T. Rowe Price in 2021 and Beyond

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. 2021 was a year of change for T. Rowe Price. Here to talk about T. Rowe Price in 2021 and what you might see from the firm in 2022 is Adam Sabban. Adam is an analyst with Morningstar's Manager Research group, and T. Rowe Price is among the fund families he follows.

Hi, Adam. Nice to see you.

Adam Sabban: Nice to see you, too.

Dziubinski: So, let's start things off by talking a little bit about fund flows and T. Rowe Price in 2021. How did flows look and why do you think they were what they were.

Sabban: We've got data from T. Rowe Price through the first three quarters of 2021, and over that stretch, they've had about $6 billion of net client outflows. Now, while that's a negative figure, more broadly, over the past five years, generally they've experienced positive inflows over most quarters, which is quite an accomplishment, I think, for an active manager, given how hard it's been for active shops to retain their assets and even moreso for firms like T. Rowe Price, which have significant assets in equity strategies which have been under the most pressure from the switch to passive investments. And so, while generally they've handled things better than most, they're still seeing some pressures on that front and year-to-date, equity strategies have been the source of the majority of the outflows that we've seen.

Dziubinski: So, speaking of equity strategies, let's talk a little bit in broad strokes about the performance of T. Rowe Price's equity funds this year. How did they stack up relative to their peers?

Sabban: Sure. So, using data through the end of November, about 45% of T. Rowe's equity funds placed in the top half of their peer groups. Now, that's quite a bit lower than last year in 2020 when about 68% of funds finished in the top half of their peer groups. What explains the change? Really both the U.S. equity and international equity strategies performed on average a few ticks lower this year versus last year. Sector equity funds, on the other hand, performed quite well in 2020 and in aggregate have replicated that performance in 2021. While this year isn't quite as strong as last year, T. Rowe's equity lineup still has some of the best track records over the long term. And so, I think investors should keep that in mind.

Dziubinski: Were there any notable outperformers?

Sabban: One that sticks out is T. Rowe Price Small-Cap Stock, which is managed by Frank Alonso. The story here is really one about allocation more so than anything else. While the fund does fall into the small-cap growth Morningstar Category, it tends to shape its portfolio more similar to a blend fund, which means that it often has larger stakes in areas like financials and energy, which are more value-leaning sectors, and those have certainly been the stronger performers this year, and that's really driven the results.

Dziubinski: And how about on the flip side? Has there been a notable laggard?

Sabban: Yeah. I'd say T. Rowe Emerging Markets has been a laggard in terms of its allocation. I think it's faced some headwinds there as it typically treads a little bit more lightly in the cyclical sectors, which again have been where the good returns have accumulated in 2021. But stock selection has also been a detractor, particularly in an area like China, which actually has been a strong spot for the fund historically, but into 2020 and into 2021, picks like Alibaba, Tencent and even the Chinese educational stocks such as TAL Education, which have had really strong downdrafts, has been a detractor. And so, you put those two together and it's been quite a challenging year. But even still, over the longer term, the fund still sports a pretty good track record.

Dziubinski: So, T. Rowe announced a couple of high-profile manager changes this year, the first being Larry Puglia at Blue Chip Growth and also David Wallack at Mid-Cap Value. What do we make of those changes?

Sabban: Yeah, these are two really high-profile transitions that have some similarities and some differences. In terms of what they share in common--both were run by a sole portfolio manager for roughly two decades. Both had put up tremendous track records. The funds each carried at one point a Morningstar Analyst Rating of Gold and were really among the top options in their categories. But there are some differences.

When you look at T. Rowe Price Blue Chip Growth, Paul Greene is the manager who is stepping up on that fund, and he was an already quite an influential analyst covering some of the largest and most prominent stocks in the large-cap growth universe, which featured prominently in the fund, and he also brought some portfolio management experience overseeing T. Rowe Price Communications & Technology, which he did very well on. And so, I think it wasn't too surprising to see him step up. So, that was kind of understandable.

But it's a totally different situation for T. Rowe Price Mid-Cap Value. On that fund, David Wallack, who has similarly put up great results over about two decades, will be stepping down. But there isn't quite as obvious a successor as there was for Blue Chip Growth. In this situation, Vincent DeAugustino, who was a financials analyst, is stepping up to the plate. But unlike Green, he doesn't have a track record of his own, and so, it's a little bit more uncertainty on this fund. And so, that's reflected in the Morningstar Analyst Ratings. Whereas for Blue Chip Growth, its People rating was marked down from High to Above Average to reflect that transition, but overall, we still really like that fund over the long term, and it remains a Morningstar Medalist. But for Mid-Cap Value, its Pillar ratings were dropped from High to Average, reflecting the greater uncertainty, and its Morningstar Analyst Rating dropped from Gold to Neutral. So, two high-profile transitions but different circumstances surrounding them.

