With unprecedented circumstances affecting the markets in 2020, there has been an evident rise in active management.
ETF Database spoke with James Norungolo, Investment Specialist, U.S. Equity at T. Rowe Price, to discuss what sets T. Rowe Price’s active management strategies apart and why navigating market shifts requires an active strategy dialed into areas that can rely on long-term performance, as well as anticipate new developments.
As Norungolo explains, active management has been a big topic this year, but the case may not look so compelling when looking at equally weighted statistics, but he notes there’s a different picture when looking at the asset weighted universe.
For instance, looking at all the Morningstar categories that were recently reviewed, the trailing three-year number through the end of the second quarter showed about 44% of active managers outperformed over that period. However, when asset-weighting the outcome, the outperforming percentage number increased to 52%.
Norungolo puts forward this information as a way of suggesting scale matters in active management. So, in terms of what sets T. Rowe Price apart – being a trillion-dollar asset manager with decades of experience managing these markets, they’ve built one of the largest, dedicated fundamental research teams in the industry, along with establishing a unique culture powered by collegiality and collaboration.
An Active Culture
“I don’t believe people stick around here unless there’s something special going on,” Norungolo states. “So, when you have portfolio managers that have decades of experience, who have come up through the analysts’ ranks; when you have this culture and, from a mentoring standpoint, you continue to pass this cultural touchstone along to new people joining the organization, I think that just helps to perpetuate it.”
Additionally, running a centrally oriented research model, without that culture or the ability to have analysts feel very comfortable approaching portfolio managers with their ideas that could be up for debate, let alone being incentivized to make sure the best ideas are actuated in portfolios, the success will not come.
To break down the numbers, T. Rowe Price has more than 170 equity analysts spanning the globe. Based on how things are covered, they become industry experts, which emphasizes how their scale matters. Based on these factors, they are enabled to hit many touch points with management teams, including early-stage private companies.
In fact, as Norungolo notes, "Having these types of meetings with early-stage companies help our analysts understand new developments in the industries that they cover. It helps us get to know management teams early on. So, whether we invest in the IPO or wait until they’ve been public for a little while, we know the team and their strategy."
He continues, “It allows us to get more comfortable with the name, and as they graduate up the cap tiers and become a large cap universe constituent, in many cases, we’ve known that company for a long time, and have maybe already invested alongside it, as it has developed. That makes for a competitive advantage.”
Analysts From All Angles
In addition to the equity analysts, there are around 100 fixed income analysts, investments in quantitative strategies and quantitative management capabilities since the 90s, and a suite of quantitatively managed products. T. Rowe Price has also formed an equity data insights team, which is embedded in the investment process, mining big datasets, and supervising insights to fundamental analysts at a company, industry, and macroeconomic level. And finally, there’s a dedicated ESG team.
As Norungolo makes clear, all of this enables portfolio managers to look at ideas through multiple lenses and allows the fundamental equity analysts to frequently partner with the fixed income analysts and take a look at other companies from various angles.
He explains, "Through the early part of the Covid crisis, understanding balance sheets, sources of liquidity, and debt covenants was vitally important because we really wanted to make sure that we didn’t have exposure to too many companies that might need to do dilutive equity raises. So, we have multiple examples of interactions with management teams where we had fixed income, equity analysts, and ESG analysts at the table, having those conversations, once again highlighting the benefits of our scale and having these resources deployed in a collaborative way.”
There’s also the long-term view, which means assessing the outlook for various businesses or industries beyond the next quarter or two, so T. Rowe Price can work on being patient with investments, get involved if there’s controversy, and let things play out over that longer period of time. That longer-term orientation is another excellent factor in supporting the active management philosophy.
T. Rowe Price currently offers four actively managed ETF strategies, which are the T. Rowe Price Blue Chip Growth ETF (TCHP), T. Rowe Price Dividend Growth ETF (TDVG), T. Rowe Price Equity Income ETF (TEQI) and T. Rowe Price Growth Stock ETF (TGRW).
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