Is there a process that investors can go through to evaluate whether a fund is an OAK (One-of-a-Kind)? You could use another service, such as Morningstar, Lipper, Zacks, or any number of investment advisory newsletters. You could take your friend's word, your brother's word, or the word of some unknown advertisement on the web. But what if you wanted to, all on your own, measure the likelihood that Fidelity Contrafund will generate solid returns over the next 20 years? First go to Morningstar:
Morningstar: Review your costs and portfolio
Morningstar is a paid investment research service, but much of the useful information you need is free. Looking up FCNTX on Morningstar we can see on the front page that the fund costs are below average. This is the first and easiest item to review about an investment you hold.
Click on the portfolio tab and you can see what kind of portfolio FCNTX holds: about 90% in US stocks-- almost entirely large-cap growth stocks. About 5% of the portfolio is in international stocks. This is very important because you need to know what the portfolio composition is in order to make a fair comparison. Now we will head over to portfolio visualizer:
Portfolio Visualizer: Compare your portfolio to an index with the same composition
Now for Portfolio 1, we will enter FCNTX. For Portfolio 2, we will enter VUG (Vanguard Large-Cap Growth) and VEA (Vanguard International Developed Markets). What do we find?
Fidelity Contrafund outperformed by .07% since 2008 with a very slight reduction in risk. There are two ways to look at this. The Contrafund investor did just fine over the last decade, but there is a danger. The Contrafund investor has manager risk, whereas the ETF investor will definitely achieve market returns over the next decade. So no alarm bells go off with Contrafund, a well-managed fund with reasonable costs, but it isn't hugely compelling either.
If we go back to Morningstar and look at the sequence of returns, we'll see that beginning in 2009 there were four straight years of outperformance by the Vanguard fund, then it went back and forth for the most part from then on. This reminds us that if you have an active fund that meets the criteria: low cost and consistent results in line with its market, you may still have to endure some periods of underperformance relative to its index benchmark.
Fidelity Contrafund has a long and solid history. William Danoff, Contrafund's manager, has done an impressive job over many years. Remember to review your risk profile before you buy any stock, bond, or fund!