Monday, December 4, 2023
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Launch Alert: T. Rowe Price Capital Appreciation & Income


By David Snowball

On November 29, 2023, T. Rowe Price launched the T. Rowe Price Capital Appreciation and Income Fund (PRCFX) after the longest gestation period in fund history. Normally, there’s a lag of 70 days between a fund’s initial SEC filing and its clearance to launch. In this case, the lag is 2,590 days. The fund was organized in October 2016, filed a full prospectus in September 2017, at which point T Rowe Price bought 10,000 shares, and appeared in all of the subsequent Statements of Additional Information filed annually with the SEC.

It’s clear this has been on the adviser’s mind and to-do list for rather a while.

The fund will invest 50-70% of its net assets in fixed-income and other debt instruments (corporate and government bonds, mortgage- and asset-backed securities, convertible bonds, and bank loans) and 30-50% in common and preferred stocks. The target securities are issued by “companies whose stocks are expected to provide an attractive return relative to the company’s associated risk…. The fund follows a similar security selection process with respect to fixed income and other debt instruments.” In particular, they target firms with some combination of

  • experienced and capable management;
  • strong risk-adjusted return potential;
  • leading or improving market position or proprietary advantages; and/or
  • attractive valuation relative to a company’s peers or its own historical norm.

There are no limits on the market capitalization of the issuers of the stocks in which the fund invests.

The fund will be managed by David Giroux, whose other charges include the long-closed T. Rowe Price Capital Appreciation Fund (PRWCX) which he has managed since 2006, and T. Rowe Price Capital Appreciation ETF (TCAF), launched in June 2023. In both cases, he is listed as the sole manager of the fund. The new fund is co-managed by Farris Shuggi, a quantitative analyst who joined Price in 2008. Price refers to these, collectively, as “the Capital Appreciation suite” of funds. Mr. Giroux positions the new fund as most attractive to “clients … who prioritize current income and enhanced capital preservation.”

Fund Equity allocation Expenses / assets Management
Capital Appreciation “at least 50%” with up to 25% international; currently 60% equity with 194 stocks 0.72% / $55 billion Giroux
Cap App Equity ETF 100% equity with 100 stocks 0.31% / 506 million Giroux
Cap App & Income 30-50% equity 0.655 / – Giroux / Shuggi

Why might you be interested?

We noted in our August 2023 analysis of the fund when it was in registration with the SEC, “You care because T Rowe Price Capital Appreciation is (a) utterly unmatched and (b) closed tight. MFO/Lipper categories PRWCX as a Growth Allocation Fund. Here is its performance against its peers:

Period APR Sharpe ratio rank APR rank Ulcer Index
03 year 11.1% #3 of 242 #6 #18
05 year 10.9 #1 of 233 #1 #6
07 year 10.8 #1 of 215 #2 #5
10 year 10.3 #1 of 188 #1 #3
15 year 10.1 #1 of 146 #1 #20
20 year 10.1 #1 0f 95 #1 #5
25 year 10.0 #1 0f 77 #1 #2
30 year 10.8 #1 of 42 #1 #1

Source: MFOPremium.com, using Lipper Global Dataset data and custom calculation

Three things to note:

  • #1. As in, “damn, this has had the #1 risk-adjusted returns over the past 5, 7, 10, 15, 20, 25, and 30-year periods?” Yep. The Ulcer Index, a more conservative risk-return calculation, refers to roughly the same picture. The few funds with lower Ulcer Indexes tended to have dramatically lower total returns as well.
  • 10. As in, “damn, this strategy returns 10% a year over every trailing period?” Yep. Annualized returns since inception in 1986: 11.2%. Average three-year rolling returns since inception, 11.3%. Average five-year rolling returns: 11.2%. Average 10-year rolling returns (you guessed it): 11.0%.
  • 3. As in “three different managers – Richard Howard (1989-2001), the late Stephen Boesel (2001-05) and David Giroux (2006- ) – all managed to produce the same results. The founding manager, Richard Fontaine (1986-89), falls outside the time boundary of our table.

In short, this appears to be a strategy that works – at least within the confines of T Rowe Price’s culture – across managers and across market cycles. Mr. Howard’s succinct description of the fund was “A defensive fund willing to use aggressive tactics.”

Potential investors would benefit from reviewing a long and thoughtful discussion about the Capital Appreciation suite (one of three discussions of the fund ongoing at the board) on the MFO discussion board. Observant1, one of our community members, shared a reflection by Mr. Giroux about his new co-manager:

Jeff Ptak from M* asked David Giroux: “With the benefit of hindsight, what do you think you might have urged your younger self to do and conversely, warn the younger you to refrain from doing, given all that you’ve learned along the way?”

David Giroux’s partial response:
“Second, I think I would tell myself to work more closely with the quantitative resources at T. Rowe earlier in my career. I really didn’t do anything on that front really until late ‘09. I joke with people internally. There was a BFS era, before Farris Shuggi, and AFS, after Farris Shuggi, period at CAF. I’ve worked very, very closely with Farris Shuggi and the rest of the quant team at T. Rowe on so many proprietary projects over the last 14 years that have really meaningfully and positively contributed to CAF’s performance. Honestly, it changed the way I managed CAF for the better over time.”

Bottom line

All investing involves risk. The risks here are the unknowns created by adding the quant overlay to a long-established strategy and the greater reliance on a fixed-income sleeve of the portfolio. Given all that we know about the strategy and the team, it seems like a risk well worth considering for conservative investors who would benefit from additional income, both for its own sake and for the sake of the stability it might add to the fund’s day-to-day performance.

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