T. Rowe Price and the Search for Assets

Asset management at scale is a very attractive business.

T. Rowe Price since 1993:

The top panel shows the change in — and tremendous level of — the net profit margin of the firm.  In the middle is the percentage change in revenues, displaying the obvious challenge:  weak markets lead to lower revenues.  At bottom, you can see that TROW has vastly outperformed the S&P 500 over this period, although it is roughly flat versus its relative peak in 2008.

Assets under management are now more than $1.6 trillion, about six times what they were in early 2009:

But other than a strong second quarter of inflows in 2020, organic growth in assets has been a challenge.  Aggregate flows have been fairly flat over the last three years, while assets are up 60%.

The company has been making moves to bolster assets.  It has introduced ETFs, starting with five semi-transparent equity products, which have had relatively modest flows.  Three bond funds debuted recently.

In addition, it has reopened its midcap funds, which have been closed to new investors for more than a decade.  The performance since that time:

PMEGX is the institutional version of the strategy and RPMGX is one class of the standard offering.  As is apparent from the chart, they move in tandem, with the difference in expenses contributing to the gap over time.

The combined assets for all of the classes of the two funds are shown at the bottom.  Additional context comes from a Morningstar update, which states that the strategy had more than $78 billion in assets in June, so other portfolios are to be found under this umbrella.  The article says that there have been outflows across the strategy of more than $11 billion in the last two years, the related selling for which has resulted in “larger-than-average capital gains distributions.”  Morningstar gives the funds its highest analyst rating of Gold.

The midcap strategy is one of six that will be moving to a new entity, T. Rowe Price Investment Management, which will be separate from T. Rowe Price Associates.

In general, T. Rowe Price has been known for producing good returns across its portfolios, the last decade of which (for its mutual funds) is summarized on page nine of the firm’s latest earnings release.  But, according to one sell-side analyst, “While T. Rowe has historically had best-in-class performance, results more recently have deteriorated.”  It remains to be seen if that is just normal variability or something else.

Some questions:

How big should a midcap strategy be to produce strong relative returns?

How big can an asset management firm grow and still maintain a culture of outperformance?

What will be the impact of cleaving part of the existing organization into a sister one?

In its most dramatic action of late, the firm announced that it is getting into the acquisitions game, buying private credit manager Oak Hill.  That fits with the moves of other managers who are trying to get some relief from the bruising competition and fee pressure in traditional asset categories by moving into hot, higher-margin ones.  Those aggressive moves don’t come cheap — and they face the risk of coming too late in a well-developed trend.

As they say, these are nice problems to have.  T. Rowe Price remains a highly-profitable, widely-admired firm.  But it faces the challenge of trying to build its pile of assets even higher, while delivering attractive results for its clients.