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Leadership Changes Don't Derail T. Rowe

Katie Rushkewicz Reichart, CFA
Christine Benz

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Despite some changes in fund management and executive leadership, Morningstar continues to rate T. Rowe Price highly. Joining me to provide a recap of the past year at T. Rowe Price 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: Katie, you've covered T. Rowe Price for a long time, and you've observed some manager changes over the past few years and some executive leadership changes. Let's start by giving a recap of some of the recent ones, including a change at the CEO level.

Reichart: James Kennedy is stepping down at year-end, and it's been a well-telegraphed change. His successor, Bill Stromberg, joined as an analyst years ago and has really worked his way up through the investment ranks. So, I think he is really well suited to take over at this point.

Benz: And in terms of the fixed-income management team, there were also some changes there in 2015.

Reichart: Yes. Earlier in 2015, Mike Gitlin departed for Capital Group, and that was more unexpected. Luckily, T. Rowe had Ted Wiese step in, and he is a 30-year veteran. So, again there, you still see a level of consistency in the upper ranks.

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Benz: In terms of the fund-management changes, those have been more in the realm of planned departures of late, as opposed to some of the more-abrupt departures we saw at T. Rowe Price in years past. Let's just recap some of those departures that revolved mainly around retirements.

Reichart: Well, we saw Brian Rogers at [T. Rowe Price Equity Income (PRFDX)]--that was the big one. After 30 years, he retired in October. And again, there, that change was announced well over a year in advance, giving John Linehan a lot of time to step into that role. Linehan himself had run a value fund a few years ago with good success, so I think we're pretty optimistic there. It's rated Bronze.

Benz: And Bob Smith--a similarly well-telegraphed retirement and a well-orchestrated departure there?

Reichart: Exactly. His associate portfolio manager took over that fund.

Benz: So, you are in charge of T. Rowe Price's Stewardship Grade and its Corporate Culture Grade in particular. Let's talk about that. You recently revisited the Corporate Culture Grade and kept T. Rowe Price at an A.

Reichart: That's true, and we visited the firm in Baltimore. We feel that, despite some of these changes we've seen in executive management and fund managers, the culture does really remain stable. We also like that we've seen turnover on the analyst team slow down a little bit. They continue doing a lot of good things for investors like closing funds; seven of their 25 biggest funds by assets are closed to new investors. You don't see that often in the industry.

Benz: I guess a related question, even though those closings are good for existing shareholders, for people who are looking at T. Rowe Price maybe for the first time, does that mean that they'll be shut out of some of those better funds in asset classes that they would want to have in their portfolios?

Reichart: It is tough especially in small cap and mid-cap where you see a lot of fund closures. But if you invest in their target-date funds, you can get access because the funds are still taking inflows that way.

Benz: Let's take a look at some of the fund-by-fund ratings. There were five T. Rowe Price funds that did receive upgrades in 2015. Can you discuss some of the highlights there?

Reichart: A lot of those just had to do with continued good execution from longtime managers. T. Rowe Price High Yield (PRHYX) was raised from a Silver to a Gold; it has just continued to do very well. It's one of the funds that's closed to new investors--that's very important in that asset class. We saw New Horizons (PRNHX) raised from a Bronze to a Silver rating. Henry Ellenbogen has just done a tremendous job there since taking over in 2010. He invests in a lot of small caps but also some private companies that have given the fund a boost.

Benz: In terms of downgrades, there were three--with some concentration on the fixed-income side. Do you have any concerns about T. Rowe's fixed-income management generally?

Reichart: I think we're still pretty confident in them. They generally offer very good conservatively run funds, especially New Income (PRCIX) and Short-Term Bond (PRWBX). Both of those did see downgrades, though. New Income dropped from Silver to Bronze, mostly because of a stretch of mediocre performance. As for Short-Term Bond, when we saw Ted Wiese promoted to head of fixed income, that rating was changed in anticipation of that manager change there.

Benz: So, he is still working as a manager on the fund--

Reichart: For now.

Benz: --but he anticipates to transition off.

Reichart: Yes.

Benz: Let's discuss performance. You did a quick recap of how T. Rowe Price funds have performed within the major asset classes. Can we run through those, starting with domestic equity?

Reichart: Sure. Domestic equity saw almost 80% of funds beating their categories averages, and they were up, on average, 5%. So, very strong there. In international equity, about 60% of the funds beat their category averages; in fixed income, 78% beat their averages. In allocation, it was 100%, so a lot of strength there--that includes some of the target-date funds.

Benz: Let's discuss that and how T. Rowe Price managed to achieve that great batting average with their allocation funds. I know on the target-date side they tend to be more equity heavy. Was that a help in 2015?

Reichart: That certainly helped in 2015, especially on the growth side; you saw a lot of T. Rowe's growth funds performing very well. Several large-growth funds were actually in the top decile of their category with good picks like Amazon (AMZN). And even though some funds held Valeant (VRX), which has obviously had its struggles, those funds have managed to do quite well this year.

Benz: T. Rowe Price is a family that I know a lot of our Morningstar.com investors like to read about. Thank you so much for being here to provide the recap, Katie.

Reichart: Thanks for having me.

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