alpha myth

Fidelity Magellan's Alpha?

alpha myth

The chart below is the Alpha Chart for the famous Fidelity Magellan fund. Peter Lynch managed the Fidelity Magellan Fund from 1977 to 1990, during which time the fund's assets grew from $20 million to $14 billion, just in time to experience more losing years than winning years. More importantly, Lynch reportedly beat the Morningstar specified benchmark for 14 years. However, as you can see, starting in 1991, 15 of 23 years resulted in a negative alpha and only 4 years of those years had respectable alphas. The $14 Billion of investor's assets did not fare well. Based on the overall track record of Magellan, 24 years of returns data is required to be 95% confident of skill. Can you get 24 years of data from your active manager?

If Peter Lynch knew how to beat the market, why couldn't he teach his successors? Or, was it just luck? Why is it that only Peter Lynch and Bill Miller achieved such results if mispriced stocks are so easy to identify and exploit? How many other managers attempted the same feat? It is far more likely that markets are very efficient and extremely hard to beat with statistical significance.