In the aggregate, active mutual funds often charge higher fees, generate more taxable capital gains because of higher portfolio turnover, concentrate assets in a smaller number of stocks, and have an above-average possibility of underperforming a low-cost benchmark over the long term. Unlike an index fund, whose methodology is publicly disclosed and changes only occasionally, an actively managed fund depends on the judgment of one or more portfolio managers. Those managers may retire, resign for opportunities elsewhere, or, in some cases, pass away.
Large firms such as Fidelity Investments typically prepare for these transitions by appointing co-managers and developing successors over many years, but there is no guarantee that the next manager will match the skill of the previous one, particularly when replacing a long-tenured star. Few examples illustrate this better than the Fidelity Magellan Fund (ticker: FMAGX). During Peter Lynch’s 13-year tenure, the fund generated an extraordinary 29% annualized return.
After Lynch retired in 1990, however, the fund cycled through multiple managers, including Morris Smith, who departed after about two years, and Jeffrey Vinik, whose tenure lasted just under four years. Later, Fidelity Magellan fund managers, particularly Robert Stansky, faced criticism for “closet indexing,” or constructing portfolios that closely resembled benchmarks while continuing to charge active management fees, contributing to years of persistent underperformance. Succession risk is now becoming relevant for another of Fidelity’s flagships, Fidelity Contrafund (FCNTX).
William Danoff has managed the fund since 1990 and has consistently outperformed, generating an 18.2% annualized return over the trailing 10 years compared with 15.5% for the S&P 500 and 16.4% for the Morningstar Large Growth category. In April 2025, Fidelity appointed two co-managers ahead of Danoff’s planned retirement at the end of 2026. The transition was significant enough that Morningstar placed the fund’s Medalist rating under review.
Morningstar’s Medalist ratings are forward-looking assessments of a fund’s ability to outperform peers or its benchmark, and a leadership change can materially affect that evaluation. For buy-and-hold investors who prefer…
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