Mutual Funds
My Favorite Fund
I've found a champion with high consistency, comfortable risk levels and a low expense ratio.
By James K. Glassman, Contributing Editor
From Kiplinger's Personal Finance magazine, January 2008
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In 1996, I set out to find the best mutual fund. Superlatives are often in the eye of the beholder, but I was searching in particular for a diversified U.S. large-company stock fund with great long-term returns, comfortable risk levels, a low expense ratio, a consistent philosophy and strong prospects. In short, I wanted to find a place my readers could put their money with few worries.
My analysis yielded a standout: Fidelity Contrafund, which Will Danoff had run since 1990. In the ten years prior to 1996, Contra had returned an annualized 19% -- an amazing performance that built an investment of $10,000 into $55,000. At the time I had owned Contra for four years myself, and I was a very satisfied customer.
I still am. Over the past ten years, Contrafund has returned an annualized 11%, in a much more difficult environment than that of the mid '80s to the mid '90s. The large-company benchmark, Standard & Poor's 500-stock index, which represents about three-fourths of the value of all listed U.S. companies, returned only 7.1% during the same ten years. Plus, Contrafund is consistently outstanding. Over the past five years, its annualized return of 18% was more than four percentage points better than the S&P's. Over the past three years, it whipped the S&P by more than six percentage points per year.
The achievement is all the more remarkable because Contrafund has grown so much. In 1986, the fund's assets totaled just $84 million; in 1996, they had risen to $19 billion; today, they are $83 billion. While Danoff can, as he puts it, "buy anything anywhere in the world," he can't take large stakes in small companies because he's likely to push up the price significantly getting in and depress it getting out. "It's harder to push money around at this size," he says.
Big and brash
Still, he is undeterred. When I interviewed him in late October, he was hugely enthusiastic about Contrafund's future, saying, "We have a very powerful platform. We're big. We see a lot. We see more companies, more IPOs, more of our friends on Wall Street. We're in the information business -- the more you have, the better choices you can make."
With Contrafund so influential and Danoff so ubiquitous, he bumps into great ideas all the time. One of his biggest winners is Google, which, according to the fund's most recent report, on June 30, was by far his largest holding -- at 4.5% of the 400-stock portfolio (second and third are Hewlett-Packard and ExxonMobil, both at 2.7%). Danoff bought Google in the initial public offering in August 2004 at $85 a share. It crossed $700 in October.
Danoff found Google by serendipity. He was interested in an investment in the search engine Ask Jeeves (now known as Ask.com), which answered questions posed in "natural language," such as, "How many people live in Providence?" When Danoff asked the chief executive of Ask Jeeves to paint a bigger picture of the search market, the executive brought up Google. Danoff tells me, "I look into it, and I'm like, 'Google has a 50% market share!'"
He continues, "I was primed for Google. It had $1 billion cash on the balance sheet and 25% operating margins. This was not a speculative company."
Danoff is eclectic and brilliant, but he follows a consistent bottom-up, growth-oriented style (which, of course, belies the fund's name, a holdover from an era when it focused on contrarian, or value, stocks). He looks for big, best-of-breed companies, and he doesn't obsess over the price. As he told Kiplinger's, "I want to buy something where I don't have to buy it right and I don't have to worry about selling it right. When you think about it, if a stock goes from $10 to $100, who gives a hoot if you buy it at $10 or $12 or $15?" Also among his top holdings right now: Apple (symbol AAPL), Berkshire Hathaway (BRK-A), Schlumberger (SLB), Genentech (DNA) and Procter & Gamble (PG).
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