WIKIFX REPORT: T. Rowe Price plans to launch investment adviser subsidiary

T. Rowe Price Group Inc. plans to put six funds into a new investment adviser subsidiary set to launch in 2022, a move executives said will help the company continue to generate excess returns for clients for years to come.

The move will split the Baltimore-based money manager's investment-research organization, T. Rowe Price Associates, into two. The company will seek approval from the U.S. Securities and Exchange Commission for a new subsidiary, called T. Rowe Price Investment Management, in the second half of 2021.

Both entities will operate as separate divisions under the T. Rowe Price umbrella, said Robert Sharps, head of investments and group chief investment officer. They will occupy separate spaces and not share investment resources or research with each other. The groups will share the company's distribution, human resources, legal and back-office functions. Incentive structures will also remain the same for employees.

T. Rowe Price Investment Management, or TRPIM, will launch with six of the company's current funds totaling more than $167 billion in assets under management. T. Rowe Price has $1.3 trillion assets total as of Oct. 31.

More than 100 employees will move to TRPIM, including portfolio managers and analysts. The funds that will be managed by TRPIM are:

• U.S. Capital Appreciation,

• U.S. Mid-Cap Growth Equity

• U.S. Small-Cap Core Equity

• U.S. Small-Cap Value Equity

• U.S. Smaller Companies Equity

• U.S. High Yield Bond Strategies

T. Rowe Price, known for its long-term approaches to everything from investment to executive succession planning, has been preparing for the subsidiary for a while. The company ramped up hiring of analysts during the past two years and will continue adding people in 2021. A spokesman said T. Rowe Price will have added 25 net new analysts by the time TRPIM launches.

“We recognize that this is a change for our clients, and in keeping with our custom of carefully communicating major investment and leadership shifts well in advance, well take the next 18 months to fine-tune and execute our operating plans while working with our clients to help them prepare for the changes,” CEO William J. Stromberg said in a statement. “A cross-functional team has been hard at work putting everything in place to ensure a smooth transition.”

Stephon Jackson, currently associate head of U.S. equity, will become head of TRPIM. David Giroux, who oversees the U.S. Capital Appreciation fund, will be chief investment officer of TRPIM.

While the announcement was big enough for T. Rowe Price to host its first-ever investor call with analysts, executives said much will remain unchanged. There will be no impact on fees or pricing, Sharps said. The company will also continue to report all of its financial results in one place, rather than breaking out its results for each subsidiary.

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T. Rowe Price will “generate new capacity” be able to keep more funds open because there will be less overlap of holdings and the subsidiaries won't share liquidity, Sharps said. Currently, 10 of the firm's U.S. equity strategies are closed to new investors.

“It's simply arithmetic,” Sharps said.

Sharps also said having two separate research teams will help with “idea generation.”

Jackson said the move will help preserve T. Rowe Price's ability to produce “alpha” — returns that exceed a fund's benchmark — “for decades to come.” Outsized returns have led to 2% organic growth in T. Rowe Price's assets under management over the past five years, he said. Like Sharps, he also expressed a need for more innovation because the number of companies with market capitalizations of at least $9 billion has declined by a third.

“The universe of investable securities is shrinking,” Jackson said.

Eric Veiel, co-head of global equity and head of U.S. equity, said T. Rowe Price as a whole will also be able to own more shares of individual stocks. The SEC has limits on how much equity investors can own before they are no longer considered “passive.” The regulations on occasion prevented T. Rowe Price's portfolio manager from taking larger positions in companies even if they thought they would be great investments.

“We can own more of certain securities,” Veiel said. “Those investment decisions would be reached independently and autonomously, but now our portfolio managers would be able to own more of those certain securities if they choose to do so, obviously keeping within each individual strategy's risk management framework.”

Some asset managers have shifted to operating under boutique or affiliates models. Legg Mason, before it was acquired by Franklin Templeton, operated under such a model with all of its affiliates like Western Asset Management and Clarion Partners operating autonomously.

Sharps said he doesn't think T. Rowe Price's announcement validates the affiliate model.

“We're still one T. Rowe Price,” Sharps said. “It is the same compensation model, the same culture and the same key tenants...I don't think any way, shape or form this is the formation of a standalone boutique. I think this is the replication of something we already do in [T. Rowe Price Associates] and really should serve to extend our ability to generate alpha and deliver excellent investment performance over time by continuing to do much of what we have done in the past.”

TRPIM will operate from offices in Baltimore, New York, San Francisco, D.C. and Philadelphia.