ContraFund: Best of breed bets

by Todd Rosenbluth, S&P Capital IQ mutual fund analyst, The Outlook

Fidelity ContraFund (FCNTX), one of the 10 largest U.S. mutual funds, with almost $60 billion in assets, has posted a strong track record which, together with positive evaluations on risk and cost factors, helps earn it a top ranking from S&P Capital IQ.

Will Danoff, who has managed the fund since 1990, focuses on investing in what he sees as “best of breed” companies that are gaining share in large markets. We think the fund is well diversified, with approximately 370 individual holdings as of November 2012.

The fund’s top-10 holdings recently comprised about one third of assets. According its mid-year 2012 shareholder update, management trimmed some smaller stocks and increased cash.

During the first half, Danoff said he added financial services exposure, including a new stake in U.S. Bancorp and increasing the fund’s position in Wells Fargo; as of November, financials were 12% of the portfolio.

Proceeds for these moves were partially the result of a then reduced weighting in energy and materials, according to Danoff, because of slow growth in Brazil, Russia, India and China; energy comprised 5% of assets as of November 2012, and materials 4%.

Despite the trades, the fund’s turnover rate of 55% is below the large-cap growth peer average of 63%. Low turnover, a below-aver- age net expense ratio, and the absence of a sales load are positive cost factors, according to S&P Capital IQ.

Additionally, the fund has outperformed its large-cap growth peers on a one, three, five, and ten-year total return basis through January 25, as well as in nine of the past ten calendar years.

Further helping the fund’s five- star ranking is its strong risk- adjusted performance metrics. As of December, the standard deviation was 14.2, below the peer average of 16.9, while the Sharpe ratio of 0.77 was above the 0.59 average. But strong past performance is not rea- son enough to view a fund favorably.

The fund had 28% of assets in information technology stocks as of the end of November, with Apple and Google as the two largest positions.

In the fund’s mid-2012 shareholder update, Danoff said he trimmed his stake in Google during the first half of the year, but still favors the company for its dominance and innovation in Internet technology and its ability to generate cash.

Other large sector weightings were in consumer discretionary (20%) and financials (12%). Overall, a number of Fidelity Contrafund’s holdings are considered undervalued and incurring modest risk, based on S&P Capital IQ’s proprietary STARS and Quality Ranking inputs.

While all 369 positions are analyzed, it is notable that five of the top-10 holdings are ranked as “strong buy” or “buy” by S&P Capital IQ equity analysts, while four have above-average (A- or higher) S&P Quality Rankings.

Positions that fit both criteria include Coca-Cola and Walt Disney. In addition, the fund receives a favorable ranking input for the credit ratings of its overall holdings.

Learn more about this financial newsletter at S&P The Outlook.

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