Leo Acheson: I'm Leo Acheson from Morningstar. I'm checking in here today with David Giroux, the manager of T. Rowe Price Capital Appreciation and winner of Morningstar's 2017 Fund Manager of the Year award for the Allocation/Alternatives Category.
David, thanks for joining us today.
David Giroux: It's my pleasure to be here. Thank you.
Acheson: Can you just describe how you were able to outperform during 2017?
Giroux: If you look at through a sector allocation basis, healthcare was really our big winner last year. While healthcare was basically in line with the market, really our healthcare stocks did quite well. Some of our life science tool companies, like PerkinElmer did very, very well. Our HMOs did well, Abbott, Zoetis. Healthcare was a big winner for us last year.
In addition, it was also what we did not own last year. Last year the market was up over 20%, but the energy sector was actually down. Energy was one of our largest underweights last year. Our team, Steve Krichbaum, Shawn Driscoll did a great job making sure that we had a pretty big underweight in energy, which really helped out last year. I'd also say our low risk, high-yield BB credits did very, very well last year. High-yield spreads fell from over 500 bps to under 400 bps over the last year, so that really helped our fixed-income performance as well.
Acheson: I thought what was also really impressive during the year was that you were able to outperform by so much while also being relatively defensively positioned. Could you touch on that?
Giroux: Probably the mistake we made a little bit last year--and I think it's probably the right mistake on a long-term basis--is just get eight to nine years into a bull market with valuations relatively high probably doesn't make a lot of sense to be incredibly aggressively positioned. I think really what it came down to is really good underlying stock-picking last year. That overcame some of our conservatism last year, and again, that's healthcare, energy, industrials all did very, very well from an underlying stock perspective.
Acheson: Another thing that I know that you were expecting and actually positioned your portfolio for was tax reform. Is that right?
Giroux: We spent a lot of time last year on tax reform, and I think we had somewhat of a differentiated view that the odds of tax reform were higher than the market implied. We did tilt the portfolio last year to compensate at a higher than average tax rates, and that benefited us.
In addition, we did something that we really haven't done really in my tenure, is we actually bought calls on a number of companies that we thought the market was inefficiently pricing the optionality from tax reform. Companies like Comcast, O'Reilly Automotive. We bought calls on these companies, and we also bought calls on both the financials and the consumer discretionary ETF. Financials and consumer discretionary are probably the two sectors that benefit the most from tax reform, so those calls did very, very well for us last year as well.
Acheson: Thank you again, David, for joining us today. We really appreciate it.
Giroux: It's my pleasure.