The institutionalisation of retail investors through mutual funds is drawing increasing attention from equity issuers. With mutual fund assets in stocks, bonds and money market instruments zooming towards the $3 trillion mark, jumping almost $100 bn in the blockbuster month of November 1995 alone, this trend cannot be ignored. Funds of every description and proportion are lying in wait for global issuers, from the $54 bn Fidelity Magellan Fund to Morgan Grenfell’s $10 mn US Micro Cap Fund. IROs have their work cut out in reaching America’s mutual fund managers.
For many industry observers, T Rowe Price epitomises the mutual fund business. Thomas Rowe Price, Jr – referred to variously as the father of growth funds, the sage of Baltimore, and an investment visionary – launched his first mutual fund in 1950 under the banner of Growth Stock. The fund returned almost 20 per cent in each of its first ten years. Later the New Horizons Fund, launched in 1960, was the first fund to specialise in small cap stock investment.Thomas Rowe Price, who died in 1983, was a stock picker of the highest order. To identify growth investments, he once said he used only ‘what my grandmother called gumption, my father called horse sense, and most people call common sense.’
‘The successful investor,’ Price wrote in 1970, ‘should be looking forward and trying to anticipate changing eras ahead of the crowd.’ Nonetheless, Price failed to foresee the crash of 1973-74, and his small family of funds was hit hard. With the S&P 500 falling 45 per cent, Price’s assets halved in value. By the time it re-emerged to its pre-bear market status, Price was ready to temper its growth strategy, reducing risk and volatility through greater diversification.
A fixed income department was created, and Rowe Price-Fleming International, a joint venture with UK-based Robert Fleming, was launched in 1979. By the time the 1980s hit arrived, Price was positioned to become an industry high flyer. ‘Our investment approach is more balanced now than ever before,’ says George Roche, the current CFO of the firm’s top ranked mutual fund group and manager of the $1 bn natural resources New Era Fund. ‘Retail investors have the chance to purchase professional, high performance management at a reasonable price. And, big institutions are choosing to open accounts where management strategy mirrors that of the retail funds. We feel we can offer the best of both worlds to our investors.’
Price coasted through the stock market crash of 1987 on the strength of its diverse portfolio and aversion to unnecessary risk. Even the bond debacle of the early 1990s failed to stem the flow of money into the firm. The Price family of funds has grown in number to 68, including 13 funds focused on foreign securities. Mutual funds have rocketed from $2 bn in 1975 to $50 bn at the end of last year, ranking Price number five among its peers. Some $20 bn is managed by Rowe Price-Fleming out of London.
Price derives more than 90 per cent of its sales from handling mutual funds and asset management for both institutions and individuals. Total assets under management stand at $75 bn, some $50 bn of which is in retail mutual funds, with the balance coming from institutions and high net worth individuals. Another $17 bn is in defined contribution pension plans (401k), which Price manages and administers.
The industry views Price funds as mid-way between Fidelity’s high performing products and Vanguard’s bargain basement offerings. Some 39 Price funds are awarded with five, four and three stars in Morningstar’s mutual fund survey, which takes performance and risk into account. Price’s stock funds average a Morningstar safety rating of 7.4, versus 7.0 for all stock funds. The star performer for 1995 was the Science & Technology Fund, gaining 31.3 per cent in the first half to $1.2 bn. The fund’s strategy is based on high-price, high-growth, and is the largest in the speciality and technology segment.
Results are driven by other performers such as International Stock, the firm’s largest fund at $6.2 bn, whose 17.4 per cent compound annual return over the ten years to 1995 ties it with Templeton Foreign Fund. It rocketed up 400 per cent over the decade through 1994, though the 1995 return was a more modest 11.4 per cent. Lead manager Martin Wade runs a portfolio light on risky emerging markets and heavy on European blue chips.
New products are added all the time, the most recent being three Personal Strategy Funds, a Value Fund, a Capital Opportunity Fund, an international bond fund and a money market fund. ‘Our product line ranges from value to growth, income, large cap and small cap,’ says John Gillespie, president of Growth Stock Fund. ‘As for how Price looks at investment, we follow no single direction. We have multiple styles and numerous disciplines.’ Gillespie says he views stocks differently from Brian Rogers, who runs the $5 bn Equity Fund, or Jack Laporte, who runs the $2 bn New Horizons Fund.
Part of the wholesale reorganisation of Price in the 1970s was to eliminate the concept of a general investment committee. By peeling off layers of bureaucracy, the firm could put resources behind managers with stockpicking ability rather than salesmanship.
A key prong of the strategy is an emphasis on internal development, creating a corporate culture that values long-term gains over short-term results. The firm mines talent from business schools, starts off recruits as analysts, and slowly grooms them to become portfolio managers. The style contrasts sharply with the aggressive management at Fidelity, which is known for rapidly promoting young, successful managers; and with Vanguard, which hires outside managers to run most of its funds.
Price fund managers operate independently, following fund charters and SEC rules for mutual funds which dictate a degree of diversity necessary for keeping risk down. For instance, a fund cannot own more than 10 per cent of any one company. At the outside edge of the SEC rules is the fund family’s riskiest offering, Capital Opportunity. It focuses on undervalued and out-of- favour stocks with a concentrated portfolio of only 40-50 companies.
Each manager is backed up by a small investment committee consisting of several analysts whose job it is to uncover companies fitting the fund’s charter and make recommendations accordingly.
Currently, Price has around 30 equity analysts and ten credit analysts following the domestic market. ‘A sell-side analyst’s job is to generate transactions and support investment banking activities,’ notes Gillespie. ‘By comparison, the job of our analysts is to pick stocks that are going up. Overall, our quality of research is better than a sell-side firm. That is something the retail investor has learned to respect.’
