T. Rowe Price (NASDAQ:TROW) isn't the best-known investment management company in the industry, but with more than half a trillion dollars under management, the company has a long history of serving its mutual-fund customers well. For T. Rowe Price stock, the benefits of the long bull market in stocks and the forward-thinking nature of its no-load fund strategy have helped boost the company's bottom line, and even as the competitive threat of exchange-traded funds have weighed on mutual-fund managers throughout the industry, recent market turmoil could give the company a chance to regain some of those who fled actively managed funds during the financial crisis. Let's take a closer look at T. Rowe Price to find out what's been happening with it lately and how its stock can move higher.
Asset management: a winning business model
Shareholders of T. Rowe Price and its peers have found that investing in asset management companies directly can be an even more lucrative proposition than investing in the funds that they offer. T. Rowe Price stock has seen dramatic long-term growth, with average annual returns exceeding 20% over the past two decades.
The reason for that growth is simple: T. Rowe Price collects management fees based on the amount of assets it manages. As the long bull market of the 1990s gained momentum, the company boosted its assets, and therefore its income. Meanwhile, even when bear markets temporarily sent its stock downward, T. Rowe Price rapidly recovered from those declines and started heading higher when the next advance for the stock market began.
Lately, though, T. Rowe Price hasn't benefited as much from share-price gains. Competitor Invesco (NYSE:IVZ) has managed to expand its margins and produce growth among its current lineup of funds, with exposure to a big range of markets that leaves it broadly placed to serve its customers' needs. But for T. Rowe Price and peer Federated Investors (NYSE:FII), investors haven't been putting as much money to work in their funds as analysts had expected to see, and that has led to some growth shortfalls. Federated in particular missed its earnings estimates in its most recent quarter, and analysts see growth there slowing to just 3%. T. Rowe Price has better prospects, retaining its double-digit revenue growth, but after a substantial move upward at the beginning of the year, its stock has treaded water.
The ETF threat
Part of what has tempered T. Rowe Price's success has been the rise of exchange-traded funds. Mutual-fund rivals Fidelity and Vanguard have embraced ETFs, with Vanguard steadily growing its own line of index ETFs to go alongside its index mutual fund offerings, while Fidelity entered into a partnership with BlackRock (NYSE:BLK) to offer its iShares line of ETFs at no commission to Fidelity customers. BlackRock in particular has vaulted to top status in the ETF industry, and although the fees that it collects from ETF assets are less on a percentage basis than what T. Rowe Price earns from active management, BlackRock's asset advantage makes it hugely profitable.
Some of T. Rowe Price's competitors have made moves toward offering actively managed ETFs. For instance, earlier this year, Eaton Vance (NYSE:EV) filed with the SEC to create a new type of ETF, limiting the amount of disclosure the company would have to make about its holdings. So far, actively managed ETF have largely been limited to the bond arena, where requirements for daily disclosure of holdings don't represent as much of a loss of proprietary information. For now, T. Rowe Price has said it has no immediate plans to offer active ETFs.
How T. Rowe Price can win
Typically, market downturns are negative for asset managers, but this one represents an opportunity for T. Rowe Price. The ETF movement has taught investors that they're better off paying low fees to handle their own investments, and ETFs work particularly well during sharply rising bull markets. When stocks fall, though, investors see more value in professional management. With solutions like its target retirement funds, 529 college savings plans, and other fully managed options, T. Rowe Price has the chance to regain some of its lost luster and capture more assets.
With a long history of steadily rising dividend payments, T. Rowe Price stock justifies its somewhat lofty valuation. But future gains for the shares depend on the company's ability to follow through on poaching business from index ETFs. The short-term pain from a bear market could actually lead to long-term gains for T. Rowe Price.
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Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends BlackRock and Federated Investors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.