T. Rowe Price Group, Inc. (TROW) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the T. Rowe Price Group 2021 Annual Meeting of Stockholders. I'm Bill Stromberg, Chair of the Board and CEO, and I'll preside over today's meeting. In an effort to support the health and well-being of our stockholders, associates and directors and based on the success of last year's virtual annual meeting, we determined to hold this meeting in a virtual format again. I'd like to call the meeting to order. The agenda and rules of conduct are available on the virtual meeting site. The rules of conduct will govern how we will run the meeting. And as stated in the rules of conduct, please limit your remarks to the proposals set forth in the proxy statement. Please note, we've allotted an hour for this meeting. There are 11 Directors who've been nominated for election, all of which are attending this meeting. The nominees are Mark Bartlett, Mary Bush, Dina Dublon, Freeman Hrabowski, Rob Maclellan, Olympia Snowe, Bob Stevens, Bill Stromberg, Rich Verma, Sandra Wijnberg and Alan Wilson. Thank you. David Oestreicher will act as Secretary of the meeting. Representatives of Broadridge Financial Solutions has acted as the tabulator for this annual meeting. Jim Raitt of American Election Services will act as the Independent Inspector of Elections, and he has taken his oath as the Inspector of Elections, which will be filed with the company's records. [ Christopher Soneski ] of KPMG, our public accounting firm, is with us and will be available to answer any questions you might have related to their engagement. The record date for voting at this meeting was the close of business on March 11, 2021. The Secretary has delivered an affidavit of mailing to show that notice of this meeting was given. A copy of both the notice and the affidavit will be incorporated into the minutes of this meeting. This morning, we're asking stockholders to do 4 things: elect 11 Directors to our Board; approve by a nonbinding advisory vote, the compensation paid to our named executive officers; ratify the appointment of KPMG to serve as our public accounting firm for 2021; and consider a stockholder proposal requesting the preparation of a report on voting by our funds and portfolios on matters related to climate change. After we complete our official business, I'll provide more detail on our 2020 results and this year's first quarter results, after which there will be a question-and-answer session. In order to begin, our bylaws require that a majority of all votes entitled to be cast at the meeting be represented in person or by proxy for us to have a quorum. The stockholders' list shows that holders of 227,453,209 shares of common stock of the company are entitled to vote at this meeting, with each share having 1 vote. We are informed by the Inspector of Election that there are represented in person or by proxy, 192,377,966 shares of common stock or approximately 84.57% of all shares entitled to vote at the meeting. Based upon the percentage of the total shares of the company held by holders of record now present at the meeting, either in person or by proxy, a quorum is present. The report of a quorum and all proxies received at this meeting will be filed in the company's records. This meeting is now duly convened. We will now consider today's proposals. Please note that we will give stockholders an opportunity to comment on the proposals themselves after all 4 proposals have been presented. If any stockholder would like to ask a question or comment on any of the proposals, please submit your questions through the web portal beginning at this time. Proposal #1. The first proposal is the election of 11 Directors to hold office until the 2022 Annual Meeting of Stockholders. The nominees have been introduced and are listed in your proxy materials. The Board of Directors recommends a vote for all Director nominees presented for election in the proxy statement and at this meeting. The second proposal, commonly known as "Say on Pay," is a nonbinding advisory vote to approve the compensation paid to our named executive officers as disclosed in our proxy statement. The Board of Directors recommends approval of the compensation of the named executive officers. The third proposal before us today is the ratification of the appointment of KPMG as our accounting firm for 2021. The Board recommends the ratification of the appointment of KPMG. The fourth proposal before us today is a stockholder proposal seeking approval to request the preparation of a report on voting by our funds and portfolios on matters related to climate change. The Board recommends a vote against this proposal. Ms. Sonia Kowal of Zevin Asset Management is now invited to address the meeting as the proponent of proposal 4. Ms. Kowal, in consideration of the rules of the meeting and the time allotted for the meeting, we ask that you limit your remarks to 3 minutes. Ms. Kowal, you're free to address the meeting.

