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Size Does Matter: Why Morningstar Downgraded Fidelity Contrafund

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Morningstar’s downgrading of the Fidelity Contrafund to silver from gold comes with a caveat: The fund “remains excellent,” explains Robby Greengold, a chartered financial analyst who is a strategist with Morningstar, in a recent column.

But its size — around $250 billion — means it is “less agile and adaptable than its large-growth peers,” Greengold states. Most of those, he points out, hold less than $500 million.

Other funds that have the kind of mass of the Contrafund “went on to show significant degradation in their excess returns as their opportunity set effectively shrank and they became harder to maneuver.”

The fund’s performance has been impressive since its inception in May 1967. From 2012 to 2020, it had only one down year: 2018, when it was -2.13. It had largely double-digit returns in other years. Year to date, the fund is down almost 11%.

Fund manager Will Danoff has been “masterful” in his leadership, Greengold writes, noting that when the fund was smaller, “it consistently achieved risk-adjusted results that far exceeded its benchmarks.”

Since the late 2000s, however, Danoff “has pulled back on the frequency of his portfolio trading and now keeps annual turnover below 40%,” Greengold writes.

Another issue is that since 2014, Danoff has moved toward large- and mega-cap stocks, such as Meta Platforms, Berkshire Hathaway and Amazon, which hold about a 90% share of the portfolio.

Greengold notes that large-caps might be hitting a rough period today, especially in the recent market correction. Further, he says, “in an environment when small caps are in favor, this strategy’s results may look more pedestrian.”

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