New T. Rowe Entity Brings Opportunities and Trade-Offs

We do not anticipate making any meaningful changes to our moat rating or fair value estimate for wide-moat-rated T. Rowe Price TROW following the company's announcement that it will be splitting its investment-research organization in two--leading to the launch of T. Rowe Price Investment Management in the second quarter of 2022. Six constrained or closed investment strategies and their supporting analytical resources will be moving over to the new entity. T. Rowe Price Investment Management is expected to be completely separate from legacy T. Rowe Price Associates, with the two teams expected to no longer share research and investment resources and corporate not providing much in the way of assets under management, flow, or fee data for the new entity.

Our initial thoughts here are that the move adheres to our longstanding argument about increased size/scale not necessarily being a benefit for active managers (exemplified by T. Rowe Price's long-running practice of closing funds once they get too large). Those attributes are great for index fund or exchange-traded fund shops where increased size/scale doesn't affect performance and allows those firms to drive down costs/fees but can be detrimental for active performance. Where increased size/scale works for active managers is where they've decided to run certain funds for cash, expecting to continue to lose AUM at a low- to mid-single-digit range annually to outflows and need the added AUM from consolidation to offset fee/margin pressure.

This move will create additional costs for T. Rowe Price, primarily over the next couple of years as things get set up. However, the firm has enough leeway with its operating margins (which we had expected to be 40%-44% during 2020-24 before this announcement) relative to peers (expected to post margins below 30% longer term) to sacrifice some in the pursuit of organic growth, especially in strategies where it may have been capacity-constrained in the past.

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