T. Rowe Price Group, Inc. — 2024 Q1
Transcript
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Good morning. My name is Norma, and I will be your conference facilitator today. Welcome to T. Rowe Price's First Quarter 2024 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 shortly after the call concludes.
Hello, and thank you for joining us today for our first quarter earnings call. The press release and the supplemental materials document can be found on our IR website at investors.troweprice.com.
Linsley, thank you. And thank you all for joining us this morning for our first quarter update. Before I get started, I'm pleased to say that Dee Sawyer, our Head of Global Distribution and a member of our firm's Management Committee, will be joining us today. Dee will provide an overview of our Retirement business, which is critical to our clients and integral to our firm's long-term success. We'll hear from Dee after Jen's update on our financial results.
Thank you, Rob, and hello, everyone. I'll review our first quarter results before turning to Dee for a look at our Retirement business.
Thank you, Jen. I am pleased to join today's call to talk about our Retirement business. As Rob noted, our clients have entrusted us with $1.54 trillion in assets. Of that, over $1 trillion, more than 2/3, are identifiable as retirement assets, demonstrating that retirement is a critical component of our business. Slides 15 and 16 in the supplemental deck provide a detailed view of our retirement assets.
[Operator Instructions] Our first question comes from the line of Craig Siegenthaler with Bank of America.
Given that Dee is joining us, I do have a retirement question for her. If alternative investments enter the retirement channel, is it more likely through single investment elections or inside of a Target Date fund? And given that T. Rowe's ownership now includes OHA, is there potential for alts inside of a T. Rowe Target Date fund anytime soon, because we understand price may be one headwind with DC plan sponsors.
With regard to alternatives, this is an area we have been actively researching. Given preferences and regulatory guidance, there are some complexity around adding alternatives within a 401(k) plan such as the daily NAV. However, if we were to introduce alternatives for our Target Date strategy, we could act quickly with Target Date solutions, including T. Rowe price solutions or OHA solutions or others because we have a long list of partners that would be able to work with us in order to do that.
Yes, Craig, this is Rob. I'll just add a few things. One, it's a priority for us to continue to evolve and improve our Target Date offering. And this is an area that we've given a lot of thought to.
Our next question comes from the line of Michael Cyprys with Morgan Stanley.
Maybe just sticking with the retirement theme. I was hoping to double click on decumulation. Just hoping you could talk a little bit more about the opportunity set that you see for decumulation products. What product structures, in particular, do you think have the biggest opportunity as you look out over the next 10 years?
Great. Thank you so much for the question. I'll start us off. So first, I think I would highlight the breadth of our retirement platform, which gives us access to plan sponsors, intermediaries and participants. And this is really important because it allows us to really understand what types of retirement income solutions are critical for the varying types of participant needs in the decumulation phase.
Our next question comes from the line of Dan Fannon with Jefferies.
Rob, I was hoping you could provide additional context around the trends you discussed of better gross sales as well as lower redemptions. It seems like April here is a bit more mixed. But can you talk to maybe the difference in the channels and/or geographies where you're seeing the biggest improvements versus what we saw last year?
Yes. Dan, thanks for the question. At a high level, I would say that our outlook for flows for the year really hasn't changed from what we discussed in January on the fourth quarter call. Although I would say that we have higher conviction now that our outflows this year will be substantially lower than they were last year.
Our next question comes from the line of Patrick Davitt with Autonomous Research.
My question is on the expense guide. Are you factoring in the full 1Q AUM mark to that? Or did you discount it a bit given the Q-to-date beta quite negative?
Yes. Thanks, Patrick. We -- similar to last quarter, we used first quarter average as an estimate for our expense growth guide, and we try to give a range around reasonable assumptions for market movement from that average in our percentage guide. And as you noted, we've had some decrease in markets in the first start of the -- in the start of April in the quarter, but that puts us back around the place we started from an average perspective.
Our next question comes from the line of Brian Bedell with Deutsche Bank.
Maybe just to go back to the retirement business. Can you talk a little bit about how you viewed the DCIO segment versus the full-service record-keeping segment in terms of economics to T. Rowe Price? I know full service is more costly, can be lower margin, but you, I think, have a better ability to capture IRA rollovers there. So if you can talk about that dynamic.