Thank you very much. Fellow shareholders and members of the Board, on behalf of Zevin Asset Management and our clients, I hereby move proposal #4, which asks for a report on potential inconsistencies between the proxy voting policies and practices of T. Rowe Price and its subsidiaries and T. Rowe Price's public statements and pledges regarding climate change, including investment considerations associated with climate change risk. Public voting records for T. Rowe Price's mutual funds reveal consistent votes against the majority of key climate change-related shareholder proposals that came to a vote at portfolio companies. Last year, T. Rowe Price Funds supported only 49% of such resolution, even when independent experts advanced a strong business and economic case for support. According to an analysis by Morningstar in December, several notable peers all support significantly higher shares of reasonable climate change-related proposals including Hartford at 90%; Columbia Threadneedle at 82%; Invesco, 66%; and JPMorgan at 57%, among others. According to the company's own figures, as disclosed in the statement of opposition to this proposal, funds only supported 30% of 81 proposals on environmental issues in 2020. That voting record flies in the face of the reasonable expectations of T. Rowe Price's investors and clients, and it requires further analysis and disclosure. T. Rowe Price has adopted policies and taken steps that affirm the importance of ESG risk management and sound investment practice. However, our company needs a better approach to proxy voting. We hope you will support this proposal for 3 reasons: The first being T. Rowe Price Funds are leaving valuable investable information on the table. T. Rowe Price could more effectively use proxy voting to support reasonable shareholder proposals and illicit climate risk-related information from portfolio companies. Number two, more thoughtful proxy voting would be more consistent with the expectations of T. Rowe Price clients and other stakeholders. T. Rowe is a member of the Principles for Responsible Investment, PRI, a global network of investors and asset owners representing more than $89 trillion in assets. One of the principles encourages investors to vote conscientiously on ESG issues. And number three, T. Rowe Price Funds lag behind the practices of large peer investment institutions, many of them fellow PRI signatories. In its statement of opposition, T. Rowe Price quotes from its proxy voting policies to emphasize that its voting practices address ESG issues and its subsidiaries evaluate ESG proposals on a case-by-case basis, supporting well-targeted proposals, addressing concerns that are particularly relevant for our company's business but have not yet been adequately addressed by management. However, that approach is inadequate because it appears to have prevented the company from supporting comments and steps on climate change and environmental issues in the majority of circumstances. Proposal #4 asks T. Rowe Price to improve its practices and evaluate whether its proxy voting philosophy and actions, meet its goal of serving the best interest of clients consistent with fiduciary duty and investing best practice. We urge you to vote yes on proposal #4. Thank you.

Thank you. We will now address any questions. Questions and comments may be made through the web portal at this time.

Mr. Chairman, the first question comes from Mr. John Barber. The question reads, "Mr. Chairman, the carpenter pension fund holds a total of 251,200 shares of the company's stock. As long-term investors, we strongly believe that the company's executive compensation plan should be designed primarily to drive the successful execution of the Board's long-term strategic business plan. Today's public company executive compensation plans are largely formulaic, peer-related plans with simplistic annual 'Say on Pay' voting reinforcing plan homogeneity. Would you or the Chair of the Compensation Committee speak to whether T. Rowe Price would be better served by an executive compensation plan tailored specifically to the company's particular circumstances and its unique long-term strategic business plan? Thank you."

This is Bill. We do believe we would be best served by having a -- incentive plans structured to our needs, and we believe that we do have that. I think you're correct in assessing that some of the proxy evaluation firms that exist prefer formulaic compensation. We have gone out of our way to leave considerable room for judgment by our Compensation Committee of the Board, and I think that they've exercised that judgment over the course of time. The company has performed very well over the course of time and consistent, I think, with the pay that we've received.

Excellent. We've also received a follow-up question from Mr. Barber, which reads, "Mr. Chairman, the topic of stakeholder capitalism as an alternative to shareholder capitalism has received considerable attention recently. As long-term pension fund investors, the carpenter's funds appreciate the sentiment embodied in the stakeholder capitalism perspective, but feel that execution could be complicated. Could you discuss the Board's perspectives on the concept of stakeholder capitalism and what principles the Board would use to balance the interest of varied stakeholders as it develops and implements the company's long-term business strategy? Thank you."

This is Bill again. My understanding of stakeholder capitalism is that leaders of the company manage the affairs of the company in such a way that it takes into account not just stockholders but also its associates, the clients, the communities where the company operates. And I think T. Rowe Price has a long history of managing the company in a balanced way like that. As you say, though, from your question, this can be tricky, balancing all the needs of those various stakeholders. We try to strike that balance. Over the course of time, we debate issues among our leadership team and with our Board on a regular basis. From time to time, we may not reach the balance that some might prefer we achieve. But I think over the long course of time, we do achieve a good balance.

Mr. Chairman, there are no further questions on the stockholder -- on the proposals from this meeting.

