How T. Rowe Price Rode Out 2019

Editor’s note: This video has been updated, removing incomplete information about the firm’s flows.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. T. Rowe Price funds have had a solid year overall. Joining me to provide a recap of the year at T. Rowe Price is Linda Abu Mushrefova. She's an analyst in Morningstar's Manager Research Group.

Linda, thank you so much for being here.

Linda Abu Mushrefova: Thanks for having me.

Benz: So, performance has been actually decent. And you went asset class by asset class and looked at performance. Let's start with domestic equity. It looks like most funds appear to be on track to beat their category peers, most domestic-equity funds, for the year to date through mid-December.

Mushrefova: That's right. Yeah. So, just over half of their domestic-equity funds have outperformed their category averages. So, pretty solid showing there. But largely, still being pressured, mostly middling to slightly above average.

Benz: The allocation categories--things look relatively better there in terms of performance. I wouldn't necessarily be surprised by that. They tend to run a little bit equity-heavy, isn't that correct, which, in a great year for equities, that's been a plus.

Mushrefova: Correct. Yeah, they've done exceptionally well in the allocation space. So, roughly 95% of those funds have outperformed, which is really, really strong. And like you said, a lot of that is due to the allocations to their underlying active equity funds.

Benz: And on the fixed-income front, I would say T. Rowe Price is somewhat less well-known for its fixed-income effort, but performance looks solid there as well.

Mushrefova: Also, an area that has outperformed. Roughly 59% of the funds there have topped their category averages. But a smaller portion of the business, so definitely not as big as the U.S. equity business.

Benz: So, you looked at performance at some of the firm's bigger funds. Blue Chip Growth, I know, is a fund that a lot of our viewers probably hold in their portfolios. This is one that has not had its best campaign so far in 2019. Let's talk about what's been going on there.

Mushrefova: So, that's been challenged. But I think to put it into context, it's still up roughly 25% year-to-date.

Benz: It's not a bad year at all.

Mushrefova: Pretty exceptional.

Benz: Yeah.

Mushrefova: But it lands in our large growth Morningstar Category, which has been a tough area. So, the Russell 1000 Growth, for example, is up over 30%. So, that has been just a really tough area to outperform, but over the long haul, it's still done very well.

Benz: And the large-cap growth strategy is writ large institutional large-cap growth. Let's talk about that. Performance hasn't been--it's been robust in absolute terms, but in relative terms not so great there as well.

Mushrefova: So, this year, that one is another one that's been challenged, also up roughly 24%. So, it's still very respectable returns there.

Benz: Right.

Mushrefova: But it has been hurt by some positioning, underallocating to Apple. Its position in Tencent has hurt. But over the trailing three-year period, it still looks really strong, especially with names like Amazon contributing to outperformance.

Benz: In terms of large funds that have performed really well, on the perennial leaders list, it seems as T. Rowe Price Capital Appreciation. This fund, for those of us on the outside looking in, is closed to new investors. Let's talk about what's worked in its favor so far this year.

Mushrefova: So, that one just continues to be a standout top performer in the category this year, led by David Giroux, who has done just exceptionally well there and consistently made really strong tactical allocation decisions, which has really helped. And we continue to see that this year.

Benz: T. Rowe Price High Yield is another fund that's having a good year. I want to talk about what we did with its ratings. But first, let's just get into what has worked for it on the performance front.

Mushrefova: So, that continues to be a strong strategy. Like you mentioned, there are some notable changes there, which we'll discuss. But we have a lot of respect for the underlying team there. They've made some really strong picks on that side, and it continues to do well.

Benz: So, let's talk about behind the scenes on that fund. I know that it still is a medalist fund, correct, but we have downgraded it. Let's talk about what's going on with the fund.

Mushrefova: So, pretty big changes there on T. Rowe Price High Yield. As you mentioned, earlier this year, it got downgraded from Gold to Bronze. So, a pretty big downgrade there. The longtime portfolio manager, Mark Vaselkiv, has been there for over two decades as the lead, and he's announced his plans to step away from day-to-day portfolio management responsibility in January of next year. So, pretty big loss there. His successor joined the fund as a comanager in January of this year. So, he has some time to manage alongside him. It's still a medalist, still a fine choice for investors, but obviously a big loss there.

Benz: Another fund that you and the team have been watching closely is New Horizons. This is kind of a legendary small- to mid-cap growth fund. It suffered a blow as well with its manager, Henry Ellenbogen, leaving. Let's discuss how you and the team approach that departure and how it affected the rating.

Mushrefova: So, that's another one that's a really big loss on that strategy. It was previously rated Gold, and we downgraded it to Bronze earlier this year following Henry Ellenbogen's departure. He actually took a couple of analysts with him to start his own firm. And while it's still in good hands with Joshua Spencer, he is not as experienced as Ellenbogen and has really big shoes to fill. So, the downgrade reflects those changes.

Benz: Linda, thank you so much for being here. Always great to hear your insights.

Mushrefova: Sure. Thanks for having me again.

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