VALUE ADDED


Newcomer Gets Lead Role

Steven Goldberg

T. Rowe Price is promoting Rob Bartolo to run its flagship Growth Stock fund. He has big shoes to fill.



T. Rowe Price is putting a fresh face in charge of its flagship fund, T. Rowe Price Growth Stock. At 35, Rob Bartolo, who has been at the Baltimore-based fund firm just five years, has been named to succeed Bob Smith, who is taking over the management of T. Rowe Price International Stock.

Growth Stock, a member of the Kiplinger 25, has for years been one of my favorite ways to invest in stocks of large, growing companies. Over the past ten years, with Smith at the helm, the fund (symbol PRGFX) returned an annualized 9% through June 30. That beat the return of Standard & Poor's 500-stock index by an average of 1.5 percentage points per year and put the fund in the top 10% among large-growth funds. As Bartolo puts it: "I'm hitting cleanup behind Babe Ruth."

I'm sorry to see Smith leave, although T. Rowe can certainly use him at International Stock (PRITX), which has been a longtime laggard.

I've only talked to Bartolo once. He impresses me as a bright, eager manager -- but so do lots of managers. The people who know him at T. Rowe are more enthusiastic. Bill Stromberg, head of the firm's equity division, says Bartolo was one of the best analysts he's ever seen. And Bartolo chalked up a terrific record as co-manager of T. Rowe Price Media and Telecommunications -- although he held that post just two years.

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At the end of the day, the reason for giving Bartolo the benefit of the doubt is that T. Rowe is such a superb company. If its leaders are willing to entrust him with the crown jewels -- after all, this is the fund T. Rowe Price himself launched in 1950 -- they must be highly confident that he will succeed. I wouldn't immediately buy more shares of the $25 billion fund, but I wouldn't sell either. Growth Stock is relatively low risk and boasts a modest 0.70% expense ratio.

One of the advantages Bartolo brings to the job is that, unlike most fund managers, he's been on the other side. For starters, he served as director of finance of MGM Mirage, the big, publicly traded casino company, in his home town of Las Vegas. "I worked on mergers and acquisitions, put together financial statements and talked to sell-side analysts," Bartolo says. He also worked as an auditor for Deloitte & Touche, the big accounting firm, ripping apart financial statements. Both experiences give him insights that should help him pick stocks. "When companies are saying certain things, hopefully I can tell what's really going on," he says.

Bartolo focuses on trying to figure out what companies can earn in coming years -- and which companies have sustainable competitive advantages. The fund tends to look mainly for companies that can increase earnings 15% or so, rather than highfliers. A trademark of T. Rowe Price's approach to stockpicking is to invest only when shares sell at reasonable prices relative to earnings and other measures. Thus, Smith trailed the benchmark Russell 1000 Growth index in the tech-bubble years of 1997, 1998 and 1999, but hasn't since.

Bartolo aims "to be on the right side of big industry trends." Take longtime favorites American Tower (AMT) and Crown Castle International (CCI). Both are in the prosaic business of building and operating cell phone towers. "People are using more and more minutes on their cell phones, and new towers are practically impossible to build." After all, who wants a cell phone tower in their backyard?

On a price-to-earnings basis, the stocks don't look especially cheap. But that's because depreciation for towers that have already been built -- a non-cash charge -- depresses reported earnings. The ratio of price to cash flow (earnings plus depreciation and other noncash charges) is in the low 20s for the tower stocks. That's not too bad considering that Bartolo expects cash flow to increase 20% annually for at least the next three years.

Google (GOOG) is another favorite. Companies still devote just 7% of their advertising budgets to online ads. Yet, 20% of the leisure time of Americans is now spent online. "You have a big tailwind in this industry," Bartolo says. And to make sure it doesn't fall by the wayside, as some predecessors did, Google is spending billions of dollars to keep its lead. At $543, Google trades at 28 times the $19.28 that analysts, on average, expect the company to earn in 2008. That's cheap, Bartolo says, given that Google has "at least a decade of great growth ahead of it."

Bartolo, of course, will pick all his own stocks. But the same T. Rowe analysts who funneled ideas to Smith will send their best stock picks to Bartolo. "The strategy that has been in place for 57 years will remain the same," Bartolo adds.

Still, it makes sense to wait before giving Bartolo-managed Growth Stock a ringing endorsement. After all, the firm has some terrific foreign-stock analysts, too. Yet T. Rowe Price International has trailed the main foreign benchmark, the MSCI Europe, Australasia and Far East index, by an average of more than two percentage points per year over the past ten years.

Smith has always added generous helpings of foreign stocks to Growth Stock. He ought to be able to improve performance at International Stock, but there's no reason to buy that fund either until the numbers get better. Both changes become effective October 1.

Steven T. Goldberg (bio) is an investment adviser and freelance writer.




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