After several years of lackluster performance under previous managers, the Fidelity Magellan Fund (FMAGX) is back on track and has now beat the S&P 500 over the past 3 years. It has also outperformed the benchmark year to date in 2015. The fund has delivered total 1- and 3-year returns of 7.90 percent and 18.07 percent, respectively, plus a year-to-date return of 4.55 percent. The S&P 500 generated returns of 5.20 percent and 14.33 percent over the past 1 and 3 years, plus 2.70 in 2015. This has Magellan beating the broader market by no less than 1.85 percent over these periods.
The fund’s recent performance outshines its subpar 5-, 10- and 15-year returns of 12.73 percent, 6.23 percent and 3.05 percent, respectively, a period that saw the once high-flying fund with $100 billion in assets under management shrink to $16.6 billion due to 15 consecutive years of outflows. Compared to the S&P 500, the fund trailed by no less than 1.51 percent over those periods.
Much of the fund’s current success can be attributed to manager Jeff Feingold, who assumed the reins in late 2011. Feingold also has a significant personal stake in the fund, demonstrating that his interests are aligned with those of shareholders. Under his stewardship, Magellan has gone from a laggard to a leader, and is once again worthy of investor consideration alongside larger funds such as Contrafund (FCNTX).
Investment Strategy
Established in 1963, the two-star Morningstar-rated FMAGX is a diversified equity strategy large-cap growth fund that seeks capital appreciation. It invests in domestic and foreign stocks in both the growth and value categories across all market capitalizations and styles. Both a fundamental analysis approach and quantitative modeling are used to select particular investments that show fast business growth, quick earnings growth or value along with improving financials. Evaluation factors include margins, insider buying, cash flow and returns on invested capital.
While the fund sticks closely to the weightings of its S&P 500 benchmark, it does favor growth stocks. Feingold also includes cyclical plays similar to his management style overseeing the Fidelity Trend Fund (FTRNX). An eye toward mid- and small-cap shares keeps the market cap weighting below that of the benchmark. In addition to a close working relationship with a quantitative analyst, Feingold can rely on more than 130 global equity analysts at Fidelity.
Portfolio Composition and Holdings
The fund manager uses a balanced approach that incorporates high-quality names when constructing the portfolio as well as stock, sector and style diversification as a way to reduce the volatility associated with growth stocks. FMAGX has a 47 percent exposure to giant-cap shares as well as 35 percent and 16 percent exposures to large- and mid-cap shares, respectively. The fund also holds a small 2 percent stake in small-cap stocks. Containing 142 individual issues, most assets are invested in the information technology, financials, healthcare and consumer discretionary sectors. Relative to the S&P 500 Index, all of these sectors are overweight, led by more than 5 percentage points of exposure added to healthcare. Combined, these four sectors account for 79 percent of the fund’s assets. All four of these sectors have done well in 2015 and aside from consumer discretionary, the fundamental outlook for these sectors remains bright, particularly the financial sector. Financials do well when interest rates are rising, and as soon as the Fed decides to hike rates, we’ll be in a rising rate cycle that favors the sector.
FMAGX has a 91 percent allocation in domestic equities and the remainder overseas, predominantly in developed markets in Europe. The fund is quite diversified, as the top 10 holdings only make up 24 percent of assets under management. The top issues in descending order are Apple (AAPL), General Electric (GE), J.P. Morgan (JPM), Berkshire Hathaway (BRKA) and Amazon (AMZN). Shares of Medtronic (MDT), Bank of America (BAC), Citigroup (C), American Tower (AMT) and LyondellBasell (LYB) round out the top 10. FMAGX has an average market cap weighting of approximately $57 billion, a P/E ratio of 18.35 and a price-to-book ratio of 2.52. Compared to the large-growth category, FMAGX has a small average market cap, as well as lower P/E and lower book value.
Performance Review
Since taking over, Feingold’s constrained approach has enabled him to lower the fund’s beta and standard deviation while turning in a performance that has beaten the large-growth category averages. The generally rising market during his tenure has enabled Feingold’s investment style to thrive. The fund has benefited from its positions in financial giants J.P. Morgan Chase (JPM) and Bank of America (BAC) as well as its stake in Capital One Financial (COF). Rising rates will help these holdings continue to perform well. Top 10 holdings LyondellBasell (LYB) and CF Industries (CF), another material sector holding, also had a positive impact on performance.
Fees, Expenses and Distributions
The fund’s expense ratio of 0.68 percent can fluctuate due to performance-fee adjustments. The fee adjusts based on performance, but can only rise or fall by a maximum of 0.20 percent over the calculation period, which is 36 months. Due to poor performance in the past, the fee is toward the lower end of its historical range, but it has begun to inch upward due to its performance over the most recent 3-year period. This no-load fund does not have 12b-1 fees. There is an initial investment minimum of $2,500. The fund has a trailing 12-month yield of 0.69 percent.
Outlook
Although it is reasonably priced compared to other no-load large-cap funds, FMAGX may not be a bargain in the future if performance continues to beat the market, but that’s a good problem to have. The main issue for investors is whether the encouraging recent performance is sustainable over the long term. The top holdings are consistent with the fund’s stated large-cap growth goals as well as its commitment to reduced volatility. While the fund appears to be headed in the right direction, many analysts still give FMAGX a neutral rating. The time to dive into FMAGX may not be here yet, but the fund has changed course and is worth a look when considering large-cap options. The current sector exposure, for example, has the fund well positioned for current market conditions.