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A Year of Upgrades at T. Rowe Price

Katie Rushkewicz Reichart, CFA
Christine Benz

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Several T. Rowe Price funds have recently received analyst upgrades from Morningstar's team. Joining me to discuss these and other recent developments at the firm is Katie Reichart. She is an associate director in Morningstar's Manager Research Group.

Katie, thank you so much for being here.

Katie Reichart: Thanks for having me.

Benz: Let's start with the funds that have recently seen upgrades. Some sector funds recently got upgraded from Bronze to Silver. Let's talk about those two.

Reichart: We upgraded Global Technology and Media & Telecomms. And I think these are real areas of strength at T. Rowe Price and these funds have just done really well for many years, and I think it's partly the strength of the analyst team.

Benz: Let's talk about some of the broader growth funds that have been upgraded recently. A couple of upgrades from Neutral to Bronze as well as one from Silver to Gold. Let's save the Silver to Gold, but talk about the two that went from Neutral to Bronze.

Reichart: We upgraded Growth Stock from Neutral to Bronze. Joe Fath has run that for now about more than three years. I think growth is just such a strength that T. Rowe and with the analysts' inputs factoring in there, I think, that gives it a good chance of succeeding over the long run.

Benz: Blue Chip Growth is the one that is going to Gold. That's one I used to cover back in day. Larry Puglia has been running that fund for a long time. Let's talk about what prompted the upgrade.

Reichart: He is obviously really experienced. He has been the fund's only manager since its 1993 inception. He has obviously used the analysts' research well. Even when there have been points where the analyst team has changed or seen turnover, he has done incredibly well through various iterations of that team. He has taken some out of benchmark bets with some names like Alibaba and Tencent that have really paid off, and we think it's just a really solid option.

Benz: It's been a strong market environment for growth strategies overall. That has certainly been a tailwind for a lot of these funds. You've talked about technology and certainly, some of the growth-leaning funds.

Reichart: That's definitely true. But I would say they have also really done well in 2017 across asset classes. If you look at the numbers, you see more than half their funds beating the category averages really across the board.

Benz: Let's talk about that, because you brought some data. For a large firm, I think, some of these numbers are pretty impressive where--you can tell us, Diversified U.S. Equity, you've got about three fourths of the funds beating their peers. Is it the growth emphasis that's in play at some of the funds? Or what's driving returns there?

Reichart: I think, especially on the growth side, you are seeing top decile returns from a lot of those managers. One key point, not only beating their peers but also really beating the benchmark which has been tough for so many active managers to do, and a lot of those funds have done it consistently.

Benz: Let's go across the other asset classes looking at International Fixed Income as well as the Allocation funds. How are the funds doing relative to their peers?

Reichart: International Equity, about two-thirds are beating their category norms. So, that's good, and I think we have seen a lot of improvement the past five or 10 years on the global analyst team side as well. That's been driving some good performance. Fixed income is about 57%, and then allocation, it's about 80% beating their category averages. The target-date funds have done very well, tend to be a little equity heavy. That's obviously helped the type of market we have had in 2017.

Benz: Let's talk about some of the funds that have performed best. You touched on T. Rowe Price Blue Chip Growth as being a really stellar performer so far this year. What are some of the other funds that have been thriving?

Reichart: T. Rowe Price Emerging Markets is up about 40% through mid-December, so a top decile for its category.

Benz: Strong-performing category to begin with, yeah.

Reichart: Exactly. Yeah. The fund has gotten a little more concentrated in some of its top names since a comanager retired a couple of years ago. That's been a real tailwind with some of the names like Alibaba and Tencent and Samsung doing quite well this year.

Benz: Concentration is not something I associate with a lot of T. Rowe Price funds. They are usually pretty mild-mannered in terms of …

Reichart: Yeah. This one is still diversified. I think it was just a little bit in some of those really outperforming names that's made a difference this year especially.

Benz: Any other funds jump out at you as having particularly strong performance?

Reichart: I would say T. Rowe Price New Horizons, that one is up about 31% in the small-growth category. The thing there that's just really impressive is it's such a big fund. It's over $20 billion in assets, and it's closed to new investors but ... 

Benz: And invests in smaller companies, right? That can be an impediment?

Reichart: That can be challenging. Henry Ellenbogen, he has run it for about seven years, has done an incredible job despite the huge asset base and some of the liquidity challenges there. That one is rated Silver.

Benz: How about funds that have turned in disappointing performance so far in 2017?

Reichart: There's T. Rowe Price Dynamic Global Bond, it's down about 2%. That's a newer fund. It's been around just a couple of years. A little different of an offering for T. Rowe, still pretty young. I would say that manager is having a better year at International Bond where he has been in the top decile of that category.

Benz: No downgrades so far in 2017?

Reichart: No downgrades, yeah. I think we've just seen this general trend of upgrades at T. Rowe. I think, as I mentioned, we just have had increasing confidence in the analyst team, seen a pretty steady group there. They have really addressed any areas of weaknesses that they might have had. I think, we have a lot of conviction in the team.

Benz: One thing that you and I have been talking off and on about over the years has been manager change. We have seen some retirements at T. Rowe Price, including in the executive suite. Let's talk about that. Do you feel like the management situation has stabilized a little bit?

Reichart: I think so. I think if you look at the individual funds where you have seen changes, the strategies aren't changing dramatically when a new manager takes over. They have the long transition periods that generally help kind of smooth the transition. I think even from an executive standpoint, they have added some new people. They have a newer CFO, but he has been with the company for so long. I think they really are able to maintain a lot of continuity even as they try to make sure they are keeping up in this type of environment.

Benz: A lot of positive trends certainly to discuss. How about flows? Have investors gravitated to T. Rowe Price funds in recognition of some of the strong performance that you have been talking about?

Reichart: They have actually seen net outflows for the year-to-date through November. On the one hand, it's not surprising because they are an active shop. You just have that headwind.

Benz: Everybody wants passive right now.

Reichart: Exactly. But on the other side, if you are looking for active, they have consistently done well. It's a little bit of a head-scratcher in that respect. You just have such stability there and the costs are generally very reasonable. It is a little surprising to see.

Benz: When a firm has had sustained outflows like T. Rowe Price has had over the past few years, does that begin to affect how the managers run the funds? Are managers holding more cash than they otherwise would, for example?

Reichart: I don't think it's really been a problem. Some of the strategies are large-cap that are seeing outflows and those stocks are so liquid. Other strategies are honestly very big …

Benz: They were big to begin with.

Reichart: Outflows aren't terrible. The level of outflows is not concerning at all where I'm worried about it disrupting the investment process.

Benz: OK, Katie. Thank you so much for being here to discuss these trends.

Reichart: Thanks, Christine.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.