What sets T. Rowe Price’s integrated equity approach apart?

I'm joined today by Laurence Taylor, equity solutions portfolio manager at T. Rowe Price. Laurence is among the incredible investors sharing insights in the Equities Investment Forum today. Welcome Laurence. It's great to have you with us.

Thank you very much. 

Laurence what makes T. Rowe Price’s integrated equity approach truly distinct in the market and how would you characterise the specific competitive advantages it delivers for clients?

I would say consistency born from two independent separate sources of alpha. We know there are good fundamental investors. We know there are good quantitative investors.

We think there are very few processes that bring together the very best of both disciplines because you tend to find investors lean to one or the other.

The benefit is that when we see disruption or change, we have fundamental forward-looking insights which help us to understand and capture that.

And then equally when markets are noisy, or complex or where there's ill-discipline and we've got a quantitative process that really helps us to strip through that complexity and make sure it is based on the outside or unemotive view of a particular company.

What metrics or frameworks does T. Rowe Price use to measure alpha generation from quantitative inputs versus fundamental research and more specifically from the intersection of both?

That's a really good question.

There's no point having a research platform unless you A, create insights and then B, capture them within client portfolios.

So as a firm, we spend a lot of time thinking about measuring our research efficacy and more importantly creating a culture where we can direct that research at client portfolios.

So when we think about the benefit of that, you can see it in our internal measurement, you could also see it in the alpha that's contained within our research strategies which were available to clients.

On the quantitative side, we measure each of the individual components of our quantitative process, that's valuation, momentum, capital allocation and quality.

So we can know when we would be expected to outperform and why.

Most importantly, we measure when we bring that together, does that give us the hit rate,

does that give us the consistency that we're looking for.

In terms of the intersection, we focus our active risk, our choices about intentional risk on where we see that intersection between the two models.

And you can see that in our performance, the consistency of our alpha over the course of time.

Can you share with us some real-world examples of how T. Rowe Price’s integrated equity process adapted during periods of volatility in markets such as those witnessed in the late 2010's or the COVID-19 crisis and what were the outcomes for client portfolios?

So in 2020, for example, we saw a huge disruption to the global economy, and we saw traditional companies see their economic returns hamper from the situation that we're in.

And we also saw companies benefit from COVID.

We saw their economics be pulled forward.

That disrupted a lot of the quantitative signals in the marketplace and that meant it was a difficult year for quantitative approaches.

And the key was a limiting draw down and that came from our fundamental research platform and that input within our investment process.

However, by the end of 2020, what we saw is one of the biggest disconnects between growth and value that we've seen over the course of many, many decades.

And our investment process, our quantitative process, was directing us to those beneficiaries of reopening, normalising the global economy.

And then that's where effectively we saw our risk budget, our processes direct us that helped us to outperform in 2021.

We saw that reopening, that narrowing of valuation spreads.

It also helped us in 2022, when we started to see a very different economy emerge and effectively a drawdown in equity markets when you need to take care of risk.

Putting those years together, there were very few managers that managed to compound alpha over the course of very, very different market environments.

We did over those three-year periods and effectively that is a demonstration of the process that we use, integrating quantitative and fundamental insights.

What role does technology such as advanced analytics or machine learning play in enhancing the investment process and supporting decision making within the integrated equity team and what advantages does it deliver for clients?

Let me categorise it in terms of risk, research and process.

In terms of risk, we can use data science, natural language processing, AI to help us understand and position for emergent risk factors.

For example, our AI exposure across the entire portfolio rather than just in tech.

And that is an emergent risk factor which has been really important to understand and to position for over the course of the last few years.

We can use AI as well to understand AI disruption risks.

So we can effectively look within software, for example, try and understand the replaceability of software businesses, the stickiness and pricing of those companies, which is really important because we are going to see benefits, and also disruption from the emergence of AI over the course of the next few years.

And I think something for all asset managers is which processes can you enhance?

How can you think about certain areas of your daily workflow, which you can automate to be able to allow you to focus more on research, alpha additive processes and effectively enhancing everything you do.

I think that's going to be a big theme for asset managers and for quite frankly all companies over the course of the next few years.

How does T. Rowe Price’s integrated equity team approach managing unintended risks or factor exposures that might arise from combining quantitative and fundamental inputs?

I would say first, we'll make it intentional and then second of all, evolve with the world that we live in.

What I mean by intentional is that we diversify our portfolios, explicitly to try and avoid any single point of failure

With our portfolios we have a gentle lean towards quality, gentle lean towards companies which are cheaper than the market average.

And we try and capture fundamentals and earnings momentum, companies that are getting bigger and better over the course of time.

But ultimately, we don't have large risk factors in our portfolios and that is intentional to allow us to capture the benefits of compounding and consistency.

On top of that, we know the world changes and what we want to do is measure our process, measure our outcome, and also measure emerging risk factors to make sure that we're looking beyond the traditional risk factors that we're given, and to make sure that our processes remain relevant regardless of the market environment that we're in.

Laurence, thank you. We're going to need to leave it there and get back to the forum.

I really appreciate you sharing your expertise with us today and for being a part of Global Investment Institute's Equities Investment Forum.

Thank you very much for having me today.