T. Rowe Price's Second Quarter 2023 Earnings Conference Call began with Gigi, the conference facilitator, welcoming all participants and reminding them that the call was being recorded. Linsley Carruth, the Director of Investor Relations, then provided an overview of the call, which would last 45 minutes and include remarks from CEO and President Rob Sharps and CFO Jen Dardis, followed by a question-and-answer period with a limit of one question per participant. Rob Sharps then provided an overview of the company's investment performance and strategic initiatives.

In the second quarter of 2023, investment performance was encouraging with most asset classes outperforming their peers. The U.S. large-cap growth franchise had top-quartile results, while mid-cap value strategies and the target date franchise also had strong performance. However, organic growth was under pressure due to net outflows of $20 billion, particularly in U.S. large-cap growth strategies.

Target date products had net inflows of $2.4 billion in the second quarter. The company is proactively managing expenses, removing or reallocating over $200 million in run rate costs for 2024. The corporate strategy is focused on deepening client partnerships, expanding investment in operational capabilities, and broadening global reach. They have made important hires and met key milestones, and launched five fully-transparent active equity ETFs, as well as four muni and two equity SMA strategies.

T. Rowe Price closed on the seed commitment for their first joint co-branded product with OHA, and filed for their BDC election on June 30th. They also hired a Head of U.S. Intermediary Alternative Sales and acquired Retiree, Inc. in order to expand and retain relationships with pre-retiree and retiree clients. Despite lingering challenges, they are making progress and investing to deliver for their clients. In the second quarter of 2023, their adjusted earnings per share was $2.02, due to higher revenues and carefully managed expense growth, as well as a lower quarterly effective tax rate. They ended the quarter with $1.4 trillion in AUM.

The quarter saw an increase in average assets, but net outflows of $20 billion due to clients taking longer to make decisions and industry-wide muted fund flows. U.S. large-cap growth equity products drove the majority of the outflows, but there were positive inflows to U.S. equity research, capital appreciation, international core, all-cap opportunities and international fixed income. Target date net inflows were $2.4 billion, and some previously closed products have been reopened to new investors, which is expected to support future sales and net flows.

In Q2 2023, adjusted net revenues were $1.6 billion, with an effective fee rate of 42.3 basis points. Adjusted operating expenses were a little over $1 billion, up 8.3% from the same period in 2022 due to capital allocation-based income related compensation. Excluding that, expenses were up 1.8%. For 2023, adjusted operating expenses are expected to be between 2-6% over the 2022 amount of $4.1 billion. To manage expense growth and drive efficiency, 2% of positions have been eliminated and hiring has been slowed.

The company expects headcount to be higher at the end of 2023 than the start of the year, despite recent reductions. The company is evaluating real estate use in order to slow occupancy and facilities expense growth, and is aiming for low-single digit adjusted operating expense growth in 2024. The company has repurchased over 420,000 shares at an average price of $107 per share for $45 million and returned over $600 million to stockholders in the first half of 2023.

Rob Sharps of the company discussed the improved performance of their large-cap growth franchise in the second quarter and year-to-date, but noted that it is too early to tell if this is translating into better flows. He noted that institutional buyers take three- and five-year numbers into consideration and that the company still has further work to do in order to improve those numbers.

The speaker believes that USI Wealth and individual investors will be the first to pick up early signals of improvement in the industry. He is feeling better about the current market conditions, which have given the company a revenue lift. He believes that if the company executes its strategic initiatives and investors start investing with a long-term orientation, outflows will decrease in 2024 and organic growth will return in 2025. The speaker believes that the worst of the pressure on flows has already been experienced.

Rob Sharps is encouraged by the success of active ETFs, noting that they have started to garner more attention and interest across the industry. He also notes that while there may be some cannibalization of the open-ended 40 Act business, they are also attracting a lot of new investors. He states that until they had an ETF lineup, they were unable to engage or deliver their strategies to certain advisors who use ETFs exclusively.

