Duff Young • The Globe and Mail • Saturday July 27, 1996
The story is as legendary as the Fidelity manager himself: Half of investors in the wildly
successful, $50-billion (U.S.) Magellan Fund lost money during the 14 year tenure
('76-'91)of famed manager Peter Lynch. Says who? Why, the story goes, Mr. Lynch
But here's the real shocker. The tale is a financial version of the urban myth. As I've learned by taking time to check it out, it's simply untrue.
I'm embarrassed to admit that I have retold it myself countless times without searching hard enough for a verifiable source. After all, it's commonly known in financial circles; it has been quoted literally hundreds of times in highly respected publications and on major network television in both the United States and Canada.
Just last week, I saw it in a letter to unitholders of Marathon Equity Fund, and it's still included as a slide in Mackenzie Financial Corp.'s road show.
But where did it come from? An exasperated spokesman for Fidelity denies it ever emerged from Peter Lynch's lips or from anyone else in the company, which, the spokesman says, has never done such a study of its investors. But the frequency at which the myth is retold is wreaking havoc on Fidelity's efforts to dispel it.
Ibbotson Associates of Chicago, a highly credible consulting firm that's also been credited as a source for the story, is equally emphatic in its denial. Never has it produced a study of the Magellan Fund, it says.
So why does the Great Magellan Myth have such legs? Because it's a compelling story. Though the fund averaged annual gains of 30 per cent over Lynch's 14 year tenure -- enough to turn $100,000 into $4 million -- so many investors lost money, the story goes, because of poor timing. They were said to have flocked to the fund when it was raging, only to bail out at the first sign of trouble, and then miss out on its comeback.
And that makes intuitive sense and produces a good, solid moral: Equity mutual fund investors should not be shaken form a buy and hold strategy by the ringing alarms of a volatile market.
In fact, even if the story's untrue, its lessons hold up well. First, investors in all sorts of funds are flipping them too often. They're mesmerized by recent performance and race to the latest winners. Trouble is, they're more likely to buy high, and then panic and sell at the first setback.
Investors in direct sold funds, like Magellan, are among the worst transgressors. Dalbar Inc., the Boston consulting firm, is the only company to have studied fund investor buy/sell patterns. It found that U.S. buyers of direct sold funds -- which are sold by the company, with no broker involved -- have and average holding period of just 12 months.
That's a shockingly short time to hold an equity fund. And Magellan investors who were so short-sighted may well have lost money. The one firm that has studied Magellan is Micropal Inc., a U.S. fund-research firm. It's found that, during any 12 month stretch of Lynch's 14-year time at the top, the fund, in fact, lost money 17 per cent of the time. So, of course, would investors who bought and sold during the same time frame.
The second lesson? Direct-purchase investors have something of a deserved reputation for their "flocking" habits. Last year, Dalbar did an analysis of direct-sold funds which found that investors in them were terrible timers. They were three times more likely than investors who bought broker-sold funds to sell at a market bottom and twice as likely to buy at a market top.
All this does suggest that even in the fabulously successful Magellan Fund, some investors lost money because of their poor buy and sell habits. But half? Not likely.
Still, in these time of volatile markets, the lessons of the Great Magellan Myth should not be lost. Even if you pick a superstar fund, you can lose money if you panic at every market setback. You're far more likely to make a bad sell call than a bad buy one. So don't let panic push your sell buttons. Focus on designing a sound investment strategy and stick with it.
As for the Great Magellan Myth, it's like your mother said: You can't believe in everything you hear. Nor should you dismiss it all, either. This is one myth with a noble moral: Mutual funds reward investors willing to tough it out for the long haul.