Value and diversity may offer shelter from storm
With the stock market gyrating enough to make even the most seasoned investor queasy, it’s nice to know that some stock mutual funds have delivered positive returns year in and year out.
David R. Giroux manages one such fund -- T. Rowe Price Capital Appreciation -- which hasn’t had a losing year since 1990. The fund has returned an average of 11.3% over the last 10 calendar years, beating the 8.3% average total return of the Standard & Poor’s 500 stock index by a wide margin.
Giroux, 32, wasn’t responsible for all of those good years. Although he only started co-managing the fund in 2004, he became an analyst at T. Rowe Price in 1998 and studied under the fund’s long-time manager, Stephen W. Boesel, who handed Giroux the reins when he retired.
Boesel had a simple strategy for success, which Giroux has adopted: Identify what’s hot and avoid it like the plague.
“The fund has a mandate to try to find assets that are worth a dollar and pay 60 cents,” Giroux said. “We really try to stay away from the most speculative portions of the market.”
That strategy has often put the fund a step or two ahead of the stock market as a whole. For instance, in 1999, when nearly everyone seemed to be snapping up technology stocks, Capital Appreciation was buying oil, natural gas and utility companies. The reason: Technology stocks were outrageously expensive, selling for as many as 50 to 100 times earnings. Some highflying companies had no earnings to compare their stock price with. Meanwhile, utilities and commodity companies were selling for a relatively cheap nine times earnings.
“Where you really get killed is when you invest in sectors that are way overvalued,” Giroux said. “If you have the self-control to avoid the hot new thing, you can generate strong, consistent returns over time.”
The historical evidence: When the S&P; 500 index plunged 9% in 2000 (taking dividend payments into accounts), Capital Appreciation delivered a 22.2% return. The following year, when the S&P; fell 12%, the fund returned 10%. And in 2002, when the big-company stock index was down 22%, Capital Appreciation eked out a 0.5% gain.
So what’s the catch?
“When the stock market goes up a lot,” Giroux said, “we’re going to underperform.”
That underperformance can be striking. The fund’s managers weren’t overwhelmed with accolades in 1998 and 1999, when the S&P; 500 delivered total returns of 28% and 21%, respectively. Capital Appreciation plugged along with returns of 5.8% and 7.1%.
“Boesel took a lot of heat in those years because his performance wasn’t keeping up with the markets. But he didn’t waver,” Giroux said. “He bought hard-asset companies that were trading at 50 cents or 60 cents on the dollar.”
The strategy paid off in the end but took remarkable discipline in the short run. Giroux is trying to maintain that discipline. Consequently, when oil and natural gas companies and utility stocks got hot recently, he sold them. His current focus: big, brand-name stocks, such as General Electric Co., Procter & Gamble Co. and insurer American International Group Inc.
“They don’t have sub-prime mortgages, and they have better growth and better dividend yields than most of the market,” he said. “You have to think of a pretty draconian situation to create one where these stock prices would go down. And if things go well, the upside is really great.”
Does that mean Giroux will buy any out-of-favor stock? Not necessarily. For instance, Ford Motor Co.’s stock is trading near its five-year low, but Giroux isn’t buying it -- even though he thinks it might present an opportunity for the right type of investor.
“There are a lot of positive things at Ford that might drive the price higher,” he said. “But our mission is to preserve investor capital in good or bad times. If things went wrong, there’s a 60% downside. That’s not the type of investment I’d make for this fund.”
His advice to investors during these tumultuous times: Look for value and diversify.
Capital Appreciation has about 60% of its assets in stocks, 10% in bonds, 18% in cash and 12% in convertible securities. Although he said there has been some “irrational selling” in the stock market over the last month, he’s been only a selective buyer of stocks
“We’re pretty neutral on stocks right now, but when the market was crashing, there was no reason that Budweiser or Kraft should have been down 4%,” he said. “When we see a dislocation in the marketplace, we take advantage of that.”
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Kathy M. Kristof welcomes your comments but regrets that she cannot respond to every question. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For past Personal Finance columns, visit latimes.com/kristof.
