BOSTON (TheStreet) -- Will Danoff, manager of Fidelity's Contrafund (FCNTX) - Get Report, the best-performing large-cap mutual fund this year, has used some of his $72 billion in assets to buy technology stocks to rebound from a loss earlier this year.
Contrafund, Boston-based Fidelity's biggest mutual fund, is up 17.2% in 2010, compared with a decline of 4.8% in June. The benchmark
S&P 500 Index
has risen 14.7%. The fund is closer in line to performance with the technology-heavy Nasdaq, up 18%.
Danoff has made
the fund's biggest holding, with a $5 billion stake, which is more than most funds' total assets. Other top positions include
, Warren Buffett's
But more strategic is Contrafund's allocation of 39% toward information technology, up from 30% in the first half of the year, according to Fidelity data. Danoff's fund peers carry a 13% IT allocation.
Danoff is bullish, in particular, on computer-hardware and semiconductor shares. Computer networking and the demand for more bandwidth and speed is driving expectations for hardware growth, as well as a view that the economy is recovering, which will result in more IT spending. The U.S. economy grew a faster-than-originally-reported 2.6% in the third quarter, the government reported yesterday, prompting bonds to dive and stocks to rise.
Contrafund's biggest bet within IT is on computer-hardware stocks, now at 19% of the fund, 6 percentage points more than other large-cap rivals, according to Morningstar.
Danoff, now in his 20th year at the helm of the behemoth fund, was unruffled when he was producing losses earlier in the year. He tipped his hand regarding his plans for the rest of 2010 when discussing performance, saying "I added to my commitment to technology, a sector I believe still holds enormous potential."
Apple, up 53% this year, has driven the fund's returns. It started 2010 as Contrafund's second-largest holding. Between price appreciation and the addition of shares, including a 67,900 purchase in the quarter ending Oct. 30, Contrafund owns 16.4 million shares of the maker of the iPhone and iPad. The stake represents 1.7% of Apple's outstanding shares.
On the following pages are some of Danoff's favorite stock picks, in addition to Apple.
The Internet search-engine provider
, the fund's largest holding at the start of the year, and now its second at 5.5%, has been a disappointment, losing 2.7% of its value this year.
But Danoff remains loyal, although he trimmed the fund's stake slightly in the first half of the year. Reflecting on its poor performance at mid-year, when it was down 28%, he said he thought Google "and its YouTube video, DoubleClick online advertising and Android mobile-phone operating system subsidiary still held a lot of promise" and that investors had bailed on it in the belief that the social-networking leader, privately owned Facebook, would hurt Google's long-term growth.
But 2011 could be a breakout year for Google. The company recently said its growing mobile business should generate more than $1 billion in annual revenue, and its display-advertising unit should contribute $2.5 billion. Earnings are expected to increase 17% this year. And it's a cash cow as indicated by the $33 billion in cash on its balance sheet, equivalent to $104 a share, and only $2 billion of short-term debt.
A recent fund favorite is database-software giant
, as Danoff beefed up the stake by 1.7 million shares in the most recent quarter to bring the allocation to 1.3% of the fund. It's Contrafund's 14th-largest position. Oracle's shares are up 30% this year, and its value within the fund rose from $724 million at the start of the year to $897 million Oct. 30.
Oracle is diversifying into networking and hardware through acquisitions. It has spent $35 billion since 2005 on them, including the $7 billion purchase of Sun Microsystems last year. As of Nov. 30, the company had $24.8 billion in cash and only $17 billion in debt on the books.
Although computer-industry standbys such as data-storage provider
and networking-services provider
remain top-40 fund holdings, others have passed them in the ranks.
, with a market value of $11 billion, is a larger Contrafund holding than Cisco, which has a $108 billion market cap.
That may be because F5, a maker of network-traffic-management systems needed to carry bandwidth-intensive applications, such as video, and application-switch networks, is eating Cisco's lunch. F5's revenue jumped 35% in its most recent fiscal year, and it's forecast to better that pace in the current year and much more spectacular growth is expected. Its shares are up 158% this year.
As for the semiconductor industry, Danoff said consolidation "has boosted that industry's profitability and reduced its volatility," which is why he's been lifting his stake.
Fund favorites in the sector, judging from their ranking in the top-25 holdings, are
, the latter up 60% this year.
Not far behind are
Curiously absent from the group of 100-largest stocks is semiconductor industry bellwether
, which was a $78 million fund stake at the start of the year. It's up 3.4% in 2010.
Altera, a leader in the programmable logic device chip market, has booming revenue due to strong chip sales to communications-infrastructure providers, such as wireless carriers that are pushed to expand bandwidth as the use of 4G mobile offerings expand.
Danoff's reputation as a stock picker is reinforced by some of the stocks he didn't buy this year. "In a down market, avoiding problems can play a big role in the fund's performance," and pointedly cited the absence of
in his portfolio as an example of that. "I did not own benchmark constituent and software giant Microsoft, and the fund benefited." Its shares are down 8% this year.
Although it's the 30th-largest fund holding at $441 million, Danoff may also be losing interest in computer-hardware maker
, as the fund shed 2.1 million shares in the period ending Oct. 30. The company has had a tumultuous year, including the controversial replacement of its chief executive. Its shares are down 19% this year.
Instead, Danoff is betting on stocks such as
, which develops and sells software tools that enable enterprises to efficiently manage and deliver software applications over computer networks. It's now a top-30 holding, just ahead of Hewlett-Packard in the allocation rankings, although its market capitalization is only $13 billion versus H-P's $91 billion.
Citrix shares have gained 68% this year. Revenue is expected to grow at a double-digit clip over the next five years, and it's a big cash generator. As a result, it holds $1.4 billion in cash and has no long-term debt.
In sum, Contrafund's assets have gyrated this year. It began the year at $64 billion, tumbled to $61 billion at mid-year and now stands at $72 billion. Fund assets can be affected by investor flows as well as changes in prices of underlying stocks.
The fund's diverse portfolio is made up of 502 stocks and two bonds, yet it has 30% of its assets in the top 10 holdings.