Sure. So thanks for the question. Let me offer a couple of points. So the first point that I would offer is when you look at our U.S. defined contribution assets under management, roughly 75% of those defined contribution assets are our DCIO channel. And so we feel really strongly about the fact that we continue to offer solutions across many different types of record-keepers and through many different types of accounts in that DCIO channel, and that's through hard work with partners on the intermediary side of our business.
Yes. The one thing that I would add quickly is within our individual investor is one area that we've been investing in is our advisory capability, specifically around rollovers and retirement.
Maybe picking up on one more point that you mentioned, Brian, because we do have the recordkeeping business in-house, we are able to more quickly roll out solutions that we want to add on from a plan sponsor perspective.
It also gives us some pretty meaningful perspective to engage with clients outside of the U.S. as defined contribution schemes evolved. So we have an existing opportunity in Asia. We're working on another one. And there are a handful of opportunities to partner with folks to leverage the expertise that we have as a retirement date fund provider. But also as a plan sponsor to kind of partner with people outside of the U.S. as they really develop their approach to defined contribution.
And our next question will come from the line of Alexander Blostein with Goldman Sachs.
I was hoping we could dig into OHA a little more, just kind of thinking about the underlying growth drivers from here. The revenue base has been a little bit more range bound over the last couple of quarters, and it's nice to see you guys launch a nontraded BDC out, so that's up and running.
Yes, Alex, thanks for the question. On the latter, I would say nothing that kind of would be material enough to call out in terms of known redemptions there.
Our next question comes from the line of Ken Worthington with JPMorgan.
Dee, a couple more questions for you, please. BlackRock announced its Paycheck product. Does the BlackRock announcement change the equation at all for de-accumulation or the competitive environment in retirement?
In terms of -- let me answer your second question first. I think we are in a really good position where we are with our overall approach to retirement income and how we are making sure that we are continuing to meet the evolving needs and addressing the complexity of decumulation. And so we certainly already have products in the marketplace. And then I mentioned a couple that are already in development that we're excited about launching later in the year. And so I would tell you, I feel really well -- really good about our position overall to be able to meet the needs of plan sponsors and end investors.
Our next question comes from the line of Brennan Hawken with UBS.
I was curious about a couple of things on the expense front. You mentioned that there's a capitalization of labor in the U.K. So curious about what that impact was in the quarter and how you expect that would impact the expense growth going forward. You also referenced a change in practice around explicit payment for research. So curious about what sort of impact that has on 2024 growth in expenses?
I think for the first part of the question, just maybe to clarify, it wasn't about a capitalization of labor. This was related to our U.K. entity where we moved into a new building at the end of last year, and we had a nonrecurring benefit in the first quarter of this year related to that. It's not material in terms of operations and really wouldn't be expected going forward. We just called it out as a onetime benefit.
Yes, that mix is really driven by the regulatory environment and client preference.
Our next question comes from the line of Aidan Hall with KBW.
Just wondering if you could provide us with some color on the trajectory of fee rates by asset class, just given some of the mix shift that's taking place in the asset base. And then it was nice to see the contribution of performance fees this quarter. I know it's tough to predict, but should we be thinking about that as a more normal contributor on a go-forward basis? Have you seen some stronger performance from your products?
Sure. So I mean, we've spoken in the past, on average, if we take a step back, I mean, a number of our products, whether it's by different vehicles or by larger institutional clients, we tend to see about 1% to 1.5% fee compression annually. Again, that can be higher or lower depending on specific choices we make about fees.
Yes. We use our scale to invest in our value proposition. And I would say that within asset classes, the trend of fee compression has -- is something that we've navigated for a very long time and is comparatively stable right now.
Yes, this is Eric. The one other thing I would add to that is that even within asset class, again, client preference is an important part of that. And when you have really strong performance in something like structured research in the U.S. equity business, which competes directly with passive but at a better fee versus passive, but lower than our overall average fee, you'll see some mix within asset class, but that's really a good business for us and is a really strong endorsement of our underlying research capabilities.
And this completes our Q&A portion. I'll now turn the call back over to Mr. Rob Sharps for closing remarks.
All right. Great. Well, we appreciate your questions and your interest in T. Rowe Price. Thank you for joining us this morning. Hopefully, you found Dee's retirement update informative. We will continue to evaluate special topics to integrate into future calls, so we can give you a deeper understanding of our business.
This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.