The Pioneer Who Discovered Growth Stocks

Long before Jack Bogle, the father of index funds, there was T. Rowe Price, the father of growth investing. He and Bogle are probably the only two investment managers to popularize an entire theory of investing.

T. Rowe Price

Born March 16, 1898, T. Rowe Price was a chemist by training but a stock picker at heart.  While working at a brokerage he decided he wanted to sell advice, not stocks. In 1937 he opened his own investment counseling firm, a bold move in those times. Fee-based investment counsel was rare. The seeds of war were sprouting in Asia and in Europe. In the U.S. four years of painful recovery from the Great Depression had relapsed into a new recession.

Somehow, Price survived and prospered, propelled by his belief that he could outperform the market by selecting stocks whose earnings were growing faster than inflation and faster than the general economy.

After World War II ended, high wartime income tax rates lived on. Price's clients wanted to ease their tax burden by moving money into accounts for their children. (In those days Daddy's Little Taxpayers were entitled to their own low tax brackets.) To facilitate small accounts Price started a mutual fund, the T. Rowe Price Growth Stock Fund.

Brokers working on commission didn't sell the Growth Stock Fund. Investors had to buy shares: Send for a prospectus. Fill out the accompanying new-account form. Return it with a check to Price in Maryland. Nevertheless, the fund's performance led to phenomenal success. In the 1970's, when Jack Bogle decided to make his index fund no load, Price's accomplishment must have bolstered his belief that his index fund could flourish without the help of a commissioned sales force.

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Jack Bogle was a successful author and a beloved commentator on personal investing. If T. Rowe Price did TV interviews or authored op-eds, I must have missed them. He is said to have disliked public speaking. Thirty-six years after his death, his public image may be getting an overdue boost. Wiley is publishing a bio, T.  Rowe Price, the Man, the Company and the Investment Philosophy. 

The Case Against Actively Managed Funds,1953

Sixty-five years ago, as now, there were those who believed that mutual fund managers failed to earn  their keep.

This example comes from a review of Louis Engel's How to Buy Stocks. in the  April 20, 1953 edition of The New York Times:

[F]rom 1937 to 1950, fourteen of the biggest and best known mutual funds whose assets were wholly invested in common stocks showed a net gain on their holdings of only 2.2 per cent…. In contrast, the Standard & Poor’s index for ninety representative stocks showed an increase during this same period of 4.1 per cent.

The Case of the Bloated Retirement Plans

Once upon a a time, 401(k) plans and their ilk seemed relatively simple, with a mere handful of investment options. Sometimes employers even helped to pay plan expenses.

Gradually but inexorably, investment choices proliferated and plan expenses expanded, cutting deeper into participants' returns.

Now the times are a-changin'. Young investors have learned that the surest way to increase returns is to lower costs. Bewildering arrays of investment choices now draw complaints, not kudos. Latest sign of the times: a federal lawsuit aimed at employee retirement plans sponsored by Yale, N.Y.U. and M.I.T.

Like previous litigation aimed at corporate plans, also steered by attorney Jerome J. Schlichter, the new suits allege that the schools' plans incur needlessly high administrative expenses and offer investment choices that are mindlessly numerous and sometimes inferior to lower-cost options. (Do N.Y.U,'s employees really want to put their nest eggs into variable annuities?) M.I.T. also draws criticism for choosing New England's investment titan, Fidelity, as plan provider. (Fidelity's CEO has served on M.I.T.'s board of trustees.)

Participants in 401(k) plans and their non-profit equivalent, 403(b) plans, need all the cost-cutting help they can get. Still, older alumni may feel a tinge of sympathy for institutions that find themselves behind the times.

Related post: In deluge of Funds, Investors Sink or Swim

Who Knows What Unicorns Are Worth?

Andrew Ross Sorkin was right about the difficulty of pinning market values on the tech startups known as unicorns. "Millions of Americans own a piece of the hottest private technology companies through their mutual funds," writes Kristen Grind in the WSJ. "But no one knows what those investments are actually worth."

