In any determination of the best mutual fund of all time, Fidelity Magellan would have to merit serious consideration.
Of course, there are too many ways to slice and dice performance data. Contending funds have different inception dates and changes of management would also factor in, but what would be impossible to ignore in Magellan's case is the fund's superlative annual returns averaging 16.34 percent for now over half a century (from May 1963 through the most recent Nov. 30 performance report).
The Fidelity fund became a household word under the tutelage of Peter Lynch in the 1980s.
While its current manager has helmed Fidelity's flagship fund a little over three years, Jeffrey Feingold's navigation of Magellan has enhanced the fund's long-term performance.
At a time when the market has returned a robust 21 percent annually, Feingold has added more than 100 basis points annually over the fund's S&P 500 benchmark.
So both Feingold's performance as a fund manager as well as the economic importance of the fund — its over $16 billion size has greater weight than the GDP of a good many smaller countries like Iceland — make his views on investing of great interest to financial advisors.
Our sister site, ThinkAdvisor, talked with the Magellan manager by phone to get his sense of the opportunities in the coming year.
While Fidelity policy precludes him from publicly sharing his predictions about specific stocks on a prospective basis, Feingold was willing to discuss "themes" currently attracting his attention — a natural for the former head of the Fidelity Trend Fund — and more importantly, to explain how he looks at stock selection.
Perhaps the most important thing to know about Feingold's stock selection is that he is a true stock picker, eschewing large sector bets.
So if financials represent around 17 percent of the S&P 500 currently, Feingold is looking to beat that benchmark, as he has, by keeping the same rough sector weight while picking better stocks than the index.
"I'm trying to find companies growing their earnings the fastest," Feingold said. "For me that doesn't mean any one particular area of the market. There are fast growing earners in all areas. Magellan is an all-weather fund," he said.
While Feingold is not slicing and dicing the S&P's sectors in any unusual way, the large-cap growth manager does have a nuanced view of "growth," which is critical to his strategy.
Specifically, he looks for three kinds of growth.
The first is the kind that is popularly understood as growth: companies with rapidly expanding earnings growth rates that are usually associated with innovative, high-demand products, most particularly in the tech sector.
The second kind of growth Feingold seeks is opportunistic — essentially "cheap stocks with improving fundamentals" whose surprise earnings acceleration will boost fund returns.
The third kind of growth with which Feingold balances the Magellan portfolio are "quality" stocks. These generally household name-type companies are characterized by strong balance sheets, seasoned management and high returns on capital.
What is significant about this strategy is that, that is how Feingold attempts to limit downside risk in a fund he said is "positioned slightly more aggressively than the market."
He's got somewhere around 1 percent of the portfolio in cash, so the way he plays defense is via the quality and to a lesser extent opportunistic growth stocks, which add ballast to the fast-moving secular growth stocks (or "scarce growth," as he calls it). Each of Feingold's three growth styles constitutes about a third of the Magellan portfolio.
With that prism in mind — and that is critical since, again, Feingold does not talk macro ("There are always stories that produce superior earnings growth," he said) — here are themes of current interest to the Magellan manager:
1. Airlines ready for take-off
It is not only flight crews and passengers who have experienced the U.S. airline industry's turbulence first hand, but investors as well. The industry, since deregulation, has been no stranger to bankruptcy.
But depressed share prices and fierce competition can result in tremendous upside for shareholders, which makes airlines Feingold's prime candidate for opportunistic growth — that is, cheap stocks ready for earnings take-off and acceleration.
"Industrial change brought about by consolidation, and in this case by bankruptcy, can lead to significantly profound change not just in industries, but also in stocks," said Feingold, who covered the industry as an analyst at Fidelity before becoming a portfolio manager.
As such, he's seen airline companies "burn through billions of dollars of free cash flow and earnings over time." But that's not what he's seeing now; he's seeing, over the past 18 to 24 months, "managers talk about things important to investors like return on capital."
And that's "not even talking about energy price moves," whose lower fuel costs he calls added "gravy." Rather, Feingold sees "structural changes within an industry that can bring about added return."
He evidently expects acceleration from the airlines in the Magellan portfolio, which include, according to records as of Oct. 31, Delta Airlines, JetBlue Airways, American Airlines, Spirit Airlines and Southwest Airlines, in order of portfolio weight.
"Over the last 18 months we've seen improving fundamentals [in these cheap stocks]. We're not in first, second or third innings anymore, but it's something in which I'm still interested. [The opportunity] will play itself out in the next couple of years," he said.
2. Scenes from a mall
With the year-end holiday shopping season that determines retailers' annual fortunes upon us, the consumer obsession with bargain hunting continues to place pricing pressure on retailers.
"It's no secret that the retail landscape has been a dynamic one, in some cases challenging […] We're potentially over-stored," said Feingold, who followed footwear and apparel as an analyst before covering airlines at the start of his career at Fidelity in the late 1990s.
