To measure the value added by our strategic investing process, we studied the relative performance of our actively managed global, international, and emerging markets (GIEM) equity funds compared against a passive competitor universe ("passive competitors" or "passive competitor composites") created by T. Rowe Price. Our study covered 16 active GIEM funds currently advised by T. Rowe Price and its affiliates.
15 of 16
funds had positive active success rates versus passive competitors over rolling 3-year periods
of funds generated positive average excess returns versus passive competitors over rolling 3-year periods
- The study found that the value added by our strategic investing process was significantly positive for a majority of the funds included in the study.1
- Over the rolling three-year periods we studied, 94% of the T. Rowe Price funds (15 of 16) posted positive active success rates after fees and costs (Figure 1).2 The average excess return over those periods was 1.38% (Figure 2).3
- We attribute our success to our practice of going beyond the numbers, by traveling to meet companies we invest in and debating and sharing investment insights to understand the complex dynamics of investment opportunities.
(Fig. 1) Percentage of Funds With Positive Active Success Rates
Rolling Periods December 31, 1998, Through December 31, 2018
Sources: T. Rowe Price and Morningstar; all data analysis by T. Rowe Price. ©2019 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.
(Fig. 2) Average Excess Returns for T. Rowe Price Funds
Equal-Weighted Average for All Periods for All Funds
Rolling Periods December 31, 1998, Through December 31, 2018
Sources: T. Rowe Price and Morningstar (see Fig. 1); all data analysis by T. Rowe Price.
Our Approach to Strategic Investing
To the extent T. Rowe Price’s GIEM funds have been able to deliver strong long‑term active performance, net of fees and costs, over the past two decades, we believe it reflects the strengths of our investment process in a number of key areas.
- We go out into the field to get the answers we need. Over 400 investment professionals4 see firsthand how the companies we’re investing in are performing today in order to make skilled judgments about how we think they’ll perform in the future.
- We seek to uncover more opportunities for our clients and are constantly on the lookout, analyzing the markets and the companies within them. By going on the road to meet with executives and employees, our professionals can ask the questions to get a deeper understanding of where a company stands and where it could go in the future.
- Experience has been a critical component of our success as well. The firm’s skilled portfolio managers have deep experience—an average of 22 years in the industry and 17 years with T. Rowe Price.5 Many of our analysts go on to become portfolio managers, which we believe creates a strong foundation on behalf of our clients.
- We also don’t wait for change; we seek to get ahead of change for our clients. We assess when to move with the crowd and when to move against it. Our people have the conviction to think independently but act collaboratively. This means we’re able to respond quickly to take advantage of short‑term market fluctuations, or we can also choose to hold tight.
Since assuming full control and ownership of its GIEM equity advisory business in 2000, T. Rowe Price has greatly expanded the resources that support those strategies. Our staff of GIEM equity professionals has more than doubled since 2006 and now provides in‑depth coverage of global economic sectors and regions from seven offices worldwide—Baltimore, London, Tokyo, Hong Kong, Singapore, Sydney, and Zurich.
By continuing to focus on the underlying factors that we believe support strong active performance, T. Rowe Price will continue to seek long‑term value creation for our clients.
We examined the performance of 16 of T. Rowe Price’s lineup of actively managed global, international, and emerging market (GIEM) equity funds over the period beginning December 31, 1998, and ending December 31, 2018, or since their inception. The study was intended to demonstrate the value added by our strategic investing process relative to passively managed investment vehicles— such as index funds and exchange-traded funds (ETFs)—with comparable investment objectives. Our focus was on funds that invest across equity categories, such as global equities or emerging market equities; specific geographical regions, such as Japan or Europe; or global sectors, such as natural resources or global real estate.
Passive Competitor Composites
To measure the value added by T. Rowe Price’s strategic investing process, we compared the returns achieved by our funds over various time horizons with the returns for competing passively managed funds pursuing similar investment objectives. These comparisons were based on the methodology described below, which was used by T. Rowe Price analysts to construct passive competitor composites for U.S.-domiciled passive funds in various equity categories, including world large stock, foreign large blend, diversified emerging markets, Asia ex-Japan, Japanese equity, European equity, global real estate, and natural resources. Figure A1 shows the passive competitor composites used to measure relative performance of each T. Rowe Price fund.
All funds included in the passive competitor composites were flagged by Morningstar as passive index funds or ETFs in its U.S. classification database. Funds were further screened by T. Rowe Price analysts to ensure they were truly representative of their assigned passive categories and had investment characteristics consistent with the objectives of the T. Rowe Price funds to which they were being compared. These additional criteria included:
- Length of track record: Only passive funds with at least one year of performance history were included in the passive competitor composites. Only funds that were in the Morningstar database as of December 31, 2018, were included.
