Fidelity Magellan, which rose to fame under the management of Peter Lynch in the 70's and 80's (partly because of its staggering returns, and partly because of its sheer size), morphed into a closet index fund in the early part of this decade. No one would accuse it of that today.
So far this year, Magellan--which currently weighs in at roughly $22 billion in assets--has lost 56 percent, more than 11 percentage points more than the S&P 500. To be fair, not a single diversified U.S. stock fund has delivered a positive return year to date, but Magellan has fallen hard: Currently, it ranks in the bottom 3 percent of funds that invest in large, growing companies.
In the fund's most recent shareholder update, manager Harry Lange (who took over in 2005) says he underestimated how much the housing bust and credit crisis would rock the financial markets. "Given my basic confidence in the global financial system, I continued to pursue a growth-oriented strategy and shunned defensive stocks, which hurt the fund," he said.
Technology and financial stocks in particular hurt the fund's performance, as well as a shift away from consumer staples (a sector that tends to hold up in down markets).
Previously, Lange told Morningstar's Chris Davis that the market wouldn't recover without financials rallying. "I suspect he's right," writes Davis. "The problem is he started buying just as the credit crisis was gathering steam, and since then it has flattened picks like AIG, Goldman Sachs, and Wachovia."
In his note, Lange reminded shareholders that the best bargains can be found in the gloomiest of markets. Although Magellan is mainly a U.S.-focused fund, he says he's looking to domestic companies with emerging-markets exposure, and he's also focusing on those with little debt and plenty of cash. "I think they have the best potential not only to survive, but eventually to thrive when the economic backdrop improves."
Shareholders shouldn't be too quick to bail on Lange. His long-term record at Fidelity is solid (at his previous fund, Fidelity Capital Appreciation, he posted an average annual gain of 10 percent, which beat the S&P by more than 1 percentage point per year.) It's also worth keeping in mind that Lange takes a contrarian investing approach, and zigging when the market zags is part of the deal.