A lot has happened in the past seven years -- the U.S. went to war in Iraq, the Boston Red Sox won their first World Series title in 86 years, and new celebrity couplings such as "Brangelina" and "TomKat" have emerged. In the investment world, the past seven years also have seen tremendous upheaval. We have experienced one of the most dramatic market drops in decades, followed by one of the longest recovery periods. However, one thing has remained constant during this time -- growth stocks have been out of favor with the market. After being beaten up during the bear market, growth stocks have recovered, but not as strongly as their value-oriented counterparts.
However, that trend will not continue forever. At some point, growth stocks will stage a comeback, and investors who have a strong exposure to these companies are likely to make some serious money. But with the recent punishing environment for growth stocks, it is difficult to find many growth-oriented mutual funds with a decent performance track record. And unfortunately, one of the better moderate growth funds out there may not be a top pick much longer.
A top-notch growth fund
The T. Rowe Price Growth Stock fund (PRGFX) is one of those rare growth-oriented funds that have actually kept pace with the broader market in recent history. The fund looks for companies with strong cash flow and above-average rates of earnings growth. Right now, picks such as General Electric (NYSE:GE), Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), and Schlumberger (NYSE:SLB) are among the fund's top holdings. Growth Stock also invests in a slug of international holdings (currently 17% of assets), so the fund has gotten a nice boost from foreign markets the past few years. A low 38% annual turnover and low expenses add to this fund's appeal.
Performance here has been impressive, with the fund posting a 10-year annualized return of 9.3% ending May 31, 2007. With the exception of the speculative years of 1998 and 1999, this fund has landed in the top half of the growth-fund universe rankings every year. The fund's price-conscious approach to growth investing likely has a lot to do with these positive results. A look at the chart below shows how the fund has fared compared with the broad market, and compared with the average large-growth mutual fund.
|
Fund/Index |
10-Year Average Annual Return Through May 2007 |
What $10,000 in 1997 Would Be Worth Today |
|---|---|---|
|
T. Rowe Price Growth Stock |
9.3% |
$24,234 |
|
S&P 500 Index |
7.8% |
$21,150 |
|
Average Morningstar Large Growth Fund |
6.4% |
$18,570 |
The only constant is change
Unfortunately, one of the things that has made the Growth Stock fund so great over the past 10 years is about to change. T. Rowe Price recently announced that the fund's longtime manager, Robert Smith, will step down in October to lead another T. Rowe fund. Smith has served as manager of Growth Stock fund since March 1997. His replacement will be Rob Bartolo, who currently heads up the T. Rowe Price Media & Telecom fund (PRMTX). While results under Bartolo's command have been impressive at that fund, he has served as manager only since 2005. It also remains to be seen how he will translate his success at picking communication companies into the more widely diversified growth approach that the Growth Stock fund is known for.
Much as it saddens me to say it, I think this changing of the guard signifies the end of an era for Growth Stock. Manager changes at funds should always cause investors to rethink their ownership position. And since, in this case, the new manager does not have significant experience investing in a similar manner at T. Rowe Price, I don't think Growth Stock's past track record will mean much in light of the management change. While the fund is no doubt still a good one, it is unclear whether it will be able to repeat its past performance successes. Once Smith steps down this fall, it might make sense to find a different growth fund for your portfolio.
It stinks when bad things happen to good funds, but remember your loyalty is to yourself and to your investment. Finding funds with a long-tenured management team is one of the most important steps you can take in building a successful mutual fund portfolio. Do this, and you can rest a bit easier, no matter what type of investing environment the next seven years may bring.
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Fool contributor Amanda Kish lives in Rochester, N.Y., and does not own shares of any of the companies or funds mentioned herein. Microsoft is an Inside Value recommendation. The Fool has a disclosure policy.
