This streak didn't end at 16 years

The streak is alive. No, not that streak. Legg Mason's Value Trust, skippered by the erudite Bill Miller, failed to beat the S&P; 500 stock index last year for the first time since 1990.

This is the other Baltimore mutual fund streak: the one that in several ways is even more impressive and more lucrative for shareholders. The one from what may be the best fund you've never heard of.


T. Rowe Price's Capital Appreciation Fund made money for investors for the 16th consecutive year in 2006. No other stock mutual fund can make that claim, according to data from Lipper. Not even dividend funds, which concentrate on less-jumpy, coupon-paying stocks. Not even balanced funds, which load up with lower-risk bonds as well as stocks.

The streak is alive, but it enters 2007 under rookie managers and with new questions about how long Capital Appreciation can deliver outstanding results.


Jeff Arricale, 35, and David Giroux, 31, took the helm in stages last year from former chief Stephen Boesel, who had been there since 2001.

This will be their first full calendar year in charge, and their arrival has prompted scrutiny typical of any switch at a big successful fund.

"This streak will end. It will end on your watch," the new managers' boss told them before they took over, Arricale recalls. "Just focus on your shareholders and don't worry about the streak."

Good advice, because the streak is not the most impressive thing about Capital Appreciation.

It's easy not to lose money - for 16 years in a row or 100 years in a row. Just buy Treasury bonds or bury dollars in your backyard. What's supremely difficult is avoiding annual losses while keeping shareholders in the stock-market game so they can profit when stocks soar.

Low risk

Capital Appreciation has succeeded to a degree that seems to violate the axiom that big returns come only with high volatility and high risk. The fund has delivered huge long-term gains with what turned out to be the downside risk of a passbook savings account.

(I exaggerate, but only slightly. On any given day the fund's net asset value may fall, and it sometimes produces negative quarterly returns.)


In the last five years, under Boesel, Capital Appreciation clobbered Value Trust and most other stock funds, returning 12.2 percent annually on average. Remember, the past five years include 2002, when the S&P; 500 lost a fifth of its value. (Boesel barely kept the streak alive that year with a 0.5 percent gain.)

In the same period Value Trust returned an average annual gain of 7.8 percent and the S&P; 500 returned 6.2 percent. In the last 10 years Capital Appreciation has returned 12.1 percent annually on average - exactly the same as Value Trust, without Value Trust's negative returns in 2000 (7 percent), 2001 (9 percent) and 2002 (19 percent.)

How was this possible? Unlike most competitors, Boesel and predecessor Rich Howard avoided technology stocks when they got too expensive, weren't afraid to holds tons of cash at the height of the madness, and invested in bonds convertible to stock, which tend to be far less volatile than pure common shares.

Disbelief over streak

Boesel says he didn't know Capital Appreciation's no-annual-loss streak was unique until a Wall Street Journal reporter ran an analysis and notified T. Rowe Price four years ago. At first he didn't believe it and had Price's analysts double check.

Shepherding the fund now are Arricale, a certified accountant with a background in financial-firm analysis, and Giroux, an analyst who specialized in industrial stocks. They worked with Boesel for two years before taking over and served on Price's "value team" of stock pickers for various funds.


How well they perform depends partly on how much intellectual DNA they inherited from Boesel. Fund gurus are cautiously optimistic.

"The new managers' smooth transition not only gives us confidence in their readiness to run this fund but also makes it more likely that shareholders won't see a jarring change in style here," Morningstar analyst Greg Carlson wrote in a report last week.

Before Boesel stepped down, the fund started dumping energy stocks and other cyclical winners that had gotten pricey relative to profits.

Under the new guys, it loaded up on out-of-favor mega-companies that look cheap, such as Tyco and General Electric.

It owns more technology than ever - other mega-caps such as Microsoft and Intel. It still holds big positions in convertible bonds, and it's sitting on 20 percent cash, a nominally defensive posture that these days carries the bonus of a 5 percent income stream.

60% in stocks


Even though the $9 billion fund is 60 percent invested in stocks, the two don't expect a repeat of 2006's 15.8 percent return for the S&P; 500. (Capital Appreciation returned 14 percent and change.)

"As the market continues to run, the capital position will continue to get more defensive," says Arricale. "Our shareholders have come to expect to make money in the good times and avoid capital loss in the bad times."

Well, that's what every shareholder expects, however unrealistically. It's just that Capital Appreciation shareholders have actually gotten it, so the expectations from these two are especially high.