Fund in Focus: Fidelity Contrafund
In this edition of Fund in Focus, we focus on one of biggest actively managed funds in the large cap space: Fidelity Contrafund (FCNTX). With its popularity and large size, Contrafund is recognized as one of Fidelity’s flagship funds. Launched in 1967, the fund was appropriately named “Contrafund” in reference to its contrarian view. Its original strategy was to select securities that were out of favor with investors, for example, buying when everyone was selling or vice versa. However, this strategy changed somewhat when William Danoff took over the fund in 1990.
Danoff took a different approach than the original mandate, pioneering a simple investment model that is still being used today. He buys well-managed, “best-of-breed” companies with growing earnings at good prices. With large assets under management, this type of fund appeals to many investors. The fund’s reputation and consistent strategy, along with Danoff’s impressive track record and expertise, have attracted a large inflow of assets over the years.
One of Danoff’s main investment philosophies states that stock prices follow earnings; if a company begins to develop and grow more earnings, it is a good indication that the price of its stock is bound to rise as well. By placing an emphasis on companies with strong earnings growth, rather than focusing on an entire industry, the fund employs a bottom-up approach. Going beyond researching the fundamentals of a company to identify the fast growers, Danoff and his team also meet directly with different management teams to better understand the core business structure, short- and long-term goals, and growth plans. With significant assets in Contrafund, Danoff has access to many resources, including large research and analyst teams that are well positioned to conduct deep dives and provide insights into companies. Management teams may also be more willing to work in concert with Danoff’s team to give a clear overview of the company’s business model, considering that the fund may be one of the largest shareholders in a company.
After financial research and analysis, Danoff selects companies that boast strong brands, good management teams, and excellent business models. The fund has a large cap growth bias, which means that the portfolio tends to invest in big-name companies with large market capitalizations, since holding a small company’s stock will not make a significant impact on a fund this large. For example, some of the large corporations this fund has consistently owned include Berkshire Hathaway, Apple, Alphabet (Google’s parent company), UnitedHealth Group, Wells Fargo, Microsoft, and Visa, among others. While these companies are viewed as mature and stable, they are also names in which consumers recognize and see value.
It is important to note that the fund invests significantly in the information technology industry (approximately 38% as of December 31, 2016), with Facebook and Amazon included in its top ten holdings. The big positions in the portfolio are valued at about $5 billion and are challenging to manage in a large fund. However, Danoff is comfortable with taking large positions, as the turnover rate of the portfolio is lower than its category average (35% versus 61%), which suggests that he is not inclined to frequently buy and sell positions. In fact, he waits until he is confident enough that a company is showing signs of continued growth before buying his positions. The low turnover rate is also beneficial, as frequent buying and selling may be costly to a fund this size. The top holdings have remained consistent, speaking to the fund’s impactful investment strategy and long-term growth perspective.
To further diversify its portfolio, the fund also invests approximately 2.5% in private companies. Although private companies potentially hold greater risk in comparison to publicly-traded corporations with known stock prices, mutual funds have increasingly invested in private firms due to the growing success of technology-driven companies such as Facebook. In fact, Contrafund was one of the first funds that owned Facebook as a pre-IPO investment, and it has experienced significant benefits from this investment. To date, the fund has several positions in pre-IPO companies, such as Pinterest Inc., WeWork Companies, and Uber Technologies Inc., with hopes of catching a “hot IPO” that could have big upside potential. These investments align with the fund’s commitment to investing in growers that show signs of strong and improved earnings based on research, not speculation.
Contrafund has been extremely popular over the years, as investors are drawn to its simple philosophy as well as its impactful approach to investing: buy good stocks with high expected earnings growth at a fair price. As the sole portfolio manager for the last 27 years, Danoff brings with him industry skills and deep experience in managing the fund through different economic scenarios. Danoff works with a talented team of experienced analysts, including portfolio managers John Roth and Jason Weiner, who are considered to carry on Danoff’s work. However, with no formal succession plan, the fund is vulnerable to key man risk, as Danoff’s role is not particularly easy to step into. With his eventual departure and no current co-manager in place, there are concerns about how the new manager tenure would affect the fund.
Additionally, with the recent market conditions and the investment environment, the fund has undergone some challenges in performance, only outperforming the benchmark S&P 500 in the 10- and 15- year periods. Some have dallied at the idea that perhaps the large size may be hindering performance, as the fund is unable to produce returns as it did in the past. Despite these issues, Danoff and his team remain optimistic that positive stock selection will eventually win in the long run. Since past performance is not an indication of positive future results, only time will tell.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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