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WIKI ANALYSIS
T. Rowe Price (NYSE: TROW) is an asset management company, with approximately $400 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.
The company has excelled in growing its assets and has done so by 18% per year since 2002, compared to 9% for the rest of the industry. In addition, the company has historically kept operating expenses very low. 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 th returns of a number of the company's financial products.
Business Overview
T. Rowe Price is the 29th largest asset manager in the world. The company's business model has remained very 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.
Operating Metrics
- Assets Under Management (AUM): T. Rowe Price is the 29th largest asset manager in the world by AUM. This metric is particularly helpful when comparing competitive asset managers as well as when looking at a company's growth over time. In 2006 T. Rowe Price saw 24% growth in AUM, better than the industry by 7% and their peers by 5%. Furthermore, T. Rowe Price's average AUM growth since 2002 (17%) is nearly twice that of the industry during that time (9%). On a compounded basis, this difference is even more magnified.
- Operating Margin: Measures a company's remaining revenue after operating costs are removed and before before interest and taxes are applied. T. Rowe Price's operating margin (operating income/total revenue) during 2006 was 43.4%, which has improved steadily since 2001, when it was just over 30%.
Business Model
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 account accounted for 83% of revenue in 2006 and 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. In 2006, the company spent $97.3MM on advertising and promotion, which amounts to roughly 9% of total operating costs, well below the industry standard. The double-edged sword is that the company may be sacrificing growth from new customers in this very competitive industry in order to keep operating costs low.
T. Rowe Price grew AUM by 24% in 2006, well above the industry average. This growth can be attributed to their strong relative investment performance during this period, and higher market valuations and income of two fund groups that were combined into T. Rowe Price funds. Furthermore, investors added $8.4 billion in net new money into T. Rowe Price funds in 2006, contributing to 3% of AUM.
Trends & Forces
Global Exposure
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.
401k Rollovers and the Aging Population
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" Fund Impact
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.
Interest Rates and Fund Risk
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.
Competition
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. In the first quarter of 2007 T. Rowe Price led its competitors in annualized growth of assets under management (AUM) at a rate of 11.5%.
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.
In 2006, T Rowe Price saw very strong asset growth (24%) ahead of their competition. This strong performance continued in the first quarter of 2007, when the company again grew at a faster pace than the industry and their peers, as seen in the chart below.
A major focus of the company's operating strategy is limiting expenses. In 2006, operating expenses were $1.0 billion, which was significantly lower than many peers in the industry on a pro rata basis. The below chart compares T. Rowe Price's expenditures with competitors. Note that both NUVEEN Investments and Waddell & Reed are significantly smaller firms than T Rowe Price (by AUM).
References
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