TROW has raised its dividend each year for more than 25 consecutive years, qualifying it as one of the 52 dividend aristocrats. The stock has sold off with the market over the last six months, shedding more than 10%. While the stock is sensitive to the market’s near-term gyrations, TROW’s dividend is extremely safe and appears to offer very strong long-term growth potential. The actively-managed fund industry faces downward fee pressure and increasing competition from lower-cost passively-managed products, but several unique characteristics of TROW’s business give us confidence that the company can continue chugging along.
TROW offers mutual funds and separate accounts that employ a broad range of investment styles, including growth, value, sector-focused, tax-efficient, and quantitative index-oriented approaches. It makes money through investment advisory fees for managing portfolios, which depend on the total value and mix of assets under management.
At the end of 2014, TROW had a record $747 billion of assets under management, with 78% invested in stock and blended asset portfolios and 22% in bond and money market portfolios. By account type, retirement accounts and variable annuity portfolios represented 68% of TROW’s assets under management (target-date retirement funds = 20%). Investors domiciled outside the U.S. represented about 6% of TROW’s assets.
Performance and trust drive the asset management business, and TROW has both. TROW has been in business for more than 70 years, demonstrating impressive investment performance over most time periods. For 2014, 74% of the TROW US mutual funds outperformed their comparable Lipper averages on a total return basis for the three-year period ended 12/31/2014, 80% outperformed for the five-year period, 88% outperformed for the 10-year period, and 73% outperformed for the one-year period. Approximately 82% of assets under management in TROW’s rated stock, bond, and blended asset funds were given an overall rating of four or five stars from Morningstar at 12/31/2014. Importantly, 100% of TROW’s target-date retirement funds (20% of total assets) have outperformed their comparable Lipper averages on a total return basis for the three- and five-year periods ended 12/31/2014. These funds should see strong growth in coming years as more baby boomers near retirement.
With large, risk-averse institutional investors driving more than 80% of industry revenue, investment funds need to have appropriate scale, secure back-end processes, and a long track record of performance success to gain their business. Before making an investment decision, institutional investors undertake an in-depth review of funds, analyzing historical performance, tenure length and quality level of fund managers, the efficiency of back office functions, fund expenses, and the breadth of products offered. Not surprisingly, bigger funds are able to put on a better show and engender more trust throughout the review process.
As one of the 25 largest asset managers in the world, TROW is able to check all of these boxes. Given its brand strength, stable operations, and performance track record, it would likely take years of underperformance or extreme staff turnover before its largest investors decided to take their money elsewhere. While the industry is pretty fragmented, there aren’t that many mega asset managers to meet the needs of the largest institutional investors – less than 2% of firms have more than 100 employees, making the biggest firms’ relationships with big institutions even stronger (fewer alternative firms to manage their money). TROW’s business is especially sticky because of its fee structure, asset mix, and product breadth.
Fees contribute significantly to a fund’s overall performance. TROW has been a low cost leader when it comes to fees, significantly helping its overall performance and keeping it further out of the crosshairs of lower-cost passive management. In 2014, TROW’s average annual fee was 47.8 basis points, 32% below the average equity mutual fund fee and 16% below the average fixed income mutual fund fee. The company’s scale and operational synergies allow it to offer its clients lower costs without hurting its overall profit margins.
While lower fees certainly help performance and client retention (less incentive to switch asset managers as long as performance is “good enough”), TROW’s business also benefits from its heavy mix of retirement-related assets, which account for about two-thirds of TROW’s assets under management. Retirement-related assets are generally stickier than other types of accounts because these clients are especially looking for a manager offering stability, safety, and trust to ensure their goals are met.