Are Manager Changes at T. Rowe Price Cause for Alarm?

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. T. Rowe Price has recently seen a succession of manager changes which could have longtime investors in the firm's funds scratching their heads. Joining me to provide a recap of what's going on at the firm is Katie Reichart. She is a senior analyst with Morningstar.

Katie, thank you so much for being here.

Katie Reichart: Thanks for having me.

Benz: You've been our T. Rowe Price expert for several years, so I'm excited to have you here to talk about these manager changes that we've seen, talk about some of the flow trends that we've seen with a lot of concentration in the target-date lineup. But let's start with the manager changes. The most recent, kind of a surprise to me anyway, was hearing that Greg McCrickard was going to retire from the Small-Cap Stock fund. Let's start with that one and talk about what's going on there.

Reichart: Well, Greg McCrickard has run T. Rowe Price Small-Cap Stock for almost 24 years. He has had a great career at that fund and he is stepping back. He will still be around T. Rowe kind of mentoring some of the younger analysts. So, you see a retirement like that, it is a loss for shareholders. He was very experienced and did a good job.

Benz: I'm a shareholder.

Reichart: And at the same time though you think, well, you're going to see some of these managers approaching retirement age and it's going to happen at one point or another. So, we saw Frank Alonso, who is associate portfolio manager there since 2013, be named successor. So, you see a little continuity there. We did downgrade the fund to Neutral though, just as we kind of see how Frank Alonso makes the transition.

Benz: So, he has not run a diversified portfolio up until now?

Reichart: He has run a small- and mid-cap portfolio for non-U.S. investors and he has had good results there. He has only run that since about 2013, so relatively short amount of time and so not quite a pure small-cap focus. And he is also taking on a lot more in assets here, a strategy of over $10 billion in assets.

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Benz: So that Neutral rating, if I'm an existing shareholder, what should I make of that in terms of deciding what to do with the fund?

Reichart: Well, I think there is some consistency there. I wouldn't say you need to go and sell your shares immediately. I don't expect the strategy to change too much and generally, the role in the portfolio will remain the same for investors. So, it's more of just we're kind of watching and see how he adjusts, but it's not a run-for-the-exit situation at all.

Benz: Let's talk about another fund. This is the Institutional Large-Cap Growth product; it also has seen some manager turnover.

Reichart: Yeah. Rob Sharps has run that fund with a great record for 15 years and he was promoted to become to part of T. Rowe's corporate management committee and become co-head of global equities. So, he is staying with the firm. It is a disappointment for existing shareholders. He has done a really good job there. But they took Taymour Tamaddon, who has run the Health Sciences Fund, for a few years and promoted him to this large-growth fund. So, again, a downgrade to Neutral as we just see how Taymour Tamaddon settles in, since he hasn't run a diversified fund before.

Benz: So, the Health Sciences Fund is also seeing a manager change as a result of that switcheroo?

Reichart: Yeah, and that fund has seen a few changes. Kris Jenner left in 2013 and now, you see a change this year. So, there's some changes in the healthcare side and we're kind of watching that. But you see performance has continued to be very strong even as they've had to rebuild the team a little bit.

Benz: The last one I want to hit on in terms of the manager changes is New America Growth. Not a large fund, but a fund that in the past at least under a previous manager we did have as a recommended fund. Let's talk about that one. It, too, has seen a manager change recently.

Reichart: And this fund was recently rated Bronze. It was downgraded to Neutral with the most recent manager change announcement. Dan Martino, he had done a good job in his short tenure there, but he is just taking on new role as an analyst and Justin White was promoted to run that fund. So, another fund that we've seen a little more manager changes than usual. So, we're watching it closely.

Benz: So, I guess, a bigger-picture question though, Katie, is we have seen this series of manager changes going on for, I don't know how long, three, five years, where we've seen a number of funds lose their managers, and I think investors in the firm's funds maybe just one fund or more than one fund might be sort of saying, is there something larger going on at the firm? And I know that you and the analysts are in frequent contact with the T. Rowe Price managers and you do these onsite visits. But let's talk about sort of that big-picture question about all these manager changes. Should investors be concerned?

