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

Good morning. My name is Howard, and I will be your conference facilitator today. Welcome to T. Rowe Price's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded and will be available for replay on T. Rowe Price's website short after the call concludes. I will now turn the call over to Linsley Carruth, T. Rowe Price's Director of Investor Relations.

Hello, and thank you for joining us today for our second quarter earnings call. The press release and the supplemental materials and documents can be found on our IR website at investors.troweprice.com. Today's call will last approximately 45 minutes. We'll start the call with our Chair and CEO, Rob Sharps; CFO, Jen Dardis, and President, Co-Head of Global Investments and CIO, Eric Veiel discussing the company's results. Then we'll open it up to your questions. We ask that you limit it to one question per participant. I'd like to remind you that during the course of this call, we may make a number of forward-looking statements and reference certain non-GAAP financial measures. Please refer to the forward-looking statement language and the reconciliations to GAAP and supplemental materials as well as in our press release and 10-Q. Discussions related to the funds is intended to demonstrate their contribution to the organization's results and are not recognitions. All investment performance references to peer groups on today's call are using Morningstar peer groups and for the quarter that ended June 30, 2026. Now I'll turn it over to Rob.

Thank you, Linsley. I'm joined today by Jen Dardis, Chief Financial Officer; and Eric Veiel, Co-Head of Global Investments, Chief Investment Officer and newly named President of T. Rowe Price. Before Jen and Eric provide an overview of our financials and investment performance, I'd like to share a few thoughts on the quarter and the progress we are seeing across the business. Markets rebounded in the second quarter after a difficult start to the year. We ended the quarter with $1.9 trillion in assets under management and $6.5 billion in Q2 net outflows. Fundamental active equity remains under pressure, and we expect that to continue in the second half of the year. Positive was in May and June, including a large sub-advisory win, reflect client demand in areas where we are investing and gaining traction. For example, we are seeing growing demand for strategies that integrate our fundamentals and quantitative platforms and directly leverage our equity research platform. Our integrated equity and fixed income strategies combined fundamental research, quantitative insights and aim to generate differentiated consistent returns. Earlier this year, we extended this franchise with 2 lower tracking error active core equity ETFs. We have also expanded our long-standing equity research franchise, applying our analyst-driven fundamental investment approach across a broader submarket and asset classes. In addition to our flagship U.S. strategy, the platform now includes international, global, emerging markets, U.S. mid cap and SMID strategies. We believe these integrated and risk-controlled active approaches offered through a variety of investment vehicles, appeal to clients seeking the benefits of active management with lower tracking error. Together, these approaches account for about $200 billion of our assets under management and have added $16 billion of net inflows year-to-date. We are also seeing momentum in active ETFs and SMAs, where we're expanding to meet the evolving needs of clients [indiscernible]. In June, we launched the T. Rowe Price Capital Appreciation Market Opportunities ETF, further extending one of our well-established investment suite. In mid-July, we launched T. Rowe Price Active Crypto ETF, which is an actively managed multi token exchange traded product and our first non-investment company, [ ETF ]. With these launches, our ETF business has grown to 34 funds and $30 billion in assets under management. In addition, we celebrated the 3-year anniversary of our first 4 fully transparent ETFs. Our SMA platform now includes 43 products and $20 billion in assets under management. We are also advancing our strategic alliance with Goldman Sachs. On the first of July, we launched T. Rowe Price Goldman Sachs Private Markets Fund, our first interval fund in collaboration with Goldman Sachs. We completed the first filing for the second fund a public, private equity interval fund, that we expect to launch later this year. And we are hearing positive client feedback on the target date sister series and are operationally ready to launch as a CIT when client demand materializes. Finally, we continue to see strong interest in our T. Rowe Price managed late-stage venture fund and expect to exceed our target fund size later this year, providing a foundation to build on this platform with a second fund anticipated in 2027. We are making meaningful progress in how we use artificial intelligence across the firm. We are moving beyond isolated use cases and tools and embedding AI directly into end-to-end business workflows, with more than 130 AI solutions deployed across the firm and over 70% associated adoption. We are scaling advanced agent-driven capabilities from AI-powered investment research and portfolio insights to sales and client workflows, enhancing decision-making speed and consistency while keeping investment judgment and fiduciary responsibility firmly with our associates. Importantly, this progress is supported by a robust governance framework strong controls and ongoing associated upskilling so we can scale AI responsibly. Before I turn to Jen, I want to highlight several recent leadership appointments. As I mentioned, Eric Veiel has been named President. In his expanded role, Eric will help drive enterprise execution and our most critical initiatives and strengthen connection of investments, global distribution and technology data and operations. He will retain his leadership responsibilities in Global Investments. And Sébastien Page, Head of Global Multi-Asset, is now Co-Head of Global Investments. With his deep multi-asset experience, Seb is well positioned to advance our work on solutions and outcomes. As we approach our 90th anniversary next year, these changes will sharpen execution across our highest priority initiatives and position the firm for continued growth in the years ahead. Finally, I want to thank our associates for their focus, teamwork and commitment to our clients. Their work is building momentum and strengthening the firm for the long term. With that, I will ask Jen to cover our financials.

