In an environment where active fund managers are under assault for poor relative performance and high fees, we believe wide-moat-rated T. Rowe Price (TROW) is the best positioned among the U.S.-based active asset managers we cover. The biggest differentiators for the company are the size and scale of its operations, the strength of its brands, its consistent record of active fund outperformance, and reasonable fees. T. Rowe Price also has historically had a stickier set of clients than its peers, with two thirds of its assets under management derived from retirement-based accounts. At the end of September, 70%, 81%, and 79% of the company’s funds were beating peers on a three-, five-, and ten-year basis, respectively, with 60% of funds rated 4 or 5 stars by Morningstar during the past five years, better than just about every other U.S.-based asset manager. T. Rowe Price also had a much stronger Morningstar Success Ratio--which evaluates whether a company’s open-end funds deliver sustainable, peer-beating returns over longer periods--giving it an additional leg up.
While T. Rowe Price will face headwinds in the near to medium term as baby boomer rollovers affect organic growth in the defined-contribution channel, we think the company and defined-contribution plans in general have a compelling cost and service argument to make to pending retirees, which should mitigate some of the impact. We also believe T. Rowe Price is uniquely positioned among the companies we cover (as well as the broader universe of active asset managers) to pick up business in the retail-advised channel, given the solid long-term performance of its funds and reasonableness of its fees, exemplified by deals this past year with Fidelity Investments’ FundsNetwork and Schwab’s Mutual Fund OneSource platform. With T. Rowe Price likely to generate low- to mid-single-digit AUM growth on average going forward (driven by 1%-3% annual organic growth in a forecast period that includes a 20% decline for equity markets), we see top-line growth expanding in the low- to mid-single-digit range annually, with operating margins of 42%-43% on average.
Greggory Warren, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.