Magellan a “Frankenfund”: Professor
Mar 6th, 2007 | Filed under: Performance, Analytics & MetricsStansky’s Monster: A Critical Examination of Fidelity Magellan’s Frankenfund
By: Ross Miller, State University of New York (SUNY), Albany
Published: February 2007
Yesterday’s posting discussed Fidelity’s desire to add performance fees to its lineup in order to address recent underperformance. Today, we cover one example of said “underperformance”: Magellan’s hard luck since the turn of the century. Fidelity’s Magellan is commonly cited for its extremely high r-squared to equity markets. In other words, it’s been an ETF in disguise.
So who better to tell the story than Professor Ross Miller of SUNY Albany - a man whose paper on index hugging is in the Portable Alpha Hall of Fame. Miller released this ringing indictment of Magellan last month.
It starts with an entertaining and easy-to-read history of the fund and its colourful managers - from Peter Lynch’s “ten baggers” (some sourced from his wife’s grocery preferences) to Jeffrey Vinik’s prematurely defensive positioning in 1996 to Robert Stansky’s closet indexing of the late 90’s and early part of this decade.
But then Miller throws off the gloves:
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[…] Thomas Schneeweis is an academic. So he views the primary benefits of managed accounts not as operational, but as analytical. He argues that daily and weekly return data (usually only available via a managed account) is superior to the more common monthly data used in the hedge fund industry. Schneeweis tells All About Alpha that monthly data hides all sorts of things from, for example, volatility during the last week of every month, to a high correlation to intra-month shocks. (Ross Miller of SUNY Albany shows the power of daily data in his recent paper on Fidelity Magellan’s uncomfortably high market correlation.)     […]
[…] This is clearly a “holding-based” approach to analyzing manager value-add that differs from the traditional returns-based approach which infers the make-up of a portfolio from the way it responds to exogenous variables. The return-based approach was, of course, first popularized by William Sharpe late last century (for modern examples of such detective work, see this Amaranth case study or this Fidelity Magellan case study).  […]