How Fidelity Contrafund’s Big Meta Bet Influences Its Rating

Key Morningstar Metrics for Fidelity Contrafund

• Morningstar Medalist Rating: Silver
• Process Pillar: Average
• People Pillar: High
• Parent Pillar: Above Average

The exceptional skill of Fidelity Contrafund’s FCNTX portfolio manager outweighs the disadvantages of its massive asset base, and its sizable position in Meta Platforms META has helped it recently.

Will Danoff has successfully steered this diversified stock fund through multiple market cycles, including recent ones. The fund’s roughly 13% annualized gain over the past decade beat the S&P 500 (the fund’s broad-market prospectus benchmark) and ranked among the best-performing third of funds in either the large-blend or large-growth Morningstar Categories. It’s a particularly impressive feat given the colossal combined asset base of more than $200 billion across all of Danoff’s funds, which has long limited their flexibility.

Granted, favorable market conditions recently have kept the funds from getting bogged down. Giant companies such as those featured in this portfolio have trounced smaller ones. In an environment where those roles are reversed, this fund’s results may look more pedestrian. Even so, Danoff’s stock-picking has proved to be an advantage.

Danoff looks for best-of-breed companies with competitive advantages, improving earnings potential, and capable leadership. He is particularly fond of founder-led firms. So, it is unsurprising to see him express high conviction in Meta, which this portfolio has held since before its 2012 debut as a public company, then called Facebook.

The stock has come to define the portfolio. Through its outperformance, the stock’s share of the portfolio reached more than 12% of assets as of year-end 2023. That’s a huge position size relative to the stock’s 2%-4% share of relevant large-blend and large-growth indexes; it topped the Meta stakes of all other U.S.-sold funds aside from sector funds, and it marked this fund’s largest stake since at least the turn of the century. The stock has recently been highly volatile. But in early February 2024, Morningstar’s equity research team saw the stock as reasonably valued and assigned it a wide Morningstar Economic Moat Rating—which suggests strong competitive footing—and an Exemplary Morningstar Capital Allocation Rating for its sound balance sheet and its management’s exceptional investment decision-making.

These features might temper the stock’s risks. Danoff also sensibly offsets them with the portfolio’s second-largest holding, Berkshire Hathaway BRK.A, which, other than its own favorable ratings by Morningstar’s equity research team, has little in common with Meta.

Fidelity Contrafund: Performance Highlights

The fund has a phenomenal long-term record under Danoff, who has managed it since September 1990.

During his tenure, the fund’s oldest class gained 13.3% annualized through December 2023, beating the 10.7% gain of the S&P 500 (its broad-market prospectus benchmark) and the 11.1% gain of the Russell 1000 Growth Index (the large-growth category index). Its total return exceeded nearly all surviving large-cap funds.

But following an 18-year hot streak that saw the fund routinely and substantially outpace its benchmarks, its relative results began to cool in 2009, shortly after its asset base ballooned to become one of the world’s largest U.S.-centric strategies. Since then, the margins of its outperformance versus peers and the S&P 500 have slimmed. It has consistently lagged the growth index, which is a relevant benchmark given the fund’s performance patterns, emphasis on high-growth stocks, and investment philosophy. Danoff has kept ahead of his large-growth peers, though, which is a testament to his skill.

The fund’s emphasis on large firms with diverse business lines and competitive advantages has helped it show some resilience in down markets. That includes 2020′s pandemic-driven bear market (when the fund dropped 29.4% and the growth index plunged 31.5%) and calendar-year 2022 (when the fund lost 28.3% versus the index’s 29.1% decline).