T. Rowe Price Group Inc. has suffered heavy outflows and client terminations during the past two years from asset owners reducing their U.S. equity exposure and/or seeking passive strategies.
The firm, which managed $746.8 billion as of Dec. 31, saw institutional net outflows totaling $8.1 billion during 2014 and $22.2 billion in 2013, data from a Credit Suisse Group AG report show.
The Baltimore manager had three consecutive quarters of net outflows — including institutional net outflows of $3.8 billion and total net outflows of $5.1 billion in the fourth quarter of 2014. Similarly sized asset managers Invesco Ltd., Atlanta, and Legg Mason Inc., Baltimore, also saw net outflows during the fourth quarter, but not nearly as much. Invesco saw net outflows of $700 million during the quarter; Legg Mason, $1.8 billion, according to the companies' earnings statements.
Despite the outflows, T. Rowe's fourth-quarter earnings statement issued Jan. 28 showed quarterly net income totaled $315.9 million, up 4% from the previous quarter and up 10% from the fourth quarter of 2013. The firm's net revenue, meanwhile, totaled $1 billion, the same as the third quarter but up 10% from the year-earlier quarter.
Ken Moreland, chief financial officer, attributed the increased profitability to the company investing corporate cash in its own funds.
T. Rowe Price is primarily an active large-cap equity manager, a strategy some institutional investors have been moving out of over the past few quarters. One investor is the $810 million Ohio State Highway Patrol Retirement System, Columbus, which terminated a $38 million large-cap portfolio in April. At the time, Mark Atkeson, executive director, told Pensions & Investments T. Rowe was terminated because the board decided to move the money into an index fund to save on fees.
In December, the Vermont Pension Investment Committee, Montpelier, terminated T. Rowe, which ran $120 million in structured research equity for the $4 billion Vermont State Retirement Systems. The board shifted its allocation to an index fund managed by State Street Global Advisors, Stephen Rauh, investment committee chairman, said in an e-mail.Still, Mr. Moreland said he is confident the outflows are driven by the current market cycle. “We don't know when this cycle will turn, but based on history, we are confident that it will turn, and confident that we will be well-positioned for it when it does,” Mr. Moreland said.
Patrick Davitt, a partner and research analyst at Autonomous Research U.S. LLP in New York, said there are “two broad themes” causing headwinds for T. Rowe.
“The first is that the U.S. market and T. Rowe funds have done so well that you see institutional investors rebalancing away to meet concentration limits. As T. Rowe is such a big manager of U.S.-focused strategies, that's a big headwind,” Mr. Davitt said.
Mr. Moreland commented: “U.S. equities have outperformed everything else over the last three years ... so quarter by quarter, a lot of investors have been reallocating away from U.S. equities. In our case, that space has been dominated by U.S. large-cap.”
The second theme behind the outflows, Mr. Davitt said, “is the move from active to passive management. A lot of large institutions want to use passive for an increasing amount of their equity exposure. And T. Rowe doesn't have a meaningful passive presence.”