In any determination of the best mutual fund of all time, Fidelity Magellan would have to merit serious consideration.
Of course, there are too many ways to slice and dice performance data. Contending funds have different inception dates and changes of management would also factor in, but what would be impossible to ignore in Magellan’s case is the fund’s superlative annual returns averaging 16.34% for now over half a century (from May 1963 through the most recent Nov. 30 performance report).
The Fidelity fund became a household word under the tutelage of Peter Lynch in the 1980s.
While its current manager has helmed Fidelity’s flagship fund a little over three years, Jeffrey Feingold’s navigation of Magellan has enhanced the fund’s long-term performance.
At a time when the market has returned a robust 21% annually, Feingold has added more than 100 basis points annually over the fund’s S&P 500 benchmark.
So both Feingold’s performance as a fund manager as well as the economic importance of the fund—its over $16 billion size has greater weight than the GDP of a good many smaller countries like Iceland—make his views on investing of great interest to financial advisors.
ThinkAdvisor talked with the Magellan manager by phone on Monday to get his sense of the opportunities in the coming year.
While Fidelity policy precludes him from publicly sharing his predictions about specific stocks on a prospective basis, Feingold was willing to discuss “themes” currently attracting his attention—a natural for the former head of the Fidelity Trend Fund—and more importantly, to explain how he looks at stock selection.
Perhaps the most important thing to know about Feingold’s stock selection is that he is a true stock picker, eschewing large sector bets.
So if financials represent around 17% of the S&P 500 currently, Feingold is looking to beat that benchmark, as he has, by keeping the same rough sector weight while picking better stocks than the index.
“I’m trying to find companies growing their earnings the fastest,” Feingold said. “For me that doesn’t mean any one particular area of the market. There are fast growing earners in all areas. Magellan is an all-weather fund,” he said.
While Feingold is not slicing and dicing the S&P’s sectors in any unusual way, the large-cap growth manager does have a nuanced view of “growth,” which is critical to his strategy.
Specifically, he looks for three kinds of growth.
The first is the kind that is popularly understood as growth: companies with rapidly expanding earnings growth rates that are usually associated with innovative, high-demand products, most particularly in the tech sector.
The second kind of growth Feingold seeks is opportunistic—essentially “cheap stocks with improving fundamentals” whose surprise earnings acceleration will boost fund returns.
The third kind of growth with which Feingold balances the Magellan portfolio are “quality” stocks. These generally household name-type companies are characterized by strong balance sheets, seasoned management and high returns on capital.
What is significant about this strategy is that, that is how Feingold attempts to limit downside risk in a fund he said is “positioned slightly more aggressively than the market.”
He’s got somewhere around 1% of the portfolio in cash, so the way he plays defense is via the quality and to a lesser extent opportunistic growth stocks, which add ballast to the fast-moving secular growth stocks (or “scarce growth,” as he calls it). Each of Feingold’s three growth styles constitutes about a third of the Magellan portfolio.
With that prism in mind—and that is critical since, again, Feingold does not talk macro (“There are always stories that produce superior earnings growth,” he said)—here are themes of current interest to the Magellan manager:
1. Airlines Ready for Take-Off
It is not only flight crews and passengers who have experienced the U.S. airline industry’s turbulence first hand, but investors as well. The industry, since deregulation, has been no stranger to bankruptcy.
But depressed share prices and fierce competition can result in tremendous upside for shareholders, which makes airlines Feingold’s prime candidate for opportunistic growth—that is, cheap stocks ready for earnings take-off and acceleration.
“Industrial change brought about by consolidation, and in this case by bankruptcy, can lead to significantly profound change not just in industries, but also in stocks,” said Feingold, who covered the industry as an analyst at Fidelity before becoming a portfolio manager.
As such, he’s seen airline companies “burn through billions of dollars of free cash flow and earnings over time.” But that’s not what he’s seeing now; he’s seeing, over the past 18 to 24 months, “managers talk about things important to investors like return on capital.”
And that’s “not even talking about energy price moves,” whose lower fuel costs he calls added “gravy.” Rather, Feingold sees “structural changes within an industry that can bring about added return.”
He evidently expects acceleration from the airlines in the Magellan portfolio, which include, according to records as of Oct. 31, Delta Airlines, JetBlue Airways, American Airlines, Spirit Airlines and Southwest Airlines, in order of portfolio weight.
“Over the last 18 months we’ve seen improving fundamentals [in these cheap stocks]. We’re not in first, second or third innings anymore, but it’s something in which I’m still interested. [The opportunity] will play itself out in the next couple of years,” he said.
2. Scenes From a Mall
With the year-end holiday shopping season that determines retailers’ annual fortunes upon us, the consumer obsession with bargain hunting continues to place pricing pressure on retailers.
