The secret to T. Rowe Price's success is its corporate culture. Thomas Rowe Price Jr. founded the Baltimore investment firm in 1937 with just four associates. The company now has more than 5,000 employees scattered across the globe. But talk to any one of them and you'll get the sense that the firm still operates as if only a handful of people came to the office. It's collegial. It's collaborative. It's convivial.
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And it works. The firm manages some $534 billion spread across 128 mutual funds. And of the 102 funds with five-year records, 56 portfolios boast returns that rank in the top 25% of their peer group and 86 rank among the top half. That's impressive. We sifted through the data to find the best offerings. Read on.
T. Rowe Price Blue Chip Growth (TRBCX). It has been more than 20 years since Larry Puglia launched Blue Chip Growth. Since then, he's turned in a 10.4% annualized return, outpacing Standard & Poor's 500-stock index by an average of 1.2 percentage points per year. (All returns are through January 16). A 1.2 point-per-year edge may not seem like much, but over 20 years it adds up to real money. An investment of $10,000 in an index fund that tracks the S&P 500 would be worth $63,730 today, but one in Puglia's fund would have grown to $80,320.
Puglia says he likes market leaders—"companies with a sustainable competitive advantage"—with above-average earnings growth, healthy balance sheets and seasoned executives. More specifically, he's looking for companies that can generate growth in earnings and free cash flow (cash that's left over after the capital expenditures needed to maintain the business) of at least 15% a year. "Stock prices follow earnings and free-cash-flow growth over time," says Puglia. "So we give ourselves the best chance of success if we focus on firms that are growing at double-digit rates."
When he finds a company that fits the criteria, he buys, then usually holds for a long time. The fund has an average turnover ratio of 24%, which implies that the typical stock stays in the fund for about four years. But some have been in the fund for much longer than that. Puglia has owned shares in the industrial conglomerate Danaher since his early days as manager. Energy-services giant Schlumberger has been in the fund since 2002, agricultural products firm Monsanto since 2005.
T. Rowe Price Capital Appreciation (PRWCX). This fund gets compared with other balanced funds, which typically hold 60% stocks and 40% bonds. But Cap App isn't your typical balanced fund. For sure, the objective is similar: to offer growth but without the spills and chills of most stock funds. And on that, manager David Giroux has delivered. Since he took over in mid 2006, the fund has earned 8.7% annualized, outpacing the S&P 500 by an average of 1.3 percentage points per year and doing so with one-fourth less volatility than the index. He has also beaten 98% of the fund's peers.
But here's one thing that makes this balanced fund different from most of its peers: Giroux isn't afraid to hold cash if he doesn't find good opportunities. In late 2012, the fund's cash reserves stood at 14% of assets. Giroux saw little value in most bonds, with interest rates so low. Now cash reserves sit in the "high single digits," says Giroux.
These days, the bond portion of the fund sits mostly in short-maturity investment-grade debt, high-yield bonds and floating-rate bank loans. But in the middle of 2013, after bond prices fell (and yields rose), Giroux added some ten-year Treasuries to the mix—for the first time since 2008. On the stock side—60% of the portfolio at last report--Giroux can invest in companies of any size, and he likes a good value. Top holdings include Danaher, medical-devices firm Thermo Fisher Scientific, and United Technologies, the maker of Otis elevators and Black Hawk helicopters, among many other industrial products.
The other thing that sets this fund apart from its peers: options. Giroux can sell covered-call options—a conservative strategy that trades away appreciation potential in return for more income. He currently has calls on 14% of the fund's stocks. He'll sell an option on a stock his fund owns when one of two things happen: Either a stock Giroux is holding has risen in price, but he isn't ready to sell; or a stock has a somewhat muted expected return, such as a utility stock.
T. Rowe Price Small-Cap Value (PRSVX). Preston Athey has managed Small-Cap Value, a Kiplinger 25 fund, since 1991. Since then, the fund has returned an annualized 13.0%, outpacing the Russell 2000 index by an average of 2.8 percentage points per year—and with less volatility, to boot. Athey's secret is simple: He likes unloved, undervalued and undiscovered stocks. And once he finds one, he buys and holds. He has owned both Markel Corp., a specialty insurance firm, and SVB Financial Group, a Silicon Valley-based bank, for more than 20 years.
