Larry Puglia and the T.

Rowe
Price Blue Chip Growth Fund

Presented by Xudong Fu
Situation
This case was written in 2016 to study the
remarkable performance record of the T.
Rowe Price Blue Chip Growth Fund (Blue
Chip Growth Fund), a mutual fund
managed by Larry Puglia at T. Rowe Price,
Inc.
The fund over its 23-year history had on
average beaten the Standard & Poor’s 500
Index.
◦ Since inception on June 30,1993 through Sep.
30, 2016, the fund had returned an average
annual return of 10.12%, outperforming the
9.12% return of S&P 500 benchmark.
Key Question
Is Larry Puglia a good investor, or
is he just lucky?
Or, will you put your retirement
money into his Blue Chip Growth
Fund?
 Record Vs. S&P 500
50.0

40.0

30.0

20.0

10.0
Annual Return

0.0
9 3* 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20
–10.0

–20.0

–30.0

–40.0

–50.0
MorningStar Report

MorningStar Rating: * * * * *
Total Assets: 30.7 Billion
Category and Investment Style:
Large Growth
Status: Open
Min. Inv.: $2,500
Load: None
Expenses: 0.71%
MorningStar Report
 MorningStar Report
1- 3- 6-
10-
  Mont Mont Mont YTD 1-Year 3-Year 5-Year
Year
h h h
TRBCX 1.48 7.52 7.24 1.35 11.34 11.56 17.86 9.11
S&P 500 TR
0.02 3.85 6.4 7.84 15.43 11.16 16.37 7.24
USD

Category (LG) 0.64 5.59 6.12 3.45 10.46 9.23 14.98 7.52

+/- S&P 500 TR

1.46 3.67 0.83 -6.48 -4.09 0.4 1.49 1.87
USD
+/-
0.84 1.93 1.11 -2.09 0.88 2.33 2.88 1.6
Category (LG)
Rank in
15 18 25 79 40 14 5 14
Category
MorningStar Report
MorningStar Report
MorningStar Report
The Rise of the Mutual
Funds
Institutional
Investors: mutual
funds, pension funds, and hedge
funds, etc.
Defined Benefit Plans
Defined benefit retirement plans: the
employer promises to pay specific sums of
money to the workers when they
retire/leave the company.
The employer is responsible for investment
decisions (Could be too much a burden to
both employees and the
company/school/governemnt).
e.g., Monthly pension = 2.25% * (years of
service) * (highest annual salary) / 12
Monthly pension = 2.25% * 30 * $100,000 /
12 = $5,625

Some even have COL adjustments regularly.

Defined Contribution Plans
Defined contribution retirement plans:
the employer contributes each pay
period to the employees’ pension
fund(s).
401K, 403B, IRA
Employees are responsible for their
own investment decisions
Puglia’s investment strategies
Blue-chip growth stocks were defined by their earnings
per share (EPS): “We decided that it was durable,
sustainable earnings-per-share growth that confers blue-
chip status on a company.”
Select stocks with the intent to hold over the long term to
allow the strength of the fundamentals to reward
investors with price appreciation. By taking the long view,
the fund could avoid high turnover (i.e., frequent selling
and buying that generates higher operating fees).
Screen stocks for the basics of EPS growth and self-
sustaining growth rate, but then look for any investment
ideas available in news reports, economic data, and rival
portfolios. These data could be used in Michael Porter’s
framework to identify firms that have competitive and
sustainable advantages in their industries.
Puglia’s investment strategies
Choose stocks of companies with a growing
market share and market size. A leading
market position conferred both cost advantages
and pricing advantages and often gave a
company more pricing flexibility.

Find companies that have a seasoned

management with a demonstrated track
record. These characteristics were evidence of
management’s ability to allocate capital to the
highest-return businesses, pare away low-
returning businesses, and manage expenses
aggressively.
Puglia’s Success Vs. Market
Efficiency
He uses information: The most
precious commodity on Wall
Street
Strong competition assures
prices reflect information.
Information-gathering is
motivated by desire for higher
investment returns.
 Relationships between forms of the
EMH

• Noticesemi-strong efficiency implies weak

that _______________________________
form efficiency holds (but NOT
__________________ vice versa
________________)
• Strong form efficiency would imply that
both semi-strong and weak form efficiency hold
__________________________________________.

17
8-17
Cumulative Abnormal Returns in Response to Earnings
Announcements

18
Issues in Examining the Results
Magnitude Issue
◦ Only managers of large portfolios can earn
enough trading profits to make the exploitation of
minor mispricing worth the effort.
Selection Bias Issue
◦ Only unsuccessful investment schemes are made
public; good schemes remain private.
Lucky Event Issue
 If 10,000 people flip fair coins 50 times we can expect 2
people to flip 75% or more heads.
 In a large group of stock analysts, some will be correct
most of the time in their picks, and they will look very
smart even though their results are due to pure chance!

