I need help to answer these questions below that are based on the case "Larry Puglia and the T. Rowe Price Blue Chip Growth Fund"

1. How well has the Blue Chip Growth Fund performed in recent years? In making that assessment, what benchmark(s) are you using? How do you measure investment performance? What does good performance mean to you?

2. What might explain the fund's performance? To what extent do you believe an investment strategy, such as Puglia's, explains performance?

3. How easy will it be to sustain Puglia's historical performance record into the future? What factors support your conclusion?

4. Consider the mutual fund industry. What roles do portfolio managers play? What are the differences between fundamental and technical securities analysis? How well do mutual funds generally perform relative to overall market?

5. What is capital market efficiency? What are its implications for investment performance in general? What are the implications for fund mangers, if the market exhibits characteristics of strong, semistrong, or weak efficiency?

6. Suppose that you are an advisor to wealthy individuals in the area of equity investments. In 2016, would you recommend investing in Puglia's Blue Chip Growth Fund? What beliefs about equity markets does your answer reflect?

Page 2 UV7288 Page 3 UV7288 Puglia's results seemed to contradict conventional academic theories, which suggested that, in markets characterized by high competition, easy entry, and informational efficiency, it would be extremely difficult to beat the market on a sustained basis. Observers wondered what might explain such consistent outperformance by a fund manager and how it could be sustained. which were funded by employers and managed by institutional money managers hired by the employers. Changes to the U.S. tax code in the 1970s set the stage for a major shift, which woull have brexid implications for the mutual fund industry. First, the Employee Retirement Income Security Act of 1974 established the self- clirected Individual Retirement Account (IRA) through which workers could save and invest individually for their retirement on a tax deferred basis. Second, large U.S.companies began to replace their DB pension plans with defined contribution (DG) plans such as 401(k) and 403b) plans. The new plans, named for the relevant sections of the U.S. tax code, shifted the burden and responsibility of saving and managing retirement assets from corporate employers to individual employees. Exhibit 4 shows the growth in retirement plan assets over the period from 1975 to 2015. By 2015, 57.1 trillion of IRA and DC plan assets were invested through mutual funds 10 The Mutual Fund Markets The global mutual fund market represented $37.2 trillion in worldwide assets at the end of 2015 Investment companies in the United States accounted for almost half the global market, with $18.1 trillion in assets; U.S. investment company assets first topped $1 trillion in 1990. growing to $5.8 trillion in 1998 and S18.1 trillion in 2015. Ninety-three million individuals and 44% of U.S. households owned mutual funds in 2015. In 2015, individual investors owned about 86% of the assets held by US investment companies The shift into DC plans created a broader customer base for the mutual fund industry, as well as a deeper penetration of the total market for financial services. With DC plans, each worker had an individual investment account that could hold multiple mutual funds, whereas a company's DB plan held the assets of tens of thousands of workers in a singde investment account. Funds owned in an employce's name after a vesting period remained in the employee's name even if they switched employers. By 2015, 44.1% or 54.9 million U.S. households owned mutual funds, up from 5.7% or 4.6 million U.S. households in 1980.11 Mutual funds provided several benefits for individual retail investors. First, they gave investors the ability to diversify their portfoliosthat is, invest in many different securities simultaneously, thereby reducing the risks associated with owning any single stock. By purchasing shares in a mutual fund, investors without significant amounts of capital could efficiently diversify their portfolios, investing as if they had the sizable amount of capital usually necessary to achieve such efficiency. Mutual funds also offered scale economies in trading and transaction costs, economies unavailable to the typical individual investor Second mutual funds provided retail investoes with professional management and expertise devoted to analysis of securities, which in theory could lead to higher than average retums. A third view was that the mutual fund industry provided, according to one observer, "an insulating layer between the individual investor and the painful vicissitudes of the marketplace The breadth of mutual fund alternatives tended to encourage fund switching, especially from one type of fund to another within a family of funds. The switching behavior reflected the increased participation of crewing numbers of relatively inexperienced and unskilled retail investors their interest in market-timing oriented investment strategies and the greater range of mutual funds from which to choose, all of which increased volatility in the market. In short, as the mutual fund industry crew and scumented, mutual fund money became "hotter" (tended to turn over faster).12 This service, after all, allows individuals to go about their daily lives without spending too much time on the aggravating subject of what to buy and sell and when, and it spares them the even greater aggravation of kicking themselves for making the wrong decision.... Thus, the money management industry is really selling "more peace of mind" and "less worry," though it rarely bothers to say so. As a result of the growth in the industry, the institutional investors who managed mutual funds, pension funds, and hedge funds on behalf of individual investors grew in power and influence. By 2015, mutual funds owned 31% of the standing stock of U'S, companies. The power and influence of institutional asset minapers was apparent in their tracing muscle their ability, coupled with their willineness, to move huge sums of money in and out of securities. The rising role of institutional investors investing on behalf of millions of individual account holders resulted in increases in tracing volume, average-trade size, and black trading (a single trade of more than 10,000 shares Between 1970 and 2015, the number of mutual funds offered in the United States grew from 361 to 9,520 This total included many different types of funds, each pursued a specific investment focus and could be classified in one of several categories, such as aggressive growth, growth, growth-and-income, international, option, balanced, or a vanety of bond or fixed-income funds. Funds could be further segmented by company size based on the market capitalization market cap), calculated by multiplying the number of shares outstanding by share price. Investors could, for example, opt to invest in large-cap, mid-cap, or small-cap growth funds Funds whose principal focus of investing was common stocks or equities represented the largest segment of the industry. In In un 'w Company Issu. "I C Factbok 2015 a bo 2000 and Compab 2015" The growth in the number and types of mutual fund reflected a major shift in retirement plans for U.S. workers. Prior to the 1980s, most workers were covered by traditional defined benefit (DB) pension plans, Hedge fund, letal fan, mement cicles the poli c y and invested the funds in financiamies and income requirements set by the US Securities and change . Hedefan create care a limited partnerships in which ile fara m e s i n, chung mannen fees of ofte fuisses pks p nee fees up to 20% off Taxestors were required lack up their inves til for a year more Sostedge