Should You Buy The T Rowe Price Capital Appreciation Fund?

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.

Originally posted 2014-03-11 00:05:34.

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11 thoughts on “Should You Buy The T Rowe Price Capital Appreciation Fund?

  1. scchan_2009 says:

    Given in a broad enough stock selection, on average the holding of the fund should replicate SP500. I looked at the expenses figures of the specific fund: Morningstar listed expenses to be 0.71%; that is high relative than a SP500 index fund (on the order 0.1-0.3% – depending on fund house and temporary discounts). However I do notice the fund also hold bonds. I think it should not be a surprise that it under preforms the SP500 during bull markets. Generally I don’t like having bonds in a fund because the expenses get quite big relative to bond yields; one may simply be better owning an actual index fund, and then buy bonds separately.

  2. smarterfaster says:

    Tim…looks like your on another ” hiatus”. Hope all is well. If others are like me, they check your site for posts and when they see no activity, the interest slowly wanes. One of the things I learned during my professional career was that when I knew that I would be absent….for whatever reason….the best thing to do was to let my employer, employees and my clients know in advance that I would be unavailable. That way they knew what to expect. My motto was ” no surprises”. During my last four years of employment, I worked half time. I set up my Outlook calendar a year in advance and identified each day that I would be in the office. Throughout the year, I would update the calendar monthly if minor schedule tweeks were required. My Outlook calendar was available to all of my employees, so they knew when to expect me and when I would be available. As far as outside the office, I would issue an email to my clients and call the most important ones in advance when I was about to leave for vacation. That way, they wouldn’t look for me when they knew that I was out. With these steps I was able to have a more flexible schedule without risking losing clients or control in the office. Maybe this advance notice approach might work well for you. Cheers

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