Fidelity's Danoff is undeterred by lofty markets

Even though equity markets are at elevated levels, legendary U.S. growth investor Will Danoff, who manages the US$106-billion Fidelity Contrafund, argues there are lots of equity opportunities that he can use to fill the newly launched Canadian-based Fidelity Insights Class.

"There is a huge 'pond' of stocks globally and there are lots of opportunities, especially for a fund that is just launching," says Danoff, senior vice-president at Boston-based Fidelity Investments. He oversees about US$146 billion in assets, including Contrafund, the world's largest fund actively managed by one individual.

Last October, the Wall Street Journal hailed Danoff as "The $108-billion Man Who Has Beaten the Market." Since he assumed the portfolio in September 1990, Contrafund has had an annualized 12.7% return to December 2016, beating the benchmark S&P 500 Index by 2.7 percentage points a year.

"I've been managing Contrafund for 26 years and working for Fidelity for more than 30 years. So you accumulate names and insights into these companies and industries," says Danoff, who graduated with an MBA from the Wharton School of Business and joined Fidelity in 1986 as an analyst. "It's really liberating to start with a fresh piece of paper and to talk to all these analysts at Fidelity, and say, 'I want your very best ideas regardless of market cap.'"

By way of illustration, Danoff notes that a 1% position in Contrafund is valued at about US$1 billion. A 1% holding in Fidelity Insights, assuming $200 million in assets, would be only $2 million. "I can move quickly and bet much bigger with smaller and mid-cap companies," he says.

Fidelity Insights, primarily a U.S. equity fund with some international holdings, will typically hold about 100 names. It will be more concentrated than Contrafund, which has about 350 stocks. "The similarities between the two funds are that I'm looking for companies that are able to double or triple in the next five years and are leadership or best-of-breed companies," says Danoff. "And they are doing something special which enables them to grow market share and grow profitably, too."

When it comes to technology, larger companies do have the advantage of scale, Danoff says. Technology giants such as

Alphabet Inc. ( GOOGL ) and

Facebook Inc. ( FB ) dominate the top 10 holdings in Fidelity Contrafund. What's significant is that Danoff is also an early adopter of technology names. He was in on the ground floor of Facebook, for instance, when it had its initial public offering in 2012 at US$38 a share.

"I like to see companies with a differentiated offering and a strong value proposition and with good current momentum," says Danoff. "Ideally, they generate 20%-plus revenue growth and improving margins. I like motivated management teams that are working hard for shareholders. And I like strong business models, which often means relatively high margins and relatively low capital intensity."

Danoff tries to avoid slow-growth firms with high capital requirements and does not like it when companies start to miss quarterly estimates. "Sometimes I struggle with companies where, temporarily, earnings are declining."

One of Danoff's advantages is Fidelity's rigorous monitoring of stocks. "I have a list of 200 stocks that I want to research. So you might hear a story, and think, 'Wow, I'll buy some.' Then a quarter goes by, you get an update and it sounds better. So you buy more,'" says Danoff, who tends take small initial positions and gradually increase his exposure as he gains confidence in the company.

Danoff has held the top positions in Contrafund for a long time and has established relationships with managements. "I have confidence in them and have a good understanding of the marketplace dynamics. I am looking for companies with the wind at their backs."

One such example in Contrafund is Metro Bank PLC ( MBNKF ), which was founded in 2010 by entrepreneur Vernon Hill and was the first new retail bank in the United Kingdom in about 150 years. Hill was previously head of Philadelphia-based Commerce Bank, which he sold to Toronto-Dominion Bank. "He had a strong customer-centric banking model which was open seven days a week. When Vernon retired I told him, ‘You're my kind of guy. Let me know if you do anything else.'"

Danoff brushes aside notions that the U.S. market's near-record highs imply that it is overvalued or even treacherous. "I look at it as a 'market of stocks' not a 'stock market,'" he says. "When I think about some of the names that I own, I believe the outlook is very bright. These companies have the opportunity to grow meaningfully for the next two or three years."

Danoff says his understanding about how to make money in the market is that stock prices follow earnings per share. "If you can find companies that are growing their earnings, yes, every once in a while there is a macro event that takes the market down, but those companies that are growing, snap back very quickly."