A fund manager who's crushing 92% of his peers unpacks the blueprint he's used successfully for 26 years - and shares his advice for surviving stock-market crashes

A fund manager who's crushing 92% of his peers unpacks the blueprint he's used successfully for 26 years - and shares his advice for surviving stock-market crashes

larry puglia

  • The T. Rowe Price Blue Chip Growth Fund, managed by Larry Puglia, has outperformed the stock market on average since 1993 and sits in the 92nd percentile of funds on a five-year basis.
  • Puglia recently told Business Insider about the investing strategies that have informed his stock picks from the fund's inception, and how he has outlasted numerous market cycles.
  • Click here for more BI Prime stories.

For Larry Puglia, managing a mutual fund is similar to working on a factory floor.

He follows an instruction manual of sorts for investing in the T. Rowe Price Blue Chip Growth Fund, which he manages solo. Using the investment firm's research as inputs, he applies his methodology, with the goal of churning out the best results as many times as possible.

This analogy is simplistic, but he told Business Insider in a phone interview that it's how he responds when people ask him whether he can replicate his 26-year track record.

It's a question someone with his performance history would field regularly. His $63.7 billion fund has outperformed the S&P 500 on average since its inception in 1993. It sits in the 92nd percentile among its peers on a five-year basis according to Bloomberg data. And, both Morningstar and Lipper have awarded it their top ratings.


From the outset, Puglia's goal was to suss out companies that held the promise of above-average earnings growth and were trading at multiples below the market's profit forecasts.

Puglia and his former colleagues nearly went with the 'Quality Growth Fund' for a name, reflecting their laser focus on this objective. But many blue-chip companies shared the same characteristics he was looking for in stock picks: leading market positions, seasoned management, and strong financial fundamentals.

"We were really looking for durable, sustainable earnings," Puglia told Business Insider by phone. "We thought that's what allowed companies to really earn higher-than-average valuations over time and sustain those valuations."

Read more: MORGAN STANLEY: These 11 large tech companies are most likely to get acquired within the next 12 months

The one fundamental metric that has stood the test of time in terms of accurately predicting a company's future returns is free-cash-flow growth, Puglia said. Its predictive value is particularly strong in the healthcare and technology sectors - two parts of the market where growth-fund managers like himself tend to congregate.


"We think that free cash flow is more difficult to manipulate, and gives a much clearer indication of the strength of a company and the profitability of a company," Puglia said.

He also looks for companies that appear to have large total addressable markets (TAM). This approach paid off with investments in Amazon and Intuitive Surgical.

A good way to assess TAM is by investigating the scope of a company's competitive advantage, he said. Puglia's approach borrows from the Harvard Business School Professor Michael Porter, whose research shows that the most competitive companies have high barriers to entry, low threats from substitute products, and loyal customers.

These traits create a "virtuous cycle" for any company, Puglia said. They informed his investments in Mastercard and Visa - two companies that have essentially formed a duopoly in the payments industry, according to Puglia.

Surviving market crashes

Puglia, like many investors, sometimes gets flustered when the news on his stock picks runs contrary to his investment theses. Having managed money during the dotcom crisis and the Great Recession, his fund has suffered several sharp drawdowns including a 40% slump from 1999 through 2002 as the tech bubble imploded.


Read more: 'The greatest bubble ever': One market expert warns that a relentless bull market is on the brink of crashing and explains how to profit from its demise

But instead of allowing crises to frighten him out of long-term bets, he digs in to check whether his assumptions about various companies hold water.

"The worse a stock is performing, the more we're going to examine in detail our assumptions, talk to the company, and try to corroborate what they're saying with customers, suppliers, and competitors," he said.

His approach with this exercise and other data-gathering endeavors is to pre-establish the questions he wants answers to, whether it's about a company's edge after a new competitor arrives or the quality of management. It's important that investors do not complicate these questions, he said.

"It's really important to get through a lot of data, but it's very important to know what you're looking for," Puglia said.


He added: "A lot of times it's just one variable - one really important thing - that we need to know about a company. If that variable is above the street's expectations and in line with or above our expectation, then we can be more confident that the investment is on track."