funds were anacred such that the p a id hold not Investment Company In W we Regal De 160 pead and was and Second Quaner 2015, lap s g k Co A muma , Good News and Bad News, Pa r th and wh i te capital companies that we espected new e 26,10,12 income taster than the with the potential new. Cimh-and-income und th funch invested in Cod in compare I.ke him tundmans, hade funds could lead in funds make-funch, ve driven fand which occhi per m wiftball Whi annan and manament than Schacie hadde t he Among the mo u chas mere 19h, o , lado de denne te LS n astir a mam funds which 35 bin aduced, but find and the punc met die p win awhich cefe capital will citi h e Page 4 UV7288 Page 5 UV7288 Mutual Fund Basics17 When individuals invested in an open-ended mutual fund, their ownership was proportional to the number of shares purchased. The value of each share was called the fund's net asset value (NAV). The NAV.computed after market close each day, was the fund's total assets less liabilities divided by the number of mutual fund shares outstanding or A final dragon shareholders' returns was taxes, Mutual funds collected taxable divklends for the shares they held and generated taxable capital gains whenever they sold securities at a profit. Dividends received and capital gains and losses were reflected in the daily NAV. The funds could avoid paying corporate taxes on dividends earned and capital gains realized during the year if they distributed the investment income to shareholders prior to year-end. The distribution shifted the tax liability from the investment company to individual shareholders. Net asset value (NAV) = Market value of fund assets - Liabilities Fund shares outstanding The investment performance of a mutual fund was measured as the increase or decrease in NAV plus the fund's income distributions during the period (1.c, dividends and capital gains), expressed as a percentage of the fund's NAV at the beginning of the investment period, or Mutual funds generally distributed the year's realized capital gains and dividend income to shareholders in December. Dividends and capital gains had, of course, been collected and realized throughout the year, and were reflected in the daily NAV as they occurred. On the day of the distribution, the NAV was reduced by the amount of the distribution. As an example, imagine a mutual fund with an NAV of $10 per share that had realized capital gains of $1.12 per share during the year. In December, the mutual fund would distribute S1.12 per share to its investors and the new NAV would be $88. Thus an investor with 100 shares who chose to receive the distribution in cash would have $112 in cash plus 100 shares worth $HSS for a total investment value of $1.000. An investor who hold 100 share with an NAV Of $10 prior to a distribution that he chose to reinvest would hold the original 100 shares with a new NAV of $8.88 plus 12.612 new shares $1.12 x 100 shares/8.88 per share), for a toul of 112.612 shares worth $1,000 ($8.88 X 12.612 shares). When funds were held in taxable mither than tax-deferred accounts, capital gains distnbutions the red both unexpected and w anted tax liabilities for investors, and reduced the net retums to investors Annual total return = Change in NAV + Dividends + Capital gain distributions NAV at the beginning of the period) Investors in mutual funds generally paid two types of fees for their investments: one-time transaction fees and ongoing management fees. A fund's transaction fee, Or sales load, covered sales commissions paid to brokers for selling the fund. The sales load could be a front-end or back-end load. A front-end sales load shaved off as much as 6% of an individual's initial investment. A back and load, in contrast, enabled investors to invest all of their money and dk fer paying the sales kad until they redeemed the shares. Some companies eschewed the use of brokers and pursued a no-load strategy, selling funds directly to investors. some variation of the two classic schools of securities analysis for Most mutual fund managers relied choosing investments Tedwww.y This approach involved the identification of protitalle investment opportunities based on trends in stock prices, volume, market sentiment, and the like. Fwda conta w yr: This approach relied on insights afforded by an analysis of the economic fundamentals of a company and its industry supply and demand, costs, growth prospects, and the like. In addition to any sales load imposed, investors paid foes for the ongoing management and operation of the mutual fund Expenses included management fees for managing the investments, administrative costs, advertising and promotion expenses, and distribution and service fees. Expenses were calculated as a percentage of the fund's total assets the expense ratio), and were charged to all shareholders proportionally. Expense ratios ranged from as low as 0.2% to as high as 2.0%. As seen in Exhibit 5, expense ratios were lower for index funds (funds designed to replicate the performance of a specific market index) than they were for actively managed funds which sought to outperfom a market index. Because the expense ratio was regularly deducted from the portfolio, it reduced the fund's NAV, thereby lowering the fund's gross retums. Depending on the magnitude of the fund's expense ratio, the net effect of loads and expense ratios on shareholder returns could be substantial 15 While variations on these approaches produced above average retums in certain years, there was no guarantee that they would produce such returns consistently ower time.22 Performance of the Mutual Fund Industry Another dmg on shareholders' returns was the tendency to keep some portion of fund assets in cash either to invest in attractive investment opportunities or to meet shareholder redemptions. As economist and industry observer Henry Kaufman warned in 1994, a sudden economy-wide shock from interest rates or commodity prices could spook investors into panic-style redemptions from mutual funds, which could force the funds themselves to liquidate investments, sending security prices into a tailspin. Unlike the banking industry, which enjoyed the liquidity afforded by the US. Federal Reserve to respond to the effects of panic by depositors, the mutual fund industry enjoyed no such government-backed reserve, and thus fund managers often carried a certain amount of cash to meet redemptions.20 The two most frequently used measures of mutual fund perfomance were (1) the annual growth rate of NAV assuming reinvestment of al dividend and capital gain distributions (the total return on investment and 2) the absolute dollar value today of an investment made at some time in the past. Those measures were then compared with the performance of a benchmark infolie such as the Russell 2000 Index or the S&P 500 Composite Index. Exhibit 6 prowides performance data on a range of mutual fund categories. The Russell S&P 500, Dow Jones, and Value Line indices offered benchmarks for the investment performance of hypothetical stock portfolios.23 Financ e you had invested 10,000 in and the precio 10 , which you then our three years, Aleppo the fund carried an expert of 2% and abroadbado 4%The fees would cut your prix proti by from $3310 52.162 Henry KfmanSatural Change in the Marken indeli ance Federal Reenkofan, 1994 2 The Dow Jones indices of indepen d ected the commanber ing hech companies and on the NYSE and the NASDAQ The Weine Indes was an equal wheck indesconsining 1,20 companies from the NYSE Aman Suckschung, NASD M e che- make it was also was the Value Line Investment Survey. The 2000 d the performance of 2,000 of the smallest in the wel 300 inces of the US css any indes emple became rolece h ower, the companies Page 6 UV7288 Page 7 UV7288 Academicians criticized those performance measures for failing to adjust for the relative risk of the mutual