Large-Cap Growth Stocks Are Back

Over the past year, the performance of T. Rowe Price Blue Chip Growth (symbol TRBCX has underscored why it pays to sit tight when a fund with a superior long-term record hits a speed bump. In 2016, as investors turned away from shares of the fast-growing, large-capitalization stocks that Blue Chip targets in favor of more-undervalued fare, the fund lagged the stock market dramatically. Stocks that had previously buoyed the fund, such as Amazon.com and Facebook, were suddenly a drag, says manager Larry Puglia. And energy and utility stocks—sectors that Blue Chip tends to ignore—performed exceptionally well.

But these kinds of style shifts don’t last forever. Large-cap growth stocks, led by the technology sector, are rebounding this year, and Blue Chip is benefiting. In the first three months of 2017, the fund returned 10.4%, beating Standard & Poor’s 500-stock index by 4.3 percentage points. Over the past 12 months, Blue Chip, a member of the Kiplinger 25, outpaced the index by nearly a full percentage point. (Prices and returns are through March 31)

The past year was also a reminder that Blue Chip can be volatile. The fund has typically been about 10% bumpier than the S&P 500, but at times it has been even less stable. Over the past 12 months, it was 38% more volatile than the index.

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Blue Chip has, however, rewarded investor loyalty. In the fund’s nearly quarter-century of existence, it has outpaced the S&P 500 by an average of 1.0 percentage point per year.

Puglia, who has more than $1 million of his own money invested in the fund, was a comanager when the fund opened in 1993, and he became sole manager in 1997. He focuses on midsize-to-large firms with above-average earnings growth, strong free cash flow (cash profits after capital outlays) and executives who reinvest profits wisely. Puglia says he favors firms whose execs are more willing to buy back shares than to acquire another company, because he views buybacks as a better way to build shareholder value.

Though the kinds of stocks Puglia gravitates to are often pricey, he doesn’t like to overpay. Facebook and Chinese web-commerce firm Alibaba may look expensive on a price-earnings basis. But the stocks’ P/Es seem reasonable relative to the companies’ growth rates.