Ten years ago, the Fidelity Magellan (FMAGX) fund was riding high. Topping $100 billion in assets under management, it was the largest fund in the industry. Indeed, Magellan was larger than many entire mutual fund firms. The fund generated more than $600 million a year in fees for Fidelity Investments.
As you might expect, the continued success of the fund was a matter of the highest importance for the company; Magellan was the mother lode. Fidelity Investments was also an incredible brain trust. The best and the brightest already worked at Fidelity. It had the resources to hire anyone it chose, if that was deemed the best decision.
With so much at stake, so much talent and such abundant resources, you would think that Magellan would easily have remained a top-performing fund.
But it didn't.
Today, according to Morningstar data, Magellan is a slender shadow of its past. It has $17 billion under management. It ranks 29th in size, 44th if you include money market funds.
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More important, over the past 10 years, 62% of its competitors have provided higher returns. Over the past year, three years and five years, Magellan has ranked below 95%, 89% and 88%, respectively, of its large growth-fund competition, according to Morningstar data. As a consequence, today it brings in about $500 million a year less in fees than it did 10 years ago.
I tell you this for a reason. If Fidelity, with all its savvy and resources, can't pick a winning manager, just what do you think the chances are of you or me doing it? What do you think are the chances that the average investment adviser can do it?
In fact, the odds are poor, whoever does it.
Worse, picking a fund manager isn't a once-in-a-lifetime decision. It's a decision that has to be made again and again. Fund managers, on average, don't stay at the same fund very long. According to the Morningstar database, for instance, the average duration of all fund managers at a particular fund is only 4.5 years. Restrict your sample to the largest funds -- those with at least $1 billion under management -- and the average tenure rises to 6.6 years.
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This means a 30-year-old worker probably will need to make a fund decision six times before retirement and three more times after retirement. Each time he makes that decision, or pays a professional to make that decision, the chances of doing better than an index fund is about 30%. Those aren't very good odds.
In fact, the odds are dismal. The probability of making two good decisions in a row is only 9%. Try to make three good decisions in a row, and the probability of success is only 2.7%. By the fourth decision, the probability of making a winning choice each time is less than 1%.
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