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Fidelity Contrafund's Danoff frets over Apple rivals

The refreshed iPod Touch with new earpods is introduced during Apple Inc.'s iPhone media event in San Francisco, California September 12, 20
The refreshed iPod Touch with new earpods is introduced during Apple Inc.'s iPhone media event in San Francisco, California September 12, 20

By Tim McLaughlin

BOSTON (Reuters) - Fidelity Contrafund manager Will Danoff, the biggest active shareholder in Apple Inc, cut his stake in the iPhone maker 12 percent in the first quarter and cited "heightened concern" about increasing competition.

Danoff, whose $92 billion Contrafund has beaten 94 percent of peers over the past 15 years, is considered one of the most savvy stock pickers among mutual fund managers.

"Given our heightened concern surrounding the increased competition Apple was facing, we continued to trim our stake in the company during the period," Danoff said in a first-quarter overview.

Apple's shares have climbed nearly 10 percent in the last week since the company announced it would increase its dividend and share buybacks to $100 billion. On Tuesday, Apple issued $17 billion of bonds, the largest non-bank deal in history, to fund some of the increases.

But the stock remains off 37 percent since hitting an all-time high of $705.07 in late September. Apple's shares were down about $3.90, or nearly 1 percent, at $438.55 in late morning trading on Nasdaq.

Danoff said investors continue to express concern about the company's decreasing profit margins as well as increasing competition from device makers including Samsung Electronics Co Ltd.

He began trimming his Apple stake late last year, but had said he still found the stock to be relatively cheap and remained upbeat about the company's cash generation prowess. In January, for example, Danoff wrote that Apple was generating $1 billion of free cash flow per week, according to a Fidelity Viewpoints interview posted on January 16.

Contrafund owned 10.1 million Apple shares at the end of March, down from 11.56 million at the end of 2012, according to Boston-based Fidelity's latest disclosure.

Danoff was hardly alone in trimming his Apple position. Some 870 institutional investors pared their Apple holdings in the most recent reporting period, while 419 sold off their entire positions, according to Thomson Reuters data. That compared with 254 investors initiating Apple positions and 1,185 adding to existing holdings.

Contrafund held $4.5 billion in Apple stock at the end of March. Its largest holding was a $5.1 billion stake in Google Inc.

Contrafund returned 9.18 percent in the first quarter, underperforming the 10.61 percent advance of the S&P 500 Index. But over the past 15 years, Danoff has outperformed the S&P 500 by 3.3 percentage points per year.

Apple was the fund's largest detractor in the quarter, Danoff said in his overview. Still, he said he continued to believe that smartphones represent one of the most robust product cycles in the tech sector.

He also favors biotech companies, overweighting on Biogen Idec Inc, which is known for its multiple sclerosis drugs. That stock was the fund's single-largest contributor to relative performance during the quarter, rallying more than 30 percent on the approval of Tecfidera, an oral drug used for treating MS, Danoff said in his overview. Contrafund owned $1.7 billion worth of Biogen shares in the first quarter.

Overall, Danoff said he continued to find cheap stocks, particularly in relation to bonds, where blue-chip companies boast free cash flow yields of 5 percent to 7 percent. That is well in excess of the 1.65 percent yield on the 10-year Treasury bond.

Contrafund's largest weighting is in the tech sector, where Danoff is betting on companies that disrupt the software industry with cloud computing offerings. Danoff, for example, owned $610 million worth of Salesforce.com Inc at the end of the quarter.

(Additional reporting by Aaron Pressman in Boston.; Editing by Lisa Von Ahn and Maureen Bavdek)

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