Thank you. Because no further business is on the agenda to come before this meeting, we'll move on to voting. The polls are now open for each matter to be voted on today. Any stockholder who hasn't yet voted or wishes to change their vote may do so by clicking on the voting button on the web portal and following the instructions there. Stockholders who have sent in proxies or voted via telephone or Internet and do not want to change their vote, do not need to take any further action. I will allow some time so that people can submit ballots. [Voting]

I declare the polls now closed and ask that the Inspector of Elections collect and tabulate the balance. Okay. We've been informed by the Inspector of Election that the preliminary vote report shows that the nominees for election to the Board have been duly elected, the compensation of the named Executive Officers has been approved by advisory vote, the appointment of KPMG has been ratified and that the stockholder proposal has not been approved. We will be reporting the final vote results in a Form 8-K to be filed with the SEC within 4 business days. If there's no further official business to come before this meeting, the 2021 Annual Meeting of Stockholders of T. Rowe Price Group is now adjourned, and we'll now proceed with the informal portion of the meeting. Please note that the web portal is now available for any questions to be submitted, which will be answered after my presentation. Okay. Let's talk about the company. This is our forward-looking statements page. It says that this presentation may contain forward estimates or opinions about our potential business results. That actual results could be different from the forward-looking statements. And we ask all investors to be careful -- to carefully consider the risks described in our 10-K before they invest. I thought it might be helpful to remind you how we at T. Rowe Price describe ourselves to our clients. We are a global investment management firm, and we're intensely focused on delivering top-tier investment results and service to our clients, and we're now operating out of 17 countries. We're an independent, publicly traded firm with rock-solid financial strength, significant inside ownership and a stable leadership team. We are performance-driven and a collaborative company. And by our -- but our strong culture, in my view, is perhaps our most differentiating strength, and it's very critical to our long-term success. For decades, we have leaned on that culture during tougher times, and we have done so throughout the pandemic. I'm confident it will carry us all the way through. Over the past year, a series of violent acts of racism against black U.S. citizens and other underrepresented minorities have angered and saddened us all. Across T. Rowe Price, our associates engaged in conversations to support each other and deepen our understanding of racism's extensive roots in our society. I'm proud of the way our associates have responded to the crisis. Diversity, equity and inclusion are strategic enablers for our business and important to our long-term success. We made good progress on a variety of DEI initiatives, and we've listed some here on this page. Our leadership team restated its commitment to DEI and began executing a plan to improve representation of women and underrepresented minorities across the company. We strengthened our DEI leadership team and have engaged more of our associates than ever. We've also listed some metrics that are helping us track our progress on the right. Though we have further to go on our diversity journey, our commitment remains unwavering, and I'm encouraged by the progress that we're making. T. Rowe Price has been in business for 84 years. We've operated as a publicly traded company, since 1986 when our IPO took place. Since then, we've delivered strong and consistent financial performance. On the left, we show the growth of earnings per share, the blue line, and dividends per share in the green line from our IPO right up through the end of 2020. And with most -- our most recent dividend increase in February of this year, the firm has now raised its dividend for 35 consecutive years. On the right, you can see the compound annual growth rates for revenues, GAAP earnings per share, dividends per share and total shareholder return over the last 5, 10, 20 and 30 years. Overall, T. Rowe's total return to shareholders has been very attractive and in line with the growth of earnings and dividends over the long term. We continue to manage your company with a long-term horizon in pursuit of consistent financial performance. And we believe that long-term shareholder returns will be consistent with the growth of earnings and dividends over time. And notwithstanding our long-term financial success, a number of trends since the financial crisis of 2008, '9, continue to drive disruption in our industry. To highlight a few, Target Date Fund competition continues to intensify. Fortunately, our performance in our Target Date strategies remains outstanding, and we continue to invest in our capabilities. In addition, there's accelerating client interest in products that consider ESG or environmental, social and governance factors and in alternative strategies that invest in private securities. We're investing in both of these areas for the long term. Passive or index investing has continued to grow as well, and it's raised the bar on performance for active managers and put pressure on fees. Increasingly, many clients are requesting customized vehicles beyond just mutual funds and we're moving quickly to make them available. Lastly, another important trend is that large distributors such as a Morgan Stanley or a Bank of America or a Schwab are working with fewer asset managers. It heightens the importance for firms like us to invest in building healthy partnerships with all of our clients. Despite the ongoing challenges, 2020 was another strong year for T. Rowe Price with significant progress made across a variety of strategic initiatives. It's particularly special given the pandemic and its disruption to our business and our associates. For example, we broadened our investment teams as we announced the formation of a new T. Rowe Price Investment Management subsidiary, which will incept in the second quarter of 2022. Over time, we expect TRPIM or T. Rowe Price Investment Management to allow us to continue to