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All Contents © 2019The Kiplinger Washington Editors
By Nellie S. Huang, Senior Associate Editor
| November 8, 2018
T. Rowe Price mutual funds may not get as much attention as their bigger brothers in the 401(k) space, Vanguard and Fidelity. But the firm’s offerings are solid. There isn’t a dog in the bunch.
Six actively managed T. Rowe Price funds and eight of the provider’s Retirement target-date offerings rank among the 100 largest 401(k) funds, according to BrightScope, the workplace retirement plan consulting firm.
Here is a breakdown of some of the best T. Rowe Price mutual funds for your 401(k); we’ll also weed out some lesser options. We rate each one either “buy” or “hold” (none of the funds listed here rated a “sell”). Read on for more details.
Returns and data are as of Oct. 25, 2018, unless otherwise noted. Three- and five-year returns are annualized.
Expense ratio: 0.70%
One-year return: 13.8%
Three-year return: 15.1%
Five-year return: 14.1%
Value of $10,000 invested 10 years ago: $52,439
Top three stock holdings: Amazon.com (AMZN), Microsoft (MSFT), Alphabet (GOOGL)
Larry Puglia has managed Blue Chip Growth – a member of the Kiplinger 25, our favorite no-load funds – for a quarter century. Investors who bought shares when he took over have earned an annualized 11.0%, which outpaces the 9.5% gain in Standard & Poor’s 500-stock index. A 1.5-point edge per year adds up over 25 years. A $10,000 investment at the start of the period in an S&P 500 index fund would be worth about $99,949 today; one in Blue Chip Growth would be worth nearly $130,036.
Puglia favors market leaders – companies with competitive advantages – that boast double-digit growth in earnings and free cash flow (cash profits left over after capital expenses necessary to maintain the business). When he buys, he tends to hold. The fund’s 34% turnover rate is lower than the typical 54% rate shared by its peers: funds that invest in large, growing companies. Two of the fund’s top holdings, Amazon.com and Google parent Alphabet, have been in the fund since 2004. The portfolio holds 124 stocks.
Expense ratio: 0.65%
One-year return: 0.8%
Three-year return: 9.4%
Five-year return: 7.1%
Value of $10,000 invested 10 years ago: $30,587
Top three stock holdings: JPMorgan Chase (JPM), Wells Fargo (WFC), Exxon Mobil (XOM)
Equity Income may not put up fat returns, but it’s not designed to. The fund focuses on undervalued dividend-paying stocks. Indeed, it would be unfair to compare the recent returns of Equity Income with the S&P 500, which has been fueled in recent years by a handful of fast-growing firms that don’t pay a dividend.
What’s more, manager John Linehan is still getting his sea legs at Equity Income. He took over in November 2015. That said, while Equity Income’s three-year 9.4% annualized return lags the S&P 500, it handily beats its typical peers – funds that invest in large-company stocks trading at a bargain price – by an average 1.3 percentage points per year over the same period.
Linehan typically holds roughly 100 stocks. The fund’s 20% turnover rate implies an average five-year holding period – longer than the sub-two-year holding stretch of typical large-company value funds. Linehan is slowly remaking the portfolio. Since he took over, he has introduced more than 46 new names, including CVS Health (CVS), DowDuPont (DWDP) and Tyson Foods (TSN).
Expense ratio: 0.67%
One-year return: 9.9%
Three-year return: 13.2%
Five-year return: 12.9%
Value of $10,000 invested 10 years ago: $49,020
Top three stock holdings: Amazon.com, Microsoft, Visa (V)
T. Rowe Price, the firm’s founder, was considered by many to be the father of the growth style of investing – the investment strategy of buying shares in fast-growing companies. So it’s understandable that more than a few T. Rowe Price funds that invest in large, growing firms appear on the list of popular 401(k) funds. Growth Stock, the firm’s flagship fund, is a decent choice, even though it’s often overshadowed by other T. Rowe Price offerings in this category (see Blue Chip Growth).
Manager Joe Fath, who took over in January 2014, has delivered a three-year annualized return that ranks among the top 30% of his fund’s peer group: funds that invest in large, growing companies. The 13.2% return beats the S&P 500, too, by roughly 1.7 percentage points per year.
Again, this fund is solid. But you must be willing to endure some bumps along the way. Fath’s record year-by-year has been streaky: He trailed the S&P 500 badly in 2014, trounced it by a wide margin in 2015, then fell far behind again in 2016. In 2017 and so far in 2018, he’s well ahead of the index.
Fath focuses on firms with growing market opportunities, smart executives at the helm and strong free cash flow (the cash profits left over after capital expenses required to maintain the business). The fund holds a mix of newer fast growers and older steady-Eddie-type growth companies. Among his recent purchases are graphics chipmaker Nvidia (NVDA), biotech firm Celgene (CELG) and MGM Resorts International (MGM).
Expense ratio: 0.56%
One-year return: 15.8%
Three-year return: 16.9%
Five-year return: 14.7%
Value of $10,000 invested 10 years ago: $57,524
Top three stock holdings: Amazon.com, Microsoft, Boeing (BA)
If all you look at are the long-term returns of Institutional Large Cap Growth, you’d snap up shares in an instant. But the fund’s fantastic record was earned mostly by Robert Sharps, who left at the start of 2017.
