Is It Surprising That Fidelity Magellan Isn't Drawing a Lot of Cash?

Fidelity Magellan

FMAGX is beating its benchmark and no one cares. This was the gist of an interesting article in Bloomberg recently. It's factually correct that the fund is in outflows and is ahead of the S&P 500. The article also correctly captured the industry environment in which even strongly performing funds fail to attract much money, at least in U.S. active equity.

But I wish the article had gone on to point out that the situation isn't as bad as these things suggest. For starters, it makes plenty of sense that investors would not be impressed. Morningstar analysts are not impressed: We give the fund a Morningstar Analyst Rating of Neutral, so clearly we think there's good reason to pass on it. And Fidelity Magellan's quantitative backward-looking Morningstar Rating for funds is just 2 stars through the end of May.

Fidelity Magellan's performance is less impressive than its performance versus the S&P 500 suggests, because the S&P 500 has a slightly lower correlation with it than the Russell 1000 Growth Index. This has consistently been a large-growth fund, and those funds are usually benchmarked against the Russell 1000 Growth Index, which has performed better than the S&P in recent years because growth is beating value. So, beating the S&P 500 over the past five years merely puts Fidelity Magellan in the company of two thirds of large-growth funds.

Since taking the helm in September 2011, Jeff Feingold has produced a return of 15.15% annualized through June 2018 versus 14.38% for the large-growth Morningstar Category and 16.41% for the Russell 1000 Growth Index. That's a respectable but uninspiring performance.

Two of the better predictors of flows are a fund's star rating and its performance versus its benchmark. Over Feingold's tenure, the fund has moved between 1 and 3 stars. To be sure, some of that weak star rating was caused by his predecessor's performance, but in any case the star ratings help explain why the fund hasn't been a draw. Is it really all that surprising that a fund with merely average five-year performance and subpar 10-year numbers hasn't attracted a legion of new followers?

If we limit ourselves to active large-growth funds that beat the Russell 1000 Growth Index over the past five years, we see an average one-year outflow of $51 million and a five-year outflow of $540 million. If we limit ourselves to large-growth funds that are currently 4-star or 5-star rated, we see net inflows of $138 million the past year and $284 million the past five years.

So, yes, things are particularly tough on large-growth managers these days, but not as tough as the story on Fidelity Magellan might lead you to believe.

As an investor, I'm absolutely fine with some of the giants like

Fidelity Magellan is a caution, though, of what can happen when a fund grows way beyond the ability of one person to run it well and of the challenges faced in righting the ship. Sure, Will Danoff is doing just fine at Fidelity Contrafund, but his kind are very rare indeed.

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