T. Rowe Price (NYSE: TROW) is an asset management company, with approximately $391 billion of their clients' assets under management (AUM). Its clients include both individuals and institutions for whom it invests in stocks, bonds and money market funds in the United States and internationally. It also has investment-management and retirement account products and services available to its clients.
One area where T. Rowe lags its competition is in accumulating assets from international clients, and it has been playing catch up. The company was handcuffed until 2000 by a joint venture with a UK asset management company that forbid T. Rowe from selling international investment products.
Two trends affecting T. Rowe and most other American asset management firms is the aging baby boomer population--which has a growing retirement investment need--and therefore needs interest rate volatility, which affects the returns of a number of the company's financial products.
T. Rowe Price is the 29th largest asset manager in the world. The company's business model has remained consistent over the 70 years since its founding. Its relatively low-risk operating model emphasizes fees over commissions and an investment approach that avoids trends like the 1990s Internet bubble.
The company offers a mix of investment styles. Thomas Rowe Price, Jr. developed what is known as a growth stock style of investing, where the focus is investing in companies that are well-managed and whose earnings could be expected to grow at a faster pace than the market. While this type of investing is still a major piece of T. Rowe Price's strategy, they also use value-oriented, sector-focused, tax-efficient, and quantitative index-oriented approaches. These strategies are implemented over both equities and fixed-income asset classes, allowing for more diversification.
Second Quarter 2010 Results
T. Rowe Price reported revenues for the quarter of $577.4 million, net income of $158.5 million, and diluted earnings per common share of $.59, an increase of 55% from the $.38 per share in the comparable 2009 quarter. Net revenues were $442.2 million in the second quarter of 2009, and net income was $100.0 million.
Assets under management were $391.1 billion at June 30, 2010, including $233.5 billion in the T. Rowe Price mutual funds distributed in the United States and $157.6 billion in other managed investment portfolios. Market depreciation, net of income, of $33.0 billion more than offset the $5.1 billion in net inflows during the second quarter of 2010, as assets under management decreased $27.9 billion from $419.0 billion at March 31, 2010.
The Company provides investment advisory, distribution and other administrative services to the Price funds under various agreements. Investment advisory services are provided to each fund under individual investment management agreements that grant the fund the right to use the T. Rowe Price name. Investment advisory revenues are based upon the daily net assets managed in each fund. Certain of the T. Rowe Price mutual funds also offer an advisor and R classes of shares that are distributed to mutual fund shareholders through third-party financial intermediaries. The Company’s subsidiary, T. Rowe Price Investment Services, is the principal distributor of the T. Rowe Price mutual funds and enters into agreements with each intermediary.
The Company provides advisory-related administrative services to the Price funds through its subsidiaries. T. Rowe Price Services provides mutual fund transfer agency and shareholder services, including maintenance of staff, facilities, and technology and other equipment to respond to inquiries from fund shareholders. T. Rowe Price Associates provides mutual fund accounting services, including maintenance of financial records, preparation of financial statements and reports, daily valuation of portfolio securities and computation of daily net asset values per share. T. Rowe Price Retirement Plan Services provides participant accounting, plan administration and transfer agent services for defined contribution retirement plans that invest in the Price funds.
The Company’s trustee services are provided by another subsidiary, T. Rowe Price Trust Company, which offers common trust funds for investment by qualified retirement plans and serve as trustee for retirement plans and individual retirement plans (IRAs). T. Rowe Price Trust Company may not accept deposits and cannot make personal or commercial loans. Another subsidiary, T. Rowe Price Savings Bank, issues federally insured certificates of deposit. The Company also provides advisory planning services to fund shareholders and potential investors through its subsidiary T. Rowe Price Advisory Services. These services include retirement planning services, such as saving for retirement, transitioning into retirement and income in retirement.
At December 31, 2009, assets under management in the Price funds aggregated $232.7 billion.
