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T. Rowe Price Thrives Despite a Tumultuous 2013

The firm remains on solid footing after some unexpected manager and analyst departures.

Katie Rushkewicz Reichart, CFA, 01/21/2014

On Dec. 31, 2013, Morningstar issued a new Stewardship Grade for T. Rowe Price. The firm's overall grade--which considers corporate culture, fund board quality, fund manager incentives, fees, and regulatory history--is an A. What follows is Morningstar's analysis of the firm's corporate culture, for which T. Rowe Price receives an A. This text, as well as analytical text on the other four Stewardship Grade criteria, is available to subscribers of Morningstar's software for advisors and institutions: Morningstar Advisor Workstation(SM), Morningstar Office(SM), and Morningstar Direct(SM).

T. Rowe Price has long provided a good experience for mutual fund investors. Its reasonably priced lineup includes many appealing funds that have experienced relatively little churn in investment strategy and management through the years. T. Rowe's disciplined and risk-aware investment process, which relies on in-house fundamental research, has consistently turned in peer-beating performances across the board. Of the 54 funds Morningstar's analysts rated as of December 2013 (which totaled roughly 82% of the firm's mutual fund assets), 47, or 87%, were Morningstar Medalists, and no fund received a Negative rating. The firm has historically been a model for how a large, publicly traded fund company can successfully operate without jeopardizing fund investors' interests.

Considering those high standards then, 2013 looks like a tumultuous year for T. Rowe, at least in one area. Not much went wrong on the performance side: Two thirds of its funds outperformed their respective categories, and long-term results remain stellar. However, the firm, known for its organizational stability, saw more departures than usual in 2013, including two highly regarded managers and five domestic-equity analysts.*

That most of the departures happened suddenly did not help matters; the firm has historically given fundholders ample notice of upcoming changes and has had the luxury of long transition periods. In February, 13-year manager Kris Jenner of  T. Rowe Price Health Sciences PRHSX announced he was leaving to start his own venture. And he took two of the firm's more-experienced health-care analysts with him, striking an even bigger blow to the team. Because he is a doctor by training, Jenner's background helped in analyzing complex biotechnology and pharmaceutical companies, which fed into T. Rowe Price Health Sciences and others across the complex, often with successful results. In fact, health-care picks such as Regeneron Pharmaceuticals REGN have been big contributors to many diversified funds in recent years, meaning the departures were felt well beyond the shareholders of T. Rowe Price Health Sciences.  

Three months later, Joe Milano of T. Rowe Price New America Growth PRWAXannounced his resignation. Milano produced a strong record during nearly 11 years at the large-growth fund but wanted to strike out on his own to start a mid-cap hedge fund, a market-cap range that played a limited role at T. Rowe Price New America Growth. While he didn't run one of the firm's biggest funds assetwise, his thoughtful nature, hands-on approach to research, and interest in instilling T. Rowe's investment process in analysts made his presence at the firm invaluable. 

The departures were unusual given that most manager changes at T. Rowe are driven by retirements and are well telegraphed in advance. (For instance, longtime manager Preston Athey of T. Rowe Price Small-Cap Value PRSVX announced his June 2014 retirement in August 2012.) That Jenner and Milano both left to start up their own shops also raises the question of whether T. Rowe has become too big and bureaucratic, getting away from the small-company mentality that prevailed years ago when it was smaller. The firm has added management layers over time, perhaps necessary given its tremendous growth. Indeed, in the past 20 years the firm has had net outflows in only one year calendar year--2000--and it's now the industry's sixth-biggest fund manager.

Still, there's not necessarily reason to think the firm's culture is deteriorating or that there's significant flight risk for other managers (besides retirements). Many of the firm's longest-tenured managers are likely to stick around given that they've produced strong long-term records, are well compensated, and work at a stable and collegial organization. Branching out and starting a new venture--particularly for managers closer to the end of their careers than the beginning--is not extremely likely, and it's hard to imagine them fleeing for another large competitor. The fact that the firm is in a strong financial position and that T. Rowe Price Group's TROWstock--a part of portfolio managers' compensation--has performed well doesn't hurt, either.

Flight risk may be more of a concern on the analyst team, which, given the firm's history of promoting from within, presumably includes the next generation of managers. Occasional turnover is expected for the roughly 200-member global analyst team, but experiencing five departures on the domestic-equity side in 2013 was unusual. A weak intern class in 2012 meant the firm didn't have the back-fill it normally does, which particularly hurt after Jenner and two health-care analysts exited. T. Rowe has since filled those slots by promoting the most experienced team member to manage T. Rowe Price Health Sciences, moving a technology analyst over, hiring externally, and adding an extra "team analyst" for general support. While the health-care team is fully staffed, the members are still ramping up and adjusting to coverage changes, so it's not as strong as before.

Katie Rushkewicz Reichart is a senior mutual fund analyst with Morningstar.

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