T. Rowe Price Group Q1 2024 Earnings Call Transcript

Thank you, Craig, for your question. With regard to alternatives, this is an area we have been actively researching. Given preferences and regulatory guidance, there are some complexities around adding alternatives within a 401(k) plan, such as the daily NAV. However, if we were to introduce alternatives for our target date strategy, we could act quickly with target date solutions, including T. Rowe Price solutions or OHA solutions or others, because we have a long list of partners that would be able to work with us in order to do that.

In regards to the specifics, we would likely offer that in a custom solution with a plan sponsor, and we have the benefit to be able to work with many plan sponsors who are asking us around how can we continue to advance solutions. Certainly, we could offer this also in a standalone, parallel solution, and that would be another way that we could bring this to market when and if it makes sense.

Yes, Craig, this is Rob. I just add a few things. One, it's a priority for us to continue to evolve and improve our target data offering, and this is an area that we've given a lot of thought to. My first observation is that we've seen very limited interest from plan sponsors in incorporating alternatives into defined contribution lineup, either as a standalone investment offering or as part of target date funds. And as Dee mentioned, there are some limitations around accommodation of the record keeping system, daily liquidity, daily pricing, those sorts of things. There's also a tremendous amount of fee sensitivity in the defined contribution marketplace, and alternatives naturally have higher fees. Where we have seen interest and where we've engaged are primarily in custom target dates that are designed by corporate clients, usually where they have defined benefit plan and they have an investment staff and an existing roster of alternative investment managers.

So, it's something that we're paying a lot of attention to. We're engaging with our plan sponsor clients and listening to what they want. But so far, there's been really very little adoption or interest in alternatives in defined contribution.

Great. Thank you so much for the question. I'll start us off. So first, I think I would highlight the breadth of our retirement platform, which gives us access to plan sponsors, intermediaries and participants. And this is really important because it allows us to really understand what types of retirement income solutions are critical for the varying types of participant needs in the decumulation phase. What our research indicates is that these needs and preferences are diverse, and our perspective is that there will not be a one size fits all solution for retirement income.

As you noted, we currently offer managed payout solutions, and we do have nearly 60 retirement plans that are using those solutions, which represents approximately 20% of our AUA in terms of overall coverage. Our payout solutions, our retirement income 2020 solution has been launched seven years ago, and then we extended that to offer it through our retirement plan services solution. As you noted, we are working on a retirement insured solution which we're calling manage lifetime income product. This will be a collective investment trust vehicle and we're planning to launch that in the fourth quarter of this year.

We also are planning to launch, as I mentioned earlier, personalized retirement manager, which is also a way to extend as time goes by into retirement income as well. This is a managed account program that we're excited about launching, and it will be introduced in the third quarter of this year. So long winded way perhaps of saying that we do believe that it's really important to offer a variety of types of solutions in order to meet the different types of needs, and that's what we found by working with participants, individual investors, plan sponsors, as well as advisors.

Yeah, Dan, thanks for the question. At a high level, I would say that our outlook for flows for the year really hasn't changed from what we discussed in January on the fourth quarter call. Although, I would say that we have higher conviction now that our outflows this year will be substantially lower than they were last year. As I've talked about in the past, I think investment performance is a good leading indicator, and continue to be pleased with what we're seeing, particularly in U.S. equity. Performance in U.S. large cap growth is clearly having an impact. We've seen redemption rates there normalize, and we've begun to see the beginnings of a recovery in gross sales in that suite.

Obviously, outflows in Q1 being half of last year's level is an encouraging data point. I'm encouraged that the retirement date fund flows remain strong, just shy of $7 billion in Q1. I'd say our ETF momentum, Dan, is building. It's small but growing to a point where it is having an impact. I would just say our pipeline is healthier in general with improved performance, we have less AUM marked as at risk, we have more in the way of notified unfunded wins, fewer notified terminations, and there's just more activity around new opportunities. At OHA, I think the capital raising pipeline there is going well, and ultimately that will convert to growth in fee basis AUM and flows.

With regard to channels, we actually had modest positive inflows in three of our channels in Q1. And even in the areas where we remain with outflows, we did see lessened redemptions and improving gross sales. Look, flows are extraordinarily hard to predict. As I noted in the prepared remarks, we did have some rebalancing impact in April that was very short notification and went against us. That easily could have gone the other way. I mean, ultimately, there are instances where you have really compelling performance or you manage an asset class that has outsized performance, and the underlying clients need to target back or rebalance back to their target allocation. So those sorts of flows are part of the business. I think that makes me much less concerned than when we're losing mandates or being terminated.

