It was in 1963 when American multinational financial services corporation Fidelity Investments launched its Fidelity Magellan Fund. This actively managed mutual fund later became one of the best-known funds in the world because of how it broke performance records. It was also once the largest mutual fund in the world until 2000. The fund had accumulated over $100 billion in assets by the end of the 20th century.

Understanding the Historic Accomplishment of Fidelity Magellan Fund: Advantages and Disadvantages

Pros: Fidelity Magellan Fund Advantages

The popularity of Fidelity Magellan Fund surged under renowned investor and fund manager Peter Lynch who managed it from 1977 to 1990. It was worth $20 million when Lynch took the reins in managing it and succeeded in growing it to $14 billion in 1990. The fund further grew to $20 billion under the management of Morris Smith and it further grew to $50 billion by 1996 under the management of Jeff Vinik. This astronomical performance made it one of the most sought-after mutual funds in the United States and the rest of the world. The following are its advantages:

• Historical Performance: The past performance of a particular fund does not guarantee its future performance but it remains a good indicator of how it has been managed. Fidelity Magellan Fund has a record-breaking performance streak under the reins of Lynch and further under Smith and Vinik. The fund specifically saw over 20 percent average annual growth from 1977 to 1990. This performance streak has persisted. The most recent average annual returns for the last 10 years are about 12.90 percent.

• Active Management: One of the advantages of Fidelity Magellan Fund and one of the reasons it outperformed market indexes and all index funds available through mutual funds and exchange-traded funds is that it is actively managed. This management style allows fund managers to make proactive and reactive informed investment decisions based on solid fundamental analysis and technical analysis. Take note that this is the main advantage of active fund management over passive fund management.

• Diverse Stock Holdings: The fund invests primarily in stocks traded in the United States stock market with large-cap stock and growth stock characteristics across different sectors and industries. The present holdings are dominated by a portfolio of tech stocks that include Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. The fund also invests in industrial, financial, consumer discretionary, and healthcare companies. It also has some minimal exposure in stock markets in Europe and Canada.

Cons: Fidelity Magellan Fund Disadvantages

Fidelity Investments decided to close the fund to new investors on 30 September 1997 because it believed that its size had grown too big to outperform the market. Furthermore, because of its sizable holdings, its fund managers also believe that it might struggle to buy and sell stocks in large quantities without significantly affecting the stock market. An announcement in 2008 noted that it would be open to new investors once again but this has not materialized up to this day. An ETF version called Fidelity Magellan ETF was launched on 4 February 2021 instead.

Nevertheless, considering its current size and the seeming inaction from its fund managers, it would be hard to ascertain when and if ever the fund will be open again to new investors. There is still some possibility. The demand for investors, the emergence of new companies with either value or growth characteristics, and a possible shift in management strategy could convince Fidelity Investments to reopen the fund. However, considering the present landscape, it would have to deal with new and old challenges. Below are the disadvantages of Fidelity Management Fund:

• Investment Landscape: The landscape for investing has changed. It is true that this might entice the reopening of the fund but it could also dissuade the fund managers from doing so. The rise of low-cost index funds and other actively managed equity funds available through pooled fund vehicles like mutual funds and exchange-traded funds might make it more challenging for Fidelity Investments to rationalize the reopening of its Fidelity Magellan Fund and to deliver returns that would outperform the market.

• Unguaranteed Performance: It is also important to highlight the fact that unguaranteed performance is another possible disadvantage of Fidelity Management Fund. The market landscape from the time of Lynch was different. The strategies that worked in the past might not work well in the present and future because the stock market in the United States has reached a certain level of maturity while the stock markets in other regions might not deliver the same growth potential and performance.

• Expensive Expense Ratio: An actively managed fund has a higher overall expense ratio than its passively managed counterparts. The sheer size of Fidelity Management Fund and its strong reputation would command an even higher expense ratio. The overall costs come from thorough research and the constant need to manage and change the allocation and composition of the portfolio. Some investors might find this discouraging because a sizeable portion of their investments will go toward these costs.