Friday, January 19, 2007

Bloomberg's Article on Fidelity Contrafund & Some Thoughts

Updated to fix the link below!

Fidelity's Contrafund (FCNTX, closed to new investors) is a behemoth. At sixty-nine billion dollars, that's with a "b", under management, it is Fidelity's biggest fund, larger now than Magellan, and it trailed the S&P 500 by a noteworthy 4 percentage points last year. It's also significantly behind the S%P over the last ten years, as you can see above. That is a long enough time to mean something.

It has to be extremely problematic to manage such a fund without it just becoming in essence the proverbial "closet index fund", taking active management expenses for index fund performance. To their credit, the fund's managers evidently work hard to set themselves apart, and the fund is well regarded. In general, with such a fund, the manager must, to differentiate it from the index, make not just company picks, but industry or sector picks, or in some funds, perhaps even country picks. To significantly impact the fund's returns, you must put a monstrous amount of money into or out of a sector or industry, let alone a single company's stock. As I said above, Contrafund has worked well in the past, and it is successfully marketed as a choice in many 401(k) plans and variable products.

The key, the point of this post, really the ultimate question about such a huge fund (and it is a fair question, too) is whether the open-end actively-managed mutual fund model itself breaks down, performance-wise, with such a brontosaurus of a mutual fund. The whole idea of active management, to beat the market, when you grow so very large, can reasonably be questioned, even if someone is not a "hard core indexer". It isn't enough to point even at a record of beating a fund's index bogey, but the investor is owed something of a rational basis for the idea of how active management can work on such a scale over a significant time period. Perhaps it exists, I just haven't encountered it yet. Appealing to the supposed very large and highly-advanced brains of the fund managers (I'm quite willing to concede them that,) isn't enough either, when it is mostly having a hard time keeping up with the bogey.

Here's the article:

Bloomberg Exclusive

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