A recent article in InvestmentNews caused Alpholio™ to revisit its analysis of Fidelity Contrafund originally published in early 2013. The article says

Over the past few years, stock fund managers have struggled mightily to beat their indexes consistently, but you’d never know it by looking at the track record of Fidelity’s William Danoff.

The 23-year veteran and manager of the flagship $111 billion Fidelity Contrafund (FCNTX) is beating the S&P 500 over the trailing one-, three-, five-, 10- and 15-year trailing time periods as of Jan. 17, according to Morningstar Inc.

First, it has to be noted that for the past eleven years Morningstar classified FCNTX in the Large Growth category, while the S&P 500® index is traditionally considered a benchmark for Large Blend funds. Therefore, it may be more appropriate to compare the performance of FCNTX to that of an large-cap growth index fund, such as the Vanguard Growth Index Admiral (VIGAX). It turns out that in terms of returns, FCNTX beat VIGAX in each year from 2003 to 2008 but in no year afterward until 2013. This caused the annualized three- and five-year returns of FCNTX to be lower than VIGAX’s. However, FCNTX outperformed VIGAX in terms of the Sharpe Ratio over the three-, five-, ten- and fifteen-year periods.

The recent return shortfall can be attributed to a large size of the fund — over $111 billion in assets, trailing only one other actively-managed fund. The article quotes the FCNTX manager admitting that:

“Larger funds have a higher degree of difficulty,” Mr. Danoff said in a rare interview last summer. “For me, it’s the ability to make big bets — it’s harder. My denominator is so big that it’s not that easy to find really great stories at scale.”

Let’s again take a look at the fund’s cumulative RealAlpha™, updated through last December:

Cumulative RealAlpha™ for FCNTX

In 2013, there was no material change in risk-adjusted performance of the fund until the second half of the year. However, after peaking in October, the cumulative RealAlpha™ declined in the last two months. While for the year the fund managed to return 1.75% more than VIGAX, Alpholio’s longer-term assessment of FCNTX stayed the same. Even prior to 2009, the fund’s cumulative RealAlpha™ was roughly flat, and since then, the fund mostly failed to beat its reference portfolio of exchange-traded funds (ETFs). Since early 2005, the fund’s annualized RealAlpha™ was negative 1.35% with respect to a reference portfolio of comparable volatility.

The fund’s reference portfolio has not changed much since the last analysis, except the average historical weight of iShares MSCI Emerging Markets ETF (EEM) became smaller than that of the Vanguard Consumer Staples ETF (VDC):

Reference Weights for FCNTX

In 2013, the reference portfolio continued to be dominated by the iShares Morningstar Large-Cap Growth ETF (JKE; average 12-month weight of 51.3%), iShares Morningstar Mid-Cap Growth ETF (JKH; 14.4%), Vanguard Health Care ETF (VHT; 10.0%), and PowerShares QQQ™ ETF (QQQ; 5.4%).

In sum, from Alpholio™’s perspective there does not appear to be any indication of a permanent change in the fund’s longer-term performance. Since 2005, investors would have achieved better results with a reference portfolio of ETFs and, in the last several years, higher returns with a comparable index fund.

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