Morningstar Salutes Fund Managers of the Year
If Jack Laporte wasn’t in the investment business, he probably would be the guy who steers supertankers to their berths in crowded harbors.
Laporte manages T. Rowe Price New Horizons, the mutual fund equivalent of a supertanker. The small-stock portfolio recently topped $3 billion in assets, making it a giant among minnows. Small-stock funds typically close their doors when they pass $1 billion or so in assets because size is a drawback amid the treacherous shoals of tiny companies.
Laporte’s ability to navigate the Baltimore-based fund to a 55% gain in 1995 earned him manager of the year honors among domestic-stock portfolios from Morningstar Inc. of Chicago.
Dan Fuss of the Loomis Sayles Bond Fund ([800] 633-3330) in Boston was named winner in the fixed-income category, and Jack Mussey of Colonial Newport Tiger ([800] 248-2828) in San Francisco took top honors among international funds. Last year was the first time Morningstar split the award into three parts.
Laporte, who took the helm of the no-load New Horizons fund ([800] 638-5660) in September 1987, has outperformed the average small-stock fund in six of the last seven years. While he isn’t making any promises for the rest of 1996, it’s encouraging that he thinks small stocks haven’t topped out.
“Frankly, valuations remain reasonable,” he said.
A big reason for his optimism has to do with a key trait of his own fund. New Horizons was the first small-stock product introduced, back in 1960. Since then, its portfolio price-earnings ratio has been used as a barometer for small stocks generally.
Simply put, when the average price-earnings ratio for all stocks held in New Horizons equals that of the large-stock Standard & Poor’s 500, small firms are deemed to be bargains. When New Horizons’ average p-e rises to twice that of the S&P; 500, small stocks are considered overheated. Small companies normally sell at higher p-e because of their greater return potential.
At the moment, New Horizons’ average p-e is smack dab in the middle of the spectrum, at 1.5 times that of the S&P; 500.
“This has been a pretty good predictor,” Laporte said.
He also points out that small stocks have tended to swing in or out of favor for periods of about seven years in a row. Considering the current favorable span for small stocks started around 1991, investors can anticipate a couple more years of good performance, Laporte figures.
“We’re five-plus years into what I still think is an up cycle,” he said.
As noted, fund managers who place large buy or sell orders in a thinly traded stock can easily push up or pull down its price, much like a passing supertanker jostles any small boats in its wake.
The wide girth of New Horizons means Laporte can’t trade big blocks of stock quickly but must ease into or out of a position over days or even weeks, said Tim Medley, a certified financial planner at Medley & Co. in Jackson, Miss.
For this reason, Medley said he prefers small-stock funds with assets less than $400 million.
But Laporte said his fund’s burgeoning size--assets have nearly doubled since late 1994--hasn’t yet caused problems. He minimizes trading disruptions by holding each stock for a little more than two years on average, about double that for rival small-company funds. It also helps that he avoids truly small corporations in favor of those that are a bit more established.
It’s noteworthy that Laporte managed to guide New Horizons to a 55% gain last year without a big stake in volatile technology stocks, many of which have taken a drubbing in recent months. In New Horizons, technology ranks as only one of four main areas of focus, along with health care, consumer-oriented companies and business-service firms.
That said, Laporte has been buying technology stocks of late, figuring the downdraft in this sector that started last fall has probably run its course. The fund’s technology holdings are mainly selected by Chip Morris, who runs T. Rowe Price’s high-octane Science & Technology Fund.
Morningstar’s award reflects more than its perception that Laporte has transformed New Horizons from an old rust bucket to a shipshape competitor. It also acknowledges progress made by T. Rowe Price generally.
“In a sense, this is a team award,” Morningstar said. “New Horizons exemplifies the strides made by T. Rowe Price, which has gone from being an industry also-ran to a company pressing hard on Fidelity and Vanguard’s heels.”
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The Vanguard Group of Valley Forge, Pa., said it is cutting management fees on 17 funds run by outside firms. Vanguard estimates the move will reduce fees by an average 18%, or $10 million annually.
The largest funds affected include Vanguard GNMA, High-Yield Corporate Bond, Long-Term Corporate Bond, Wellesley, Wellington and Windsor. Of the 17 funds, 12 are run by Wellington Management Co.
