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Lessons From the Large Caps


Why portfolio manager Joe Milano loves tech and health care, but not financials.

As he travels the country, chatting with C-suite executives from a range of diverse industries, Joe Milano, the 37-year-old manager of the T. Rowe Price New America Growth Fund (PRWAX), hears a common question: Where's the recovery?

"Companies are like investors: They're hoping a recovery is coming, but they haven't seen it," Milano says. "Things aren't worse and maybe, at the margin, they are a bit better, but not significantly so."

Milano himself, while cautiously optimistic about near-term economic prospects, is skeptical about the recovery the US will experience over the next two to three years. He's positioned his portfolio so it isn't reliant on a big economic tailwind.

"The fund doesn't need the economy to rip in order to benefit," Milano says. "I don't need a big number, just a positive one."

Milano took the reins of PRWAX in July 2002, and he's proven himself a capable captain. Through September 23, the large-growth fund's five-year annualized return of 4.22% leads the S&P 500 by 3.02 percentage points, and bests 85% of its Morningstar peers. In fact, Morningstar recently highlighted Milano as an early contender for domestic-stock manager of the year.

An added attraction of PRWAX: It costs a relatively cheap 0.91% per year.

Minyanville recently caught up with Milano at his office in Baltimore, Maryland. We spoke about his views on the economy, the market, and some of his favorite picks like Apple (AAPL), Medco Health Solutions (MHS), and Monsanto (MON).

Minyanville: What's your take on the economy?

Joe Milano: In the near term, things could look good. Consumers are getting more confident; unemployment is going up, but the pace is slowing a bit; comparisons are easy. So, for the next year, my view is that the economy is getting better. But I spend a lot of time thinking more long term and, there, I'm less positive.

Minyanville: How come?

Milano: My intermediate to longer-term view is that we will get some growth, but it won't be all that great. The consumer won't lead us out, taxes are going up, and the government isn't in good shape financially.

Minyanville: What's your outlook for investing in large companies?

Milano: I am bullish on a name-by-name basis. Right now, the sexier and junkier, the more it's up. The more boring and higher quality, the less it's up. But I think the market will get more selective as the rebound and rally age. Starting between now and 2010, we will be in a market where you will want to own larger over smaller, higher quality over lower quality, and stuff where expectations are low.

Minyanville: How do you see the earnings trend unfolding over the next couple quarters?

Milano: In the near term, they will be good. You have this little recovery on the demand side, and a rebuilding of inventories in the system. The comparisons will also be easy in the fourth quarter, first quarter, and second quarter. I actually think the earnings trajectory in the next few quarters will look positive because we will have a bounce in revenue growth and better-than-expected margins. Headlines will be more positive than negative.
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