Since its founding in 1937, T. Rowe Price Group (TROW) has grown to become one of the leading money managers, with more than $390 billion in assets under management (AUM) at present. Investment advisory fees, accounting for the bulk of revenues, are calculated as a percentage of the market value of AUM. The company offers a variety of mutual funds, with equity and blended asset portfolios accounting for around 75% of AUM, combined, and fixed-income funds comprising the remaining 25%.
The money manager has been looking to expand overseas. To that end, it recently purchased a 26% interest in UTI Asset Management Company, the fourth biggest asset management firm in India, for $142.4 million. That move has enabled T. Rowe Price to participate directly in a very promising market. Going forward, we expect similar deals in other countries, especially those in the rapidly developing Asian region. (AUM owned by clients outside the United States are now a little more than 10% of T. Rowe Price’s total.)
The money manager has good future prospects, in our view. Notably, a number of its mutual funds have posted consistently better total returns than their respective peer groups. Assuming that this trend holds, AUM ought to grow at a steady rate going forward. One area that offers promising commercial opportunities is retirement planning, given the aging of the baby-boomer generation. Indeed, the company’s target-date retirement funds, which automatically adjust asset allocations as investors get older, ought to continue to be a key contributor to net cash inflows. (These investments currently comprise around one tenth of AUM.)
Future results also should be aided by product introductions. To that end, management seeks to launch a variety of actively managed exchange-traded funds, pending regulatory approval. This is a fledgling market, but we see decent growth potential here. Moreover, T. Rowe Price has the capability to strengthen its market position via acquisitions, given its healthy balance sheet, which boasts more than $1 billion in cash and zero debt. Finally, additional improvements in operating efficiency ought to help, to a certain extent.
Those considering T. Rowe Price stock should be aware of the risks involved, including the chance of a general downturn in the financial markets (as was the case in 2008 and the first part of 2009), which would cause the value of AUM to decline, and may prompt investors to withdraw funds, further eroding AUM. Another factor to consider is the possibility of changes in the tax code, for such things as capital gains and corporate dividend tax rates, which could dampen interest in certain T. Rowe Price products. Also, a highly competitive operating environment makes good investment performance all the more important.