Shares of the T. Rowe Price Blue-Chip Growth Fund, which go by the ticker symbol TRBCX, have delivered 10% annual returns since its inception date of June 30th, 1993. It has beaten the S&P 500 index by a full percentage point each year, and has even performed half a percentage point better than the small-cap indexes.
What I like about this fund is that it is stuffed with businesses that have a ten-year trailing earnings per share growth rate of 15% while the portfolio itself only sports a P/E ratio of 20. In these moderately overvalued times, that is the best thing you can do—latch onto the fastest growing firms that are trading at prices that bear some sort of connection with reality.
It really is a “Who’s Who” fund of the fastest growing large-cap stocks. The fund is stuffed with Alphabet stock, which has grown earnings by almost 30% annually for the past decade. It has credit card giants Visa and Mastercard, which sport earnings per share growth rates in the 15-20% range. It is loaded with Microsoft stock, which is sitting on tens and tens of billions of cash and is growing at 9% each year. It purchased shares of Morgan Stanley back when financial stocks were undervalued, and has participated nicely in its recent doubling. Every T. Rowe Price manager seems to have a love affair with Danaher, which is run by excellent capital allocators that have grown the business by 14% annualized since 1987. It also owns stellar-performing shares of Facebook and Amazon, though hopefully fund manager Larry Puglia sells those two stocks before P/E compression catches up with it.
And that’s a big chunk of your holdings. The stocks mentioned above constitute 40% of the fund. If Puglia and the rest of the management of the the T. Rowe Price Blue-Chip Fund stick with these investments, I think there is a good chance that TRBCX will beat the S&P 500 by one to three points annually on a pre-tax and pre-fee basis.
Why? Because the S&P 500 is growing at 6% and is valued at around 24x earnings. Meanwhile, the Blue-Chip Fund trades at 20x earnings and is filled with stocks growing at a rate of 8% to 11%. It is offering you more growth at a better valuation than the market as a whole. That strikes me as setting the odds up in your favor. If you’re approaching retirement and you want to own the best companies in the world that are still showing traces of their fast growth days, this fund is for you.
However, I do have a couple of concerns. The turnover rate of 32% is a bit higher than I’d like to see—it means each stock in the fund is only held for an average period of three years. I’m also concerned about the fact that everyone else seems to have realized what a great fund this is, as it holds over $32 billion in assets. Once it crosses $50 billion or so, I have concerns about the management team’s ability to make investments without moving the market. It also means that its universe of stocks for consideration is rapidly shrinking to the most liquid mega-caps.
Also, the fund only has 0.1% of its assets in cash. It is, as they say, “fully invested.” The risk here is that if there is a stock market correction, and people do what they always do and withdraw money from the stock market, the management team of the fund will have to sell some of its holdings to meet redemptions. I suppose this is a risk confronting every mutual fund in existence, but when the cash position is minimal, the sensitivity to fund withdrawals is heightened. As a basic of good stewardship, I would expect to see at least 1% of assets at a very minimum set aside to cover potential withdrawals. All it takes is net outflows greater than $32 million for the fund management to have to start selling some stock holdings to comply with redemptions.
But so far, most of my concerns have been mitigated.
In the past three years, there have been no distributions that would require payment of the short-term capital gains taxes. And there have no distributions at all in the fund’s history that have been greater than 6% of the net asset value, meaning the fund-holders have never been hit with an unexpected bombshell tax bill from their investment.
And the types of investments that TRBCX owns right now—Danaher, Microsoft, Visa, Mastercard, Morgan Stanley, Alphabet, Amazon, Facebook—could just as easily be owned with $50 billion in assets under management.
The expense ratio for the blue-chip fund is 0.71%, which is on the low end of average for large-cap actively managed mutual funds (the industry average is a bit over 1%). If it is available to you through a 401k, there might be a lower rate that got brokered for you on your behalf. But even if you had been paying the full fee for all these year, you would have still beaten the S&P 500 by a little bit.
My view is that the Blue-Chip Growth Fund’s outperformance is going to become even greater in the coming years. In particular, the major investments in stocks like Alphabet, Visa, Mastercard, and Danaher are going to keep growing at a double-digit rate to create a bigger gap between the fund’s results and the performance of the S&P 500. Also, the fact that the fund’s valuation is 20% cheaper than that of the S&P 500 might be another area of outperformance because it won’t have to experience as much P/E compression.
The other holdings—which include Starbucks, Disney, Lockheed Martin, Boeing, O’Reilly Automotive, and Apple—are exemplary as well. They are just so small in the 0.1% to 0.5% of assets range to have much of an effect on the future performance of the fund. I do wish it had more cash and a tad lower turnover, but out of the 7,238 mutual funds in existence, I would wager that the T. Rowe Price Blue-Chip Growth Fund is in the top 150 or so.
Originally posted 2017-01-15 06:00:02.