You've heard of the man, and you've heard of his mutual fund. From 1977 to 1990, Peter Lynch guided Fidelity Magellan
We're all looking for the next Magellan. But with a dizzying array of mutual funds out there, it's impossible to know where to look. Or is it?
Great funds in the making
If we wanted to identify an up-and-coming fund, what would we look for?
Let's start at the top, where we'll want to see a confident manager who has a track record of success, assembles the portfolio using a sound and time-tested strategy, and has plenty of his or her own money in the fund.
We also fervently favor funds with reasonable expense ratios. Shannon Zimmerman, analyst of Motley Fool Champion Funds, tells us that few statistics relate more strongly to future performance than this one. Extra costs simply represent extra ground that the fund manager has to make up each year just to stay even with his benchmark and rivals.
Finally, the fund will need a reasonable-sized asset base, one that gives the manager enough flexibility to build meaningful positions (and exit them) without fear of moving stock prices in the wrong direction -- that is, up when buying and down when selling.
One thing's for sure: Magellan itself can't be the next Magellan. It has morphed into a giant that counts China Life Insurance
Up and coming
There's a lot more to finding the next Magellan than all that, of course. We admit that Lynch combined intelligence, common sense, and even a knack for playing hunches in a way that's hard to match. In his everlasting pursuit of what he called "10-baggers," he unearthed monsters like Volvo
But Shannon has shown a knack of his own for identifying potential fund winners. His performance is, frankly, astounding. After three years, every single one of his 50 recommendations is in positive territory. Even better, this 50-pick average is beating the market and relevant benchmarks 38% to 25% since the service began.
And the winner is ...
The next Magellan is out there, right now, with huge gains ahead of it. But it's not an index fund, and it's not even Magellan itself (which has turned into a bloated giant that resembles an index tracker). Not for nothing did Fidelity recently shuffle the management deck at Magellan, which -- in an effort to stanch the inflow tide -- is currently closed to new money.
Instead, the next great mutual fund is being led by a smart manager who doesn't have to overcome outrageous fees or contend with an outsized asset base that undermines his stock-picking strategy. To find out what that might be, read more of Shannon's thoughts on great mutual funds and see all of his recommendations (smaller, nimbler funds among them), right now through a full-access 30-day free trial. There's no obligation to subscribe. Here's more info.
This article was originally published on Jan. 20, 2006. It has been updated.