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Asked what the difference is between running $300 million--the Contrafund's initial stake--and its present billions, Danoff, a rumpled 36-year-old, smiles and says, "I'm working harder." At this size, just buying or selling a meaningful amount of stock can be difficult. "I won't take a half-million-share stake in a day," he says. "I'll buy 50,000 shares a day for months to build up a position." Danoff is candid about the downside of running a fund so large: "You're racing a Mack truck against a speedster [i.e., a smaller, competing fund]. I go 45 miles per hour, and the speedster goes 70 miles an hour. But he may spin out at some point. I'll do well if I stay out of trouble."
Should investors be concerned that the size of Fidelity's funds makes them unwieldy? "It's a reasonable worry," Danoff says. "I would close my fund [to new investors] if I really didn't think that I could beat the market over time." That is the standard answer to this question from Fidelity managers, but of course, it's not really an answer; it's a promise.
Fidelity's investment techniques have historically produced market-topping returns--and commensurate fees. Beating the averages, such as the S&P index, is what Fidelity is being paid for. Magellan, for example, charges $9.50 each year for every $1,000 under management. By contrast, the Vanguard fund that passively mimics the S&P 500 charges only $2 for every $1,000. Overall competition in the industry has become so tough that Fidelity has had to lower fees on some of its funds.
The real test for a fund is beating an index like the S&P 500. If you can't beat an average, then you aren't investing with any more skill than you would if you chose stocks randomly. How hard is it to beat the S&P 500? Really hard. Over the past five years, 63% of all diversified-equity mutual funds have failed to do so. The greatest Fidelity performer of all, of course, was Peter Lynch. During his 14 years of managing Magellan, he averaged an annual return of 29.2%; the S&P 500 index rose 15.8%.
Producing new Peter Lynches is the entire purpose of Fidelity's equity division. Take Brian Posner, 35, who runs Equity-Income II, a fund with over $14 billion. Between 1992 and 1994, Posner outperformed the S&P 500 by wide margins, but in 1995 his results were lower by about 11 percentage points; this year he's just about even with the market. He calls himself "a quant from the University of Chicago," but he insists that the daily contact with the other managers and analysts is what really helps his thinking. He cautions new analysts against relying too much on technology. "I tell them, 'Don't let it become a crutch to eliminate face-to-face contact.' I want them to feel an emotional stake in this process." Like all the managers, Posner faxes his orders to his trader each morning and usually doesn't trade again all day. Eighty percent of his workday is spent on the phone to companies or meeting with executives. True to his metier, he relies heavily on corporate financial statements: "They tell me what can realistically be accomplished."