Danoff @ Contra

i was thinking about this earlier today...how long does anyone think william danoff will stay with fidelity as the manager of the contrafund (fcntx)....he's been there since '90 but recently past magellan in total assets under management i believe (i could be wrong but i think i remember recently reading that)....and the fund is, well, fantastic...any thoughts

[DesertCat]

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i was thinking about this earlier today...how long does anyone think william danoff will stay with fidelity as the manager of the contrafund (fcntx)....he's been there since '90 but recently past magellan in total assets under management i believe (i could be wrong but i think i remember recently reading that)....and the fund is, well, fantastic...any thoughts

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The bigger a fund gets, the harder it is to beat the market. Magellan got huge because of Peter Lynch, but he left when it essentially became unmanageble. It's record since then has been spotty at best, despite Fidelity rotating in their best managers.

I don't know how big contrafund was earlier in Danoff's tenure, but if it was much smaller it's probably unreasonable to expect him to do as well going forward.

[cdxx]

Peter Lynch says in his books that "too big to succeed" is a terrible cliche. Magellan was too big to succeed for the last 10 years of Lynch's tenure, yet it performed fine.

[DesertCat]

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Peter Lynch says in his books that "too big to succeed" is a terrible cliche. Magellan was too big to succeed for the last 10 years of Lynch's tenure, yet it performed fine.

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Did it perform as well as it did earlier in his tenure?

When Lynch left Magellan was $14B (and for most of his tenure it was much much smaller). Contrafund is $55B. I don't know how to adjust for greater market liquidity, but I'd still think that Danoff's challenges are greater with $55B than Lynch faced with $14B.

I don't think there is any doubt that greater size leads to lower returns. Buffett has said it, and his track record demonstrates it. It also makes sense because larger funds have fewer investment options.

That said, can Danoff continue to beat the market investing $55B? It's possible. I'm just saying he is much more likely to do it managing only $1B. Managers typically create their best records with smaller sums. Their success leads to large inflows of new investors, and this inflow makes their jobs harder and harder.

It's another one of the reasons why I can't recommend actively managed mutual funds. Even when you find a good manager, it's difficult to know how long they can continue to outperform. Magellan has trailed the market for over a decade now, and Fidelity is still milking fees from $60B in investor money using the name that Peter Lynch made famous.

[cdxx]

what is your point? are you ranting or arguing with me? you do realize that you are essentially arguing with lynch's own words, right?

yes, it's harder to manage $100B than $100M. that's not news. how many stocks under $5 double in 2 days? a lot compared to stocks over $50. however, most people and mutual fund companies would choose a safer 5% return on $1B than a risky 100% return on $10M.

[DesertCat]

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what is your point? are you ranting or arguing with me? you do realize that you are essentially arguing with lynch's own words, right?

yes, it's harder to manage $100B than $100M. that's not news. how many stocks under $5 double in 2 days? a lot compared to stocks over $50. however, most people and mutual fund companies would choose a safer 5% return on $1B than a risky 100% return on $10M.

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Relax, it's just a discussion. The discussion was whether Danoff could beat the market going forward given the huge amount of assets he has to manage. You claim that Lynch feels that more money doesn't lower returns (though I can't find that statement in his book "one up on wall street"). I pointed out that the worlds greatest investor (Buffett) has stated many times that more money lowers returns, and his returns have declined as he's had more money under management.

And I think you misunderstand why more money lowers returns. It has nothing to do with flipping "$5" stocks for quick gains. When Danoff has $55B, if he decides to own 100 stocks he's going to have to put half a billion on average into each one. If he's limited to buying 5% of a company, that means he has to invest in the world of $10B+ market cap companies. This restricts Danoff's choices, he could never buy the small cap or mid cap stocks that Peter Lynch loved.

There is an argument is that these large funds become closet "index funds" since they end up almost entirely invested in S&P 500 stocks.

The choice isn't between a "safer" 5% return and a risky "100% return, it's more akin to a choice between a safer 15% return and a riskier 10% return. The large fund manager has to buy stocks he doesn't want, that likely won't do as well as other choices.

When you think about all the restrictions more money brings, it's not so surprising that Peter Lynch retired as soon as Magellan started to get big.

[DesertCat]

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Peter Lynch says in his books that "too big to succeed" is a terrible cliche. Magellan was too big to succeed for the last 10 years of Lynch's tenure, yet it performed fine.

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"My biggest disadvantage is size. The bigger the equity fund the harder it gets for it to outperform the competition. Expecting a $9B fund to compete successfully against $800M fund is the same as expecting Larry Bird to star in basketball games with a five pound weight strapped to his waist."

Peter Lynch - "One Up On Wall Street"

[buffett]

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Peter Lynch says in his books that "too big to succeed" is a terrible cliche. Magellan was too big to succeed for the last 10 years of Lynch's tenure, yet it performed fine.

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"My biggest disadvantage is size. The bigger the equity fund the harder it gets for it to outperform the competition. Expecting a $9B fund to compete successfully against $800M fund is the same as expecting Larry Bird to star in basketball games with a five pound weight strapped to his waist."

Peter Lynch - "One Up On Wall Street"

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Please don't take this as a thread hijack, but....
this is a picture of what bothers me about discussing the Bible with some people. They claim it says a certain thing without citing a specific passage to back it up.

Also, this is not a personal dig at cdxx, but more of a board-wide "let's not fall victim to this sort of stuff" pep talk.

[cdxx]

"... The theory was that a fund with 900 stocks in it didn't have a chance to beat the market average because it was the market average. I was accused of managing the largest closet index fund on the planet.
This theory that a large fund can only be a mediocre fund is still in vogue today, and it's just as misguided as it was a decade ago. An imaginative fund manager can pick 1,000 stocks, or even 2,000 stocks, in unusual companies, the majority of which will never appear in the standard Wall Street portfolio."

Peter Lynch, "Beating the Street" chapter 6, page 116-117.

"Magellan became a $10 billion fund in May 1987. This announcement provided more grist for the naysayers who predicted it was too big to beat the market. I can't quantify the contribution that skeptics made to my perfomance, but I don't doubt it was substantial. They said a billion was too big, then 2 billion, 4, 6, 8, and 10 billion, and all along I was determined to prove them wrong." (ed: which he did)

"Beating the Street", chapter 6, page 130.

I could attempt at pointing out where DesertCat misunderstands why more money lowers returns, but I won't. I'll say that a fund is not limited to owning 5% of a company. it is limited to buying 5% of a company, and upto some percentage of the fund, which is a little different. it is also not limited to 100 stocks, or 1000 stocks. The disadvantage of a large fund is having to do bookkeeping for 1000 stocks instead of 100 (edit: also finding 1000 companies that could double in value as opposed to 100). there are advantages to a large fund as opposed to a small fund as well. such as not having to sell off assets, sustaining greater variance, etc.

I will agree that one of the easiest ways for a fund to lose capital is invest in stocks that a fund manager doesn't like. But there's no indication that Lynch or Danoff ever had that as a requirement.

[Sniper]

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An imaginative fund manager can pick 1,000 stocks, or even 2,000 stocks, in unusual companies, the majority of which will never appear in the standard Wall Street portfolio

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But not a fund manager with mega-Billions of dollars to invest.

If you look at the performance records for funds over time, you will see that the larger they grow, the harder it becomes to beat the market averages.

Magellan is now a poorly ranked fund, across all time periods!