Earlier in the year, the folks at Morningstar chose their domestic stock fund manager of the year: Will Danoff, who oversees Fidelity's mammoth Contrafund (FCNTX). The fund, which sports an expense ratio (annual fee) of less than 1% and no load, has returned a compound average annual return of 11.9% over the past five years and 7.6% over the past decade. Those might not sound amazing, but recent years have been tough in the market -- those returns beat the market handily, each by nearly five percentage points. The fund's top holdings recently included Monsanto
Hearing of Danoff's honor, I thought I'd look into him a little more, to see what wisdom he's shared with investors. Here are some of his perspectives on investing, from interviews and profiles I found of him online, along with some commentary from me:
- As he puts it, Danoff invests on "the vanguard of the entrepreneurial spirit of our country." Not only is that patriotic, but it's also rather profitable, as it got him into some big search engines such as Google
(NASDAQ:GOOG)early. Biotechnology is another interest of his, and his investment in Genentech (NYSE:DNA)is up some 45% this year. This is not unlike our Motley Fool Rule Breakers investment style, which seeks out dynamic young companies breaking the mold and finding new ways of doing things.
- He notes, "I've tried to buy companies that I can own for three to four years." Other successful fund managers also aim to turn over their holdings relatively infrequently. My colleague Amanda Kish has addressed turnover in funds, noting that good managers have to draw a balance. If they make too few active trading decisions, they're not really doing their job or justifying the fees they earn. Yet trading too much causes high costs and tax consequences.
- Danoff has explained that for fund managers, "You don't have to be the best fund in a big up year -- you just have to consistently be in the top quartile." That might seem unambitious, but it's actually smart. That's because when fund managers try to land on "best funds" lists that focus on the short term (such as the past three months or a year), they often end up trading much more actively than is ideal. They feel pressure to be holding whatever stock has been soaring lately, and in an effort to do so, they generate a lot of trading commission costs that shareholders ultimately pay for. Worse still, they can end up not being patient enough, not giving the stocks they bought enough time to perform.
- Danoff mentioned that he's "not a big fan of megacaps," because "in a slow economy, these bigger companies have trouble growing." Although that intuitively makes sense, even big companies can post strong growth. Look at Wal-Mart
(NYSE:WMT)and ExxonMobil (NYSE:XOM), and their recent performance, in an economy that can hardly be called charging. Well, Wal-Mart upped its revenue by almost 10% year over year in its second quarter of 2008, while ExxonMobil increased its year-over-year sales over 40%. Those results aren't too shabby. ExxonMobil's earnings grew 14% from last year's second quarter, while Wal-Mart's were up nearly 17%, which is rather impressive.
- When asked how he responds to criticisms that the fund, with assets topping $70 billion, is too big, Danoff skirted the question a bit. It's a fair question, because as funds grow huge, they're much less nimble, and it becomes harder for them to perform well. It's the same problem that Warren Buffett has -- but while Buffett's company may not grow as briskly as it did when it was smaller, it's still a compelling investment.
Finally, when asked when it's the right time to sell a stock, he said that you should do so when you have a better idea for your money. I agree, but I'll add that if a holding has surpassed its fair value significantly, it can be smart to sell, moving those assets into something undervalued (and therefore more likely to appreciate soon).
Danoff has served his shareholders very well and continues to do so, as do a host of outstanding fund managers. Contrafund is closed to new investors right now, but if it reopens -- as many other funds have -- it's worth a look.