What was it like to buy $8.7 billion worth of stocks in March? A fund manager explains

By Tim Gray

David Giroux, manager of the T. Rowe Price Capital Appreciation Fund, said buying $8.7 billion worth of stock in March, when the stock market was plummeting, was like preparing for a colonoscopy.

“It’s very unpleasant, but you know it’s the right thing to do.”

Giroux’s pandemic shopping spree significantly repositioned his $38.2 billion mutual fund, which invests in stocks, bonds and other securities, moving it to 72% stock from 53%. Giroux bought $5.7 billion in stock for the fund, and about $3 billion for institutional accounts that mirror it.

His buying entailed bets on beaten-down companies, including Marriott International.

“We were buying it all the way down,” he said. By the time the market bottomed in late March, Marriott’s stock price had dropped 70%.

It may not be clear for months or years whether all of Giroux’s moves pay off. But his account of the market’s slide this year provides a glimpse into how an experienced investor responded to a panicked, stressful time. He did what professionals often say one should do in down markets. He bought. And bought.

“We always add when the market crashes,” Giroux said. “But you always wonder, ‘Is this time going to be different? Is this going to be the time I blow up my clients?’”

His account of that hurly-burly period shows how difficult, psychologically, buying in a panic can be. Even with the resources of T. Rowe Price, a $1 trillion money-management firm based in Baltimore, behind him, he admitted that he agonized as he watched the value of his fund shrivel in March. One day, it sank 9%.

“A lot of my investors aren’t millionaires,” he said. “They’re people trying to save for retirement or a kid’s college. They expect me to minimize their losses.”

Giroux’s own investment in the fund was shrinking, too. “It’s by far the largest investment I have,” he said. “It’s my mother and father’s largest, too.” Giroux wouldn’t comment on precisely how much money he has invested in the fund, beyond saying, “It’s substantially greater than $1 million.”

The stock market has since rebounded, and Capital Appreciation gained 0.13% through June 30, compared with a loss of 3.08% for the S&P 500.

Coronavirus cases are surging anew, and the market may falter again. Mindful of that, Giroux has begun paring back some of the bets he made during the February and March slide. In late June, his fund consisted of about 63% stock, 23% bonds, 12% cash and 2% convertible securities. (A convertible can be swapped for a set amount of the issuing company’s common stock, if the stock reaches an agreed-upon level.)

For the 14 years that ended June 30, his fund returned 9.25% annualized versus 8.84% annualized for the S&P 500. As for risk, the standard deviation of its returns — a measure of volatility — was 14.18% versus 20.63% for the S&P 500. (A lower number indicates less volatility and less risk.) The fund is closed to new investors.

Giroux, 45, isn’t expected to stick to a single sector or type of security. In addition to stocks, investment-grade and high-yield bonds and convertible securities, he can invest in leveraged loans and covered call options. His long-term goal is to match the S&P 500’s performance while taking only two-thirds as much risk.

That setup can make Giroux’s performance hard to evaluate — what’s the right bench mark? — but it also limits his excuses. Unlike a narrowly focused manager, he can’t blame the performance of, say, value stocks or energy companies if he loses money.

Leo Acheson, a Morningstar analyst, said Giroux “is willing to reposition his portfolio very quickly to take advantage of inefficiencies in the market. He’s not afraid to go against the grain.”

A dearth of apparent inefficiencies was a frustration for Giroux before the coronavirus broke out. In January, he was feeling as stymied as he could recall being during his tenure as a fund manager. Financial markets offered no bargains, he said.

“No sector or asset class looked attractive,” he said. The fund’s cash stake was 20%, well above its normal level of 5% to 10%.

Then came the virus. The S&P 500 peaked on Feb. 19, and, over the next month, it hurtled downward. By the time it hit bottom on March 23, it had dropped nearly 34%].

T. Rowe Price sent its staff home on Friday, March 13. That weekend, Giroux parked himself at his kitchen table, with two laptops and an iPad and his AirPods plugged in his ears.

