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Why We've Downgraded Fidelity Contrafund

One substantial disadvantage drove the rating downgrade for this otherwise excellent fund, says Morningstar's analyst.

Fidelity Contrafund FCNTX remains excellent, but its colossal asset base is a substantial disadvantage and warrants a Morningstar Analyst Rating downgrade to Silver from Gold.

With around $250 billion in assets, the strategy amounts to a hefty 0.65% of the S&P 500's aggregate market value and is far less agile and adaptable than its large-growth peers, most of which hold less than $500 million. The handful of other large-cap funds to have previously amassed a similar size went on to show significant degradation in their excess returns as their opportunity set effectively shrank and they became harder to maneuver.

This strategy is no exception. From 1990 to 2006--when the strategy was much smaller--it consistently achieved risk-adjusted results that far exceeded its benchmarks under the masterful leadership of Will Danoff. It has since beaten its peers and the S&P 500 by narrower margins than before and has consistently lagged the Russell 1000 Growth Index, which is a more relevant index given the fund's performance patterns, emphasis of high-growth stocks, and investment philosophy.

Danoff, who has kept the strategy competitive for 30-plus years by pursuing well-managed companies with improving earnings potential, has done what he can to cope with its size. In the late 2000s, he pulled back on the frequency of his portfolio trading and now keeps annual turnover below 40%. Since 2014, he has oriented the portfolio toward large- and mega-cap stocks--such as Meta Platforms FB, Berkshire Hathaway BRK.A, and AMZN--whose roughly 90% share of the portfolio ranks among the large-growth Morningstar Category's biggest.

That has helped over the past decade as large caps have outperformed and provided resilience in market downturns--including 2020's pandemic-induced bear market and the recent market correction from Dec. 28, 2021, to Jan. 27, 2022. In an environment when small caps are in favor, this strategy's results may look more pedestrian.

Key Proprietary Morningstar Metrics

Morningstar Analyst Rating: Silver Process Pillar: Average People Pillar: High Parent Pillar: Above Average

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