fund. Over long periods, as Exhibit 7 shows, different types of securities yielded different levels of total retum, and each type of security was associated with differing degrees of risk (measured as the standard deviation of returns). Thus the relationship between risk and retum was reliable both on average and over time. For instance, it would be expected that a conservatively managed mutual fund would yield a lower retum-precisely because it took fewer risks.24 all past prices for a stock were incorporated into today's price; prices today simply followed a random walk with no correlation with past patterns. Sriwg efficiency held that today's prices reflected not only all past prices, but also all publicly available information. Finally, the strong form of market efficiency held that today's stock price reflected the information that could be acquired through a close analysis of the company and the economy. "In such a market," as one economist said, "we would observe lucky and unlucky investors, but we wouldn't find any superior investment managers who can consistently beat the market, Proponents of EMH were both skeptical and highly critical of the services provided by active mutunl-fund managers. Paul Samuelson, the Nobel Prize-winning economist, said: After adjusting for the risk of the fund, academic research indicated that mutual funds had the ability to perfom up to the market on a gross return basis, but when all expenses were factored in the funds underperformed the market benchmarks. In a paper first published in 1968, Michael Jensen reported that gross risk-adjusted retums were -0.4% and that net risk-adjusted returns (ie, net of expenses) were - 1.1%. Later studies found that, in a sample of 70 mutual funds, net risk-adjusted returns were essentially zero, and some analysts attributed this general result to the average 1.3% expense ratio of mutual funds and their tendency to hold cash Existing stock prices already have discounted in them an allowance for their future prospects. Herc... one stock is about as good or bad a buy as another. To the passive investox, chance alone would be as good a method of selection as anything else. In his best-selling book, A Randwalk Douw Stre, a classic investment tome first published in 1973, Burton Malkiel, an academic researcher, concluded that a passive buy-and-hokl strategy (of a large, diversified portfolio) would do as well for the investor as the average mutual fund. Malkiel wrote: Tests supported Samuelson's view. For example, in June 1967, Fontes magazine established an equally weighted portfolio of 28 stocks selected by throwing darts at a dartboxird. By 1984, when the magazine retired the feature article, the initial $28.000 portfolio with $1,000 invested in each stock was worth $131,698, a 9,5% compound rate of return. This beat the box market averages and almost all mutual funds, Fanies concluck. "It would seem that a combination of luck and sloth beats brains,"4 Even a dart-throwing chimpanzee can sdect a portfolio that performs as well as one carefully selected by the experts. This, in essence, is the practical application of the theory of efficient markets....The theory holds that the market appears to adjust so quickly to information about individual stocks and the coonomy as a whole, that no technique of selecting a portfolid neither technical nor fundamental analysis can consistently outperform a strategy of simply buying and holding a diversified group of securities such as those that make up the popular market averages...lone has to be impressed with the substantial volume of evidence suggesting that stock prices display a remarkable degree of efficiency....If some degree of mispricing exists, it does not persist for long, "True value will always out in the stock market. Despite the teachings of EMH and the results of such tests, ne money managers such as Larry Puglia had significantly outperfomed the market over long periods. In reply, Malkiel suggested that beating the market was much like participating in a coin-tossing contest where those who consistently flip heads are the winners, In a coin-tossing game with 1,000 contestants, half will be eliminated on the first flip On the second flip, half of those surviving contestants are eliminated. And so on, until, on the seventh flip, only eight contestants remain. To the naive observer, the ability to flip heads consistently looks like extraordinary skill By anak Malkiel suggested that the success of a few superstar portfolio managers could be explained as luck Many scholars accepted and espoused Malkiel's view that the stock market followed a "random walk," where the price movements of the future were uncorrelated with the price movements of the past or present This view denied the possibility that there could be momentum in the movements of common stock prices. According to this view, technical analysis was the modem-day equivalent of alchemy. Academics also dismissed the value and effectiveness of fundamental analysis. They argued that capital markets information wasetticient that the data, information, and analytical conclusions available to any one market participant were bound to be reflected quickly in share prices. Not surprisingly, the community of professional asset managers viewed those scholarly theories with disclain. Dissension also grew in the ranks of academicians as research exposed anomalies inconsistent with the EMH. For example, evidence suggested that stocks with low price-to-carnings (P/E) multiples tended to outperform those with high P/E multiples. Other evidence indicated positive serial correlation (... momentum) in stock returns from week to week or from month to month. The evidence of these anomalies was inconsistent with a random walk of prices and retums. The belief that capital markets incorporated all the relevant information into existing securities' prices was known as the efficient market bypothesis (EMH), and was widely, though not universally accepted by financial economists. If EMH were correct and all current prices reflected the true value of the underlying securities, then arguably it would be impossible to beat the market with superior skill or intellect. The most vocal academic criticism came from the burgeoning field of "bchavioral finance," which suggested that greed, fear, and panic could be much more signifikant factors in determining stock prices than mainstream theories would suggest. Critics of EMH argued that events such as the stock market crash of October 1987 were inconsistent with the view of markets as fundamentally rational and efficient. Lawrence Summers, economist and past president of Harvard University, argued that the 1987 crash was a clear gap with the theory. If anyone di seriously believe the price movements are determined by changes in information about economic fundamentals, they've got to be disabused of that notion by the 500-point drop" which erased more than 22% of market value in a single day. Following the 1987 crash, Yale University economist Robert Economists defined three levels of market efficiency, which were distinguished by the degree of information believed to be reflected in current securities' prices. The wwa form of efficiency maintained that Franklin Allen, C w t h ed. (New York N ew-Hilllewin, 2006 337 Richard A. Reaky Stewart Myers, WILLIE Wakil 164 lic, 175-176 Bali w (New York: No , 1990 , 211 San D. Car Mid Vala T UNAF.1481 Charleville, VA Duden Business Publishing, 2008 MH Dely, Tici-Saria There Are Pusled by Recere come in Sock Market Otober 21 1959, Page 8 UV7288 Page 9 LV7288 Shiller concluded: "The efficient market hypothesis is the most remarkable error in the history of economic theory. This is just another mail in its coffin." transaction fees such as sales loads and redemption fees) with emphasis on downward variations and consistent performance. A