As of December 31, 2009, the Company managed $158.6 billion in other client investment portfolios. The Company provides investment advisory services to these clients through its subsidiaries on a separately managed or sub-advised account basis and through sponsored investment portfolios, such as common trust funds, Luxembourg-based mutual funds and variable annuity life insurance plans. As of December 31, 2009, these portfolios included United States stocks, international stocks, stable value assets and, bonds and money market securities. hdfh
T. Rowe Price's has three main sources of revenue: Investment Advisory Fees, Administrative Fees and Other Income, and Investment Income of Savings bank subsidiary. The investment advisory fees consist of fees drawn from individual and institutional investors in T. Rowe Price's sponsored mutual funds and other managed fund portfolios. The administrative fees bring in roughly 16% and the investment income of savings bank subsidiary accounts for the remaining 1%. On the operating costs side, all of T. Rowe Price's funds have expense ratios below the median of its Lipper peers.
Due to a joint-venture with UK asset management firm Robert Fleming, T. Rowe Price was not able to sell non-U.S. investment products to its clients until 2000. The joint venture company Rowe Price Fleming International was formed to sell non-U.S. securities to U.S. investors. For some of its competitors, the international markets account for upwards of 20% of total AUM. This has been, in recent years a weakness for T. Rowe Price, but also an opportunity for improvement. In 2006 about 7% of T. Rowe Price's AUM was from international clients and the firm is very actively trying to close the gap between it and its rivals on international markets.
A significant amount of T. Rowe Price's assets are from 401k plans. Recently retaining these assets has become a more serious concern for firms like T. Rowe Price. When workers change jobs (which is a relatively frequent occurrence among younger workers) many decide to cash out on their previous 401k plan and pay the resulting penalty for doing so rather than rolling the plan over into a retirement account (IRA) or maintaining the balance with the 401k provider. When this happens, firms such as T. Rowe Price lose these assets.
The same is increasingly true for retirees, who often times move their 401k savings into a personal IRA and with the assistance of a financial advisor, restructure their portfolio to fit their retirement needs. As the population of baby boomers ages, these occurrences are expected to increase in the near future. T. Rowe Price has begun to focus on these "at-risk" assets by implementing more personalized services in an effort to retain clients and assets.
Lifecycle funds refer to an retirement investment product that is being offered by an increasing number of asset managers lately. Through a lifecycle fund, an initial amount of money is invested at the start date and as the investor ages--and retirement comes closer--their investments are adjusted, whether in terms of the amount of money allocated or the risk within the portfolio. Many 401k providers are beginning to use lifecycle funds as a default investment for customers who are automatically enrolled in 401k plans.
Lifecycle products are relatively easy for investors to understand and implement and are often seen as an attractive retirement investment. As such, retirement plans (many of which use a lifecycle fund as the default for their investors) have seen increased growth rates in recent years. Furthermore, these types of funds are more likely to be long-term investments and are less likely moved from fund to fund, providing greater stability for asset management companies such as T. Rowe. The growing popularity of these products represents an opportunity for accelerated growth for the company. As one of the early asset managers to offer lifecycle products, T. Rowe Price now has an advantage over new competitors that are establishing lifecycle products of their own based on a strong brand name and years of demonstrated returns. Lifecycle funds represents about 50% of T. Rowe Prices total mutual fund flows and about 25% of total flows.
A large portion of T. Rowe Price's assets are invested in fixed income funds (e.g., bonds, money market funds), which provide returns to their investors that are directly correlated to current interest rates. With the volatility of the interest rate market in recent months this may become a more significant concern for investors. Further changes in interest rates could induce a large drop in returns on the fixed income funds that T. Rowe Price manages. These concerns also include actions that the Fed may take to control the macro economy in the United States.
T. Rowe Price competes with a large number of pure asset managers both in the United States and internationally. Its main competitors include Alliance Bernstein, BlackRock, Franklin Resources, Affiliated Managers, Cohen & Steers, Janus Capital, Nuveen Investments, and Waddell & Reed.
T. Rowe Price is still behind many of its competitors on the international front, however. With only 7% of AUM coming from non-U.S. clients, T. Rowe Price is actively attempting to gain a larger international presence. Due to a joint venture with UK based asset management firm Robert Fleming, until 2000 T. Rowe Price could not sell its investment products on the international markets. This joint venture company, Rowe Price Fleming International managed non-US stock and bonds for American investors. Since then, its growth in this market has been respectable, but it is still an area for improvement.