Why We've Downgraded This Popular Fund
Succession plans are on the horizon at T. Rowe Price Blue Chip Growth.
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Despite T. Rowe Price Blue Chip Growth's promising future, the eventual retirement of experienced lead manager Larry Puglia drops its Morningstar Analyst Rating to Silver from Gold for all share classes except the more expensive R shares, which get a Bronze rating.
A new era looms for this strategy, which Puglia has successfully led since its 1993 inception. Puglia, 60 years old in 2020, has not set a date, but is likely to retire within the next two years. T. Rowe Price solidified succession plans by naming Paul Greene associate manager in January 2020, allowing him a long time to delve beyond his areas of expertise.
Greene brings valuable skills to the job. He delivered knockout returns at T. Rowe Price Communications & Technology (PRMTX) from May 2013 to April 2020, covering picks that have also boosted results here, including Amazon.com (AMZN) and Facebook (FB). He's familiar with holdings consuming 40% of the portfolio's assets. Plus, he'll rely on the same central analyst team from which Puglia draws, which is historically strong in growth-leaning sectors. These factors help set Greene up for success.
The strategy's size is one looming challenge. Greene ran around $7 billion at his previous charge, much smaller than this strategy's $100 billion asset base, which could be harder to navigate. Still, Greene took a long-term approach at his previous assignment, with turnover averaging 12% annually; that type of patience should work to this strategy's advantage.
Greene won't drastically alter the strategy. Puglia has succeeded with a diversified mix of aggressive and steady growers, compiling a record that beat the Russell 1000 Growth Index by 1.5 percentage points annualized from his start through June 2020. It held strong in a variety of market environments, including losing less than the benchmark in the pandemic-induced Feb. 19-March 23 sell-off. Puglia's eventual departure triggers the strategy's downgrade, but Silver remains a strong vote of confidence in its future.
Process | Above Average
The strategy earns an Above Average Process rating because manager Puglia has consistently followed an approach that's effectively combined T. Rowe Price's strong analytical resources and his own insights. Eventual successor Greene will use a similar approach that will help it maintain an edge. They focus on firms with sustainable earnings, high returns on invested capital, and free cash flow growth, avoiding overly leveraged companies. The quality of a firm's management team matters, too, particularly when it comes to capital allocation. The strategy often has a high percentage of assets in stocks with wide or narrow Morningstar Economic Moat Ratings.
However, the strategy isn't simply a compilation of steady blue chips. Rather, it includes plenty of fast growers, including a few non-U.S. names. The strategy's long-term earnings growth is regularly above the benchmark's, but it has also traded at higher price multiples at times. At more than $100 billion in assets, size could present a challenge as T. Rowe Price's other growth managers traffic in many of the same names. However, the portfolio remains focused on highly liquid large-cap stocks where trading isn't as challenging; it has never overly relied on less-liquid small- and mid-cap names to gain an advantage over the competition. Ultimately, the portfolio is distinct enough to give it an edge over the benchmark and peers.
People | Above Average
A looming change of the guard drops the strategy's People rating to Above Average from High. Manager Larry Puglia joined T. Rowe Price in 1990 as a financial-services analyst and has managed this strategy since its mid-1993 inception, making him one of the category's longest-tenured managers. He was nominated for Morningstar Domestic-Stock Fund Manager of the Year in 2013 and 2017 and invests more than $1 million here.
Paul Greene's appointment as associate manager in January 2020 provided clarity on succession plans. Puglia, age 60 in 2020, will likely retire within the next two years, allowing sufficient time for a hand-off. Greene will use the period to ramp up on areas outside his expertise as an analyst and manager of T. Rowe Price Communications & Technology, which he ran from 2013-20. During his tenure, that fund gained 14.4% annualized, well above the communication category's 3.9%. He's collaborated with Puglia on many of this strategy's top picks, such as Amazon and Facebook, and his experience makes him a logical candidate for this role given his deep familiarity with holdings constituting 40% of assets. While Greene hasn't managed a diversified portfolio before, he'll rely on the same well-regarded analyst team Puglia has used. That team is a huge strength at T. Rowe Price. The analyst team has managed through changes well and maintains a stable investment culture.
