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The U.S. Equity T. Rowe Price Approach

T. Rowe Price's Strategic Investing Approach Has Benefited Our Results

T. Rowe Price

Executive Summary

  • Research has shown that active manager performance can be cyclical and 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 to quantify the value added by our strategic investing approach.
  • 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
  • We credit our success to our efforts to go beyond the numbers and get ahead of change, which we believe leads to better decisions and prudent risk management.

(Fig. 1) Relative Performance Can Be Volatile Over The Short Run
Percentage of managers in eVestment Alliance database outperforming their category and style benchmarks (net of fees)
Rolling one‑year periods ended December 31, 2018

Past performance is not a reliable indicator of future performance. 

Opening Quote Evaluating managers based on quarterly or even annual results can be difficult and potentially misleading. Successful strategies often take time to bear fruit.... Closing Quote

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 about 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.

(Fig. 2) Active Managers May Lead In Bear Markets, Lag In Bull Markets
Manager performance versus benchmark performance (net of fees)
Rolling one‑year periods ended December 31, 2018 

Past performance is not a reliable indicator of future performance. 

Opening Quote Active U.S. equity managers as a group have been somewhat more likely to outperform in periods when market returns have been more variable. Closing Quote

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).3

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.

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). 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.4
  • 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.5

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.

(Fig. 3) When Return Dispersion Is High, Active Managers May Have More Opportunities To Add Value
Active manager performance versus return dispersion (net of fees)
Rolling one‑year periods ended December 31, 2018

Past performance is not a reliable indicator of future performance. 

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.

(Fig. 4) Relative Performance Has Been More Stable Over Longer Time Horizons
Percentage of managers in the eVestment Alliance database outperforming their benchmarks (net of fees)
Rolling periods ended December 31, 2018 

Past performance is not a reliable indicator of future performance. 

Research Study

T. Rowe Price's Strategic Investing Approach Has Benefited Our Results

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.

2Frank 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 material or for any inaccuracy in T. Rowe Price Associates’ presentation thereof.

3Based on relative performance of the strategies in their respective categories in the eVestment Alliance database, net of fees, as of December 31, 2018. 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.

4Kosowski, “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.

5Based on the same eVestment Alliance manager categories and benchmark comparisons used in Figure 1.


Important Information

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—The S&P 500 Index is a product of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates (“SPDJI”), and has been licensed for use by T. Rowe Price. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). T. Rowe Price’s product is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P or their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product nor do they have any liability for any errors, omissions, or interruptions of the S&P 500 Index.

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.

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.

 

201903‑743327

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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

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