Just two years ago, a wary T. Rowe Price Group Inc. watched largely from the sidelines as technology stocks made their stratospheric climb, causing its mutual funds to lag and critics to say the Baltimore-based firm was out of step with the "New Economy."
Today the picture is drastically different. The cautious corporate culture that denied Price the huge gains on the way up shielded its fund holders from the big losses technology-heavy funds suffered on the way down. Price now has one of the strongest and safest stable of funds in the industry.
"It's been really interesting to see," said analyst Catherine Hickey, who follows Price for Morningstar Inc., the Chicago-based financial research company. "As soon as the market turned, a lot of its funds leapt to the forefront. A lot of its funds have really been strong."
With about $93.5 billion in stocks and bonds (excluding money-market funds) as of March 31, Price is the industry's seventh-largest mutual fund company, according to the Boston-based Financial Research Corp. Price's funds have been known for delivering steady, consistent returns - lagging during bull markets and approaching the lead in turbulent times. That pattern became especially pronounced during the technology-stock bubble and subsequent bust.
"When you are looking for less [risk], you also may be giving up some returns" during strong markets, said senior research analyst Kathryn Barland, who follows the mutual fund industry for Lipper Inc., another research firm. "If you are looking for more consistency in performance, you may not get the shooting-star performance of the fund leaders. But you also aren't going to get the pain of other funds on the [stock market's] way down."
The difference from bull to bear market is dramatic. From Dec. 31, 1997, to Feb. 29, 2000, when the Standard & Poor's 500 soared 41 percent, 16 of Price's 22 actively managed U.S. stock funds underperformed the Lipper median average of their peers.
However, between March 23, 2000, and Sept. 20, 2001 - during which the S&P 500 plunged 36 percent - 21 of the company's 23 domestic stock funds were in the upper half of their class, according to Lipper. And nine of those 23 funds ranked in the top 10 percent of their categories.
Still, Price executives vividly recall their angst of two years ago as they watched the technology stocks that most of their funds didn't hold ascend vertically between late 1998 and early 2000. Even the company's star high-tech fund - the Science & Technology Fund - was left in the dust: It climbed 101 percent, badly lagging the 135 percent average of its peers and well behind such leaders as the Firsthand Technology Innovators Fund, which gained 212 percent.
Inside the company, analysts, fund managers and executives debated whether it was a market mania or a new economic paradigm, where the basic rules of investing were no longer relevant. Chief Investment Officer M. David Testa was certain it was the former.
An obvious bubble
"I was quite convinced that this was a bubble - and not just in technology: It was across the large-cap spectrum, which was puffed up," Testa said. "There have been several big bubbles throughout the history of our financial markets. It was pretty obvious this was one."
New money poured into technology, telecommunications and Internet mutual funds. But Price saw its net money inflows - the difference between new investments and redemptions - plummet: from $9.14 billion in 1997 to $3.48 billion in 1998 and $1.1 billion in 1999, according to a report by Financial Research.
Price would subsequently see net outflows of $1.01 billion in 2000 and $936.7 million in 2001, the FRC report said.
That has since turned around: For this year's first quarter, Price had strong net inflows of $1.03 billion, FRC said.
On March 6, 2000, a Monday, The Wall Street Journal published a story about Price under the headline: "Price pays high price for avoiding tech craze; tradition-bound firm stays on road less traveled, and runs low on gas."
That Friday, the tech-centered Nasdaq composite index closed at its all-time high of 5,048.62. It now trades around 1,700.
But as the market turned for the worse, Price's prospects began to improve.
"They happen to be sitting in a very good spot right now," said Barland, the Lipper mutual fund analyst.
For the 12 months that ended March 31, 24 of Price's 25 domestic stock funds outperformed the Lipper median for their category. Five of those funds ranked in the top 5 percent of their class. Another five ranked in the top 10 percent. In all, 16 of these 25 funds were in the top quarter, outperforming 75 percent of their peers, Lipper figures show.
This pattern of lagging during good times and leading in bad ones is due to the T. Rowe Price investment philosophy: Get fund holders the best returns with the least risk.
"I think we do a very good job," Testa said.