Mutual Fund Site

Large cap growth funds have become an interesting point of study for us. With retail investors pulling more money out of these mutual funds than they are with any other asset class out there, it is nothing short than perplexing why few people are not seeing the tremendous opportunities out there to dump money into these funds. After all, professional investors are seeing these opportunities and while they may not be investing in large cap equity funds, they are looking at riding this segment.

The Fidelity Contrafund (FCNTX) is a large cap equity fund that has a fairly respectable track record as well as a strong reputation, thanks in large part to the fund manager who has been with the fund for over two decades now. Trailing returns from the extremely short term (such as 1-week) all the way through to the long term (such as the 15-year) have all exceeded the trailing returns for the S&P 500, as well as the fund’s peers’ average. This is an exceptional feat, no questions about it.

On yearly returns, though, the fund might be easily discounted. Since 2001, the fund underperformed the S&P 500 in four periods. They were often short by less than 1% (in just 1 period was the fund a sub-performer to the S&P 500 by 4.25%). Over the same period the fund provided investors with 4 periods of negative returns, coinciding with the years where the broader market experienced negative returns (2000, 2001, 2002, and 2008). All other years provided firm, double-digit gains, enough to allow the fund provided favorable trailing returns that exceed the broader market’s.

One of the biggest determinants to whether a mutual fund is considered a good “buy” prospect is to understand its biological composition. Since this composition will evolve, just as our bodies do, seeing how well it is managed today can often provide hints into whether it should continue to provide similar returns in the future.

Well Diversified Holdings

One of the obvious traits we find with this equity fund is that it is well diversified. This is particularly important for investors who plan on holding a particular mutual fund as part of their core portfolio holdings. With 472 different equity positions, this fund has certainly allowed for diversification to exist. But with 29% of these assets in the fund’s Top 10, we must also inspect those top holdings a little closer to see whether they make sense from a risk perspective.

First, the sector holdings tell us that the fund has spread its risk quite well. Its largest exposure is in Hardware, an 18.9% exposure versus its peers’ average of 17.3%. The mutual fund’s largest holding happens to be Apple, a hardware firm, that has returned roughly 44% on a YTD basis (more on this later).

The second and third largest sector exposures are Consumer Services at 12.75% of assets (versus its peers at 11.14%) and Financial Services at 12.7% (versus its peers at 10.94%). The bias here is to clearly take on risks where other large cap growth funds are not and so far it has been strong decision for the fund, which its Top Holdings will show.

However, it is worth noting that the fund’s largest exposure is just 18.9%, signaling that the risks are fairly well diversified across different sectors. Variance from the average is not overly aggressive and when looking at the weightings compared to the benchmark, the S&P 500, we see that its biggest bet has indeed been on the Hardware side with Consumer Services and Financials well below the index average.

Top Holdings – Names You Know

This mutual fund’s top holdings are names we have all gotten to know and love over the years. These highly recognized names should provide retail investors with the comfort they often want when investing in actively managed equity funds.

Apple, Inc. at 6.42%, YTD Return of 44.85%

The name Apple has been synonymous with capital gains over the past four years and so. With a strong retail offering and technology that continues to inspire consumers, Apple’s run seems unlimited. The mutual fund continues to add to this position, indicating its belief that Apple’s product pipeline and revenues are sure to keep growing. Risks here are also well known and publicized (Steve Jobs’ health, competition from Blackberry and other Smartphone manufacturers as well as computer manufacturers, etc.), making the investment less risk for a lot of investors. With a single security in such a large mutual fund taking up so much risk, transparency is of utmost importance.

Google, Inc., at 4.64%, YTD Return of -0.23%

Although Google has been flat for the year, this is also a highly recognizable name with plenty of growth and revenue potential. Google’s advertising revenues remain strong even in the face of economic uncertainty and its healthy research and development programs allow it to change the face of the internet in a way that should benefit them most. We like Google as a growth play and can applaud the Fidelity Contrafund for continuing to add to this position.

Berkshire Hathaway Inc at 3.94% of assets, YTD Return of 20.99%

The heavy investment in Berkshire Hathaway allows this fund to work with the world’s most prolific billionaire investor. Almost everyone knows the name Warren Buffett, yet few can actually own a piece of Berkshire given its steep stock price. Although changes at Berkshire certainly pose some risks to the stock price, it seems unlikely that the fundamentals will change anytime soon. The Fidelity Contrafund has continued to add to this position, although quite modestly.

Review of Top Holdings

None of the names above should be too unfamiliar to investors, providing a level of comfort. Luckily, these names have also performed with the exception of Google. (For the record, the fourth largest holding, McDonald’s is a Consumer Services exposure at 2.68% and has a return of 26.76%). In fact, the mutual fund’s top 10 holdings are all names even the most novice investor will know, either culturally or through the media: these are not unfamiliar names that will frighten people.

Overall, the fund provides a good deal of comfort in the way it has invested. Although many investors might wish to see more weighting in Apple, the fund’s limitation here is a strong point as it allows the diversification one would expect from a large cap equity fund. And seeing such names in a fund’s top holdings provides a great deal of explanation and understanding with respect to the hefty 29% of holdings being invested in the Top 10.

Who Should Own This Fund

This is a comfortable equity mutual fund. It can easily be held as one’s core equity exposure, regardless of the investor’s risk profile. Morningstar‘s rating of 5-stars across all possible rating slots (3-year, 5-year, 10-year and Overall) certainly adds reassurance to the strong track record, solid diversification choices and top holding picks of the mutual fund. We can easily see the Fidelity Contrafund in anyone’s portfolio.