David Giroux, manager of the $9.7 billion T. Rowe Price Capital Appreciation Fund, has beaten 96 percent of his rivals this year on bets that companies linked to consumer spending will lead a stock market recovery.
Stakes in Wal-Mart Stores Inc. and Tyco International Ltd., both among his top 10 holdings, and a group of cable television stocks have helped him return 1.4 percent this year, according to data compiled by Bloomberg. That compares with the 4.3 percent decline by the Standard & Poor's 500 index.
Giroux takes a "barbell" approach to investing. At one end, he buys what he sees as riskier stocks that appear undervalued compared with fundamentals such as projected earnings and sales. At the other end, he holds what he considers conservative investments, including utilities and energy companies, that he expects will perform well even during a recession.
"Our traditional style is to limit losses in a difficult environment, but we also take opportunities that the market puts in front of us," Giroux said in an interview Thursday from his office at T. Rowe Price headquarters in Baltimore.
A graduate of Hillsdale College, a small school in Michigan with a student body of 1,300, Giroux spent nine years as an industrial and automotive analyst at T. Rowe. The firm started grooming him in 2004 to take the reins of one of its highest profile funds. He took sole control of Capital Appreciation in March 2007 at the age of 31, inheriting a fund with a 16-year streak of positive returns.
Greg Carlson, an analyst at Chicago-based Morningstar Inc., said he was impressed by how T. Rowe prepared Giroux to take over the fund and how he has performed.
"We feel pretty confident in this fund and have been recommending it from the time he took over," he said.
The fund gets Morningstar's top rating of five stars. It has a Sharpe ratio of -0.25, compared with -0.29 for its peers. A higher ratio means better risk-adjusted returns.
"I always say that even though I'm 32, I invest like a 52-year-old," Giroux said, referring to holdings in companies he calls "Steady Eddies."
Giroux owned $247 million of AT&T Inc. and $130 million of San Diego's Sempra Energy as of March 31, after buying the stock "aggressively" in the first quarter. Sempra, which owns utilities, power plants and pipelines, has gained 8 percent since the end of the quarter, while AT&T, of San Antonio, Texas, the biggest U.S. phone company, is up 0.6 percent.
Giroux said he was lucky to have cut his stake in General Electric Co., based in Fairfield, Conn., before the company surprised analysts by missing first-quarter profit estimates April 11 and plunged 13 percent.
"I wish I could say I knew they would miss earnings, but I just thought Tyco Electronics was a better play," he said.
Giroux's bets on consumer stocks are based partly on historical analysis of how recessions affect equity prices. He said consumer stocks fell ahead of an economic decline and tend to bottom out two months into a recession before leading other equities in recovery.
This made him bullish in the first quarter, when he increased positions in Bermuda-based Tyco Electronics Ltd., the world's biggest maker of electronic connectors, and its former parent, Tyco International Ltd., the largest supplier of security systems. Tyco Electronics is up 2.7 percent this year, while Tyco International has gained 14 percent.
He has also made big gains with Wal-Mart, the world's largest retailer, which has gained 17 percent this year, and cable operators Comcast Corp., of Philadelphia, up 18 percent, and Time Warner Cable Inc., of New York, up 10 percent.
He is keeping risk low by stashing about 13 percent of the fund's assets in cash, with an additional 18 percent in bonds and bonds that can be converted into stocks.
Giroux said he was not afraid to take chances when he believed investors had pushed a stock down too far. He said that was currently the case with some financial stocks hurt by the fallout from subprime-mortgage defaults.
He owned $101 million of investment bank Morgan Stanley, of New York, and $84 million of Merrill Lynch & Co. Inc., also of New York. Giroux said the value of Merrill's brokerage business, plus its holdings in fund manager BlackRock Inc. and Bloomberg L.P., exceed its stock price.
"You're getting the investment bank for free," Giroux said.
Merrill is a passive investor in Bloomberg, the parent company of Bloomberg News.
Rising fuel and food prices have made Giroux pull back slightly from some consumer stocks in the last two months, expecting that will delay a consumer-led recovery. He remains confident they will lead a stock market recovery next year.
"People underestimate the resiliency of the U.S. consumer," he said.
Up 1.4 percent in 2008.
Wal-Mart Stores Inc., Tyco International Ltd.