What's the secret strategy for a fund that holds the distinction of 15 consecutive years of positive total returns? "We think like financial planners," says Stephen Boesel, portfolio manager of the $8 billion no-load T. Rowe Price Capital Appreciation Fund (PRWCX) with colleagues Jeff Arricale and David Giroux. "We start with an investment objective, take a long-term investment horizon, we're patient, we diversify, we rebalance tactically, we understand that costs are important so our overall costs and trading costs are low, and last but not least, we try to think of dollars, rather than percents," says Boesel.
Boesel, who announced his retirement about a year ago, will hand over primary responsibility of managing the fund's portfolio at the end of June to Arricale and Giroux. Boesel has been the primary manager of the fund since August 2001, and will remain on the investment committee at least through the end of 2006.
This asset allocation fund's consistently positive returns have helped it earn Standard & Poor's five-star ranking overall, and in each of the one-, three-, five- and 10-year periods. The fund earned an average annual 12.03% total return for the 10 years ended May 31, versus 7.01% for its S&P Hybrid U.S. Equity peer group; 9.72% versus 3.42% for five years; and 14.03% versus 8.79% for the three-year period.
How different will the day-to-day management of the portfolio be once [the changeover] occurs?
Arricale: Our shareholders shouldn't notice any difference. We view the world from a reasonably similar perch: a focus on valuation; contrarian, out-of-favor stocks and sectors; a curiosity about bonds and convertible bonds; thinking beyond equities; and finding the most attractive part of the capital structure.
Boesel: The fund will have a 20-year anniversary at the end of this June, and there have been three portfolio managers [over that whole time.] The philosophy has always been the same, always drawing on the T. Rowe Price research department.
How long have you worked together on this fund?
Boesel: They've been members of the advisory committee, in David's case, I think at least three years, I believe, and in Jeff's case, the last year-and-a-half or so.
You've had a remarkable 15 consecutive years of positive returns for the fund. How have you been able to do that?
Boesel: I think there are three elements that have to fall into place for us to be successful. Flexible portfolio management–we have the flexibility to own various asset classes so that gives you the potential to be right, and enhance your return in other areas when the equity market isn't doing well. We have quality research input, [and we] rely heavily on credit analysts in addition to our equity analysts; and third, rigorous evaluation work. It's the combination of the three of those things that have let us be successful.
What's your investment process for the fund?
Boesel: By charter we [must] have a minimum of 50% of the portfolio in common stocks. That's why it has an equity orientation, but what makes this portfolio unique is [getting] our fixed-income exposure through convertible bonds and high-yield securities.
Giroux: We have, between fixed-income, international, and domestic equities, 118 analysts that are constantly generating ideas for us. We have 50 different quantitative screens–everything from the standard low P/E, high dividend yield, and some others that are free-cash-flow or earnings-quality focused, [to] things that can help identify securities before they blow up. Jeff and I travel; we have met with almost every single company in the portfolio; last year we met with over 200 companies internally, and we saw over 200 companies at conferences.
Arricale: Within T. Rowe Price, this product is the most total-return focused. If the stock market was down 15% and we were down 13%, you might think that's a success; we would not think that's a success–we're really trying to make money.
In a negative market how do you generate a positive return?
Giroux: Over time this product is probably going to have a larger cash position than the average mutual fund. That will allow us to pounce when the market crumbles, and that cash will not go down if the market goes down. We have a convertible exposure that is somewhere in the high teens as a percentage of assets today–that convertible exposure does limit the downside because a convertible is essentially a bond with a call option. Our convertible exposure should buffer our downside.