Thank you, Rob, and hello, everyone. I'll review our second quarter financial results, before turning it over to Eric for comments on Investments performance. Our adjusted diluted earnings per share for Q2 2026 was $2.57, up to $2.52 in Q1 2026 and $2.24 in Q2 2025. The increase over both prior periods was driven primarily by higher average AUM and higher investments advisory revenue, coupled with lower share count, offset in part by higher expenses. As previously reported, we had $6.5 billion in net outflows in Q2. While we experienced elevated outflows in April, we saw positive flows in both May and June. May flows were driven by a large defined contribution investment-only win into our hybrid target date series and June flows benefited from a large sub-advisory win into 2 of the research and integrated equity strategies that Rob discussed. We also saw positive flows from clients in both EMEA and APAC during the quarter. Fixed income, multi-asset and alternatives each delivered positive net flows in Q2, continuing to demonstrate the breadth of client demand across several areas of our business. Within our growing ETF business, we had $4.4 billion in net inflows. We also continue to see steps in our hybrid and blend retirement strategies, which now account for about 25% of our overall target date assets. Our Q2 adjusted net revenue was $1.9 billion, up 2.7% from Q1 2026 and up 8.5% from Q2 2025. The increase was driven by higher AUM, partially offset by a lower change in accrued carried interest, which now includes the carry earned on our late-stage venture fund in addition to the private credit strategies. Investment advisory revenue for the quarter was $1.7 billion, up from both the prior quarter and the prior year quarter on higher AUM levels. Our annualized active fee rate, excluding performance-based fees, was 38.1 basis points compared with 38.4 basis points in Q1 2026. The ongoing trend in our effective fee rate continues to reflect changes in asset and vehicle mix, including client demand for lower fee strategies and vehicles as well as continued pressure from redemptions in higher fee equity strategies and mutual funds. Turning to expenses. Q2 adjusted operating expenses were $1.2 billion, up 4.2% from Q1 2026 and up 4.9% from Q2 2025, compared to both prior periods, higher market-driven expenses, product and recordkeeping and nonrecurring G&A costs were primary drivers of the increase. As a reminder, market-driven expenses correlate to changes in AUM or revenue and include variable compensation and costs related to assets distributed through third-party intermediaries. The increase in product and record-keeping costs is largely related to costs reimbursed from our products and offset in administrative fee revenue. Also contributing to the increase from Q2 last year were higher technology, occupancy and facilities expenses, partially offset by cost savings initiatives. As we noted in Q1 2026, to better reflect technology spend executed by third parties, we began reporting technology-related professional fees in technology, occupancy and facilities, and we adjusted all prior periods presented. Based on the sustained average AUM and revenue trend in the first half of the year, we now expect full year adjusted operating expenses, excluding carried interest expense, to be up 4% to 7% over 2025 $4.6 billion. This increase, coupled with ongoing savings efforts, will allow us to continue to invest in areas of future growth, including ETFs and SMAs, delivering outcome-oriented solutions for clients, enhancing our advice blood offerings and investing in AI to improve research, decision-making and operational efficiency. Turning to capital management. During Q2, we bought back [ $157 million ] worth of shares, bringing year-to-date buybacks to over $497 million, or nearly 2.5% of our outstanding shares. This brought our share count at the end of Q2 to 213.3 million shares. Our balance sheet remains strong with $4.4 billion of cash and discretionary investments. Our ample cash position gives us the ability to invest in the business and also pursue opportunities that strengthen our long-term competitive position. And now I'll turn it over to Eric for comments on Investments performance.

