Dear Mr. Market:

You need to hear about another mutual fund like you need a new hole in your head. That being said, however, how about we talk about one that’s been around for a long time? They must be doing something well….right?

We’ve certainly not held back with our opinion in the past when it comes to mutual funds. While they certainly can warrant a spot in many portfolios, they need to be reviewed and compared carefully to their peers and other investment options. Today we are going to take an in-depth look at a fund we see in many portfolios but very few individuals actually understand what it is. The Fidelity Contrafund (FCNTX) is one of the largest actively managed equity mutual funds there is with assets just under $110 billion!

Fund Information:

The Fidelity Contrafund (FCNTX) is managed by William Danoff.   He has been the sole manager of the fund since September 17, 1990.

Inception Date: May 17, 1967

Net Assets: Approximately $108 billion

Current NAV per share:   $99.06

Alpha:   .06 (1 yr.) -0.10 (3 yr)

Beta:   1.01

Standard Deviation: 11.54

Portfolio Turnover: 46%

Expense Ratio: .67%

FCNTX has a minimum investment of $2,500 and minimum subsequent investments of $500 in taxable accounts. For IRA’s the minimum is $500.

Strategy:

The Fidelity Contrafund’s primary goal is capital appreciation. The fund typically invests in common stocks that the manager believes are not fully recognized by the investing community and offer future growth. It invests in both domestic and foreign positions and has both “growth” and “value” oriented stocks. It incorporates primarily a fundamental oriented analysis when selecting positions. William Danoff is known as one of the hardest working managers in the industry, often meeting with up to 20 different companies a week as he looks for new investment opportunities.

Morningstar currently classifies FCNTX as a Large Growth fund. The fund is actively managed with a turnover rate of 46%. Due to the size of the fund itself and the equity positions it holds it has been suggested in the past that it should be considered a ‘mega’ or giant cap fund.

Current Allocation and Holdings:

Percentages for the Fidelity Contrafund (CLICK HERE)

86.20% Domestic Equities

8.88% International Equities

0.02% Bonds

4.90% Cash

The current equity position sector breakdown:

25.41% Information Technology

17.2% Consumer Discretionary

16.11% Financials

13.37% Health Care

7.26% Consumer Staples

7.11% Industrials

6.00% Energy

2.42% Materials

0.15% Telecommunication Services

0.03% Utilities

FCNTX currently holds 95% of its funds in equities, of this 86% are U.S. stocks. The fund buys international stocks but typically prefers to focus on domestic equities that may benefit from growth overseas. When compared to the S&P 500 the fund is over-weighted in: Information Technology (25.41% vs 18.54%) and Consumer Discretionary (17.24% vs 11.81%). It is underweighted in: Industrials (6% vs 10.60%), Energy (6% vs 10.60%) and is essentially void of Telecommunication Services and Utilities which make up almost 6% of the S&P 500.

Top 10 Holdings

Berkshire Hathaway Inc. Class A   4.54%

Google Inc. Class A   3.48%

Google Inc. Class C   3.48%

Wells Fargo & Co   3.20%

Apple Inc.   2.86%

Noble Energy Inc.   2.31%

Biogen Idec Inc.   2.21%

Facebook   2.17%

TJX Companies   2.05%

Walt Disney Co.   2.02%

At the end of the first quarter FCNTX announced that it held a total of 320 positions in its portfolio. The top 10 positions currently make up nearly 30% of the portfolio. The fund has a P/E (price to earnings) ratio of 20.35 and a P/B (price to book) ratio of 2.92. Yield is not a focus of this fund and it currently offers a nearly non-existent percentage of 0.12% to its shareholders as it focuses on price appreciation.

Performance:

Looking at the last 10 years the fund has posted some impressive returns from 2004 to 2007 (15.07%, 16.23%, 11.54% and 19.78%). In 2008 the fund was down -37.16% while its benchmark (S&P 500) was down -37%. More recently the fund has essentially tracked the S&P 500, in 2013 it outperformed its benchmark by 1.76% while underperforming in 2011 by -2.25%. Through the end of May, 2014 the fund is posting returns of +1.93% and the S&P 500 is up 4.97%.

As of 6/27/14 FCNTX has had the following performance vs. the S&P 500:

Past month:   +3.43%   (+2.22%)

3 months:   +4.2%   (+5.7%)

YTD:   +2.99%   (+5.73%)

1 year:   +20.62%   (+20.45%)

3 year:   +14.39%   (+15.15%)

5 year:   +17.82%   (+18.40%)

10 year:   +9.99%   (+7.77%)

For updated Morningstar Trailing Performance click here or you can compare it to other funds or indexes using simple tools like Google finance by clicking here

Fees:

The fund charges a management fee of 0.51% with “other expenses” amounting to 0.15% which total for an overall operating expense of 0.67%. This is in line with many of its competitors but are you getting what you pay for? When it comes to mutual funds like this you need to see if paying the fees (even in a no-load fund) are worth it enough and that the fund consistently beats its benchmark.

