Investors, new and old, will likely come across the words of investing legend Peter Lynch, former manager of the Fidelity Magellan Fund during its glory years. Many look to him for advice, as he was the man who took the Magellan Fund from a multi-million dollar mutual fund to a multi-billion dollar mutual fund. Through his leadership, the company rose in prominence and even surpassed the S&P 500 at times.
But behind his prestige lies an investment story—cautionary for inexperienced investors—in which most of the Magellan Fund’s investors ended up losing money.
The Fidelity Magellan Fund, currently at a +11.46% 10-year average annual return, is notorious for this fable-esque, cautionary tale. Despite its success under Lynch (averaging an annual return of 29%), many investors ended up losing money. So what happened?
It isn’t quite a scandal—rather, it reflects more poorly on the investors than the fund itself. Many investment practices and lessons can be taken from this phenomenon if we analyze what really went wrong. But before that, let’s start with some background information about the Magellan Fund.
What is the Magellan Fund?
Now one of the most well-known funds in the world, the Magellan Fund is actively managed. This means that a single manager or team of managers directly works with the fund to try to outperform the market. Currently, the Magellan Fund’s manager is Sammy Simnegar, who became the sole manager on Jan. 1, 2020.
In addition, the Magellan Fund has portfolio managers, such as Will Danoff and Eddie Yoon. Using research from global analysts, these managers aim to reap a higher return from your portfolio. The Magellan Fund manages mutual funds and earns money through assets under investments. Though it has gone through closed periods, it is currently open for investors.
In its August 2022 report, the Magellan Fund shows its portfolio holdings listing Microsoft, Apple, and Amazon at the very top. It’s top ten holdings make up 34.9% of its investments.
A Brief History of the Magellan Fund
Originally called the Fidelity International Fund (despite not owning any foreign assets at the time), the Magellan Fund was created in 1963. At its inception, Edward Johnson III was the portfolio manager. Its largest period of growth occurred during Lynch’s tenure from 1977-1990. By the time he ended his tenure, the Magellan Fund had gone from a “small, aggressive capital appreciation fund” to a company outperforming the S&P 500 for all but two years of his time as manager.
When Lynch took over as manager, the Magellan Fund had about $18 million in assets. When he left in 1990, this had grown to around $14 billion. The Magellan Fund assets have changed over the years, at one point surpassing $100 billion. Though nowhere close to that amount now, it still has a multi-billion dollar asset value.
In peak years, the Magellan Fund has yielded triple digit returns, which increased its domestic and international fame. This brought it both domestic and international attention, attracting numerous investors. In fact, the size of the fund grew so large that in 1997, the fund closed. It would re-open over 10 years later, in 2008.
Taking a new turn, a new version of the Magellan Fund launched, this time as an exchange-traded fund (ETF). Though ETFs operate similarly to mutual funds, the key difference is that ETFs can be sold and purchased on the stock exchange (like regular stocks). While this can admittedly have a higher expense ratio, as Magellan is an active-management fund, this new version can offer greater risk management through diversification and access to stocks in multiple locations. For those who are not interested, the original mutual fund versions still exist.
What You Might Have Heard About the Magellan Fund
It’s a story many investors are familiar with: despite high average returns, many investors lost money with the Magellan Fund, according to Fidelity Investments, the overarching company of the fund.
Keep in mind the duality of the situation. Though the average investor reportedly lost money, this occurred during the span of time when the fund reached incredible highs. Lynch is still highly respected, having retired in his 40s after a strong investing career. So how does one maintain such a reputation when so many investors walk away with a loss?
Why So Many Magellan Fund Investors Lost Money
While it’s true that the Magellan Fund had some bad years during Lynch’s time as manager, it had far more years with high returns. An average annual return rate of 29% doesn’t come easily, and Lynch’s push for active management allowed the Magellan Fund to take off. Lynch kept a good image as the manager because it wasn’t his fault that investors were pulling out with a net loss; that was the result of poor investment practices on behalf of the investors.
How Emotional Reactions Affected Investing Success
Truthfully, the losses can be attributed to inexperienced investors. Many times, people would get excited and buy-in at times of growth and panic at a time of decline. Rather than waiting it out, investors would allow their emotions to guide them. People would jump ship and sell, only to find themselves at a loss since they bought in high and sold low when a less emotional response would have made them money.
Many investing decisions have been made in similar situations. Some factors that negatively influence investors to include the news, “performance chasing,” and impulsivity.
The news cycle can give investors a false sense of knowledge. In the case of the Magellan Fund, news of its success led investors to leap into the opportunity. Without enough research, investors took the idea of prospective fast earnings and ran with it. Similarly, when news of lower performances hit, this led to many people pulling out, thinking they would lose everything. Especially with stock sensationalism, the media cycle can compel some investors to make bad choices with their money.
This contributes to performance chasing, in which investors focus on “in-the-moment” high-performing investments. This can lead to a series of multiple investment losses, as flocking to what’s rising at the moment and leaving as soon as it declines means a net loss.
Both are underlined with impulsivity, an emotional response. When dealing with investments, it is better to take a more objective and analytical approach, as an emotional route can lead to investment losses.
Learning the Trade
Lynch himself even speaks about the dangers of buying in at the wrong time. In fact, many people bought shares at the high point of the market in the 50s and 60s. This set the stage for a slower Magellan Fund start when Lynch took over, as people were still recovering from their losses and were less interested in funds like Magellan.
Using the Infidelity Magellan Fund as a case study can highlight examples of what not to do with your investments. If you are still inexperienced, consider consulting professional help, at least to get you started. Statistics show that the odds are against you, but there are tips and words of wisdom to make your experience better and hopefully maximize your profits.
Is the Magellan Still a Good Fund?
Magellan is still up and running, albeit without the record-setting numbers it had seen in its glory days. According to Market Watch, shares go for $10.27. Current fund returns for one year are -25.98%, though for three and five years, this rises to 6.90% and 8.25%, respectively.
Lynch again has advice for future investors, applicable even to the Infidelity Magellan Fund. In his Frontline interview, he claims that when it comes to investing, “The stomach is the key organ here. It’s not the brain. Do you have the stomach for these kinds of declines?”
It’s the question many investors during his tenure should have asked themselves when they took the leap with the Magellan Fund. Rather than giving up or panic-selling in the wake of weaker years, it can sometimes be better to wait it out. Don’t cement your investment losses without researching or consulting others.
If you are searching for investment services or financial planning, look no further than Alpha Wealth Funds. Our team can also help with separately managed accounts and emerging hedge funds as well.
We are committed to educating our clients so concepts like the ones mentioned here are no longer a worry or stressor. We can work with you to get your financial goals off the ground. Let’s ensure your financial journey doesn’t end like one of the many investors who lost money on the Magellan Fund. Contact us today.
Please feel free to reach out to me on this or any of your investment needs or questions. I may not always have the answers at my fingertips, but I promise I will get them for you. Michael Torrence
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Michael Torrence – Investment Advisor Representative: Michael was born and raised in Ohio and attended The Ohio State University. After College, he was commissioned as a 2ndLt in the United States Marine Corps. He attended his initial training in Quantico, Virginia, then graduated at the top of his Primary Aviator Class and was selected for the Strike (Jet) Platform.
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