Portfolio manager Joe Fath loves to get his hands dirty restoring old sports cars. Restoring T. Rowe Price’s oldest mutual fund to its former glory required a different approach: Embracing new tech.
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earing a blue Chicago Cubs pullover and sunglasses to avoid the rushing wind and glare of the road, money manager Joseph Fath spins his 1957 red-and-white Corvette around a corner. “Wait until we get this baby out onto the highway,” he says. As the convertible’s engine roars, a passing trucker honks his approval.
Fath collects and restores cars from the 1950s and ’60s. The most important car in his garage, though, is something new: an R1T pickup truck from Rivian, the electric vehicle outfit. Rivian has been one of Fath’s biggest scores as manager of the T. Rowe Price Growth Stock Fund. In a short span of two years, the fund has more than quintupled a $928 million stake in Rivian to $4.8 billion by the end of 2021.
Fath, 50, has run the $62 billion growth fund for eight years. It’s a demanding job. A few wrong bets would put at risk what Forbes estimates to be around $350 million a year in management fees that Baltimore’s T. Rowe Price draws from this one fund, which accounts for about half of the growth stock strategy’s assets under management.
Thomas Rowe Price Jr., a pioneer of growth stock investing, created the mutual fund in 1950, when the fund business was in its infancy. Sticking to Price’s vision of buying into the companies of the future, the fund seeks growth companies in industries undergoing what Fath, repeating a familiar theme on Wall Street, describes as “disruptive change.”
For the fund’s founder, the companies of the future included IBM and National Cash Register. For Fath, it means companies like Amazon, Microsoft, Google parent Alphabet and Rivian. “We identify companies that can really be on the right side of change, ideally catching them at the early part of their growth,” he says.
Companies on the wrong side are not just retail stores and automakers. A conspicuous place of disruption is the industry in which Fath works: money management. Active management, which has experts picking stocks, is losing ground to passive management, in which stocks are bought mechanically from a list of all those available in a certain category.
T. Rowe Price’s strong suit has always been active management, and it now finds its handsome profit margin imperiled by vendors of index funds. For six years running, reports Morningstar, the fi rm has experienced a net outfl ow of assets. The ominous trend is visible at Fath’s fund, which saw $5.8 billion walk out the door in 2020. The pace of departures picked up to $3.7 billion in the first half of last year. (A spokesman says outflows are overstated because some institutions are moving their funds to T. Rowe trusts and other investment vehicles using Fath’s growth strategy.)
Now look at the $79 billion Vanguard Growth Index Fund, which has been gaining assets. It’s similar to T. Rowe Price Growth; the two funds share three of their five largest positions. Vanguard’s fund has done better over the past five years, but Fath’s is beating other stock-picking-focused competitors like Fidelity’s Contrafund and American Funds’ Growth Fund of America. Fath’s 16.9% annualized return (net of fees) since he took over the fund puts him more than two percentage points ahead of the S&P 500 index.
The Vanguard fund is cheaper. Its ETF share class is priced at 0.04% of assets annually in fees; retail shares of the T. Rowe fund cost 0.64% a year. Fath’s formidable task: to persuade his shareholders to keep paying 16 times as much as they would at Vanguard for a collection of growth stocks. What does he have to offer?
One advantage: deals like the one that got the fund into Rivian, which went public at a $90 billion valuation last November. Prior to that stock offering, Fath’s fund led several rounds of late-stage funding for Rivian, and Fath spent some time on the company’s board of directors as an observer. Fath’s fund has also enjoyed big gains from getting into DoorDash, Snowflake and Airbnb before they went public.
“We identify companies that can really be on the right side of change, ideally catching them at the early part of their growth. Value companies just don’t light my fire.”
Fath gushes about the R1T: “It’s like having a Ferrari in a pickup truck—800 horsepower, and it goes from zero to 60 miles per hour in three seconds.” He sees potential in the manufacturer’s twofold strategy: Rivian is the first to electrify pickup trucks, and it’s expanding into SUVs and commercial vehicles; it has an order to deliver 100,000 electric vans to Amazon by 2025.
Fath has also put money into privately held Redwood Materials, the battery recycling company created by Tesla cofounder JB Straubel. Says Fath: “The entire [automobile] ecosystem is undergoing change, not just those who sell vehicles but everyone that supplies them.”
