Fidelity Contrafund Hurt By Tech, Helped By Genentech

The long-time manager of Fidelity Investments' Contrafund, one of the largest mutual funds, said he held on to technology stocks such as Google Inc. (GOOG) and Apple Inc. (AAPL) too long last year but correctly passed on troubled financial companies.

The recently reopened fund was also helped by its big stake in biotechnology firm Genentech Inc. (DNA), said Will Danoff, who has managed it since 1990. Fidelity published his overview of the fund's performance on its Web site.

Returns in the $45.9 billion Contrafund plummeted 37.2% in 2008, about matching the decline in the Standard & Poor's 500 index while outperforming more troubled Fidelity notables such as the Magellan Fund and the Growth & Income Portfolio.

Morningstar.com gives Contrafund five out of possible five stars and gives Danoff high praise.

But in looking at 2008, Danoff said, "I'm very disappointed with this result, and I take no solace in observing" the S&P 500 performance match, or the fact the fund outpaced others at Fidelity and much of its peer group.

"It was still a horrible year for the global economy," Danoff added.

Regarding specific moves, the manager said, "I was late in reducing some of my holdings in the tech sector," particularly in Internet-search giant Google, consumer-electronics heavyweight Apple and mobile-phone maker Research In Motion Ltd. (RIMM).

Google and Apple were among the fund's largest holdings last year, and they stayed there in January, according to new Fidelity data. Google was the top holding in January with a market value $2 billion, representing 4.4% of the fund's net assets, Apple was No. 5 in January with a $1.1 billion market value, while Research In Motion was further down the list.

Shares of both Google and Apple fell more than 55% last year, while Research In Motion tumbled 64%, with all three performing far worse than the broader market. Apple and Google have reclaimed a tiny fraction of that lost ground in the new year, but Research In Motion has continued to slide.

"In retrospect, I was too ebullient about their long-term prospects," said Danoff, who added that "picks in the retailing and capital good groups also hurt" last year.

He also noted that he started to pull back on exposure to growth-oriented energy production companies after oil prices peaked and then started declining, but that he was underexposed to "more-stable earners" such as Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX). The prices of both energy companies declined less than the broader market last year, although their stock value has been hit hard in 2009.

The fund was helped greatly, on the other hand, by heavy exposure to biotechnology firm Genentech, which saw its stock price improve by nearly 24% last year amid a takeover offer from Roche Holding AG (RHHBY). Genentech, Contrafund's second-largest holding in January and the biggest in December, "made the biggest contribution to relative performance," Danoff said.

He also highlighted his decision to pass over "big problems" among financial stocks, such as troubled insurer American International Group Inc. (AIG) and bank Citigroup Inc. (C), where the fund had "big underweightings." Additionally, Contrafund didn't have any stake in mortgage-company Fannie Mae (FNM), Danoff noted.

A small position in General Electric Co. (GE), "whose troubled financing unit pulled down the value of its stock, also helped, as did a moderate position in cash," he added.

Looking ahead, the manager noted dramatic efforts by governments and central banks to try to stabilize the global economy. "Given these actions, I believe it is possible that the outlook for corporate profit growth and equity prices could improve by the end of 2009," Danoff said.

He also added that he still finds blue-chip growth stocks "to be one of the most attractive groups of stocks to own" and called the group "stable and cheap."

Fidelity reopened Contrafund to new investors in mid-December to balance out a trend of assets leaving the fund as investors retire. It had closed to new accounts in April 2006.

- By Jon Kamp, Dow Jones Newswires; 617-654-6728; [e-mail]