Fidelity's Giant Contrafund Finally Closes
Fidelity is doing the right thing with its largest stock fund -- but the news is not all good.
In announcing the closing of Fidelity Contrafund (symbol FCNTX) Friday, Fidelity is doing the right thing. Contrafund, Fidelity’s largest stock fund, has swollen to $64 billion in assets. Managing that much money is a tough task, even for a gifted manager such as Will Danoff. The bad news is that the Boston fund giant is closing the fund too late -- and handling the closing badly.
First the good news. Fidelity is stopping the flood of cash into perhaps its best open large-cap fund. "Will Danoff has done an outstanding job ... and investors have noticed in increasing numbers," Philip Bullen, a Fidelity official, said in a news release. Net inflows into Contrafund and Fidelity Advisor New Insights -- a broker-sold fund that Danoff also runs and that will also close -- totaled more than $12 billion for the 12 months through February 28.
Since taking over the fund in late 1990, Danoff has been nothing short of spectacular. Contrafund ranks in the top 10% among large-company growth funds over the past five, ten and 15 years. The 15-year return is an annualized 15% -- four percentage points ahead of the SP 500. Astonishingly, Danoff has failed to finish a calendar year ahead of his competitors only twice.
He’s a talented counter puncher, often able to pick up growth stocks when they’re somewhat out of favor. He currently has 21% of assets in foreign stocks, which has boosted performance. He likes to trade; on average, he holds stocks less than two years. (Read our interview with Danoff published in the December issue of Kiplinger's Personal Finance.)
Now the bad news. Contrafund will remain open to new investors through April 28. Why the delay? It’s almost as if Fidelity is holding a going-out-of-business sale on Contrafund. Investors will almost certainly shovel more money into the already bloated fund. In addition, current investors, as well as participants in 401(k) and other retirement plans that already offer Contrafund, will continue to be able to invest after April 28. Assuming performance remains good, Contrafund will almost certainly continue to grow even beyond April.
In contrast to the $64 billion it now holds, Contrafund held roughly $300 million when Danoff took the helm, $15 billion at the end of 1995, and $40 billion at the end of 2000. Now, between Contrafund and Advisor New Insights, Danoff will be left running more than $70 billion. Can he handle the money? Morningstar points out that Advisor New Insights, which is much smaller than Contrafund, beat Contrafund by three percentage points last year.
Like most firm’s with an enormously profitable franchise, Fidelity was unable to resist the ca-ching of cash registers and close Contrafund when it still boasted a reasonable girth. Performance won’t fall of a cliff; Danoff is brilliant. But it likely will tail off. A better large-company growth pick is T. Rowe Price Growth Stock (PRGFX), with just $14 billion in assets.
If you still think you might want to take a bet on Danoff later on, though, put in the minimum, $2,500, now -- and see how Danoff handles his heavy load for awhile before investing more.