Why We Think T. Rowe Price Capital Appreciation Equity Can Beat the Market

Key Morningstar Metrics for T. Rowe Price Capital Appreciation Equity

• Morningstar Medalist Rating: Gold
• Process Pillar: Above Average
• People Pillar: High
• Parent Pillar: High

T. Rowe Price Capital Appreciation Equity’s sensational manager, proven investment parameters, and cheap fees make it a top pick in the highly competitive US large-blend Morningstar Category.

David Giroux, a two-time Morningstar Allocation Manager of the Year, is out to take on the S&P 500—and we like his odds. This fully transparent exchange-traded fund, launched in June 2023, leverages Giroux’s extensive experience from selecting stocks for the T. Rowe Price Capital Appreciation PRWCX mutual fund, where he’s delivered top-decile returns through June 2024 over the trailing three-, five-, 10-, and 15-year periods in the moderate allocation category. Since becoming lead manager in 2007, that fund has never finished a calendar year ranked in the bottom half of the category.

Giroux’s approach begins with identifying companies without major long-term flaws, like poor management teams or unstable business models. He then focuses on those with reasonable valuations and strong earnings growth potential. There’s also an emphasis on which companies will deliver the best risk-adjusted results. Although this has typically led to a tilt toward growth stocks thanks to their better financial health, with a consistent overweighting in the technology sector, he’s also long preferred utilities for their stability, which creates a nice balance in the portfolio. For example, at the end of June 2024, T. Rowe Price Capital Appreciation Equity’s 6.8% allocation to utilities was 3 times more than those of the S&P 500 prospectus benchmark and the category average.

The secondary goal for T. Rowe Price Capital Appreciation Equity, after beating the S&P 500, is to maximize aftertax returns. To do so, Giroux will trade less often than in his mutual fund, electing to own a broader set of companies he likes for the long term as opposed to rotating through subsets he especially favors over the intermediate term. He also remains wary of frequent trading in this transparent vehicle to avoid disclosing trades for stocks that his larger mutual fund may also be involved with. Shrewd trading is a hallmark of his tenure on the mutual fund, so he is missing a value driver here, though the framework remains a plus. He also expects to keep the ETF’s dividend yield lower than the S&P 500′s to further minimize taxable income, but that shouldn’t significantly affect the process. Higher dividend-paying stocks like telecoms and REITs haven’t been key players in his portfolios in the past.

This portfolio shouldn’t be expected to deviate far from the benchmark. After its first year, its tracking error (a measure of how differently a fund performs from its benchmark) was 1.71% to the S&P 500; the average actively managed large-blend strategy had a tracking error of 3.27% over the same period. Hugging the benchmark too closely can make it hard to outperform, but the ETF’s 0.31% expense ratio is a low hurdle to clear. If anyone has a good chance of hurdling a low fee as they dash toward long-term outperformance, it’s Giroux.

T. Rowe Price Capital Appreciation Equity: Performance Highlights

Through bull markets, bear markets, growth rallies, value revivals, and across four US presidents, David Giroux’s track record as a portfolio manager of T. Rowe Price Capital Appreciation is impeccable.

From his start as sole lead manager in 2007 through June 2024, the fund landed in the top decile of the moderate allocation category for the trailing three-, five-, 10-, and 15-year periods. It has yet to finish in the bottom half of the category in a single calendar year and has regularly trounced a blended benchmark of 60% S&P 500 and 40% Bloomberg US Aggregate Bond Index.

Those lofty results set an unreasonably high bar for any new strategy, and with T. Rowe Price Capital Appreciation Equity turning one year old in June 2024, there’s a long way to go to show that success can be replicated in a stand-alone equity fund. Given the constraints on this fund’s process, Giroux aims to beat the S&P 500 by about 100 basis points annually over the long term (still quite a feat). That’s about a fourth of the outperformance he’s delivered in his multi-asset strategy. Still, there he has a broader tool kit that includes options, bonds, and the ability to follow his contrarian nature to buy market dips or reduce risk when markets present fewer compelling opportunities. That said, we like his chances to deliver on his goal.

For its first full year through June 2024, T. Rowe Price Capital Appreciation Equity returned 23.3%, slightly trailing the S&P 500′s 24.7% return but a full 2 percentage points better than the average peer. The overweighting in utilities was the biggest detractor over the period, but that’s to be expected given the strong growth rally that took place for much of that stretch.