In founding his firm, Thomas Rowe Price Jr. believed that investors could earn superior returns by buying well-managed companies in fertile fields whose earnings and dividends could be expected to grow at rates faster than those of inflation and the overall economy. Robert W. Smith, portfolio manager of the $9.6-billion T. Rowe Price Growth Stock Fund (PRGFX), follows the same principle.
Smith seeks companies that excel in cash generation, have well-structured business models, and possess the ability to re-invest capital at very good rates of return. Standard & Poor’s, Business Week Excellence in Fund Management Awards recently recognized Smith for his proven history of strong management, anchored by a track record of consistently sound returns.*
For the one-year period through April 29, 2005, the fund gained 3.64%, while the average large-cap growth fund rose 1.62%. For the three-year period, the fund gained 3.86% (annualized), beating the peer group, which edged up 0.83%. Similarly, for the five-year period, the fund dropped 2.11%, while the peer group plunged 8.43%.
Smith’s investment philosophy and stock-selection process have generally remained consistent: he buys companies with increasing market share, good management teams, and good use of cash flow, noting that such companies tend to prosper during difficult times. More importantly, Smith is interested in fairly priced companies that will grow in value over time, provide a favorable return-on-capital, and, in particular, generate at least 15% return-on-equity.
Smith’s research team focuses on individual sectors (most often in growth-oriented businesses) by analyzing their historical performance and outlook. Once the sector has been selected, individual securities are evaluated and chosen with long-term goals in mind.
As of April 30, 2005, the fund’s top sectors consisted of information technology, 24.4%; financials, 18.7%; consumer discretionary, 17.3%; healthcare, 13.1%; industrials and business services, 8.4%; consumer staples, 6.1%; and energy, 4.5%.
Prior to the dot-com implosion, Smith kept the portfolio underweight in technology stocks, adopting a more conservative approach. Now it ranks as the fund’s top sector. Despite the recent slide in technology equity prices, Smith believes sector fundamentals will begin to improve and achieve good growth, demand, and valuations for the first time in years. Within the tech sector, Smith feels his odds of owning Hewlett-Packard (HPQ) are slim to none, citing its lack of proprietary business and decreasing market share. On the other hand, Dell Inc. (DELL) is gaining ground; Smith feels the company is well-managed and uses capital favorably.
Smith attributes a significant portion of the fund’s outperformance to his energy holdings, which were boosted by record high oil prices. Additionally, the materials sector generated good returns largely due to strengthening global demand for commodities, especially from China.
While Smith presently has an overweight position in healthcare, including such names as UnitedHealth Group (UNH) and WellPoint Inc. (WLP), he is steering clear of the pharmaceutical industry.
Smith maintains a diverse portfolio of stocks with a long history of growth, thus mitigating each individual company’s risk. With respect to volatility, the fund features a Sharpe ratio of 0.16, versus the peer group average of -0.04.