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T. Rowe Price's International Funds Are on the Upswing

Firm has been busy on the international front.

Bridget B. Hughes, 10/09/2007

If I told you that as recently as 2000 T. Rowe Price had little in the way of analyst support for its international offerings, would you believe me?

I wouldn't blame you if you didn't. After all, T. Rowe Price TROW was founded on the belief that investment research is critical. Further, its international-fund business is hardly a startup. By late 1999, T. Rowe Price offered 12 international funds to retail investors (and one aimed at institutions), including diversified portfolios and narrowly focused emerging-markets offerings. It managed more than $20 billion in assets abroad, landing it comfortably in the ranks of the biggest international-fund managers. T. Rowe Price International Stock PRITX is among the oldest foreign-stock offerings, and T. Rowe Price New Asia PRASX is the oldest Pacific/Asia ex-Japan fund today.

It wasn't exactly a shoestring operation. The stable of funds was managed by a joint venture, established in 1979 between T. Rowe Price and London's Robert Fleming Holdings. Nearly 20 regional portfolio managers divvied up responsibilities. But while the group could draw on Fleming's analysts to some extent, original research was left to the small group of managers. This smallness stood in stark contrast to the firm's U.S. operation, which prided itself on expansive in-house research.

For the most part, the foreign funds were okay. Like their domestic brethren, T. Rowe's foreign managers used a conservative-growth approach. The emerging-markets funds, in particular, were appealing because of a long-term investment horizon and moderate approach. But the shop's core funds were less inspiring. While T. Rowe Price International Stock and T. Rowe Price Global Stock PRGSX were decent, they should have been better, especially considering the important role they are designed to play in investor portfolios.

Opportunity Knocks
Good news came in early 2000. Chase JPM acquired Fleming, giving T. Rowe Price the opportunity to buy out Fleming's interest in the joint venture. With Fleming out of the picture, T. Rowe Price had room to grow overseas. It focused on the institutional business--and needed an infrastructure to do so.

T. Rowe Price began hiring. On the investment side, as it has stateside, it mostly favored young analysts, some of whom had previously served the firm as summer interns. Analysts stationed overseas now number about 30--up from essentially zero seven years ago. And although the big hiring push is over, more hires are in the pipeline.

Although the quantity of analysts does not automatically translate into quality research and strong returns, we are optimistic. For one, the same modus operandi has been successful in the United States, where the shop's U.S. equity research is among the best in the business. The firm has already built a well-respected team of global-sector analysts, who inform and collaborate with other analysts. And T. Rowe Price hired Kamran Baig in 2004 to serve as its director of non-U.S. equity research. One of Baig's main responsibilities is to regularly measure overseas analysts' performance.

That's not to say that there aren't holes. First, there's the training process and time needed to work up to a full assignment list. T. Rowe Price Japan PRJPX manager Campbell Gunn expects the Japan-stock team to be covering the fund's full investment universe by late 2007. T. Rowe Price European Stock PRESX manager Dean Tenerelli thinks it may take until deep into 2008. There's also the squishier issue of teaching old dogs new tricks. That is, getting seasoned portfolio managers, both on the international and U.S. sides, to trust new analysts. Baig can help here, but building those relationships will take time.PAGEBREAK

Fund Company Serendipity
Perhaps as important to T. Rowe Price's long-term potential on the international side as the boost in analytical fire power was the appointment of portfolio manager Rob Gensler on Global Stock in April 2005. Gensler is a great investor, who had previous success on T. Rowe Price Media & Telecom PRMTX and T. Rowe Price Global Technology PRGTX. His assignment was good news for Global Stock, and we quickly made the fund an Analyst Pick.

It's Gensler's ripple effects that have us optimistic about the rest of the international-fund lineup. When Gensler took the job on Global Stock, he insisted on looking at the portfolio through a "single lens." Previously it had been run essentially as four separate regional portfolios (U.S., Europe, Asia ex-Japan, and Asia), but as the world's economies, sectors, and firms have become more interconnected, that approach made less sense.

Gensler quickly showed how his "single lens" approach could work. Global Stock's performance improved immensely, and two other funds have since followed suit. New Asia moved to a single manager, who now covers both North and South Asia. Frances Dydasco, who has been on the fund since November 1996, now has full control of the fund.

Bigger changes are in the works on International Stock, the firm's oldest and largest foreign-stock fund. On Oct. 1, 2007, Bob Smith, formerly of the successful T. Rowe Price Growth Stock PRGFX, joined veteran Mark Bickford-Smith, an Asia specialist, on the fund. David Warren, who had picked Japanese stocks, is taking a non-portfolio-management role at the firm. Dean Tenerelli is focusing on T. Rowe Price European Stock. Smith and Bickford-Smith will work together applying a more holistic approach. But Smith is the ultimate decision-maker. International Stock's transformation comes as its five-year return lands near the foreign large-growth category's bottom third.

Gensler's reach goes beyond portfolio management. Although he did not move to London to hire or train analysts, we think his interaction with them will be good for shareholders. Gensler thinks of Global Stock as a best-ideas portfolio, and he is putting his stamp on the analyst team. Gensler is driven and thorough and has high expectations. We think he can execute. 

The Old Guard
Some veteran portfolio managers also give T. Rowe Price an advantage on the international front. We continue to be impressed with the shop's emerging-markets team. In fact, three T. Rowe Price emerging-markets offerings--T. Rowe Price Emerging Markets Stock PRMSX, T. Rowe Price Latin America PRLAX, and New Asia--remain Analyst Picks. Managers Chris Alderson, Gonzalo Pangaro, and Frances Dydasco, respectively, are all emerging-market veterans with strong records.

We also have faith in T. Rowe Price's corporate management. The firm earns an A for its corporate culture in Morningstar's new system of Stewardship Grades, based on its record of putting shareholders first. Its international funds are all reasonably priced, as well.

We see T. Rowe Price moving from a good international shop to a formidable one. Our Analyst Picks remain our top choices from the firm. We'd also suggest that investors take a look at T. Rowe Price International Growth & Income TRIGX, a foreign large-value fund that emphasizes diversification and dividends at a bargain price. We're not ready to pound the table for T. Rowe Price International Stock yet, but we are getting closer.

Bridget B. Hughes is a senior analyst with Morningstar.

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