T. Rowe Price Growth can invest up to 15% of assets in privately traded companies. Vanguard’s index fund can own none.
“The last thing you want to do in our business is wait, right?” Fath says. With more companies staying private longer and achieving large market values before going public, he says, you have to invest in early funding rounds to get ahead of their growth curve. “It’s pretty invigorating to be around these dynamic companies that either are starting a business or trying to grow that business. Value companies just don’t light my fire.”
The other way an active fund like Fath’s can stand out is to make concentrated bets. The Vanguard fund owns 279 stocks to T. Rowe Price Growth’s 93. Last year, Fath got permission from his shareholders to change the fund’s legal status from diversified to non-diversified. That makes it easier for him to make an outsized bet on a single stock.
Fath grew up in the suburbs of Chicago to a father who was a sprinkler fitter and a mother who was an administrative assistant. Neither parent went to college. “I kind of had to find my own way,” Fath says. His love of autos comes from his father: The two of them bonded by working on cars together throughout his childhood.
After graduating from the University of Illinois at Urbana-Champaign in 1993, Fath did stints at accounting and gaming firms. One semester into Wharton Business School at the University of Pennsylvania in 1999, Fath heard from an old accounting-firm friend who was working on an idea for an education technology startup. Sold on the pitch, Fath took a deferral from school and signed on as chief financial officer at what became Broadform, an online collaboration platform for parents, students and teachers in K-12 schools.
Although the business started off well, funding dried up as markets tanked in the wake of the dot-com bubble. Fath found himself back in business school in early 2001, and a year later Broadform got wrapped into Think.com, a nonprofit controlled by Oracle.
“I had this bug for wanting to build stuff that tied into how I ended up investing as well,” Fath says. He joined T. Rowe Price as an analyst and eventually became an associate portfolio manager in 2008 before taking over the Growth Stock Fund in 2014.
The two key hallmarks Fath’s analysts look for when identifying companies on the right side of change are the pace of earnings and cash flow growth—as well as the durability of that growth.
Roughly half of Growth Stock Fund companies are secular growers or innovative disruptors. Another 15% to 25% are cyclical growers, such as financials and industrials, which can sometimes see double-digit growth, Fath says, though that tends to be fleeting.
The last 15% to 25% of the portfolio is in what Fath calls “special situations,” which include companies transitioning to growth from value, companies benefiting from a lasting industry change or companies that grow stronger through consolidation.
Example: Microsoft. In the early 2000s, it was very much on the “wrong side of change with desktop,” Fath recalls. But after Satya Nadella took over as chief executive in 2014, the company pivoted into mobile and cloud computing, eventually returning to double-digit earnings growth. Fath started buying the stock in 2015, and Microsoft, at 10% of the fund, is now his largest holding.
Microsoft, Apple, Meta Platforms (Facebook) and Amazon have continued to “find new ways to win” by shoring up existing businesses, innovating and expanding into new markets. Just as Amazon saw payoff s from web services and advertising, Meta is poised to see a return on its recent expansion into e-commerce and eventually its Metaverse project, Fath predicts.
“We’re going to continue to make investments in companies that are changing the world... if you have confidence in the durability of that growth profile, it can bail you out over time.”
The fund’s mandate permits him to venture abroad. He owns TikTok’s Chinese parent company, ByteDance; Dutch semiconductor manufacturer ASML; and Singapore-based consumer internet company Sea. He particularly likes Sea, which has three businesses: digital entertainment (it’s known for its Garena Free Fire video game), e-commerce and digital payment systems. Fath sees potential as the company expands its online shopping business and moves into new markets such as South America.
High-flying growth and technology stocks have been under selling pressure in the past two months. Rivian is trading at less than half its peak price. So is Snap, the camera and social media company formerly known as Snapchat and the fund’s 16th-biggest holding. You have to put up with that volatility to get the long-term upside, Fath says. He’s a long-term player, with a turnover of 33% making his fund one of the sleepier actively managed growth stock portfolios.
Hang in there, Fath says to shareholders. “We’re going to continue to make investments in companies that are changing the world or are taking advantage of an opportunity that exists in their sector. If you have confidence in the durability of that growth profile, it can bail you out over time.”
It’s somewhat poetic that Fath, with his appreciation for what he calls the “golden age” of U.S. manufacturing in the 1950s and ’60s, now runs a retro fund from that same era. “Finding parts for [old] cars can take years,” he says. But just like finding new high-powered growth stocks to invest in, “that’s the treasure hunt of it all.”
