With well over $100 billion in equity assets, the Fidelity Contrafund is one of the largest actively managed mutual funds in the world. Yet as of the date of this post, November 4, 2015, the Contrafund’s large size hasn’t hindered its ability to outperform its chosen benchmark, the S&P 500, over the last ten, five, three or even one year intervals. Given the success of the fund under the helm of its portfolio manager, William Danoff, it’s worth taking a deeper look at what is driving the success.
The Contrafund and S&P 500 have both been around for decades, but current snapshots of each show some substantial differences that are contributing to Contrafund’s success. The first basic difference of the Contrafund vs. the S&P 500 is its concentration in only about 300 securities currently. This is roughly 200 securities fewer than the S&P 500’s composition. As you dig deeper, you also find that the top five holdings of the Contrafund represent a substantial 20% of its overall portfolio, while the S&P 500’s top five weightings only represent about 11%.
While all five of Fidelitiy Contrafund’s top holdings are also represented in the S&P 500, the more telling indicator is what Fidelity Contrafund doesn’t currently hold – Exxon Mobil or much of any Energy company at all. In fact, while the S&P 500 has nearly 2% of its weighting in Exxon Mobil and over 7% in Energy overall, the ten Energy companies held by Fidelity Contrafund in aggregate represent a miniscule 1% of the portfolio. And the number of Exxon Mobil shares held? …..zero. Given the poor returns Energy stocks have delivered in 2015, this underweighting of the sector is certainly one of keys to Contrafund’s success.
As you further examine these concentrated bets Contrafund made, another standout is its focus on Internet stocks. That is its largest sector focus, currently representing 9% of the fund’s overall portfolio. 5% alone is allocated to its top portfolio holding, Facebook. Compare that to the S&P 500 where internet stocks make up a paltry 4%.
Much has been written of late of the growing influence of index-oriented mutual funds and exchange traded funds. But the smart stock and sector selection exhibited by funds like Fidelity Contrafund lend some credence to the notion that smart portfolio managers can indeed outperform.
Source: S&P Capital IQ. Most recent data available as of Nov 4, 2015.