Audience for the document: Share Class: Language of the document:


Share Class: Language of the document:

Change Details

If you need to change your email address please contact us.
You are ready to start subscribing.
Get started by going to our products or insights section to follow what you're interested in.

Products Insights

GIPS® Information

T. Rowe Price ("TRP") claims compliance with the Global Investment Performance Standards (GIPS®). TRP has been independently verified for the twenty one- year period ended June 30, 2017 by KPMG LLP. The verification report is available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm's policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation.

TRP is a U.S. investment management firm with various investment advisers registered with the U.S. Securities and Exchange Commission, the U.K. Financial Conduct Authority, and other regulatory bodies in various countries and holds itself out as such to potential clients for GIPS purposes. TRP further defines itself under GIPS as a discretionary investment manager providing services primarily to institutional clients with regard to various mandates, which include U.S, international, and global strategies but excluding the services of the Private Asset Management group.

A complete list and description of all of the Firm's composites and/or a presentation that adheres to the GIPS® standards are available upon request. Additional information regarding the firm's policies and procedures for calculating and reporting performance results is available upon request

Other Literature

You have successfully subscribed.

Notify me by email when
regular data and commentary is available
exceptional commentary is available
new articles become available

Thank you for your continued interest

Please enter valid search characters

Navigating Global Disruptive Forces

Executive Summary

  • More cautious Fed policy benefits fixed income investors, but lack of liquidity poses risk for below investment‑grade bonds.

  • An increasing number of companies are facing secular risk, or disruption, that can derail their earnings growth and valuations.

  • The number of attractive industries is shrinking, so navigating secular risk is critical to investment success.

While financial markets have rebounded from the sharp and steep sell-off in December, the investment environment and outlook remain highly uncertain. David Giroux, chief investment officer of equity and multi‑asset and head of investment strategy, and Mark Vaselkiv, chief investment officer of fixed income and portfolio manager of the firm’s Global High Yield and High Income Strategies, recently discussed the market environment and the disruptive forces that pose longer‑term risks for many companies. Following are some highlights of that discussion.

Q: The same concerns that troubled investors in the fourth quarter of last year and that sparked a virtual bear market for equities are still present. Yet the stock market has rebounded strongly, and bond performance also has improved. How do you generally view the investment environment now?

Giroux: Last year was one of above‑normal gross domestic product growth and abnormally strong earnings growth fueled by tax cuts and fiscal stimulus. We knew coming into 2019 that it would be a slower‑growth year. Stock valuations became very attractive in December, but with the rebound, the market may be a little ahead of itself as valuations have moved above the long‑term average. A higher valuation can be expected early in the economic cycle when earnings growth is usually above trend. But late in the cycle—when earnings growth is below trend and the odds of recession are greater—valuations should be lower.

The one thing that has changed is the Federal Reserve, which has reversed course on raising interest rates and maybe the pace at which it moderates its massive balance sheet.

Vaselkiv: I agree that the recent commentary from the Federal Reserve is an important change from the tone set last year. The Fed is going to be more patient with raising rates and show more flexibility on drawing down its balance sheet, which grew to well over USD $4 trillion during the period of quantitative easing. So, yield spreads across markets have narrowed over the past month or so, and current valuations are fair compared with historical averages.

However, there is dispersion globally because global credit cycles are increasingly unsynchronized. For example, China and Brazil are in the repair stage, the eurozone and Russia are in recovery, the United States and Canada are still in expansion, and the United Kingdom and Australia are in the downturn phase.

The best opportunity for long‑term investors is to invest in the repair and recovery phases of the cycle. Conversely, there is danger in overweighting countries and regions during periods of expansion and at the cusp of potential downturn. Our emerging market strategy has capitalized on this trend in recent years, most recently in Brazil as new leadership there is undertaking structural reforms. At the same time, we are concerned with the U.S. being late in the credit cycle and Mexico being very tied to the U.S. economy.

One thing that hasn’t changed is the overall strength of the U.S. consumer. That should provide a solid foundation for the U.S. economy for the foreseeable future.

Q: In terms of risks, one risk, which also poses an opportunity, is the significant disruption unfolding across the economy. David, you have studied what you call secular risk. How do you define that?

Giroux: This is a topic I have been dealing with for 20 years. Secular risk is the emergence of a new competitive force, technological advance, change in customer habit, or regulatory change that is structural and long term. It results in slower topline growth rates, margin depression, and/or compression in the valuation multiple. This is not cyclical or some temporary market share loss; it is structural. We believe these disrupted companies’ topline revenue growth, the earnings per share growth, and valuation multiple will be lower in the next 10 years than in the last 10 years.

Our analysis indicates that about 31% of the U.S. stock market is impacted by secular risk, and about 35% of the S&P 500 earnings are derived from companies facing secular risk. Two years ago, secular risk affected about 20% of the market and about 24% of S&P 500 earnings.

Q: What are examples of secular risk?

