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T. Rowe Price's 2018 Winners and Losers

Katie Rushkewicz Reichart, CFA
Christine Benz

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. As 2018 winds down T. Rowe Price can feel pretty good about its funds' performance. Joining me to provide a recap of the year at T. Rowe Price is Katie Reichart. She is a director in Morningstar's manager research group.

Katie, thank you so much for being here.

Katie Reichart: Thanks for having me.

Benz: Katie, let's talk about the headlines. In terms of performance domestic equity funds at T. Rowe Price have really had quite a good year in what has been a tricky market. Let's talk about that.

Reichart: About 79% of U.S. equity funds at T. Rowe beat their category averages, so that's pretty remarkable in a tough year.

Benz: This is kind of through mid-December, things could change a little bit. But overall pretty good year. International equity also not quite as good but still a decent percentage beating their peer group.

Reichart: Yes, about 60%.

Benz: Allocation funds, which I know is a big business for T. Rowe Price, also, those funds look quite good relative to their peers.

Reichart: That was about 87% beating category averages.

Benz: Fixed income, one little bit of a weak spot--just about half of the fund's beating their peer groups. Let's talk about within domestic equity some of the funds that have performed particularly well. New Horizons, closed to new investors, but still very large fund, having just a banner year. What's going on there?

Reichart: This fund has done really remarkably well. It's up 11% through mid-December for the year. Its Russell 2000 Growth Index is down 2%. Henry Ellenbogen, he's just continued to do really well with his stock picks. Some Shopify he bought after the IPO. Others were names he actually owned as private companies such as Atlassian. It's remarkable he's done this well. This fund is huge, the strategy as a whole is more than $20 billion in assets.

Benz: And that fund is a medalist.

Reichart: It is, it's Silver rating.

Benz: Institutional Large Cap Growth also having a good year. Large cap growth has been a tricky spot, it's actually been decent for the whole year. But pretty hard hit quite recently.

Reichart: Taymour Tamaddon has been running the fund just under two years. The fund's up 10% year to date. The Russell 1000 Growth's up just about 4%. I think he's picked stocks well, but also it's held up pretty well in these tougher markets that we've seen in the past couple of months, which is impressive. Obviously, names like Amazon have helped a lot, but then there are other names that aren't really big positions in the benchmark like VMware. He did really well with Red Hat which had an acquisition offer from IBM. So, we're really impressed with the stock-picking we're seeing there.

Benz: And that's a medalist, too?

Reichart: It is, it's Bronze right now.

Benz: On the laggard side T. Rowe Price Spectrum Growth. First let's talk about what that fund is, it's fund of funds, correct? It's having a year to forget so far in 2018.

Reichart: It's down about 4% versus its Russell 3000 benchmark'ss 0.3% gain. This is fund of funds, it's more geared toward large growth, but it also has about a third of its assets in international equity and it's been obviously very tough year for international markets. So that's hit it, and then also add some small value exposure in there, and that's been another area of the market that hasn't done well.

Benz: In terms of notable fund news, some changes in the international side, on the International Value fund. Had been a medalist, had been at Bronze, got downgraded to Neutral. What's going on there?

Reichart: That one, we saw a manager change. Jonathan Matthews took on a new role at T. Rowe few months ago. He'd run it for eight years. It went from Bronze to Neutral, and Sebastien Mallet is running the fund now. He has a decent record at Global Value Equity, but I think there is still some questions about is he going to run both funds, is he going to hand one of these off. We're at Neutral for now.

Benz: T. Rowe Price Real Estate, I know this has always been or long been one of our favorite actively managed REIT funds, going from Gold to Bronze. So, dropping two rungs what's going on there.

Reichart: That's a retirement. David Lee has run the fund since its 1997 inception. So that's a big loss of experience there. Nina Jones is taking over, and she has worked with him for several years and also runs the Global Real Estate Fund at T. Rowe. We still have some confidence, but of course any time you lose that type of experience, it's a pretty big loss.

Benz: Right. And T. Rowe does do a pretty good job trying to make these manager changes as seamless as they can be, right?

Reichart: Exactly, and there's always a period of several months where the new manager is working alongside the outgoing manager. We feel good about the transition and how that's going.

Benz: But the nonetheless a loss. Let's talk about ratings changes, some downgrades--a big one--T. Rowe Price New Income which is kind of their core intermediate term bond product going from a Bronze rating to Neutral. What happened there?

Reichart: Dan Shackelford is retiring in early 2019. Lots of retirements, yeah. It's that time of life for some of these people so it makes sense. The comanager Steve Bartolini remains, but I think we've also seen a couple of other retirements on the fixed-income side that can feed into this fund. I think given that, that led to the downgrade. The fund hasn't performed as well as we'd like to see especially in down markets. There is also some cost pressure, because it's long been attractively priced, but now competitors have gotten even cheaper. It's lost that cost advantage a bit.

Benz: Fixed income is one spot where you want to stay keenly attuned to the price that you are paying for the fund. T. Rowe Price Tax Free Short Intermediate Term, still a high medalist at Silver but dropping from Gold. What's going on there?

Reichart: That's another case of fee pressure. It had long been attractively priced, and it's lost its edge a bit as peers have come down. But we still really like T. Rowe's muni team and have a lot of conviction in it.

Benz: I guess the headline though, we mentioned a couple of downgrades, the headline is that T. Rowe still has a lot of medalist funds in its lineup and actually saw a lot of upgrades so far in 2018.

Reichart: Yes, especially in the first half of the year, they saw several upgrades in the medalist ratings. And overall 63 of the 68 funds that Morningstar covers are medalists. I think that's pretty remarkable.

Benz: It's a good batting average.

Reichart: I would say really especially with some of the performance numbers you see, I think it just goes to show you can outperform in active equity, that's what T. Rowe is known for, and I think they have proven that time and again.

Benz: Katie, thank you so much for taking the time to be here.

Reichart: Thank you.

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