Looking out three to five years, do you have all the cylinders you need or want? To us … it's about attracting and retaining the best talent, creating an environment where those talented people can collaborate to create value for clients. We feel great about the organization today. … If you look at what we refer to as the "four-legged stool," we think that's complete. We've got a traditional direct retail business and a full-service 401(k) business, institutional business in the U.S. and overseas, and intermediary, or third-party, business in the U.S. and overseas. I don't think we're so much thinking of adding more legs to that stool as we are how can we build out and serve our clients better in those areas.
What will look different in three to five years? It's safe to say we will be even more global ... (That) began 25 years ago when we formed the joint venture with Robert Fleming (Rowe Price Fleming, the joint venture in overseas markets between T. Rowe and Robert Fleming that lasted 20 years, until 2000, when JPMorgan's purchase of Robert Fleming led to T. Rowe buying out Fleming's half — which opened up the option of expanding T. Rowe's overseas distribution and fund management operations). One of the reasons for its long success is we agreed not to compete with one another on the distribution side.
Is it hard to maintain the corporate culture while going global? It doesn't just happen. We've always been quite deliberate in preserving and strengthening and building that culture. I think what you'll see with the global investment organization, and as I think back on the last couple of months, even, we've had both global meetings of new investment analysts and meetings of global client service people, in Baltimore, San Francisco, overseas. We are intentional about getting people together, and not just having meetings — go out and have dinner, do something fun, get to know one another so that when they're shooting e-mails back and forth and they're on the phone, there's a relationship behind that.
It all sounds very Japanese. I often joke with (CEO-elect) Jim Kennedy … that one of his great contributions was creating the T. Rowe Price softball league — and it really did have an impact. You've got all these really bright analysts coming in, and, we've always focused not on just producing good investment ideas, but how do you communicate that idea around the organization? Because a good idea doesn't produce any benefit if we don't get it into client's portfolios. So having a guy — or a gal — get a hit, and be standing on second base, talking to the portfolio manager that tomorrow they're going to be trying to sell an idea to, that relationship building is as important in some ways as the pure analysis and the insights.
You have portfolio managers in London, Hong Kong, Tokyo, Buenos Aires and Singapore. Where will you be in five years? I would expect there'd be more non-U.S. investment professionals and there would be more locations. We currently cover India out of Singapore, and we cover China out of Hong Kong and Tokyo. It's adequate for now.
What has the recent wave of money management M&A activity meant for T. Rowe? It's okay with us to have it reaffirmed that an independent investment manager that has people focused on investing is a good thing. We think that helps us tell our story.
But if this is a market of transformational deals, you're not in the market? Broadly speaking, no, we're not looking for a transformational deal. We've never pursued growth for growth's sake. The reason we want to grow is to create the opportunity to attract and retain talent, so it's a strategy as opposed to an objective. We don't feel the need to transform ourselves. We think we're doing just fine.
So if you got a collect call about acquiring a shop with $200 billion in assets, you wouldn't accept the charges? It seems unlikely.
Your colleagues all talk about putting clients first. I've met religious cults with less message discipline. Yeah, we all drink the same Kool-Aid on that one.
Which of your products are institutional investors excited about? We've seen a lot of interest in structured research, where in effect you get the benefit of our whole research organization. It's a sector-neutral portfolio. We ask our analysts who cover those sectors to overweight their best ideas. One way a portfolio manager might be convinced that an analyst really believes in an idea is that he's overweighted it in the structured research strategy. It also gives analysts the chance to get their hands on some money. It produces an attractive risk return profile for the client, leverages our research, (and in) a virtuous cycle, it actually strengthens research and the sharing of ideas within the organization.
Any interest in portable alpha, liability-driven investing or other trendy stuff? When we look at new products, we've got some pretty simple rules of thumb. Do we think this is an investment strategy that has durable value for clients? Do we think we can add value? Then there's the broader business question: does it make sense, given who we are?
What products look potentially interesting? I think you'll see some more style-oriented non-U.S. strategies. You'll see more concentrate portfolios over time, overseas and in the U.S.
What about 130/30-type strategies? It wouldn't shock me to see this coming from T. Rowe Price.
There does seem to be a religious aversion here to hedge funds. We have an aversion to being put in a position of having conflict with our clients. There may be ways to engage in long-short strategies that don't put us in harm's way. We would entertain that, (but) we'd have to be thoughtful about our approach.
Are hedge fund fees a hurdle? I think there's such compelling strength and value in the collaborative culture that we've got, it would be very surprising to me if we would undertake something that would undermine that. So if we find a way to approach an investment strategy like this, it won't be on the backs of some outrageous compensation strategy that sets one group apart form another. Thou shalt not forget the first $300 billion.
You've had great success with these target-dated funds. Couldn't they use more uncorrelated strategies, such as commodities? Our experience has been you can often find uncorrelated asset classes even among traditional classes. We've had good success with the natural resources strategy for years.
Some observers insist T. Rowe could benefit from an acquisition that boosted your business in intermediary channels. We have a substantial business working with financial intermediaries. We haven't found that the direct business has prevented us from working with advisors. A decade ago, there was sort of a perceived channel conflict. That has all fallen by the wayside. So if the question is ‘Would we acquire our way into those channels?' — we don't need to. We're already there.