Wednesday November 09, 2011
by Mark Salzinger, editor The No-Load Fund Investor
This month we examine Price Capital Appreciation (PRWCX), a unique fund with a stock-centered portfolio that adds other asset classes to the mix.
These holdings include convertible bonds, leveraged loans and options in an attempt to generate equity market returns with lower risk. Nimble and contrarian, the fund has produced strong absolute and relative returns.
Over the past three years, for example, it has gained 14.9% annualized, placing it high in the top quintile of the growth-income funds in our performance comparison tables.
David Giroux has managed Price Capital Appreciation for more than five years, including the past four as solo manager.
To reach the fund’s objective, he attempts to move the portfolio into assets that have the best prospects for robust risk-adjusted returns, which often means investing in downtrodden or unpopular sectors and asset classes, while reducing strongly performing positions with weaker potential for further outsized returns.
Giroux must invest at least half the portfolio in stocks, and no more than a quarter of assets in bonds rated below investment grade. Aside from that, he has free rein.
He plies Price’s contrarian-leaning value approach, preferring to invest “when there’s blood in the streets”—typically when prices and sentiment are depressed.
He builds the fund’s allocation to various asset classes from the bottom up—that is, he focuses on finding individual securities with prospects for attractive returns, rather than adding to a specific kind of asset (stock, bond or other) because that group as a whole appears attractive.
In late 2008 and early 2009, this against-the-grain strategy meant loading up on beaten-down stocks and convertible bonds; their subsequent rallies helped the fund to significant gains in 2009 and on into 2010.
Very recently, the fund has loaded up on scorned industrial stocks at the expense of consumer staples, a strong-performing sector that had been one of the fund’s heaviest concentrations as recently as June 30, 2011.
The second largest asset class was leveraged loans, also called bank loans, making up most of the portfolio’s 14% weighting in corporate bonds.
Compared to straight high-yield bonds, leveraged loans have little interest-rate risk (their coupon payments reset periodically to match prevailing interest rates) and are near the top of the pecking order of creditors.
Giroux says these attributes and the recent sell-off among such bonds give them far greater potential for gain relative to their risk than that of either conventional high-yield or investment-grade bonds.
Much of the fund’s outstanding track record was built on large-cap stocks and convertible bonds, the latter generating income and reducing downside risk relative to straight equity exposure.
Giroux also employs a covered call writing strategy. The fund sells call options on stocks it already owns. Calls recently were written on more than 20% of the fund’s equity allocation, and the fund yields nearly 2%.
Over the past five years, all of which came on Giroux’s watch, Price Capital Appreciation has returned 4.4% on an annualized basis, vs. 0.6% for the S&P500 Index.
Volatility over that time has been nearly 20% lower than the S&P500 (standard deviation of 14.8, vs. 18.2 for the index), while the severity of losses has tended to be much milder than that of the broader market.
Price Capital Appreciation levies a reasonable 0.72% expense ratio and requires a minimum initial investment of $2,500.
Learn more about this financial newsletter at Mark Salzinger's The No-Load Fund Investor.