Fidelity Contrafund Continues to Impress

The following is our latest Fund Analyst Report for Fidelity Contrafund FCNTX. Morningstar Premium Members have access to full analyst reports such as this for more than 1,000 of the largest and best mutual funds. Not a Premium Member? Gain full access to our analyst reports and advanced tools immediately when you try Morningstar Premium free for 14 days.

Fidelity Contrafund's seasoned manager uses the fund's clout to its advantage and earns it a Morningstar Analyst Rating of Silver.

The fund's substantial merits start with its leader. Will Danoff, manager since 1990 and the Morningstar Domestic-Stock Fund Manager of 2007, has excelled across multiple market cycles. It's a particularly impressive feat given the strategy's colossal asset base, which recently amounted to roughly $180 billion across all accounts and has long limited its flexibility. Danoff isn't a one-man show, though. He combines his own insights with Fidelity's deep analyst bench.

Danoff looks for best-of-breed companies with competitive advantages, improving earnings potential, and capable leadership. He is particularly fond of founder-led firms. Relatively big helpings of companies such as Berkshire Hathaway BRK.A, Facebook FB, Salesforce.com CRM, and Netflix NFLX are what distinguish the portfolio most from the Russell 1000 Growth Index.

The approach resembles that of many large-growth Morningstar Category rivals but stands out here for Danoff's hands-on approach and use of the fund's scale to its advantage. As one of the largest owners of many of the stocks the fund owns, he has unparalleled access to corporate management teams and relies on his intuition to identify up-and-comers early on and construct the portfolio. For example, shortly after it went public in 2017, he accumulated a small stake in Okta OKTA, a $3 billion cybersecurity software firm that by early 2021 had swelled tenfold.

But the fund's heft precludes it from taking significant bets in similarly small companies and maneuvering nimbly. Danoff's solution has been to invest across a sprawling portfolio of more than 300 stocks, emphasize large caps, and hold them for three to four years on average.

That has been a helpful tack over the past decade as large caps have outperformed and momentum has fared well. During an environment when small caps are in favor, this strategy's results may look more pedestrian.

Process | Above Average Will Danoff's ability to handle and even leverage the fund's massive scale to investors' advantage earns it an Above Average Process rating.

Danoff's recipe for success isn't unusual. He looks for best-of-breed companies with competitive advantages, improving earnings potential, and capable leadership. These attributes are central tenets in many large-growth peers' approaches. Where this fund distinguishes itself, though, is in execution. Danoff weaves together his own analytical insights, gleaned from his more than three decades at Fidelity, with research from a deep bench of around 60 domestic-equity analysts. Plus, as the biggest owner of many stocks, Danoff enjoys unparalleled access to company management, helping him understand each business' keys to growth.

Danoff is particularly fond of founder-led firms. Relatively big helpings of companies such as Berkshire Hathaway, Facebook, Salesforce.com, and Netflix are what distinguish the portfolio most from the Russell 1000 Growth Index.

Capacity has long been and remains a headwind, given that Danoff manages roughly $180 billion across all his accounts. To counter constraints imposed by the fund's size, Danoff has tweaked his process through the years, including trading less often and owning fewer mid- and small-cap names.

Danoff prefers best-of-breed companies with competitive advantages significant enough to repel would-be rivals, and it regularly shows in this fund's portfolio. In December 2020, for example, over 60% of the fund's assets were in firms with wide Morningstar Economic Moat Ratings, a higher share than four fifths of its peers in the large-growth category.

The fund's size limits Danoff's ability to take meaningful positions in all but the biggest individual firms, but he doesn't shy away from making bold bets where he can. The portfolio's biggest five overweights--Berkshire Hathaway, Facebook, Salesforce.com, UnitedHealth Group UNH, and Netflix--soaked up 23% of the fund's assets but just 6% of the S&P 500 and 7% of the Russell 1000 Growth Index.

As the domestic market's three largest companies--Apple AAPL, Microsoft MSFT, and Amazon.com AMZN--have handily outperformed and grown their share of the growth index to nearly 30% from 15% in 2017, Danoff has kept the fund's top-three share from breaching 25% of assets.

