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T. Rowe Price Has Had a Rough Time of Late. Negativity in the Money Manager’s Stock Could Be Overdone.

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Money manager
T. Rowe Price
Group has fallen way out of favor on Wall Street. There are 15 analysts covering the stock, according to FactSet. None say to buy. More say to sell than hold. That’s approaching
GameStop
-level rejection.

I ran a screen of U.S. companies of all sizes that are covered by at least 15 analysts. Only
Bed Bath and Beyond
scores worse on average ratings. It sells housewares to people who are presumably put off by
Amazon’s
convenience and Target’s lack of shoebox-size coupons. Same-store sales plummeted 26% last quarter.

T. Rowe beats Bed Bath on analyst popularity by the slimmest of margins. It comes up just short of
Consolidated Edison,
a two-century-old power company that somehow looks like a slow grower even for its age.

That’s not how this is supposed to work. Money management is a dream business. Revenue is based on how much customer cash you put to work. Costs aren’t. An office building or two filled with big brains can just as easily allocate a 12-figure sum as a nine-figure one. So fund companies can become surprisingly prosperous as they grow.

Last year, Baltimore-based T. Rowe turned 50 cents of each revenue dollar into operating profit. That’s 20 cents more than
Apple,
which was riding high pandemic demand for its gadgets. Assets under management for T. Rowe ended the year at $1.69 trillion, triple what they were a decade ago. Peregrine Communications, a marketing consultant, nudged the firm ahead of index giant
BlackRock
to the No. 3 spot on its ranking of asset manager brand awareness, behind only Fidelity and Vanguard.

T. Rowe ended the year with its biggest acquisition ever. It paid $4.2 billion for New York City’s Oak Hill Advisors, with $56 billion under management, marking an expansion from mutual funds to private markets. Then two things went wrong in a hurry for asset managers in general, and T. Rowe in particular.

The first is that inflation soared, and the Federal Reserve quickly ramped interest rates up from historically low levels to ones approaching normal, and stocks tumbled. Also, bonds. And pretty much everything else.

For asset managers, of course, market declines mean lower assets under management, and thus, lower fees. And that means that profit margins dip, but hopefully bounce back when markets recover.

T. Rowe has a second problem, however. Its funds are growth-y. I mean, that’s not a firmwide directive or anything. “We have portfolio managers and analysts who are as value oriented as you can get,” Eric Veiel, the firm’s chief investment officer, tells me. But until this year, growth stocks had beaten up on value stocks for a decade. And that paid off richly for T. Rowe.

“Some of our bigger strategies are in the growth category and some of those strategies have a growth tilt even within the growth category,” says Veiel.

This year, value has waged a comeback, and growth has gotten clobbered. So, T. Rowe has done worse on returns than many of its rivals. Its flagship T. Rowe Price Blue Chip Growth fund (TRBCX) was recently down 33% for the year, versus a 25% decline for the large-cap growth category, according to Morningstar.

Another big one, called simply T. Rowe Price Growth Stock (PRGFX), has done a percentage point worse. Among its top holdings are stalwarts like
Microsoft,
Apple, and Amazon, which have suffered big market setbacks, along with more adventurous names like electric-vehicle makers
Tesla
and Rivian Automotive, which are down even more.

That means assets are getting doubly hit—once from market declines, and a second time from performance-chasing investors taking their stashes elsewhere. Wall Street predicts that the firm will end the year with $1.26 trillion under management, down 25%, including $59 billion of net outflows, or money leaving faster than it’s coming in.

At an annual investor meeting in September, T. Rowe’s management laid out a goal of returning to positive flows within 12 to 18 months. There’s no marketing more effective for mutual funds than three-year, top-quartile returns—except maybe top-decile ones.

Growth stocks jumped 4% on Wednesday, versus 2% for value stocks, after the Federal Reserve suggested that it will go easier on rate increases. If you squint, extrapolate, sip chilled gin, and adjust for extraordinary adjustability, you can just about call that a good sign for high-quality growth stocks. But building a better short-term record will take time, even if market winds shift back in T. Rowe’s favor.

T. Rowe would like to remind you that it’s good at this. At the start of this past week, it published an analysis of 20 years of returns for its 124 actively managed funds, and thousands of rival funds. Overall, its funds beat their benchmarks in 73% of rolling 10-year time periods, versus 47% for other firms.

Stock funds did even better, beating benchmarks 76% of the time. On average, T. Rowe’s stock funds beat benchmarks by more than a percentage point a year over 10-year periods. They outperformed during average one-, three-, and five-year periods, too—just not the latest ones.

I asked Veiel whether his fund managers are changing their approaches, or have become even more committed to their positions at today’s lower prices. “It’s a mixed bag,” he says. They’re sticking with long-term winners like Microsoft, but they’ve dropped shakier positions like Snap. The firm strives for conviction without dogmatic belief, or what Veiel calls strong views held lightly.

“Stubbornness and great portfolio management rarely go hand in hand,” he says.

T. Rowe shares fell from over $220 at one point last year to a whisker under $100 last month, before recovering to $125. That puts them at 16 times this year’s projected earnings. And earnings are expected to come in more than one-third below peak levels. I can’t say whether the bottom is in, but the negativity seems overdone.

Write to Jack Hough at jack.hough@barrons.com. Follow him on Twitter and subscribe to his Barron’s Streetwise podcast.


Credit: marketwatch.com

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