Fund scandals found to profit T. Rowe Price

Bonanza: T. Rowe Price has benefited from investors fleeing from scandal-tinged mutual funds.

Mutual Funds

August 22, 2004|By Bill Atkinson | Bill Atkinson,SUN STAFF

The nation's mutual fund industry -- managers of $7.6 trillion of investors' money, including the retirement savings of many millions of Americans -- is under major regulatory assault.

So why is George A. Roche, chairman of T. Rowe Price Group Inc., the Baltimore mutual fund giant, smiling?

Because, the industry's troubles have produced a bonanza for the company.

Since the scandal broke nearly a year ago, worried investors have withdrawn billions from funds managed by companies accused of favoring major clients, collecting inflated management fees and hiding the total costs of their services.

The scandal has resulted in huge fines, boardroom upheavals at Putnam Investments, Janus Capital Group, Pilgrim Baxter & Associates and Strong Capital Management Inc., and a continuing major revision of Securities and Exchange Commission rules governing mutual funds.

Experts say all of this has prompted investors to move hundreds of millions of dollars into funds managed by Price, which has thus far been untouched by the scandal.

Inflows into Price funds and portfolios soared 74 percent to $10.6 billion in the first half of this year from $6.1 billion in the first six months of last year. Assets under management hit a record $206.8 billion at the end of June, up 28 percent from the same point last year. And first-half profits climbed to $157.6 million, up 70 percent from a year earlier.

As Roche sees it, recent events have been a double victory. The company's conservative investment practices -- criticized during the recent bull market -- have been vindicated, and honesty has contributed significantly to the company's bottom line.

While Price has profited from the fund crisis, it is providing the SEC with information -- along with the rest of the industry -- and could be affected by rule changes in coming months.

In July, the SEC asked Price and about two dozen other mutual fund companies for information to determine whether they paid to have their funds listed as 401(k) options. Price complied with the request.

Roche acknowledges that even fund companies with an apparent clean bill of health could stumble.

"We could make an honest error someday," Roche said in a recent interview. "Our focus has always been to try and do things for the long run. We want our investors to be long-term investors."

Still, Price has passed the regulators' tests so far and has taken steps to make sure there are no lurking problems. Industry experts say they expect the company to weather the crisis undamaged.

"I always included them among the big four firms that would come out [of the scandal] unscathed," said Mercer E. Bullard, a former Securities and Exchange Commission lawyer and industry critic who is president of Fund Democracy, a shareholder advocacy group.

"They have lived up to their reputation. The kinds of funds they offer, the kinds of advertising they do, the kinds of disclosure they provide all suggest they are a pretty reliable firm."

Other careful fund organizations that have benefited during the recent industry turmoil include Boston-based Fidelity Investments, Vanguard Group of Valley Forge, Pa., and American Funds in Los Angeles.

"They [Price] follow the rules," added Ward Harris, managing director of the McHenry Group, a benefits and investment plan consulting group in Emeryville, Calif. "I think they have a fine culture. I don't see anything structural or cultural or ethical."

It's not just ethics that have worked for Price.

The company's mutual funds are performing well, it has no debt on its books and plenty of capital, so it can act quickly and buy assets from fund companies that might struggle as regulatory burdens mount.

"They are standing out as one of the leading asset managers," said Matthew J. Snowling, an analyst at Friedman, Billings, Ramsey, an investment banking firm in Arlington, Va. "They are taking market share."

"When you look at the entire landscape of their competitors they are certainly at the top of the heap," said Rachel Barnard, a stock analyst at Morningstar Inc., a mutual fund company research firm in Chicago.

"All of these things, the conservative nature, the fact that it hasn't been involved in [the mutual fund scandal] and the fact that it has been able to attract all of this money has really paid off in spades this year."

The firm's culture has served Price well, industry experts say: It is conservatively managed, doesn't reward a few stars with huge salaries, and works to put clients first.

Price, for example, closed the fast-growing Mid-Cap Growth Fund to new investors in December and the Small-Cap Stock Fund and High Yield Fund in February because demand was so strong that the company feared the funds would get too big and strain the managers' ability to invest efficiently.

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