Star stock fund managers, once the darlings of the mutual fund industry, are becoming harder and harder to find in today's index-happy world — but William Danoff has plenty of reasons to believe stock picking can still win in the end.
Mr. Danoff, 52, has been the portfolio manager of Fidelity Investments' $93 billion Contrafund (FCNTX) for almost half his life. Since taking over the fund in October 1990, when it had less than $10 billion in assets, he's achieved returns almost double that of the S&P 500. Most impressively, he's done so by avoiding the blowups of such fellow star managers as Fairholme Capital Management LLC's Bruce Berkowitz and Legg Mason Inc.'s Bill Miller.
“He is one of the last iconic gunslinging stock pickers left,” said Jim Lowell, editor of the Fidelity Investor newsletter and a shareholder of the Contrafund.
A $10,000 investment in the Contrafund on Mr. Danoff's first day would be worth more than $156,000 today. The same investment in the S&P 500 would be worth around $80,000, and in the average large-cap fund, it would be worth just $61,000, according to Morningstar Inc.
The fund has succeeded by looking like anything but the fund's benchmark index. Over the past 10 years, as the fund has beat 90% of its peers, the Contrafund has had an average active share of 72%, according to Morningstar, which means just 28% of the portfolio has overlapped the S&P 500.
Mr. Danoff has achieved that difference by not shying away from making companies he really likes a big part of the portfolio.
The fund's top 10 holdings, for example, average around one-third of the portfolio, or about 10% more of the portfolio than the average large-cap-growth fund, according to Morningstar.
“Really good stories are hard to find, so when you find them, you've got to bet big,” Mr. Danoff said in an interview. “It's like a poker game — when you think you have a winning hand, you've got to bet big.”
Mr. Danoff does his most important research out in the field, meeting with executives of more than 1,000 companies a year.
“I'm looking for best-of-breed management in companies that have some competitive advantage,” he said.
The way to find those companies is by attending an exhaustive number of meetings with company executives — something Mr. Danoff learned from one of his mentors, the original star fund manager, Fidelity's Peter Lynch.
“He felt if you saw more companies, you would increase the chances of finding good ones,” Mr. Danoff said.
It was Mr. Lynch, who managed the Fidelity Magellan Fund (FMAGX) from the late 1970s to 1990, who attracted Mr. Danoff to Fidelity after he graduated from The Wharton School of the University of Pennsylvania in 1986.
In 2005, the title of top stock picker was passed to Mr. Danoff as the Contrafund surpassed Magellan in assets for the first time.
Now, with the fund approaching $100 billion in assets, finding the good opportunities that put the Contrafund on the map is becoming harder.
“Larger funds have a higher degree of difficulty,” Mr. Danoff said. “For me, it's the ability to make big bets — it's harder. My denominator is so big that it's not that easy to find really great stories at scale.”
The downside to big bets, of course, is that when they don't work out, they can be pretty painful.
The Contrafund, the largest shareholder in Apple Inc. (AAPL), experienced this pain over the past year as it witnessed the technology giant's share price plummet from $700 a share to $400. That drop has led the Contrafund into the unfamiliar position of trailing the S&P 500 over the one-, three- and five-year periods, according to Morningstar Inc.
The Contrafund has cut its holding in Apple substantially since its peak last year to 4.2% of the funds' assets today, from 9.6% in October.
Mr. Danoff declined to comment on any specific stocks he's excited about these days, but he did say he's been thinking more about avoiding losses than ever before.
MINDFUL OF MISTAKES
“You want to avoid the big mistakes,” he said. “I've been spending more time in the last year or so saying, 'Where can I lose a lot of money?' as opposed to, 'Where can I make a lot of money?' Avoiding the losers is almost as important as finding the winners.”
Ironically, the fund's performance in downturns is one of its biggest selling points, Mr. Lowell said.
“One reason we have him is, he really does have these great defense characteristics,” he said.
Over the last 10 years, the Contrafund has captured 101% of the market's upside and just 87% of the downside. The average large-cap fund has captured 101% of the upside but 109% of the downside, according to Morningstar Inc.
The good news for shareholders is that they're not in it alone. Mr. Danoff is one of the largest shareholders of the fund — a point of pride for him.
“Eating your own cooking is critical,” he said. “I feel the pain just as much as everyone else. I'm responsible for Contrafund. If I don't produce, I'm fired.”
Unlike his mentor, Mr. Lynch, who famously retired near the top of his game, Mr. Danoff has no plans to retire early.
“I just want to have fun every day,” he said. “It's still fun. It's challenging, but I like what I do.”