Reichart: Well, it has been a lot of changes for T. Rowe after a period of not having a lot of manager changes, and there were a few unexpected ones that occurred earlier in 2013. Now, you're seeing some more that are--you can't really blame them for managers retiring after long careers or being promoted to other roles at the firm. So, I think you take it on a case-by-case basis. I don't think there is a systematic problem at the firm leading to all this turnover. But we are keeping a close eye in some of these areas, like small-cap you've seen very experienced managers, Greg McCrickard and then Preston Athey, a couple of years ago retiring. So, we're seeing a changing of the guard and it's just something to watch. It doesn't mean the new managers won't be successful. You see Henry Ellenbogen of New Horizons on the Small Growth side, he has done phenomenally well and he was a newer manager …

Benz: Just kind of couple of years ago.

Reichart: Exactly. So, there is a changing of the guard, and I think T. Rowe does a good job of succession planning, thinking out different scenarios for shorter term or more abrupt changes and longer-term plans. They spot up-and-comers, and I think they work to really develop those people at the firm.

Benz: Another issue I want to cover with you Katie is the fact that a lot of the flows into T. Rowe Price funds have been quite concentrated in its target-date series, which I know that you and the team like quite a bit. You think they are among the best target-date funds out there. Let's talk about that issue. I guess, if flows are going to go into any one type of product, target-date funds are probably the healthiest place for them to go. But let's kind of unpack that issue and discuss whether there are any potential concerns related to that issue.

Reichart: Well, target-date is a huge part of T. Rowe's business. I think in 2015 it was about 28% of the firm's mutual fund assets and you look at a year like 2015, and they probably would have seen outflows firmwide if it weren't for the inflows coming in from target-date assets. But like you said, that's kind of sticky assets. So, I think you're not going to see a lot of investors coming and going there.

The one issue is, some of the funds in the target-date series are closed to new investors. They are still seeing inflows though from the target-date series. So, I think longer-term T. Rowe is really thinking about that. You have some of the small-cap and mid-cap funds that have been closed for years; it can only push them so much in terms of assets and capacity. So, T. Rowe did announce that they could start using a small- and mid-cap index in the series going forward in small doses, and that might be a way to handle capacity. On the other hand, it's philosophically not quite T. Rowe-like. I mean, they've gotten a big edge from their fundamental stock-picking, especially on the small- and mid-cap side.

Benz: And they are not especially known for having very low-cost index products, right?

Reichart: Exactly, yeah.

Benz: Another thing I want to cover with you is the new series of quantitatively driven funds. Let's talk about that. That does look like an area that T. Rowe is looking to build out. Let's talk about that and also, are they showing up in the target-date funds at this point?

Reichart: So, T. Rowe recently renamed Diversified Small-Cap Growth as QM Small-Cap Growth Equity, and they also announced that they are launching QM U.S. Value Equity, QM U.S. Small- and Mid-Cap Core Equity, and QM Global Equity. So, they are building out their quantitative efforts. I would say the Small Growth Fund, that manager has been running the fund for about 10 years with a really good record and that fund is rated Silver. So, they have shown that they have some edge in this …

Benz: And that has been quantitatively run.

Reichart: Yes, that's a quantitative fund with a little bit of fundamental input. So, they have shown that their models work and they have built up the team the past few years in terms of quantitative analysts. Philosophically again, it is interesting for a shop like T. Rowe to be going this direction. But I think when you think about their capacity constraints, when they think down the road, this is kind of another avenue for them to grow and these funds might have less overlap with some other fundamental funds just given the universe is so much bigger for quant funds.

Benz: So, let's just connect the dots with quantitatively driven funds. Why are they more able to handle asset growth than maybe the fundamentally oriented funds are?

Reichart: Right. So, I think the quant funds, they have a wider pool, they can cast a wider net of investment ideas and so they are not--if they launch another small-cap fund that was purely fundamental, the analysts would probably still be making the same picks and they'd be trying to go into all those funds and that wouldn't really solve the capacity issue. So, this is one way where they can kind of take a slightly different approach and perhaps have fewer capacity constraints.

Benz: Katie, I know T. Rowe Price has long been a firm of high interest to Morningstar.com readers and viewers. Thank you so much for being here to provide such a thorough recap of what's going on.

Reichart: Thanks for having me.

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