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my wall st journal interview proved correct
Old 06-09-2007, 04:03 AM   #1
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my wall st journal interview proved correct

last year i was interviewed by the wall st journal as to what i thought about the closing of fidelity's contra fund and how i felt about what to do when funds get so big they close.

guess i was right as contra failed to beat the s&p by almost 50% for the year.

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Hot closing funds often cool off a bit

By Jennifer Levitz
The Wall Street Journal


When Matt Jakowsky heard that Fidelity Investments will be closing Contrafund to new investors April 28, he thought he'd better get in before the doors shut. The $65.2 billion mutual fund has had a 22 percent annual return over the past three years, trouncing broad stock-market indexes.
But after he did some research, he decided to pass. "I thought, you know, this is just silly. Contra's way too big," says Jakowsky, a 53-year-old electrical-supplies salesman from Queens, N.Y., who describes himself as an active investor.
Several analysts say he may have taken the right approach.
A closure is often a tip-off that the fund has already reached an unwieldy size, and that the manager is having difficulty taking positions in attractive stocks that are large enough to improve performance, says Russel Kinnel, director of mutual-fund research at the Chicago fund-tracking firm Morningstar.
And many funds can continue to grow after a closure. Contrafund, Fidelity's largest portfolio, will accept new investments via retirement plans, such as 401(k)s, that already have the fund among their menu of investment choices.
Contrafund, managed by Will Danoff since 1990, is a large-cap fund that's known for getting ahead of trends. It emphasizes rapidly growing companies such as those in Internet, wireless communications, health care and emerging markets.
Investors looking for a similar fund will want to find a manager who's flexible, says Don Phillips, managing director of Morningstar. He recommends funds managed by William H. Miller III at Legg Mason, such as the Legg Mason Opportunity fund. Dan Lefkovitz, Morningstar's Fidelity analyst, suggests USAA Aggressive Growth fund, ABN Amro-Montag & Caldwell Growth fund and T. Rowe Price Group Inc.'s New America Growth.
In a study a few years ago looking at 38 funds that closed, Morningstar found that the closers, on average, beat 80 percent of their peers in the three years before closing. Afterward, they fell behind more than half of their peers. Total return slipped to 15.4 percent a year from 19.6 percent.
More than 30 funds have closed to new investors so far this year, largely a reflection of the popularity of funds that invest in small companies, which have enjoyed a run on the stock market.
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Old 06-09-2007, 11:08 AM   #2
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Wow! Money Mag AND Wall Street Journal! When do you get in on some of that talk show circuit money?
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Old 06-09-2007, 11:30 AM   #3
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Good move on Contrafund. Over 14 years my wife put part of her 403b in this fund, one of the few good offerings in her miserable 403b plan. It did well for her. She retired last year and because of some deferred contingent fees we will not be closing her account for several more months, we are transferring her funds into Vanguard Wellsley & Star. The Contrafund had a good run, but over the long run most managed funds lose money and the good ones start to perform a lot like an index fund, in part because they grow so much. One of the good things about an index fund is that it is immune to asset bloat.
But that is a good call on not going into this fund just because it is closing, avoiding the usual result of chasing hot funds.
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Old 06-09-2007, 11:31 AM   #4
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Not sure what they are talking about. Contrafund has beaten S&P 500 for YTD, 3-year and 5-year periods. The 3 and 5 year returns are annualized, so the S&P500 was severely trounced over those time periods.

Trailing Returns %
YTD 3 year 5 year
ContraFund 7.98 15.20 12.88
+/- S&P 500 TR 0.81 3.46 2.93

If they are talking about the past 12 months IMO they are being very selective. In fact they appear to have chosen the ONE period where Contrafund trailed badly. Pretty useless IMO if not downright misleading.

I'm glad Contrafund finally closed, but I'm not going to sell it for that reason.

Audrey
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Old 06-09-2007, 11:41 AM   #5
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Hmm...I think I smell marketing...that happens whenever something seems factually correct, yet functionally wrong.
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Old 06-09-2007, 11:45 AM   #6
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Like the OP said, fund closings are just a starting point for further research.

"Close" is an ambiguous term for "taking less money, except in some situations" and very difficult to compare across the fund market. I don't know of any fund that's announced its closing to mean "all contributions will be refused". Some funds actually take in more money after their closing than before, probably due to the publicity surrounding the closing or new contribution channels.

Tweedy, Browne Global Value closed over two years ago and has continued to stomp ahead while trailing its index. It also closed at the end of the 1990s, took a huge whack, and re-opened again in 2003. Both closings were pretty much the same situations-- fund bloat & overvalued markets-- with wildly different results.
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Old 06-09-2007, 01:38 PM   #7
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Quote:
Originally Posted by audreyh1 View Post
Not sure what they are talking about. Contrafund has beaten S&P 500 for YTD, 3-year and 5-year periods. The 3 and 5 year returns are annualized, so the S&P500 was severely trounced over those time periods.

Trailing Returns %
YTD 3 year 5 year
ContraFund 7.98 15.20 12.88
+/- S&P 500 TR 0.81 3.46 2.93

If they are talking about the past 12 months IMO they are being very selective. In fact they appear to have chosen the ONE period where Contrafund trailed badly. Pretty useless IMO if not downright misleading.

I'm glad Contrafund finally closed, but I'm not going to sell it for that reason.

Audrey
I don't know the specifics of this specific fund and don't intend to delve into it so I'll just make some general comments.
  • I've seen mutual funds select dates for their ads that sometimes are months behind current performance.
  • The specific use of the Contra fund in this article is just for a "hook" that gives people something to focus on to get them to read the rest of the article. It really isn't that important to the point of the article.
  • The comparison for the Contra fund to the S&P 500 is probably not fair since by the description in the article it is free to chase small caps and growth stocks.
  • The time frame where Contra has "underperformed" is meaningless if you really want to compare it to the S&P 500.
The far duller analysis of the performance of the "closed fund universe" is more significant. However, I don't expect the index funds to ever become "closed" so I'm not impacted.
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Old 06-09-2007, 01:54 PM   #8
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Originally Posted by Nords View Post
I don't know of any fund that's announced its closing to mean "all contributions will be refused".
Nords, actually there has, althought it doesn't happen very often. The Wasatch family frequently prohibits any new contributions, even from existing investors, when they close funds.
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Old 06-09-2007, 03:19 PM   #9
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they used 1 year because they wanted to start tracking it from when they closed the fund which was the jist of the article.

ytd i show s&p up 7.20 vs contra 7.98.

my favorite which is equity income is up 8.43
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Old 06-09-2007, 04:22 PM   #10
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Looks to me like Contrafund has done well in a period not so kind to large growth oriented funds. If growth has a period of outperformance over large value maybe the relative returns will look even better. Don't own it but do have DODGX which is about as large as Contrafund and closed to new investors.
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Old 06-09-2007, 06:53 PM   #11
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i think the point was that as contra grew larger and larger it went to a great fund to basically an enhanced index fund
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Old 06-09-2007, 10:57 PM   #12
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I got out of Contrafund back in 1994 because I thought it was getting too big. Rolled it over to an individual stock portfolio and haven't looked back.
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