Watch the the replay below.
The Asteroid Is Speeding Up: 1. The passive ETF asteroid is accelerating, but TROW remains committed to active only strategies. The firm's core (non-target date) mutual fund business is battling the biggest drawdown in history, just as several other passive drivers are poised to unfold. 2. TROW has the biggest stable of Large Cap strategies in the group, and it's precisely the Large Cap category that is losing the most share to passive. 3. The Department of Labor's Fiduciary rule is set to take effect and will make mutual funds less desirable to distribute because passive products (ETFs and index funds) help to avoid liability and complex reporting standards.
Target Date Is Slowing Down: TROW's main growth driver has been target date funds, but the once stalwart growth channel is now slowing substantially. Why? The target date (TD) fund arena has also been penetrated by passives. What was once a bastion for active management (90% TD market share), active TD funds are today increasingly being supplanted by passive with active TD market share now moving toward 60%. The TROW target date franchise also allocates "through" retirement, which means its TD funds have higher than average equity allocations. This results in increased volatility and a greater risk of underperformance during market declines.
Phase Transition. TROW shares continue to trade at a premium valuation to the asset management group despite substantially slowing growth. The stock is an early cycle beneficiary, but lags the market and the group in flat to down markets. Risks to a short position include the firm's dividend and buyback, but historically TROW buybacks have peaked at ~5%, which is what they're already doing.
CALL DETAILS - Thursday, March 31st at 11 am EST
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Jonathan Casteleyn, CFA, CMT