David Giroux: ‘I Want to Look Forward, Not Backward’

Episode Summary

Executive Summary: Morningstar’s Jeff and Christine interview David Giroux about his long-term investing process at T. Rowe Price, including how he exploits structural market inefficiencies, favors GARP, and manages valuation risk across equities and fixed income. He also explains the TCAF ETF launch, capacity management, utility and credit opportunities, and why he still sees upside in names like Amazon, Mobileye, and Revvity.

Main Topics: Structural market inefficiencies and GARP investing (Priority: 5/5): Giroux argues his edge comes from identifying recurring market inefficiencies and focusing on growth-at-a-reasonable-price businesses that often lack a natural owner. He says GARP stocks can offer superior long-term risk/reward versus pure value or growth. Process evolution and team/quant collaboration (Priority: 5/5): He reflects on lessons learned early in his career: work sooner with quantitative resources, build strong risk/process infrastructure, and exploit inefficiencies ruthlessly rather than playing the same game as everyone else. TCAF ETF launch and capacity management (Priority: 5/5): Giroux explains why T. Rowe launched the active ETF, how it differs from the closed mutual fund, and how capacity, tax efficiency, turnover, and portfolio overlap were analyzed to avoid hurting existing shareholders. Stock selection framework and valuation over a multi-year horizon (Priority: 4/5): He describes a five-year IRR-oriented process that weighs earnings power, free cash flow, and normalized multiples, using this lens to justify holdings that look expensive on near-term valuation metrics. Sector views: utilities, fixed income, and high yield (Priority: 5/5): Giroux makes the case that higher-quality utilities and selective sub-investment-grade credit now look attractive because of stronger earnings growth, attractive yields, and better risk-adjusted returns than in the low-rate era. Specific holdings: Amazon, Mobileye, Revvity, and Berkshire Hathaway (Priority: 4/5): He details why he owns or favors several names the market may question, emphasizing long-term margin normalization, adoption curves, portfolio reshaping, and valuation relative to future cash flows. Avoiding the ‘star manager’ trap (Priority: 4/5): Giroux says the biggest career risk is complacency. He emphasizes continuous improvement, humility, team challenge, and the pressure of responsibility to clients and family as motivators to keep performing.

Key Arguments: Giroux’s edge is exploiting structural inefficiencies that most investors ignore; he believes this is more effective than competing directly with the crowd. GARP stocks are often mispriced because growth managers and value managers each exclude them; this creates a persistent supply-demand imbalance. The TCAF ETF is designed not as a clone but as a differentiated, tax-efficient, lower-risk, long-term compounding vehicle. His stock picks are based on five-year IRRs, not near-term multiples; a stock can look expensive today and still be attractive if normalized earnings and margins rise. Utilities are no longer just bond proxies: grid hardening, renewables, and rate-base growth can drive equity-like returns with lower volatility. High-quality BB credits and select leveraged loans can deliver equity-like yields with far less risk because of strong business quality and equity cushions. He sees Amazon’s retail margins normalizing and advertising/cloud growth supporting strong long-term returns. He sees Mobileye as early in a multi-year adoption curve for autonomy-related technology, making current valuation reasonable despite the market skepticism. Revvvity’s recent business exits were short-term dilutive but improved the long-term portfolio quality and growth profile. He views Berkshire as a good business but not a good value at current prices, especially given insurance’s low multiple and the long-term risk to auto insurance from safer vehicles.

Data Points: Years running Capital Appreciation Fund: Since June 2006 - Giroux has led the flagship fund for nearly two decades. Outperformance vs benchmark/peers: About 420 bps per year - He said CAF equities have outgrown the market by roughly 4.2 percentage points annually since inception of his tenure. Equity outperformance consistency: 16 of the last 17 years - He said the equity sleeve has beaten the market in 16 of the last 17 years. Beta: At or below 1 - He characterized the equity sleeve as outperforming without taking excessive market risk. TCAF holdings universe: 100 names - He said the ETF is optimized down to about 100 holdings. CAF equity sleeve holdings: 64 names - He contrasted the ETF’s broader universe with the mutual fund’s smaller list. Large-cap strategy capacity: $50 billion to $100 billion - He said TCAF could likely scale to this range without meaningful capacity issues in most names. TCAF turnover: 5% to 15% - Expected annual turnover in the ETF, lower than the mutual fund. CAF equity turnover: 40% to 50% - Estimated turnover for the mutual fund’s equity sleeve. Fixed-income allocation in CAF: 18% in late 2021; about 33% today - He described a large increase in fixed-income exposure as yields became more attractive. Treasury allocation in late 2021: Zero - He said the fixed-income book had no Treasury exposure then. Fixed-income duration in late 2021: About 1.29 years - He cited very short duration in the low-rate environment. High-quality high-yield current yields: About 6.5% to 7% - Yield range he cited as attractive today. High-quality leveraged loan current yields: About 8% to 9% - Yield range he cited in leveraged loans. Double-B spread: About 200 to 250 bps over Treasuries - He used BB credit spreads to illustrate the opportunity in high-quality sub-investment-grade debt. Amazon long-term operating margin: High-single-digit operating margins in North America retail - His model assumes margin normalization over the next several years. Amazon expected return: Low- to mid-teens IRR - His estimate for Amazon over the next five years. Mobileye OEMs signed: Five large OEMs - He cited current customer traction for Mobileye. Mobileye OEMs in discussion: Another nine OEMs - He cited additional potential customers. Revvity revenue exited: About 30% of revenue base - He said the company exited legacy businesses to improve quality and growth. Revvity operating margin: About 30% with a path to 35% - His view of the improved margin profile after restructuring. Revvity China exposure: About 17% of revenues - He highlighted China as a reason the stock is discounted. Utilities EPS growth: About 6% to 7% per year - He argued many high-quality utilities can outgrow the market. Utilities dividend yield: About 3.5% to 4% - Used to estimate total return potential. Long-term equity market return assumption: About 8.5% - He framed this as roughly 7% earnings growth plus 1.5% dividend yield. Yum Brands debt spread: About 195 to 200 bps over - He said spreads could tighten if leverage falls and the company becomes investment grade.

Pivotal Quotes: "when you're playing the same game as everyone else, it's really a losing game" — David Giroux: He was explaining the need to identify and exploit structural inefficiencies rather than mimic peers. "there's no natural home" — David Giroux: On why GARP stocks can be mispriced, since growth and value managers often exclude them. "I just want to look forward, not backward" — David Giroux: He described how he avoids complacency and the danger of star-manager self-satisfaction.

Implications: For listeners, the episode reinforces a disciplined, long-horizon, process-driven approach to active management. It also suggests that quality GARP equities, utilities, and selective high-quality credit may remain attractive in a higher-rate environment.