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Chipotle Mexican Grill Inc
Vanguard PRIMECAP Fund
Fidelity Investments’ William Danoff meets with executives from as many as 1,000 companies a year, jots down tickers in a tattered old notebook to identify what he calls “best of breed” companies and shuns an index-tracking approach to managing the $79.5 billion Contrafund.
That has helped Danoff’s fund produce the best risk- adjusted return among the 10 largest actively managed U.S. stock funds over the past decade, according to the BLOOMBERG RISKLESS RETURN RANKING. Danoff steered the fund to the biggest gain over the past 10 years, and achieved that with less volatility than all but one fund in the group, according to the Bloomberg ranking.
“I’m like a doctor whose patients are young, healthy and eating well,” Danoff said in a telephone interview. “That should allow me to do a little bit better,” said the Boston- based fund manager, whose favorite picks include Apple Inc. and Chipotle Mexican Grill Inc. (CMG)
Danoff has beaten the Standard & Poor’s 500 Index as well as rivals by using a research-intensive approach since he took over the fund in 1990, looking for clues about which companies are taking market share away from competitors and which are falling behind. Started in 1967 with the goal of finding contrarian investment ideas, the fund has evolved into one that invests in fast-growing, strong companies that aren’t fully understood by investors. Danoff has said his preference for quality stocks helps insulate the portfolio from volatile markets, providing a smoother ride for investors.
“Seeing all those companies lets him piece together a mosaic of the market better than anyone else,” Christopher Davis, an analyst with Chicago-based Morningstar Inc. said in a telephone interview. “It is all about the execution, the ability to pick stocks is what makes him unique.”
Contrafund (FCNTX) gained 109 percent in the 10 years ended June 11 to produce a risk-adjusted return of 5.7 percent, doing almost twice as well as the S&P 500 by both measures. The $28 billion Vanguard Primecap Fund had the second-best risk-adjusted return among the 10 biggest funds, returning 93 percent over the decade with more volatility than 70 percent of its peers. The $41 billion Dodge & Cox Stock Fund had the worst risk-adjusted results, producing a return of the 55 percent with the highest price swings, according to data compiled by Bloomberg.
The $55 billion Investment Company of America, run by Los Angeles-based Capital Group Cos., had the lowest volatility among the 10 largest funds, Bloomberg’s ranking shows. The fund’s 54 percent gain was the second-lowest of the 10 largest funds. Capital Group’s $114 billion Growth Fund of America, the biggest U.S. active equity mutual fund, ranked fifth by the risk-adjusted measure after rising 73 percent in the past decade with the fourth-lowest price swings.
The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.
Vanguard Primecap (VPMCX), which has has been run since 1984 by a team of managers from Pasadena, California-based Primecap Management Co., had about the same volatility as the market.
Primecap has done well over time by concentrating in technology and health-care stocks, said Daniel Wiener, editor of the New York-based newsletter Independent Advisers for Vanguard Investors in a telephone interview. Its top two holdings, Thousand Oaks, California-based Amgen Inc. and Weston, Massachusetts-based Biogen Idec Inc., are both biotechnology firms.
Danoff’s stock-picking prowess stands out among active equity managers, who have lost favor with investors because many have struggled to beat benchmarks consistently. Danoff beat his peers by roughly keeping pace with the U.S. benchmark S&P 500 in rising stock markets and outperforming peers in periods when stocks were falling. Contrafund captured 97 percent of the gains of the broader markets over the past decade in what Morningstar defines as “up markets,” while experiencing 80 percent of the losses in “down markets.”
“Danoff earns his keep on the downside,” James Lowell, editor of the Needham, Massachusetts-based newsletter Fidelity Investor, said in a telephone interview.
In 2002, Contrafund lost 9.6 percent compared to a drop of 22 percent for the index.
“I’m tickled that my risk metrics look good,” Danoff said.