deliver strong investment results for years to come even as our business grows. Within distribution, we continued to invest in our U.S. intermediary business and expanded our sales efforts in EMEA and Asia Pacific. Good, new business momentum in these areas continued, and this gives us confidence to continue to invest for growth. Investment performance is critical to our long-term success, as you know. And through March 31 of this year, our long-term performance for clients remains strong relative to peers and relative to benchmark. Our results over shorter time periods have been solid, though a little bit less strong. Our investment teams remain as focused as ever on delivering outstanding long-term value for our clients. On the left is a look at our U.S. retail mutual fund results versus peers, and we think these are indicative of overall firm-wide results. We show 70% or more of our funds in the top 2 Morningstar quartiles with a healthy percent in the top quartile over 10 years. On the right, our results for our investment composites, which include all vehicles, net of fees versus benchmark. These figures are probably the best representation of our performance versus benchmarks across our entire book of business. And these results are very strong over 5 and 10 years, and very solid over 3 years. No matter what else we say in a presentation like this, you all should know that our investment performance will always be a top priority for us. As of March 31 of this year, our assets under management have grown at 12% compounded over the last 10 years, driven by good market returns, the alpha we've generated above the market returns and by positive net cash inflows. Also highlighted here is the 16% annualized growth of our multi-asset business with the gold line. This includes our very successful Target Date and Target Retirement strategies, which have been key growth drivers for the company. Here's a look at our most recent growth in revenues, earnings and dividends. Revenue growth was solid at 11% in 2020, as seen on the left, and AUM, assets under management, recovered rapidly after the downdraft in the first quarter of 2020. Market recoveries, coupled with from lower expense items during the pandemic, led to an attractive 19% earnings per share growth in 2020. On the right are highlights of our 2021 first quarter, which we reported in late April. Markets remained strong, and our Q1 revenues rose significantly up 25% compared to last year's first quarter. Earnings per share followed suit growing 61% year-over-year. Rest assured that we continue to invest in our capabilities. We now expect our expenses to grow 10% to 14% in 2021. Lastly, in February of this year, we increased our quarterly dividend by 20% to $1.08 per share per quarter. Our balance sheet remains rock-solid, which has been a hallmark of our company for many years. This financial strength allows us to invest back into our business through good times and bad. As of March 31, 2021, we had about $4.85 billion in cash and discretionary investments, no debt and 8 billion in stockholders' equity. And while we have been reinvesting in our business, we've also been returning capital to shareholders. All the way to the right on this chart, you can see that over the last 10 years through December, we have returned 89% of our earnings to stockholders through regular dividends, 2 special dividends in 2012 and '15, and through share repurchases. We bought back almost $1.2 billion worth of our shares during 2020, majority of it early in 2020, when our share price declined with the rest of the market as the pandemic spread. We will continue to return capital to shareholders opportunistically. Last December, we announced plans to relocate our global headquarters to Harbor Point in 2024. Harbor Point is a vibrant and growing waterfront neighborhood in Baltimore and Downtown. We plan to lease 2 modern green buildings, which will be custom-built to best suit the firm's needs and to support our collaborative culture with a true commitment to sustainability. We're excited about the move, and we've begun detailed development of the designs and planning. T. Rowe Price believes in giving back to the communities where we work, and this chart shows some of the ways that we do it. T. Rowe Price has funded our Foundation with $177 million cumulatively since its founding in 1981. The Foundation team has granted $143 million since inception and over $11.5 million just in 2020 alone, including $6 million for associate matching gifts. Our associates also volunteered more than 26,000 hours last year, and 365 of our associates serve on charitable boards. We also continue to advance our work on environmental sustainability, and in 2020, hired our first Head of Corporate ESG. Our work has led to consistent improvement in scores by the rating agencies. Giving back to our communities is important to us, and we're going to continue to work -- to do this good work through good times and bad. Finally, our 2021 priorities are here, and some have an evergreen element to them, delivering excellent investment results; attracting, developing and retaining top, diverse talent; continued diversification by expanding global product and distribution teams; and strengthening our operations and technology platforms. But we also have many specific goals for 2021, including returning to our offices this fall, preparing for the launch of our new investment subsidiary, T. Rowe Price Investment Management in 2022, launching additional active equity ETFs as well as our first fixed income ETFs, progressing our middle-office systems transition and further embedding diversity, equity and inclusion and ESG principles across the enterprise. We have a solid plan to grow and diversify our business while driving efficiency through the organization. I want to thank you for the confidence you place in us. We're going to work as hard as we can and as smart as we can to continue to earn it. This concludes the management presentation. I'll now open the floor to questions. As stated in the rules of conduct, we will impose a limit of one question per stockholder, which must be no more than 3 minutes in length. After all stockholders wishing to ask questions have had the opportunity to do so, additional questions, up to a total of 3, will be allowed if time permits. Please note, we'll attempt to answer as many as -- questions as time allows.

