When Will Danoff's Fidelity Contrafund (symbol FCNTX) reopened to new investors, we quickly added it to the Kiplinger 25 roster. Since taking over Contrafund in September 1990, Danoff has piloted this large-company growth fund to an annualized return of 11%, beating Standard & Poor's 500-stock index by an impressive average of five percentage points per year.
Danoff searches for innovative market leaders with high returns on capital. He'll pay "a fair price for a great company," he says, especially when that company is gaining share of a market in which barriers to entry are high. Recently, Danoff has gravitated toward defensive stocks, such as Coca-Cola and Johnson & Johnson.
When Brian Rogers is taking on more risk, it's time to pay attention. Rogers, manager of T. Rowe Price Equity Income (PRFDX) and chairman of the Baltimore-based fund house, is as steady and sober as they come. Since Price launched Equity Income in 1985 with Rogers at the helm, the fund has done as well as the S&P 500, returning 8% a year but with lower volatility than the index. That is no small feat.
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Rogers has been trimming his holdings of consumer stocks, such as Procter & Gamble and General Mills, while snapping up shares in more economically sensitive companies, including Boeing, Deere and Nucor. "When prices of good-quality companies are down 50% or more, it makes sense to invest in controversial sectors," says Rogers.
Mason Hawkins, the crusty bargain-hunting veteran who co-manages Longleaf Partners (LLPFX), is excited. He says stocks of the best businesses in the world are the cheapest they've been in 75 years. "The market is voting fearfully today because no one knows when the global economy will stabilize," he says.
One of Hawkins's favorite measures is free-cash-flow yield (a company's free cash flow divided by its market capitalization) relative to the yield on Treasuries. On that basis, many of Longleaf's large holdings, such as Dell, Disney and DirecTV, yield more than 10%, compared with the 3% yield of ten-year Treasury notes. Share prices, he says, reflect a huge amount of fear, "giving you the opportunity you want as a long-term shareholder."
As the third-generation member of his family to manage money, Chris Davis takes the long view in his role running Selected American Shares (SLASX). He offers the case of Johnson & Johnson, a stock he holds that has fallen by 23% over the past year. "Do I think J&J is much riskier, the earnings prospects worse, or its competitive advantage lower? No, I don't think so."
J&J and Procter & Gamble are global stalwarts, one category of holdings in Selected, which Davis manages with Ken Feinberg. A second category is cash-rich companies, such as Berkshire Hathaway, that can make savvy acquisitions and play a bit of offense in these chaotic capital markets. Another Davis strategy is to invest in beneficiaries of the growing global middle class. The last bucket is in stocks with "headline risk." These days, that mostly means financials.
The six men who run Vanguard Primecap Core (VPCCX) don't speak to the press. Instead, they let the results of their fine fund do the talking. They focus on growing companies but are value-oriented in their stock picking. Moreover, their portfolio turnover rate is exceptionally low for a growth fund. Primecap steered clear of the debacle in financials and instead loaded up on health-care stocks, such as Eli Lilly and Amgen, and technology companies, such as Oracle.
It's interesting that both growth- and value-oriented funds are loading up on health-care stocks. Dodge & Cox Stock (DODGX), on the value end of the spectrum, has 28% of its portfolio in the sector, double the S&P 500's weight. Charles Pohl, one of nine co-managers, says that health-care stocks are unusually cheap, given the potential for growth both at home and abroad and the opportunity for drug makers, in particular, to boost profitability by becoming more efficient.
Commodity Funds
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