- Portfolio constraints: Funds having environmental, social, and governance; low-volatility; high-divided yield; currency-hedged; small-cap; or IPO-specific security mandate components were excluded. These funds typically impose restrictions on portfolio holdings that make direct performance comparisons with non-screened funds inappropriate, in our view.
- An additional name screen was applied to Morningstar’s Diversified Emerging Markets, Latin America, Pacific Asia ex-Japan, Global Real Estate, and Natural Resources fund categories to identify passive funds with investment objectives comparable with the T. Rowe Price funds in those same categories. For instance, Morningstar’s Latin America category includes a number of products that focus specifically on Brazilian equities; in order to capture products within the category with a pan-Latin America mandate, a name screen was applied.
- To ensure that passive competing global funds were true global funds, the Global Real Estate and Natural Resources composites only include funds having between 25% and 75% of their portfolios invested in non-U.S. equities.
- Funds that exclude specific countries from their investment objectives were screened out and only included in the Foreign Large Blend and Foreign Large Value (i.e., ex-U.S.) passive competitor composites, where many “international” strategies that track non-U.S. or ex-U.S. benchmarks fall, and in the Pacific Asia Ex-Japan passive competitor composite, as mentioned in the additional name screen noted above.
The Morningstar World Stock, Foreign Large Blend, and Foreign Large Value categories include funds that invest in the full global equity opportunity set—that is, without geographic limitations—as well as those that invest primarily in developed markets outside the U.S. In order to match the investment objectives of the T. Rowe Price funds in those same categories, passive competitors were screened to identify those with prospectuses that permit materially significant investment in emerging and/or frontier equity markets and those that are only permitted incidental or minor exposure. We defined “material” exposure as 5% or more of a fund’s total portfolio value (as shown in the Morningstar database) as of the study’s end date. Based on these screens, we created separate World Large Stock (With EM Exposure) and World Large Stock (Without EM Exposure) passive competitor composites.
The Foreign Large Blend (Without EM Exposure) passive competitor composite was used to measure the relative performances of the T. Rowe Price Overseas Stock Fund and the T. Rowe Price Institutional International Disciplined Equity Fund. The Foreign Large Value (Without EM Exposure) passive competitor composite was used to measure the relative performance of the T. Rowe Price International Value Equity Fund. The World Large Stock (With EM Exposure) passive competitor composite was used to measure the relative performances of the T. Rowe Price Global Stock Fund and the T. Rowe Price Global Growth Stock Fund. The World Large Stock (Without EM Exposure) passive competitor composite was used to measure the relative performance of the T. Rowe Price Institutional Global Value Equity Fund.
Following application of the appropriate screens to each category, the five largest passive funds by assets under management were included in the passive competitor for that category. In cases where the category included less than five funds after screening, all of the funds in the category were included in the passive competitor composite. Passive competitor composites with only one competitor were excluded from the study. Passive competitor composite performance reflected an equal‑weighted average of the total returns for each fund in the passive competitor during each performance period measured.
Passive competitor composites were only calculated for periods in which a sufficient number of passive competitors were available in the Morningstar database. Sufficient data were defined as having at least one comparable passive competitor in all rolling periods and at least two comparable passive competitors in the final rolling period covered by the study.
A full list of the passive competitor composites used in the study, and the competing passive funds included in each composite, can be found in Figure A2.
T. Rowe Price Fund Inclusion
T. Rowe Price funds were included in the study universe as of December 31, 1998, or, for funds without full track records over the period covered by the study, as of the date of their inception. However, performance time periods for some T. Rowe Price funds were limited by an inability to construct adequate passive competitor composites for them prior to the dates of their inclusion. Sufficient passive comparison universes could not be identified under our methodology for seven active T. Rowe Price GIEM funds: the Africa & Middle East Fund, the Emerging Europe Fund, the International Discovery Fund, the International Stock Fund, the Global Consumer Fund, the Global Industrials Fund, and the Global Technology Fund. Accordingly, those seven funds were excluded from the study. Figure 3 on page 3 of the study shows the inception and inclusion dates for each T. Rowe Price fund included in the study, while Figure A3 on page 12 shows the total number of rolling performance periods covered by the study for each T. Rowe Price fund.
One additional active GIEM fund, the Quantitatively Managed (QM) Global Equity Fund, also was excluded from the study. The QM Global Equity Fund had an extremely short performance history, consisting of only 19 rolling one-year periods (rolled monthly) and no rolling 3-, 5-, or 10-year periods as of December 31, 2018.
Relative fund performance versus the appropriate passive competitor composite was measured using two metrics:
- Active Success Rate: Records the percentage of times a T. Rowe Price fund beat its passive competitor composite, net of fees and costs, over a specified time horizon (e.g., 10 years). A positive active success rate was defined as outperforming the passive competitor composite in more than 50% of all rolling periods over a particular time horizon.