Thank you, Bill. The first question comes from [ Mark Zashen ]. His question is, "How is price competing with the rise in ETF? How will the company manage funds with the Biden tax plan?"

I'm going to ask our Chief Investment Officer and Head of Investments, Rob Sharps, to answer that.

Thank you, Bill. We've been evaluating our approach to ETFs for some time. In 2020, the SEC approved semitransparent active equity ETFs. We have built an ETF team. We've launched 4 semitransparent active equity ETFs that represent flagship T. Rowe Price equity strategies. They've been in market since August of 2020 and are performing well. On a go-forward basis, we do intend to launch additional ETFs, including transparent ETFs in several bond categories. If I take a step back, I think we view ETFs as one among many vehicles through which clients can access our investment strategies. Our goal is subject to certain limitations to make our strategies available in this broader range of vehicles as we can, including our open-ended funds, ETFs, collective trusts, model accounts and separate accounts to suit client needs. With regard to the second part of the question in terms of the Biden tax plan, there's still a lot we don't know about what the ultimate legislation will look like. We will follow it and evaluate ways to address it for clients in taxable accounts. But I think it's important to remember that the vast majority of our client assets are in tax deferred or tax-exempt accounts, largely retirement related.

Excellent. The second question also comes from [ Mark Zashen ], and he asks, "How does, will -- again, I'll say, T. Rowe Price, increase its presence in the alternative private equity area?"

Yes. This is Rob Sharps, Mark. I'll go ahead and take that one as well. Several years ago, we began to develop strategies, leveraging our confidence in investing in publicly traded securities to address the alternatives marketplace. We currently have several entries in the dynamic and unconstrained bond category as well as a Multi-Strategy Total Return offering, all of which are in various stages of developing track records, many of which are quite compelling. We also launched our first Cayman vehicle late in 2020 for an absolute return strategy. So my observation would be for the -- for whether it's a liquid vehicle or an illiquid vehicle, for strategies that are investing in public securities, we've got a number of entries that ultimately, I think, are promising and will meet client need. With regard to alternatives in the illiquid category, things that invest in private assets, whether it's private real estate, infrastructure, private equity, private credit, it's not something we participate in outside of making some specific investments for our liquid portfolios. But it is something that we're evaluating. The trend toward greater allocation to illiquid strategies and private assets among many of our clients is not something that's lost on us. And we will kind of evaluate what our approach to that will be on a go-forward basis.

Our next question comes from [ Mr. William Webb ]. His question is, "As of March 31, 2021, the company held more than $2.8 billion of cash and cash equivalents. Periodically, the company has special -- has paid special dividends in the past. Is the Board considering another special dividend, particularly if income tax rates go up in 2022?"

This is Bill. We have paid special dividends a couple of times in the past. We are in regular conversation with our Board of Directors about uses for our -- that cash, and we have considered it and talked about potential for special dividends at most meetings. We still have not made a decision about anything that we would do this year. But again, the dialogue remains robust around our use of capital.

Our next question also comes from [ Mark Zashen ]. He asks, "How does the company approach the IPO market for investments?"

This is Rob. We generally approach evaluating opportunities with IPOs in a very similar way to the way we would approach a currently listed security. We do very rigorous underlying due diligence. But more recently, often, that starts with a test-the-waters meeting to the extent that we don't have a private investment in the company, so don't have a longer-term track record. We generally meet with the company's executive leadership team on a road show. Our research analysts will write a research report, making a recommendation, including underlying financial models. And ultimately, the portfolio managers will make the determination partly based on that research whether or not an IPO is appropriate for the portfolios that they manage.

Mr. Chairman, there are no additional questions.

With no further matters to come before the meeting, the meeting is now adjourned. Thank you for joining us today.