T. Rowe’s Giroux Keeps Beating the Market; Here’s Where He’s Placing His Bets

David Giroux, the top-performing manager of the T. Rowe Price Capital Appreciation Fund PACLX, made his reputation as a contrarian investor. But more recently, his successful long-term approach of hunting among the unloved has been boosted by a very different set of stocks: Big Tech.

Giroux feels the stock market broadly is expensive, has a higher-than-usual stake in US Treasuries, and has been building cash while waiting for more names to look attractive. In the meantime, he sees potential from his usual fare of contrarian positions, such as beaten-down UnitedHealthcare UNH and engineering software company PTC PTC.

Giroux’s instincts have served investors very well over the years. The $65 billion Capital Appreciation Fund, which holds a mix of stocks and bonds, has outperformed 99% of funds in the moderate allocation category over the past five-, 10-, and 15-year periods. Giroux, a six-time nominee and two-time winner of the Morningstar Outstanding Portfolio Manager Award, has run the fund since 2006. Over the past decade, the fund’s 10.6% annualized return beat not just the 6.6% category average but also the 7.5% return from the Morningstar US Moderate Target Allocation Index. The fund generated this outperformance without piling on risk; over the past decade, its standard deviation was about the same as the category average.

Big Tech Stocks Lead Giroux’s 2024 Gains

The fund is coming off an unusual year. In 2024, its performance put it in the 31st percentile of its category—its worst relative performance in the past decade. While it’s a consciously contrarian fund, the largest contributors to its performance in 2024 (at least on the equities side) were mainstream companies such as Nvidia NVDA, Amazon AMZN, and Alphabet GOOG, according to Morningstar Direct.

“Last year was not a contrarian market,” says Giroux. “It was very much a momentum market in which GARP [growth at a reasonable price] stocks, which typically outperform the market by 400 basis points a year, underperformed the market by 1,600 points.” He currently sees the market as fairly expensive, with investors willing to pay a premium for stocks in 2024, and so he has a higher-than-average allocation to Treasuries.

However, as the market drops, he thinks more stocks will become attractive. The fund holds about 6% of its assets in cash, so it’s poised to take advantage of new equity opportunities without sacrificing fixed income. “The easiest way to make money in the marketplace is to a find a great company that’s out of favor for non-fundamental reasons,” Giroux explains. “During periods of market uncertainty, we add risk assets when everybody else is selling. We systematically add risk assets when they’re cheap and pull back when they’re expensive.”

T. Rowe Price Capital Appreciation Fund

• Fund Size: $64.3 billion
• Morningstar Category: Moderate Allocation
• Morningstar Medalist Rating: Gold
• Morningstar Rating: ★★★★★
• Expense Ratio: 0.97%

Inside a Top-Performing Strategy

Giroux has achieved the fund’s record with a rigorous stock screening process and a fixed-income strategy that bucks some traditional risk analysis. He starts with the stocks in the S&P 500, then narrows down by avoiding companies with six characteristics which he says typically lead to lower risk-adjusted returns: extreme valuations, poor capital allocation, bad management, secular risk, high earnings volatility, and an inability to generate earnings and dividends of a certain level.

For valuation, Giroux compares a stock to its company’s growth. For capital allocation, he focuses on free cash flow and how it’s deployed, with a significant focus on how a firm deals with acquisitions. “A lot of companies look at acquisitions as an avenue to make themselves bigger,” says Giroux. “Sometimes bigger is better, but sometimes, when bigger is your objective, that’s not a good outcome.” Overall, “our north star is the five-year forward expectation [for returns].”

Through these criteria, Giroux cuts out about 80% of the S&P 500. He then picks the 60 or so names that he thinks will have the highest risk-adjusted return. The fund currently holds 74 stocks.

Revvity: Strong Capital Allocation

One company exemplifying the virtues Giroux looks for is biotech firm Revvity RVTY. Originally PerkinElmer, the firm changed its name in 2023 when it spun off its lower-margin food and beverage business to focus on biotech. Besides that streamlining, Giroux likes Revvity’s acquisitions, as they’re made to focus the business and not merely grow the company. He points to the 2017 acquisition of medical diagnostics firm Euroimmun as an example.

While the stock is up 125% since the fund bought it in 2015, it has fallen 41% from its 2021 peak. The US Market Index is up 237% over the same period. Morningstar’s analysis puts the stock as trading at a 29% discount to its fair value estimate.

UnitedHealthcare: a Great Company Out of Favor

Another name that has recently underperformed but which Giroux thinks is primed for growth is insurer UnitedHealthcare Group, which is down 2.2% in the past year. “Even in a horrible year, they still grew earnings at 9%-10%.” He also says the company is likely to do well under the new political regime in the United States, as its business doesn’t suffer from tariff risks that might hurt many other firms.

Giroux says the company faced difficulty in 2024 because of rising utilization (the amount of healthcare people use that it has to pay for), which hurt margins. He says this happened because of one-time events and does not represent a sustained growth in utilization, setting UnitedHealth up for a comeback.

PTC: New Management and Solid, Boring Earnings

Giroux also sees turnaround potential for engineering software firm PTC, whose stock has fallen 7% in the past year. “The previous CEO was very focused on turning it into a 15% grower, but its customer base doesn’t grow that fast,” he explains. He says the firm was making acquisitions in areas outside its core business focus, which pushed revenue growth at the expense of losing focus on where it had the biggest advantages.

Giroux points to numerous improvements in the business, such as improving margins and free cash flow, which he says is partially due to good leadership by new CEO Neil Barua, who was brought in last year and has helped refocus on its core business.

Giroux says there’s no exciting silver bullet to PTC’s success; just a little bit of margin improvement, a little bit of growth in market share, and a little bit of expansion into new products. “This is a boring company for the market,” he says, meaning it as a compliment. He thinks the current strategy should allow the company to sustainably and organically grow revenue 10% a year.

Fixed Income: Find the Inefficiencies

The fund’s current allocation to fixed income sits at 33%, while it’s typically closer to 25%-30%. A higher-than-average 37% of the fixed income portfolio is in Treasuries. Giroux cites two reasons for this. First, yields are still relatively high. “For most of my investment career, you’ve gotten really poor yields on Treasuries.” He thinks that with Treasuries now yielding 1.5-2.0 percentage points over inflation, they’re attractive relative to the stock market’s relatively rich valuations. In addition, with the potential for an economic downturn and flagging stocks, he says Treasuries are almost like an insurance policy: “In almost every downturn over the last 25 years, with the exception of one, Treasuries tend to rally.”

More broadly, Giroux’s focus in the fixed-income space is high-yield corporate bonds and bank loans, which he thinks are often misjudged. “There is a structural inefficiency in that one of the biggest participants, insurance companies, can’t participate in a lot of high-yield loans,” he says. “So there’s this supply/demand imbalance, which makes high-yield trade at higher spreads than they should be relative to their risk.”

Giroux looks for bonds sold by companies with very low earnings volatility, so even though their debt is high relative to earnings, the risk of loss is low. He also focuses on companies with high enterprise value/loan ratios so that in the case of default, there is a cushion before bond holders lose money.