Executive Summary / Key Takeaways

• T. Rowe Price, a long-standing active asset manager, is strategically diversifying its offerings and distribution channels (ETFs, Alternatives via OHA, Retirement Solutions, Insurance, Wealth) to counter industry headwinds like the shift to passive and fee compression.
• While Q1 2025 saw modest revenue growth driven by higher average AUM, profitability was impacted by lower investment gains and a decline in carried interest income compared to the prior year period.
• The firm is actively managing expenses, revising its 2025 adjusted operating expense growth guidance downward to 1-3% over 2024, reflecting market-driven adjustments and intentional cost controls, while still investing in strategic priorities and technology.
• Despite continued net outflows in Q1 2025, momentum is building in key growth areas like ETFs, Fixed Income, and Target Date funds, supporting management's outlook for reduced outflows in 2025 and a path toward organic growth, although positive full-year flows are deemed unlikely for 2025.
• Key risks include ongoing market volatility, persistent fee pressure, the challenging environment for active equity alpha generation outside narrow market segments, and regulatory uncertainty regarding alternative investments in retirement plans.

Setting the Stage: Active Management in a Shifting Landscape

T. Rowe Price Group, Inc. stands as a firm with a nearly 90-year history rooted in active investment management. Its core business revolves around providing investment advisory services across a broad spectrum of asset classes – equity, fixed income, multi-asset, and alternatives – to a diverse client base of individual and institutional investors globally. Revenues are intrinsically linked to the value and composition of its assets under management (AUM), making the firm susceptible to fluctuations in global financial markets and client flows.

The investment management industry is undergoing significant evolution, marked by persistent trends such as the increasing market share of passive investment strategies, ongoing downward pressure on fees, and a growing demand for new and innovative investment vehicles. T. Rowe Price has responded to this dynamic environment by strategically expanding its capabilities and distribution channels, seeking to diversify its revenue streams and capture growth in areas beyond traditional active mutual funds. This includes a concerted push into ETFs, alternative investments (significantly bolstered by the 2021 acquisition of OHA), and enhancing its leadership in retirement solutions.

In the competitive landscape, T. Rowe Price operates alongside major players like BlackRock (BLK), The Charles Schwab Corporation (SCHW), and Invesco (IVZ), among others. While BlackRock leverages its immense scale and dominance in passive ETFs and technology platforms like Aladdin, and Schwab excels in cost leadership and digital retail brokerage, T. Rowe Price differentiates itself through its deep fundamental research capabilities and a focus on active management aimed at generating alpha. T. Rowe Price's approach emphasizes bottom-up analysis and security selection, which it believes provides a competitive edge, particularly in less efficient markets or during periods of market dislocation. However, this research-intensive model can result in higher operational costs compared to passive managers and may face challenges in market environments dominated by narrow leadership or strong passive performance.

Technological Edge and Strategic Investment

Integral to T. Rowe Price's active management approach is its investment in technology, aimed at augmenting its research and investment processes. The firm has been building capabilities in data science, machine learning, and predictive models since 2017. This focus is on "intelligent augmentation," providing investors with additional data points and tools to enhance decision-making and unlock productivity gains.

A key operational detail is the deployment of its AI tool, Investor Copilot. This custom chatbot, embedded within the firm's private research platforms, is used by 280 investors to summarize proprietary research and service insights. While management notes that generative AI technology is still nascent for material lift in common investment research tasks, they see potential for material business value as the technology and use cases mature. The firm is backing this commitment with capital, planning $85 million for technology initiatives as part of its total anticipated 2025 capital expenditures of $282 million. This investment in technology, while perhaps not offering the same scale-driven cost advantages as some competitors' digital platforms (which can be 20-30% faster in processing according to some comparisons), is strategically vital to enhancing the core active research moat and improving the caliber of outcomes delivered to clients.

Recent Performance Reflecting Market Dynamics

The first quarter of 2025 saw T. Rowe Price's financial results influenced by a mix of market movements and strategic shifts. Net revenues totaled $1,763.9 million, a modest 0.8% increase from $1,750.2 million in the first quarter of 2024. This growth was primarily fueled by a 4.0% rise in investment advisory fees, which reached $1,598.4 million, reflecting a 9.2% increase in average assets under management to $1,620.3 billion. Market appreciation contributed $31.7 billion to AUM in the quarter, alongside net cash outflows of $8.6 billion.

However, the positive impact of higher AUM on advisory fees was nearly offset by a significant decline in capital allocation-based income, which fell sharply from $47.1 million in Q1 2024 to just $1.2 million in Q1 2025. This volatility in carried interest income is tied to the performance of affiliated funds and reflects lower overall market returns impacting these investments in the recent quarter. The annualized effective fee rate also experienced pressure, declining from 41.6 basis points in Q1 2024 to 40.0 basis points (excluding performance fees) in Q1 2025. This decrease is attributed to a mix shift in AUM towards lower fee asset classes and products driven by client flows and transfers, a trend management notes has contributed to higher fee compression (~2% in 2024) compared to historical averages (1-1.5%).

