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Primecap Odyssey Growth: Stellar Record, Low Fees

This Gold-rated fund is a fine vehicle for new investors to gain access to the Primecap managers.

David Kathman, CFA, 01/21/2017

The following is our latest Fund Analyst Report for Primecap Odyssey Growth Fund POGRX. Morningstar Premium Members have access to full analyst reports such as this for more than 1,000 of the largest and best mutual funds. Not a Premium Member? Gain full access to our analyst reports and advanced tools immediately when you try Morningstar Premium free for 14 days.

Primecap Odyssey Growth is one of six funds managed by the Primecap team, whose Vanguard Primecap VPMCX has achieved one of the fund industry’s best track records during the past 30 years. The managers' patient, disciplined contrarian growth strategy emphasizes companies with strong growth potential but temporarily depressed valuations, and they're willing to hold on to stocks for a long time waiting for a turnaround. Each of the five portfolio managers independently runs a sleeve of assets, allowing them to follow their convictions within this broad strategy, and they don’t hesitate to make significant sector and industry bets in areas where they see a lot of potential. In recent years, technology, biotech, and airline stocks have been the managers’ favorites.

Within that framework, this fund stands in the middle of the Primecap Odyssey funds in terms of its growth orientation; it is more aggressive than relatively cautious large-blend sibling Primecap Odyssey Stock POSKX but not as risky as mid-cap growth Primecap Odyssey Aggressive Growth POAGX, which holds considerably more small- and mid-cap stocks (70% versus this fund's 42%). Its top holdings include big names like Microsoft MSFT and Amgen AMGN but also smaller, faster-growing stocks such as   Seattle Genetics SGEN and Abiomed ABMD, both of which were among the top five holdings as of Sept. 30, 2016.

This approach has worked very well since the fund's 2004 inception and has mostly helped the fund avoid the performance extremes of some of its siblings. It has only trailed the large-growth Morningstar Category in two calendar years since inception (2007 and 2011), and it easily beat the category each year from 2012 through 2016, even as several other Primecap funds went through rough stretches. The fund will inevitably go through some periods when it trails its peers, such as the first half of 2016, when returns were dragged down by healthcare and airline holdings. But such short-term slumps are nothing to worry about, and its stellar record and low expenses earn it a Morningstar Analyst Rating of Gold. It and Primecap Odyssey Stock are the team's only funds that remain open to new investors.

Process Pillar: Positive | David Kathman, CFA, Ph.D. 01/06/2017
The Primecap management team uses a stock-picking strategy very similar to that found at the American Funds, where the founders worked before starting Primecap. That strategy can perhaps best be described as patient contrarian growth. The managers look for companies that have grown rapidly in the past and have good future growth potential but that have become temporarily cheap for some reason.

The team is often willing to wait for a stock to rebound, as long as nothing about the company has fundamentally changed. As a result, the Primecap Odyssey funds have very low turnover, typically around 10% annually, and favorite stocks can stay in the portfolio for years. When the managers do trim or sell a stock, it's usually for valuation reasons, though occasionally they'll sell because something about the company or the economic environment has shifted significantly.

Relative to the five other funds this team runs, this fund is more aggressive than the more corelike Vanguard Primecap and Primecap Odyssey Stock. It focuses a bit more on small- and mid-cap stocks; its $25 billion average market cap as of January 2017 is smaller than the team's other charges except for Primecap Odyssey Aggressive Growth. It also tends to have more-pronounced sector bets than its siblings, with greater weightings in fast-growing biotech and diagnostics stocks.

Each Primecap portfolio is divided into sleeves that are managed independently by each of the listed managers, with some senior analysts also getting small sleeves to run. This approach tends to keep the overall portfolio fairly diversified, but, because all the managers interact frequently and tend to look at the market in similar ways, the portfolio is often significantly tilted toward sectors and industries that the managers find attractive.

David Kathman, CFA, is a senior fund analyst with Morningstar.

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