Fidelity ties its fortunes to Google

By Tim Middleton

When the Dow Jones Industrial Average ($INDU) plunged 361 points last Wednesday, or 2.6%, Fidelity Contrafund (FCNTX) fell only 2.0%. One thing that helped: Contrafund's largest holding, Google (GOOG, news, msgs), slipped only 1.2%.

Google's dazzling performance -- up 68.5% this year, as of Nov. 7, and 96.5% in the last two years -- helps explain the improved performance of a number of Fidelity mutual funds. Fidelity is Google's largest shareholder, owning more than 10% of the Mountain View, Calif., search-engine giant.

Fidelity is the largest mutual fund company, a $1.33 trillion behemoth, and it could take weeks to sell its 24.4 million Google shares if this bet goes awry.

Three of Fidelity's largest four U.S. stock funds have Google among their top five holdings. If a fund the size of Contrafund, with its $80 billion in assets (and, by the most recent numbers, roughly $3.5 billion worth of Google), sours on the stock, it could be bad news not just for Google but also for a lot of other Fidelity fund shareholders.

A quiet exit?

As it has grown into the nation's largest fund firm, Fidelity, once known as an aggressive manager of growth funds, has for the most part grown more staid in its investing style. Its funds often form the heart of corporate 401(k) offerings, and the last thing Fidelity wants is to put a scare into the retirement-plan committees of its corporate customers.

But Fidelity has been known to swing for the fences and has shown some skill at making quiet exits. When Jeffrey Vinik was manager of Fidelity Magellan (FMAGX) in the mid-1990s, he once amassed a huge position "in practically every chip manufacturer on the planet," says John Bonnanzio, one of the editors of the Fidelity Insight newsletter. The industry buzzed, but when computer chips turned down, it turned out Vinik had already unwound his positions.

Magellan has since undergone two changes in management and has blossomed this year, thanks in part to Google, which accounts for 3.4% of its $47.34 billion of assets. It was ahead 20.1% as of Nov. 7, trouncing the market by more than 14 percentage points.

Contrafund, which with assets of $82.65 billion is Fidelity's largest, is ahead 20.2%. And a slew of other Fidelity offerings with big Google stakes are likewise prospering.

Google is the largest position in Fidelity OTC (FOCPX), and the fund has roared ahead 31.3% this year. It's also No. 1 in Fidelity Advisor Growth Opportunity T (FAGOX), where it accounts for 12.6% of assets. That fund is ahead 26.3%.

Fidelity Growth (FDGRX), with assets of $39.11 billion, is ahead 22.3%, thanks in part to the 5.6% of assets it has in Google. Other top-performing Fidelity funds with big Google stakes are Fidelity Advisor Equity Growth (EQPGX), up 29.5%, and Fidelity Growth Discovery (FDSVX), ahead 29.1%.

Not alone in its bet

Fidelity's ownership of Google shares -- some 24.4 million of them -- is equal to 10.5% of the company's total. Some 60% of Google's shares are owned by institutions, which don't tend to trade heavily. More than 5 million of the shares do trade every day, but any quick exit from the stock would be impossible.

Fidelity could already be booking its Google profits and moving on. As a matter of policy it won't discuss individual stocks, and even other investment firms are envious of its ability to keep its trading secret.

Or -- and this is more likely -- its independent-minded fund managers could be pursuing their own strategies without regard to what the others are doing. They often move in the opposite direction of their colleagues.

"About 10% of the trades they do are cross-trades," says Russel Kinnel, director of fund research for Morningstar. This is when one fund buys what another is selling. "I'm sure that as (Google) hits new highs, some of the value guys are getting out, and some of the momentum managers are adding to their stake."

And Fidelity is hardly the only mutual fund company betting on Google. The second-largest fund complex, American Funds, owns 6.2% of the company, and Vanguard, the third-largest, owns 2.6%.

I don't follow stocks and have no opinion on Google. But I do have an opinion of William Danoff, manager of Fidelity Contrafund. I think he's one of the most brilliant investors working today. He flourishes in up markets and does well even when they turn down. In the last bear market, Contrafund lost 6.8% in 2000, 12.6% in 2001 and 9.6% in 2002. That was much less than the market in two of those years -- 12.5 percentage points less in 2002. In 2001 he trailed by a minuscule 0.7 percentage point.

So if he likes Google, I like Google. I just hope he's right. And I'm sure Fidelity seconds that opinion. Danoff is their superstar, and his fund is their cash cow. They've got a lot more riding on him than I do.

At the time of publication, Tim Middleton owned or controlled the following securities mentioned in this article: Fidelity Contrafund.

Published Nov. 13, 2007

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