Tim Coyne and the USI Wealth Broker-Dealer Financial Advisory team have been successful in communicating their strategies to the marketplace. The momentum of this success has been building over the past few months. In response to Dan Fannon's question, Jen Dardis stated that the midpoint of the range is based on the 30-day rolling average of June 30 AUM levels and there will be $15-20 million in severance costs in Q3, which will be partially offset by lower salaries in Q4 due to roles that departed in July.

Rob Sharps spoke about expense management, emphasizing the need to invest in strategic initiatives, talent, and culture in order to sustain profitability. He mentioned that additional savings can be achieved through process improvement and optimization, and these savings should be used to invest in the business and ensure long-term success. He also mentioned the two-year anniversary of the Oak Hill acquisition announcement.

Rob Sharps discusses M&A efforts, which typically don't change quarter-to-quarter. He is open to evaluating opportunities to add new capabilities that are important to their clients, such as real estate and infrastructure. He is only interested in pursuing opportunities that have a strong cultural fit, performance-oriented teams, and a long-term orientation. Sharps is also pleased with the acquisition of OHA, despite the current market conditions.

Rob Sharps discusses the current environment where the markets have gone up a lot yet there are outflows from the intermediary channel. He questions whether the same performance drives flows on a lag basis, and if there is a massive product preference change in the channel. He also mentions the responsibilities of the new Head of Intermediate Distribution.

Investors are waiting for a more attractive buying opportunity and the market has been driven by a small number of names. There is a shift away from open-ended mutual funds to other vehicles such as SMA and ETFs. Despite these trends, there is still a market for active management and it is important to understand how to deliver value to clients. The current market climate is cyclical in nature.

Rob Sharps discusses the 401(k) recordkeeping business, which he characterizes as healthy and growing in the core market. He also mentions the expansion of coverage for advisors that specialize in retirement and recordkeeping for small- and medium-sized businesses. Jen is asked to provide her perspective on the topic as well.

The 401(k) recordkeeping business is executing well, but the DC investment only or institutional defined contribution business is more mixed. There have been some terminations from plans due to performance in the large-cap growth channel, which has caused some pressure. However, if performance is improved and gets back to historical standards, this should eventually run its course. Additionally, the 401(k) recordkeeping business helps with plan design, product design, and innovation in target date products and retirement income products.

T. Rowe's incentive comp emphasizes longer-term performance track records for investment professionals, with three-, five-, and even 10-year results taken into account. The company is focused on making sure it has the capacity to attract and retain world-class diverse talent and maintain its culture in order to deliver for its clients and shareholders.

Jen Dardis discusses how T. Rowe has been working to reduce expenses through closing open roles instead of eliminating roles with people in them. She also notes that they have seen modest fee compression rates of 1-2% over the past several years to remain competitive. T. Rowe is widely known to be one of the best places to work in asset management and they have been able to maintain their strong culture and pay packages through the last decades plus bull market.

Rob Sharps emphasizes that asset managers need to have a balanced approach to cutting expenses while making sure the investment franchise is not negatively impacted. He states that the majority of headcount initiatives did not affect investments and that the company is focused on making sure compensation practices are competitive and that incentives are in place for people throughout the organization. He also believes that the company's retention rate is excellent and similar to their peers.

Jen Dardis explains that the company has made a number of investments over the past five years, which have increased operating expenses by $1 billion. To increase efficiency and change skill sets, the company is making adjustments, and pivoting and reprioritizing resources against strategic priorities. The expense growth next year would have been 300-400 basis points higher if the company had invested in all new things, so the adjustments are being made to ensure the company is investing in the right areas.

Jen Dardis discusses the potential of AI in the asset management industry, noting that it could have an impact on the competitive landscape. She also mentions that they have been experimenting with AI and machine learning and that they are aware of the rapidly evolving capabilities of generative AI.

Rob Sharps closes the conference call by thanking everyone for joining and expressing his appreciation for their interest and good questions. He goes on to say that the company is encouraged by their investment performance and have a path to improvement as they work their way through 2024. He emphasizes the dedication and commitment of their associates and their focus on delivering for their clients. The company is also investing in machine learning and generative AI to improve their ability to generate insights, reach and impact new clients, and drive efficiency across the business.

This summary was generated with AI and may contain some inaccuracies.