too important to you and your family to ignore.