The last thing I would say with regard to flows is that the industry backdrop really seemed to be firming in the first part of the year, really through Q1. And it's been softer in April from the high frequency data that we get. So, I think we'll just have to watch with regard to whether that's a blip or kind of whether it's the beginning of a period of softer underlying flows broadly. But ultimately, there are a lot of things that I see that are encouraging that will allow us to, as I said, have substantially less in the way of outflows throughout the course of the year, even if it isn't linear improvement.

Yeah, thanks, Patrick. We -- similar to last quarter, we used first quarter average as an estimate for our expense growth guide, and we try to give a range around reasonable assumptions for market movement from that average in our percentage guide. And as you noted, we've had some decrease in markets in the first start of the -- in the start of April in the quarter, but that puts us back around the place we started from an average perspective.

Sure. So, thanks for the question. Let me offer a couple of points. So, the first point that I would offer is when you look at our U.S. defined contribution assets under management, roughly 75% of those defined contribution assets are our DCIO channel. And so, we feel really strongly about the fact that we continue to offer solutions across many different types of record keepers and through many different types of accounts in that DCIO channel. And that's through hard work with partners on the intermediary side of our business.

With specifically about our retirement services business, we feel really good about that business in the fact of two things. So, number one, as I mentioned in my earlier remarks, in the fact that 60% of that business overall is in proprietary products, and that's unique for T. Rowe Price. The second thing about that retirement business is we do also have an individual investor channel where a participant, if they should choose, can roll over. And we do see that that is an advantage for us in terms of overall economics, but overall meeting participant needs where they are. So hopefully that's helpful perspective.

Yeah. The one thing that I would add quickly is within our individual investors, one area that we've been investing in is our advisory capability, specifically around rollovers and retirement. So, in addition to the retiree acquisition last year, which is another tool to help optimize decumulation, we've been investing in retirement advisory services. And it's a part of the individual investor business that's growing.

Maybe picking up on one more point that you mentioned, Brian, because we do have the record keeping business in house, we are able to more quickly roll out solutions that we want to add on from a plan sponsor perspective. So, all the services that Dee talked about earlier, because we have the inner workings of the plan recordkeeping, we're able to launch those more quickly than if we had to do that on another platform. But it does allow us to kind of test those and then roll them out more broadly as clients prefer.

It also gives us some pretty meaningful perspective to engage with clients outside of the U.S. as defined contribution schemes evolve. So, we have an existing opportunity in Asia, we're working on another one, and there are a handful of opportunities to partner with folks to leverage the expertise that we have as a retirement date fund provider, but also as a plan sponsor, to kind of partner with people outside of the U.S. as they really develop their approach to defined contribution.

Yes, Alex, thanks for the question. On the latter, I would say nothing that kind of would be material enough to call out in terms of known redemptions there. If you take a step back, I'd say there are many elements of the OHA deal that I'm very happy with. I think it's been an excellent cultural fit. They're very good investors. They have associates that are deeply committed to their clients. Their investment performance across their range of strategies from distress to structure to multi sector has been very strong. We have some emerging distribution synergy. You mentioned launching the BDC in the wealth channel, so that's the first of many potential opportunities there, and I'll spend a few seconds more specifically on that. But we've also seen multiple T. Rowe Price referrals from institutional relationships around the globe that are now translating into new business for OHA.

But as you noted, the growth in fee basis AUM has been slower, particularly over the course of the last couple of quarters. There have been some redemptions, primarily in their liquid book. There's been some challenges around deployment. Some of what they do in distressed is trigger based, and it, I suppose is a good thing that there hasn't been a lot of distressed or spreads haven't been wide enough to actually trigger calling and deploying some of that capital. There's been less new issuance in private credit in general, and OHA has been less active in some of the parts of the market that have grown most rapidly, so insurance or senior direct lending. That said, I think the direction of travel here is encouraging. I noted earlier when I was talking about flows that their capital raising pipeline is strengthening. I would expect -- you'll call it mid-teens growth in capital under management, and in particular their dedicated senior private lending product is gathering a lot of momentum. I do think ultimately, they'll have -- call it kind of mid -- high-single digit growth in fee basis AUM this year, and that will start to build momentum going forward.

Specifically, as it relates to OCREDIT, we had almost $1.4 billion in invested assets in OCREDIT at March 31, and I think we're doing all of the things we need to do to deliver a great experience for our wealth partners and their underlying clients. The most important order of business right now is scaling and successfully launching on multiple platforms. We had an important launch of our first wirehouse earlier this month, and we've had several smaller launches and have several lined up for the May to July timeframe, and are working on filling things in beyond that. And I would say I'm encouraged by those discussions and the visibility with regard to how that will unfold over the course of the next year.