rcling to Morningstar, a high rating could reflect above average retums, blow-average risk, or both Market events such as the Internet bubble of the late 1990s and the global financial crisis of 2007-2009 further added to the belief that market participants were not always rational and the EMH was flawed. Yet, despite the mounting evidence of its shortcomings, the EMH remained the dominant model in the academic community. Puglia graduated www.cn law from the University of Notre Dame and went one to earn an MBA from the Darden School of Business, where he graduated with highest hos. A Certified Public Accountant (CPA), Puglia also held the Chartered Financial Analyst (CFA) designation. Puglin leamed his first lessons about investing from his father, a traditional buy-and-hold investor. "He would buy good companies and literally hold them fox 15 or 20 years. The Rise of Passive Investing More than 20 years after graduating from Princeton University in 1951, where he wrote his senior thesis on "The Economic Role of the Investment Company," John C. Bogle founded the Vanguard Group and established a fund whose investment goal was to match not be the perfomance of a market index. Bogle's First Index Investment Trust launched on December 31, 1975, and was quickly dismissed as folly by many. Investors, critics proclaimed, would not be satisfied with receiving average returns. Puglia, 56, joined T. Rowe Price in 1990 as an analyst following the financial services and pharmaceutical industries. He worked closely with portfolio manager Tom Broadus (co-manager of the Blue Chip Growth Fund from mid-1993 until leaving the fund on May 1, 1997), who provided additional lessons about investing Broadus warned the young analyst that his investment style would sometimes be out of sync with the market. Part of the portfolio Manager's job, he told Puglia, was to recognize that and lose as litde as possible. Over time, Bogle's fund, which tracked the S&P 500, and was eventually renamed the Vanguard 500 Index Fund, proved critics wrong without expensive portfolio managers or research analysis to compensate, the fund charged a low expense ratio of 0.16%. Without portfolio managers trading in and out of securities, the fund's tumover rate was 3%, meaning that year-end capital gains distributions were negligible, making the fund extremely tax efficient for taxalle investors. When the Blue Chip Growth Fund launched in 1993, its managers engaged in considerable debate over "what constituted a 'blue-chip growth company.' Some people felt we should own the old Dow Jones smokestack companies, others said we needed to own the Ciscos and the Microsofts. After giving it a lot of thought, we decided that it was darable, sustainable earnings-per-share growth that confers blue-chip status on a company. That's what allows it to gamer an above-average price-earnings ratio, and that's what allows you to really hold such an investment for the long term and allows your wealth to compund. So that's basically what we're trying to do we're trying to find companies with durable, sustainable earnings-per-share growth and we want to hold these companies for the long tem." At least some investors decided that the benefits of being average outweighed the costs of trying to be abxwe average. From approximately $11 million in assets in 1975, the fund grew to $262.80 billion in assets on September 30, 2016. ^ Vanguard also grew. By December 2015, the company employed 14,000 individuals and offered more than 300 U.S. and non-US. funds, serving more than 20 million investors from approximately 170 countries. The fund's objective was long-term capital growth, with income only a secondary consideration Consequently, Puglia invested in well-established large and medium-sized companies that he believed had potential for above-average earnings growth. More specifically, Puglia looked for companies with leading market positions, seasoned management that allocated capital effectively, and strong returns on invested capital. To be included in his portfolio, a company needed several things: Vanguard's success was noticed. In particular, other investment companies developed and offered index funds, and ls 2015, $2.2 trillion was invested in index-based mutual funds. Exhibit & shows the growing percentage of assets invested in equity index funds from 2000 to 2015, and Exhibit 9 shows how outflows from actively managed funds matched the inflows to passively managed investment funds from 2009 to 2015. 1. Growing market share and market size. In Puglia's view, a leading market position conferred both cost advantages and pricing advantages. A company with superior market share generally made its products more cheaply, and also enjoyed more pncing flexibility. As important as Towing market share was growing market size. Superior market share in a declining marketplace was not a good indicator, so Puglia also evaluated the market for a company's products and how large the total addressable market could grow over time. Larry Puglia and the T. Rowe Price Blue Chip Growth Fund At a time when many investors were eschewing actively managed funds such as Puglia's in favor of passive investments designed to track stock market indices, Puglia's investment perfomance stood out. Morningstar, the well-known statistical service for the investment community, gave the Blue Chip Growth Fund its second- highest rating, four stars for overall performance, placing it in the top 32.5% of 1.482 funds in its category. Morningstar rated funds with at least a three-year history based on risk-adjusted retum (including the effects of The Maminar for reflected aman ec e mo specie de Puerte for up to E adjadrom bewbacing a risk altyas dermined by the amount of varia in the funds to return the funds lead adjusted rtum. Funds were then ranked within their respective Mont ages and signed as Therop 10 funds is ach categorived in the next 225 received for star the next received the war the next 22.5% received and the best 10% ved one v William Le c .com ine 1: Investing with larry 12. svest Puglia; T. Rowe Price Bar Chip Gunath Fund,"l a n p robl.chip. ch full 121998, Dec. 16, ba The Vanguard Group website, b l and .com uppdpd ESB ened Dec. 16. 2016. s ed Dec. 15, 2016) 2005 Invement Company Facebook p.218 Similar index mutual fund were indesexchange-wafands . A s designed to track anides, brunlike an indes fund, shares in ETF wided on and change, ke shares of stock Investors behandok T within the same day and paid act ion for each t en. ETFs were more efficient than wings m aland and they allowed to widened, wather than only rating at the November 2009 kr. Sara Cewton Sex, Search for the Ho Chips Dune Sustainable Gaming Gowth Grace L. Willums 14 Chip Socks for the Slow Grow Barve. Semember, 2014 Apple Slichael kors Visi,Bay Larry Pala's Bes December 2012, NYOSI O d Dec. 16. 2016. p . pplemical Page 10 UV7288 Page 11 UV7288 the research team would do further qualitative research, including meeting with corporate management and xrruborating their assertions and other cut with cu TIN, suppliers, and competitors. 2 Competitive advantage(s): Puglia used Harvard Business School professor Michael Porter's competitive analysis to identity companies with sustainable competitive advantage, what gendary value investor Warren Buffett referred to as "economic castles protected by unbreachable moats 3. Strong fundamentals including above-average earnings growth, stable-to-improving margins, strong free cash flow, and return on equity. 