T. Rowe Price U.S. Blue Chip is a very strong offering in this category.
Larry Puglia has run this fund since its inception in 2003 and has a solid, 21-year track record at its US-sold counterpart. This is the same strategy used here. It involves a diversified portfolio and investments in well-run companies with durable growth prospects and high free cash flows and returns on invested capital.
There have been some subtle changes over the recent years. The fund has taken on a more growth-oriented bent through the years. While it's always resided in the large-growth section of the Morningstar Style Box, it's steadily moved from the core-growth side into high-growth territory. This has become especially pronounced in the five years following the 2007-09 financial crisis. Puglia anticipated growth would be harder for many companies to come by after the recession, so the fund started embracing more aggressive growth stocks. The fund's consumer discretionary stake rose, and its biotechnology exposure hit an all-time high nearly 12% of assets as of September 2014.
Puglia focuses on firms with sustainable earnings, high returns on invested capital, and free cash flow growth. The fund avoids overly leveraged companies, reflected in a debt/capital ratio that's routinely below the Russell 1000 Growth Index's. The quality of a firm's management team matters, too, particularly when it comes to capital allocation. However, the fund isn't simply a compilation of steady blue chips. Rather, it includes plenty of fast-growers, such as Amazon (AMZN) and Priceline.com.
These moves have paid off. The fund's 16.4% trailing five-year return through October 2014 beats 85% of its large-growth peers’. The trade-off is an aggressive risk profile. Indeed, the fund's Morningstar Risk score, which emphasizes downside deviations in returns, is above average for the three- and five-year periods.
Puglia has consistently invested in 120-140 stocks throughout his 21-year tenure, even as the fund has grown. Concentration in the top-10 holdings has typically been 20% to 30%. Most positions are under 5% of assets, though top holdings have occasionally ticked above that.
During Puglia's tenure, the fund has typically held up better than peers and the benchmark in down markets with the exception of 2008. It also lost more than the index and most peers in the market sell-off in March 2014 and ranks close to the category average year to date through Oct 2014.
Given the strategy’s current aggressive stance, investors should be prepared to hang on through bumpy periods. Short-term returns shouldn’t be overemphasized, however, as the fund has good risk-adjusted returns during Puglia's tenure. All told, this fund has plenty of attractive features and we believe it is a very good choice for exposure to US Large Cap Growth stocks. The fund is Rated Silver.