Parent | High
T. Rowe Price remains well-positioned in an increasingly competitive industry, earning a High Parent rating. It has withstood the headwinds facing active managers with its rigorous research process, strong performance across asset classes, and continued investment in its research team. Head count grew 9% in 2019, and T. Rowe’s debt-free balance sheet gives it flexibility to keep hiring amid an economic slowdown, as it did in past downturns. A build-out of its multi-asset team in recent years supported enhancements to its prized target-date suite in 2020, and the firm has bolstered its quantitative capabilities for internal and external use. While T. Rowe typically home-grows its talent, it has made several experienced equity analyst hires in key sectors lately. This strengthened analyst bench has allowed the firm to capably handle expected manager retirements with its characteristically smooth transitions as well as the rare surprise loss, such as when star manager Henry Ellenbogen left to start his own firm in 2019.
T. Rowe is evolving from a business standpoint. It’s broadening distribution outside the U.S., expanding its ESG capabilities, and planning for semitransparent exchange-traded funds, expected in late 2020. Yet it brings a measured, thoughtful approach to strategy launches and capacity management, with fundholders’ interests at the forefront.
It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s second-cheapest quintile. Based on our assessment of the fund’s People, Process, and Parent pillars in the context of these fees, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Silver.
This strategy has delivered consistently strong results under Puglia. From his 1993 start date through June 2020, the fund's five-year rolling returns never landed in the large-growth category's bottom quartile and beat the Russell 1000 Growth Index 74% of the time. Overall, the fund's 11.5% annualized gain on his watch exceeds the index's 10.0% and the category's 8.8%, and it maintains an edge on a risk-adjusted basis.
The fund has posted superb returns in the bull market dating back to 2009, with top-quintile or better showings in 2009, 2012, 2013, 2015, 2017, and 2018. It has lost less than peers and the benchmark in down markets throughout Puglia's entire tenure. However, it has been a bit more volatile than the benchmark in recent years versus earlier in Puglia's tenure, capturing 105% of the benchmark's losses in down markets during the past 15 years. The fund had an uncharacteristically poor showing in 2008. It underperformed in the market sell-off from July 2015 to February 2016 because of its above-average stake in biotech stocks and some tech picks. But it held its own against the benchmark during 2018's fourth-quarter market pullback, and it posted a slightly smaller loss in 2020 during the Feb. 19-March 23 pandemic-induced drawdown. Participating in the strong rally for growth stocks since then has helped the fund land solidly ahead of the benchmark in 2020's first half.
Puglia has consistently invested in 120-140 stocks throughout his tenure, even as the strategy has grown. Concentration in the top 10 holdings was near the high end of its historical range at 48% as of March 2020. Most positions were under 5% of assets, but Amazon stood at 10% recently, above the Russell 1000 Growth benchmark's 6% weighting, to reflect Puglia's long-term conviction. The strategy had a similarly sized position in Apple (AAPL) a few years ago when that name was a huge index constituent and Puglia wanted to keep positioning distinct from the benchmark (recently it owned 3%, well below the benchmark's 8% stake).
The strategy has kept volatility in check by diversifying its picks within sectors and balancing economically sensitive ones with more-defensive plays. It has been light on consumer staples in recent years, instead holding three fourths of its assets in consumer discretionary, technology, and communication-services stocks. Out-of-benchmark China positions, including Alibaba (BABA) and Tencent (TCEHY), have helped it stand out versus large-growth category peers. But it is willing to venture beyond traditional growth haunts, as reflected in its above-average financials stake. The portfolio hasn't historically owned many private companies, but that exposure could creep up slightly when successor Greene eventually takes over given such ownership at his previous charge.
Katie Rushkewicz Reichart does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.