T Rowe Price’s chief executive has said the worst is over for the asset manager after the heaviest year of outflows in its history, with more than $80bn expected to leave the platform by the end of this year.
“My sense is we are approaching the end of the more intense period of outflows,” chief executive Rob Sharps said in an interview with the Financial Times. “In certain, very visible, aspects it was a very disappointing year. In particular, the flow picture and the business that we lost.”
The active equity house has faced strong headwinds since early 2022, when poor performance in some of T Rowe’s largest growth equity strategies sent investors running for the exits.
But outflows gained momentum this year, as the knock-on effects of poor performance were compounded by even higher interest rates aimed at reining in inflation, geopolitical instability and uncertain markets. Money market funds saw record inflows of $1.2tn this year, as yields hit highs not seen for decades and kept investors sitting in cash.
“Outflows this year were more than what I forecasted in the beginning of the year,” said Sharps, who took over as the head of T Rowe Price at the start of 2022. The Baltimore-based manager is facing down its 11th consecutive quarter of outflows, with more than $140bn fleeing the platform since the start of 2022.
Investor reticence caught the active manager off guard, intensifying outflows even as the market — and performance — seemed to bounce back. “Across investor types, individual and institutional, there was more conservatism than there typically is. Especially when the S&P 500 is up 20 per cent and you’re not in a recession,” Sharps told the FT.
Growth for T Rowe, which has $1.4tn under management, is not expected to turn positive until 2025 at the earliest, the company said. The firm has had two rounds of lay-offs in the past two years to try to reduce expenses.
“It’s been a bad year for equity flows, and particularly bad for US equity flows, and particularly bad for actively managed funds. It’s been a perfect storm for T Rowe because they check all of those boxes,” said Alex Blostein, an analyst at Goldman Sachs.
T Rowe Price has long held a reputation as a top active manager in US equities. In the decade to 2020, 82 per cent of all of T Rowe Price’s mutual funds outperformed their benchmarks, according to Morningstar, and more than half were in the top 25 per cent in their category.
A steady stream of new capital chasing returns helped blunt the impact of industry trends such as the explosive growth of the low-cost passive investment providers that rocked active managers. “They had good performance so could still show growth even though active management was struggling,” said Brennan Hawken, an analyst at UBS.
But when interest rates started to rise in the first half of 2022, T Rowe’s growth equity strategies — some of its flagship products — struggled.
“They were victims of their own success,” Hawken said. “Interest rates went up, and growth equity is the ultimate long duration asset. When performance deteriorated . . . outflows picked up, and this year has been really, really bad.”
But even as performance has rebounded this year T Rowe’s outflows have persisted: an aftershock related to industry dynamics. While retail investor dollars tend to move quickly after poor performance, large institutions have a long evaluation process to change management firms, meaning outflows can stretch out over years.
Heavily concentrated indices, where a handful of stocks generate the bulk of returns, have also made it difficult for more diversified funds to outperform their benchmarks. “If your advantage is broad and deep research and investing capability, but only a handful of companies matter to aggregate returns, it makes that less valuable,” Sharps said.
Continued competitive pressures from lower-cost passive index providers and ETFs have pushed down fees for all active managers too, hurting the revenue they earn on assets under management even as those assets fall. T Rowe’s fee rate has come down 8.2 per cent in the past three years, according to UBS.
Investors are unlikely to return to the funds they’ve left. “Once people leave, they don’t go back to the same vehicles,” Blostein said. Assets that do come back have largely gone into ETFs or passive funds.
T Rowe’s low-cost active ETF business has been a rare bright spot, with more than $1.4bn in net inflows since the start of 2021. “I do accept that the direction of travel is into lower cost products, I don’t accept that the direction of travel is into passive,” said Eric Veiel, head of global equity at T Rowe.
The manager has had some success against the index this year, particularly with its bold bets on AI through Nvidia. T Rowe is the sixth largest investor with a 2.3 per cent stake in the chipmaker valued at $1.2tn. And its retirement business has continued to grow, with record inflows into its target date funds this year. Two-thirds of T Rowe’s assets are now retirement related, Sharps said.
Still, a shock from markets could make life harder yet for active managers hoping for a calmer year ahead, and high interest rates, geopolitical instability and momentum into passive investment managers may persist for some time.
Sharps said that while “the cyclical forces behind passive are highly unlikely to be as intense in the next five to 10 years, this dynamic doesn’t change in a year”. He added: “But I feel good about the progress we made this year.”
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