The total cost for every $10,000 you invest in FCNTX is as follows:

3 years           $214

5 years           $373

10 years         $835

It is important to remember that fees, no matter how you break them down, are always a drag on performance! In this case at least FCNTX is a no-load mutual fund but you’re still paying for performance similar to the market itself.

Taxes:

One issue that caught our attention was in regards to taxes and the potential capital gains exposure (PCGE). This is common with many large mutual funds and can have a profound impact on investors.   Morningstar calculates the PCGE at 45.42%. This is an estimate of the percent of a fund’s assets that represent gains that have not yet been distributed. Prospective investors need to take notice of a large number like this as it could have a huge impact if purchased in a taxable account. This is one of the issues with mutual funds – investors that have not benefitted from past performance can be left holding the tax bill when positions that have increased in price are sold in the portfolio. In certain market environments this can result in shareholders having underperformance and then getting hit with a tax bill as well; talk about insult on top of injury!

Take a moment to wrap your head around some of the imbedded tax liabilities in this fund. Who knows when or how aggressively the fund will sell any of its top 10 holdings but when they do the impact could be huge! With nearly $110 billion in the fund let’s look at the top five holdings (holding periods are not known and this is for illustrative purposes only):

Berkshire Hathaway Inc. Class A (BRKA), a 4.54% position … up +117.58% over the last 10 years.

Google (GOOG), for a combined 6.96% … up +976.85% over the last 10 years.

Wells Fargo & Co. (WFC), a 3.20% position … up +82.48% over the last 10 years.

Apple Inc. (AAPL), a 2.86% position … up +1,803% over the last 10 years.

** Everyone’s tax situation is different and unique to their own financial situation. We would encourage you to discuss these numbers with your Tax Professional to discover the impact they could possibly have in regards to your finances.

Conclusion:

As we stated at the beginning of this review we typically have a bias against most mutual funds but hopefully you’ve seen that this review is intended to be educational and informative. While we have held off in sharing our opinion (until now!) we feel it is important to look at all the information before coming to conclusions.

The Fidelity Contrafund is a behemoth in the mutual fund industry as it is one of the largest mutual funds in the United States. The name can be a bit misleading as it leads investors to think that it would be in opposition to or contrast the market. The Fidelity Contrafund is clearly NOT a contrarian fund and perhaps is more like a glorified index fund. When looking at its performance history the fund performs in line with its benchmark, the S&P 500. If you are looking to track the market and incorporate and index approach within your portfolio then this fund could fit the bill but there is a larger issue to consider. With expenses of 0.67% the fund should also be considered an overpriced index. If you want an index fund we would encourage you to consider investments like: iShares S&P 500 (IVV) an exchange traded fund with expenses of just 0.07% or if you prefer a mutual fund the Vanguard 500 Index Fund (VFIAX) with expenses of only 0.05%.

The tax liabilities that lie within the Fidelity Contrafund are something that every investor should be aware of before making any purchase! Keep in mind that this fund has been in existence for 47 years. Investors will pay taxes based on capital gains distributions (click here) whether they have held the fund for 3 months or 45 years. Take caution and don’t ignore the imbedded tax liabilities associated with a fund like this. “It’s not how much money you make but how you get to keep”.

We often see FCNTX in company retirement plans as Fidelity has a massive presence and influence in this space. If you own this fund in your 401(k) or 403(b) that does not mean that it needs to be a position in your taxable investment account. Fees and taxes can erode an investment portfolio at an alarming rate. As we mentioned before, there are many options available to investors today so take the time to research and make an informed decision!

Another factor to consider when looking at FCNTX is that William Danoff has been managing the fund nearly 24 years! The fund is often compared to another giant in the mutual fund industry – American Funds Growth Fund of America (AGTHX). A key difference is that AGTHX has a management team of 12 portfolio managers! That is 11 more than the Contrafund. In September of last year Mr. Danoff asked for assistance with the Fidelity New Millenium Fund (FMILX). Speculation has been made that this could be an indicator that he will eventually phase himself out of management with the Contrafund. Changes in management always impact mutual funds regardless of how that is reported. After such a long tenure you can expect a solid job from Fidelity’s PR team but don’t skim through the possible transition lightly.

If you would like to have another set of eyes take a look at your portfolio or see if FCNTX warrants a position in your portfolio we would encourage you to contact us. Every prospective client receives an in-depth portfolio analysis with specific recommendations.

“Know what you own, and know why you own it.” – Peter Lynch