Fidelity Contrafund Contrarian? <I>Au Contraire</I>

BOSTON (TheStreet) -- The Fidelity Contrafund (FCNTX) is loaded with some of the most widely held stocks, including an outsized bet on technology darling Apple (AAPL), which may mean the mutual fund's risk-taking, "contrarian" days are over.

Contrafund is the single-largest shareholder of Apple at 1.7% of the device maker's outstanding shares. It's a $5.4 billion stake that makes up 6.8% of the mutual fund.
Fidelity Contrafund manager Will Danoff

The fund has squeezed Apple, the maker of iPads and iPhones, for all its worth, as its stock has been a double-digit contributor to its returns for at least the past five years, due to Apple's average annual return of 41% for the period.

And its joy ride is not over yet, as Apple's shares hit an all-time peak of $400 July 26 and is now trading at $385.65, a gain of 22% this year, which puts it on pace to maintain its five-year average annual return.

Other top-five holdings of Contrafund, which are likely to be found among the most popular picks of large mutual funds, are: search-engine company Google ( GOOG), at 4% of the fund, valued at $3.2 billion; Warren Buffett's Berkshire Hathaway ( BRK/A), 3% of the fund, valued at $2.4 billion; the fast-food chain McDonald's ( MCD), at 2.5% of the fund, valued at $2 billion; and beverage maker Coca-Cola ( KO), at 2.2% of the fund, valued at $1.7 billion.

Morningstar analyst Christopher Davis said in a June 10 research note that because of the fund's huge asset base, longtime manager Will Danoff has shifted the fund's focus from mid-cap and small-caps stocks to a "growth-at-a-reasonable-price philosophy," which means "the fund is now dominated by larger fare."

Indeed, eight of its top 25 holdings are also in the top 25 of the S&P 500 Index and there's a lot of overlap further down the roster as well.

But any potential criticism of Danoff from wandering from Contrafund's agenda, which according to Fidelity's definition is "investing in securities of companies whose value (Fidelity) believes is not fully recognized by the public," is mitigated by his track record.

Danoff took over the then-$300 million Contrafund in 1990, and through his stock-picking acumen has built it to a $78 billion fund as of June 30, with a mind-boggling 494-stock portfolio.

The steady returns are what have lured investors, and this year is no exception as inflows through June 30 were about $3.5 billion.

Contrafund is down 3% over the past three months, but up 3% this year through Aug. 3 on a cumulative total-return basis, versus the 6.6% decline of the S&P 500 over the past three months and a 1.3% gain this year.

More telling of its success, Contrafund has a 10-year average annual return of 7% versus the S&P's 2.3%, a performance that puts it in the top 1% of all funds in the large growth fund category.

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As for its second-quarter investment activity, Contrafund is apparently souring on big U.S. banks, perhaps a sign that it views the economy as continuing to weaken.

Danoff sold about 2.7% of his Wells Fargo ( WFC) shares, although it remains its eighth-largest holding in the portfolio with a value of $1.4 billion at June 30. Wells Fargo's shares are down 6.3% over the past three months and 12% this year.

Contrafund sold 6.4% of its Citigroup ( C) shares, shrinking its stake to $685 million, which is 0.87% of the fund. Citigroup's shares are down 18% over the past three months and 22% this year.

The fund also cut its stake in investment-banking firm JPMorgan Chase ( JPM) by 10% to $424 million, making it 0.54% of the fund.

And it sold 24% of its Visa ( V) shares, reducing its stake to $535 million, or 0.7% of the fund. The credit-card provider's shares are up 5.8% over the past three months and 19% this year.

Conspicuously absent from Contrafund's portfolio is the national banking giant Bank of America ( BAC).

The fund's biggest buy in the quarter was 1.1 million shares of Qualcomm ( QCOM), which brings its stake in the developer of a key communications standard used in wireless networks to $9.4 million.

Among the stocks it initiated holdings in during the period are: health-insurance provider Humana ( HUM), auto-dealership owner Penske Automotive Group ( PAG) and yoga clothier Lululemon Athletica ( LULU).

The fund closed out positions in Canadian oil exploration and development firm Ivanhoe Energy ( IVAN), selling 6 million shares; phosphate and potash producer Mosaic ( MOS), selling 1.2 million shares; Renren ( RENN), which operates a social-networking Internet platform in China, selling 3.3 million shares; and casino developer Wynn Macau Ltd., selling 3.9 million shares.

The fund held 4.6% cash at June 30, up from 2.8% at the end of May, but down from the 5.2% at the beginning of the year. Some of those changes are influenced by the pace of investor inflows.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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