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When we interviewed Will Danoff three years ago, the gregarious manager of Fidelity Contrafund was in the midst of a terrific year. His fund earned 16% in 2005, beating Standard & Poor's 500-stock index by 11 percentage points -- not too shabby for a fund with $60 billion in assets. Contra made money the next two years, trailing the market by four points in 2006 and clocking it by 14 in '07. But Contra, now swollen to $71 billion and closed to new investors, has been unable to escape the bear's claws. Year-to-date to August 11, the fund lost 12%, lagging the market by almost two percentage points. "Clearly, this has not been a good year for shareholders of Contrafund," says Danoff, 48.
His long-term record remains solid. Since Danoff began running Contra in 1990, it has gained an annualized 15%. That tops the S&P 500 by an average of four percentage points per year and the average large-company growth fund by about five points per year.
Danoff excels at sizing up the big picture on the one hand, talking up company executives on the other, and using these inputs to fashion an investment plan. On this warm summer day, he arrives for an interview at a Fidelity office adjacent to Boston's South Station carrying a weathered notebook that contains handwritten stock symbols neatly placed in rows and columns. The symbols represent all of the companies whose executives Danoff has met during his 18-year tenure at Contra. To learn more about some of these encounters and how Danoff is navigating the treacherous bear market, read on.
KIPLINGER'S: How do you manage Contrafund in this kind of market?
DANOFF: The big picture is that the housing crisis is slowing the economy. That applies to the U.S., the rest of the developed world and to emerging markets. Demand is slowing, and costs are rising. You know that profit growth is going to slow for many companies, so in that environment, whom do you want to bet with? Do you want to bet on the number-four or -five player in an industry, or do you want to bet on the market leader, which has a sustainable competitive advantage?
The way you put it, the answer is self-evident.
Right. I'm trying to upgrade the quality of my portfolio every day. And right now, one of my main themes is big, multinational blue chips. A weak dollar helps the multinationals. Continued growth in emerging markets helps the multinationals. They tend to have very good business models and generate a tremendous amount of free cash flow. And they're under-owned, probably by institutions and certainly by hedge funds. Meanwhile, their share prices have bounced around the past eight or nine years, while their earnings have grown steadily at 10%, 12%, 14% a year. I'm thinking of companies like Coca-Cola, Procter & Gamble, PepsiCo. Their price-earnings ratios are half where they were at the start of the decade. In a tough environment, these types of companies often have better outlooks relative to other companies.
Your interest in multinationals suggests you doubt "the greatest global boom of all time" will end anytime soon.
Correct. But the U.S. consumer is facing the day of reckoning. If you're a U.S. worker who's making a product that isn't competitive, you can't expect to have two SUVs and a big house and a great pension. That world is ending. The U.S. standard of living is probably going to decline relative to the rest of the world. And the U.S. dollar will continue to weaken. But that's not so bad, because U.S. manufacturers are now very competitive. And the developing economies are going to want U.S.-made stuff, such as Nike sneakers and western foods and Coke.
You haven't increased the fund's cash position much -- cash is just 7.5% of assets.
I've always run relatively fully invested. Cash never goes above 10%. If it gets that high, I say to myself that I'm not hustling hard enough. For instance, I should have been much more aggressive in buying health-care stocks this year.
Why?
If the economy is weak, you can still make a case for innovative med-tech companies and innovative biotech companies. Of course, people are worried that if Obama wins the election, there will be more controls on medical care. But as people around the world get more and more wealthy there will be greater demand for health-care services. And the demographics here and in other developed countries suggest that people will need more and more pharmaceuticals, so that's an area with big opportunities. This isn't so much a sector call as an expectation that this area will attract a lot of innovative com-panies. Genentech has been an example of a world-class, innovative company in this sector. However, it recently became the target of an acquisition by Roche, which wants to buy the part of the company it doesn't already own.
POSTED BY: Mike G (September 11, 2008 10:06 PM)
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