- Excess Return: For each rolling period, the return (net of fees and costs) for the fund’s passive competitor composite was subtracted from the T. Rowe Price fund return (also net of fees and costs), producing an excess return. Excess returns were then averaged across the total number of rolling periods in each time frame for each T. Rowe Price fund.
Available 1-, 3-, 5-, and 10-year performance comparisons for the T. Rowe Price funds over the full period covered by the study can be found in Figures A4 and A5 (p. 13-14). It should be noted that active success rates and average excess return results may differ depending on a fund’s overall performance pattern. For example, a fund that outperformed its passive competitor composite by a large margin in a relatively small number of rolling periods within a given time frame might show positive average excess returns but a negative active success rate (i.e., below 50%).
For each T. Rowe Price fund in the study, we calculated returns for one-, three-, and five-year rolling periods, rolled monthly. Returns for the threeand five-year rolling periods were annualized. In addition, we also examined relative performance over 10-year rolling periods, although six of the funds in the study did not have 10-year performance histories. Another fund, the T. Rowe Price Global Growth Stock Fund, had only three rolling 10-year performance periods as of December 31, 2018, while the passive competitor composite for the T. Rowe Price New Asia Fund (the Asia Ex-Japan composite) had only five 10-year performance periods as of that date.
Of the ten funds that had sufficient histories for 10-year comparisons, seven (or 70%) had positive average excess returns over their passive competitors in the rolling 10-year periods covered by the study.
Broad relative performance averages were constructed for the T. Rowe Price funds included in the study. These performance averages were based on equally weighted averages of all available performance periods for all the funds in the study across each rolling time horizon. Full results, including for 10‑year rolling periods, can be found in Figure A6.
From 1979 to 2000, some of T. Rowe Price’s GIEM equity strategies were advised by Rowe Price‑Fleming International (RPFI), a joint venture with Robert Fleming Holdings Ltd., a UK‑based asset manager. In August 2000, T. Rowe Price completed its purchase of Fleming’s 50% interest in RPFI, and the subsidiary was renamed T. Rowe Price International Ltd.
All study results were based on total returns, including dividends reinvested. Returns for the T. Rowe Price funds included in the study and for the competitors included in passive competitor composites both were based on daily net asset values and thus reflected the subtraction of management fees, operating expenses, and trading costs. NAV data for the T. Rowe Price funds were taken from T. Rowe Price’s internal performance database, which is used by T. Rowe Price to calculate returns for its quarterly, semiannual, and annual client reports; for marketing materials; and for regulatory disclosures. Return data for the passive competitor composites were taken from the Morningstar database.
Fund Share Classes
The fund returns used in the study are based on the after‑cost performance of the Investor Class of shares for each fund. In recent years, some of the T. Rowe Price funds included in the study have launched Advisor and R Classes that include 12b‑1 fees paid to intermediaries for distributing these funds. Given the limited track records of these share classes and the fact that they are not the lowest‑expense share class available, we believe it was more accurate to base our study on performance results of the Investor Classes. The Advisor, R, and I Classes share the same portfolio as the Investor Class. For the three institutional funds used in the study, returns were based on the fee structures available to investors with USD 1,000,000 million to invest.
1 In this study, we compared the returns achieved by our funds over various time horizons with the returns for competing passively managed funds pursuing similar investment objectives. All funds included in the passive competitor composites were flagged by Morningstar as index funds or ETFs in its U.S. classification database. Funds were further screened by T. Rowe Price analysts to ensure they were truly representative of their assigned passive categories and had investment characteristics consistent with the objectives of the T. Rowe Price funds. See the study appendix for additional details on our methodology.
2 A positive active success rate is defined as a T. Rowe Price fund beating the performance of its passive competitors in more than half of the rolling periods measured.
3 All excess return data for the T. Rowe Price funds and passive competitors referenced in this study take into account both the payment of investment management fees and other fund expenses, such as trading costs, and thus are after fees and costs.
4 T. Rowe Price investment staff as of 12/31/2018. Includes 105 portfolio managers, 24 associate portfolio managers, 165 investment analysts, 44 associate analysts, 14 multi-asset specialists, 9 specialty analysts, 2 strategists, 2 economists, 29 traders, and 18 senior managers.
5 As of December 31, 2018.
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This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action. The views contained herein are those of the authors as of April 2019 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.
Risk: All investments are subject to risk, including the possible loss of principal. International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for investments in emerging markets.
This information is 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. The opinions and commentary provided 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 is not a reliable indicator of future performance. All charts and tables are shown for illustrative purposes only.
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