1/26/98 Barron's 17
1998 WL-BARRONS 5432608
Barron's
Copyright (c) 1998, Dow Jones & Company, Inc.
Monday, January 26, 1998
Like a Fox: T. Rowe Price doesn't hide the bad news; But will '98 be good news?
By Abby Schultz
The first thing millions of investors saw when they opened their financial
magazines this month is a four-page foldout ad from T. Rowe Price touting its
mutual funds' consistency and low-risk profiles. Fund companies advertise a
lot, of course, but T. Rowe's ad blitz comes on the heels of a lousy year for
the company during a stellar year for the market, when many of T. Rowe's
largest funds wound up near the bottom of the rankings.
That doesn't mean the company ignores the bad news. "This year brought us
back to earth," says M. David Testa, the company's chief investment officer. T.
Rowe is so open about that fact that during its annual news conference in
December, the poor track record of its international and domestic equity funds
was highlighted in big letters on the slide screen at Le Parker Meridien in New
York. "They're just a pretty straightforward operation," says Jon Hale, who
follows the group's equity funds for Morningstar in Chicago. "There's no go-
betweens for us to get interviews with managers, and the managers speak freely
to us. It's definitely a distinction between them and Fidelity."
Indeed, when Fidelity Investments went through a rough patch in late 1995
and 1996, it clammed up, making it even more difficult than usual to talk to
its managers and treating information as if it contained state secrets. By
contrast, T. Rowe's press office quickly arranged interviews with several
managers, who weren't shy about discussing their results for this story.
Also unlike Fidelity, which showed the door to some of its underperforming
managers and put shackles on those who stayed, T. Rowe Price doesn't plan
radical changes. While 'fessing up to its recent missteps, the Baltimore-based
fund house is hewing to the belief that a conservative style will restore its
good record.
T. Rowe is forthright like a fox. By openly admitting failure, it avoids
being savaged in the media as Fidelity often is, and it gets a chance to
explain its failings before outsiders are able to go on the attack. "We want to
be out ahead from a communications standpoint when things like this happen,"
says Edward Giltenan, a company spokesman. "Everyone here is smart enough to
know it's better to get the information out."
For example, Jack LaPorte, manager of T. Rowe's New Horizons, a $2.1 billion
small-capitalization growth-stock fund, attributed much of his fund's awful
performance last year to "too many bad stock picks." And manager Brian Rogers
of T. Rowe Price Value -- one of the better-performing funds -- said he was
"limping" to a poor fourth-quarter finish.
T. Rowe's take on its poor performance last year is that even though the
frenetic markets of 1997 didn't favor its low-risk, careful stockpicking style,
nevertheless cautious, conservative and consistent T. Rowe is better over the
long haul.
"For better or worse, I do the same thing all the time," says Rogers, who
manages T. Rowe Price Equity-Income as well as the Value Fund and also serves
on the group's equity steering committee. Rogers says the firm makes sure all
managers do what they are supposed to do, and don't "load up on biotech stocks"
or something simply out of frustration when the markets aren't going their way.
The firm traces its origins to the investment-counseling business founded in
1937 by T. Rowe Price Jr., an early adherent of growth-stock investing. Now the
12th-largest mutual-fund group, with $87 billion in assets at the end of 1997
(up $23.5 billion from a year earlier), the firm is the 10th-largest manager of
401(k) assets, with $22.5 billion under management, according to Cerulli
Associates, a Boston consulting group. "T. Rowe is wedded to the 401(k) market,
and the need to stay close to their style is important," says Geoff Bobroff, a
mutual-fund consultant in East Greenwich, Rhode Island. The firm's style also
fits with the advice of investment consultants, who constantly urge investors,
large and small, not to dwell on short-term performance but to emphasize
consistent funds that stick to their objectives.
T. Rowe's glasnost is consistent with its history. The foldout ads, in fact,
have been running with more or less the same text since August 1996. And
they've never included performance data, even when T. Rowe's funds were on top,
says Giltenan. Openness is the result, Testa says, of trying to educate
shareholders about what the firm is doing and thinking. "This philosophy
predated T. Rowe going public in 1986," says Giltenan, "and it's not germane to
the issue of communicating performance to shareholders," but of communicating
policy.
Forthrightness, of course, isn't the same thing as nonchalance. Lately, Price
has had some better news to deliver: the improving performance of its funds as
the stock market has become more volatile. But it's not yet clear if the
message is getting through: The price of the firm's publicly traded stock
peaked in late October at about 74 and has been trading recently around 60.
