For fund manager David Giroux, the coronavirus pandemic has been the ultimate test of his uncanny ability to boost profits while reducing risk. In March 2020, his T. Rowe Price Capital Appreciation Fund scooped up billions of dollars in stocks as the market was plunging, causing him to liken the experience to preparing for a colonoscopy—very “unpleasant” but the right thing to do. The bargain-­hunting experience paid off—the fund was outpacing the S&P 500 this year as of December 11. Now Giroux is focused on adjusting his portfolio to prepare for a challenging 2021 outlook.

His secrets that could help you steer your portfolio now… 

The Outlook 

I expect the stock market to rise in 2021 as we get closer to wide distribution of vaccines, and by 2022, we should be in a post-COVID-19 world. However, the process will not be seamless. Tens of millions of Americans still will be unemployed, and it’s hard to assess how long the economic damage will linger, so there are ample reasons for caution.

That’s why I start with a portfolio allocation that has seen me through good times and bad. Although I generally keep roughly 60% of my portfolio in stocks and 40% in bonds, cash and other fixed-income investments, the stock allocation was recently 69%—about as high as I ever go—because I see a lot of potential reward right now if I take a bit more risk. 

However, if a raging bull market returns in 2021, it’s likely that I will temporarily fall behind the S&P 500 because I avoid the riskiest stocks and maintain a large exposure to bonds, which have much lower volatility. That’s OK because if it’s a weak or choppy market, my portfolio will hold up much better than the S&P 500. Many investors think a 60-40 portfolio is old-fashioned, even obsolete, because of today’s near-zero yields and the prospects for losses on bonds if interest rates rise. Although bonds don’t look very appealing now, they still can be valuable as shock absorbers to stabilize your portfolio in rough times. They were essential during the 2020 recession. And I’m still able to find attractive areas in the fixed-­income universe such as floating-rate bank loans, which are providing relatively high yields but are less risky than “junk” bonds.

How to Profit

Lighten up on Big Tech. Gains in the S&P 500 largely have been driven by five large-cap technology stocks that benefited from the stay-at-home economy. Google parent Alphabet Inc., Amazon, Apple, Facebook and Microsoft averaged returns of 48% in 2020 through December 11 versus 13.4% for the overall index. But I’ve greatly reduced exposure to most of these stocks for now because they face challenges that could lead to sharp pullbacks and volatility.

The challenges include stretched valuations and slowing earnings growth as stay-at-home consumers start to get out more. Also, many of the stocks above are likely to face bipartisan calls in Congress for stronger antitrust enforcement in 2021.

Exception: I’m sticking with my stake in Alphabet. It lagged the other Big Tech stocks in 2020 because of the dip in digital advertising from ­travel-and-leisure companies. That could be a major catalyst for Alphabet’s earnings growth as we emerge from the pandemic. Plus, I’d welcome a worst-case antitrust scenario in which the federal government breaks up Alphabet. The sum of its parts would be significantly more valuable than the whole. 

Pivot to stocks that underperformed in 2020 and that have limited downside now and the potential to outperform the market. I’ve redeployed some of my tech-stock gains into these laggards and increased the overall stock allocation in my portfolio to 69%—up from as low as 53% in early 2020—while reducing bonds and other fixed-income investments to 23% and cash to 8%, reflecting my optimism for 2021. Attractive areas include… 

Utilities: This is my favorite long-term investment to profit safely. Utilities often do well in recessions because their earnings and dividends are so consistent. But they have underperformed the market during the pandemic because many investors still regard them as having slow-­growing profits.

That’s no longer the case. In recent years, new technology has sharply reduced the cost of generating electricity from wind turbines and solar panels. That has driven many utilities away from coal. Utilities that invest in new renewable-energy plants now can create very consistent earnings growth of 5% to 7% a year, up from 2% to 3% in the past, and pay annual dividends recently yielding an average of about 3%. My favorites now…

American Electric Power (AEP) is one of the largest utilities in the US, providing electricity to more than five million retail customers in 11 states. The stock is cheap, recently 20% below its February 2020 highs, and management is making a long-­overdue push into renewable energy. Recent yield: 3.58%. Recent share price: $82.48.

NextEra Energy (NEE) serves 5.5 million customers in Florida. Although its recent yield was just 1.9% because its stock rose nearly 25% in 2020 as of December 11, it’s the world’s largest producer of wind and solar energy, as well as one of the largest ­battery-based energy-storage companies. Recent share price: $73.28.

Medical-device companies: Patients have been reluctant to visit medical offices as the pandemic spread. As a result, profits sagged in 2020 for firms that create sophisticated health-care devices ranging from dental implants to cardiovascular stents. Device companies will do well as the coronavirus recedes and as the massive baby-boomer generation continues to age. My favorites now… 

Boston Scientific (BSX) is one of the largest makers of implantable medical devices, including pacemakers, stents, defibrillators and catheters. The depressed stock price, down 26% in 2020 as of December 11, makes it an attractive takeover target for a global health-care or pharmaceutical ­company. Recent share price: $34.

Envista Holdings (NVST) supplies more than a million dentists globally with dental implants, surgical tools, orthodontic products and digital imaging equipment. Recent share price: $32.31.

Financial-services firms: This was the second-worst-performing sector of the S&P 500 in 2020 through December 11 next to energy. Part of that poor performance is justified because ultralow interest rates hurt profit margins at banks. But investors have overreacted. The risks to banks are far lower than in the 2007–2009 financial crisis, and most are well-capitalized. As the economy improves, even a small rise in interest rates will boost their stock prices. My favorite now…

PNC Financial Services Group (PNC) is a regional bank with branches in 21 states. It gets little attention from Wall Street, but it’s flush with cash after selling its original $240 million stake in asset-management ­giant BlackRock last year for $17 billion. The dividend yield was recently 3.2%, and it is hunting for major acquisitions that could raise earnings growth. Recent share price: $143.99.

Consider nontraditional fixed–income investments. I keep about 11% of my overall portfolio in ­floating-rate bank loans. These overlooked bondlike securities are loans made by major banks to corporations with lower-quality credit ratings, typically BB or lower. They’re similar to junk bonds, with recent yields in the 4% to 5% range, but they have much lower default rates. Also, if interest rates rise in the next few years, these securities will do even better because they don’t have fixed payout rates as most bonds do. Instead, their payouts typically reset every 30 to 90 days, adjusting as interest rates change. Buying bank loans directly is challenging for small investors, but most top mutual fund families offer a bank-loan fund. I get access to some of these securities by investing in the T. Rowe Price Floating Rate Fund (PRFRX).