The nearly $1 billion T. Rowe Price Science & Technology fund was the top performer in the Pensions & Investments universe of mutual funds most used by defined contribution plans.
For periods ended Dec. 31, the equity fund returned a five-year annualized return of 22% and a one-year return of 15.8%.
By a healthy margin, the T. Rowe Price fund surpassed runners up Twentieth Century Ultra, with a 19.4% five-year return and Keystone Custodian S-4, with 17.5%.
For the one year, Science & Technology towered above Vanguard/Primecap, which ranked second with 11.4% and Janus Venture, which ranked third with 5.5%.
In fixed income, despite 1994's abysmal market performance, the top bond funds for the five years had relatively long durations.
IDS Bond Fund led the rankings with a 9.07% annualized return, followed by PIMCO Total Return Institutional with 8.99%, and Merrill Lynch Global, with 8.87%.
Not surprisingly, given the sharp rise in interest rates, the top bond funds for the year were short-term funds led by Harbor Short Duration, with 2.74%. That far exceeded the No. 2 fund, the GE S&S Short Term, which logged a 1.65% return and the Kent Short-Term Bond Institutional fund, with 1.03%.
The top equity funds for the five years, although aggressive, nevertheless ranked in the top quartile, even on a risk-adjusted basis. This is the first time P&I has included such a ranking of stock funds (see related story, page 20).
The T. Rowe Price Science & Technology Fund benefited from being an aggressive equity fund during a good period for stocks. It also was skewed toward electronics technology, which "probably has been the best performing sector over the last five years," said Chip Morris, president of the fund and a vice president of T. Rowe Price Associates Inc., Baltimore, Md.
The fund was light in "science" stocks, such as health care companies, which Mr. Morris began selling in 1991. Including other sectors such as environmental services, science stocks represented 5% to 20% of the fund in the past five years.
He takes a pragmatic approach to the wild technology sector: "We try and find the best companies we can and the best managements we can, but live in fear we're going to get hosed somehow."
The sector themes the fund emphasized during the five years have not changed: the replacement of host-based (mainframe) computer systems with personal computer networks; the pervasiveness of digital electronics; wireless communications; consumer software and PCs; and the increasing "scarcity value" of biotechnology companies.
"Of 200-plus (biotechnology) companies, a handful do something real. The other 195 are a collection of underfunded lab coats and petri dishes,"
Mr. Morris said.
But that doesn't matter to Mr. Morris, whose fund makes big bets on a very small number of companies, currently 45.
"It's very important to be selective, especially with a fund of this size," he said, noting five years ago the fund had only $100 million.
"I'd like to have 30 names, but can't do it for liquidity reasons. As the fund grows I might have to expand to 50 or 60 names," he said.
The top holdings are: Xilinx Inc., which makes programmable semiconductor chips; First Financial Management, a credit card processing company that owns Western Union; and Vodafone Group PLC, a cellular service and paging company that he called the U.K. equivalent of McCaw Cellular Communications.
Like Science & Technology, Twentieth Century Ultra Investors profited by emphasizing technology stocks. The fund, which ranked second for the five years, is coping with its stellar growth to $10 billion from $345 million at the end of 1989. Its bottom-up growth strategy hasn't changed, but it has had to increase its large-cap holdings with such stocks as Oracle Systems and Microsoft Corp. to ensure adequate liquidity. At the same time, the fund has increased the number of small- to midcap names it holds.
While growth stocks have had a rough ride since the Federal Reserve Board started raising interest rates, Christopher Boyd, vice president and portfolio manager of Investors Research Corp., Kansas City, Mo., investment adviser of the fund, said "I feel really good. The earnings coming through for the companies we own have been unbelievable, on the strong side. Even in a neutral interest rate environment, people will be able to focus more on earnings growth."
"I don't think growth is necessarily reflected in the price of these stocks," he added.
Jim Callinan, portfolio manager of the $600 million Putnam OTC Emerging Growth Fund, which ranked fourth over five years, said the fund has a research staff dedicated to finding aggressive growth companies in industries that are fast-growing. The minimum earnings growth rate is 18%.
The fund invests in many initial public offerings and later accumulates larger stakes in the aftermarket. In fact many of these companies - such as America Online, Medaphis Corp. and Bed Bath & Beyond buoyed the fund's return over the five years. As many top-performing initial public offerings mature, Mr. Callinan has been selling them to make room for newer companies, thereby lowering the average market cap of the portfolio to about $400 million from $700 million.
"This is the first year since 1990 that presents a buying opportunity for small caps ... We're looking for IPOs that will triple and quadruple in the 1996 to 1997 period," Mr. Callinan said.
He is adding to holdings of medical device companies. Other sectors include consumer on-line services and consumer software sectors. He is trimming cable holdings. Among his new holdings are: Ascend
Communications, which makes on-line services equipment; Sierra On-Line, a consumer software company; and Franklin Electronic Publishers, which produces electronic devices the size of calculators that can store 3,000-page texts. The fund increased its ownership to 10% of the company from zero in the past two months.
Among fixed-income funds, the $2.2 billion IDS Bond Fund stayed on top by remaining upbeat on the market.
"Most of the really outstanding performance was generally in 1991, 1992 and 1993. The duration of the fund was always longer than the market and at times by a significant amount. Being bullish in a bull market really helped," said Fred Quirsfeld, vice president and senior portfolio manager. What's more, the fund was heavy in corporates, including high-yield securities. "In a period when spreads were tightening it allowed the fund to put a lot of distance between other funds and the market," he said.
Mr. Quirsfeld remains bullish. "I believe the secular trend in rates is down. I'm now expanding the duration of the portfolio. It was as low as
5.2 years; now it's about six years." He might raise it to seven as his conviction grows that interest rates will fall.
Corporate exposure might be reduced to 30% investment grade and 15% high yield from the current 40% and 20%, respectively, over the next six months. The fund will add to treasury and mortgage-related securities.
At the same time, credit quality will be improved.
"I've been wanting to gradually upgrade the credit quality in the fund. We're moving into a slower growth environment. There will be less tolerance for credit mistakes," Mr. Quirsfeld said.
The $115.2 million Harbor Short Duration fund, subadvised by Fischer, Francis Trees & Watts, New York, used derivatives and foreign instruments to enhance its performance relative to peers, according to Ronald Boller, president of Harbor Capital Advisors, Toledo, Ohio.
"People look at options and futures and these derivatives and think they're high risk. Taken out of context they are, but properly used, you can beat the competition ... We use them properly and control risk very carefully," he said.
In addition, the fund is allowed to hold up to 20% in foreign securities, unhedged. That limit goes up to 40% if half of the holdings are hedged.
For the five years, another Harbor fund, the $175.1 million Harbor Bond Fund, subadvised by Pacific Investment Management Co., also the manager of the No. 2 fund, ranked fifth.
According to Mr. Boller, the fund is very similar to the PIMCO Total Return Institutional. Any difference in return stems from the Harbor fund's slightly higher expenses.
The fund also has the ability to hold securities with durations as long as three years and as short as -1 year, the fixed-income equivalent of selling short, Mr. Boller said.