Giroux: Amazon is probably the biggest factor driving secular changes for other companies, particularly traditional retail, malls, and grocery stores, and with the emergence of AWS, its cloud‑based platform, tech hardware has come under pressure as well. IBM had double‑digit earnings growth for years, but earnings have been under pressure in recent years as IBM faces the secular threat of cloud‑based services. Netflix has disrupted cable networks and cable systems like Viacom and Discovery, which had great business models that have now come under pressure. Technological advances in shale drilling have disrupted energy majors, offshore drillers like Exxon and Chevron, and energy service companies. Changes in consumer habits, such as preference for new brands and organic products, have pressured packaged food companies. A large part of the health care sector is facing secular pressure. Banks could face pressure on deposits in the future from alternative banks like Square or PayPal.

It’s not impossible to overcome secular risk, but the odds are against most companies. When I joined T. Rowe Price in 1998, Apple was viewed as a dead company. Now it’s the second largest company in the S&P 500 as it has been able to innovate its way out of secular risk. A couple of years ago under prior management, Microsoft was considered a secular loser. But a new management team has transitioned that company to a secular winner with a strong number two position in cloud computing, competing with Amazon.

Vaselkiv: Secular risk also impacts fixed income markets. Many value‑oriented companies have taken on more debt on their balance sheet, so that amplifies the secular risk some of them face. We look to invest in companies on the right side of change. Netflix is one of our favorite high yield companies. It has USD $2 billion in operating cash flow and is now moving outside the United States to develop specific content around the world.

Q: What industries are insulated from secular risk or might even benefit from it?

Giroux: Utilities are one of the few beneficiaries, with the growth of renewables like solar and wind helping drive faster rate‑based growth while lowering customers’ bills. Industrials, including defense, are less exposed unless Amazon or Google or Netflix start developing aircraft engines and jet fighter planes. Parts of business and information services so far have been immune to secular risk. The 70% of the companies that are not threatened by secular risk should see their valuation multiples rise over time.

Opening Quote Even a successful company that is not exposed to secular risk...can suffer severe multiple compression if the market perceives its problems as a secular risk. Closing Quote
David Giroux Chief Investment Officer of Equity and Multi-Asset and Head of Investment Strategy

Q: What are the implications of secular risk for markets and investors?

Giroux: The number of attractive industries is shrinking, so navigating secular risk is critical to investment success. Relying on traditional mean reversion for companies is more difficult than in the past, particularly for value investors. A company that encountered difficulties in the past due to a market share loss or cyclical downturn might turn around with new management or by buying back stock, driving mean reversion. But that becomes more difficult if they are secularly challenged companies. It’s hard to paint a picture of how companies like Viacom, Discovery, or General Mills innovate their way out of secular challenges. Even a successful company that is not exposed to secular risk or disruption but hits an air pocket can suffer severe multiple compression if the market perceives its problems as a secular risk.

It’s important to identify companies that are secularly challenged because earnings may decline while their valuation multiples compress dramatically. So the emergence of secular risk creates a powerful tailwind for active investing and poses a significant challenge for passive investing over the next five to 10 years. It also highlights the importance of long‑term investing on a three‑ to five‑year time horizon. T. Rowe Price managers try to manage that risk by having a lower exposure to or being structurally underweight secularly challenged companies.

Q: Aside from companies facing secular risk, what concerns you in the fixed income markets?

Vaselkiv: The major risk in the market for below investment‑grade companies is the lack of liquidity. When the Fed moderated its position on rate increases toward the end of last year, we saw massive outflows in the bank loan market that essentially wiped out nearly all the gains for last year. The high yield bond market also suffered huge outflows toward year‑end. Keep in mind that since the global financial crisis a decade ago, corporate debt in America has grown to over USD $75 trillion, and the ability of major Wall Street broker‑dealers to trade has significantly diminished because of regulatory changes.

Declining liquidity will amplify the uncertainty and volatility in fixed income markets. But there are good opportunities for credit around the world, and broad diversification with a global strategy should reduce the risk of some of the more troubled regions.

We also use the liquidity issue to our advantage. We like to say that there are two kinds of investors in credit markets: permanent residents and tourists. There have been a lot of tourists in the high yield bond market. When yield spreads widened in December as the tourists fled, we were able to take advantage of that for clients with a longer‑term view.


Important Information

The specific securities identified and described are for informational purposes only and do not represent all of the securities purchased, sold or recommended by T. Rowe Price, and no assumptions should be made that the securities were or will be profitable.

This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.

Australia—Issued in Australia by T. Rowe Price Australia Limited (ABN: 13 620 668 895 and AFSL: 503741), Level 50, Governor Phillip Tower, 1 Farrer Place, Suite 50B, Sydney, NSW 2000, Australia. For Wholesale Clients only.

Brunei—This material can only be delivered to certain specific institutional investors for informational purpose upon request only. The strategy and/or any products associated with the strategy has not been authorised for distribution in Brunei. No distribution of this material to any member of the public in Brunei is permitted.

Canada—Issued in Canada by T. Rowe Price (Canada), Inc. T. Rowe Price (Canada), Inc.’s investment management services are only available to Accredited Investors as defined under National Instrument 45‑106. T. Rowe Price (Canada), Inc. enters into written delegation agreements with affiliates to provide investment management services.

