I received a reader question asking whether the T Rowe Price Capital Appreciation Fund is a good selection for those of you that don’t have self-directed 401(k) options.
Over the past year, the T Rowe Price Capital Appreciation Fund has gone up 22% while the S&P 500 has gone up 32%. I’m not sure why I’m including this statistic, because one year performance has more to do with luck rather than the evaluative skill of the manager.
Over the past three years, T Rowe Price Capital Appreciation (PRWCX) has gone up 13.16% while the S&P 500 has gone up 16.18%. Over the five year stretch, the S&P 500 is up 17.94% per year while the T Rowe Price Capital Appreciation Fund is up 17.07% per year. Although the T Rowe Price Capital Appreciation Fund has beat the S&P 500 over the past ten years, that data isn’t relevant because David Giroux took over in 2006 and therefore the data set would include the work of his predecessor (incidentally, this is the logical fallacy that crops up in a lot of financial commentary. You’ll hear a pundit point to an excellent fund and say, “Aha! Reversion to the mean. Told you that no one can outperform the market forever.” People outperform the S&P 500, not namesake funds. If Peter Lynch stayed on at Magellan, the results would have been a lot better. But instead, people look at the proof of the reversionary tendencies after he left as some kind of indication that magic has been lost. You should follow the person, not the fund).
Of course, just because the T Rowe Price Capital Appreciation Fund has trailed the S&P 500 over the past five years doesn’t mean that it’s a “bad” fund. It’s designed to be defensive in nature, meaning it should outperform in poor stock market conditions.
Essentially, you should look at the composition of the holdings to see if they are to your taste. Giroux’s strategy is this: find companies with high earnings per share growth rates to occupy the heaviest positions in the portfolio, and then surround them with the bluest of the blue chips.
Giroux is “in on the secret” that U.S. auto part repair places are goldmines when it comes to generating free cash flow, and has sizable positions in both Autozone and O’Reilly Automotives. The persistence of the Autozone buyback is almost unfathomable—the share count has declined from over 100 million in 2002 to 32 million shares in 2014, driving the price upward from $60 per share then to over $500 now.
He also owns Danaher, Google, and Dunkin Brands, which constitute the “high growth” side of the portfolio. Google is like Visa in that it is both supersized and manages to grow at 15% per year, Danaher is a stock that shows up in just about every T Rowe Price Fund over the past 20 years, and Dunkin Brands has doubled its profits since 2011.
From there, Giroux stuffs the fund with the kinds of blue-chip companies that are frequently mentioned on this site—Procter & Gamble, General Mills, Nestle, Heinz (before Warren Buffett bought ‘em out), Mondelez (the spinoff of Kraft), and United Technologies (which is basically General Electric without the financial arm).
The expense ratio for the fund is 0.73%, meaning you’d have to pay $7.30 in fees for every $1,000 you have in ownership of the fund. On a million-dollar ownership in the fund, that’s going to cost $7,300 per year (which displays the truism that as your balance grows, you’re better off owning the individual components of the fund rather than paying a management override fee).
Personally, I would classify the T Rowe Price Capital Appreciation Fund in the “good but not great” category. It’s nice. It does its job. It builds wealth and will get you through recessions with little scathing. It owns the kind of funds that are typical of conservatively oriented retirement funds. You’re probably not going to regret holding for fifteen to twenty years. But if someone grew restless with the fees or reached the conclusion that they could simulate the results (or do even better) if they spent a couple years educating themselves on stocks, they’d probably be right. But if you’re dealing with limited options in a 401(k), it should be considered no hardship to own.
To review the prospectus of the fund yourself, click here.