* Danoff: "Wound is still open" after poor run in December
* Looking to buy in out-of-favor sectors
* Hopes to run Contrafund another 20 years
* "Strong earnings growth often comes at a price"
By Ross Kerber
BOSTON, Jan 6 His track record gives him grounds to gloat, but star fund manager William Danoff of Fidelity Investments instead offers only a few modest lessons from 20 years of running the massive Contrafund. (FCNTX.O)
With about $72 billion in assets, Contrafund is the largest actively managed stock fund under a single manager and Fidelity's largest aside from money market vehicles.
In a rare interview at his offices in downtown Boston this week, Danoff, 50, outlined the nuts and bolts of his approach to investing, saying he prefers to buy companies when their sectors are out of favor with other investors.
Danoff also said he has been willing to pay up for quality companies -- those likely to increase market share and earnings even if their stock seems expensive.
"Other people can buy a weaker company really cheap," he said. "I want companies that are generating strong earnings growth, and strong earnings growth often comes at a price."
Graphic on how Contrafund stacks up:
FUND VIEW-Fidelity's Danoff counts on tech spending
Danoff brushed off the praise others have heaped on his performance, crediting Fidelity's expansive team of analysts, and emphasizing some difficult runs he has had.
In December 2010, for example, Contrafund beat just 7 percent of peers at a time when markets were generally ending the year with a surge.
"That wound is still open," Danoff said of December's results.
Others would call it a mere paper cut. Contrafund, which Danoff has managed since 1990, has done better than 98 percent of peers over 10 years and beaten 84 percent of peers over five years, according to data from Morningstar Inc.
BEATING RIVALS EVEN IN AN OFF YEAR
2010 was an off year by Danoff's standards -- Contrafund beat only 65 percent of peers in returning 16.93 percent, 1.4 percentage points above the average for large-cap growth funds. And that followed 2009, when 76 percent of peers did better.
Nonetheless, Danoff's investor base, many of whom count on the Contrafund to build wealth for their retirement or for their children's college educations, stayed loyal at a time when equity funds have been out of favor.
Contrafund had a net inflow of $768.7 million in cash from new investors in the 21-month period ended Sept. 30, 2010, when it was reopened to new investors for the first time since 2006, according to data from the Lipper unit of Thomson Reuters.
The temporary closure was meant to give Danoff a respite from having to find new places to invest the torrent of cash his strong performance was attracting. Withdrawals by retirees prompted the reopening.
Morningstar fund analyst Christopher Davis said Danoff stands out for posting good results through both bull and bear markets. "It may not be that Danoff knows more than everyone else, but he pieces together information far better than most managers," Davis said.
Retired Fidelity executive Steve Jonas, who supervised Danoff from 2005 to 2007, made a similar point: that Danoff has an eye on others even when he is making his own bets.
"The really good investors think differently than the crowd. Will takes everybody else's thinking into account. He's not a forced contrarian," Jonas said.
Jonas joked about Danoff's laid-back persona and embrace of the "business casual" dress code. "He has a tie on if he has to," Jonas said. Among Danoff's hobbies are swimming, playing tennis and baking with his family.
Danoff's current reading is "The Warmth of Other Suns," Isabel Wilkerson's nonfiction account of the migration of African-American families to Northern U.S. cities in the last century.
He is also reading "Better," by surgeon, MacArthur Fellow and Harvard professor Atul Gawande, about how doctors -- and by extension other professionals -- can improve their performance amid the constraints of organizations.
Danoff grew up in Stamford, Connecticut, where his mother was a school teacher and his father a pediatrician. He graduated from Harvard and later the University of Pennsylvania's Wharton business school, and joined Fidelity in 1986 as a securities analyst.
After stints at one of Fidelity's smaller retail funds and as portfolio assistant for the Magellan fund, Danoff took over Contrafund in 1990, when its assets were about $300 million.
Danoff said that small base gave him time to hone his craft before the fund's enormous size became a challenge. "I've grown up here," he said, adding, "It's harder for a fund manager to be parachuted in to a bigger fund."
Though Danoff did not say so, the line could sum up the story of Harry Lange who since 2005 has posted a middling record running Magellan -- once Fidelity's flagship fund, but now an also-ran with about $22 billion in assets.
EXECS BEAT A PATH TO DANOFF'S DOOR
Danoff said he would be happy to run Contrafund another 20 years rather strike out on his own like his predecessor on Contrafund, Jeffrey Vinik, who now runs his own money-management firm and last year bought the Tampa Bay Lightning National Hockey League team.
One reason is that with some $1.5 trillion in assets under management -- a figure roughly the size of Canada's gross domestic product -- Fidelity attracts a daily stream of top executives of major companies eager to make their case to Danoff and other fund managers.
That gives him a unique perspective across many industries, Danoff said, and makes it easier to compare companies against each other. "I'm trying to see just a little bit further around the corner than the rest of the world," he said.
Ironically, the meetings with industry titans help Danoff keep it real. Visiting CEOs often mention that their mothers own Contrafund, or that it is among their company's 401(k) plan offerings. What does he tell them? "I'm working as hard as I can," Danoff said.
Contrafund's sheer size -- it was the ninth-largest of all equity mutual funds as of Nov. 30, according to Lipper -- gives Danoff plenty of sway over the companies in which he invests, of which Apple and Google are currently the largest.
But Danoff says he is no activist. "My desire is to invest with great managers and let them run the business," he said.
Contrafund's mandate also gives Danoff wide power to decide what stocks to buy and sell. The fund's name suggests a contrarian streak, which Danoff said could be a misnomer and prompted internal discussions about a new label.
But nothing doing. "The powers that be, well above my pay grade, have decided never to change the name," he said. (Reporting by Ross Kerber; editing by Ros Krasny and Matthew Lewis)