4. Seasoned management with a demonstrated track record Puglia looked for evidence of management's ability to allocate capital to the highest-retum businesses and pare away low-retuming businesses, and to manage expenses aggressively. He compared a company that generates superior return and has strong free-cash flow but lacks strong management to a fast ship without a rudder. Sooner or later, it will run around According to Morningstar, $10,000 invested in the Blue Chip Growth Fund at its inception in mid-1993 would have grown to $94,021 in assets on September 30, 2016. Puglia's fund significant outperformed the average growth for the large cap growth category of $56,185 and growth from investing in the S&P 500, which returned $76,100. As news of Pugla's performance record spread, more and more investors moved their money to the Blue Chip Growth Fund, such that over the life of the fund, more than $15 billion of new money was added to the funds assets under management. Even so, Puglia remained modest; he knew his investing style would not always be in sync with the markets and that the fund's retums could vary quite a bit at times from the S&P 500. During those times, Puglia would recall the advice of his former co-manager to recognize the shift and lose as little as possible. Conclusion Puglia was assisted in this process by a very highly regarded global research team that included more than 250 industry analysts, as well as portfolio managers responsible for other funds. Together, members of the research team covered more than 2.300 public companies around the globe, almost two-thirds of global markets by market capitalization. The firm's recruiting and internal mentoring programs allowed it to attract and develop talented investment analysts, who formed a pool of well-trained and experienced candidates for portfolio manager positions. T. Rowe Price's culture and structure encouraged and facilitated close and frequent collaboration between managers and analysts and equity and fixed income professionals. Its performance evaluation and compensation practices rewarded collaboration and focused on long-term, rather than short-tem, results. Management regularly promoted the strength and contributions of the research team to clients, directly or through its website, and shared research supporting its approach to active management Judged from an historical perspective, Puglia's investment success seemed exceptional. His long-run, marker-beating performance defied conventional alemic theories, Investors, scholars, and market observers wondered about the sources of such superior perfomance and about its sustainability. At of the end of 2016, was it rational for an equity investor to buy shares in the Blue Chip Growth Fund, or for that matter any actively managed fund? Investors and other observers wondered whether and for how long Puglia could continue to outperform the market. In particular, they wondered whether he would be able to sustain his performance under the weight of having $30 billion in assets to invest. Puglia, Ike most of the firm's portfolio managers, had initially served as an analyst, and considered analyst recommendations and insights from the research team to be instrumental to the stock-selection process. With assistance from the research team and robust firm resources, he focused on identifying companies with durable free-cash-flow growth Although most investment candidates were identified through analyst recommendations, Puglia also employed other identification methods, including screening databases for various characteristics, such as steady earnings growth and retum on equity ewer one, three, and five years. Puglia explained, "We'll look under every stone, searching news reports, economic data, and even rivals' portfolios for investment ideas, "There are plenty of other managers out there with excellent track records," he said, and we're willing to learn from others where possible 54 Identifying a potential investment through screening was only one quantitative aspect of the investment research and decision-making process. For each company of interest, Puglia calculated the company's "self- sustaining growth rate, multiplying retum on equity by 1 minus the payout ratio (percentage of earnings paid out in dividends). A company with a 25% return on equity paying out 10% of eamings in dividends, would, for example, have a self-sustaining growth rate of 22.5%. Recognizing the limitations of return on cquity or other measures based upon GAAP or book accounting, Puglia and the research team also used free cash flow extensively in quantitative analysis and stock selection. If a company met Puglia's quantitative criteria, he and c Berline Hathaway Incanul letter to shareholders, 1995, ap T. Rowe Price white, b e m b l i e ations accessed Jan 3, 2017) hilophum acced Dec. 14, 2016) the Lampade m e d Dec 16, 2016) Derived from an apk in Leg Page 12 UV7288 Page 13 UV7288 Exhibit 2 Larry Puglia and the T. Rowe Price Blue Chip Growth Fund Exhibit 1 Larry Puglia and the T. Rowe Price Blue Chip Growth Fund Momingstar, Inc., Report on T. Rowe Price Blue Chip Growth Fund: Summary T. Rowe Price Blue Chip Growth Fund TRBCX Morningstar, Inc., Summary of T. Rowe Price Blue Chip Growth Fund: Performance T. Rowe Price Blue Chip Growth Fund TRBCX Performance 1999 SCRATE: 2016 M a r, Inc. All rights reserved. Here Chip Growth Fund TRBCX, release date June 2016: 1 with Monor, T. Row Price le Sear: 2016 Seminar, Inc. Al l Reped with Gwth Pun TRICX.redeune 7, 2016:11 Momar T. Re Price Nha Chip 2016 Momings, Inc. All rights reserved. The information crained in ) is propietary to Moringer and is provides (2) may not be copied or does not co m e advice offered by Momingurand) is we wanted to be cure, comple, o imely. Neither Mo s providers are responsible for any damages or lowes arising from any one of this information Past performance is negat u re results Use of info r m Meningsur des necessarily on agreement by Mornings , Inc. of any investment philosophy priced in this publication 1 216 Momar Inc. All rights reserved. The incintained here is proprietary to Moringtar nderiment provider (2) may not be copied or disrund des not co m e advice offered by Moming w ine and be accurate, complete time. Neither Mamitar ner i viders were alle forang dumuges coses arising from of this information Past performance is to get of future resisted info from Mongstar does not necessari greement by Meaning Inc, any investment philophy te pred in this publicati Page 14 UV7288 Page 15 UV7288 Exhibit 3 Lamy Puglia and the T. Rowe Price Blue Chip Growth Fund Eshibit 4 Larry Puglia and the T. Rowe Price Blue Chip Growth Fund Retirement Man Assets by Categories 1975 and 2015 (billions of dollars, end-of-period) Morningstar Performance Comparison of T. Rowe Price Blue Chip Growth Fund, the Large-Cap Growth Category, and the Broad Market Index (Average Total Returns % Sept. 30, 2016) 1975-2015 1975 Retirement Assets (SB) Percent 1% 2015 Retirement Assets (SB) 7,329 6.734 CAGR TRP Blue Chip Groth Full S&P llex Lange-Cap Growth Categy +/-S&P 500 Index +/-Large-Cap Growth Category Rank in Caeory 19% Month Month Month Year 1.48 7.52 7.24 1 .35 11.34 3.95 6.4 784 15.43 064 5.596.12345 10.46 1.46 3.67 0 83 -648 -4,09 0.84 1.931 -2.09 0.88 15 18 25 7940 Year Year 11.56 17.96 11.16 16.37 923 14.99 04 1.49 233 2.88 145 Year 9.11 7.24 7.52 1,87 1.6 14 Percent 31% 28% 12% 11% 7% 2,791 IRAS DC plans Private sector DB plans State and local govemment DB plans Federal DB plans Annuities TOTAL 15% 9 1,512 1.948 23,978 12% 100% Nocera total tumindalusia principals deialdies distrib ger, the slums slunce, the mos tenen the paid . For some lesen seum 8% 100% 469 10% male that CAGR "Dand ance. com fundomance Lane Nomingar T. Karence Ho Chaplich und TROX ar bal s ol No. 21.2016 Das w 16, 2ML r ed by the hand en dan minum Company Inn bume CLUB Page 16 UV7288 Pape 17 Exhibir 5 Larry Puglia and the T. Rowe Price Blue Chip Growth Fund Expense Ratios of Actively Managed and Index Funds in Basis Points 1996-2015 Exhibit 6 Larry Puglia and the T. Rowe Price Blue Chip Growth Fund Momingstar Performance Comparison of U.S. Murual-Fond Categories Name YTDC) 16.37 12.92 