By late 2016, Larry J. Puglia had been managing the $33 billion T. Rowe Price Blue Chip Growth Rind (Blue Chip Gmwth Fund) for more than 23 years. One of the fund’s original managers. Puglia had been the sole manager of the open-ended mutual fund since 1997 and had generated superior returns on average for his investors over the life of the fund.’ Since inception in mid-I993 through September 30. 2016. the fund had return. an average annual total return of 10.12%, outperforming the 9.12% return of the fund’s benchmark. the Standard & Poor’s 500 Index (S&P 500).2 For mast fund managers. beating the S&P 500 in any single year was an accomplishment. yet Puglia had served his investors well by performing better than competitor funds both in bull markets, such as that of the late 1990s, as well as the bear markets, such as that of the first decade of We 2000x. Exhibit 3.1 presents a summary of the Blue Chip Growth Fund. Exhibits 3.2 and 3.3 show the foal’s performance and annual return versus its benchmark and other funds in the large-cap growth category.
third view was that the mutual-fund industry Fovided, according to one observer, -an insulating layer between the individual investor and the painful vicissitudes of the marketplace-, This service, after all, allows individuals to go about their daily lives without spending too much time on the aggravating subject of what to buy and sell and when, and u spares them the even greater aggravation of kicking themselves for making the wrong decision…. Thus. the money management industry is really selling -mom peace of mind- and -less um, though it rarely bothers to say so.’ Between 1970 and 2015, the number of mutual funds offered in the United States grew from 361 to 9,520. This total included many different types of funds; each pur-sued a specific investment focus and could be classified in one of several categories. such as aggressive-growth. growth. growth-and-income. international, option. bal-anced, or a variety of bond or fixed-income funds.. Funds could be further segmented by company size based on the market capitalization (market cap), calculated by mul-tiplying the number of shares outstanding by share price. Investors could. for exam-ple, opt to invest in large-cap, mid-cap, or small-cap growth funds. Funds whose principal focus of investing was common stocks or equities represented the largest segment Inickas’Y’ number and of mutual funds reflect. a major shift in growth n the num a types or U.S. workers Prior to the 1980s, most workers were covered by traditional ‘di:it:all -benefit (DB) pension plans. which were funded by employers and managed by institutional money managers hired by the employers. Changes to the U.S. tax code in the 1970s set the stage for a major shift, which would have broad implica-ndustry. First, the Employee Retirement Income Security ti:c”t’oti.°1911771eZbilliasheudnichleiself-direcEted Individual Retirement Account (IRA) through which workers could save and invest individually for their retirement on a tax-deferred basis. Second. large U.S. companies began to replace their DB pension plans with de-fined-contribution (DC) plans such as 401(k) and 403(6) plans. The new plans. named for the relevant sections of the U.S. tax code, shifted the burden and responsibility of saving and managing retirement assets from corporate employers to invested em-ployees. Exhibit 3.4 shows the growth in retirement-plan assets over the period from 1975 to 2015. By 2015, 57.1 trillion of IRA and DC plan assets were through mutual funds.
The shift into DC plans created a broader customer base for the mutual-fund indus-Pry, as well as a deeper penetration of the total market for financial services. With DC lans. each worker had an individual investment account that could hold multiple mu-tual funds, whereas a company’s DB plan held the assets of tens of thousands of workers in a single investment account. Funds owned in an employee’s name after a vesting period remained in the employee’s name even if they switched employers. By 2015. 44.1% or 54.9 million U.S. households owned mutual funds, up from 5.7% or 4.6 million U.S. households in 1980, Thedth’nutual-fdaiteniv7enl;7=7rdi:htiP ciallyrononeiype of fund: tertlahnafatio 1::whtg:vi:r reflected the increased participation of growing numbers of relatively inexperienced and ‘instilled retail investors: their interest in market-timing-oriented investment strate-!:Isa■ialliV71 ItneraZnrIt’i fs=alfsil:ldes=-hflucnildtZts’Irs;. grew’ lindc.isle;rnted, mutual-fund money became -hotter (tended to turn over faster,. Asa result of the growth in the industry, the institutional investors who managed mutual funds, pension funds, and hedge funds. on behalf of individual investors grew in power and influence. By 2015, mutual funds owned 31% of the outstanding stock of U.S. companies.” The power and influence of institutional asset managers was ap-parent in their trading muscle—their ability, coupled with their willingness, to move huge sums of monelted in increases in trading volume, average-trade size, and block trading (a single trade of more than 10.000 shares).
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