T. Rowe funds shine with boost from Amazon as Valeant bet sours

Listen to this article

In a tough year for stock pickers, T. Rowe Price Group Inc.’s Joseph Fath and his colleagues are standing out with strong performance.

Fath’s $46.3 billion T. Rowe Price Growth Stock Fund is up 11 percent in 2015, beating 95 percent of its peers, according to data compiled by Bloomberg. Of his firm’s 11 U.S. growth stock funds with at least $1 billion, five have posted double- digit gains.

Growth managers, who focus on companies with fast-rising sales and earnings, are trouncing their value-oriented colleagues this year as the technology, health care and consumer shares they favor outpace the energy and financial holdings preferred by bargain hunters. Baltimore-based T. Rowe Price is making its mark by concentrating in some of the year’s biggest winners, including Amazon.com Inc., Facebook Inc. and Starbucks Corp., trades that more than offset big losses from drugmaker Valeant Pharmaceuticals International Inc.

“They’ve picked a lot of the momentum stocks like Amazon that have done amazingly well,” said Steven Roge, who oversees more than $200 million at R.W. Roge & Co. in Bohemia, New York.

T. Rowe Price has posted gains ranging from 10 percent to 12 percent this year through Nov. 11 in its $30.7 billion Blue Chip Growth Fund, $13.4 billion Institutional Large Cap Growth Fund, $4.4 billion New America Growth Fund and $2 billion Institutional Large Cap Core Growth Fund. Two growth funds that buy smaller stocks, the $25.1 billion Mid-Cap Growth Fund and the $15.7 billion New Horizons Fund, are beating 97 and 91 percent of their peers, respectively.

Industrywide, actively run U.S. equity funds are up 0.4 percent on average, Morningstar Inc.’s data show.

Growth ‘dearth’

There’s no mystery why growth is the place to be, said Michael Mullaney, chief investment officer at Fiduciary Trust Co. in Boston.

“There is a dearth of economic growth in the world, so investors are gravitating to those companies that can show some,” said Mullaney, who helps manage $11.5 billion.

The Russell 1000 Growth Index is up about 4 percent this year, versus a drop of 5.6 percent for the Russell 1000 Value Index.

At Baltimore-based T. Rowe Price, the analysts and managers who invest in growth stocks look for companies that can increase sales and profits rapidly and keep up the pace.

Home runs

“If you can find growth, and durable growth, you have a home run,” Fath, 44, said in a telephone interview.

The firm examines trends reshaping the global economy and tries to identify the companies best able to exploit them. Amazon, the top position in most of T. Rowe’s large-cap growth funds, is a leader in two areas: the shift to e-commerce and the rise of cloud computing.

The shares soared last month after third-quarter revenue gains were powered by a 78 percent surge for Amazon Web Services, the company’s cloud division, which is more profitable than its low-margin e-commerce operation. Amazon posted a surprise profit.

“We’ve had a thesis for some time that Amazon’s gross margins would increase substantially because of the cloud business,” said Larry Puglia, 55, manager of the Blue Chip Growth Fund.

Amazon more than doubled this year. Over five years, the shares quadrupled.

Visa, MasterCard

Amazon, like other T. Rowe technology holdings including Facebook and Google parent Alphabet Inc., is benefiting from a network effect, said Fath. As the companies get bigger and add users, their services become cheaper and more valuable to their customers. Alphabet is up 39 percent this year, Facebook 38 percent.

Visa Inc. and MasterCard Inc., also top holdings in the large-cap growth funds, are benefiting as global consumers move from cash toward credit and debit cards. The stocks are up 19 percent and 14 percent, respectively. T. Rowe has owned both stocks since they came public, according to filings.

One challenge for growth investors, Puglia said, is hanging onto winners when their valuations look expensive. He has sold shares in Starbucks over the years, only to watch the stock march higher.

“Sometimes with a great company you have to be willing to look around corners,” Puglia said. The coffee giant gained 49 percent in 2015.

Growth companies can fall rapidly when their performance disappoints. Priceline Group Inc., the largest U.S. online travel agent and a major T. Rowe holding, slid the most in more than three years earlier this month when its fourth-quarter earnings forecast trailed analysts’ estimates.

Valeant’s fall

T. Rowe’s strategy can be risky when high-fliers fall to Earth.

The firm’s funds also invested heavily in Valeant, whose shares have plunged 72 percent from their August peak after a short-seller accused the company of using a specialty pharmacy to inflate sales. Fath, whose firm was Valeant’s second-largest shareholder as of June 30, declined to comment on the holding.

Fath and Puglia recognize that growth stocks are vulnerable to changes in the economic landscape.

Drug price controls could hurt their health-care holdings. Swiftly rising interest rates could undercut the value of anticipated cash flows far out into the future, one of the factors affecting stock prices. Stronger economic growth could boost the appeal of the beaten-down cyclical stocks value managers buy.

“At this point value looks incredibly cheap,” said Mullaney of Fiduciary Trust.