Year(%) Year(W) 11.31 589 8.72 534 7.916 .20 7.06 646 Month() 5.03 4.20 2.62 2.72 2.08 2.04 1.63 0.43 Year(") 12.11 11.83 12.21 11.81 11.48 Small Value Small Blend Mid-Cap Value Large Value Mid Cap Blend Small Growth Large Blend Mid-Cap Growth 9.49 Month() 5.30 4.04 1.77 1.33 0.75 1.84 -0.33 -1.72 -1.57 5.43 471 8.45 7.74 6.29 3.41 5.42 435 704 492 11.57 11.31 12.17 10.62 1.44 Actively managed Equity--- Actively managed Bond Index Equity Index Bond Large Growth 1.57 0.04 721 12.40 *** Note: Datath November 11, 2016 Res pero less than one year, thereum fures are ea r ch , frem al and represente em for the period mod Fee bless me dices in Nie Experients we were so w vable ananes and mural funds that e wees. Desde mutual funds prmany her mural and D e Vimingar SCG C Dec 15, 2016). Page 20 UV7288 Exhibit 9 Larry Puglia and the T. Rowe Price Blue Chip Growth Fund Monthly Cumulative Flows to and Net-Share Issuance of U.S. Equity Mutual Funds and Index Exchange-Traded Funds (ETFs) January 2007 December 2015 in billions of dollars) 1000 800 600 01/01 2007 | 01/01/2013 0.400 01/01/2008 01/01/2009 01/01/2010 011/2011 01/01/2012 01/01/2014 01/01/2015 -600 -800 -1000 L- -------------------------------- Index domestic equity mutual funds ..... Index domestic equity ETFs - Actively managed domestic equity mutual funds - Note: Equity mutual fund flows include net new cash flow and reinvested dividends. Data exclude mutual funds that invest primarily in other mutual funds. Data source: Created by author based on data from Investment Company Institute, http://www.icifactbook.org/ch2/16_fb_ch2 (accessed Dec. 16, 2016). Page 2 UV7288 Page 3 UV7288 Puglia's results seemed to contradict conventional academic theories, which suggested that, in markets characterized by high competition, easy entry, and informational efficiency, it would be extremely difficult to beat the market on a sustained basis. Observers wondered what might explain such consistent outperformance by a fund manager and how it could be sustained. which were funded by employers and managed by institutional money managers hired by the employers. Changes to the U.S. tax code in the 1970s set the stage for a major shift, which woull have brexid implications for the mutual fund industry. First, the Employee Retirement Income Security Act of 1974 established the self- clirected Individual Retirement Account (IRA) through which workers could save and invest individually for their retirement on a tax deferred basis. Second, large U.S.companies began to replace their DB pension plans with defined contribution (DG) plans such as 401(k) and 403b) plans. The new plans, named for the relevant sections of the U.S. tax code, shifted the burden and responsibility of saving and managing retirement assets from corporate employers to individual employees. Exhibit 4 shows the growth in retirement plan assets over the period from 1975 to 2015. By 2015, 57.1 trillion of IRA and DC plan assets were invested through mutual funds 10 The Mutual Fund Markets The global mutual fund market represented $37.2 trillion in worldwide assets at the end of 2015 Investment companies in the United States accounted for almost half the global market, with $18.1 trillion in assets; U.S. investment company assets first topped $1 trillion in 1990. growing to $5.8 trillion in 1998 and S18.1 trillion in 2015. Ninety-three million individuals and 44% of U.S. households owned mutual funds in 2015. In 2015, individual investors owned about 86% of the assets held by US investment companies The shift into DC plans created a broader customer base for the mutual fund industry, as well as a deeper penetration of the total market for financial services. With DC plans, each worker had an individual investment account that could hold multiple mutual funds, whereas a company's DB plan held the assets of tens of thousands of workers in a singde investment account. Funds owned in an employce's name after a vesting period remained in the employee's name even if they switched employers. By 2015, 44.1% or 54.9 million U.S. households owned mutual funds, up from 5.7% or 4.6 million U.S. households in 1980.11 Mutual funds provided several benefits for individual retail investors. First, they gave investors the ability to diversify their portfoliosthat is, invest in many different securities simultaneously, thereby reducing the risks associated with owning any single stock. By purchasing shares in a mutual fund, investors without significant amounts of capital could efficiently diversify their portfolios, investing as if they had the sizable amount of capital usually necessary to achieve such efficiency. Mutual funds also offered scale economies in trading and transaction costs, economies unavailable to the typical individual investor Second mutual funds provided retail investoes with professional management and expertise devoted to analysis of securities, which in theory could lead to higher than average retums. A third view was that the mutual fund industry provided, according to one observer, "an insulating layer between the individual investor and the painful vicissitudes of the marketplace The breadth of mutual fund alternatives tended to encourage fund switching, especially from one type of fund to another within a family of funds. The switching behavior reflected the increased participation of crewing numbers of relatively inexperienced and unskilled retail investors their interest in market-timing oriented investment strategies and the greater range of mutual funds from which to choose, all of which increased volatility in the market. In short, as the mutual fund industry crew and scumented, mutual fund money became "hotter" (tended to turn over faster).12 This service, after all, allows individuals to go about their daily lives without spending too much time on the aggravating subject of what to buy and sell and when, and it spares them the even greater aggravation of kicking themselves for making the wrong decision.... Thus, the money management industry is really selling "more peace of mind" and "less worry," though it rarely bothers to say so. As a result of the growth in the industry, the institutional investors who managed mutual funds, pension funds, and hedge funds on behalf of individual investors grew in power and influence. By 2015, mutual funds owned 31% of the standing stock of U'S, companies. The power and influence of institutional asset minapers was apparent in their tracing muscle their ability, coupled with their willineness, to move huge sums of money in and out of securities. The rising role of institutional investors investing on behalf of millions of individual account holders resulted in increases in tracing volume, average-trade size, and black trading (a single trade of more than 10,000 shares Between 1970 and 2015, the number of mutual funds offered in the United States grew from 361 to 9,520 This total included many different types of funds, each pursued a specific investment focus and could be classified in one of several categories, such as aggressive growth, growth, growth-and-income, international, option, balanced, or a vanety of bond or fixed-income funds. Funds could be further segmented by company size based on the market capitalization market cap), calculated by multiplying the number of shares outstanding by share price. Investors could, for example, opt to invest in large-cap, mid-cap, or small-cap growth funds Funds whose principal focus of investing was common stocks or equities represented the largest segment of the industry. In In un 'w Company Issu. "I C Factbok 2015 a bo 2000 and Compab 2015" The growth in the number and types of mutual fund reflected a major shift in retirement plans for U.S. workers. Prior to the 1980s, most workers were covered by traditional defined benefit (DB) pension plans, Hedge fund, letal fan, mement cicles