For example, last June 30 various mutual fund managers valued unicorn superstar Uber at prices ranging from over $40 a share to less than $34. As of the same date, a T. Rowe Price fund manager guessed the software startup Cloudera was worth almost twice the price estimated by another fund manager.

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 As money that once might have parked in CDs and money market funds continues the desperate search for real returns elsewhere, uncertainty and market turbulence increase. Unicorns are one more reason for investors to seek professional, unbiased assistance.

Can Index Fund Managers Police Corporate America?

Most investors own stock indirectly. If your actively-managed fund holds GE shares, you expect the manager to vote the GE shares in the best interest of you and your fellow fundholders.

Can you have the same expectation for managers of your index funds? Should managers of S&P 500 funds, for example, become active defenders of everyday investors at all 500 companies?

Bringing these questions to mind is the news that Vanguard, BlackRock and State Street, three index-fund titans, played a major role in defending DuPont from an assault by Trian.

Maybe passive investing isn't so passive after all.

Mom and Pop Are Buying ‘Unicorns’

16th Century Unicorn Cup, British Museum

Our younger daughter loves Blue Apron, the online provider of recipes and ingredients that equip you to prepare restaurant-style dinners at home. Fidelity must love Blue Apron, too. The mutual fund giant is reportedly buying shares of the pseudo-private company at a price that puts Blue Apron's value at $2 billion.

Back when our daughter was born, the line between privately-held companies and those with publicly-traded shares seemed bright. A mutual fund would not have bought shares in a private company like Blue Apron. And even if it had wanted to, few start-ups were thought to be worth billions.

Today, writes Andrew Ross Sorkin at Dealbook, shares in high-value tech startups – known as "unicorns" – are finding their way into mutual funds that mom and pop can buy. Indeed, Sorkin points out, mutual fund investors may own a unicorn or two without knowing the creatures are hiding in their funds' portfolios.

Sorkin worries that the market value of unicorn shares is a matter of opinion, rather than being determined by an active stock market.

It’s virtually impossible to know exactly how the mutual funds determine the value of private companies. Not one of the mutual fund companies with which I spoke was willing to fully explain its methodology.

Fortunately, Sorkin points out, even when unicorns are held in a fund, they represent a small fraction of the fund's holding. "So if you’re an investor looking for a lot of exposure to unicorn technology companies, these mutual funds are hardly going to give you a concentrated bet. And that’s probably a good thing."

Investing in Mutual Funds Made Simple

Mutual fund investors must be bewildered by their thousands of choices, we observed recently.

Not necessarily. Mere handfuls of funds attract much of the money. "Passive" investors – that is, indexers – have an especially narrow focus. Eighty-five percent of the dollars in S&P 500 index funds reside in just five funds.

What's more, Jonathan Clements reports in the WSJ, investors in S&P 500 index funds appear to strengthen their advantage by exercising patience. As shown at right, they enjoy superior dollar-weighted  returns, presumably because they better resist the impulse to buy high, sell low.

Will robo-advisers extend the advantage of patient investing to a wider range of wealth builders?

The Unbearable Complexity of Almost Everything Financial

"The complexity of our financial lives is so extreme that we must painstakingly manage each and every aspect of it,"laments Ron Lieber in The New York Times. He cites Social Security.

In my parents' time, the breadwinner claimed Social Security when he retired, his stay-at-home wife claimed her spousal benefit, and that was that. Today? Couples need to study a book or two and seek expert counsel or risk leaving money on the table.

If Social Security has become too complicated, "tax-favored" retirement plans have become a national disgrace. We have pensions (often underfunded) and 401(k)s (often overpriced). We have IRAs and spousal IRAs and self-directed IRAs and Roth IRAs and SEP IRAs and rollover IRAs and stretch IRAs and …..

Yet everyone agrees, few Americans are putting aside enough for retirement. Those who do must contend with thorny thickets of rules and regulations. As a result, financial planners devote more and more time to questions relating to the transfer, withdrawal and bequeathing of retirement funds.

