- We believe T. Rowe Price’s strategic investing approach, underpinned by the rigor of our independent research and the decision-making of our experienced portfolio managers, has created value for our clients over the longer term.
- We reviewed the performance of 18 T. Rowe Price diversified active U.S. equity funds over the 20 years ending in 2017, or since inception in cases where the fund had less than a full 20-year track record. We found that the majority of funds generated positive average excess returns, net of fees, over their benchmarks across multiple time periods.1
- The likelihood that T. Rowe Price’s diversified U.S. equity funds would outperform the relevant benchmarks increased as rolling time periods were extended.
- We attribute our success to our ability to go beyond the numbers and get ahead of change, which we believe leads to better decision-making and prudent risk management on behalf of our clients.
T. Rowe Price believes strongly that skilled, risk-aware active management has the potential to add value over longer-term time horizons. Evaluating active manager performance, however, requires investors and/or their financial advisors to distinguish between signal and noise—that is, to see past the many factors that may create a distorted short-term picture (either positive or negative) of manager skill.
As active equity managers, we are primarily interested in whether our own investment process has created long-term value for our clients. To gain a clearer understanding of this issue, we conducted a rigorous study of the performance of T. Rowe Price’s diversified U.S. equity funds over the two decades ending 12/31/2017 (or since inception for funds that lacked a full 20-year track record).
Our study covered 18 of the 22 active diversified U.S. equity funds currently advised by T. Rowe Price, including two institutional portfolios that are not directly available to individual investors. Institutional funds that are clones of other diversified equity funds were omitted from the study to avoid double counting. The 18 funds included in the study represented approximately 77% of total U.S. equity assets in the domestic and global equity mutual funds advised by the firm as of 12/31/2017. The funds, their primary style benchmarks, and the dates of their inclusion in the study are shown in the chart below.2
For each fund in the study, we examined performance over rolling 1-, 3-, 5-, and 10-year periods (rolled monthly) from 12/31/1997 through 12/31/2017. We then calculated excess returns relative to the appropriate benchmark for each fund in each time period. Fund returns were based on net asset value (NAV) data, and thus were net of fees and trading costs.
For each fund, we calculated active success rates (the percentage of periods in which the fund outperformed its benchmark) and average excess returns relative to that benchmark for each time frame (i.e., over all rolling 1-, 3-, 5-, and 10-year periods).3
The Performance Study Universe
T. Rowe Price funds, benchmarks, and inclusion dates
Source: T. Rowe Price.
1 Given that the U.S. equity market is generally considered the world’s most efficient, transparent market, we believe it provides a strong test for active management skill. See the appendix (page 7) for additional information on the performance study methodology.
2 Four T. Rowe Price diversified U.S. equity funds—the Large-Cap Core Fund (LCC), the Tax-Efficient Equity Fund (TEE), the Quantitatively Managed (QM) Small & Mid-Cap Core Equity Fund, and the QM U.S. Value Equity Fund—were excluded from the study. The LCC incepted in June 2009 and thus had no 10-year rolling returns and only 43 5-year rolling returns in the period covered by the study, making a long-term performance analysis unreliable. The two QM funds incepted in February 2016 and thus had only 11 1-year rolling performance periods in the time frame covered by our study. The TEE’s exclusion stemmed from the fact that its objective of seeking to maximize after-tax portfolio growth was inconsistent with the study’s use of before-tax benchmarks and its focus on before-tax excess returns. Performance is available upon request and on troweprice.com. More detailed information about the study methodology can be found in the appendix on page 7.
3 Excess returns for the 3-, 5-, and 10-year rolling periods were annualized.
4 The Capital Opportunity Fund transitioned from a U.S.-unconstrained all-cap strategy to a U.S. structured research strategy on 4/30/1999. T. Rowe Price’s U.S. Structured Research Equity Strategy uses a portfolio construction process that emphasizes stock selection by the firm’s industry-focused analysts. While the majority of the Capital Opportunity Fund’s assets are invested in U.S. large-cap stocks, U.S. small- and mid-cap and foreign stocks may also be purchased in keeping with the fund’s objectives. The fund’s sector weightings are approximately the same as for the S&P 500 Index.
5 Formerly the Diversified Small-Cap Growth Fund.
6 The New America Growth Fund incepted in September 1985 but was added to the study as of the date of an investment program change that broadened its objective to include investing in a diversified portfolio of U.S. growth companies. See the appendix (page 7) for additional information.
All investments are subject to risk, including the possible loss of principal. Small- and mid-cap stocks are generally more volatile and risky than large-cap stocks because they generally have more limited operating histories, narrower product lines, and tend to focus on smaller markets. Growth and value investing tend to go in and out of favor and may underperform the broader equity markets over certain time periods. Dividends are not guaranteed and are subject to change. For a more complete discussion of the funds’ risks, see the applicable mutual fund prospectus.
The views contained herein are as of October 2018 and may have changed since then.
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell indexes. Russell® is a trademark of Russell Investment Group.
Price Perspectives are provided for informational and educational purposes only and are not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. This Price Perspective provides opinions and commentary that do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.
Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.
Past performance cannot guarantee future results. All charts and tables are shown for illustrative purposes only.
T. Rowe Price Investment Services, Inc., Distributor.