Navigating Winds of Change at T. Rowe

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. For a firm that has historically had very stable management, T. Rowe Price has recently seen a fair number of manager changes. Russ Kinnel recently wrote about that topic in Morningstar FundInvestor, and he is here with me today to talk about that topic.

Russ, thank you so much for being here.

Russel Kinnel: Good to be here.

Benz: Russ, let's take a look back and discuss some of the big manager changes that have affected T. Rowe Price over the past few years. Some of them have been very planned with a long lead time, and some of them have been more abrupt. Let's start with the abrupt changes--the people who have quit over the past few years.

Kinnel: We've seen people like Kris Jenner, on [T. Rowe Price Health Sciences (PRHSX)], and Joe Milano, on the New America Growth Fund (PRWAX), quit. Those are real surprises because they are kind of mid-career and because T. Rowe managers tend to stick around for most of their career. Also, it meant the transition was a little more jarring, a little more rapid than we're used to. We've grown accustomed to those long lead times where the change is announced 18 months or two years in advance. So, those are a little jarring.

Benz: Let's discuss some of the planned retirements. One of the biggies is happening at T. Rowe Price Equity Income (PRFDX) with Brian Rogers stepping down, but there have been some others as well. Let's talk about those.

Kinnel: That's right. Brian Rogers is set to step down from equity income in October of this year. That's another good example of one of those changes with a long lead time. Preston Athey stepped down last year from T. Rowe Price Small-Cap Value (PRSVX)--not a manager but the CEO. James Kennedy is going to step down next year as well.

Benz: You noticed that some of these planned retirements took place, as retirements commonly do, when these folks were in their early to maybe mid-60s. You took a look forward at some funds where managers have very long tenures--and that's something that we like to see--but when you look forward, within the next few years, maybe out to 2018, you see that potentially some of these folks are hitting that time in their lives when they might start thinking about retirement. Let's talk about some of those funds with those veteran managers.

Kinnel: That's right. Interestingly, there are four managers who will hit the age of 60 in 2018. So, as you say, certainly you wouldn't expect them to all retire on the same day, but it does mean that down the road we're going to see some retirements of some good managers. Brian Berghuis, who runs the Mid-Cap Growth fund (RPMGX); Greg McCrickard, who runs the Small-Cap fund (OTCFX); Shackelford, who runs the New Income fund (PRCIX); and Mark Vaselkiv, who runs the High-Yield fund (PRHYX). They're all very good managers running medalist funds, but I think it's worth understanding that those managers are getting closer to retirement age.

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Benz: You wrote about this in Morningstar FundInvestor, and I guess one thing that I came away with after reading the article was that, if I owned these funds, I shouldn't run from them. You don't think that there is any reason to pre-emptively sell them.

Kinnel: Not at all. For one, of course, we don't know that they'll retire at age 60. They seem to do early 60s at T. Rowe. But number two: They do typically have these long lead times on retirements because, of course, that's something you can plan well in advance. There is really no reason to rush. Let's say we hear in 2018 that this manager is going to retire in 18 more months and that this other person is going to take over. That's a pretty long lead time. So, looking back from today's perspective, I don't see a reason to rush. But I do think it's something to watch, both on an individual-fund level and firmwide, because there are some winds of change there at T. Rowe. We're going to see a generational shift.

Benz: One thing I know that you and the team have been watching is how this has affected our view of T. Rowe's stewardship. Historically, it's been a firm that we've held up as being a very good steward of shareholders' capital. Do you see all these manager changes as potentially affecting our view of their stewardship?

Kinnel: Well, we still have a very high view of them. They continue to do the right thing for investors. But one of the key parts of stewardship is culture, and part of culture is having that stability in management. So, certainly, I think they are in pretty good shape now; but with this generational shift going on, I think you want to watch it closely to see how it all plays out because things can change with the change of leadership. So, it's definitely something to watch closely in the next few years.

Benz: One thing that I have been watching--and I know you've been watching--is the potential tax implications when you have these manager changes and then you have the new manager making changes to the portfolio. There can be taxable capital gains. So, that seems like something that investors would want to keep an eye on if they own some of these funds in a taxable account.

Kinnel: That's right. Even if the strategy doesn't change, you may still see, say, a new manager at equity income who maybe has a different taste in their favorite equity-income names. So, I think there is that potential. And obviously, given how [far we are into the bull market,] it's certainly something to be aware of if you hold these in taxable accounts.

Benz: Russ, thank you so much for being here. T. Rowe Price: a presence in many investors' portfolios. Thanks for sharing the information.

Kinnel: You're welcome.

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