Meanwhile, basic investing leaves people utterly bewildered: Thousands of mutual funds. More than a thousand exchange traded funds. A confusing, ever-growing array of packaged investment products. (If a fund is formed to invest in a portfolio of hedge funds that invest in other hedge funds, do you call it a fund of funds of funds?)

In "the landscape of confusion and tedium that characterizes our financial lives," Lieber observes, "every task seems to require its own multichapter management manual."

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Most investors won't read the manuals; they will seek human guidance. They are most likely to turn to brokers, who can't always offer disinterested help. Hence the well-intentioned movement to transform investment salespeople into fiduciaries.

Can this 21st-century alchemy succeed?

Ask Not For Whom the Bell Tolls

Increasingly, investors see actively managed funds as a sinking ship, according to this WSJ report:

[T]he passive/active divide kept getting wider in 2014. Investors took a net $91.46 billion out of actively managed U.S.-stock funds and invested a net $63.52 billion in passive U.S. funds—preferring low-cost index funds to the skills of stock pickers—according to estimates through November from Morningstar Inc. 

Their lack of faith in managers is understandable. According to preliminary data from Morningstar, 88% of managers of large-cap growth funds underperformed the S&P 500 index in 2014.

Investors Are Only Human

The Strange Allure of Higher Fees.

Private Bankers Are Not Fiduciaries

J.P. Morgan's investment specialists are held to fiduciary standards. Morgan's private bankers are not. Do private bankers push the bank's own funds when cheaper or better alternatives might be available? In recent months both the Office of the Comptroller of the Currency and the Securities and Exchange Commission have been investigating.

The WSJ story notes that Morgan's funds most often outperform their Lipper averages. And because the bank charges an extra 0.5% annually for holding outside funds, Private Bank clients may find Morgan's own funds less expensive.

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See the SEC's page of advice for mutual fund investors here.

In Deluge of Funds, Investors Sink or Swim

No wonder people find investing bewildering. The mid-year report on mutual funds in The New York Times contains page after page after page – ten pages in all – of mutual fund listings. If printed in type big enough to read, the listings would have covered 12 or 15 pages.

For the would-be investor, this sea of funds must be a daunting sight.

Yet it used to be even scarier. After cresting above 8,000 before the Great Recession, the number of mutual funds has eased off. Jack Bogle estimates that 7 percent of equity mutual funds gave up the ghost each year from 2001 to 1012.

Even so, more than 7,000 mutual funds are still operating.

And that's not all. Joining the thousands of conventional load and no-load funds are about 1,600 exchange-traded products, primarily ETFs.

In part the deluge of funds is an optical illusion. Sizable segments of the mutual fund listings consist of house funds – products intended for customers of a bank, brokerage or insurance company. Other funds may be moribund relics of faded hopes or failed algorithms.

Likewise, most exchange traded funds (or "products," to use the umbrella term) are lucky to get their names in the paper. Of 1,600 funds, a mere 241 hold almost 90 percent of the assets.

Perhaps the deluge of funds indicates the need for investment advisers, although fund-picking is no easier than stock-picking.

Or perhaps the deluge is driving bewildered investors toward online services that offer simple portfolios of a few basic ETFs.

What do you think?

Stop the Mutual Fund Merry-Go-Round?

Photo: Wikimedia Commons

Once upon a time, a Merrill Lynch broker made a pitch for the company 401(k) plan. Could we see the prospectuses for the proprietary funds he proposed to use? Of course, he said.

Did we ever see a prospectus? Of course not.

In theory, regulations required that an investor receive a prospectus before purchasing fund shares. In practice, brokers selling high-expense, low-performing funds could not comply. They were schooled to use Plan B: Make the sale first, deliver the prospectus later.

That memory cropped up as I read David Swensen's tirade against The Mutual Fund Merry-Go-Round.  Yes, "investors should take control of their financial destinies, educate themselves, avoid sales pitches and invest in a well-diversified portfolio of low-cost index funds." But asking fund salespeople to hand out more informative prospectuses, offer index-fund alternatives and generally act like fiduciaries? I fear that's still not practical.