We've had really good conversations with a range of clients, from large broker dealers and private banks to regional RIAs. We're investing in our sales capacity and field support, including education and additional alternative specialists. Again, this is the first of several offerings that we hope to bring to the wealth channel. I think what I've found is that this is a long sales cycle. It's the first time we've done this. So, it has taken longer than I would have anticipated, or I think the OHA folks would have anticipated at the outset. But I still think that it's a very, very large opportunity, and I'm really enthusiastic about kind of what it will bring in time.

Thanks for the question. In terms of -- let me answer your second question first. I think we are in a really good position where we are with our overall approach to retirement income and how we are making sure that we are continuing to meet the evolving needs and addressing the complexity of decumulation. And so, we certainly already have products in the marketplace, and then I mentioned a couple that are already in development that we're excited about launching later in the year. And so, I would tell you, I feel really well, really good about our position overall to be able to meet the needs of plan sponsors and investors.

I think it's also important to note that we do plan to continue to extend those relationships through our other channels, including our intermediary channel, making sure that we're partnering with advisors and their end clients. And so, we feel good about our lineup that we have today, as well as the lineup coming. So that would answer the first question, or the second part of your question.

Regarding the first part of your question, what I would tell you though is, as we think about retirement income, it's just important to note that there is a fair number of solutions in the marketplace. And where I would say we are differentiated is in the fact of the breadth of our platform. If you think about the fact that T. Rowe Price is uniquely positioned in the fact that we work with plan sponsors, we work with end investors, we work with intermediary clients, we work with institutions, we work with clients across the globe. We are uniquely positioned to be able to support that all the way across, more specifically around retirement income. We also have solutions comparable to the solutions that you've mentioned. And so, I do feel that we are well positioned and there isn't anything that I would say is notable to say that we're behind to mention on this call.

Sure. Thanks. I think for the first part of the question, just maybe to clarify, it wasn't about a capitalization of labor. This was related to our U.K. entity where we moved into a new building at the end of last year, and we had a nonrecurring benefit in the first quarter of this year related to that. It's not material in terms of operations and really wouldn't be expected going forward. We just called it out as a one-time benefit. With regard to research fees, yes, we did call that out as a benefit in 2024. I think what I would say is that we remain fully committed to external research and its value, but the mix of hard and soft dollar will flex over time as we work with different regulations and work with how our clients want to receive those costs.

Yeah, that mix is really driven by the regulatory environment and client preference.

Sure. So, I mean, we've spoken in the past, on average, if we take a step back, I mean, a number of our products, whether it's by different vehicles or by larger institutional clients, we tend to see about 1% to 1.5% fee compression annually. Again, that can be higher or lower depending on specific choices we make about fees. But certainly, the direction of travel has been that when clients can take advantage of scale, they will get discounts for the pricing when they come in, and we have a number of large relationships that we manage as part of our strategic relationships.

With regard to performance fees, this was one off. I mean, there are a handful of equity products that we have, not a significant number that have fee arrangements. Of course, within the OHA product range, there are more. This one in particular, this quarter, related to a handful of equity products on the T. Rowe side.

Yeah, we use our scale to invest in our value proposition. And I would say that within asset classes, the trend of fee compression is something that we've navigated for a very long time, and is comparatively stable right now. A few years ago, we made a substantial investment in fee competitiveness of the target date funds and called that out specifically at the time. But I would say overall, I feel very good about our value proposition and our fee competitiveness right now. So, where you see fee compression, I think it would be natural where you have a migration from funds to trust, where you have more rapid growth in some lower fee vehicles, or ultimately there are puts and takes.

I'd say, market movement also drives a fair bit of this from quarter to quarter, but I don't think that there's anything unusual or that I would call out with regard to the fee environment right now.

Yeah, this is Eric. The one other thing I would add to that is that even within asset class, again, client preference is an important part of that. And when you have really strong performance, something like structured research in the U.S. equity business, which competes directly with passive but at a better fee versus passive but lower than our overall average fee, you'll see some mix within asset class, but that's really good business for us and is a really strong endorsement of our underlying research capabilities.

All right, great. Well, we appreciate your questions and your interest in T. Rowe Price. Thank you for joining us this morning. Hopefully, you found Dee's retirement update informative. We will continue to evaluate special topics to integrate into future calls so we can give you a deeper understanding of our business. So, again, thanks for joining us and have a good day.