Once Burned, Twice Shy

Return with me now to the year 1990. George H. W. Bush was President. The Buffalo Bills had a heartbreaking loss to the NY Giants in the Super Bowl. The Cold War ended with the dissolution of the Soviet Union. The Gulf War started when Iraq invaded Kuwait.

In the investment world, Peter Lynch, the long-time mutual fund manager of Fidelity’s Magellan Fund, retired to be replaced by Morris Smith. In my chapter of Jonanthan Clement’s book My Money Journey, I tell how my mother and I made a leap of faith in 1981 to make our first foray into stock investing by purchasing the Magellan Fund. By 1990, my mother’s retirement plans were much more secure, Peter Lynch was my hero and the Magellan Fund was Fidelity’s flagship.

My logic in 1990 was “Surely Fidelity will not let its flagship fund founder… they will place it carefully in the hands of the next Peter Lynch.”  So, we continued to hold Magellan for what would become a disappointing decade.

To refresh my memory, I asked CoPilot to summarize Magellan’s performance for ten years after Lynch’s retirement. Morris Smith had a two-year tenure with similarly strong results. According to AI, from 1992 to 1996 “Jeff Vinik produced strong absolute performance but made a famous defensive shift into bonds and cash in 1995, causing the fund to lag the S&P 500 during a major rally.”  Then came Robert Stansky in 1996. Magellan had over $100 million in assets by then. “The fund is specifically remembered for underperformance in his tenure.”  Further, “With that size, Magellan became more index‑like and diversified, making it very hard to keep up with a narrow, momentum‑driven tech rally. The S&P 500 concentrated gains in a few mega‑cap growth names; Magellan, by design and scale, couldn’t mirror that concentration.”

With the advantage of hindsight, we now know that the next Fidelity legend, Will Danoff, was starting his tenure with Fidelity Contrafund in 1990. From CoPilot: “According to Fidelity’s own published figures, during Danoff’s nearly 35‑year tenure:

• Contrafund delivered an annualized return of 14.04%
• This exceeded the S&P 500 by 2.92 percentage points per year over the same period

That level of long‑term excess return is extremely rare for a mega‑cap, actively managed fund.”

The irony is that during the late 1990s Magellan was deemed “too large to manage” while Danoff has continually beat the market managing a fund that is considerably larger, even adjusted for inflation.

That is the good news. That bad news is that Danoff is retiring at the end of 2026.

I started dollar cost averaging into Contrafund in my taxable account every pay period from 2004 to 2012 at which point I retired. After retirement, I sold out other positions to reallocate much of the stock holdings in my Roth IRA into Contrafund. Over the years, as the two positions got larger and larger, I stopped reinvesting distributions and I pulled money out. But as of the end of February, it was still the largest single holding I have across all my accounts.

Reading what Morningstar says about the transition planned for Contrafund, I should be buoyed by the apparently deliberate approach Fidelity is taking toward the transition:

Morningstar says: “Fidelity has been preparing for this moment. Co‑managers Asher Anolic and Jason Weiner have already been in place, and the handoff is described as “measured” and designed to preserve continuity.” Further, “… current comanagers Asher Anolic and Jason Weiner will broaden their responsibilities and assume full control of the fund’s assets by year-end.”

Sounds good, but then Vinik and Stansky come to mind. Peter Lynch learned to manage a massive fund by degrees as his experience grew with the fund. His successors were thrown into a very large fund. Will Danoff learned the same way as Lynch. No matter how good Anolic and Weiner are, they are stepping directly into big shoes.

This week, I moved just less than a quarter of my Contrafund holdings to FNILX, Fidelity’s Large Cap Index fund, which is essentially a zero cost S&P 500 index. I expect to move more during 2026. I am exchanging the index beating Contrafund for the index itself. My current thinking is that I won’t divest completely, if only because of the taxable gains I’d incur in the taxable account. I will continue to redirect the Contrafund distributions to other funds and not add new money to Contrafund.

Once burned, twice shy.