During a year that the average large growth fund lost more 40 percent, Fidelity Contrafund wasn’t the exception to that rule. Over the course of 2008, the fund gave up 37.2 percent, which some what ironically, ranked the fund in the top quartile of the large growth category.

 

After surpassing Fidelity Magellan in 2005 to become the family’s largest fund with more than $55 billion in total assets, the fund has since shrunk to just over $42.4 billion amidst plunging equities prices and investor redemptions.

 

On factor playing into the funds decline was large sector bets by William Danoff. Having been at the helm of the fund for almost two decades, Danoff has been known to make large sector bets over the years. As any investor can attest to: 2008 was a tough year for anyone in the equity markets. But over the course of the year, Danoff made large sector bets on energy, accounting for almost eight percent of fund assets, and financial services, in which almost 15 percent of the fund’s assets were invested. He was widely quoted in a variety of media outlets as expecting energy prices to remain elevated for fundamental reasons, when in fact they nose dived over demand worries in the midst of the worst recession in recent memory. We all know what ultimately happened in the financial services sector, though Danoff had the foresight to avoid the worst of the losses by holding names such as Wells Fargo (NYSE: WFC), which avoided the total collapse which crippled so many of its peers.

 

Another redeeming quality for the fund was the fact that Danoff had the foresight to begin transitioning the deeper into health care, holding names such as Abbott Laboratories (NYSE: ABT). Another major holding which should help generate a solid first quarter performance for the fund is Genentech (NYSE: DNA), which finally agreed to be acquired by Roche Holdings AG (OTC: RHHBY) at $95 per share. As of the fourth quarter, the funds position in the Genentech had swollen to 4.1 percent of net assets from two percent of net assets in the fourth quarter. All told, the fund will likely realize a gain of more than 20 percent in the first quarter on that sizable position. From the date the deal was announced to March 17, the fund’s net asset value jumped by more than 10 percent. And one advantage bestowed by the funds large earlier losses is that the tender will have a negligible effect on capital gains distributions.

 

Another smart move by Danoff was the transition into consumer staples, including names such as Proctor & Gamble (NYSE: PG), Kraft Foods (NYSE: KFT) and Coca-Cola Company (NYSE: KO). And while even the heavy weights in the consumer brands gave up some ground in share prices, the losses in the sector weren’t nearly as bad as in others.

 

The fund also maintained small positions in retailers at the discounter end of the spectrum, holding 99 Cents Only Stores (NYSE: NDN), Dollar Tree Stores (NSDQ: DLTR) and Wal-Mart (NYSE: WMT). 99 Cents Only Stores is now a bit of a misnomer, having increased its top price to 99.99 cents and Wal-Mart has faced some currency headwinds, but it is the only retailer that has consistently posted monthly same-store sales increases.

 

All of that wasn’t enough for the fund to turn in a positive performance last year, and as of December 15, 2008, after having been closed for more than two years, it opened its doors to new investors. The question now is whether or not putting you money into William Danoff’s hands is a smart move.

 

Normally, we approach reopened funds with a bit of skepticism. For starters, frequently when funds reopen it’s because they’ve lost money due to questionable manager performance. Another reason to devote a bit of extra due diligence is because funds that reopen frequently underperform moving forward.

 

In this case though, while Danoff did make some questionable calls, he wasn’t the only one. And that can’t be entirely held against him because this recession has behaved much differently than those past. There’s nothing unforgivable in those missteps.

 

This is also the fund’s second reopening, it had previously been closed from 1998 to 2000, and it performed admirably in its open interval.

 

Another positive for both the fund and for Danoff is that he has now weathered three recessions, beating out the majority of his peers in all three. The fund has returned an annualized 11.6 percent since its inception in 1967, and while Danoff can’t claim credit for all of that, he’s certainly helped shepherd the fund to that impressive performance mark.

 

To top it all off, for the trailing three-year period, including last years havoc, the fund sports a beta of just 0.92, versus the average 1.01, while generating an alpha of 3.56. Those are impressive statistics considering the market turmoil the fund has faced.

 

So, while we would normally suggest approaching the idea of investing in reopened funds with a healthy degree of skepticism, this is one that can be wholeheartedly embraced. And with a layer of insulation against capital gains, if you’re in the market for a large growth fund, Fidelity Contrafund is definitely worth a look.