Even Fidelity's star manager frets about Robinhood

Will Danoff has been wondering why billions of dollars keep flowing out of the Contrafund, the giant mutual fund he manages at Fidelity Investments. Performance isn’t the problem. He’s up 21% this year, trouncing the S&P 500’s 6.2% return. His conclusion: Today’s kids want something sexier.

“There’s a demographic issue,” said Danoff, who has beaten the benchmark by an average of more than 3 percentage points annually over three decades. “We need to appeal to the Gen Zers and the younger generation as well, and luckily I think our app is quite good. But you know, a typical Gen Zer may not be as interested in owning a mutual fund.”

That assessment, from one of Fidelity’s biggest stars, captures the angst of an entire industry. For years, traditional mutual funds have been losing favor. Many investors were turned off by chronically poor performance, and others objected to paying commissions or annual fees that often approach 1%.

There’s now less money in actively managed U.S. equity funds than in low-cost alternatives such as index funds and exchange-traded funds that track the market instead of trying to beat it. More recently, young investors have flocked to Robinhood Markets, making commission-free trades with a few taps on their smartphones.

Next to the social media antics of celebrity speculator Dave Portnoy, Danoff’s world of buy-and-hold discipline seems antique by comparison.

“When I started in 1990, there were 261 equity funds, and now there are thousands,” said Danoff, who manages $230 billion. “There are thousands of hedge funds. There are thousands or millions of Robinhood investors. There’s sovereign wealth funds, etc. So there’s no question that it’s become much, much more competitive.”

VAST RESOURCES

Closely held Fidelity remains one of the titans of asset management, running some $3.3 trillion, and unlike most competitors the company has embraced ETFs, runs a discount brokerage and even developed expertise in cryptocurrencies. Danoff said access to Fidelity’s vast resources is one of the reasons he’s been able to outperform the S&P 500 for so long.

Yet he also recognizes the appeal of index products, whose growth in the 2010s eroded the economics of mutual funds and bookended the era when managers such as Peter Lynch, Bill Miller and Ken Heebner were household names. Last year, 71% of U.S. large-cap managers failed to beat the benchmark, according to S&P Global.

“One issue with investing in any actively managed fund is what happens when the fund manager retires or what happens if the fund manager loses his fastball,” said Danoff, 60. “And then, secondly, do I still trust my fund manager?”

Managers also make mistakes. In Danoff’s case, he unloaded most of the Contrafund’s position in Tesla Inc. in 2017 and 2018, missing out on more than $10 billion of gains. Now he’s stuck in limbo, confident that electric vehicles have a bright future, that Tesla is a great company and that Elon Musk is a “remarkable executive.” But he’s apprehensive about buying into a capital-intensive business, not to mention the stock’s $411.6 billion valuation.

BUFFETT’S BERKSHIRE

At the same time, Danoff has stuck with Berkshire Hathaway Inc., even though its returns have lagged behind the S&P 500 over the past decade.

“The more I’ve spent time with Warren Buffett and, you know, attending annual meetings in Omaha, the more I like it,” he said. “With all my tech holdings, this is a very good counterbalance and some ballast for the big fund.”

Size is something Danoff has to wrestle with, especially in the $139 billion Contrafund. As a manager who focuses on earnings growth, he built some of his top holdings in Amazon.com Inc., Facebook Inc., Apple Inc. and Alphabet Inc. -- companies so powerful they’ve become targets for antitrust regulators.

“I do worry about that,” he said.

For now, the COVID-19 pandemic has been a boon to Danoff’s portfolio, validating his long-term bets on software, social media, cloud computing and digital payments. The times also have forced him to reckon with the role corporate America -- and the investors who back it -- plays in issues such as climate change, economic inequality and systemic racism.

“Speaking up for civil rights or equal rights attracts a better-caliber employee,” Danoff said. “The great companies that I’m invested in care deeply about our country. They care deeply about the environment and they realize making all stakeholders happy is good for business and good for the shareholders.”