Operating expenses on a U.S. GAAP basis saw a slight 0.3% increase to $1,167.6 million in Q1 2025. On an adjusted basis, excluding market-related impacts on deferred compensation liabilities and acquisition-related items, operating expenses rose 5.9% to $1,135.1 million. Key drivers included a 4.5% increase in compensation costs due to higher salaries and benefits, an 11.8% rise in technology, occupancy, and facility costs reflecting ongoing technology investments and the impact of the new headquarters (though depreciation started in April), and a 14.3% increase in distribution and servicing costs tied to higher AUM distributed through intermediaries. Despite expense increases, the U.S. GAAP operating margin saw a slight improvement to 33.8% from 33.5% in the prior year, as revenue growth outpaced expense growth. However, net income attributable to T. Rowe Price Group, Inc. decreased 14.5% to $490.5 million, and diluted earnings per share fell 13.7% to $2.15, primarily due to significantly lower non-operating investment gains compared to the strong market performance in Q1 2024.

Strategic Initiatives Driving Future Growth

T. Rowe Price is actively executing on several strategic fronts to reignite organic growth. A key area of focus is the expansion of its ETF franchise. The firm now offers 19 ETFs with over $12.5 billion in AUM as of March 31, 2025, having seen $3.26 billion in net inflows in Q1 2025. Management is building momentum through broadening the product lineup, including the recent launch of Hedged Equity and Capital Appreciation Premium Income ETFs, and securing platform placements, which are crucial for scaling AUM. The firm sees significant future opportunity in third-party asset allocation models utilizing TROW ETFs and accelerating demand outside the U.S.

The firm is also leveraging its OHA acquisition to build its alternatives business, particularly in private credit. While deployment in private lending was muted in Q1 2025 due to a slow M&A environment, OHA had a record quarter of capital raising in Q3 2024 ($5.5 billion in new commitments), signaling future flow potential as capital is deployed. T. Rowe Price is committed to investing in future OHA product launches, with $357 million earmarked through 2026. The firm is actively bringing OHA's capabilities to the wealth, retirement, and insurance channels, viewing private market alternatives as a significant untapped opportunity, although regulatory clarity and plan sponsor adoption remain hurdles for widespread inclusion in defined contribution plans.

Retirement solutions continue to be a core strength and growth driver. T. Rowe Price remains the largest provider of active target date products, with $484.2 billion in AUM and $6.3 billion in net flows in Q1 2025. The firm is expanding its reach internationally, launching target date capabilities in Japan and Canada and partnering with a global bank for retirement funds in Asia, the UK, and the Middle East. Domestically, innovative offerings like Personalized Retirement Manager and Managed Lifetime Income, initially launched on the firm's recordkeeping platform, demonstrate a commitment to evolving solutions for retirement investors. The firm's strong positioning across various recordkeepers is a key competitive advantage in this channel.

Outlook and Guidance

Looking ahead, T. Rowe Price is focused on improving flow trends and managing expenses in a volatile market. Management's base case outlook for full-year 2025 net flows is for improvement relative to 2024, trending toward positive flows, but they deem it unlikely to achieve positive net flows for the full year 2025. They expect a larger contribution to flows from alternatives, ETFs, and SMAs, alongside continued momentum in fixed income, particularly within the insurance channel.

On the expense front, the firm has revised its guidance for 2025 adjusted operating expenses, excluding carried interest expense. The new expectation is for expenses to be up 1% to 3% over 2024's $4.46 billion, a reduction from the earlier 4% to 6% range. This lower guidance reflects adjustments in market-driven expenses based on recent AUM levels and intentional management of controllable costs, such as slowing the pace of hiring and reducing variable expenses. The firm is also evaluating opportunities for more structural cost savings to limit expense growth in 2026 and beyond, targeting 2% to 3% annual savings on a structural basis over multiple years to help fund new initiatives. The estimated effective tax rate for full-year 2025 is projected to be in the range of 23.5% to 27.5% on a U.S. GAAP basis, and 24.0% to 27.0% on an adjusted basis, with volatility expected from market fluctuations impacting stock-based compensation and changes in non-controlling interests.

Risks and Challenges

Despite strategic progress, T. Rowe Price faces significant risks. Fluctuations in global financial markets directly impact AUM and revenues. The ongoing shift from active to passive management and persistent fee pressure continue to be structural headwinds for the core business. The market environment in Q1 2025, characterized by narrow leadership and high factor volatility, made it challenging for many active strategies to outperform cap-weighted benchmarks, impacting investment performance metrics.

The ability to attract and retain assets is highly dependent on investment performance relative to peers and benchmarks, particularly the three and five-year track records which are influential in key channels. While redemption pressure has eased in some strategies, sales improvement is still earlier in the cycle. Regulatory changes, including potential tax law changes or new rules regarding alternative investments in retirement plans, could impact operations and investor interest. The contingent consideration related to the OHA acquisition, while currently valued at zero, represents potential future cash outflows if revenue targets are met. Furthermore, the VA business continues to experience net outflows, including a large termination expected in late 2024, adding to flow headwinds.

Conclusion

T. Rowe Price is navigating a challenging, evolving investment landscape by leveraging its foundational strengths in active management and research while aggressively pursuing diversification across products, vehicles, and distribution channels. The Q1 2025 results reflect the impact of market volatility on AUM and non-operating income, alongside ongoing fee pressure and strategic investments driving expense growth, albeit at a moderated pace based on revised guidance.

The firm's strategic pivot towards ETFs, alternatives through OHA, and expanding its retirement and insurance footprints are critical components of its path back to organic growth. While achieving positive net flows for the full year 2025 remains a stretch goal, management's outlook for meaningful improvement in outflows, supported by momentum in key growth areas and disciplined expense management, signals progress. For investors, the story centers on T. Rowe Price's ability to execute on its diversification strategy, demonstrate the value of its augmented active management approach in generating alpha, and effectively manage costs amidst industry headwinds, ultimately determining its long-term growth trajectory and competitive standing.