What T. Rowe Price's Split Means for Fund Investors

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. In late 2020, T. Rowe Price announced that it was splitting its investment research organization into two, launching T. Rowe Price Investment Management sometime next year. Joining me today to talk about the split and what it means for T. Rowe Price investors is Russ Kinnel. Russ is Morningstar's director of manager research and editor of Morningstar FundInvestor.

Hi, Russ. Thanks for being here today.

Russ Kinnel: Glad to be here.

Dziubinski: First, let's back up and talk a little bit about what is T. Rowe Price doing and why is it doing it.

Kinnel: It's really an unusual story here. T. Rowe is essentially pulling a number of funds and analysts and managers out of their main group and starting a separate investment entity. And really, the idea is to manage capacity, and it's kind of along the lines of what we've seen Capital Group, aka American Funds, do. They've split multiple times. T. Rowe is just doing this one split, but it's something that's going to be in the works for a while. It's not something they're going to flip the switch on. It's going to take a while to make these splits and to build up redundant analysis, et cetera, and systems, so that when they do flip that switch, they'll be able to hit the ground running on both groups.

Dziubinski: Russ, six strategies are moving over to this new entity. Which six are there?

Kinnel: It's Mid Growth, Capital Appreciation, Small-Cap Stock, Small-Cap Value, U.S. Smaller Companies Equity, which is sold to investors outside the U.S., and T. Rowe Price U.S. High Yield--and to be clear, that's not T. Rowe Price High Yield, which is the giant fund everyone knows; it's U.S. High Yield which is run by an entity they acquired recently.

Dziubinski: Got it. So, what are some of the pluses to this move, both to the strategies that are moving to the new entity and the strategies that are remaining behind?

Kinnel: Well, it's a way to manage capacity because a firm has capacity limits in terms of how much of an individual stock they can trade, but also in terms of, say, an analyst recommends a stock and if you have a bunch of managers buying that stock, then that can drive up the price on the stock, maybe not all funds get as big a position as they want. And then, conversely, when the analyst downgrades, then a bunch of them might sell at the same time. And so, the idea is to build out some redundant coverage so that each of these teams will have their own small-cap analysts, tech analysts, healthcare analysts so that you will over time presumably see greater differentiation as they own different holdings, and that will presumably allow them to manage capacity a little bit better. Maybe it will have greater ability to run more money. You may notice that a number of the funds I mentioned are closed to new investors. So, of course, they're impacted by that. And of course, there's also a bit of a small- to mid-theme to these picks as well, because again, it's harder to run small-cap funds to scale. So, the idea is to have that scale, and that's sort of similar, as I mentioned, to a Capital Group/American Funds has managed. So, Capital Group/American Funds has done a few other steps as well. And T. Rowe not going that far. T. Rowe is not going to have six managers on the fund the way American Funds does.

Dziubinski: So, let's look at the opposite side of things then. What are some of the challenges that could present themselves here?

Kinnel: Well, I think, you really need a lot of resources to pull this off. It's not something you'd want to do when you're strapped, because you think about hiring a number of tech analysts or small-cap analysts, and, obviously, T. Rowe doesn't want to simply hire a bunch of people right out of college, right? They want the support for these funds moving to the new entity and the older entity, they want them to have as good support as in the past. So, you've got to hire some very good analysts. But let's say, the analyst on, I don't know, coal industry or software, let's say, the analyst on one of these entities isn't as good as the analyst over here. Of course, that hurts, right? Because it means then some of them may not be getting as good of support. So, that's one of the potential issues. Also, managers who may have bounced ideas off a favorite analyst or a favorite manager may no longer be able to do that. The idea is to have these groups operate more or less autonomously. In other words, they can't share ideas across the line. And so, there really are some challenges. It's not without downside. Now, I think because T. Rowe Price is such a big and successful firm and they've got such a good record at hiring and training analysts, I have a fair amount of confidence in their ability to do this. But there's definitely trade-offs on both sides of the issue.

Dziubinski: So, at the end of the day, if someone is invested in T. Rowe Price's funds, should they be looking at this as a good or a bad thing that's happening?

Kinnel: I think it's a good thing. I think T. Rowe is definitely doing it with investors in mind. But it's a marginally good thing. If executed well, it should make things better. But as I said, there are trade-offs. So, it's probably something at the margin, and I think it will be something we'll obviously want to track closely as they draw closer to actually making this move.

Dziubinski: Well, thanks Russ for us for putting this development at T. Rowe Price in perspective. We know that a lot of our viewers own their funds. We appreciate your time.

Kinnel: You're welcome.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thank you for tuning in.