5 Thank you, Jen. I'll start by saying that our investment platform remains strong with deep research capabilities, a long-term track record of outperformance and expanding capabilities across equities, fixed income, multi-asset and alternatives, powered by world-class talent and driven by a steadfast commitment to clients, investment excellence remains our top priority. Turning to performance. In the second quarter, over half of our funds beat their peer groups for the 1-, 3- and 10-year time periods, while the 5-year missed this mark with 44% of funds beating their peer groups. On an asset-weighted basis, 10-year performance remained strong with 79% of funds outperforming. On a 1-, 3- and 5-year basis, 44%, 57% and 43% outperformed, respectively. Our equity funds mirrored the overall fund range with over half of the equity funds beating their peers for the 1-, 3- and 10-year time periods, while 5-year time period fell below this threshold. On an asset-weighted basis, equity funds continued to deliver strong performance for 10-year time period, while the near-term time periods are more challenged. Within our equity franchise, U.S. equity research, global stock, global value and mid-cap value stood out as strong performers, [indiscernible] quartile performance for the 3-, 5- and 10-year time periods. Our fixed income funds continued to deliver strong performance. On an asset-weighted basis, over 75% of the funds outperformed for all reported time periods. Within our fixed income franchise, global multisector, institutional floating rate and several of the muni strategies stood out as strong performers with top quartile performance for the 3-, 5- and 10-year time periods. In our target date franchise, long-term performance remained strong with 80%, 54% and 98% of AUM outperforming their peers on a 3-, 5- and 10-year basis. The 1-year target date performance rebounded with 80% of AUM outperforming peers, driven by strong performance in the second quarter when 79% of AUM outperformed peers. Last quarter's strong performance was due to our retirement glide paths higher relative equity exposure as well as our tactical asset allocation decisions. Turning to alternatives, despite the negativity continuing to surround private credit, OHA's funds generated gains across both institutional and wealth products. CLO's strategies rebounded following challenging performance in Q1, but remain down on a year-to-date basis. Distressed and opportunistic funds mostly generated losses in Q2 and had mixed first half results reflecting the uneven market environment. OHA's liquid credit funds and mandates generated gains on an absolute basis but underperformed their benchmarks, largely driven by several high conviction positions that experienced increased volatility. Before we take questions, I want to say a word about the 2026 Russell reconstitution. What we saw with the reconstitution in June was not a routine rebalance. It was a significant reshaping of benchmark risk characteristics. There was over $300 billion of turnover, but more importantly, there was a substantial migration of AI-related exposures, momentum factors and technology leadership across benchmarks. As a result, in the Russell large and mid-cap growth benchmarks, AI-related exposure increased materially, while small cap and value benchmarks simultaneously lost exposure to many of the recent market's strongest performance drivers. The rebalance did not simply reshuffle stocks. It effectively reassigned exposures to some of the most influential themes and factors. That reassignment brought new buyers and sellers into stocks moving across benchmarks, adding volatility to both the broader market and individual names. When benchmark changes are this abrupt and risk profile shift meaningfully, it creates opportunity for active management assess changes through a research-driven lens. And now we'll open the line up for questions.

[Operator Instructions] Our first question or comment comes from the line of Bill Katz from TD Securities.

Eric, once again, congratulations on a new position. Maybe a big picture question for you. As I listened to your prepared comments, I hear a lot of growth in lower fee vehicles, and your comments that active equity is going to remain under pressure. So how are you thinking strategically to reshape the business given the fee rate is going down and the expense growth is still pretty high, all else being equal? And how might M&A help shape that thought process?

