Invest in an Investment Adviser

A firm that has been successfully providing investment management and advice for three quarters of a century must be doing something right. From modest beginnings in Baltimore, Maryland, in 1937, T Rowe Price  (NASDAQ: TROW) has developed its subsidiaries into a global business employing 5,200 associates in 13 countries, and managing over $450 billion in assets. Tailored investment services, including a suite of targeted websites, are offered to three markets: individuals, financial intermediaries such as banks and retirement plan providers, and institutions including defined benefit funds and governmental entities. It also operates a large number and variety of mutual funds, the largest of which are Growth Stock, Equity Income and Mid-Cap Growth. The management  leadership committee boasts more than 140 years combined experience with the firm.

Investment advisory fees are calculated based on either the daily or month-end value and composition of assets under management, so the group is exposed to fluctuations in financial markets and the resulting effect on stock prices. The standard form of contract with clients allows for the agreement to be terminated at any time without penalty, so the group clearly has faith in its ability to keep on performing to its customers’ satisfaction. Money market advisory fees have been waived since mid 2009 because of the low interest rate environment. Ancillary administrative services undertaken on behalf of clients, such as accounting and trust services, are operated on a cost recovery basis only and so have no impact on the bottom line.

Research, discipline and experience are the keystones that T. Row Price believes set it apart from its competition, plus a belief in teamwork without adhering to the collective malady it calls ‘groupthink’. Its recognized brand and reputation for integrity, service and investment performance are nevertheless vulnerable to rumors quickly disseminated in the information age. Clients can easily vote with their feet, taking their assets and associated revenue to any one of a number of multiple competitors, including brokerage and investment banking firms, insurance companies, asset management firms, mutual fund companies and other financial institutions. Specifically, competition comes from groups like BlackRock, AllianceBernstein, Affiliated Managers and Franklin Resources.

Latest TROW full year results are for the fiscal year ended December 31 2010, a year in which US equity indexes rose strongly. Net revenues totaled $2.4 billion, up 27% on 2009, but there has been considerable revenue fluctuation in the last five years. Net income was $672 million, $2.53 per diluted share. Money market advisory fee waivers reduced income by $25 million. Assets under management increased by $91 billion during the year and reached a record $482 billion at year end, having dipped as low as $276 billion in 2008. Over 60% of assets under management are retirement accounts and variable annuity investments. At year end, a four or five star rating was held by more than 70% (by value) of the TROW equity and blended investment funds rated by independent investment research group Morningstar. Only 12.5% of managed assets belong to overseas clients, so there is much room for expansion in this quarter. More information is available in the company’s Form 10-K 2010

Most recent results are for the nine months ended September 30 2011 (in the Q3 earnings news release) and the news is uneven. Net revenues of $2.1 billion (21% up on comparable 2010) and an improved operating margin contributed to net income of $585 billion, up by 22%. Money market fee waivers cost $26 billion for the period. However, the Morningstar four and five star fund ratio fell to 65%. As well as this, assets under management dropped to $454 billion at September 30, as a result of volatility in global financial markets, down from $521 billion at June 30. President and CEO James A C Kennedy, while expressing confidence in the long-term growth prospects for both financial investments and the company he leads, was guarded in his comments about the near future in the earnings news release.

T. Rowe Price’s earnings model makes it particularly susceptible to the volatility of financial markets, as evidenced by the up-and-down revenue results since 2006. A second full year of revenue growth will no doubt be recorded for 2011, but it should have been so much better than it is likely to be as a result of asset value contraction. Net income, however, has remained relatively stable in the face of market unpredictability, and senior management has its eye firmly fixed, as ever, on the long term.