Robert Smith: T. Rowe Price Growth Stock Fund

Smith holds each stock three years, on average. Sound selection has put him ahead of 92% of his peers

Robert Smith's investment philosophy is refreshingly simple: Follow the earnings. "Over time, stocks move with earnings growth," says the 44-year-old portfolio manager of the $12-billion T. Rowe Price Growth Stock Fund (PRGFX). "If a company's earnings grow 20%, its stock will grow 20%. Historically, that has been true." But in the short-run there can be peaks and valleys during which a company's stock price will not reflect the underlying value of the company.

Smith tries to get in at the valleys and get out at the peaks. So far so good. The fund has beaten more than 92% of its peers in the large-cap growth category over the past decade.

Smith, who also won the Standard & Poor's/BusinessWeek Excellence in Fund Management award last year, says he looks for companies in which earnings are expected to grow at least 12% annually for the next three to five years. "If the average company in our portfolio earns 15% a year with a 1% dividend yield and we never make a mistake, we would expect to return 16% a year," he says.

MAKING A GOOD THING LAST.

  Of course, mistakes are made, and even if they're not, sometimes the market takes a while to see things Smith's way. But Smith does his best to minimize losses. His portfolio is typically diversified amongst 100 to 150 stocks. He invests in companies with price-earnings ratios that are about the same as T. Rowe Price's estimate of the company's earnings growth rate. He starts to sell when the p-e of a stock reaches twice the growth rate.

So in the case of Google (GOOG), which he thinks is a 25%-to-30% grower, he sold his position last fall when the stock hit a 50 p-e. He recently started buying again after the p-e fell to 30.

Patience is another hallmark of Smith's style. His fund's turnover ratio is only 36%, meaning he holds each portfolio stock about three years. By contrast, his average peer has an 86% turnover ratio, holding just a little over a year.

Smith doesn't understand his competitors' eagerness to sell. "If you own a good company like General Electric (GE) or Microsoft (MSFT), you shouldn't have to sell it because it's growing faster than the market over time," he says. And given his fund's superior results, it seems such patience, more often than not, is rewarded.

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