Value Added


A Growth Fund for Spicing up your Portfolio

Steven Goldberg

Primecap Odyssey is a terrific fund that's filled with small and midcap stocks. It's a buy. Just don't overdo it.



Maybe I'm getting carried away because the market has done so well lately. But I'm excited about Primecap Odyssey Aggressive Growth (symbol POAGX), a fund that invests mainly in the stocks of fast-growing small and midsize companies, including a raft of biotech and technology names. It's a long way from the boring blue-chip stocks and funds I usually recommend. But I think it's simply too good to overlook.

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Returns have been awesome. Over the past five years through March 18, the fund returned an annualized 13.9%. That compares with 6.5% annualized for the average midcap-growth fund and 5.5% for Standard & Poor's 500-stock index. Another plus: Annual expenses are just 0.68%, low for an actively managed fund.

Performance has not been consistent, though. For example, the fund trailed 95% of midsize growth funds in 2007 and 73% of its peers in 2010. I expect the pattern of feasts and famines to continue.

The lumpy returns stem from the managers' willingness to make big sector bets. It's also due to their willingness to buy out-of-favor stocks and hold them for the long term. Annual turnover in the fund is only about 14%, suggesting that stocks are held for seven years, on average. Odyssey Aggressive Growth has been about 27% more volatile than the S&P 500. That's about average for midcap growth funds.

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The managers love health care and tech. They believe the future innovation of those companies isn't reflected in their prices. The fund has 38% of its assets in health care, and 29% is in tech.

The managers anticipate big strides in medicine. "We believe pharmaceutical development is being enhanced in terms of speed, efficacy and safety as the dramatic reduction in the cost of sequencing genes is leading to a more fundamental understanding of disease," they wrote in their most recent annual report. That would be a welcome development given drug makers' poor record inventing blockbuster products over the past decade.

Although Morningstar puts Odyssey Aggressive Growth in the midcap category, the fund invests of companies of all sizes. According to Morningstar, it has 36% of assets in midsize companies, 20% in large companies and the rest in smallcap and microcap stocks, including many obscure biotech outfits. Among some of the big-cap names in the portfolio are Google (GOOG) and Swiss drug maker Roche Holding (RHHBY).The average price-earnings ratio of the stocks in the fund is a rich 21 times estimated earnings for the coming 12 months. But earnings of the fund's holdings are expected to grow rapidly.

Primecap, a firm with a storied history, launched Odyssey Aggressive Growth in 2004. In 1983, three managers left the highly regarded American funds to launch Primecap. One died last year, but another one, Theo Kolokotrones, is a co-manager of Aggressive Growth. So is Joe Fried, who has been with Primecap since 1986. And the firm has done a good job bringing along the next generation. The fund lists two other co-managers, Alfred Mordecai and Mohsin Ansari. Each manager handles a slice of the fund's assets.

The firm began managing Vanguard Primecap (VPMCX), a large-cap growth fund, in 1984. Since its launch, the Vanguard fund has returned an annualized 13.2%, an average of 2.4 percentage points per year better than the S&P 500.

Like the American funds, Primecap shuns the media. So don't expect to learn much about why Aggressive Growth trailed its peers or bested them. Fund shareholder reports shed little light.

All three Primecap-managed Vanguard funds are closed to new investors. But Primecap runs three Odyssey funds, which receive only a trickle of the cash that flowed into the Vanguard funds when they were open. Aggressive Growth, the raciest of the offerings, has assets of $2.4 billion.

The big minus: Small caps aren't cheap. On average, stocks of small companies sport price-earnings ratios 12% higher than stocks of large companies, according to the Leuthold Group, an investment research firm.

Because of that, I wouldn't go overboard with this fund—or any fund specializing in small or midsize stocks. But this one is good enough enough to buy—even now.

Steven T. Goldberg is an investment adviser in the Washington, D.C. area.


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