But Athey is retiring in June, when associate portfolio manager David Wagner, who has been shadowing him for more than six months, is slated to take over. Wagner is no newbie; he built a solid five-year record managing a Price fund for European investors that invested in stocks of small and midsize U.S. companies. In the five-year period through September 2013, when he formally stepped down, Wagner's fund, SICAV US Smaller Companies, returned 15.7% annualized. That outpaced the fund's benchmark, the Russell 2500 index (which measures stocks of small and midsize companies), by an average of 3.1 percentage points per year. Still, we'll be watching Small-Cap Value closely as the changeover nears.
T. Rowe Price Personal Strategy Growth (TRSGX); T. Rowe Price Personal Strategy Balanced (TRPBX); T. Rowe Price Personal Strategy Income (PRSIX). The Personal Strategy funds at T. Rowe Price hold a blend of stocks and bonds in a static allocation. Growth, the most aggressive of the Personal Strategy funds, holds 80% stocks and 20% bonds. Balanced is a 60% to 40% mix of stocks and bonds. And Income is a portfolio of 40% stocks, 40% bonds and 20% money market securities.
But these funds don't hold other T. Rowe Price funds. They hold actual stocks and bonds picked by managers of other funds you've probably heard of, including some mentioned in this story. Larry Puglia, of Blue Chip Growth, manages the large-company growth allocation of the Personal Strategy funds, for instance.
An asset-allocation committee meets monthly to decide how to allocate assets in the funds over the next six to 18 months. The people who populate that committee include star managers such as Brian Rogers, the firm's chairman, chief investment officer and manager of T. Rowe Price Equity Income, and Capital Appreciation's David Giroux.
That might be the secret to the success of these funds. All three of the Personal Strategy funds have ten-year records that rank among the top 8% of their peer groups. Those stellar returns aren't due to one or two hot streaks. The funds look good on a year-to-year basis as well.
T. Rowe Price Retirement target-date funds. Target-date funds offer one-stop shopping. You pick a fund with the target year that's closest to your expected retirement, plunk your money in, and the managers invest it in stocks, bonds and other assets, adjusting the mix over time to make it more conservative as you near the target-date year.
The funds in T. Rowe Price's Retirement series have standout returns; they regularly rank among the top 10% of target-date funds over the long haul. The reason: the underlying funds. The Retirement series portfolios hold some of the firm's best funds: Growth Stock, New Horizons and Small-Cap Value. They hold some index funds, too, in part to keep expenses low.
One caveat: The Retirement target-date funds have a glide-path -- the stock-bond blend of investments over time — that tilts more toward stocks than bonds in any given year than the typical target-date fund. That results in a little more volatility than the typical target-date fund, but we think that's the right approach for most people.
(T. Rowe Price recently launched a second target-date series called "Target Retirement"—too recent to analyze for the purposes of this story. The series is supposed to be more conservatively positioned than the original target-date funds.)
Finally, a word about a few funds that didn't make the list this year. Two top-notch funds, T. Rowe Price New Horizons (PRNHX) and T. Rowe Price Mid-Cap Growth (RPMGX), are closed to new investors. And two sector funds have new managers. Kris Jenner, the manager of T. Rowe Price Health Sciences (PRHSX), left the firm in February; Taymour Tamaddon, an analyst with the fund, took over. And at T. Rowe Price Media & Telecommunications (PRMTX), Dan Martino left to run New America Growth, and Paul Greene, an analyst with the fund since 2006, took the top spot. Finally, Robert Bartolo recently resigned as manager of T. Rowe Price Growth Stock (PRGFX), the firm's first mutual fund, to move to the West Coast. We have full faith in Price's ability to groom new talent. But we must stick to our own form of discipline, just as any good fund manager would do. And that means we need to see a longer track record before we can confidently recommend these funds.