Yes, Bill, I'll start. From a strategic perspective, we want to make sure that we're delivering world-class investment capabilities in ways that are aligned with our clients' needs. I would acknowledge that over a relatively long period of time, active equities lost meaningful share to passive and you've had a pretty meaningful vehicle migration away from open-ended mutual funds in the taxable wealth channel, in particular, to ETF and SMA, which has put pressure on fees. In retirement, I would say we're seeing a similar trend where you have a shift from fully active to blended hybrid, which also is putting pressure on fees. I think, strategically, what we'd really like to do is, first of all, invest in maintaining our world-class capabilities from an investment perspective and make sure that we can deliver on our existing client commitments, that we have the talent and resources to continue to generate great results. The active equity business, even though it's been in outflow, is extraordinarily important to us. $900 billion of our AUM is in direct active equity, and it also has an impact on the underlying target date fund business. So we're in no way, shape or form going to deemphasize that business. We think it's going to continue to be important for a very, very long period of time. That said, we do want to grow in fixed income, which is balancing just from a market exposure perspective, active fixed income continues to grow. And I think we're making very substantial progress there. We want to grow in alternatives. And we've talked about our approach to that, whether it's organic with our late-stage venture capability, whether it's through acquisition, for example, OHA or through partnership with our Goldman collaboration. And in each of those instances, I feel we're making substantial progress. I would say, strategically, we also want to invest in our direct platforms. We see having modern digital interfacing capability advice in our direct to individual and our recordkeeping platforms as increasingly important and as a substantial opportunity. Advice is an opportunity to diversify the revenue stream of the organization. And I would say in each of those priorities, whether it's diversification from an asset class and capability perspective, fixed income and alternatives, whether it's diversification from a vehicle perspective, ETF and SMA, or as we lean into our direct platforms, there will be organic investment in those businesses and that may be part of what you're referring to with regard to expense growth, and we can go into that in a little bit more detail to the extent that there is interest. But we'll also continue to evaluate inorganic opportunities. Industry consolidation continues at pace. We see a lot of things. We have a very high bar, but to the extent that there are things that we think are financially compelling and strategically aligned with those objectives, then I can certainly see strategic M&A playing a part in reshaping the business.

Our next question or comment comes from the line of Michael Cyprys from Morgan Stanley.

With the launch of your actively managed crypto ETF, you're taking a big step in building your digital asset capabilities. As you look out over the next several years, how do you see that strategy evolving alongside potential emergence of tokenize stocks and bonds? And have tokenized assets become more widely adopted? Do you expect digital wallets to become an important client interface? And how does that influence your long-term distribution and wallet strategy?

Yes. Mike, this is Eric. Happy to take that one. We think tokenization represents a structurally important evolution investment management industry overall. And our digital assets group, which we stood up 4 years ago, is actively engaging with industry groups, partners and intermediaries as we explore opportunities into organization. To your question, specifically, if tokenized assets become more widely adopted, then yes, I think digital wallets will become an increasingly important client interface? The direction of travel here seen in the growth of tokenize stocks and the work that the DTCC is pursuing towards tokenizing underlying securities and ultimately, funds, I think, is real. We have hands on digital asset capabilities. We've been working with digital asset wallets, and we see the potential here. Ultimately, as with our broader digital assets approach, our goal is to align our tokenization strategy with our broader firm-wide objectives. That means identifying ways to use this technology, I would say, in 3 ways: first, helping us to meet the needs of our clients; second, reaching new investors; and then third, increasing operational efficiency. And I think there's opportunities in all of these areas. Digital asset wallets and tokenized assets and funds will ultimately, I think, allow us to deliver more customized solutions across client relationships. So we recognize this is going to take time, but we do think it's an incredibly promising area, and we are investing behind it.

Next question or comment comes from the line of Glenn Schorr from Evercore.

So I guess a question wrapping up some of the flow stuff. So maybe you had the large D.C. win in May, you had the big equity strategies in June. Maybe you could size those as we build towards -- getting towards the second half outlook, meaning active equity, less outflow is good, but you do have some seasonality potentially in rebalancing in the back half in equity land. And then a little color on July flows, the institutional pipeline and your thoughts on second half overall, that would be great.

