Why We Still Like T. Rowe Price New Horizons

Key Morningstar Metrics for T. Rowe Price New Horizons

• Morningstar Medalist Rating: Silver
• Process Pillar: Above Average
• People Pillar: Above Average
• Parent Pillar: High

T. Rowe Price New Horizons PRNHX is aggressive, but its strong research team and long-term investment framework have merit.

This fund looks for companies with lots of growth potential, but it won’t chase those that don’t have staying power. The former criterion has historically led the fund into small-cap territory, but the latter has pulled it in the other direction in recent years. The former small-cap fund switched to the mid-growth Morningstar Category in 2018 because the managers hung on to their big winners as they matured. Furthermore, since manager Josh Spencer assumed control in March 2019, he has emphasized companies on the low side of mid-cap territory and strayed from small caps outside of biotechnology. Spencer favors mid-caps’ more established competitive advantages and proven earnings power. Markets have agreed in recent years as mid-caps have outperformed small caps.

Still, the strategy’s official benchmark is the small-cap Russell 2000 Growth Index, and Spencer hasn’t abandoned its small-cap roots. While he rides his winners as they grow, he still buys small caps, albeit at the top end of the range. He’s also been cognizant about trimming—and ultimately selling—stocks that appreciate too far into mid-cap territory.

The fund’s hybrid approach makes it difficult to compare with its mid-growth peers. While the fund’s no-load share class gained 21.3% in 2023, that barely ranked above the mid-growth peer average despite beating the Russell 2000 Growth Index by nearly 3 percentage points. The portfolio’s small-cap holdings (most of them in biotechnology) were a key reason for underperformance versus mid-cap benchmarks. On the plus side, Spencer stuck by many of his beaten-down tech stocks in 2022, which proved to be a good call and boosted returns.

Despite recent headwinds, this fund still has an enviable long-term track record versus all relevant benchmarks. Standing in its favor is a portfolio manager with the requisite background to succeed, a large and detail-oriented analyst team, access to private-market opportunities, and a disciplined investment framework. While the portfolio is at somewhat of a disadvantage if larger mid-cap stocks do well, there hasn’t historically been a strong relationship between company size and performance within the mid-growth universe. Granted, the past few years are an exception.

Investors in this recently reopened strategy should see things through.

T. Rowe Price New Horizons: Performance Highlights

Josh Spencer became the lead manager of this strategy at the end of March 2019 and got off to a strong start before fizzling.

The fund’s no-load shares gained 6.9% annualized from Spencer’s debut through November 2023, trailing its average mid-growth category peer by 60 basis points and the Russell Midcap Growth Index category benchmark by 1.9 percentage points. Spencer measures his performance relative to the Russell 2000 Growth Index, which he did outpace by 3.2% annualized, though a substantial mid-cap bias complicates the comparison.

The fund soared in 2019 and 2020 when its high-growth leanings and strong stock picks delivered top-quartile results among peers, but it floundered in 2022 with a bottom-decile finish as those factors reversed. A lack of exposure to soaring energy stocks, poor healthcare and technology picks, and a paucity of normally steady and defensive industrials contributed to the disappointing results.

In 2023, hugging the respective top and bottom borders of the small- and mid-cap segments hurt the fund’s results relative to mid-growth benchmarks.