Dziubinski: And then, speaking of high profile, T. Rowe Price also announced that its CEO was retiring and someone new was stepping in. Let's talk about that transition.

Sabban: Sure. So, the current CEO is Bill Stromberg, and he announced that he will be retiring at the end of the year. And T. Rowe Price subsequently named Rob Sharps, who was the group CIO and head of Investments, as his successor. Now, Sharps is a former portfolio manager just like Stromberg. And so, T. Rowe is kind of continuing the trend of installing investors at the top of the company, and so I think there will be a consistent voice at the top. What does it mean more broadly? Based on how T. Rowe has communicated things around the transition, I think it's more of a situation where you have kind of a passing of the torch from one generation to the next, rather than an overarching strategic shift. And so, I think when we look at the long term of the company, I still think things should be fairly consistent.

Dziubinski: Now, T. Rowe Price also made an acquisition in 2021, which T. Rowe Price doesn't do very often. They acquired Oak Hill Advisors. What do we think of that acquisition?

Sabban: Yeah. So, it's definitely a rarity for the firm, but this acquisition does stand out. Oak Hill Advisors was a specialist in private credit strategies, which is an area where T. Rowe doesn't really have a foothold, so certainly a venture on that front. I think when T. Rowe looked at the acquisition, I think they saw a path for growth in terms of future asset growth, but also a way to diversify their asset base and gain exposure to an area of the market that isn't really seeing the same types of fee pressures and competition from passive alternatives as they're sitting on their equity business. I think, additionally, T. Rowe has pledged seed capital to help incubate future strategies to be launched alongside Oak Hill. And so, I definitely think this would be something to watch in the future.

Dziubinski: And then, T. Rowe also made a little bit of a push into active ETFs this year. Tell us about what happened.

Sabban: T. Rowe isn't certainly new to the ETF scene. They first launched their first ETFs last year, which were equity ETFs. This year, they've launched fixed-income ETFs. And really, the firm's strategy so far has been to launch ETFs that are essentially replicas of existing open-end mutual fund strategies. And so, last year, for instance, a Blue Chip Growth ETF was launched that mimics the mutual fund, and they're kind of applying the same playbook this year to fixed-income strategies, so essentially giving investors another avenue to access their funds.

Dziubinski: Now, Adam, I know that we at Morningstar aren't necessarily in the business of predictions, but I'm going to ask you anyway. What are some of the things investors might expect from T. Rowe in 2022? Most notably, the firm is splitting its research team into two, and maybe we can talk a little bit about what the impact of that might be next year.

Sabban: Yeah, that's definitely the big-ticket item for 2022. It's certainly been a large undertaking for T. Rowe Price. And kind of in a nutshell what's happening is T. Rowe is splitting up into two distinct and independent research entities. And they're going to be essentially siphoning off six strategies into this new entity, which will be known as T. Rowe Price Investment Management, and those include some prominent funds such as T. Rowe Price Capital Appreciation, Mid-Cap Growth, Small-Cap Stock, Small-Cap Value, US Smaller Companies strategy, and a U.S. high-yield fund.

Now, why are they doing this? Well, the positives are that it's going to give both business units greater leeway to invest in small and mid-cap stocks, which is certainly a positive. But it does bring some challenges and changes. If you're a portfolio manager or an analyst and you're used to collaborating with colleagues who are now on the other side of the business, those research pathways are gone. There's essentially a firewall that is in place in between the two business units to ensure their independence. And so, I think that is a change. That being said, T. Rowe has put a whole lot of planning into this and thought, and they've certainly done a lot of hiring, particularly in terms of research analysts, to ensure that there's continuity of coverage across both business units and that portfolio managers have the resources that they need to continue to be effective managers. And so, I think they've handled things prudently, but it's also the type of thing where it's difficult to know how it will shake out until 2022 when the split actually goes through. And so, I'm certainly eager to see how these strategies will perform in these new environments.

Dziubinski: And we'll certainly be talking to you, Adam, in 2022 to find out how things are going for them. We appreciate your time today.

Sabban: Thanks so much.

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