Reynolds Blue Chip Growth Fund

Class No Load (RBCGX)
Scorecard
3 / 5 Stars
Lipper
3 1 3 1 4
Zacks Investment Research
1 (Strong Buy)
Standard & Poor's
2 / 5 Stars
TheStreet.com
D+ (Sell)

#58 in Mid-Cap Growth

U.S. News evaluated 221 Mid-Cap Growth Funds. Our list highlights the top-rated funds for long-term investors based on the ratings of leading fund industry researchers.

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Performance

The fund’s performance has been inconsistent. Because the fund skirted the 2008 market freefall, it has ranks first among large-cap growth funds for its 3- and 5-year returns. But because it lost nearly 70 percent of its value between 2000 and 2002, its 10-year returns are worse than its peer average and the S&P 500. The fund has returned 23.38 percent over the past year, 11.77 percent over the past three years, 18.71 percent over the past five years, and 10.11 percent over the past decade.
 

Trailing Returns Updated 06.30.2014
Year to date 2.9%
1 Year 23.4%
3 Years (Annualized) 11.8%
5 Years (Annualized) 18.7%
10 Years (Annualized) 10.1%

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Summary

After one of the worst performances of the 2001-03 bear market, Reynolds Blue Chip Growth changed its tune and became one of the most conservative large-cap growth funds for the rest of the decade. That strategy served it well as the decade wasn’t kind to this category. And investors may return when they notice that, due to the manager’s prescience in the run-up to the 2008  market crash, the fund’s performance now tops the list of large-cap growth funds for both three and five-year returns.

As of July 03, 2014, the fund has assets totaling almost $184.52 million invested in 724 different holdings. Its large-basket portfolio consists of mid- and large-cap growth stocks, with a heavy concentration in the top 10 holdings.

Though manager and founder Frederick Reynolds aims to keep his fund at least 80 percent invested at all times, the environment in the fall of 2007 had him feeling uncertain. “Basically, it was a feeling that a lot of stocks were highly priced, and funny things were going on, such as in the mortgage market,” Reynolds said. He started selling in October of 2007, and by the end of the year, he was 93 percent cash. That, of course, was when the stock market was near its height, and over the course of 2008, the fund lost just 5 percent while the average large-cap growth fund lost 40 percent.

The fund then jumped back into the market earlier than its peers, earning a seven percent premium above the large-cap average in 2009. The huge sell off and buyback has given the fund a whopping 527 percent turnover rate over the last year, as of September 30, 2010, but in normal times the fund trades a bit less frequently, holding stocks for an average of three months. “The reason we’re willing to be fully invested right now is that stocks are cheap,” Reynolds said. “Am I worried? Yes. We’re going to grow slowly, but we’re going to grow.” The fund has returned 23.38 percent over the past year and 11.77 percent over the past three years.

Besides factoring in the movement of the market, Reynolds pays attention to changes in company fundamentals to inform his buying and selling. Although this is not a fund with an immutable long-term strategy, the fund does follow trends. “Buy what China buys,” Reynolds said, explaining the fund’s attraction to big basic minerals and resources companies like mining giants Rio Tinto and Potash Corporation of Saskatchewan.

Now at roughly 15 percent of the fund’s assets, Reynolds expects foreign holdings will grow as a share of the portfolio in upcoming years. The fund is what Reynolds calls “maneuverable” at just over $100 million in assets. But another reason for the fund’s small size may also be its inconsistent returns. In the bear market of 2001 to 2003, the fund lost by huge margins to both its peers and the S&P 500 and, after a comeback in 2003, it remained lackluster until 2009. It also sports a pricey 2 percent expense ratio, well above its peer average. The fund has returned 18.71 percent over the past five years and 10.11 percent over the past decade.

Investment Strategy

Frederick Reynolds’s strategy is to buy blue chip companies with capitalizations above $1 billion that have proven their ability to grow earnings at rates at or above 10 percent. He uses a quick turnover model, selling out of the market when he predicts a downturn and buying back in when stocks are cheap. This should be considered a market-timing fund.

Management

Frederick Reynolds is the sole owner of Reynolds Capital Management, which he has run since its inception in 1988. He uses outside analyst reports.
 

Fees

The fund has a much higher expense ratio than peers, largely due to its low asset base.
Reynolds Blue Chip Growth Fund has an expense ratio of 1.58 percent.

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Risk

The fund invests for the short term. This may allow it to side step large-scale market collapses, as it did in 2008 when it lost far less than the average large-cap growth fund, but also lose ground slightly to low-turnover peers in the longterm because of the higher frequency of  transaction costs. However, although the fund’s performance has improved during the past five years, investors may be wary of a fund that lost 75 percent of its value between 2000 and 2002.
 

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