Fidelity Contrafund Holds Up Through Hard Times

Through the bumpy months of spring and summer, from the stock market's peak on April 29 through September 8, Fidelity Contrafund (symbol FCNTX) tumbled 9.2%. But Contra lost three percentage points less than Standard & Poor's 500-stock index, making it one of the better-performing stock funds in the Kiplinger 25 during the correction.

Shares in undervalued blue chips, such as Coca-Cola (KO), which has climbed 9.8% so far this year, helped the fund, says manager Will Danoff (all returns are through September 8).

Another boost came from gold. Contrafund owns shares in several leading gold companies, including Newcrest Mining (NCMGY.PK) and Randgold Resources Ltd. (GOLD), where production is growing. Shares in those companies have climbed 1.5% and 36.9%, respectively, this year. Says Danoff: “I’m not looking for gold prices to appreciate. I’m looking for well-managed companies that are in a position to grow. If the price of gold appreciates, even better.”

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With the market well off its high, Danoff is on the prowl for good opportunities: “What do you do in this kind of environment when the whole market goes down?” he asks. “You buy.” He’s keeping an eye out for blue chips with an edge -- a new product, a strong position in India or China or other growth markets, and strong cash-flow generation. Danoff says it will be easier for these kinds of companies to maintain their market share or even gain share during uncertain times. He’s also looking at smaller companies, including those that have gone public in the past five years and should be able to generate earnings growth no matter the economic environment. Earlier this year, Danoff made an investment in social networking Web site Facebook, which is not yet publicly traded. And he’s tilting toward emerging markets, where he says “there are fewer headwinds” than in the U.S. and Europe.

Since taking over management of Contrafund 20 years ago, Danoff has seen assets balloon to more than $100 billion at times -- the fund currently holds $73.7 billion. Large funds often get cornered into becoming closet index portfolios; it becomes difficult to generate returns that outpace the broader market. But size hasn’t been a problem for Danoff: The fund’s 11.0% annualized 20-year return trounces the broader market index as well as its peers (funds that invest mainly in large, growing companies). Over the past year, Contrafund returned 12.7%, beating the S&P 500 by 2.6 percentage points and the category average by one point.

Not that there haven’t been a few bumps along the way. After a few years of average performance -- the fund lagged the S&P 500 from 1994 to 1998 and held some 700 stocks -- Danoff says he realized that there was a limit to the number of companies he could follow. The potential extra returns from the 300 smallest positions weren’t big enough to justify holding them in the portfolio. “Bill Miller [of Legg Mason Value] was doing well then, and I thought his outsize position in Dell and AOL made his record,” Danoff says. “I thought, gosh, if I really like something, I should bet bigger.” So he trimmed the number of holdings in Contrafund to about 400. As of July 31, the fund held shares in 492 companies.

Danoff has learned a few things this year, too. For starters, he admits that he was wrong about technology stocks, which account for 31% of the fund’s assets. He thought many tech companies looked cheap and that the move toward cloud computing and smart phones would drive up their share prices. “That hasn’t played out as well as I’d hoped,” he says. Shares in Nokia (NOK) and Research in Motion (RIMM) have tumbled 35% and 46%, respectively, so far this year. “It’s not quite steady as she goes, but I’m doing what I always do,” says Danoff. “That the share prices are down is an opportunity for me.”