Equity analysts are arranged along tight sectoral lines, covering everything from aerospace to waste management. ‘Domestic analysis is bottom-up in style,’ states Roche. ‘With no definite stock list or big picture strategy, and all kinds of funds with different objectives, it is the analyst’s job to look at his industry, find a stock with the right profile, and channel it to the appropriate fund manager.’
No matter what a company’s investment profile, communicating the message accurately to a Price analyst could spark the interest of a fund manager. The range is impressive. It goes from Small Cap Value, Mid-Cap Growth to Blue Chip Growth; and from Growth & Income, investing in income-producing stocks with growth potential, to OTC-based funds and Equity Income products that choose stocks with above-average yields.
‘Our analysts leave no stone unturned in looking for investments,’ claims Roche. ‘They stay in close touch with the Street’s sell-side, attending conferences and studying research. They are in on conference calls and site visits, keeping track of quarterly earnings and changes in performance. Meeting management is of prime importance to them.’
Price’s bottom-up domestic investing contrasts with its top-down, bottom-up international business run by Rowe Price-Fleming, which comprises 15 money managers with $20 bn in assets – over 90 per cent in equities.
Price-Fleming has investment managers in Baltimore, London, Tokyo and Hong Kong, with a new office planned for Latin America. As both money manager and broker, Robert Fleming publishes its research for buy-side clients while funnelling information to joint venture fund managers. For instance, the Price team of fund managers generates global strategy from research supplied by Fleming economists. ‘An IRO can contact Fleming analysts and be noticed by Fleming, Rowe Price-Fleming, or T Rowe Price,’ says Roche.
Price-Fleming is acknowledged for its few sharp moves in times of panic. When the Mexican crisis hit, portfolio managers waited patiently for the dust to settle before selectively selling off stocks that they considered were long-term risks. In fact, Price-Fleming had the foresight to sell some Mexican holdings before the disaster hit, so only 5 per cent of its non-US assets were invested in the market. The current emerging market play for Price-Fleming is the Pacific Rim, where 15 per cent of the global portfolio is invested. The Netherlands is also heavily weighted with some 9 per cent of assets invested in that market.
Given the great diversity of T Rowe Price and its method of training fund managers, IROs looking to attract its capital must take a diverse approach. Each fund is different, so reaching the right analyst and fund manager with the right information becomes critical. Without a well-targeted approach trouble could easily be wasted.
Conversely, taking the time to study Price’s structure and fund management capacity, in order to find a way through the maze, could pay handsome dividends.
Growth Stock Fund: Chasing Growth
Since its inception in 1950, the Growth Stock Fund has been investing in companies following a growth track. With $2.8 bn of funds under management, fund manager John Gillespie describes Growth Stock as a broad fund invested in large, well-established companies with above average earnings growth over time. Despite keeping risk down -achieving a safety reading of 7.4 from Morningstar – the fund has grown over 250 per cent in the last decade.
Growth Stock typically invests in companies growing at twice the long-term rate of the S&P 500, and Gillespie pays a modest premium multiple for that superior growth. ‘We look for growing companies wherever we can find them around the world,’ he says. ‘The style is to deliver above average performance with below average volatility.’ He reduces risk by diversifying into international assets and looking for growth at a reasonable price.
Under its charter, Growth Stock can invest up to 30 per cent overseas and over the last decade the proportion has not dipped below 15 per cent. The current level is in the mid-20s, about two-thirds invested in Europe. ‘Foreign diversification serves to lower volatility, while adding to the overall performance long-term,’ says Gillespie, who prefers to buy a company’s stock in its most liquid market. He says the Growth Stock portfolio has more foreign ordinary shares than ADRs, despite the fact that ‘if an Asia Pacific company does not have an ADR, we find ourselves at an information disadvantage.’
Gillespie gets more than 75 per cent of his ideas from internal sources at Price. Even when a research report sparks an investment idea, it is merely the starting point for a more in-depth look at the company. Direct contact with companies is much more useful than Wall Street-sanitised research,’ says Gillespie, who spends a full third of his time on the road. Nonetheless, with Alex Brown, a large IPO underwriter, also in town, Baltimore has become a regular stop-off on the roadshow circuit.
Nowadays, more information is reaching Gillespie’s desk electronically, particularly with the growth of Internet use by companies and financial services, as well as the ability to access SEC filings on the Internet. While video has yet to arrive on Gillespie’s desktop, he often watches NBC Pro videotapes of New York Society of Securities Analysts meetings for company information. Gillespie’s desktop computer is well-loaded, with First Call analysts’ notes, Bridge Information System, and various other data feeds, charting services and applications.
Like all Price fund managers, Gillespie pays close attention to proxy votes at the companies in his portfolio, though he never initiates resolutions. Each Price manager is allowed to vote proxies according to personal judgement, while the firm keeps careful track of all activity. Gillespie notes that managers back up proxy decisions with a written rationale that is made available to customers. As for personal likes and dislikes, Gillespie has a particular distaste for poison pills. ‘Companies should earn their independence rather than legislate for it,’ he says.
In addition to his fund management responsibilities on the mutual fund side, Gillespie handles pools of pension fund money. He manages these in a method similar to his mutual funds. The key difference is the greater attention paid to taxes for the retail mutual funds. Erisa pension fund customers do not have to pay capital gains tax, while the retail clientele have to deal with taxable profits on a yearly basis. ‘Still, I do not let the tax equation prohibit me from making the right investment decision,’ concludes Gillespie.
