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All Contents © 2017The Kiplinger Washington Editors
By Nellie S. Huang, Senior Associate Editor
| November 2017
Courtesy T. Rowe Price
Many actively managed funds saddle investors with high fees and mediocre returns. But if your 401(k) plan includes T. Rowe Price funds, you’re in luck.
Out of the 100 largest funds in 401(k) assets in the country, seven are actively run by Price, according to consulting firm Brightscope. (Another eight are target-date portfolios that include index funds). Price’s active 401(k) funds have, for the most part, outperformed their benchmarks over the past decade. Fees for these funds tend to be reasonable, too, ranking below the comparable-fund averages.
Which ones should you choose? To help you decide, we analyze each fund’s investing style, track record and risks, rating them “buy” or “hold.” (We don’t slap any with a “sell” rating.) Note that the share classes listed here may be different and less costly than those in your 401(k). Returns and data are as of Oct. 31; three- and five-year returns are annualized.
Expense ratio: 0.72%
One-year return: 34.6%
Three-year return: 14.8%
Five-year return: 19.0%
Value of $10,000 invested 10 years ago: $25,349
Top three holdings: Amazon.com (AMZN), Alphabet (GOOGL), Facebook (FB)
Blue Chip has taken investors on a hot-and-cold ride lately. The fund beat Standard & Poor’s 500-stock index by about 10 percentage points in 2015, trailed the market by 11 points in 2016 and came roaring back in 2017, returning 33.6%, nearly double the S&P 500’s 16.9% gain.
Such streakiness is usually a red flag for us. But we’re willing to give Blue Chip a pass due to the superb long-term results achieved by manager Larry Puglia. Running the fund since its launch in 1993, he has produced an annualized return of 10.9%. That beat the S&P 500 by an average of 1.4 percentage points per year. The fund has also beaten its bogey, the Russell 1000 Growth index, by an average of 1.6 percentage points per year.
Although Puglia holds 123 stocks, he’s emphasizing a few key areas. Technology stocks account for the largest slice of the fund, at 29% of assets, followed by consumer-oriented stocks (24%), led by Amazon.com, the fund’s largest holding. Puglia also sees good growth prospects in financial firms such as Mastercard (MA) and Visa (V), and he owns shares in several biotech firms, including Alexion Pharmaceuticals (ALXN) and Vertex Pharmaceuticals (VRTX).
Buy this fund for long-term growth. Puglia may take you for a bumpy ride, but you should be handsomely rewarded.
Expense ratio: 0.66%
One-year return: 20.9%
Three-year return: 8.3%
Five-year return: 12.1%
Value of $10,000 invested 10 years ago: $17,892
Top three holdings: J.P. Morgan Chase (JPM), ExxonMobil (XOM), Wells Fargo (WFC)
Equity-Income began a new era in 2015 when John Linehan replaced longtime manager Brian Rogers, who retired. So far, we like what we see. The fund has returned a cumulative 30.1% since Linehan started in November 2015, beating the 29.2% total return of Standard & Poor’s 500-stock index.
Linehan hasn’t changed the fund’s conservative, value-oriented style. He looks for large-cap stocks with strong balance sheets, above-average dividend yields and relatively cheap share prices. He likes to go bargain hunting, too. He snapped up shares of health insurer Anthem (ANTM) in late 2015, after the stock had tumbled, and he swooped in on Ford Motor (F) in 2016, when it hit a rough patch. Both stocks have rebounded sharply since then.
One thing that disappoints us: the fund’s yield. Despite its billing as an equity-income fund, it paid out at a 2.1% rate over the past 12 months, yielding only a tad more than the S&P 500 (at 2%). That is frustrating, considering that the portfolio is packed with dividend-paying stocks. Fund fees erode some of their payouts, though, leaving investors with a middling yield.
We advise holding the fund for now. We want to watch Linehan a little longer before we rate Equity-Income a “buy.”
Expense ratio: 0.68%
One-year return: 32.8%
Three-year return: 14.2%
Five-year return: 18.2%
Value of $10,000 invested 10 years ago: $24,358
Top three holdings: Apple (AAPL), Amazon.com (AMZN), Alphabet (GOOGL)
Thomas Rowe Price founded Growth Stock in 1950 as the firm’s flagship fund. Back then, the idea was to find big companies with strong cash flows, growing market opportunities and solid management teams. That philosophy still guides this fund. And manager Jeff Fath, who took over in 2014, isn’t pulling any punches.
Most of the companies in this portfolio are growing rapidly. Top picks include Chinese internet firm Alibaba Group (BABA), Amazon and Facebook (FB). These are high-momentum, high-growth stocks that have fared exceptionally well, driving the portfolio’s superb returns this year (up 31.5%, versus a 16.9% gain for the S&P 500).
