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Can Fidelity’s Contrafund Keep Up the Good Work?

March 27, 2015

Is Fidelity’s flagship Contrafund a Magellan in the making? That’s the question posed by Advisor Perspectives guest-writer Larry Swedroe. He compares the $112.8 billion fund’s long-term track record to that of legendary manager Peter Lynch at Fidelity’s Magellan in the 1980s. After Lynch departed in 1990, Magellan’s returns flattened, and its huge size made it hard for managers to outperform.

To find an answer, Swedroe, research director at the BAM Alliance, tries to identify the market factors most prominent in driving Contrafund’s winning record over 47-plus years. First, he considers returns over different time periods. In the past five years, he finds, “there’s no longer anything special about the fund’s performance.” While he admits “five years isn’t a very long period,” he suggests that “it’s possible the growth in assets under management has increased the burden on the fund to such a degree that it will no longer be able to generate superior performance.”

At the same time, Swedroe finds that current Contrafund manager William Danoff — who has been in place since 1990 — has shown an ability to swing into parts of the market with the strongest winds at their backs. Also, Danoff’s Contrafund seems adept at identifying different segments that swoon less in market downturns and post better overall returns over longer periods.

Another interesting takeaway: Even though Morningstar considers Contrafund a large-growth stock fund, Danoff’s allocation decisions do take valuation into account. Swedroe concludes the fund manager has been able to “identify key factors driving performance” ahead of the pack. But the article casts doubt on whether the Contrafund will have as much flexibility to pounce as quickly on as many emerging opportunities if assets keep swelling. “Only time will tell,” writes Swedroe, “if it can reachieve its prior level of outperformance.”

By Murray Coleman
  • To read the Advisor Perspectives article cited in this story, click here.