He said he spent many of the ensuing days in a T-shirt and a pair of Star Wars pajama pants given to him by one of his daughters. The outfit sounds right: Giroux has a nerdy earnestness that recalls Mr. Rogers more than the Wolf of Wall Street.

His spouse, Ann Giroux, said she knew he was anxious then because of his wakefulness. “David is the kind of person who internalizes,” she said. “But I always know he’s stressed because he’s not sleeping well, or at all.”

He devoted that first weekend to building a spreadsheet that helped him project how 100 companies with good management and promising long-term prospects might be affected by the pandemic. A crucial consideration was when earnings might return to pre-pandemic levels.

Because of panic selling, many of these stocks were now priced attractively, he said. He ran those through his spreadsheet and decided 37 merited further research.

Assisted by his associate portfolio manager, Adam Poussard, and T. Rowe Price’s analysts, he delved into their operations and broke down their financial information. “We stress-tested the balance sheets,” he said, simulating dire outcomes.

With the market sinking fast, the group logged long days and a few all-nighters, communicating mainly by email and phone. In the market’s frenzied sell-off, they didn’t have time for meetings via Zoom. “Other downturns haven’t gone from 0 to negative 34” in such a short time, Giroux said. “In the global financial crisis, the market fell over 18 months.”

The team’s work suggested buying stocks that might seem unlikely winners in a pandemic, like Marriott. Travel had, of course, largely ceased, and investors were responding by dumping Marriott’s shares.

“We did draconian scenarios of how long it might take for Marriott to get back to a normal trajectory, and even then, the stock price was irrational,” said Ira Carnahan, a T. Rowe Price portfolio specialist. “It was being priced like there was a real risk of bankruptcy.”

Giroux said that, in his view, not only was Marriott financially sturdy but many of its franchisees were too. (Many hotels run by Marriott are owned by someone else.) The franchisees weren’t carrying risky levels of debt on their properties either, he said.

He also bet that business travelers would eventually have to return to hotels and that online meetings wouldn’t replace most face-to-face interaction.

“When no one’s traveling, there’s no competitive disadvantage to Zoom calls. But what happens when your competitors start doing meetings in person again?”

For the year through June 30, Marriott has lost 41.7%. Giroux said he’s not expecting an immediate recovery.

By the end of March, Capital Appreciation had bought seven new stocks. Besides Marriott, they were industrial companies like Cintas, Ingersoll-Rand and Linde; an aerospace company, Raytheon Technologies; a medical technology company, Stryker; and a bank, PNC Financial Services. The fund has since sold Cintas, Raytheon and Stryker, after all three rose in the second quarter.

General Electric, a pre-pandemic stake to which Giroux added, has been a laggard among the fund’s longer-term holdings. On June 30, it was down 38.7% year to date.

Giroux said his confidence in the company stems partly from his faith in its chief executive, H. Lawrence Culp Jr., and partly from its hefty aerospace and health care businesses. Aircraft engines and magnetic resonance imaging machines can’t be rendered obsolete by an app, he said.

Culp, who took over GE in 2018, is a former member of the T. Rowe Price board. Giroux met him nearly 20 years ago when Culp was CEO of Danaher, a tech company with life science and environmental businesses. He showed there that he was a canny acquirer of companies, buying up businesses and improving their margins and cash flow, Giroux said. “That’s what GE needs — it has some underperforming divisions.”

Giroux said he expects the stock market to sag and surge in the months ahead, falling with new COVID-19 outbreaks and rising as lockdowns bring them under control. But he said he doesn’t expect another drop as steep as the one in February and March.

Before his buying spree, he had dozens of conversations with physicians, public health experts and virologists to better understand coronaviruses, their treatment and the likely timeline for a vaccine.

“What came from that was a sense we’d able to manage through with more testing and contact tracing and more therapeutic options,” he said. Plus, news on a vaccine has been encouraging, with several promising candidates progressing, he said.

“This is a horrible crisis, with hundreds of thousands of people dying — a close friend of mine lost a family member — but I feel like, by 2022, we’ll be a post-COVID-19 world.”