“It’s no secret that the retail landscape has been a dynamic one, in some cases challenging […] We’re potentially over-stored,” said Feingold, who followed footwear and apparel as an analyst before covering airlines at the start of his career at Fidelity in the late 1990s.
While this “promotional environment” at department stores can crush many retailers, it neatly illustrates the opportunity in Feingold’s quality growth category to buy “brands that have stood the test of time, companies like Nike […], which are still growing their top line, 5-6-7%,” he said.
Consumer discretionary stocks with a high weight in the Magellan Fund, records show, include Keurig Green Mountain, The Coca-Cola Company and Starbucks. Moving from drinkable to wearable, high-weight stocks include Nike and VF Corp, maker of Wrangler and Lee jeans and Vans and Timberland footwear are among its other popular brands.
“For me as an investor, [brands like these offer a] powerful lesson over time because these companies tend to be all-weather,” in that they endure in more challenging environments “and yet still have room to grow organically and through acquisitions.”
This they accomplish through “global appeal [and] brand strength” that bring “stable, consistent returns on capital and steady earnings growth.”
3. Dream Stocks on Cloud Nine
“We’ve talked about the cheap stocks with improving fundamentals and quality themes,” Feingold summarized, but “the fund also has exposure to technology—digital advertising, cloud computing,” said Feingold in a bit of an understatement.
In the digital advertising area, Google and Facebook—both are top 10 portfolio holdings—together make up some 6% of the portfolio.
Cross-category Google, as well as Microsoft, Rackspace Hosting, Salesforce.com and Amazon bear some of the portfolio’s cloud computing weight.
While these are today’s glamour stocks, Feingold is candid about the potential pitfalls of these kinds of secular growth stocks:
“They’re more expensive. The hit rates can be a little bit lower. But with the help of our research team, the hope is if you find the right companies the consistency of the outperformance [can be] truly great.
“Over at least the past three years the returns I’ve produced has been reflective of that,” added the benchmark-beating fund manager.
4. Stocks With Drive
Magellan’s best-performing stock in the past quarter brought a burst of investor return that is more typically confined to the venture capital space, but it points to the special opportunities a fund company of Fidelity’s size can provide its shareholders.
Mobileye, an automotive firm based in Israel’s capital, Jerusalem, is pioneering technology that can automatically steer cars away from other vehicles or pedestrians, holding forth the promise of safe cell phone calls or lipstick application behind the wheel.
The company’s IPO in Q3 brought Magellan returns in the 400% to 500% range, but what is interesting is that Fidelity got in on the action years ago, owning the company as a private investor. Establishing relationships with fast-growing private companies is a relatively new phenomenon, and account for less than 1% of the mammoth fund.
The investment “speaks to a real opportunity over past few years,” which Feingold said exemplifies the fund’s willingness “to wait several years […] to really think long term and to use liquidity and volatility to our advantage,” he said.
Feingold also suggested that Mobileye’s recent success points to a longer-term theme: “While the auto industry has had its challenges, one area that is growing fast is safety features and elements of driverless cars.”
Besides Mobileye eyeing this sort of technology, records show the Magellan portfolio also holds Google, which is developing autonomous car prototypes, and Tesla Motors, which has announced plans to develop autonomous steering, breaking and parking systems.
5. Drug-Induced Transcendence
While Feingold “day in and day out [scours] the universe, looking for dislocations between fundamentals and market price” in his three categories of growth stocks, he will occasionally find what he calls Nirvana—a stock that has characteristics of secular growth, opportunistic growth and quality.
“Biotech is a great example,” he said. “Despite having a great 2013 and taking a hiccup in the beginning of March when the sector sold off quite dramatically and rapidly, [some of] these stocks […] recovered […] more than the ground they lost.”
Gilead Sciences, Amgen and Biogen Idec are three biotech firms prominent in the Magellan portfolio, some of which exhibit “scarce growth,” some “quality,” but Feingold singles out Gilead Sciences as a stock through which investors can achieve nirvana.
“Gilead has all three [of his growth categories] selling at less than 10 times earnings; strong, cheap and still growing fast.”
The biotech sector in general is characterized by companies that are growing at above-average rates.
“Yes, they’re capital intensive in the early part of the cycle, but Biogen and Gilead already paid for the drugs,” he said.
The Magellan manager admitted to having been nervous during the sector’s March sell-off, but the resulting nirvana, which he calls a rare occurrence in a portfolio manager’s career, is the reward for enduring that kind of experience.
Going forward, Feingold is upbeat about 2015. While he eschews macro-analysis, he sees U.S. companies as cash strong, and regards the weakness of stock alternatives as providing a tail wind to equities.
“While valuations are not cheap anymore, I don’t think they are egregious in a historical context, given yields in other asset classes,” he said, adding: “I’m reasonably optimistic.”