A recent Money magazine article asked a question that's on the minds of many mutual fund investors: "Can Magellan Bounce Back?" Magellan is the 41-year-old flagship mutual fund of Fidelity Investments, managed during its prime by Peter Lynch, whose success with the fund attracted so much attention and capital that Magellan became the nation's largest mutual fund.
Times have changed, though. The fund has underperformed the S&P 500 over the past five years, and money has flowed out of it. (Though it remains huge. With more than $65 billion in assets, it's among the five largest stock funds out there.) What went wrong? Well, manager Bob Stansky made some calls he probably regrets. In recent years he lightened up on technology-heavy companies, which have been doing well, in general, lately, and he loaded up on pharmaceuticals, which have been lagging.
There are probably some other issues at play, too. For starters, like many funds, Magellan owns chunks of a lot of companies -- more than 200, in fact. If you're an investor with a personal portfolio, do you think you'd fare best by spreading your money over 200 stocks, or over your 10 best ideas? (We think so, too.) It's surely hard to have the same confidence in stock No. 198 as you do in your top 20 stocks, and if you have less confidence in something, why invest your hard-earned money in it?
One answer to that question is that with large mutual funds, they often have to spread themselves thin. If your fund is worth $66 billion, investing that amount evenly in just 10 companies would amount to $6.6 billion in each firm. Most companies in America are not worth anywhere near $6.6 billion in their entirety, and funds can't buy whole companies or enormous chunks of them. Consider, for example, that KrispyKreme Doughnuts
So size does get in the way of mutual fund performance, though some big funds still have managed to fare fairly well. Before you invest in any mutual fund, learn more about them in our Mutual Funds Center. Consider investing in index funds, too, as they tend to outperform the vast majority of stock funds.
And if you'd like to do even better than the overall stock market, seek out those extraordinary funds that are likely to outperform it. We can help you zero in on some via our new newsletter , Motley Fool Champion Funds --try it for free!
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article, but she does own some shares of Magellan. (So perhaps she owns a few shares of some of them, via Magellan.)