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T. Rowe Price ("TRP") claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. T. Rowe Price has been independently verified for the twenty four-year period ended June 30, 2020, by KPMG LLP. The verification report is available upon request. A firm that claims compliance with the GIPS standards must establish policies and procedures for complying with all the applicable requirements of the GIPS standards. Verification provides assurance on whether the firm’s policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firm-wide basis. Verification does not provide assurance on the accuracy of any specific performance report.

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Price Perspective - In Depth

U.S. Equities

Long-Term Benefits of the T. Rowe Price Strategic Investing Approach

T. Rowe Price

Executive Summary

  • We believe that 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.
  • Research has shown that specific market environments are often associated with periods of relative underperformance and outperformance. Research also indicates that some specific manager characteristics may contribute to long-term success.
  • We reviewed the performance of 18 T. Rowe Price institutional diversified active U.S. equity strategies over the 20 years ending in 2017, or since inception in cases where the strategy had less than a full 20-year track record. We found that the vast majority of our strategies 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 strategies would outperform the relevant benchmarks typically increased as rolling time periods were extended.
  • We attribute our success to our efforts 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.

Most sophisticated investors are aware of the pitfalls of overreacting to short-term market trends—a habit that can lead to disappointing long-term returns. Capital markets are volatile, and investors who rush to sell or buy assets based solely on their recent performance may find they’ve taken on more risk than they expected.

The same principle applies to actively managed investments—those that seek to add value for clients through security selection, sector rotation, factor weighting, or other techniques. Like the markets themselves, relative performance tends to be volatile. Evaluating managers based on quarterly or even annual results can be difficult and potentially misleading. Successful strategies often take time to bear fruit, and contrarian bets are rarely rewarded immediately. Attractive growth opportunities may be prospective, not immediate, and undervalued companies may remain undervalued for months or years.

The academic literature is clear on the obvious problem that the “average” active manager faces in seeking to generate excess returns, especially net of fees and other costs. Over time, the positive and negative excess returns of active managers as a group have tended to balance out, leaving fees and other costs as a net drag on relative performance.

However, while we recognize the virtues of passive index strategies—and employ indexed components in some of our asset allocation strategies—we do believe strongly that a skilled strategic investing approach has the potential to add value for clients over longer-term time horizons.

Evaluating manager performance requires investors and/or their financial advisors to distinguish between the signal and the noise—that is, to see past the many factors that may generate volatility in relative returns and paint a distorted short-term picture (either positive or negative) of manager skill.

Relative Performance Is Noisy in the Short Term

The first point to recognize is that relative performance—equity performance, in particular—can be extremely volatile over the short run, as seen by the trends in manager rankings in four key size/style categories in the eVestment Alliance database over the past two decades (Figure 1).2

While aggregate relative outperformance will tend to equal aggregate underperformance over time, that may mean a relatively small number of managers outperforming a benchmark by wide margins while a large majority of managers slightly underperform—or vice versa. This balance can reverse very quickly. When return dispersion is low, manager and benchmark performance may differ by only a handful of basis points, further magnifying the volatility of relative performance rankings when return differentials widen again.

Figure 1: Relative performance can be very volatile over the short run

Rolling one-year periods ended 12/31/2017

Percentage of managers in eVestment Alliance database outperforming their category and style benchmarks (net of fees)

Relative performance can vary widely over short-term periods due to market trends or other factors. The result is a highdegree of volatility, or statistical "noise."

Sources: Zephyr StyleAdvisorand eVestment Alliance; data analysis by T. Rowe Price.

Times When Active Outperforms

Within that short-term noise, more predictable—or at least more cyclical—patterns also may be found. Research has identified several broad market environments in which active equity managers, in general, may be more likely to outperform.

These include:

  • Bear markets: Research suggests that active U.S. equity managers have had a relatively higher chance of outperforming when market performance is poor (Figure 2). At least one study has argued that this effect persisted even after differences in exposure to market risk (i.e., beta) were taken into account, suggesting that active managers have provided a certain amount of relative performance improvement in more volatile markets.3
  • High return dispersion: When the correlation of returns within a benchmark is low, active managers as a whole may have more opportunities to add value through security selection or sector rotation.
  • Volatile markets: Figures 2 and 3 both suggest that active U.S. equity managers as a group have been somewhat more likely to outperform in periods when market returns have been more variable.

Over longer time horizons, periods of extreme relative underperformance or outperformance have tended to revert toward the mean, smoothing out some of the noise that dominates quarterly and annual results. This tendency is highlighted in Figure 4, which shows relative manager performance in the same four eVestment Alliance categories as in Figure 1, but across progressively longer rolling time periods.4

The influence of longer-term cyclical factors is now more visible. Over the entire 20-year time frame, the percentage of managers outperforming their benchmarks in most of the eVestment Alliance categories shown has typically fluctuated around the 50% mark.

Figure 2: Active managers may lead in bear markets, lag in bull markets

Rolling one-year periods ended 12/31/2017

Manager performance versus benchmark performance (net of fees)

Active managers, as a group, have tended to outperform in bear markets by limiting downside volatility. Market performance has been inverted in the above charts to make that point clearer.

Sources: Zephyr StyleAdvisor, eVestment Alliance, and Russell; data analysis by T. Rowe Price.


