What Sets Fidelity Contrafund Apart

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 has excelled during manager Will Danoff’s nearly three-decade tenure, supporting its Morningstar Analyst Rating of Silver.

Danoff looks for best-of-breed companies with good business models, competitive advantages, and improving earnings potential, placing much emphasis on company management. While that premise could define many large-growth competitors, the fund's process has been successful because of Danoff's execution. He's hands-on, participating in many of the hundreds of company meetings that occur at Fidelity every year. He also has Fidelity's large global analyst team at his disposal, which helps him keep tabs on the sprawling portfolio of 300-plus names and feeds him ideas that can help distinguish the fund from its relevant benchmarks.

Indeed, Danoff consistently crafts a seemingly inimitable portfolio. The fund’s stake in the Morningstar technology sector, which has ranged from 30%-40% of assets over the past three years, looks hefty next to the fund’s S&P 500 prospectus benchmark but modest relative to the Russell 1000 Growth Index. The latter bogy is the better comparable, based on its holdings overlap, style similarities, and performance patterns. Still, within the large-growth Morningstar Category, the fund stands out for its relatively colossal 20% stake in financial-services firms such as Berkshire Hathaway BRK.A. The fund also owns some privately held companies, notably WeWork and SpaceX. These remain a small portion of the fund's overall assets, but investing in them early could prove beneficial down the line if they have successful IPOs. Plus, they are another way the fund differentiates itself from popular passive funds.

The $117 billion fund has long been one of the industry's biggest by assets. The challenges its size presents, plus fees that aren't as low as might be expected given its economies of scale, keep it from achieving a higher rating. However, the fund remains an attractive offering thanks to Danoff's experience and consistent execution through the years.

Process Pillar:

Positive | Robby Greengold 02/22/2019 Will Danoff follows a typical growth strategy, looking for firms with improving earnings, but his execution sets the fund apart. He weaves together his own analytical insights, gleaned from his more than 30 years at Fidelity, with research from more than 100 global analysts. As the biggest owner of many stocks, Danoff has unparalleled access to company management, helping him understand business' growth drivers. Capacity has long been a risk, given that Danoff manages more than $150 billion across accounts. (In 2013, Fidelity named John Roth as comanager at Danoff's other charge, Fidelity Advisor New Insights FINSX, which in the past looked very similar to Fidelity Contrafund but now deviates to a greater extent.) Even so, Fidelity Contrafund is the second-biggest actively managed large-cap fund and is often a top owner of its holdings, so its size does limit its flexibility.

Danoff has made tweaks to the process through the years to accommodate its size, including trading less often, owning fewer mid- and small-cap names, and maintaining a portfolio of 270-500 stocks. (The name count has trended downward recently as he has focused on his best ideas.) These moves haven't affected long-term performance, which remains strong. The fund has been closed in the past, but it is currently open and has experienced outflows in recent years.

Danoff's consistent execution through the years earns the fund a Positive Process rating.

Will Danoff’s preference for best-of-breed companies with competitive advantages is clear. In December 2018, over 95% of the fund’s assets were tethered to firms with either wide or narrow Morningstar Economic Moat Ratings.

Despite the fund's large asset base and portfolio of hundreds of names, it has avoided looking too indexlike. It has held as much as 20% in non-U.S. equities in the past, though its 5% non-U.S. stake in December was on the low end of its normal range during the past decade.

While the fund's size limits Danoff's ability to take meaningful positions throughout the portfolio, he doesn't shy away from making big bets where he can. The portfolio’s top four positions-- Amazon AMZN, Facebook FB, Alphabet GOOGL, and Berkshire Hathaway--soaked up nearly a fourth of the fund’s assets in December while accounting for less than 10% of the S&P 500 and 13% of the Russell 1000 Growth Index. In keeping with the preceding three years, the fund’s technology Morningstar sector weighting remained Danoff’s largest bet. Tech stocks claimed a third of the portfolio’s assets, which was about 10 percentage points more than the S&P 500’s share but a bit less than Russell 1000 Growth Index’s. The fund stands out within the large-growth Morningstar Category for its more than 20% stake in financial services; that stake is bigger than 95% of its peers’.