the poli c y and invested the funds in financiamies and income requirements set by the US Securities and change . Hedefan create care a limited partnerships in which ile fara m e s i n, chung mannen fees of ofte fuisses pks p nee fees up to 20% off Taxestors were required lack up their inves til for a year more Sostedge funds were anacred such that the p a id hold not Investment Company In W we Regal De 160 pead and was and Second Quaner 2015, lap s g k Co A muma , Good News and Bad News, Pa r th and wh i te capital companies that we espected new e 26,10,12 income taster than the with the potential new. Cimh-and-income und th funch invested in Cod in compare I.ke him tundmans, hade funds could lead in funds make-funch, ve driven fand which occhi per m wiftball Whi annan and manament than Schacie hadde t he Among the mo u chas mere 19h, o , lado de denne te LS n astir a mam funds which 35 bin aduced, but find and the punc met die p win awhich cefe capital will citi h e Page 4 UV7288 Page 5 UV7288 Mutual Fund Basics17 When individuals invested in an open-ended mutual fund, their ownership was proportional to the number of shares purchased. The value of each share was called the fund's net asset value (NAV). The NAV.computed after market close each day, was the fund's total assets less liabilities divided by the number of mutual fund shares outstanding or A final dragon shareholders' returns was taxes, Mutual funds collected taxable divklends for the shares they held and generated taxable capital gains whenever they sold securities at a profit. Dividends received and capital gains and losses were reflected in the daily NAV. The funds could avoid paying corporate taxes on dividends earned and capital gains realized during the year if they distributed the investment income to shareholders prior to year-end. The distribution shifted the tax liability from the investment company to individual shareholders. Net asset value (NAV) = Market value of fund assets - Liabilities Fund shares outstanding The investment performance of a mutual fund was measured as the increase or decrease in NAV plus the fund's income distributions during the period (1.c, dividends and capital gains), expressed as a percentage of the fund's NAV at the beginning of the investment period, or Mutual funds generally distributed the year's realized capital gains and dividend income to shareholders in December. Dividends and capital gains had, of course, been collected and realized throughout the year, and were reflected in the daily NAV as they occurred. On the day of the distribution, the NAV was reduced by the amount of the distribution. As an example, imagine a mutual fund with an NAV of $10 per share that had realized capital gains of $1.12 per share during the year. In December, the mutual fund would distribute S1.12 per share to its investors and the new NAV would be $88. Thus an investor with 100 shares who chose to receive the distribution in cash would have $112 in cash plus 100 shares worth $HSS for a total investment value of $1.000. An investor who hold 100 share with an NAV Of $10 prior to a distribution that he chose to reinvest would hold the original 100 shares with a new NAV of $8.88 plus 12.612 new shares $1.12 x 100 shares/8.88 per share), for a toul of 112.612 shares worth $1,000 ($8.88 X 12.612 shares). When funds were held in taxable mither than tax-deferred accounts, capital gains distnbutions the red both unexpected and w anted tax liabilities for investors, and reduced the net retums to investors Annual total return = Change in NAV + Dividends + Capital gain distributions NAV at the beginning of the period) Investors in mutual funds generally paid two types of fees for their investments: one-time transaction fees and ongoing management fees. A fund's transaction fee, Or sales load, covered sales commissions paid to brokers for selling the fund. The sales load could be a front-end or back-end load. A front-end sales load shaved off as much as 6% of an individual's initial investment. A back and load, in contrast, enabled investors to invest all of their money and dk fer paying the sales kad until they redeemed the shares. Some companies eschewed the use of brokers and pursued a no-load strategy, selling funds directly to investors. some variation of the two classic schools of securities analysis for Most mutual fund managers relied choosing investments Tedwww.y This approach involved the identification of protitalle investment opportunities based on trends in stock prices, volume, market sentiment, and the like. Fwda conta w yr: This approach relied on insights afforded by an analysis of the economic fundamentals of a company and its industry supply and demand, costs, growth prospects, and the like. In addition to any sales load imposed, investors paid foes for the ongoing management and operation of the mutual fund Expenses included management fees for managing the investments, administrative costs, advertising and promotion expenses, and distribution and service fees. Expenses were calculated as a percentage of the fund's total assets the expense ratio), and were charged to all shareholders proportionally. Expense ratios ranged from as low as 0.2% to as high as 2.0%. As seen in Exhibit 5, expense ratios were lower for index funds (funds designed to replicate the performance of a specific market index) than they were for actively managed funds which sought to outperfom a market index. Because the expense ratio was regularly deducted from the portfolio, it reduced the fund's NAV, thereby lowering the fund's gross retums. Depending on the magnitude of the fund's expense ratio, the net effect of loads and expense ratios on shareholder returns could be substantial 15 While variations on these approaches produced above average retums in certain years, there was no guarantee that they would produce such returns consistently ower time.22 Performance of the Mutual Fund Industry Another dmg on shareholders' returns was the tendency to keep some portion of fund assets in cash either to invest in attractive investment opportunities or to meet shareholder redemptions. As economist and industry observer Henry Kaufman warned in 1994, a sudden economy-wide shock from interest rates or commodity prices could spook investors into panic-style redemptions from mutual funds, which could force the funds themselves to liquidate investments, sending security prices into a tailspin. Unlike the banking industry, which enjoyed the liquidity afforded by the US. Federal Reserve to respond to the effects of panic by depositors, the mutual fund industry enjoyed no such government-backed reserve, and thus fund managers often carried a certain amount of cash to meet redemptions.20 The two most frequently used measures of mutual fund perfomance were (1) the annual growth rate of NAV assuming reinvestment of al dividend and capital gain distributions (the total return on investment and 2) the absolute dollar value today of an investment made at some time in the past. Those measures were then compared with the performance of a benchmark infolie such as the Russell 2000 Index or the S&P 500 Composite Index. Exhibit 6 prowides performance data on a range of mutual fund categories. The Russell S&P 500, Dow Jones, and Value Line indices offered benchmarks for the investment performance of hypothetical stock portfolios.23 Financ e you had invested 10,000 in and the precio 10 , which you then our three years, Aleppo the fund carried an expert of 2% and abroadbado 4%The fees would cut your prix proti by from $3310 52.162 Henry KfmanSatural Change in the Marken indeli ance Federal Reenkofan, 1994 2 The Dow Jones indices of indepen d ected the commanber ing hech companies and on the NYSE and the NASDAQ The Weine Indes was an equal wheck indesconsining 1,20 companies from the NYSE Aman Suckschung, NASD M e che- make it