19
Fundamental Analysis by
Puglia
 Fundamental Analysis - using economic and
accounting information to predict stock prices
◦ Try to find firms that are better than everyone else’s
estimate.
◦ Try to find poorly run firms that are not as bad as the
market thinks.
Question : If the markets are weak form efficient or
semi-strong form efficient or strong form efficient
will fundamental analysis be able to consistently
If the markets are only weak form efficient?
predict price changes?
Fundamental Analysis CAN predict price changes
If the markets are semi-strong or strong form
efficient?
Fundamental Analysis CANNOT predict price
changes 20
Active or Passive Management
Active Management
◦ An expensive strategy
◦ Suitable only for very large
portfolios
Passive Management: No attempt
to outsmart the market
◦ Accept EMH
◦ Index Funds and ETFs
◦ Very low costs

21
 Market Efficiency &
Portfolio Management

Even if the market is efficient a

role exists for portfolio
management:

Diversification
Appropriate risk level
Tax considerations

22
Interpreting the Evidence
Black Monday on 10/19/1987 -
The Dow Jones Industrial Average
(DJIA) fell 508 points to 1,738.74
(22.61%)

Bubbles and market efficiency

◦ Prices appear to differ from intrinsic
values
◦ Rapid run up followed by crash
◦ Bubbles are difficult to predict and
exploit 23
 Mutual Fund Performance
The conventional performance benchmark
today is a four-factor model, which
employs:
◦ the three Fama-French factors (the return
on the market index, and returns to
portfolios based on size and book-to-
market ratio)
◦ plus a momentum factor (a portfolio
constructed based on prior-year stock
return).

24
Mutual Fund Performance
Consistency
◦ Carhart — alphas positive before fees,
negative after
◦ Bollen and Busse — support for
performance persistence over short time
horizons
◦ Berk and Green — skilled managers will
attract new funds until the costs of
managing those extra funds drive alphas
down to zero
25
Estimates of Individual Mutual Fund
Alphas, 1993 - 2007

26
 How did investment managers really do? (Different
Test)

Taken from Lubos Pastor and Robert F. Stambaugh, “Mutual Fund Performance and Seemingly Unrelated Assets,” Journal of
Financial Exonomics, 63 (2002).

27
 Risk-adjusted Performance in Ranking
Quarter and Following Quarter

28
 What does the previous page mean?

Suppose you have $100,000 to invest for 30 years. And let us

suppose that S&P 500 gives us about 10% annually on average.

1) Invest in an S&P 500 index fund (expense <0.1%)

◦ 100,000*(1+(10% - 0.1%))30 = $1,697,973

2) Invest in an active mutual fund whose performance is on-par

with index (expense >0.5%, the average active mutual fund
expense is about 1.3%)
◦ 100,000*(1+(10% - 0.5%))30 = $1,522,031

3) Invest in a mutual fund that underperforms market by 2.13%

◦ 100,000*(1+(10% - 2.13% - 0.5%))30 = $844,284

4) Invest in Larry Puglia that overperforms market by 1.00%

◦ 100,000*(1+(10% + 1.00% - 0.70%))30 = $1,893,500

29
 What about hedge funds?

What about hedge funds? They

only invite people with high net
worth, and they are “hedging”, so
they must have done something
great, right?

Well, at least their expense is

great. About 2% + 20% above
LIBOR.
30
 What about hedge funds?

https://www.washingtonpost.com/news/get-there/wp/2017/02/27/warren-buffett-s
ays-this-simple-mistake-has-cost-investors-more-than-100-billion/?utm_term=.
9f49b521c6b3
31
 What about hedge funds?

Average 6- After
Average of 5 month Fee S&P Index
Fund A Fund B Fund C Fund D Fund E Funds Libor Fees Return Fund

2008 -16.5% -22.3% -21.3% -29.3% -30.1% -23.9% 3.17% 2.00% -25.90% -37.0%

2009 11.3% 14.5% 21.4% 16.5% 16.8% 16.1% 1.19% 4.98% 11.12% 26.6%

2010 5.9% 6.8% 13.3% 4.9% 11.9% 8.6% 0.52% 3.61% 4.95% 15.1%

2011 -6.3% -1.3% 5.9% -6.3% -2.8% -2.2% 0.49% 2.00% -4.16% 2.1%

2012 3.4% 9.6% 5.7% 6.2% 9.1% 6.8% 0.70% 3.22% 3.58% 16.0%

2013 10.5% 15.2% 8.8% 14.2% 14.4% 12.6% 0.42% 4.44% 8.18% 32.3%

2014 4.7% 4.0% 18.9% 0.7% -2.1% 5.2% 0.33% 2.98% 2.26% 13.6%

2015 1.6% 2.5% 5.4% 1.4% -5.0% 1.2% 0.46% 2.14% -0.96% 1.4%

2016 -2.9% 1.7% -1.4% 2.5% 4.4% 0.9% 1.04% 2.00% -1.14% 11.9%

Overall Gains 8.7% 28.3% 62.8% 2.9% 7.5% 21.22% -7.09% 85.4%

32
So, Are Markets Efficient?
Professional manager performance is
broadly consistent with market efficiency
Most managers do not do better than the
passive strategy
There are, however, some notable
superstars:
Peter Lynch, Warren Buffett, and Larry Puglia

33
Discussion: Larry is good
He has a wonderful history over a
long time, and his investments
focus on the long-term goals.
He uses information (earnings,
growth rates, etc.) to make
decisions.
He focuses on interviews and
quality of the management.
Discussion: Larry is just
lucky
Everybody (not really, but a lot of
them) is using information such as
earnings and growth rates.
Empirical evidence shows that fund
mangers on average do not
outperform markets.

Another issue: what will happen if

more investors put their money to
Larry’s fund?
My takes
I am an empirical finance
researcher.
I believe in big data more than
outliers.
I focus on disciplines.

And, I would be wrong over the

last three years.
My takes
My takes