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Will T. Rowe Price Keep Making the Right Moves?

Five things we think the firm must do to stay on top.

In early 2000, a Morningstar analyst wrote that departing shareholders of  T. Rowe Price Equity-Income (PRFDX) were "overreacting." Like many value funds, the offering was going through a rough stretch, though its poor performance was less its own making, and more the result of investor sentiment.

But it wasn't only the firm's value-oriented funds that our analyst was defending at the time; across the board, the firm's funds, which stressed durability over streakiness, were being viewed by many as out of step with the times. Even a gain of more than 100% in 1999 wasn't enough to lift the firm's Science & Technology Fund out of the tech group's bottom half. As such, the sentiments of many investors were likely captured in a March 6, 2000, piece in the Wall Street Journal, entitled, "T. Rowe Pays High Price For Avoiding Tech Craze--Tradition-Bound Firm Stays On a Road Less Traveled, And Runs Low on Gas."

The rest, of course, is history. The market tumbled, T. Rowe's conservatism protected its investors, and since then the firm has been growing at a steady clip. But with growth come challenges--including the particularly thorny one of protecting a unique culture. So, how should the firm be looking to the future? For these and other questions, I made my way down to Baltimore with some colleagues last week. Here are five observations I came away with:

In With the New
The grooming of the next generation of investment professionals is essential--and T. Rowe Price is on track. While T. Rowe has been associated with such investment luminaries as Brian Rogers and Jack Laporte, the firm's crop of younger managers and analysts is a promising one. For instance, we're favorably disposed to  T. Rowe Price New America's (PRWAX) Joe Milano and think that  T. Rowe Price Growth & Income's  Anna Dopkin is putting in a solid foundation for a good run.

What's in It for Me?
While the firm has fresh blood, it's also imperative that it put a framework in place to keep younger investment professionals around for the long haul. This hasn't been as pressing an issue in the past because the firm was small and growing, so it was generally easy to find money management opportunities for up-and-coming analysts. But with a broad lineup now in place, it'll be tougher to create those opportunities at the same pace. Thus, there's a risk--which isn’t unique to T. Rowe Price--that younger analysts with money management ambitions may bolt.

As such, it's imperative that the firm creates a more defined "career-analyst" path and offers analysts the opportunity to manage pools of money. The firm says it is doing just that by taking steps to reduce the salary gap between managers and tenured analysts, and it's letting analysts run a pool of money. (They do that through analyst-run  T. Rowe Price Capital Opportunity (PRCOX) and $3.5 billion in nonfund money managed in the same way.)

A Global Affair
If the firm is going to keep up with deep-pocketed rivals,  T. Rowe International Stock (PRITX) must do better. It has been a decent--but far from great--offering at best. And the firm's domestic managers have relied on their international colleagues only moderately, a fact that could develop into a more meaningful issue as an increasing number of investors evaluate sectors on a global basis.

The crux of this problem lies in the fact that T. Rowe used to run its international operation as a joint venture. It now has full control of its international operations and as recently as last week, installed Kamran Baig as head of foreign research. (He was previously cohead of European research for Goldman Sachs Asset Management.) It's a sign that the firm recognizes the problem--and with Brian Rogers, the firm's CIO, also stressing the importance of international research, we'll be closely watching to see if real change materializes.

Consistency Is Key
There's no doubt that T. Rowe was able to stick to its investment strategy even though it meant foregoing meaningful inflows in the late 1990s because the firm is independent. All too often firms cave in to short-term profitability pressure at the expense of sound long-term investment strategies. As such, we think it's crucial that the firm remain independent. And signs are that it will; not only is the firm run by investment professionals, but there's a clear understanding that the firm is what it is today because it's stuck by its values. Things could change, of course, but for now we don't have any reason to be concerned on this front.

Talent Runs Deep
Top to bottom, T. Rowe Price remains an impressive investment organization. While T. Rowe needs to look to and plan for the future, it's important to note that it's also too early to usher out the old guard. Brian Berghuis, Mary Miller, and Preston Athey are among the most talented investors around. They don't seek the spotlight, but the work they do is first rate. While they--and the firm in general--will no doubt hit the proverbial rough patch again sometime, one hopes that investors will take it in stride this time.

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