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Is Time On T. Rowe's Side?

Finance: Asset Management

Is Time on T. Rowe's Side?

The bruised asset manager waits out its turnaround

The late Thomas Rowe Price Jr., a forefather of growth-stock investing, once said that success meant peering into the future to "anticipate changing eras ahead of the crowd."

Where's that crystal ball when you need it? His eponymous Baltimore company premiered the Growth Stock Fund in 1950, giving Price a jump on the postwar boom of record profits and productivity. Its first fund's success established T. Rowe Price Associates Inc. as a front-runner in the mutual-fund industry. But now, a half century after foresight launched it, tunnel vision is turning it into an also-ran.

Its conservative brand of growth investing shuns stocks priced at potential, rather than real earnings growth. No aggressive or large-cap growth funds here. Meanwhile, tech and Internet stocks that were off-limits soared, spurring many investors in search of more lucrative returns to go elsewhere: Only 12 of T. Rowe's 42 retail equity funds gained more than peer-group averages in 1999, and only about half of the funds outdid the 19.52% gain in the Standard & Poor's 500-stock index. Indeed, its languishing stock has marked it as a takeover target.

T. Rowe's stock at $43 is no higher than in 1998. Its price-earnings ratio is down to 19, vs. a p-e of 32 two years ago. American International Group Inc.'s Chairman Maurice R. "Hank" Greenberg said in May he wants to buy an asset manager, and rumors are that T. Rowe is on his list. T. Rowe comes cheap because of heavy redemptions: In two of the past five quarters, more investors cashed out of T. Rowe's funds than bought them. Ranked by new fund sales in 1999, T. Rowe is now No. 42, down from No. 6 two years ago, according to Boston's Financial Research Corp.NOT FOR SALE. The 63-year-old firm says its blue-chip brand name and $185 billion in assets under management aren't for sale. "There's no reason to simply sell out," says Vice-Chairman James S. Riepe. Since outflows aren't outpacing sales yet, Riepe says he isn't worried.

Still, the company knows it must change. George A. Roche, T. Rowe's chairman and president, is bent on doing just that. Roche was hired by the company's founder as an analyst in 1968. He joined the $1.15 billion New Era Fund and was its manager until April, 1997, when he took on his current post. Roche's push into foreign markets, where 401(k)-style plans are budding, will spur growth, he says. New tech funds and online trading through Gateway, its fund supermarket, will appeal to a new breed of investor. A no-load company until this year, T. Rowe launched a share class with commissions on 10 funds, to entice brokers to do business with them. But no one expects these measures to pay off overnight.

Meanwhile, T. Rowe can do nicely on fees earned from assets they manage, up 20% in 1999 largely from new institutional and private money. "It's the growth of assets in hand that drives long-term growth," Roche says.

One thing T. Rowe won't change anytime soon is its old way of picking stocks. "We're not out to maximize short-term flows," Roche says. "We don't go out and create an Internet fund, suck in our investors at the top, and have them lose money."

T. Rowe's vision of growth investing has staged a comeback this year. Interest rate hikes have damped speculation in hot-shot tech and boosted traditional growth stocks. Now, two-thirds of T. Rowe's funds are beating their peers. Roche says time is on his side.

It won't be the first time T. Rowe has waited out its turnaround. In the mid-1970s, when inflation and interest rates surged, the market and T. Rowe's funds got crushed. Assets stagnated for a decade while the company created bond and overseas funds and built a $75 billion retail retirement arm. When the bulls started to run in the 1980s, T. Rowe's investing formula produced big returns. The question for T. Rowe Price shareholders is: Will its vision be 20/20?By Mara Der Hovanesian in New YorkReturn to top

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