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By Jason Stipp | 04-17-2014 01:00 PM

Giroux: Very Few Attractive Names in the Stock Market Today

The T. Rowe Price Capital Appreciation manager says bargains are hard to come by today but does see some value in the highest-quality high-yield bonds.

Jason Stipp: I'm Jason Stipp for Morningstar. It's Beat the Market Week on Morningstar.com, and today we're checking with David Giroux of T. Rowe Price Capital Appreciation to get his take on the stock and the fixed-income markets and how he's positioning the portfolio today.

David, thanks for joining us.

David Giroux: It's my pleasure.

Stipp: David, there seem to be dual concerns that are vexing investors today. The fixed-income market seems a bit troubled as rates are certain to, at some point, go up. We saw some of that last year, and we've seen some investors leaving fixed income.

At the same time, the stock market feels at least fully valued, and some would say a little bit more than that. So, a lot of investors don't feel like there are a lot of good choices in the market today.

You are a manager who invests in both stocks and bonds. As you're looking at both of those asset classes and the opportunities and risks, how are you drawing a balance between them right now?

Giroux: Jason, I think that first of all, it's a great question. And what I would say is, it is a challenging environment for a multi-asset class manager, especially a multi-asset class manager who really cares about protecting clients' downside.

Because you're right, the equity market is somewhat expensive. The median company and the S&P 500 is trading around 17 times earnings now. That's basically the highest valuation level that we've seen in the last seven years. That's a level that is not consistent with being able to find a lot of great value in the marketplace today. So the equity market is not great.

Now, typically, when you see the equity market somewhat expensive, it means maybe bonds are attractive. The challenge, as you highlight, is that interest rates are still low. They have come up significantly off the bottom, but still relative to history, relative to where they should be, they're probably still a little bit low.

I would say the one area of both fixed income and equities where we see a little bit of value is what I would call the highest-quality high-yield bonds--companies that we think are sort of money-good, if you will, even in a difficult economic environment where you're earning 4% to 5% for really high-quality BB bonds.

When we think about high-yield in general, we think high-yield is a little bit of a bubble, but most of that bubble is really on the CCC credits and the B credits, where spreads are well inside of history. We think the highest-quality BBs look attractive relative to equities and relative to the fixed-income market in general.

Stipp: You mentioned that your fund operates in certain bands as far as your exposure to equities. What might we be able to infer about how you're viewing the equity versus the bond market by looking at how your portfolio is positioned between fixed income and equities today?

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