Profiting From the Long View
Once derided by Wall Street as too stodgy, T. Rowe Price now serves up sexy returns
At the start of this decade, Wall Street began writing T. Rowe Price's obituary. A first draft appeared in the Wall Street Journal on March 6, 2000. "The gears of the investing machine that helped make T. Rowe one of the nation's 10 biggest mutual fund firms have gotten stuck," the story concluded. Investors were then in the final ardor of their torrid love affair with highflying technology stocks—a passion that portfolio managers at T. Rowe Price never quite shared. With only half as much tech exposure as their most aggressive rivals, many funds run by this stodgy Baltimore investment management firm—it turns 70 this year—lagged behind the competition at shops like Janus or Invesco.
Just days after the article appeared, the Internet bubble burst, giving way to the worst bear market in a generation. And while investment managers who had fattened up on tech slimmed down fast, T. Rowe Price is now bigger than ever, thanks to its stubborn conviction to invest for growth, but only at a reasonable price. Since the bear market ended in 2002, total assets under management at T. Rowe have more than doubled, from $141 billion to $350 billion this spring. Investors aren't just flocking to the company's funds; they seem to love the stock, too. Shares of T. Rowe Price have risen 27 percent a year on average for the past five years vs. 8.5 percent for the S&P 500, representing the broader stock market.
To be sure, T. Rowe isn't the largest player in money management—not by a long shot. Based on total global assets under management, T. Rowe Price ranked 28th among the world's largest money managers at the end of last year. It's not even the splashiest investment firm in Baltimore. That honor goes to rival Legg Mason, whose 35-story office tower—emblazoned with its logo—soars above the nearby structure housing T. Rowe, which doesn't tout the company's presence. Yet for the past three years, its funds ranked in the top 10 when it comes to attracting new assets, according to Financial Research Corp. So far this year, it's in the top five.
And although T. Rowe likes the low-key approach, its bosses aren't pushovers. About a year and a half after the tech meltdown, T. Rowe Price executives contacted the Wall Street Journal. "We said, 'Maybe you guys should do a follow-up to that story,'" says Edward Bernard, T. Rowe Price's vice chairman. "Their response was, 'Boy, you guys have a long memory.'"
Untainted. It's that long institutional memory—and a surprisingly long-term approach to money management—that serves as a cornerstone of T. Rowe Price's recent success. It was also one of the few mutual fund companies that totally avoided any hint of controversy during the market-timing and trading scandals in 2002 and 2003. In fact, when Dalbar, a leading financial services consulting firm, attempted to study the aftereffects of those scandals on the fund industry, "we made a huge mistake," says Dalbar President Lou Harvey. "We left T. Rowe Price completely out of the study." Why? "Because T. Rowe Price's name didn't appear anywhere in the headlines during those scandals," he says.
Though T. Rowe Price is based outside the nation's money management corridor, which runs from New York to Boston, it has a remarkable track record in attracting and retaining some of the industry's best talent. The average tenure of a mutual fund manager is only around four years industrywide, according to the fund tracker Morningstar. At T. Rowe Price, the typical manager has been running his or her portfolio for nearly seven years, while having spent around 13 years at the firm.
The bosses are vets, too. The average member of T. Rowe's management committee, which oversees the firm's strategy, has been with the company for 24 years. This includes the firm's newly installed three-headed leadership team, with James Kennedy as chief executive, Bernard as vice chairman, and longtime fund manager Brian Rogers, who continues to run the much-heralded T. Rowe Price Equity Income fund, now chairman of the firm.
Part of this is due to the company's culture. The last time T. Rowe poached a truly experienced portfolio manager from another firm was in the early 1980s, says Kennedy. "It didn't work out," he says, "and we have long memories here." Instead, most of T. Rowe Price's fund managers and analysts are either home-grown or receive the bulk of their experience at the firm.
T. Rowe Price is also able to hang on to the talent it develops through an incentive program that's option intensive—and that rewards managers and analysts not on quarterly performance but on their long-term track record.
This experience and mind-set certainly helped T. Rowe navigate the last bear market. Between the start of the tech-stock bust on March 13, 2000, and the end of the bear market on Oct. 9, 2002, the average domestic stock fund managed by T. Rowe did fall, but only 13.6 percent a year, according to Morningstar. By comparison, the average domestic stock fund not managed by T. Rowe lost considerably more: 17 percent.
Even after the bear went back into hibernation, T. Rowe Price funds kept beating the competition. Between the start of the current bull market on Oct. 10, 2002, and the end of 2006, the average U.S. stock fund managed by T. Rowe Price returned around 21 percent a year—versus 18.7 percent for the rest of the industry.
Go-go years. T. Rowe clearly benefited from past mistakes. A lot of investors don't remember, but T. Rowe Price used to be considered an aggressive growth stock investor in prior decades. In fact, says Bernard: "We were Janus in the 1970s." But that growth strategy got creamed by the bear market of 1973-74. It wasn't until 1980 that T. Rowe Price was able to get back to the asset level it enjoyed before the '73-'74 bear.
The firm learned that no matter how much it liked a particular strategy, it needed to spread its bets more broadly. That damaging downturn also convinced execs that "you need to have people in place who have seen various cycles in the market," Bernard says. One of the firm's better-known funds, T. Rowe Price Capital Appreciation, holds the unique distinction of being the only domestic stock fund in the industry that has not lost money in the past 16 calendar years.
"The one thing you can say about T. Rowe is that their investment approach seems to be very well managed," says Geoff Bobroff, president of Bobroff Consulting.
And counterintuitive, too. Case in point: the struggling home-building sector. With the continued drop in home prices, shares of home builders have been the absolute worst-performing industry group so far this year, according to Morningstar, with average losses of nearly 19 percent. Yet late last year, Brian Rogers began buying some beaten-down home builders for his Equity Income fund. For example, his fund currently holds small stakes in the home builder D. R. Horton along with Masco, a maker of products for home construction and improvement.
"We're industry agnostic," says Rogers, explaining the fund's philosophy. He notes that his stakes in both companies are small, relative to other holdings in the $26 billion fund, "because we have no idea when the sector is likely to turn." But he's willing to give solid companies that recently met with disappointing news a few years to right their ship.
Drowning in cash. As a business, T. Rowe Price has taken a similarly long-term view. Often, when certain funds do exceedingly well, a torrent of cash rushes into those portfolios, as investors try to get a piece of the action. Yet too much cash flooding into a fund too quickly can often cool down its performance, since it's hard for a manager to put a huge chunk of cash to work effectively all at once.
That's just what happened to T. Rowe Price after the bear market: Investors who were burned by more aggressive fund companies started to pile into several T. Rowe Price portfolios. The company's response to this influx of new money? In the fourth quarter of 2003 and the first quarter of 2004, T. Rowe Price actually closed several funds to new investors in hopes of protecting its existing clients. Those portfolios had accounted for around 40 percent of the company's net mutual fund inflows in 2003.
The company's cultivation of long-standing relationships helps explain why T. Rowe Price has become a leading player in the 401(k) industry. It ranks seventh among companies that run defined-contribution retirement plans, according to Pensions & Investments, an industry trade publication. It was also one of the early entrants into the 529 college savings universe, administering Alaska's and Maryland's plans since the start of this decade.
Of course, none of this is considered sexy in a market fixated on hedge funds and private-equity investments. But that's T. Rowe Price's style. As Morningstar fund analyst Chris Davis puts it: "They don't dazzle you, but their steady-Eddie approach shines over time."
This story appears in the June 25, 2007 print edition of U.S. News & World Report.