was also was the Value Line Investment Survey. The 2000 d the performance of 2,000 of the smallest in the wel 300 inces of the US css any indes emple became rolece h ower, the companies Page 6 UV7288 Page 7 UV7288 Academicians criticized those performance measures for failing to adjust for the relative risk of the mutual fund. Over long periods, as Exhibit 7 shows, different types of securities yielded different levels of total retum, and each type of security was associated with differing degrees of risk (measured as the standard deviation of returns). Thus the relationship between risk and retum was reliable both on average and over time. For instance, it would be expected that a conservatively managed mutual fund would yield a lower retum-precisely because it took fewer risks.24 all past prices for a stock were incorporated into today's price; prices today simply followed a random walk with no correlation with past patterns. Sriwg efficiency held that today's prices reflected not only all past prices, but also all publicly available information. Finally, the strong form of market efficiency held that today's stock price reflected the information that could be acquired through a close analysis of the company and the economy. "In such a market," as one economist said, "we would observe lucky and unlucky investors, but we wouldn't find any superior investment managers who can consistently beat the market, Proponents of EMH were both skeptical and highly critical of the services provided by active mutunl-fund managers. Paul Samuelson, the Nobel Prize-winning economist, said: After adjusting for the risk of the fund, academic research indicated that mutual funds had the ability to perfom up to the market on a gross return basis, but when all expenses were factored in the funds underperformed the market benchmarks. In a paper first published in 1968, Michael Jensen reported that gross risk-adjusted retums were -0.4% and that net risk-adjusted returns (ie, net of expenses) were - 1.1%. Later studies found that, in a sample of 70 mutual funds, net risk-adjusted returns were essentially zero, and some analysts attributed this general result to the average 1.3% expense ratio of mutual funds and their tendency to hold cash Existing stock prices already have discounted in them an allowance for their future prospects. Herc... one stock is about as good or bad a buy as another. To the passive investox, chance alone would be as good a method of selection as anything else. In his best-selling book, A Randwalk Douw Stre, a classic investment tome first published in 1973, Burton Malkiel, an academic researcher, concluded that a passive buy-and-hokl strategy (of a large, diversified portfolio) would do as well for the investor as the average mutual fund. Malkiel wrote: Tests supported Samuelson's view. For example, in June 1967, Fontes magazine established an equally weighted portfolio of 28 stocks selected by throwing darts at a dartboxird. By 1984, when the magazine retired the feature article, the initial $28.000 portfolio with $1,000 invested in each stock was worth $131,698, a 9,5% compound rate of return. This beat the box market averages and almost all mutual funds, Fanies concluck. "It would seem that a combination of luck and sloth beats brains,"4 Even a dart-throwing chimpanzee can sdect a portfolio that performs as well as one carefully selected by the experts. This, in essence, is the practical application of the theory of efficient markets....The theory holds that the market appears to adjust so quickly to information about individual stocks and the coonomy as a whole, that no technique of selecting a portfolid neither technical nor fundamental analysis can consistently outperform a strategy of simply buying and holding a diversified group of securities such as those that make up the popular market averages...lone has to be impressed with the substantial volume of evidence suggesting that stock prices display a remarkable degree of efficiency....If some degree of mispricing exists, it does not persist for long, "True value will always out in the stock market. Despite the teachings of EMH and the results of such tests, ne money managers such as Larry Puglia had significantly outperfomed the market over long periods. In reply, Malkiel suggested that beating the market was much like participating in a coin-tossing contest where those who consistently flip heads are the winners, In a coin-tossing game with 1,000 contestants, half will be eliminated on the first flip On the second flip, half of those surviving contestants are eliminated. And so on, until, on the seventh flip, only eight contestants remain. To the naive observer, the ability to flip heads consistently looks like extraordinary skill By anak Malkiel suggested that the success of a few superstar portfolio managers could be explained as luck Many scholars accepted and espoused Malkiel's view that the stock market followed a "random walk," where the price movements of the future were uncorrelated with the price movements of the past or present This view denied the possibility that there could be momentum in the movements of common stock prices. According to this view, technical analysis was the modem-day equivalent of alchemy. Academics also dismissed the value and effectiveness of fundamental analysis. They argued that capital markets information wasetticient that the data, information, and analytical conclusions available to any one market participant were bound to be reflected quickly in share prices. Not surprisingly, the community of professional asset managers viewed those scholarly theories with disclain. Dissension also grew in the ranks of academicians as research exposed anomalies inconsistent with the EMH. For example, evidence suggested that stocks with low price-to-carnings (P/E) multiples tended to outperform those with high P/E multiples. Other evidence indicated positive serial correlation (... momentum) in stock returns from week to week or from month to month. The evidence of these anomalies was inconsistent with a random walk of prices and retums. The belief that capital markets incorporated all the relevant information into existing securities' prices was known as the efficient market bypothesis (EMH), and was widely, though not universally accepted by financial economists. If EMH were correct and all current prices reflected the true value of the underlying securities, then arguably it would be impossible to beat the market with superior skill or intellect. The most vocal academic criticism came from the burgeoning field of "bchavioral finance," which suggested that greed, fear, and panic could be much more signifikant factors in determining stock prices than mainstream theories would suggest. Critics of EMH argued that events such as the stock market crash of October 1987 were inconsistent with the view of markets as fundamentally rational and efficient. Lawrence Summers, economist and past president of Harvard University, argued that the 1987 crash was a clear gap with the theory. If anyone di seriously believe the price movements are determined by changes in information about economic fundamentals, they've got to be disabused of that notion by the 500-point drop" which erased more than 22% of market value in a single day. Following the 1987 crash, Yale University economist Robert Economists defined three levels of market efficiency, which were distinguished by the degree of information believed to be reflected in current securities' prices. The wwa form of efficiency maintained that Franklin Allen, C w t h ed. (New York N ew-Hilllewin, 2006 337 Richard A. Reaky Stewart Myers, WILLIE Wakil 164 lic, 175-176 Bali w (New York: No , 1990 , 211 San D. Car Mid Vala T UNAF.1481 Charleville, VA Duden Business Publishing, 2008 MH Dely, Tici-Saria There Are Pusled by Recere come in Sock Market Otobe