Fund Spy

America's Most Consistent Fund Family

Katie Rushkewicz Reichart, CFA

As one of the industry's premier fund companies, T. Rowe Price has made a name for itself by putting investors' interests firsts, maintaining a disciplined investment process, and consistently turning in peer-beating performances. The firm's success through the years has garnered plenty of attention and assets (it's now the sixth-biggest company in terms of mutual fund assets), but size hasn't slowed it down or caused it to stray from its founding principles.

T. Rowe Price's stability stems from its ability to attract and retain top talent. It's not unusual for investment professionals to spend their entire careers at the firm, starting out as analysts or summer interns during business school and ultimately becoming portfolio managers for long stretches. Many of the firm's top executives have come up through the ranks, including CEO James Kennedy, who joined the firm as an analyst in 1978, and Brian Rogers, T. Rowe's chief investment officer, who has run  T. Rowe Price Equity Income (PRFDX) since its 1985 inception. Unsurprisingly, T. Rowe Price's manager tenure and retention scores rates rank well above the industry norms.

When a manager change does occur, it's typically due to a retirement (save for the occasional exception, like Jeff Arricale's 2010 abrupt departure from  T. Rowe Price Financial Services (PRISX)). Retirements are often announced well in advance, allowing for a months-long transition period during which the incoming manager works closely with the departing manager. That was the case with two high-profile changes in 2010: Henry Ellenbogen replaced veteran Jack Laporte on  New Horizons (PRNHX) and Tim Parker took over for Charlie Ober of  New Era (PRNEX). More retirements are likely forthcoming in the next several years, but T. Rowe should continue handling them better than most firms in the industry.

The unexpected does happen, though. T. Rowe Price was caught off guard when fixed-income director Mary Miller left in December 2009 for a post at the U.S. Treasury. Her replacement, global head of trading Mike Gitlin, was somewhat of a divergence from the norm given that he had no past experience running money and had joined T. Rowe Price only in 2007. T. Rowe says he won the post based on his strong people-management skills, and his leadership allowed other fixed-income managers to continue focusing on investing.

Still, T. Rowe's talent is deep. Its global analyst team numbers in the hundreds and has had fairly good retention. Analysts' compensation can rival that of portfolio managers' if their work influences a lot of funds, so there's no widespread pressure to get on the manager fast track. That's led to a diverse team of experienced analysts, analyst/associate portfolio managers, and up-and-comers who might eventually be groomed for a lead-manager position. A firmwide mentoring program and formal performance evaluations allow analysts to discuss their interests and future career paths, and, as T. Rowe Price has expanded globally, some analysts (particularly on the fixed-income side) have taken temporary assignments overseas.

The stability of its investment personnel and deep analyst bench has allowed T. Rowe Price to maintain a successful investment culture through the years. Stock-picking, based on the firm's in-house fundamental analysis, drives the funds' strategies and performance, and it's proved remarkably good across the board, with strong fixed-income and equity offerings alike. Roughly 90% of T. Rowe's funds have beaten their respective peer groups during the past five years through Dec. 31, 2010, and three fourths have bested their category norms during a 15-year period. T. Rowe's emphasis on diversification and risk management mean its funds are often less volatile than peers. This risk-conscious nature helped the funds stave off huge losses during the financial meltdown; only 10% of its funds fell in the bottom quartile of their respective categories in 2008. Yet the funds aren't sluggish. In fact, the majority beat their peers during 2009's rally. The combination of good performance, reasonable fees, and strong management is the reason 24 T. Rowe funds are Morningstar Fund Analyst Picks, and the fact that several domestic-equity, fixed-income, and asset-allocation offerings are represented on the list speaks to T. Rowe Price's depth as an organization.

While T. Rowe Price has established itself as a powerhouse in the U.S., that status has not yet fully translated to its international side, which has undergone a major transformation during the past decade. In 2000, T. Rowe Price assumed full control of its joint venture with U.K.-based Robert Fleming Holdings, the operation behind its international funds since 1979. T. Rowe has spent the past 10 years gradually building out its global team, which has grown from a handful of analysts in 2000 to more than 40 today. There were some growing pains in the early years, but its foreign operations are now more established, with 10 offices outside the U.S. The firm has improved its technology platform to foster better communication among investment professionals worldwide.

There are some bright spots in T. Rowe Price's overseas lineup, among them Justin Thomson's  International Discovery (PRIDX) and Gonzalo Pangaro's  T. Rowe Price Emerging Markets Stock  (PRMSX). And T. Rowe Price took steps to fix a weak spot on its foreign roster, moving proven manager Bob Smith of  Growth Stock (PRGFX) to middling  International Stock (PRITX) in 2007. But there are signs the international bench is still not fully established. In July 2010, Jonathan Matthews, an energy analyst who joined the firm in 2008 and had no prior experience running a diversified fund, took over  International Growth & Income (TRIGX) (previous manager Raymond Mills still runs  Overseas Stock (TROSX)). It makes sense that there are some unfamiliar faces given the relative newness of T. Rowe's international team. However, it's hard to have confidence in an unproven manager right out of the gates, especially one who hasn't been at T. Rowe for long.

The bigger question pertains to how the firm will grow its global investing operation from here. It launched Global Large-Cap Stock (PAGLX) in 2008, Global Infrastructure TRGFX in 2010, and two institutional global funds in 2010, and it wouldn't be surprising to see more in the future. New global funds could mean more unproven managers at the helm. T. Rowe Price built up its international team in a reasonable fashion, but the next several years will be the true test of its success.

In T. Rowe's defense, it's not in the firm's nature to haphazardly roll out a bunch of new funds. Rather, the firm approaches its fund lineup with the same deliberate tack of its investment process, preferring to thoroughly research new ideas before making decisions. For example, the target-date funds added inflation protection and real assets components to its funds in mid-2010--later than some of its competitors, but allowing time for internal research to determine their necessity. Other launches during the past few years have included funds that fit nicely into investors' portfolios, including US Large-Cap Core (PAULX) and the well-diversified  Strategic Income (PRSAX).

While T. Rowe's thoughtful approach to its fund lineup is notable, asset growth is something to keep an eye on. T. Rowe typically has done a good job closing funds with burgeoning asset bases (most recently  Mid-Cap Growth (RPMGX) and  Mid-Cap Value (TRMCX)), but some of its small-cap funds, including New Horizons,  Small-Cap Stock (OTCFX), and  Small-Cap Value (PRSVX), are among the biggest in their categories. The managers have adeptly handled heavy bases thus far, but the real concern is how T. Rowe's fast-growing target-date funds will impact them (all three funds are represented in the lineup). Target-date funds accounted for 21% of the firm's mutual fund assets as of Sept. 30, 2010, and continue gaining in popularity. Even though the small-cap funds don't play a major role in the lineup, the situation bears watching.

Ultimately, it's hard to argue with the consistency T. Rowe Price has shown through the years. It came out on top of a Morningstar study of the 30 largest fund companies, which considered metrics such as performance, manager ownership, manager retention, and average manager tenure. And the firm has kept investors at the forefront despite its status as a publicly traded company. Managers write detailed shareholder letters discussing specific portfolio holdings--both winners and losers--and T. Rowe's website is among the best out there, promoting investor education. T. Rowe Price's stability should continue working to investors' advantage.


Katie Rushkewicz Reichart, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.