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By Greg Carlson | 10-13-2014 12:00 PM

Giroux: Utilities Trump Staples in Defensive Stocks

The Gold-rated T. Rowe Price Capital Appreciation manager also discusses the fund's recent growth picks and attraction to BB-rated bonds.

Greg Carlson: Hi, I'm Greg Carlson, and I'm an analyst with Morningstar. I'm joined today by David Giroux, the manager of T. Rowe Price Capital Appreciation.

David, thanks for being here.

David Giroux: It's my pleasure.

Carlson: Just as a word of explanation, David was our Allocation Fund Manager of the Year for 2012, and the fund does receive a Gold Analyst Rating from Morningstar.

David, perhaps we can get an update on what you've been doing with the fund lately. First of all, it closed to new investors at the end of June.

Giroux: Yes, that's accurate.

Carlson: Can you talk about what prompted that?

Giroux: I think we were getting significant inflows for the last two or three years. I think it's very, very important to make sure that those flows, while they were not an impact in the short term, we were worried that if that level of flows were to continue for three, four, five years in the future, it could impair our ability to invest in things like high yield, to invest in mid-cap names, again three, four, five years down the road. We took an attitude, and T. Rowe took an attitude, that protecting our existing clients was more important than growing the strategy.

Carlson: And indeed in the few months since fund closed to new investors it's gone from strong inflows to fairly flat.

Giroux: Relatively flat, absolutely, which we feel good about.

Carlson: Preserving your flexibility.

Giroux: Yes.

Carlson: Let's talk about what you have been doing within the portfolio. I know back in the March-April time period, you picked up some growth stocks as they corrected, and you generally are not a big investor of growth stocks per se.

Giroux: You are right. In that April-March timeframe, we saw a number of names, especially in growth side, get hit. We used that weakness to initiate a couple of companies that traded at maybe a little bit higher multiples than we've historically bought--Twentieth Century Fox, we bought Liberty Global, and we also bought Visa. Actually all of those companies are really attractive on a longer-term basis. Their valuations had come down from 9 times EBITDA to 8 times EBITDA for Liberty Global, and a 25 times multiple, to a 20 multiple for Visa. So we felt very, very good that the valuations were at the low end of their historical trading range. We felt very good about their long-term prospects.

Carlson: Maybe you can touch on a couple of things that have exited the portfolio as well.

Giroux: Earlier this year we let our Nestle exposure go, as it revalued back up to toward the high teens to 20 multiple. We let General Mills out of the portfolio. We had some concerns on a longer-term basis about the staples space and what's going on in the center of the store, and the multiples with staples continued to be very high, relative to history and on an absolute basis, the fundamentals in staples companies are typically pretty poor right now. So we actually feel much better about utilities on a relative basis to staples today.

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