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Morningstar | Solid 1Q Sets T. Rowe Price Up for Slightly Better Near-Term Results

In an environment where active fund managers are under assault for poor relative performance and high fees, we believe wide-moat-rated T. Rowe Price is the best positioned among the U.S.-based active asset managers we cover. The biggest differentiators for the firm are the size and scale of its operations, the strength of its brands, its consistent record of active fund outperformance, and reasonable fees. T. Rowe Price has historically had a stickier set of clients than its peers, as well, with two thirds of its assets under management derived from retirement-based accounts. At the end of March 2019, 68%, 79%, and 82% of the company's funds were beating peers on a three-, five-, and 10-year basis, respectively, with 60% of funds rated 4 or 5 stars by Morningstar during the past five years, better than just about every other U.S.-based asset manager. T. Rowe Price also had a much stronger Morningstar Success Ratio--which evaluates whether a firm's open-end funds deliver sustainable, peer-beating returns over longer periods--giving it an additional leg up.While T. Rowe Price will face headwinds in the near to medium term as baby boomer rollovers affect organic growth in the defined-contribution channel, we think the firm and defined-contribution plans in general have a compelling cost and service argument to make to pending retirees, which should mitigate some of the impact. We also believe T. Rowe Price is uniquely positioned among the firms we cover (as well as the broader universe of active asset managers) to pick up business in the retail-advised channel, given the solid long-term performance of its funds and reasonableness of its fees, exemplified by deals the past couple of years with Fidelity Investments' FundsNetwork and Schwab's Mutual Fund OneSource platform. With T. Rowe Price likely to generate low- to mid-single-digit AUM growth on average going forward (driven by 1%-3% annual organic growth), we see top-line growth expanding at a positive 1.1% CAGR (due primarily to mix shift on ongoing industry fee pressures), with operating margins of 39%-41% on average.