T. Rowe Price (TROW) might not be the biggest fund factory out there … but T. Rowe Price Funds sure are getting the job done for retail investors planning for retirement.
T. Rowe Price itself reported good fourth-quarter earnings in late January as 2013 proved to be a year of polar opposites — T. Rowe Price mutual funds saw net cash inflows of $10.2 billion, while institutional funds experienced net cash outflows of $22.2 billion.
Until T. Rowe Price can win back some of the institutional clients it has lost, mutual funds are the star attraction.
According to Lipper, 77% of T. Rowe Price funds outperformed their peers over a five-year period, with 78% of them rated four or five stars by Morningstar.
That, my friends, is impressive.
Conveniently, the T. Rowe Price website for individual investors breaks down T. Rowe Price mutual funds into five categories: target-date funds, stock funds, international funds, bond & money market funds and asset allocation funds.
An investor would be well-served owning one fund in each of these categories to diversify their portfolio, so we’ll look at a total of five T. Rowe Price funds worth owning.
T. Rowe Price Mutual Funds: T. Rowe Price Capital Appreciation Fund (PRWCX)
Type: Stock fund
It’s tempting to go with the T. Rowe Price Equity Index 500 Fund (PREIX) and its 0.28% expense ratio. It’s hard to ignore that kind of value.
However, active management is the focus of this article. As such, I’ll recommend the T. Rowe Price Capital Appreciation Fund (PRWCX), which allocates 66% to stocks with the remainder in bonds and cash.
PRWCX’s $20 billion in net assets are invested in a total of 288 holdings, with the top 10 representing 28% of the portfolio. Top holdings include Danaher (DHR), Thermo Fisher Scientific (TMO) and United Technologies (UTX).
Fund manager David Giroux has managed the fund since July 2006 and has been with T. Rowe Price since 1998. PRWCX’s only negative total return was in 2008 when it lost 27%, but that still was 10 percentage points less than the S&P 500.
Rated five stars by Morningstar, PRWCX’s annual expense ratio of 0.73% is considered below average for its moderate allocation category. The fund turns its entire portfolio about once every two years, which is lower than the average for large-cap mutual funds, and its tax-adjusted returns rank it in the top 1% of its category.
When it comes to T. Rowe Price funds, PRWCX is one of the finest.
T. Rowe Price Mutual Funds: T. Rowe Price Inflation Protected Bond Fund (PRIPX)
Type: Bond fund
With all the uncertainty surrounding interest rates and bonds, I’m not willing to play with fire.
Warren Buffett stated in his 2013 shareholder’s letter that the average investor should invest 90% of their funds in a low-cost S&P 500 index fund and the rest in short-term government bonds. The fund that I recommend to take care of your bond allocation is the T. Rowe Price Inflation Protected Bond Fund (PRIPX), which invests at least 80% of its assets in inflation-protected bonds.
You’re not going to get rich owning this fund, but your principle will keep pace with inflation.
The fund’s composition consists almost primarily of Treasury inflation-protected securities (TIPS) with weighted average maturities of almost nine years and effective durations of close to seven. TIPS are backed by the U.S. government, so your funds are safe and secure.
Over the past five years, PRIPX has achieved an annual total return of 4.5%. This kind of steady-as-you-go pace is exactly what Buffett intended when he made the aformentioned statement.
For those keen on overweighting stocks as you get closer to retirement, this is a good counterbalance.
T. Rowe Price Mutual Funds: T. Rowe Price International Stock Fund (PRITX)
Type: International fund
The T. Rowe Price International Stock Fund (PRITX) seeks to own companies that can generate double-digit earnings and cash flow growth. Most of its performance in recent quarters has come from technology, with emerging markets delivering benchmark-beating results.
PRITX is not a domestic stock fund in disguise, as 91% of its holdings are located outside the U.S. Leading the way: U.K., Japan and Switzerland, whose companies together account for 42% of the portfolio.
Europe, in total, accounts for half the fund’s holdings with Asia/Pacific the lion’s share of the remainder. Its top 10 holdings — including such companies as WPP (WPPGY) and Credit Suisse (CS) — represent just 14% of the net assets.
Manager Robert Smith has done a good job spreading the love across all 133 holdings.
Other highlights of the fund include an expense ratio of 0.85%, a turnover ratio of 44% and a median market cap of $27 billion.
Picking among the handful of T. Rowe Price funds focused internationally, PRITX is the one I’d go with, although you’ll want to consider that it has had a couple of black marks — though, those came in 2008 and 2011. Still, PRITX had double-digit returns in the other eight years between 2004 and 2013. That’s remarkable consistency.
T. Rowe Price Mutual Funds: T. Rowe Price Retirement 2020 Fund (TRRBX) or T. Rowe Price Target Retirement 2020 Fund (TRRUX)
Type: Target-Date Fund
Investors closer to retirement will want to pay special attention here.
If you’re sitting around 60 years old and plan on retiring around age 65, you’ll want to consider the T. Rowe Price Retirement 2020 Fund (TRRBX) or the T. Rowe Price Target Retirement 2020 Fund (TRRUX).
There are two big differences between the funds:
First, TRRUX is a new fund established in August 2013, whereas TRRBX has been around since 2002. The second relates to the glide path, which is the transition from stocks to bonds that occurs as you get closer to and into retirement.
TRRUX currently has a stock/bond split of 53%/47% compared to TRRBX at 67%/33%. In six years, when the two funds hit the target date (2020), TRRUX will invest 42.5% of its assets in stocks and the remainder in bonds. Thereafter, over a period of 30 years, the stock allocation will glide down to 20% where it will remain with 80% in bonds.
In the case of TRRBX, its stock allocation in 2020 will be 55%, also gliding down to 20% over 30 years.
Of the two T. Rowe Price funds, I’d be more inclined to go with TRRBX because I’m a big believer in staying stock-heavy into retirement (you never know how long you’re going to live). That said, if you’re risk-averse, TRRUX is a better fit because the glide path transition from stocks to bonds over the next 36 years will be less severe.
T. Rowe Price Mutual Funds: T. Rowe Price Personal Strategy Growth Fund (TRSGX)
They say it’s not how you start but how you finish. For this reason, I’m going with the T. Rowe Price Personal Strategy Growth Fund (TRSGX), whose objective is to seek the highest total return possible while maintaining an asset allocation of 80% stocks and 20% bonds.*
Those percentages aren’t written in stone, but that’s the target. Currently, bonds represent just 15% of the portfolio, though that’s likely to change.
With a total of 1,422 holdings that are turned every couple of years and an expense ratio of 0.69%, which is considered low, you’re getting a good large-cap fund with a dash of bonds thrown in for good measure. Over the past five years, TRSGX has achieved a total average annual return of 19% through April 2 — 301 basis points higher than its category average. Morningstar currently rates it four stars, although in the past it has been a notch higher.
*Note: TRSGX actually has a higher ratio of stocks to bonds than the “stock fund” pick PRWCX, but fund listings are based on T. Rowe’s own proprietary fund divisions.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.