BOSTON Will Danoff, who runs Fidelity Investments' behemoth Contrafund, is frustrated by his lagging performance this year and is pruning his exposure to cloud software stocks that got clobbered recently in a swift and hard-hitting downturn.
Steering the mutual fund equivalent of a battleship, with $109 billion in assets, Danoff has been one of the best stock pickers over the past 20 years. And that is partly because of his lopsided bets on so-called momentum stocks, particularly big tech companies that don't need a lot of capital to fuel growth.
But that hasn't worked well in recent weeks, and while he retains a technology bias he said he is also looking for undervalued stocks outside of the sector.
"I'm not complacent," he said on Friday in an exclusive telephone interview with Reuters. "I've had a tough first quarter. I'm looking at each stock in my portfolio and asking, 'How good is this story.'"
As it turns out, the valuations of some of the cloud software companies that Contrafund, has been holding, such as Workday Inc and Cornerstone OnDemand Inc, were too good to be true.
Workday has dropped 20 percent and Cornerstone has fallen 28 percent in a momentum stocks sell-off during the past month. As a result, Contrafund is down 1.24 percent this year through April 17, lagging the benchmark S&P 500 Index's positive advance of 1.49 percent for the same period. Contrafund beat the index by 1.76 percentage points last year.
But while some portfolio managers have run for cover and have been buying the steady earnings of big oil companies like Exxon Mobil Corp and utility stocks, Danoff says he's not ready to play it safe.
"You can play that game, buy Hamburger Helper and buy more integrated oil stocks. But I prefer to test my thesis," he said.
Danoff said he has trimmed some positions in the cloud software sector, but not the leaders. He didn't provide any details about what he has sold. But he was optimistic about human resources software company Workday's growth trajectory and said the company has a good management team.
Contrafund had an $8.8 billion position in Google Inc and a $2.6 billion stake in Facebook Inc at the end of February, according to the latest available fund disclosures.
Danoff still gives both companies a vote of confidence.
He described Google's Internet search engine as a proxy for human curiosity.
"Do I want to underweight human curiosity? I don't think so," Danoff said.
Meanwhile, he conceded that Facebook's February announcement that it would spend $19 billion in stock and cash for WhatsApp, a mobile texting company, raised doubts about Mark Zuckerberg, Facebook's founder and chairman.
"Should I doubt a 29-year-old who's running a $150 billion company?" Danoff said. "He saw an important asset and he sees the future more clearly than I do. He thinks it (WhatsApp) is worth it. Well, we will see."
Danoff says he expects to use the current earnings season as one way to identify companies on a strong growth trajectory, including those outside the tech and biotech sectors. He declined to give any names.
He said he's asking Fidelity's army of 150 stock analysts if there are any stocks that other investors have put in the trash can that could be valuable.
PRUNING SOME STOCKS
He isn't used to running behind the pack.
"I'm a little frustrated with my performance," Danoff said.
Over the past 10 years, Danoff has outperformed 94 percent of his peers in the large-cap growth fund category, according to Morningstar Inc. His 9.85 percent average annual return over that period easily beats the 7.42 percent average advance of the S&P 500 Index.
Still, he has seen enough not to panic when there is a sudden reversal in a sector.
The sell-off in the software as a service sector reminds Danoff of how Home Depot Inc plunged in the late 1980s when he was a retail stock analyst at Fidelity. Since then, Home Depot's stock has risen to about $87 a share from about 60 cents a share, on a split-adjusted basis.
"I don't want to get shaken out of a stock if I like the long-term story," Danoff said. "There are big opportunities in the next couple years. We don't want to batten down the hatches and say we're closed for business. We're definitely open for business."
(Reporting By Tim McLaughlin; Editing by Richard Valdmanis and Martin Howell)