Figure 3: When return dispersion is high, active managers may have more opportunities to add value

Rolling one-year periods ended 12/31/2017

Active manager performance versus return dispersion (net of fees)

Sources: Zephyr StyleAdvisor, eVestment Alliance, and Russell; data analysis by T. Rowe Price.


Performance of T. Rowe Price Diversified U.S. Equity Strategies

Looking at broad historical trends can be enlightening when it comes to evaluating the performance of active managers as a group. But it doesn’t tell us much about the question investors are probably most interested in: Can my manager generate positive excess returns after management fees and other costs?

For investors with longer time horizons—such as pension plan sponsors—we believe this question is best answered across multiyear periods (or even multiple market cycles) to filter out the short-term relative volatility described above. However, the standard 1-, 3-, 5-, and 10-year return histories typically shown to clients and prospective investors—and used in many industry performance studies—provide only snapshots of past performance as of a current date. To gain a clearer picture of manager skill, we believe more intense investigation is required.

As equity managers, we are primarily interested in whether our own investment process—which emphasizes bottom-up fundamental analysis, in-depth research coverage, and collaboration across size and style categories—has created long-term value for our clients. For a better understanding of this issue, we conducted a rigorous study of the performance of T. Rowe Price’s institutional diversified U.S. equity strategies over the 20 years ended December 31, 2017 (or since inception for strategies that lacked a full 20-year track record).  

Price Perspective - In Depth

Read the full study.

Read the full study.
Long-Term Benefits of the T. Rowe Price Strategic Investing Approach

1Given that the U.S. equity market is generally considered the world’s most efficient, transparent market, we believe it provides a strong test for management skill. See the appendix for additional information on the performance study methodology.

2Based on relative performance of the strategies in their respective categories in the eVestment Alliance database, net of fees, as of December 31, 2017. Size and style categorization is by eVestment Alliance. The performance of large growth managers was measured against the Russell 1000 Growth Index, large value managers against the Russell 1000 Value Index, small growth managers against the Russell 2000 Growth Index, and small value managers against the Russell 2000 Value Index.

3Kosowski, "Do Mutual Funds Perform When It Matters Most? U.S. Mutual Fund Performance and Risk in Recessions and Expansions," Quarterly Journal of Finance, Vol. 1, No. 3, 2011.

4Based on the same eVestment Alliance manager categories and benchmark comparisons used in Figure 1.


Important Information

Important Information on Hypothetical Portfolio on Page 9—The data in Figure 10 is hypothetical in nature and is shown for illustrative, informational purposes only. It is not intended to forecast or predict future events, but rather to demonstrate T. Rowe Price’s capability to manage assets in this style. It does not reflect the actual returns of any portfolio strategy and does not guarantee future results. Certain assumptions have been made for modeling purposes and are unlikely to be realized. No representation or warranty is made as to the reasonableness of the assumptions made or that all assumptions used in modeling analysis presented have been stated or fully considered. Changes in the assumptions may have a material impact on the information presented. Data shown for the Hypothetical Portfolio is as of December 31, 2017 and represents the manager’s analysis of Hypothetical Portfolio as of that date and is subject to change over time. The Hypothetical Portfolio is not actively managed and does not reflect the impact that material economic, market or other factors may have on weighting decisions. If the weightings change, results would be different. Management fees, transaction costs, taxes, potential expenses, and the effects of inflation are not considered and would reduce returns. Actual results experienced by clients may vary significantly from the hypothetical illustrations shown. This information is not intended as a recommendation to buy or sell any particular security, and there is no guarantee that results shown will be achieved.

The gross model performance results do not reflect the deduction of investment advisory fees. Returns shown would be lower when reduced by the advisory fees and any other expenses incurred in the management of an investment advisory account. For example, an account with an assumed growth rate of 10% would realize a net of fees annualized return of 8.91% after three years, assuming a 1% management fee.

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.

Russell indexes—Frank Russell Company (“Russell”) is the source and owner of the Russell Index data contained or reflected in these materials and all trademarks and copyrights related thereto. Russell® is a registered trademark of Russell. Russell is not responsible for the formatting or configuration of this materials or for any inaccuracy in T. Rowe Price Associates’ presentation thereof.

S&P—Copyright © 2018, S&P Global Market Intelligence (and its affiliates, as applicable). Reproduction of S&P 500 Index in any form is prohibited except with the prior written permission of S&P Global Market Intelligence (“S&P”). None of S&P, its affiliates or their suppliers guarantee the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions, regardless of the cause or for the results obtained from the use of such information. In no event shall S&P, its affiliates or any of their suppliers be liable for any damages, costs, expenses, legal fees, or losses (including lost income or lost profit and opportunity costs) in connection with any use of S&P information.

Key Risks—The following risks are materially relevant to the strategies highlighted in this material: Transactions in securities of foreign currencies may be subject to fluctuations of exchange rates which may affect the value of an investment. Strategies are subject to the volatility inherent in equity investing, and their value may fluctuate more than strategies investing in income-oriented securities. The value approach carries the risk that the market will not recognize a security’s true worth for a long time, or that a security judged to be undervalued may actually be appropriately priced. There is an increased risk where a strategy has the ability to employ both growth and value approaches. Certain strategies are subject to sector concentration risk and are more susceptible to developments affecting those sectors than strategies with a broader mandate. Investment in small companies involves greater risk than is customarily associated with larger companies, since small companies often have limited product lines, markets, or financial resources.

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.

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