Today’s article in Barron’s includes excerpts from an interview with a long-time manager of the T. Rowe Price Blue Chip Growth Fund (TRBCX, Retail Class; PABGX, Advisor Class; RRBGX, R Class shares). This $24.8 billion fund has an expense ratio of 0.74% to 1.25% (depending on the share class) and a relatively low turnover rate of 35% in the past calendar year. According to the article
…the T. Rowe Price Blue Chip Growth Fund (ticker: PABGX ) has beaten the competition and the index over the standard time frames, including three, five, and 10 years, and since inception more than 20 years ago. But veteran manager Larry Puglia, who has run the fund since its 1993 launch, has also racked up rolling five-year returns that have beaten the competition 93% of the time.
In 2013, 20 years after Puglia took charge, the fund gained 41.6%, marking its second-best run since inception, and Morningstar nominated him for Domestic-Equity Fund Manager of the Year. It returned an annualized 17.74% and 9.34% over the past five and 10 year periods, slightly ahead of the Standard & Poor’s 500 at 16.39% and 8.40%.
For further analysis, this post will use the Retail Class (TRBCX) of the fund. These shares have the lowest expense ratio and are readily accessible to individual investors.
The primary benchmark for the fund is the S&P 500® index. One of the practical, long-lived implementations of this index is the SPDR® S&P 500® ETF (SPY). Alpholio™ calculations show that over the past 10 years, the fund returned more than the ETF in about two-thirds of rolling 12-month periods.
The median market cap of the fund’s holdings is currently just over $48 billion, which is substantially lower than $68 billion for the S&P 500® index. Additionally, with the fund’s growth profile, the Russell 1000® Growth index may be a more appropriate benchmark. A practical embodiment of that index is the iShares Russell 1000 Growth ETF (IWF). The fund beat that ETF in about 64% of all rolling 12-month periods in the past 10 years.
To gain further insight into the T. Rowe Price Blue Chip Growth fund’s performance, let’s use the Alpholio™ methodology that more accurately adjusts for portfolio risk. Here is a chart of cumulative RealAlpha™ for the fund:
Over the past 10 years, the fund has not generated a significant amount of cumulative RealAlpha™. The only exception was an outstanding, but transient, performance in the second half of 2013. Overall, the fund produced only a fraction of a percentage point of annualized discounted regular and lag RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). At about 16.5%, the fund’s standard deviation (volatility) was just slightly higher than that of its reference ETF portfolio. The fund’s RealBeta™ was approximately 1.06.
The following chart illustrates changes of weights in the reference ETF portfolio for the fund over the same analysis period:
The fund had top equivalent positions in the iShares Morningstar Large-Cap Growth ETF (JKE; average weight of 47.8%), Vanguard Consumer Discretionary ETF (VCR; 11.3%), iShares Morningstar Mid-Cap Growth ETF (JKH; 9.8%), Vanguard Financials ETF (VFH; 9.1%), PowerShares Dynamic Market Portfolio (PWC; 6.3%), and SPDR® Morgan Stanley Technology ETF (MTK; 5.6%). The Other component in the chart collectively represents three additional ETFs with smaller average weights.
In conclusion, after a true adjustment for risk with a dynamic reference portfolio of a small number of ETFs, T. Rowe Price Blue Chip Growth fund failed to substantially outperform over the past 10 years, except for a temporary spike in 2013. Although the fund is diversified, its portfolio is currently fairly concentrated with top-ten positions accounting for about 32% and top-four sectors for 81.5% of assets. While the fund’s expense ratio is quite competitive, its sheer size undoubtedly presents an investment challenge.
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