The fund has reliably stuck out in the large-growth category for its above-average financials exposure. Its 8% stake in December exceeded three fourths of its peers but was down from 14% one year prior. Communication services continued to be the fund's biggest sector-level active weight with 19% of assets versus the growth index's 11%.

People | High Will Danoff has masterfully run this fund since September 1990, posting competitive results even as its assets have ballooned. Danoff's unique ability to steer this massive strategy through multiple market cycles merits a High People rating.

Danoff leverages the research of Fidelity's well-regarded and deep analyst bench, but he isn't overly dependent on it, either. Granted, the analysts' company-specific insights are critical to Danoff effectively overseeing the fund's portfolio of 300-plus stocks. And as Danoff commands roughly $180 billion in assets across all his charges, the analysts have considerable incentive to relay their best ideas to him. But Danoff doesn't just take their word for it. He is active in research and has become well-known for keeping a tattered notebook that lists the tickers of and notes about the companies he's met.

Danoff's heavy asset load magnifies key-person risk and makes capacity a concern. Danoff has said he's not ready to retire anytime soon and collaborates with other of the firm's portfolio managers to keep up with the market. Nidhi Gupta--a seasoned tech and communication-services analyst but a newcomer to diversified portfolio management--comanages Fidelity Advisor New Insights FINSX with Danoff. Jean Park, the veteran portfolio manager of mid-growth fund Fidelity Growth Strategies FDEGX, comanages Fidelity VIP Contrafund.

Parent | Above Average Fidelity earns an Above Average Parent rating because of its ability to stay ahead of its competition.

The firm's successful stock-picking mutual funds fueled its rise to prominence, and it has adapted well to investor preferences that have shifted markedly over the past two decades. Index funds and exchange-traded funds have garnered most of the industry's flows as money has gushed from actively managed products--Fidelity's included. Yet overall, the asset-management division has continued to achieve positive organic growth by introducing or maintaining aggressive pricing on its own suite of passively managed funds and expanding its menu of client-demanded investment structures, such as managed accounts and collective investment trusts. These moves are made possible by the firm's strong distribution network, scale, established brand, and willingness to tolerate losses on some products in pursuit of broader strategic objectives.

Fidelity continues to invest heavily in its active managers' analytical and technological resources. It is home to a handful of the industry's most talented equity managers and boasts a topnotch fixed-income division. Across asset-class teams, elevated levels of turnover within its leadership ranks bear watching. Overall, though, the firm has served fundholders well through its competitive capabilities and costs.

Performance The fund has a phenomenal long-term record under Will Danoff, who has managed it since September 1990. During his tenure, the fund gained 13.8% annualized through January 2021, versus the S&P 500's 10.7% and the Russell 1000 Growth Index's 11.2%. Danoff's record is impressive considering that since 2004 he has overseen more than $40 billion of assets in total and since 2013 has steered over $100 billion.

Over the past decade it has not kept pace with the growth index, which is a more relevant benchmark than the broad S&P 500, given the fund's performance patterns, emphasis of high-growth stocks, and investment philosophy. Since February 2011, its 15.2% annualized gain lagged the Russell 1000 Growth Index's 16.8%. Its stake in financials, to which Danoff has routinely allocated triple the index's share of between 2% and 4%, weighed on relative results as big holdings such as Berkshire Hathaway and Wells Fargo WFC underperformed high-flying sectors such as consumer discretionary and technology--typical underweights for the fund.

The fund often shows resilience. Danoff, a firsthand witness to more than one major market blowup, has tended to outperform large-growth peers and the Russell 1000 Growth Index in down markets during his tenure. That includes 2020's pandemic-induced drawdown, when the fund dropped 29.4% and the index plunged 31.5%.

Price It's critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its category's middle quintile. That's not great, but based on our assessment of the fund's People, Process, and Parent Pillars in the context of these fees, we think this share class will still be able to deliver positive alpha relative to the category benchmark index, explaining its Analyst Rating of Silver.