2023 has been the year of conflicting market narratives. Entering the year, markets feared rising rates and an earnings dropoff. A dreary recession loomed. Since then, the S&P 500 has risen 16%, with markets stubbornly moving forward despite those challenges. Where, then, should investors look? T. Rowe Price’s Investment Management’s head of investment strategy and CIO, David Giroux, recently explained how he seeks long term gains by investing against the grain.
Giroux manages the firm’s T. Rowe Price Capital Appreciation Fund (PRWCX) and the new T. Rowe Price Capital Appreciation Equity ETF (TCAF ). He brings much of the investing against the grain approach to those strategies, helping PRWCX, for example, return 11% YTD.
What should investors look for in exploiting market inefficiencies? Giroux looks for long term capital appreciation, reminding investors that neither good nor bad times stick around forever. For T. Rowe Price, that means seeing stocks somewhere between fair and slightly overvalued. It also means finding utilities and healthcare stocks appealing, “particularly if earnings expectations for the broader market” prove too optimistic for 2024. Fixed income, too, stands out, “especially the high yield segment.”
“How do we try to exploit this inefficiency?” Giroux writes. “When conditions are good, people want to own cyclical businesses that exhibit greater sensitivity to the economy. That’s when we’re usually going against the grain by buying names in defensive industries. When people want to own defensive stocks because of fears about weakness in the economy and markets, we’re usually buying cyclicals.”
More than just investment type, however, finding long term gains from inefficiencies also means exploiting structural and behavioral inefficiencies. Whereas many investors might avoid certain areas, there may be opportunities in high yield, for example. Per Giroux, insurance companies, for example, miss out on high yield where “jewels” can be found amid junkier offerings. Growth managers, in turn, can miss out on advantages found in growth at a reasonable price (GARP) approaches.
“Our view is that the middle—companies that offer the prospect of growth at a reasonable price (GARP)—can generate compelling risk‑adjusted returns over the long term,” Giroux notes. “But GARP companies typically don’t appeal to growth managers, many of whom want names that are increasing their revenues organically by at least 10% annually.”
“With these large pools of capital biased against GARP companies, we’ve historically found opportunities to take advantage of what we regard as irrationally low prices for high-quality businesses that should be able to compound in value over time,” he adds.
These are just some of the observations Giroux identifies as helping the firm seek long term gains for investors. Whether via TCAF or PRWCX, investors may want to take heed of the virtues of seeking out market inefficiencies for long term gains in active ETFs.
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