Performance Pillar:

Positive | Robby Greengold 02/22/2019 This fund earns a Positive Performance rating. It has been a top large-growth offering under Will Danoff, who has managed it since September 1990. During his tenure through January 2019, the fund gained 13.1% annualized to the S&P 500's 10.1%, the Russell 1000 Growth Index's 9.9%, and the category's 9.2%. Danoff's record is all the more impressive considering the huge sum of money he oversees, totaling more than $150 billion. Undoubtedly, this fund is less flexible than the $7 billion Fidelity Series Opportunistic Insights FVWSX used exclusively in Fidelity's target-date series, which he has led to even better results since its late-2012 inception.

This fund isn't too volatile for a growth fund. Danoff, who has run money long enough to witness a few major market blowups, has outperformed large-growth peers and the Russell 1000 Growth Index in down markets during his tenure, including both bear markets of the 2000s. That pattern holds over the long haul: Across the index’s 55 money-losing one-year rolling periods since Danoff’s start, the fund did better four fifths of the time. The fund's Morningstar Risk rating, which penalizes downside deviations in returns, is low. Danoff prefers proven growers showing tangible signs of improving earnings to more-speculative fare, which means the fund can lag in certain market environments such as 2009's rally.

People Pillar:

Positive | Robby Greengold 02/22/2019 Will Danoff has run this fund since September 1990, posting competitive results even as it has grown. Danoff's years of experience and stock-picking abilities have given the fund an edge and support its Positive People rating.

Danoff effectively leverages the research of Fidelity’s well-regarded team of analysts, which is deep and global and which has ample access to corporate management. The analysts' input is essential, as it would be difficult to effectively oversee a portfolio of 300-plus stocks himself. The analysts have incentives to relay their best ideas to him, as he commands more than $150 billion in assets across all his charges. But Danoff is actively involved in stock-specific research and carries around a thick notebook listing the tickers of companies he's met with.

Given Danoff's heavy asset load, capacity has been a long-standing concern. In 2013, John Roth became comanager alongside Danoff at the $26 billion Fidelity Advisor New Insights, but Danoff also runs the $7 billion Fidelity Series Opportunistic Insights (used exclusively in the target-date series) and a fund sold in Canada. This fund courts significant key-person risk, but Danoff has announced no intention of retiring anytime soon.

Danoff invests more than $1 million in both this fund and Fidelity Advisor New Insights.

Parent Pillar:

Positive | 07/06/2018 Fidelity isn’t without challenges but remains well positioned enough to compete in a changing industry. It earns a Positive Parent rating. The firm’s diversified asset mix has shielded it from steady outflows from its active U.S. equity funds, with its taxable bond, international equity, and low-priced index offerings attracting assets. Its revamped target-date offerings have improved, and in 2018 the firm plans to launch an additional series combining active and passive funds to better compete in an area where investor interest has grown.

Attracting and retaining talented investment professionals is more important than ever. The equity division came under fire in 2017 amid reports of sexual harassment and a hostile work environment, leading to portfolio manager dismissals and a change in leadership. While Fidelity addressed the personnel issues and is working to improve collaboration through weekly team meetings, more-open floor plans, and improved feedback systems, it remains to be seen how the division may incorporate team-based elements into the legacy star-manager system. Meanwhile, the fixed-income division remains in steady hands following the retirement of a longtime CIO. While the bond analyst and manager ranks have seen more change than usual lately, the team-oriented structure of its investment-grade and municipal offerings helps minimize the impact of departures.

Price Pillar:

Positive | Robby Greengold 02/22/2019 This fund has a performance fee, so its expense ratio can change based on how its three-year returns look relative to the S&P 500. (For every percentage point of out- or underperformance, the expense ratio is adjusted by 0.02% up to a maximum of 0.20%.) The fund's Price rating is determined without considering the performance adjustment.

Over three fourths of the fund’s assets reside in the no-load share class, which is priced below average relative to similarly sold peers. That is enough to earn the fund a Positive Price rating. The remaining assets are held by the K shares, which charge middling fees. Expenses have ranged from 0.64% to 1.01% in the past decade; the latter is hard to justify given the fund's huge asset base.