By Philip van Doorn, MarketWatch
It’s almost become scripture in the investing world that actively managed mutual funds can’t beat index funds or exchange traded funds that track benchmarks.
While that might be mostly true, there are exceptions, of course. The T. Rowe Price Blue Chip Growth Fund /zigman2/quotes/208533233/realtime TRBCX +1.31% has outperformed its benchmark for decades. Larry Puglia, who has run the fund since 1993, talked to MarketWatch about his investment strategy and several stocks he favors.
Pushback against fees
An argument against active management is cost. A typical actively managed fund can have annual management fees north of 1% of assets. Some have sales charges for certain classes of shares and/or high minimums for lower-cost share classes. Some funds/share classes have additional 12b-1 “distribution fees.” Some classes of actively managed funds or share classes are only available through an investment adviser, who can easily charge you 1% on top of the fund’s own expenses.
‘People question active management, but so far it has worked out well for us.’
Larry Puglia, manager of the T. Rowe Price Blue Chip Growth Fund
Meanwhile, there has been a race to the bottom in terms of fees for some of the largest index ETFs. The SPDR S&P 500 ETF /zigman2/quotes/209901640/composite SPY +0.45% has an annual expense ratio of only 0.09%, while the Vanguard S&P 500 ETF /zigman2/quotes/201209218/composite VOO +0.45% has even lower annual expenses of 0.04%, according to Morningstar. [That’s 4 basis points. One percent is equal to 100 basis points.]
During the bull market that has lifted all broad-index boats, the low-cost index-fund strategy has seemed to be a no-brainer, especially if your alternative in a 401(k) account is high-cost target-date funds. But there are still investors who believe a good manager can mitigate downside risk while maximizing upside capture when compared with a benchmark index.
The T. Rowe Price Blue Chip Growth Fund has $57.1 billion in assets and has had a remarkable record for beating its benchmark, the Russell 1000 Growth Index /zigman2/quotes/210598136/delayed RLG +0.96% and measures up even better against the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.48% (including reinvested dividends).
The fund has two share classes. The retail shares /zigman2/quotes/208533233/realtime TRBCX +1.31% have annual expenses of 0.70% (considered “low” by Morningstar) and the institutional shares /zigman2/quotes/209680352/realtime TBCIX +1.30% have annual expenses of 0.57%. The fund has a five-star rating (the highest) from Morningstar.
Here are comparisons of total returns for the T. Rowe Price Blue Chip Growth Fund’s retail shares (after expenses) to those of the two indexes:
|Annualized total returns through Feb. 8, 2019:|
|Time period||T. Rowe Price Blue Chip Growth Fund||Russell 1000 Growth Index||S&P 500|
So the fund beat both indexes by considerable margins for all of the long-term periods. And comparisons to the index ETFs would be even more favorable, because the ETFs have fees, however small.
For some periods, the fund’s ourperformance, on an average annualized basis, may not look significant, but the differences add up over long periods. Here’s a comparison of 15-year total returns:
Here’s an edited version of Puglia’s interview with MarketWatch:
MarketWatch: How can a fund with $57 billion that holds 122 stocks [as of Dec. 31] avoid being a “closet indexer” and outperform the indexes so consistently? [A “closet indexer” refers to funds that adhere closely to their benchmarks for fear of underperforming.]
Larry Puglia, manager of the T. Rowe Price Blue Chip Growth Fund: You can own 120 names but still have investments that are quite differentiated from the benchmark. There are a lot of large companies in the benchmark that we have not owned at all. AT&T /zigman2/quotes/203165245/composite T -0.64% is one; General Electric /zigman2/quotes/208495069/composite GE -3.10% is one we have not owned for five or six years. Conversely, we have held Danaher /zigman2/quotes/210555154/composite DHR +1.61% in pretty good size for 25 years.
There have been times when the top positions in the fund have had fairly significant weights. The top 20 names in the portfolio have made up generally 40% of the assets. [As of Dec. 31, the fund was even more concentrated, with the top 10 positions making up 45% of the portfolio. They are listed below.]
At one point we had 10% in Apple /zigman2/quotes/202934861/composite AAPL -0.10% . We have had more than 10% in Amazon /zigman2/quotes/210331248/composite AMZN +1.72% recently, but that is unusual. When you put several 5% positions together, you can have some concentration in a portfolio.
T. Rowe Price
MarketWatch: Can you describe your approach to selecting stocks?
Puglia: When we launched this product, we considered calling it the quality growth fund. A blue-chip growth company is one that can generate durable earnings and free cash growth. That typically comes form three things:
A leading market position — number one or two by market share.
Management that knows how to allocate capital — if management does not know how to allocate the excess capital it generates, it will soon run aground.
The third thing we look for is strong financial fundamentals, principally a high return on invested capital.
MarketWatch: How do you feel about stock buybacks? Is over-enthusiasm for buybacks causing some companies to underinvest?
Some companies that have been fairly aggressive in buying stock back have also treated employees well and invested in their business to generate growth. Buybacks are a tool that can be employed sub-optimally or very wisely. Some of the best investments we have had have not only bought back stock, they have done so opportunistically. Many have also increased dividends over time and invested wisely. Some of these companies tend to look out for all their constituents.