Yes, Glenn, thank you for the question. We're pleased that we made some progress and brought some substantial new relationships on to -- into the organization in the second quarter. But I would say we clearly have more work to do. We expect net flows in the second half of the year to be meaningfully more challenging than the first half, primarily due to a number of the things that you've cited. Ongoing outflows in active equity, especially in open-ended mutual funds and a handful of our growth strategies. The absence of those outsized mandates, which funded in May and June and benefited first half flows. As you alluded to, portfolio rebalancing away from equities, reflecting the significant year-to-date gains, and that will largely impact flows in the third quarter. And then finally, I'd note that despite the fact that our overall target date pipeline is up substantially, there's an air pocket in the late-stage pipeline, which would suggest that we'll see a lull in RDF flows in the second half. So that should kind of give you a sense for what we see in Q3 and Q4. I do want to highlight, though, that we see significant positives. We expect 2026 to be a record year for gross flows, reflecting strong interest in a broad range of our investment strategies. As I talked about in my earlier remarks, we have very strong interest in our lower tracking offerings, integrated equity and our equity research suite. We're seeing substantial progress in active ETFs, and we think there's a very long runway there. In fixed income, I think we're anticipating consistent and sustained net flows across a range of strategies and vehicles. We're anticipating building momentum in alternatives as OHA and our late-stage venture capability, invest committed capital and continue to raise additional capital, and we begin to scale the T. Rowe Price Goldman Sachs public private strategies. I'd also note the good work that our EMEA and APAC teams are doing and the fact that we have had positive net flows in those geographies. So there's a lot of good in a number of areas, but kind of given the size of our active equity book and our mutual fund book, as I said at the outset, we've got substantial more work to do.

Our next question or comment comes from the line of Alexander Blostein from Goldman Sachs.

I wanted to get your perspective on maybe longer-term expense management approach, especially in light of some of the advances we see with technology and AI. Broadly, TROW had a fairly consistent framework. I think about 1/3 of your expense base is variable, about 2/3 is fixed. You guys are investing in the business, obviously, to improve the growth. But in light of your comments around the top line and we obviously know the organic growth challenges there, are there more significant actions you could take to bring down the pace of expense growth more structurally?

Thanks for the question. So we'll start by saying we have been focused on purposeful expense management, looking at ways to drive productivity and efficiency. And as you mentioned, technology and AI are a critical part of that. What we've been doing, though, is allowing -- having steps to be able to allow us to both invest behind our strategic priorities and maintain controllable expense growth in the low single digits. We focused right now on '26 and '27. That was some guidance we gave last year, and we continue to stand behind those numbers. As you mentioned, about 1/3 of our expense base is market driven, and that will correlate with asset or revenue growth over time, those controllable expenses make up about 2/3 of our expense base. As we think about that 1/3 of expenses, the 2 biggest items in there, year-end variable compensation and expenses related to assets distributed through third parties, and the variability of those expenses is what's driven the guide to 4% to 7% in 2026. As we think about the expense management efforts we're taking, we do want that to be a balance, again, focused on things that will drive longer-term productivity and efficiency. Things that we've talked about over the last 2 years have been things like leveraging trusted third parties for tech functions where they can provide scale. These are things like our help desk and infrastructure. We've been doing broader reviews of processes to streamline and leverage technology to introduce automation. We've had a thoughtful review of certain vehicles and strategies where we have minimal client interest or impact to be able to close those, and then managing down some of our excess capacity in our real estate portfolio, to match our associate population where we've had changes in headcount. So I think we'll continue to take those steps to be able to balance. But again, the purpose of doing this is to allow us to continue to invest back in the business in areas for growth. So on a net basis, we think that puts us in a low single digit cost here for controllable expense.

Yes. I'll add a little bit here. I mean we're balancing the short term and the long term. In the short term, we are laser-focused on using shareholder resources efficiently and continuing to drive cost savings. But we need to create the capacity to invest in our business. As Jen mentioned, we have a program underway, which we've talked about in the past from a cost savings perspective. And I think we're executing against that. And directly to your question, I believe we'll find ways to extend that, leveraging technology and in particular, AI. I think that should allow us to limit growth in our base expenses and free up resources for us to continue investing in the business. We want to invest in our talent. We want to invest in new capabilities. We want to invest in deeper connectivity with clients. We've talked about a number of those areas and a number of those priorities. And I think that AI is a differentiating technology that will allow us to accelerate the pace of improvement in those areas and with those priorities.

Our next question or comment comes from the line of Dan Fannon from Jefferies, LLC.

So I wanted to talk about the SMA opportunity. I think you mentioned, Rob, you've got $20 billion in AUM. That's pretty small relative to your peers, and kind of we think about tax efficiency and the kind of growth and demand for that process or investment strategy. Can you talk about your go-to-market or how you expect or plan to kind of scale the SMA business for you over the next couple of years? .