David Giroux
David Giroux, who has run the Capital Appreciation fund since 2006, believes stocks are running too hot © FT montage; Reuters

A top-rated active fund manager at T Rowe Price has substantially backed away from a “rich” US equity market, reflecting nerves among some investors about the lofty valuations that have become entrenched since markets rebounded forcefully from the pandemic lows of last year.

David Giroux, who has run the Capital Appreciation fund since 2006, has gained 13.5 per cent so far this year with a mix of equities and bonds, ranking ahead of peers and the Morningstar benchmark split between equity and fixed income.

But Giroux has cut the fund’s equity exposure down from about 70 per cent at the market low of 2020 to the mid-50s per cent level now, fearing that stocks are running too hot.

The blue-chip US S&P 500 has soared by almost a fifth this year, reaching a new all-time peak this week.

Giroux’s strong reputation for timing market shifts means other investors are likely to take note. “The equity market is rich here at more than 20 times earnings for the next year and we have pulled back,” Giroux told the Financial Times.

Line chart of S&P 500 showing rising US stocks

During his time at the Capital Appreciation fund, Giroux has established a record of being judicious about the equity market cycle, raising and cutting exposure at key moments.

When equities bottomed last year, Giroux was a big buyer, repeating a pattern seen in the market slumps of 2008, 2011 and late 2018. In 2007 and late 2019, Giroux cut exposure ahead of big market declines.

In the past decade, the fund has ranked in the top quartile of funds that invest between half and 70 per cent of their assets in equities, according to Morningstar. For the decade up to the end of this July, the fund generated a return of 5 percentage points above* the average gain of its category peers and the Morningstar benchmark.

“Giroux’s ability to identify mispricing across a wide array of asset classes, and act quickly when he does, is partly to thank for that record,” said Morningstar.

Giroux said T Rowe’s investment approach reflected deep research into companies, lower fees and long-term holding periods.

“I believe there are 40 rather than 200 good names that can generate long-term value,” said Giroux. “Our funds tend to have lower fees than their peers and below average turnover.” Unlike active rivals that shadow equity benchmarks, “we have a little more confidence in our research and identifying companies that will do well over the next five years”.

Shares in the Baltimore-based asset manager have risen more than 40 per cent this year, extending a period of eclipsing those of rivals and the broad market since 2016. Wall Street analysts rate the asset manager highly, particularly given the growing challenge from passively managed exchange traded funds over the past decade.

“Despite the massive shift to ETFs, management has remained focused and invested in the firm’s key strategic advantage, which is superior investment performance and delivering alpha for clients,” said Kyle Sanders, equity analyst at Edward Jones.

Line chart of Share prices and index rebased showing T Rowe Price shares outpace rivals

Among the top managers in terms of assets in actively managed funds, T Rowe has one of the highest average Morningstar ratings, trailing Dodge & Cox but ahead of Vanguard, BlackRock and Fidelity. The percentage of the company’s assets that carry a five-star rating from Morningstar is among the highest at 33 per cent, just behind BlackRock and D&C. Fund fees for T Rowe are “low or below average” relative to the industry, according to Morningstar.

The asset manager “has withstood the headwinds facing active managers with its rigorous research process, strong performance across asset classes, and continued investment in its research team”, said Greggory Warren, analyst at Morningstar.

The asset manager is preparing to launch a new division that will include Giroux’s fund alongside five other strategies.

T Rowe Price Investment Management (TRPIM), will launch in the second quarter of 2022. The two entities will not share research or investment resources and the split is designed to alleviate limits on the amount of shares in a company that can be held by an asset manager across its funds.

Running two investment arms “allows each side to adhere to its own company ownership limits and provides more bandwidth for portfolio managers to claim bigger stakes in companies than they would be able to under the current set-up”, said Morningstar in a research note. It wrote that 10 equity strategies, accounting for nearly a third of their assets “are closed to new investors or capacity-constrained”.

*This story has been amended to clarify that the fund’s average gain was 5 percentage points above its category peers.

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