But this isn’t a fund for cautious investors. Its concentration in high-growth stocks could be a liability if momentum suddenly shifts to other parts of the market. And Fath’s record has been inconsistent: The fund trailed the S&P 500 badly in 2014, trounced it by a wide margin in 2015 and then fell far behind again in 2016.
We think this fund remains a decent pick for exposure to large-cap growth stocks in a 401(k). But it is spicy and could suffer heavily in a market downturn.
Expense ratio: 0.56%
One-year return: 38.3%
Three-year return: 15.5%
Five-year return: 20.0%
Value of $10,000 invested 10 years ago: $27,440
Top three holdings: Amazon.com (AMZN), Microsoft (MSFT), Priceline Group (PCLN)
Long-term investors in this large-cap growth fund have fared exceptionally well. Gains have averaged 12.2% on an annualized basis over the past 15 years, beating 91% of its rivals and crushing the S&P 500 by more than two points a year.
Despite the fund’s smashing record, we remain cautious about recommending it. The fund achieved its 15-year returns under manager Rob Sharps. But he left in early 2017 to become co-head of global equities at T. Rowe. A new manager, Taymour Tamaddon, has run the fund since then, and it’s too soon to give him a strong vote of confidence.
Granted, we’re optimistic about how he’ll do. Tamaddon racked up solid results at the previous fund he managed, T. Rowe Price Health Sciences (PRHSX), producing a 21.1% annualized return over a three-year stretch, beating his bogey. So far, he’s off to a good start at Institutional Large Cap Growth, returning 34.8%, well ahead of the market average.
Nonetheless, we want to see more results before we grant this fund a “buy” rating.
Expense ratio: 0.77%
One-year return: 27.6%
Three-year return: 12.9%
Five-year return: 17.4%
Value of $10,000 invested 10 years ago: $25,959
Top three holdings: Teleflex (TFX), Textron (TXT), Microchip Technology (MCHP)
This is one of the best stock funds you can buy. Manager Brian Berghuis, who has run the fund since it opened on June 30, 1992, has racked up a 13.8% annualized return (through September 30). Not only has he beaten his bogey, the Russell Mid Cap index, from the start, but he has edged the S&P 500, the Russell 2000 and the Dow Jones industrial average.
Aiming for growth, Berghuis looks for midsize firms that can increase earnings by more than 12% per year. He likes companies with proven products or services in industries where demand is expanding.
When he finds a compelling stock, he tends to stick with it. The fund’s annual turnover rate—the percentage of stocks that the manager replaces in a given year—is just 29%, far below the 64% average for mid-cap funds. Berghuis has owned shares of Microchip Technology, which makes microcontrollers (semiconductor chips for electronic devices), for instance, since 2003.
If your 401(k) offers this fund, snap it up. And consider yourself lucky. New investors can no longer buy the fund outside of a retirement plan.
Expense ratio: 0.79%
One-year return: 33.5%
Three-year return: 13.9%
Five-year return: 18.7%
Value of $10,000 invested 10 years ago: $31,541
Top three holdings: Vail Resorts (MTN), SS&C Technologies Holdings (SSNC), CBOE Global Markets (CBOE)
Henry Ellenbogen took charge of this small-company stock fund in March 2010. Since then, he has produced an 18.6% annualized return, beating the 13.3% return of the Russell 2000, an index that tracks small-cap stocks. Also impressive: New Horizons has been 10% less rocky than its benchmark.
Ellenbogen likes small, fast-growing companies with solid footholds in their industries. He hangs onto winners long after they grow into mid- or large-cap stocks. For instance, he first purchased Netflix (NFLX) in 2011, when its market value was about $14.2 billion. Today, it’s worth $85.7 billion.
We highly recommend buying this fund if your 401(k) offers it. It is closed to new investors outside of retirement plans.
Expense ratio: 0.90%
One-year return: 25.8%
Three-year return: 10.1%
Five-year return: 14.7%
Value of $10,000 invested 10 years ago: $25,334
Top three holdings: SS&C Technologies Holdings (SSNC), John Bean Technologies (JBT), Teledyne Technologies (TDY)
This small-cap stock fund has been exceptional. But we’re hesitant to recommend it now, due to a changing of the guard.
Longtime manager Greg McCrickard, who ran the fund for 24 years, retired in October 2016. Associate manager Frank Alonso took over. And he has yet to distinguish himself, producing a 19.7% annualized return, in line with the fund’s bogey, the Russell 2000 index.
Hold this fund if it’s your only choice for exposure to small-cap stocks in your 401(k). But until we can get a better read on Alonso’s performance, we’d recommend putting your money in a small-cap index fund or T. Rowe Price New Horizons (PRNHX), if you have access to it in your 401(k).
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