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T. Rowe Price Is Managing Change Well

Solid succession planning and a strong analyst bench work in its favor.

This article was originally published in the August 2017 issue of Morningstar FundInvestor. 

Earlier this year, Morningstar visited  T. Rowe Price's (TROW) Baltimore headquarters. We wanted to check in on changes that have occurred at the executive, fund manager, and analyst levels and see how well the firm is positioned as industry assets continue shifting to passive investments.

On the whole, we came away encouraged with how T. Rowe Price has handled personnel changes while retaining the research-focused culture that has long defined it.

We've illustrated our shifting views on T. Rowe's funds with this graphic depicting upgrades and downgrades in recent years. It was published this summer in Morningstar FundInvestor before International Stock was upgraded.



Strong Analyst Bench
Analyst-driven research is key to most T. Rowe Price funds, so a stable, effective team is important. The firm has raised its game in this respect, moving out underperformers and transferring a few analysts internally to bolster its ranks. Following disappointing stock-picking in the consumer discretionary sector, the firm created a new consumer sector lead role (a position that already existed for other sectors) to improve global collaboration, add accountability, and boost team morale. It also transferred an analyst from the high-functioning energy team and hired back someone who'd previously worked at T. Rowe Price to add depth. The business-services team also saw a couple of internal moves. These changes should help T. Rowe's equity team function better, which is critical to fund performance.

The changes haven't been as disruptive as the departures the equity team experienced in 2014, when three members of its healthcare team left to start a hedge fund and T. Rowe Price had to rebuild more abruptly. It's also encouraging that the firm has continued to recruit at top business schools, even as active managers on the whole have faced business pressure with money moving to passive funds. (2016 was the first calendar year that T. Rowe Price saw firmwide net outflows across its mutual funds since 2000, so it has held up better than most active managers.)

With a fair amount of hiring the past few years, the directors of research have worked to effectively bring new hires up the learning curve--especially as some have seen only one type of market (up) in their careers; here, T. Rowe Price's most experienced managers provide meaningful context and mentoring. The firm has also built an admirable associate analyst program that has helped boost stock coverage of small- and mid-cap companies. Some promising associates work exclusively with a portfolio manager, including at  T. Rowe Price Mid-Cap Value (TRMCX) and  T. Rowe Price Small-Cap Value (PRSVX). The bar is high for promotion to full analyst, though the program gives the firm a glimpse into prospective candidates.

Changing of the Guard, Part One
While the equity analyst ranks have stabilized, some managers have retired in recent years. Retirements are inevitable, and at T. Rowe many managers retire in their early 60s. Seeing four retirements announced between 2012 and 2016, then, was simply a matter of timing and didn't signal anything especially alarming about broader firmwide dynamics given the ages of the outgoing managers. Plus, T. Rowe Price handles those transitions smoothly, with significant time for the new manager to work with the departing one.

However, a noticeable changing of the guard has occurred in two areas: small cap and large growth. Preston Athey of T. Rowe Price Small-Cap Value and Greg McCrickard of  T. Rowe Price Small-Cap Stock (OTCFX) retired in 2014 and 2016, respectively. Their departures were a loss because they had run the funds for more than 20 years. The longest-tenured fundamental small-cap manager is now Henry Ellenbogen, who took over  T. Rowe Price New Horizons (PRNHX) in 2010.

Both funds' Morningstar Analyst Ratings were down­graded from Silver: T. Rowe Price Small-Cap Value's Bronze rating is attributable in part to successor David Wagner's tenure on the small-cap team (he'd been associate manager since 2005). T. Rowe Price Small-Cap Stock is rated Neutral as the change is still relatively fresh, and Frank Alonso's history on the small-cap team dates back only to 2013 (he joined T. Rowe as a consumer analyst in 2000).

Still, there are reasons for optimism. T. Rowe Price has expanded its small/mid-cap coverage as the analyst team has stabilized, not only relying on the associate analysts but also adding a few dedicated analyst positions. The newer managers have only recently left the analyst ranks themselves and are engaged with T. Rowe's research team. The incoming managers have worked more closely with the broad analyst team to source new ideas versus using sell-side research. Plus, Wagner and Alonso posted good results at a small/mid-cap strategy available to non-U.S. investors before taking on their new roles. That experience wasn't perfectly analogous to their current roles, given the strategy's much smaller asset base and the small/mid-cap focus, but it at least provided some management experience.

Changing of the Guard, Part Two
Two of T. Rowe Price's three large-growth managers are also new to their roles within the past four years. (Larry Puglia has remained a steady presence at Silver-rated  T. Rowe Price Blue Chip Growth (TRBCX) since 1993.) But here, all three funds are medalists, including  T. Rowe Price Growth Stock (PRGFX), which was upgraded to Bronze from Neutral in May 2017. Manager Joe Fath has settled into the role well after his predecessor abruptly left the firm in 2014. As is the case with most T. Rowe Price manager transitions--smooth or not--Fath hasn't drastically altered the basic approach, other than decreasing the name count slightly and boosting exposure to top ideas  Amazon.com (AMZN),  Alphabet (GOOG),  Facebook (FB), and  Priceline (PCLN). The fund's prospects are strong in large part because of T. Rowe Price's analyst team, which has historically made good technology and media/telecom calls.  T. Rowe Price Institutional Large Cap Growth (TRLGX) is also rated Bronze despite a fairly fresh manager change. Taymour Tamaddon took over in January 2017 when longtime manager Rob Sharps became CIO; Tamaddon also brings relevant experience from his time at  T. Rowe Price Health Sciences (PRHSX).

Along the same lines,  T. Rowe Price Global Technology (PRGTX) was upgraded to Silver from Bronze in March 2017 to recognize the depth of that sector team. Under Joshua Spencer, a former tech analyst who took over in 2012, the fund has delivered strong performance relative to peers.

Bigger Picture
In other areas, T. Rowe Price has upped its game. Foreign equity is stronger than it's ever been, with five Analyst Rating upgrades since 2011; as of September, all of T. Rowe's actively managed international-equity funds rated by Morningstar were Medalists.  T. Rowe Price International Stock (PRITX) is the newest Medalist. It was upgraded to Bronze from Neutral in August, as manager Richard Clattenburg proved he had settled into that role well. Similarly, T. Rowe Price International Value Equity (TRIGX) (previously called T. Rowe Price Growth & Income) was upgraded to Bronze from Neutral in November 2016, with manager Jonathan Matthews capably managing through various market environments since his 2010 start (the process remained intact following the name change). More broadly, T. Rowe Price has done a good job building up its overseas analyst team since 2000.

Overall, T. Rowe Price has shown an ability to sustain itself through changes to its analyst and manager ranks. Since Morningstar first started issuing Analyst Ratings in November 2011 through September 2017, T. Rowe funds experienced 14 downgrades and 17 upgrades, highlighting the firm's ability to handle change and get the right people in the right places despite some key departures.

Katie Rushkewicz Reichart does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.