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Fund Spy

Primecap’s Golden Lineup: Its Six Funds Come in Pairs

Putting recent results in context.

Morningstar has long recognized Pasadena, CA-based Primecap Investment Management as an outstanding active manager, and that continues with the May 9 announcement of Primecap’s James Marchetti as the inaugural winner of the Rising Talent Morningstar Award for Investing Excellence. He is the most recently named portfolio manager on an elite five-person team. Backed by one of the industry’s best analyst benches, this team uses a high-conviction multimanager approach to run Primecap’s six U.S. open-end funds. As each fund receives a Morningstar Analyst Rating of Gold, investors would do well to understand their differences, especially in the aftermath of years like 2018, when the three funds that Primecap subadvises for Vanguard outperformed their Odyssey-branded counterparts.

Primecap’s six funds fall into three pairs.  Primecap Odyssey Aggressive Growth (POAGX) and  Vanguard Capital Opportunity (VHCOX) look for companies with rapid earnings growth, many of which are mid-, small-, and micro-cap stocks. Vanguard Capital Opportunity’s larger asset base puts more limitations on its ability to buy micro-cap stocks.  Primecap Odyssey Growth (POGRX) and  Vanguard Primecap (VPMCX) look for companies with rapid earnings growth and invest across the market-cap spectrum, with Vanguard Primecap’s larger asset base putting more limits on its flexibility.  Primecap Odyssey Stock (POSKX) and  Vanguard Primecap Core (VPCCX) look for companies that are attractive for a variety of reasons, including better than expected growth potential, mispriced assets, or turnaround potential.

Flows of money into and out of the funds also contribute to holdings variations. Primecap Odyssey Stock, for example, is currently open to new investors and through April 2019 had received $1.76 billion in inflows over the past three years. Vanguard Primecap Core, in contrast, has been closed to investors since Sept. 22, 2014, and through April 2018 had outflows of nearly $1 billion over the past three years.

Differences notwithstanding, there is considerable overlap in the portfolios of each fund pair. There is also overlap, though to a lesser extent, across all six funds. The degree of overlap has served long-term investors well, but it can hurt in the short run.  Biogen's (BIIB) March 21, 2019, share-price drop of 29.2% on news that it had discontinued late-stage trials of an Alzheimer’s treatment affected few asset managers more than Primecap. All six Primecap strategies owned Biogen, but its Vanguard funds had the most exposure. Biogen was the second-largest position in Vanguard Capital Opportunity, third-largest position in Vanguard Primecap, and eighth-largest position in Vanguard Primecap Core. It was a top-25 holding in Primecap Odyssey Growth and top-40 holding in both Primecap Odyssey Aggressive Growth and Primecap Odyssey Stock.

Due in part to greater Biogen exposure, each of Primecap’s Vanguard funds is trailing its Odyssey counterpart year to date through May 15. In 2018, however, the Vanguard funds did better. As the accompanying table shows, 2018 was a tough year for Primecap overall but each Vanguard fund beat its Odyssey counterpart by 2.2 to 3.2 percentage points. According to Morningstar attribution, positions in  Nektar Therapeutics (NKTR),  ServiceSource International (SREV), Spectrum Pharmaceuticals (SPPI), and  BlackBerry (BB) contributed to most to Primecap Odyssey Aggressive Growth’s underperformance of Vanguard Capital Opportunity, for example.

Over longer periods of time, however, the picture changes. Exhibits 2 to 4 below compare the results of each pair to a relevant benchmark and Morningstar Category average. The time period measured is from the first date we have return data for the most recently incepted fund, through May 15 for absolute returns and the end of April for risk-adjusted returns. Primecap Odyssey Aggressive Growth was ahead of Vanguard Capital Opportunity on both an absolute and risk-adjusted basis. Primecap Odyssey Stock beat Vanguard Primecap on an absolute, but not risk-adjusted, basis. Meanwhile, Primecap Odyssey Stock fell short of Vanguard Primecap Core on both an absolute and risk-adjusted basis. In all cases, though, the six Primecap funds are ahead of relevant benchmarks and peer norms.


Investors wishing to buy a Primecap fund for the first time have only two options right now: Primecap Odyssey Growth and Primecap Odyssey Stock. The other four are closed, but that could change. Vanguard Capital Opportunity, for example, re-opened to new investors on April 3, 2013, before closing again on March 4, 2014.

If any or all the closed Primecap funds re-open, bear in mind that each Odyssey fund tends to be more aggressive than its Vanguard sibling. That pattern is especially clear when comparing the performance of Primecap Odyssey Aggressive to Vanguard Capital Opportunity. Exhibit 5 juxtaposes the relative gross returns of those two funds (left axis, solid line) with the growth of a dollar invested in the Russell Midcap Growth Index (right axis, dotted line). The solid line is generated by dividing Primecap Odyssey Aggressive Growth’s monthly gross returns with those of Vanguard Capital Opportunity. When the line trends up, it shows the degree and timing of Primecap Odyssey Growth’s outperformance of Vanguard Capital Opportunity. When it trends down, it shows the reverse. Meanwhile, the dotted line shows what the stocks in the Russell Midcap Growth Index were doing during those periods.

Notice that when the solid line trends up (meaning Primecap Odyssey Aggressive Growth is outperforming Vanguard Capital Opportunity), the dotted line generally trends up (meaning the index is rallying). However, when the sold line trends down (meaning Primecap Odyssey Aggressive Growth is underperforming Vanguard Capital Opportunity), the dotted line often trends down (meaning the index is losing money). The same pattern holds in comparing the other Primecap pairs, though it is less pronounced.

Investors with an above-average tolerance for risk and a long-term outlook have reaped rich rewards from casting their lot with Primecap, whichever fund they have held.

 

Alec Lucas has a position in the following securities mentioned above: POAGX, POGRX. Find out about Morningstar’s editorial policies.