Since then, Taymour Tamaddon has run the fund. He came from T. Rowe Price Health Sciences (PRHSX), where he’d earned an impressive 21.1% annualized return over three years, beating that fund’s bogey. So far at Institutional Large Cap Growth, he’s on fire: The fund has returned a cumulative 52.6% gain over the first 22 months of his tenure, more than double the 25.2% gain in the S&P 500. If the time frame weren’t so short, we’d happily give our stamp of approval. But for now we will wait before we grant a “buy” rating.
One worry: The fund has an outsize holding – 10% of the fund’s assets – in Amazon.com. The stock, as everyone knows, has done well over the long haul, but recent volatility has dented the fund’s performance. In late October, shares in the e-commerce juggernaut were 25% off their 52-week high of $2,039 (set in early September).
Expense ratio: 0.76%
One-year return: 5.5%
Three-year return: 10.9%
Five-year return: 11.4%
Value of $10,000 invested 10 years ago: $46,053
Top three stock holdings: Textron (TXT), Teleflex (TFX), The Cooper Companies (COO)
Mid-Cap Growth been a star stock fund for the past quarter century. If it’s available in your 401(k) plan, you can still buy shares in it, even if you’re new to the fund. It’s otherwise closed to new investors.
Manager Brian Berghuis, who has run the fund since June 1992, focuses on growing midsize companies (with $300 million to $5 billion in market value) that can increase earnings or free cash flow (cash profits left over after capital expenses required to maintain the business). But he doesn’t unload promising investments when they grow into bigger firms. More than one-third of the portfolio is made up of large-company stocks. O’Reilly Automotive (ORLY), which has a $28.6 billion market value, has been in the fund since 1999. Shares climbed 60.1% over the past 12 months. Progressive (PGR), which has a $41.7 billion market value, has been in the fund since 2012; shares gained 44.8% over the past year. At last word, Berghuis was trimming his stake in both stocks.
Berghuis has been consistently good: In seven of the past 10 full calendar years, he has outpaced the S&P MidCap 400 index, which tracks shares in midsize companies. Over the long haul, he’s a winner, too: The fund ranks among the top 6% or better of its peers – funds that invest in growing, midsize firms – for the past five, 10 and 15 years. Since he came on as manager in mid-1992, the fund has earned a 13.5% annualized return, which outpaces the S&P 500, the S&P MidCap 400 and the small-company benchmark, the Russell 2000 index.
Expense ratio: 0.78%
One-year return: 17.0%
Five-year return: 13.4%
Value of $10,000 invested 10 years ago: $68,488
Top three stock holdings: Vail Resorts (MTN), Burlington Stores (BURL), Bright Horizons Family Solutions (BFAM)
Many of the funds on this list of popular 401(k) funds are good. But only a handful are true powerhouse portfolios. New Horizons is one of them. It’s closed to new investors, which just adds to its allure. But if it’s offered in your 401(k) plan, that’s not an obstacle. You can invest in New Horizons in your 401(k) even if you’re new to the fund.
Since March 2010, when manager Henry Ellenbogen took over New Horizons, the fund has logged an annualized 18.2% gain. That beats the Russell 2000 small-company index. It also bests the typical fund that invests in small, growing firms. And it even outpaces the S&P 500, despite the fact that large-company stocks have routed their small-company counterparts in five of the past seven full calendar years.
Ellenbogen’s secret sauce is to build a core portfolio of mostly steady long-term growing, small-company firms, and to boost returns with a few well-chosen burgeoning firms that are off the radar. Several of his steady growers have been in the portfolio since his early days at the fund, including Vail Resorts and Gartner (IT), and are now midsize companies. Vail and Gartner are among the fund’s top holdings and have gained 31.9% and 17.9%, respectively, annualized over the past three years. But those returns pale in comparison to the fund’s best performers. Wix.com (WIX) is an Israeli provider of web-development platforms and has climbed an annualized 64.2% over the past three years. Shopify (SHOP), which offers cloud-based commerce platforms for small to midsize businesses, has climbed 62.9% annualized over the same period.
Consider yourself lucky if you have access to this fund. Although the fund’s size has continued to balloon even after it closed to new investors – at $24.3 billion, it’s the biggest actively managed small-company stock fund in the country – Ellenbogen is a proven solid stock-picker.
We’ve been longtime fans of T. Rowe’s Retirement target-date funds, which invest in a mix of assets that changes over time as you age. Over the past decade, all of the funds in the series with target years between 2015 and 2050 boast annualized returns that rank among the top 1% of their peer groups.
The series is managed by Jerome Clark and Wyatt Lee. But they work closely with a team of 30 experts who meet regularly to make sure the portfolio allocation – the way assets in any given portfolio are divided into U.S. stocks, foreign stocks, Treasuries or dividend-paying shares, among other kinds of assets – is still on track across the series for the funds to deliver on their aim: to grow your retirement savings and make sure they last in retirement.
In late 2017, for instance, the team decided to shift the bond holdings within each portfolio. One big change: Reducing the exposure to an intermediate-term bond fund to make way for a more flexible bond fund and an international bond fund that hedges against currency moves.
Don’t assume, however, that the portfolio undergoes hefty shifts. Clark and Lee hew to a general stock-bond glide path – the mix of stocks and bonds that shift over time. Among the T. Rowe Price Retirement funds that are popular in 401(k) funds, the path starts 30 years from retirement, with the 2050 fund, which has roughly 85% in stocks and 15% in bonds and cash. As you get closer to retirement and even well past retirement, the mix continues to shift over time into a more appropriate and more conservative mix. Retirement 2015 won’t hit the end of its path until the year 2045. Currently, its portfolio holds 46% stocks, 50% bonds and 4% cash.