Over more than 25 years, Primecap has quietly built one of the most superior records in the business, and this may be the best stock fund for this market. By Steven Goldberg, Contributing Columnist April 13, 2011 How should you invest in this market? The economy seems to be recovering, but it's doing so at an agonizingly slow pace. Housing prices keep falling, unemployment is much too high, and oil prices are rising.In this tricky environment, it’s especially important to entrust your money to experienced hands -- managers who’ve navigated troubled waters before. My top stock-fund pick for this market is Primecap Odyssey Growth (symbol POGRX), member of the Kiplinger 25. Over the past five years through April 8, the fund returned an annualized 5.2% --an average of 2.5 percentage points per year better than Standard & Poor’s 500-stock index. The five-year number doesn’t begin to tell the story of the remarkable managers who run Odyssey and other Primecap funds. Hardly any managers or analysts ever leave the American funds, probably the best broker-sold fund family. But in 1983, three American veterans -- Howard Schow, Theo Kolokotrones and Mitchell Milias -- broke with the Los Angeles–based firm to form Primecap. A year later, Vanguard contracted with Primecap to launch Vanguard Primecap (VPMCX). Since its inception, in November 1984, Vanguard Primecap has returned an annualized 13.5% -- an average of 2.6 percentage points per year better than the S&P 500. Over the past 20 years, the fund has returned an annualized 12.0%, making it the top-performing no-load, large-company-growth fund. Advertisement Primecap is a quiet company -- at least so far as the media is concerned. I’ve tried for many years to interview the managers -- without success. Probably the best interview with them was conducted by Vanguard itself for a version of Primecap that it is incorporated in Ireland and sold in other European countries. The original fund, Vanguard Primecap Core (VPCCX), and Vanguard Capital Opportunity (VHCOX), also run by Primecap, are closed to almost all new investors. But Primecap started Odyssey Growth in 2004, a fund that looks much like Vanguard Primecap. Primecap has always specialized in large-company growth stocks. These are the world’s best-known and most stable companies, and their stocks typically command premium price tags. But in the last couple of years, investors have been ignoring many large-company growth stocks. That means a lot of great companies are trading at unusually cheap prices. Such anomalies can go on for years, but they eventually are resolved. That’s why I like large-capitalization growth stocks so much today, and why Primecap Odyssey Growth is my favorite stock fund. Advertisement The managers aim to buy these gems when they’re selling at depressed prices relative to their “fundamental value.” They then exhibit extraordinary patience in hanging on to stocks until the market fully appreciates their value. The fund typically owns stocks for five to ten years. About 30% of Odyssey Growth is in technology stocks, and almost 40% is in health stocks. Primecap has maintained high weightings to those sectors “for at least the last decade,” says Vanguard’s Daniel Newhall, who heads the team that oversees the fund company’s outside managers. The Primecap managers like those sectors because they’re believers in innovation. That’s why almost all of their health care stocks are in pharmaceuticals, biotechnology and medical devices. In Primecap’s annual report last fall, the managers said tech and health care “also represent areas where the United States has a competitive advantage relative to the rest of the world.” By contrast, Primecap held bank and other financial stocks in disdain long before the 2008 meltdown. “They were uncomfortable with the degree of leverage and the lack of transparency,” Newhall says. Those financials Primecap does own tend to be involved in relatively simple businesses, such as insurance brokerage. Advertisement Despite Primecap’s careful approach, its funds won’t insulate you from the stock market’s vagaries. Odyssey Growth is about as volatile as the S&P 500. The fund lost 51.5% in the 2007–2009 bear market, compared with 55.3% for the S&P 500. It does boast a low expense ratio -- just 0.68% a year. Primecap’s success has hardly gone unnoticed. The firm is managing more than $70 billion. To cope with asset growth, Primecap has long employed a method pioneered by the American funds: Each of its six senior managers is responsible for investing a portion of the firm’s assets. Each of Primecap’s ten analysts also manages small amounts in his or her sector. The firm’s founding managers -- Schow, 83; Millias, 69; and Kolokotrones, 65 -- still work every day, Newhall says. “But they’ve taken meaningful steps to develop the next generation and the generation after that.” Time will tell. But for now, this is a superb fund. And in the report they issued last fall, the managers were bullish. They cited growing demand in emerging markets for U.S. products and services, heavy investment in research and development that should lead to more innovation, and corporate balance sheets “as strong and liquid as they have ever been.” Steven T. Goldberg (bio) is an investment adviser in the Washington, D.C. area.