The fact is, T. Rowe is in the uncomfortable position of trying to explain
away a short period of bad performance that's getting attention, in part,
because it fell within a calendar year that was stellar for the market as a
whole. For most of last year, more of T. Rowe Price's stock funds were in the
bottom of their respective investment categories than were in the top half,
Hale of Morningstar notes. But for three-, five- and 10-year periods, T. Rowe
has an overwhelming number of funds in the top half, he says. As the table here
shows, most of T. Rowe's larger-cap funds have tracked its Standard & Poor's
500 index fund, the Equity Index fund.
Hale agrees that T. Rowe suffered this year because the markets didn't favor
the firm's conservative investment style. "One thing that seems to permeate all
the funds is that, relative to their peers, they are fairly conservatively
managed," he says. "That tends to mean they have more diversified portfolios
than some of their competitors and they have very solid risk scores."
That holds true whether the fund is in an aggressive-growth category, like
science or technology, or in a conservative category, like large-cap value,
Hale adds. The average domestic stock fund has a Morningstar risk score of 1.0,
while T. Rowe has 18 funds with risk scores below 1.0 and four with scores
above 1.0, according to Morningstar. Indeed, the Equity-Income and Value funds'
risk scores come in at 0.44 and 0.54, which helped them earn five stars from
Morningstar, its highest rating.
To maintain a risk score of 0.62 in T. Rowe's $2.1 billion Blue Chip Growth
fund, manager Larry Puglia holds 160 stocks and turns over the portfolio at a
sluggish rate of 20% a year. He looks for long-term stable growers at
reasonable prices, a strategy that limits his exposure to many big technology
companies as well as some of the top performers of the first half of last year,
such as Coca-Cola and Gillette. Instead, he continues to focus on companies
like Merck, AlliedSignal, Norwest Bank, and Travelers Group.
It's clear that Puglia's approach has succeeded over the long haul. The fund
has kept pace with the S&P over the past three years, with less risk than the
average equity fund, thus earning its five stars from Morningstar.
One fund that has not fared nearly as well is the $5 billion New Horizons,
the archetypal small-cap stock fund, which has continued to lag. "We've had a
number of stocks that have hurt us this year," manager Jack LaPorte admits.
One of those was Boston Chicken, a stock LaPorte held for several years,
which traded at 36 at the end of 1996 and was recently around 7. LaPorte sold
much of his position last summer when it was around 14. He's since sold other
companies that proved to be wrong bets, like Fore Systems and Ascend
Communications. [KORN: Buy at the top, sell at the bottom?]LaPorte says he likes his current portfolio. And that could
mean he'll be positioned to do well in the murkier investment waters of 1998.
The big question, of course, is whether the more value-conscious stockpicking
style evident in all of T. Rowe's funds, in fact, will prove to be a much safer
one for this year. "It's hard to see how it will hurt, although it's not
totally clear it will be a huge advantage," says Rogers. Still, the market is
unlikely to have another 30% year -- 10% will probably be more like it -- and
Rogers says, "It's easier for stockpickers to operate in this environment." At
least that's what T. Rowe Price's shareholders hope.
---
ABBY SCHULTZ writes about the financial markets from New York.
---
What Price Performance?
Annual
Total
Return Risk
1 Year 3 Years 5 Years Rating
Blue Chip Growth 27.56% 30.98% NA 0.62
Capital Appreciation 16.20 18.49 14.84% 0.31
Equity Income 28.82 27.41 19.95 0.44
New Horizons 9.77 25.93 19.57 1.45
Value 29.25 32.43 NA 0.54
Equity Index 32.87 30.75 19.83 0.77
NA - Not applicable.
Sources: Lipper Analytical Services, Morningstar
---- INDEX REFERENCES ----
COMPANY (TICKER): T. ROWE PRICE ASSOCIATES INC. (TROW)
NEWS SUBJECT: Analysts' Comments; Barron's; Mutual Funds; Stock Market
News (ANL BRNS FND STK)
MARKET SECTOR: Financial (FIN)
INDUSTRY: Securities; Mutual-Fund Companies (SCR ZFU)
PRODUCT: Analysts' Ratings/Comments; Investment Services (DAR DIS)
REGION: Maryland; North America; United States; Eastern U.S. (MD NME
US USE)
LAYOUT CODES: Features (FEA)
Word Count: 1507
1/26/98 BARRONS 17
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