Danoff, 51, joined Boston-based Fidelity Investments in 1986 after earning a master’s of business administration degree from the Wharton School at the University of Pennsylvania in Philadelphia. He received a bachelor’s degree from Harvard College in Cambridge, Massachusetts.
Contrafund in 2005 shot past the Fidelity Magellan as its largest stock fund as Danoff’s performance attracted a swell of investor deposits. The Magellan fund, which in its almost half- century history has been run by managers including Edward C. Johnson III and Peter Lynch, has declined at an average annual pace of 4.1 percent over the past five years, trailing behind 95 percent of similarly managed funds, and has seen its assets dwindle to $14.5 billion.
Although he is a Danoff fan, Morningstar’s Davis is concerned that the sheer amount of money the manager runs could crimp his flexibility. In addition to Contrafund, Danoff is in charge of the $19 billion Fidelity Advisor New Insights Fund, which has many of the same holdings.
“Size is a negative” because it could limit Danoff to buying only the largest stocks, Davis said.
Contrafund has also not been completely immune to market shocks. The fund moved in tandem with the markets in 2008 after the financial crisis, as investor fears fueled correlation among stocks. The fund lost 37 percent in 2008, matching the overall market’s decline.
Under Danoff, Contrafund has returned 13 percent a year since 1990 compared with a 9.2 percent gain, including reinvested dividends, for the S&P 500. He topped 96 percent of peers over the past five years, with a gain of 2.5 percent.
Contrafund has also had the best risk-adjusted returns, with among the lowest price swings, over the past five and three years, according to data compiled by Bloomberg.
Fidelity, whose $1.5 trillion in assets makes it the second-biggest U.S. mutual-fund company, is known for its emphasis on research using its staff of industry specialists and analysts. When Danoff speaks to Fidelity’s analysts he tells them he wants companies with a durable advantage whose stocks he can hold for five years. Chipotle, the Denver, Colorado-based chain of low-priced Mexican restaurants, meets his criteria.
“They have changed the way people eat fast food,” said Danoff. “This is not just another burrito joint.”
Chipotle and Apple rank among the top 10 companies in the S&P 500 in terms of risk-adjusted returns over the past five years, according to data compiled by Bloomberg.
Chipotle shares are up more than 18-fold since Danoff bought them at the initial public offering in 2006. In the first quarter of 2012, the company’s same-store sales rose 13 percent.
Chipotle is also an example of how Danoff shuns investing based on market benchmarks. The restaurant chain represented 1.2 percent of Contrafund’s assets as of April 30, more than 10 times its weighting in the S&P 500 Index, according to data compiled by Bloomberg.
In his 2011 letter to shareholders, Danoff noted that he had little or no exposure to some of the biggest stocks in the index, including Irving, Texas-based Exxon Mobil Corp. and Armonk, New York-based International Business Machines Corp.
“This is a very actively managed fund,” said Morningstar’s Davis. “It is not an index hugger.”
Fidelity is the largest single owner of Cupertino, California-based Apple, (AAPL) according to data compiled by Bloomberg, and within Fidelity, Contrafund is the largest holder with a 1.4 percent stake in the company.
“If the whole market went down 20 percent, which companies would investors want to own?” Danoff asked. “Outstanding companies like Chipotle and Apple which have good business models.”
Danoff bought 3.4 million Apple shares in the first three quarters of 2009 when the stock averaged $129 a share. “Apple is one of those companies that grew right through the slowdown,” he said. Apple closed June 12 at $576.16.
Danoff’s second-largest position, Mountain View, California-based Google Inc., has not fared as well. Shares gained 2.3 percent a year for the past five years, data compiled by Bloomberg show.
Google, said Danoff, has strong free cash flow and remains an innovative company. “The market just doesn’t want to give them credit right now,” he said.
Fidelity Investor’s Lowell said Danoff has demonstrated that he can outperform no matter how much money he manages.
“There is no question that any fund company or any hedge fund would love to be able to have a stock picker who is as consistently good at what he does,” said Lowell.
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