Five years ago, T. Rowe Price Group Inc. bet that investors were looking for a way to make retirement planning simple - a one-stop fund that would automatically adjust its blend of stocks and bonds to suit an investor's age.
The firm's target-date retirement funds have paid it dividends, with investors pouring $2.6 billion into them in the fourth quarter, helping to lead the company to a 27 percent gain in profit for the three months that ended Dec. 31.
The company said yesterday that net income for the quarter was $148.9 million, or 53 cents per share, compared with $117.6 million, or 43 cents per share, in the year-earlier quarter.
The average earnings forecast of 14 analysts polled by Thomson Financial was for 51 cents per share. The company's shares closed yesterday at $47.78, up 47 cents.
The results came as stock market gains and $6.3 billion of new investment from customers drove assets under management to a record $334.7 billion - an increase of $26.6 billion for the quarter. Net revenue increased 21 percent to $489.1 million.
Though still a small part of the Baltimore-based money manager's total assets, the surging retirement funds have been a significant source of growth for the firm. Total assets in the funds nearly doubled during the past year to $17.3 billion, the company said yesterday.
"It's astounding the fact that of the $3.2 billion of inflows notched from the mutual fund business, 81 percent originated from those retirement funds," said Jeffrey Ptak, an equity analyst with Chicago-based Morningstar Inc.
Ptak said the success of the funds is a good indicator of future revenue because investors are less likely to move retirement funds around on a whim. Once the money is invested, it tends to stay put, which is not always the case with other mutual funds.
James Kennedy, who took over as chief executive of T. Rowe Price last year as part of a management succession plan, agreed the retirement funds will remain an important driver of growth.
"What we try to do is give people solutions," Kennedy said of the target-date funds.
T. Rowe Price joined a wave of mutual fund companies offering target-date retirement funds, which are fast becoming an engine for growth.
Investment advisory fees from the company's mutual funds distributed in the United States grew nearly $50 million in the quarter to $293 million. Mutual fund assets increased by $15.7 billion, with market gains adding $12.5 billion of the total.
Cash inflows were spread evenly among the funds, with U.S. stock funds adding $1.3 billion, and bond and money market funds adding the same.
With strong assets under management, Matt Snowling, an analyst with Friedman Billings Ramsey, said in a research note yesterday that he expects the company to continue to deliver growth rates above the industry average.
Expenses during the fourth quarter grew $44 million over the year-earlier period, with stock options and other employee compensation accounting for much of the increase.
The firm increased its staff size by 5.3 percent in the past year to accommodate growth. It now has 4,605 employees, of which 3,405 work in the Baltimore headquarters.
"We hired right through the downturn," said Kennedy, referring to a dip in the market last year. "When markets were really heading south, we hired some great people when our competitors were pulling back and cutting staff."
Advertising and promotion climbed by $2.4 million over the year-earlier period. The company says it expects to spend 10 percent more on advertising in the year ahead.
Price bought back $171 million of its common shares last year and is debt-free with $1.4 billion in cash and investments on hand.
Kennedy said the company would be prudent in assessing potential acquisitions.
"We're not driven to growth for the sake of growth," he said. "We're not going to go out and make a big acquisition."