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Mutual Funds

The Primecap Edge

This premier growth fund manager isn't getting the attention it deserves.

Dodge & Cox has been around forever -- the San Francisco firm dates to 1930. But the fund family didn't really garner notice from the average investor until earlier in this decade, when a rally in value stocks and the dot-com bust revealed that outstanding fundamental value investors like Dodge & Cox deserved investor attention. The same may be said today of Primecap, which is one of the best fundamental growth managers.

In the shadows. Few growth investors have gotten much attention this decade because the 2000-02 bear market took a big bite out of their returns. The five- and ten-year returns of the typical growth-stock manager aren't exciting.

Primecap isn't obscure. It runs billions of dollars in Vanguard Primecap (symbol VPMCX), and its co-founder, Howard Schow, has a track record of nearly 25 years at the company. But the Primecap team isn't getting one-tenth the attention that Growth Fund of America receives. The two oldest Vanguard funds that Primecap runs, with long and glorious track records, are closed to new investors, and Primecap's four newer funds have had less than four years to show what they can do. Vanguard Primecap's ten-year return of an annualized 8.9% to August 1 blows away the return of the typical large-company growth fund.

Schow set up Primecap in Pasadena, Cal., after leaving the American fund family (which includes Growth Fund of America), and Primecap's investing philosophy often reflects Schow's early training. The most important sim-ilarity between the two companies is the tendency to go deeper into research than other growth managers. Primecap also employs a patient, valuation-conscious approach, just as many of the best value investors do.

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Both firms demonstrate that just because growth companies change faster than value companies, you don't have to be a slave to investment fashion and change your portfolio every season. Too many growth managers follow charts, invest in themes or follow obvious but unfulfilling measurements, such as the PEG ratio (price-earnings ratio divided by earnings growth rate). Wouldn't you rather know what the company is worth than what its growth rate is?

Also, similar to American, Primecap employs experienced analysts and multiple managers, who pick stocks independently of one another. The firm is owned by its 18 managers, analysts and traders.

We at Morningstar follow Vanguard Primecap and have been fans for a long time. When the Primecap team took over Vanguard Capital Opportunity (VHCOX), we recommended the fund right away, and I invested in it through an IRA. In 2003, we named Primecap's Schow, Theo Kolokotrones and Joel Fried our domestic-stock managers of the year. They continued to impress me as they've consistently produced strong returns. The trio typically do well in growth-led years. But they also hold up better than most growth managers in many value-led years.

New entries. In 2004, Primecap launched a new fund through Vanguard, Primecap Core (VPCCX), plus three more under its own Odyssey name, which you can buy directly from Prime-cap. Of the four open funds, I'd recommend Vanguard Primecap Core and Primecap Odyssey Aggressive Growth (POAGX) -- Primecap Core because it's the cheapest of the large-company options, and Primecap Odyssey Aggressive Growth because it owns mostly small- and mid-cap stocks its heftier brethren can't buy.

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Primecap Odyssey Aggressive Growth still has just $275 million in it -- you don't often get a chance at joining such exclusive company. Primecap Capital Opportunity started as a small- and mid-cap fund, and I'd be thrilled if Odyssey Aggressive Growth comes remotely close to its record. I own Primecap Core in a taxable account and Odyssey Aggressive Growth in my 401(k). That's right: three Primecap-run funds in all. Like the Primecap folks, I have conviction.

Columnist Russel Kinnel is director of mutual fund research for Morningstar and editor of its monthly FundInvestor newsletter.