Security Analysis and Portfolio Management

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CASE 1:

Fidelity Investments and the Magellan Fund

 

Fidelity Investments was founded 1946 and is now one of the largest mutual fund managers in the world. Currently, Fidelity operates more than 500 different funds which serve more than 20 million investors worldwide, amounting to total AUM (Assets under management) of $1.5 trillion. 15 percent of these assets are located outside the US.

Their funds cover all asset classes. Their best performing and most famous fund is the Magellan fund which was started in 1963. Its return since then is 15.97% and the fund manages around $20 billion in assets and almost all of it is in common stocks. For comparison purposes, a passive fund manager tracking the S&P500 for the same period would return around 6%. Its top ten holdings are: APPLE INC, EXXON MOBIL CORP, CHEVRON CORP, PROCTER &, GAMBLE CO, GOOGLE INC A, WELLS FARGO & CO, GENERAL ELECTRIC CO, TJX COMPANIES INC NEW, COGNIZANT TECH SOLUTIONS CL A, BERKSHIRE HATHAWAY INC CL B. One of the most prominent investment managers of our time, Peter Lynch, was a Magellan fund manager.

During Peter Lynch’s reign over Magellan (1977-1990) the fund averaged a return of 29.2%, unmatched by any other mutual fund. The astonishing results flocked investors and the fund’s assets under management grew from $20 million to $14 billion over the period of 13 years. So how did he manage to achieve this high return for the fund? He is considered the inventor of the so-called “common sense” approach to investing. Lynch’s investment philosophy was to invest only in companies he understood in depth. He stated often that he invests only when the company has a sound and coherent business model, has good management, and does not have high levels of debt. The most important factor is the “story” behind an investment – there must be a really appealing reason for buying a company, something more than just earnings growth expectation. His investment in Chrysler, Taco Bell (while it was still private), Phillip Morris, and General Electric all brought huge returns to Wall Street guru with some of the investments tripling or quadrupling during the holding period. Lynch was famous for being a chameleon in terms of investment philosophy (in contrast to investors such as Warren Buffet, who is a proponent of the Value Investing approach). Even though his common sense approach to investing was applied almost universally during his reign, Lynch often tried new, different strategies in order to maximize the fund’s return. He managed to attain a share of the booming bonds market in the 1980s by investing in fast growing Fannie Mae, the mortgage giant that would later be involved in the financial collapse of 2008.

Peter Lynch co-wrote three books on investments – “One Up on Wall Street”, “Beating the Street”, and “Learn to Earn”, preaching his investment philosophy and sharing some interesting insights on the markets. Often considered a “must read” for investment professionals these books are often quoted in famous financial newspapers and media.

Table 1

Investment philosophy Practical Investment Advice
Know what you own.

 

If you are excited by a particular product or service, ensure that it accounts for a sufficient percentage of total company sales and that it makes a significant contribution to profits.
It’s futile to predict the economy and interest rates. Favor companies with a strong cash position
You have plenty of time to identify and recognize exceptional companies. Favor companies with a forward PE ratio well below their forecasted EPS growth rate
Avoid long shots. Avoid companies with high debt-to-equity ratios.
Good management is very important – buy good businesses. Avoid slow growers and cyclical stocks.
Be flexible and humble, and learn from mistakes. You should always stay fully invested, otherwise you will likely miss out on market upswings
Before you make a purchase, you should be able to explain why you’re buying.

There’s always something to worry about.

 

 

Questions:

  1. Analyze the Fidelity Investments Fund performance using the information in the case plus any additional sources from Internet. What was the end of the story? What is the moral from this story?
  2. Shortly describe the “Common Sense” approach proposed by Peter Lynch (use the information in Table 1 above). What else can you add to his practical investment advices?
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