'Big Is Better' Thesis Wins New Shareholders

When stock mutual funds took a hit in July thanks to a sharp downturn in the market, the T. Rowe Price Blue Chip Growth Fund felt the tremor.

But unlike some small-company funds that had double-digit drops in returns, this large-company fund only lost a few percent. It ended up with a 7 percent gain for the third quarter, much better than the average domestic stock fund. And the fund's assets also grew, soaring 50 percent between June 30 and Oct 1.

"This has been a good year for large-cap stocks, so people tend to seek out our type of fund," explains co-manager Larry Puglia in a phone interview from T. Rowe Price's Baltimore headquarters.

The Blue Chip Growth Fund has year-to-date returns of 21.5 percent as of Oct. 4, well above the 14 percent of the Standard & Poor's 500 stock index.

With the market at record levels lately, some analysts see investors turning to large-capitalization funds as a haven from market volatility. Mr. Puglia says lower risk is the biggest advantage a large-cap growth fund has over a small-cap fund. In his fund's case, risk is reduced by investing in well-established companies that have multiple businesses or franchises.

The companies in his portfolio are able to generate "more durable, more sustainable earnings growth than some of the aggressive-growth companies that have really not been around a long time," he says. Newer companies, he maintains, may only have one or two products "that can be made obsolete by new technologies."

For example, the fund holds stocks of companies like McDonald's, Walt Disney, Travelers Group (which owns brokerage house Smith Barney, as well as recently acquired Aetna Life & Casualty insurance operations), General Electric, and tobacco giant Philip Morris (which also owns Kraft Foods, home of Post cereals and Oscar Mayer).

Analysts say the fund - which aims at long-term growth of capital, rather than current income - is unlikely to blindside investors. "Great returns, with moderate or very low risk," is how Morningstar Inc.'s Kevin Kresnicka describes its performance over the last three years.

When the fund celebrated its third anniversary on June 30, it was eligible for its first rating from Morningstar, a Chicago-based fund tracker. It earned the top rating - five stars.

Since then, its assets have jumped from $223 million to $354 million as of Oct.1.

Puglia attributes the growth to a number of factors, including good performance by his fund and large-company funds in general. The fund's average annual return for the last three years is 20.1 percent, according to Morningstar. Of the more than 500 growth funds that have existed that long, it is in the top 6 percent.

Lead manager Puglia and partner Thomas Broadus Jr. try to run the fund with a long-term perspective. "We generally try to pursue a low-turnover approach.... And when you manage that way, you should not get too overly concerned with short-term results."

Puglia points out that the fund had a turnover rate of only 38 percent in 1995. That means the majority of the holdings did not change.

Given the fund's low turnover, and investments in blue-chip companies similar to those found in the S&P 500, investors might wonder what separates it from an index fund.

Overall, Puglia says they try to do the S&P and index funds one better by finding the best investments within the group of blue-chip companies. He points out that for the past five years the companies in the fund's portfolio have grown earnings at a 16.6 rate versus 11.8 percent for the S&P 500. "We have a higher return on equity than the S&P 500 and we have a lower [dividend] payout ratio, so our companies are generating a lot more capital than the average S&P company."

These managers take a bottom-up approach to stock picking, meaning they look for specific companies that will perform well no matter how the economy is doing, rather than looking for particular sectors and choosing stocks within those.

Puglia says they look for companies that have earnings growth of about 15 percent a year, and meet three key criteria: They have leading market position, seasoned management teams, and strong financial fundamentals.

Management is especially important, Puglia notes, since the fund buys "complex multinationals, and we think it's more difficult to run a Disney, or a McDonald's, or a Procter & Gamble than it is to run a company that is solely domestic."

Only about 5 percent of the fund's investments are international, but Puglia says investors still get exposure to overseas markets because of the large number of multinational companies the fund owns.

Puglia's interest in the fund goes beyond just doing his job: A significant portion of his retirement money at T. Rowe Price is invested in the Blue Chip Growth Fund, he notes. He also holds the company's midcap growth, equity-income, science/technology, and midcap value funds.

A native of Pennsylvania, Puglia started investing with his father when he was young, owning his first stock when he hit his teens. His choice: Citicorp. "Because it was a leading US bank and it was a very cheap stock with a high dividend yield."

Banking has remained a favorite of Puglia, who specialized in the topic at Peat Marwick Main & Co., before signing on as an analyst at T. Rowe Price in 1990.

Puglia's specialties at T. Rowe Price have been financial services and pharmaceutical companies, both of which have substantial weightings in the fund (9 percent and 7 percent, respectively, as of June 30). He says the fund is modestly overweighted in financial stocks, which have performed well "as people have gotten a little more comfortable about the environment for interest rates and inflation."

Although not considered overly risky, this young fund has yet to see a major market correction. It is on average less risky than other growth funds, but would still feel the impact of a correction, Puglia says.

Still, he is optimistic. "Even though the fund hasn't been through a bear market," he says, "there have been downdrafts in the market and corrections and the fund's performance in those corrections has been above average."

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