For every Contrafund, there's a Magellan out there.
Fidelity Contrafund FCNTX manager Will Danoff is back to running a more than $100 billion threshold once more. A few years ago, Fidelity handed one of Danoff's three funds to another manager in order to cut his workload. However, his continued success, a market rally, and the inflows that his funds have drawn have him managing more than $100 billion combined again in Contrafund and Fidelity Advisor New Insights FNIAX, which have $84 billion and $19 billion, respectively. Contrafund was one of the industry's largest funds 15 years ago (with approximately $25 billion in assets at that time). Even with its heft, the fund has one of the best 15-year records to show for it, a 9.25% annualized gain.
Danoff is the exception rather than the norm, however. To put Danoff's task in perspective, I pulled together a list of solo managers running actively managed domestic-stock funds and ranked it by assets. In fact, Danoff is running twice as much as the next manager on the list, Steve Wymer at $44 billion in Fidelity Growth Company FDGRX, and three times as much as number three on the list, Rob Bartolo of T. Rowe Price Growth Stock PRGFX.
My first thought was that it's really, really hard to achieve what Danoff has done. Running really large sums has pummeled many good managers. My second thought is that it will be a challenge for all of the managers on this list to run their funds over the coming years. The good news is many have strategies and experience that give them a pretty good chance of continued success. That hasn't always been the case.
Asset bloat causes a number of problems for a fund manager. It reduces the exposure a fund can gain to smaller, less-liquid stocks. It's not uncommon to see a fund have tremendous success with small-, mid-, and large-cap stocks only to grow so large that it has to be almost exclusively large cap. In addition, the costs of trading stocks go up because the fund will have to trade more stocks just to get an equivalent position--so that it is driving up its purchase price and down its selling price. Even making those adjustments, managers often have to spread out their portfolio among more names so that their favorite names have less impact and they have to do more research on more companies.
To understand just how tough this task really is, check out Table 2, which lists the managers running the most money solo 10 years ago. Six of the funds on that list have gone on a forced diet as they are smaller today than they were 10 years ago even though the stock market has gained an annualized 4.5% over that time. Fidelity Magellan FMAGX has shrunk by $55 billion, Fidelity Growth & Income FGRIX is down $26 billion, Janus JANDX is down $14 billion, Fidelity Equity-Income FEQIX is down $12 billion, Fidelity Blue Chip Growth FBGRX is down $5 billion, and Fidelity Dividend Growth FDGFX is down $7 billion from that time. Those six funds also have had at least one manager change over that 10-year period. The changes and asset drop tell me investors haven't had a good experience.
The performance figures back that up. Four of the funds suffered bottom-quartile performance over the past 10 years. One, Fidelity Growth & Income, actually is in the red for the past 10 years. On the plus side, four funds cracked the top quartile led by Danoff.
The results underline the importance of fund companies closing funds before they grow to unmanageable sizes as there aren't enough Will Danoffs to go around. Of those in the current top 10, only three are closed to new investors. I'd rather see more of them closed, but U.S.-equity funds are not drawing big sums of inflows at the moment, so the time to close may come at a later date. For example, Contrafund just moved to positive flows this year.
From an investor's perspective, you should be particularly wary of manager changes at giant funds. It also helps to consider how well a strategy can be adapted to larger assets, how strong the resources are behind a fund, and a firm's track record of closing.
Asset size is a real handicap, so you should raise the bar before buying or sticking with a big fund with a solo manager.