The storied Fidelity Magellan methodology, which now comes in an exchange traded fund wrapper, can be a starting point for investors considering where active management can fit in today’s equity markets.
In the recent webcast, The Potential for Outperformance: Fidelity Magellan ETF, Fidelity Investments’ portfolio manager, Sammy Simnegar, and senior vice president, sector and ETF sales manager, Richard Koerner, explained how Fidelity Investment’s flagship Magellan fund has helped investors reach their financial goals for decades and how the time-tested, actively managed approach is now available in a flexible, tax-efficient, low-cost and easily accessible investment vehicle.
Specifically, the Fidelity Magellan ETF (FMAG) is a cheap and efficient way to access Fidelity’s storied flagship fund strategy: the actively managed Fidelity® Magellan® Fund (FMAGX), which has been around since May 1963. The strategy normally invests in equity securities, holding “growth” stocks, “value” stocks, or both from domestic and foreign issuers. The ETF’s active managers utilize fundamental analysis of factors such as each issuer’s financial condition and industry position, and market and economic conditions to select investments.
The strategists explained that the dynamic strategy could help investors better adapt to an uneven global expansion. The U.S. shifted fully into the mid-cycle phase as a broadening expansion accompanied the economy’s reopening. Major economies are on differing trajectories, with a number of developing countries inhibited in particular by their more limited vaccination and reopening progress. The global cycle’s momentum is widening, with staggered re-openings likely leading to ongoing improvement, even if in fits and starts.
In the next mid-business cycle, the strategists highlighted the traditional outperformance of specific market segments. For example, among market sectors, the communication services and information technology segments stand out, whereas consumer discretionary, materials and utilities typically underperform. Additionally, the momentum and value factors also take charge while the low-volatility factors lags.
Relative asset performance patterns can be influenced by the direction of key variables, according to the strategists. Markets experienced a reflationary dynamic of rising inflation expectations and real interest rates over the past year. Q2, however, added a hint of weak-growth flavor. We see potential for elevated volatility in the coming year, as shifting expectations for monetary policy could push markets toward more inflationary or disinflationary outcomes.
Given the current market dynamics, investors can turn to the Fidelity Magellan ETF to navigate the environment. The strategists argued that fundamental analysis can unearth earnings growth potential that is not reflected in a current stock price. Consistent outperformance can still be achieved by investing in a combination of high-quality cyclical growth stocks and structural, steady growers, which both benefit from long-term mega-trends.
FMAG leverages all of Fidelity’s capabilities to identify opportunities. For instance, the active managers screen for quality through earnings growth & stability, return on invested capital and balance sheets, momentum through relative price & earnings momentum, short-term estimate momentum and long-term price momentum, growth through track records of above-market EPS growth, sustainable tailwinds and predictable growth, and valuations through free cash flow yield, enterprise value/earnings before interest and taxes, and price-to-earnings ratio.
Looking ahead, the strategists highlighted ongoing mega-trends that could continue to provide a tailwind for risk assets, such as everything-as-a-service or XaaS, focus on health and wellness, innovation, sustainability, and digitization. On the other hand, headwinds include global factors like increased CAPEX intensity on resources, increased regulation and entitlements, rapid erosion of competitive advantages, and divergence in the fortunes of countries.
Financial advisors who are interested in learning more about Fidelity’s Magellan fund strategy can watch the webcast here on demand.