INTERNATIONAL – Will Danoff is wondering why billions of dollars keep flowing out of the Contrafund, the giant mutual fund he manages at Fidelity Investments. Performance is not the problem. He is up 21 percent this year, trouncing S&P 500’s 6.2 percent return.
His conclusion: today’s kids want something sexier.
“There’s a demographic issue,” said Danoff, who has beaten the benchmark by an average of more than 3 percentage points annually over three decades, in a Bloomberg Front Row interview. “We need to appeal to the Gen Zers and the younger generation as well, and luckily I think our app is quite good. But you know, a typical Gen Zer may not be as interested in owning a mutual fund.”
That assessment, from one of Fidelity’s biggest stars, captures the angst of an entire industry. For years, traditional mutual funds have been losing a bit of favour. Many investors have been turned off by chronically poor performance, and others objected to paying commissions or annual fees that often approach 1 percent.
There is now less money in actively managed US equity funds than in low-cost alternatives such as index funds and exchange-traded funds that track the market instead of trying to beat it.
More recently, young investors have flocked to Robinhood Markets, making commission-free trades with a few taps on their smartphones.
Next to the social media antics of celebrity speculator Dave Portnoy, Danoff’s world of buy-and-hold discipline seems antique by comparison.
“When I started in 1990, there were 261 equity funds, and now there are thousands,” said Danoff, who manages $230 billion (about R3.7 trillion).
“There are thousands of hedge funds. There are thousands or millions of Robinhood investors. There’s sovereign wealth funds, etc. So there’s no question that it’s become much, much more competitive.”
Closely held Fidelity remains one of the titans of asset management, running $3.3 trillion, and unlike most competitors the firm has embraced exchange-traded funds, runs a discount brokerage and even developed expertise in cryptocurrencies.
Danoff said access to Fidelity’s vast resources is one of the reasons he’s been able to outperform the S&P 500 for so long.
Yet he also recognises the appeal of index products, whose growth in the 2010s eroded the economics of mutual funds and bookended the era when managers such as Peter Lynch, Bill Miller and Ken Heebner were household names. Last year, 71 percent of US large-cap managers failed to beat the benchmark, according to S&P Global.
“One issue with investing in any actively managed fund is what happens when the fund manager retires or if the fund manager loses his fastball,” he said. “And, second, do I still trust my fund manager?”
Managers also make mistakes. In Danoff’s case, he unloaded most of the Contrafund’s position in Tesla in 2017 and 2018, missing out on more than $10bn of gains. Now, he is stuck in limbo, confident that electric vehicles have a bright future, that Tesla is a great company and Elon Musk is a “remarkable executive.” But he is apprehensive about buying into a capital-intensive business, not to mention the stock’s $411.6bn valuation.
At the same time, Danoff has stuck with Berkshire Hathaway, even though its returns have lagged behind the S&P 500 over the past decade.
“The more I’ve spent time with Warren Buffett and attending annual meetings in Omaha, the more I like it,” he says. “With all my tech holdings, this is a very good counterbalance and some ballast for the big fund.”
Size is something Danoff has to wrestle with, especially in the $139bn Contrafund. As a manager who focuses on earnings growth, he built some of his top holdings in Amazon.com, Facebook, Apple and Alphabet – companies so powerful that they have become targets for antitrust regulators.
“I do worry about that,” he says.
For now, the Covid-19 pandemic has been a boon to Danoff’s portfolio, validating his long-term bets on software, social media, cloud computing and digital payments. The times also forced him to reckon with the role corporate America – and the investors who back it – plays in issues such as climate change, economic inequality and systemic racism.
“Speaking up for civil rights or equal rights attracts a better-calibre employee,” Danoff says. “The great companies I’m invested in care deeply about our country. They care deeply about the environment and they realise making all stakeholders happy is good for business and good for the shareholders.”