China—This material is provided to specific qualified domestic institutional investor or sovereign wealth fund on a one‑on‑one basis. No invitation to offer, or offer for, or sale of, the shares will be made in the People’s Republic of China (“PRC”) (which, for such purpose, does not include the Hong Kong or Macau Special Administrative Regions or Taiwan) or by any means that would be deemed public under the laws of the PRC. The information relating to the strategy contained in this material has not been submitted to or approved by the China Securities Regulatory Commission or any other relevant governmental authority in the PRC. The strategy and/or any product associated with the strategy may only be offered or sold to investors in the PRC that are expressly authorized under the laws and regulations of the PRC to buy and sell securities denominated in a currency other than the Renminbi (or RMB), which is the official currency of the PRC. Potential investors who are resident in the PRC are responsible for obtaining the required approvals from all relevant government authorities in the PRC, including, but not limited to, the State Administration of Foreign Exchange, before purchasing the shares. This document further does not constitute any securities or investment advice to citizens of the PRC, or nationals with permanent residence in the PRC, or to any corporation, partnership, or other entity incorporated or established in the PRC.

DIFC—Issued in the Dubai International Financial Centre by T. Rowe Price International Ltd. This material is communicated on behalf of T. Rowe Price International Ltd. by its representative office which is regulated by the Dubai Financial Services Authority. For Professional Clients only.

Before 1 March 2019: EEA—Issued in the European Economic Area by T. Rowe Price International Ltd, 60 Queen Victoria Street, London EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. For Professional Clients only.

From 1 March 2019: EEA ex‑UK—Unless indicated otherwise this material is issued and approved by T. Rowe Price (Luxembourg) Management S.à r.l. 35 Boulevard du Prince Henri L‑1724 Luxembourg which is authorised and regulated by the Luxembourg Commission de Surveillance du Secteur Financier. For Professional Clients only.

From 1 March 2019: UK—This material is issued and approved by T. Rowe Price International Ltd, 60 Queen Victoria Street, London, EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. For Professional Clients only.

Hong Kong—Issued in Hong Kong by T. Rowe Price Hong Kong Limited, 21/F, Jardine House, 1 Connaught Place, Central, Hong Kong. T. Rowe Price Hong Kong Limited is licensed and regulated by the Securities & Futures Commission. For Professional Investors only.

Korea—This material is intended only to Qualified Professional Investors upon specific and unsolicited request and may not be reproduced in whole or in part nor can they be transmitted to any other person in the Republic of Korea.

Malaysia—This material can only be delivered to specific institutional investor upon specific and unsolicited request. The strategy and/or any products associated with the strategy has not been authorised for distribution in Malaysia. This material is solely for institutional use and for informational purposes only. This material does not provide investment advice or an offering to make, or an inducement or attempted inducement of any person to enter into or to offer to enter into, an agreement for or with a view to acquiring, disposing of, subscribing for or underwriting securities. Nothing in this material shall be considered a making available of, solicitation to buy, an offering for subscription or purchase or an invitation to subscribe for or purchase any securities, or any other product or service, to any person in any jurisdiction where such offer, solicitation, purchase or sale would be unlawful under the laws of Malaysia.

New Zealand—Issued in New Zealand by T. Rowe Price Australia Limited (ABN: 13 620 668 895 and AFSL: 503741), Level 50, Governor Phillip Tower, 1 Farrer Place, Suite 50B, Sydney, NSW 2000, Australia. No Interests are offered to the public. Accordingly, the Interests may not, directly or indirectly, be offered, sold or delivered in New Zealand, nor may any offering document or advertisement in relation to any offer of the Interests be distributed in New Zealand, other than in circumstances where there is no contravention of the Financial Markets Conduct Act 2013.


Singapore—Issued in Singapore by T. Rowe Price Singapore Private Ltd., No. 501 Orchard Rd, #10‑02 Wheelock Place, Singapore 238880. T. Rowe Price Singapore Private Ltd. is licensed and regulated by the Monetary Authority of Singapore. For Institutional and Accredited Investors only.

Switzerland—Issued in Switzerland by T. Rowe Price (Switzerland) GmbH, Talstrasse 65, 6th Floor, 8001 Zurich, Switzerland. For Qualified Investors only.

Taiwan—This does not provide investment advice or recommendations. Nothing in this material shall be considered a solicitation to buy, or an offer to sell, a security, or any other product or service, to any person in the Republic of China.

Thailand—This material has not been and will not be filed with or approved by the Securities Exchange Commission of Thailand or any other regulatory authority in Thailand. The material is provided solely to “institutional investors” as defined under relevant Thai laws and regulations. No distribution of this material to any member of the public in Thailand is permitted. Nothing in this material shall be considered a provision of service, or a solicitation to buy, or an offer to sell, a security, or any other product or service, to any person where such provision, offer, solicitation, purchase or sale would be unlawful under relevant Thai laws and regulations.

USA—Issued in the USA by T. Rowe Price Associates, Inc., 100 East Pratt Street, Baltimore, MD, 21202, which is regulated by the U.S. Securities and Exchange Commission. For Institutional Investors only.

© 2019 T. Rowe Price. All rights reserved. T. Rowe PRICE, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.