T. Rowe Price reports growth in the ETFs business reaching $5.3 billion in assets

Our sales pipeline remains strong, redemption pressure is stabilizing, and our associates are driving our strategic initiatives forward, putting us on track to significantly reduce net outflows this year. Our investment performance in the second quarter was solid, with two-thirds of our funds outperforming their peer group one-year medians, and over 40% of our funds ranking in the top quartile. Our equity franchise has seen impressive performance across various strategies, with several funds consistently ranking in the top quartile over one-year, three-year, and five-year time periods. The transparent equity ETFs we launched last year have shown strong performance, with multiple ETFs ranking in the top quartile versus peers over the past year. In our fixed income franchise, our muni funds and institutional floating rate and credit opportunities funds have also delivered top-quartile performance over various time periods. Additionally, our flagship retirement funds and newer retirement blend strategy continue to perform well across multiple time periods. Returns from our alternative strategies have been strong, driven by effective individual credit selection.

We are excited about the growth of our ETF business, with assets under management reaching $5.3 billion as of June 30, up from $1.2 billion in June 2023. Inflows to our ETFs totaled $2.4 billion in the first half of the year, attracting diverse investors across different segments. We anticipate continued growth in our ETFs, with several ETFs reaching over $300 million in assets, making them eligible for many platforms. We are expanding our product lineup, including new fixed income ETFs, and plan to introduce more investment strategies as ETFs in the future.

Our recent milestones include the launch of the T. Rowe Price OHA Flexible Credit Income Fund, becoming a strategic partner to a major independent broker-dealer, and growing our SMA franchise to over $8 billion in assets. We also unveiled a new retirement income solutions framework to help plan sponsors evaluate retirement income offerings. Our associates’ dedication to delivering value for our clients and advancing our strategic initiatives is evident in our results, and I want to thank them for their hard work.

Turning to our financial results, our adjusted earnings per share increased by nearly 12% from Q2 2023, driven by higher operating income and a lower effective tax rate. We reported $3.7 billion in net outflows this quarter, with outflows concentrated in equity products but offset by inflows in fixed income, multi-asset, and alternatives. Our target date franchise saw strong net inflows, and we also recorded positive flows from clients outside the US. Adjusted net revenues increased by 8.5% from Q2 2023, driven by higher average AUM. Operating expenses increased by 7.8%, primarily due to market-driven expenses and increased marketing and promotional spend. Our adjusted operating income rose by 9.8% from Q2 2023 to $655 million. We anticipate a 6% to 8% increase in adjusted operating expenses for 2024 compared to 2023, driven by rising equity markets. Our non-GAAP effective tax rate guidance for 2024 has been narrowed to 23.5% to 25.5%. Our focus remains on returning capital to stockholders through dividends, buybacks, and potential future M&A opportunities. We have repurchased $112 million worth of shares in the second quarter, reducing shares outstanding to less than 223 million, and have returned nearly $761 million to stockholders in the first half of the year. We are managing expenses thoughtfully while investing in our associates and enhancing capabilities to serve our clients. Year-over-year improvement in flow trends is driven by a positive market environment, improved investment performance, and strategic initiatives. Our sales pipeline is strong across channels and geographies, with notable inflows in target date funds, alternatives, and ETFs. There is also a decrease in at-risk assets due to improved investment performance. We believe our strong positioning with scale buyers in various sectors, such as insurance, retirement, wealth, and OCIO, will likely lead to additional large mandates in the future. In the last quarter, we secured six new wins of over $1 billion each, with one particularly significant win in May. While outflows may increase in the third and fourth quarters due to seasonality and the lumpy nature of these wins, they are expected to remain below last year’s levels. We are making progress towards our goal of returning to positive flows by 2025, but there is still work to be done.

Regarding our partnership with a new distribution broker with 10,000 representatives, we see this as an opportunity to expand our reach and grow our share. While we have similar arrangements with other large wealth platforms, each partnership is unique and mutually beneficial. We are optimistic about the impact of this new partnership and believe it will help us gain share over time.

In terms of performance improvement and distribution channels, we have observed that reactions to performance tend to vary across different channels. Direct individual and wealth businesses tend to react more quickly to performance improvements, while the institutional or large intermediary mandate channel may have a slower response. We have seen improvement in areas that leverage funds or commingled vehicles first, followed by improvement in the institutional channel. The redemption cycle is progressing towards more traditional levels, with redemptions slowing down and sales starting to pick up. I would say that in the sales cycle, we are currently seeing early improvements in sales.

Rob Sharps mentioned that we recently launched our 16th ETF, focusing on intermediate muni bond offerings. We have more ETFs in the pipeline and will continue to assess opportunities where we can provide unique and valuable offerings to our clients. Our goal is to expand our ETF strategies over time in a thoughtful manner, focusing on areas of value to our clients.

In terms of our ETF sales and distribution approach, we have specialized ETF sales expertise to support our field team in reaching out to various parts of the market, including wealth advisors and other channels. We are still in the early stages of tapping into the active ETF market and identifying unique opportunities.

We offer a mix of clone strategies and new capabilities to bring a range of investment options to our clients. We have found that some clients prefer the clone approach for known strategies with a track record, while others prefer fully transparent strategies. We believe both approaches have their merits and are comfortable offering a variety of investment options.

We leverage our relationships with larger platforms and clients to identify placement opportunities early on and focus on scaling strategies to cut through the noise in the market. The ETFs have appealed to a wide range of investors, including RIAs, wealth platforms, broker-dealers, institutional investors, and international investors. While the ETF segment is still relatively small compared to our overall AUM base, we see it as a significant opportunity and are actively pursuing it. I would like to request that you put together an explanation for me concerning OCREDIT. I am concerned that the current disclosure could potentially lead to confusion. It appears to be a me-too product following established offerings like BCRED. I am interested in hearing how OCREDIT differentiates itself from these established products and how you are communicating this differentiation to your distribution partners. Thank you. In considering the changes in the competitive landscape, particularly in the traditional and alternative investment sectors, the key question is how to approach this shift and leverage opportunities for growth. With a focus on initiatives like KKR and Capital Group, the strategy for accelerating these opportunities is crucial.

Regarding redemptions, it’s important to note that seasonal fluctuations play a role in both sales and redemptions, with the target date franchise showing more sales momentum than redemptions. Additionally, while there may be some seasonality in the gross sales of target date funds, recent trends indicate a positive outlook with redemption pressures easing in areas where performance challenges were previously experienced.

Looking ahead, there are various avenues for growth, including expanding globally, enhancing fixed income offerings, exploring ETFs, and delving into alternative investments. While partnerships may be considered, the preference lies in developing strategies organically or through acquisitions like OHA. The goal is to streamline distribution efforts by focusing on selling T. Rowe Price or T. Rowe Price-controlled strategies, ensuring a high caliber outcome for clients.

In conclusion, the approach to navigating the evolving competitive landscape involves a mix of organic growth, strategic acquisitions, and a focused distribution strategy to deliver optimal results for clients.