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T. Rowe Price sees unusual turnover in portfolio managers

T. Rowe Price has a reputation as a place where portfolio managers can spend their entire careers.

But over 12 weeks this year, three fund managers left the Baltimore-based investment company or announced plans to do so. Two left suddenly, with a star manager taking two top analysts along.

That's high turnover for any fund company, but particularly at Price, where the average tenure of a fund manager at the firm is 15 years.

"It's out of character," said Laura Lallos, an analyst with Chicago-based Morningstar Inc., which tracks funds. "It's worth watching, though, just because it is surprising."

Analysts and fund experts say they aren't sure of the reason for the turnover at Price, known for its collegial environment and generous — but not lavish — compensation. Fund managers, they say, typically leave for a promotion, retirement or a chance to run their own firm. But the surging stock market might have contributed to the timing, with managers preferring to leave on top or being able to raise capital more easily to start their own ventures.

"People are feeling very good in our business right now," said James Hardesty, chairman of Hardesty Capital Management in Baltimore.

Price described the recent departures as unrelated. And, although they are out of the ordinary, they're not unprecedented. The company, for instance, lost four portfolio managers in 2001 and 2002.

"It's never good when you see turnover at an asset manager firm," said Macrae Sykes, an analyst with Gabelli & Co. in Rye, N.Y. "It's a people business. You want stability in terms of your management teams."

But Sykes said he doesn't expect the recent departures to impact Price long-term because of the firm's diversity and strong culture.

John Linehan, head of U.S. equities for Price, said the firm can't guarantee more managers won't leave, but will work hard to prevent others from doing so.

"It's a frothy market, and there are a lot of people looking for good talent," Linehan said. "We have a very strong fund performance, and we have highly talented teams. So it's not surprising others are looking in our direction."

Linehan said Price was prepared for turnover.

"We have a very deep bench and have very talented investors who are stepping up to take their places," he said.

The first to leave was Kris H. Jenner, who had managed the Health Sciences Fund since 2000. Jenner, a doctor, had a knack for picking small health care companies that tended to be riskier and holding on to them for long periods, said Flynn Murphy, a fund analyst at Morningstar.

The fund was more volatile than other health sciences funds, although Jenner's strategy worked over time, Murphy said.

The $6.5 billion fund has been one of Price's top performers, with a nearly 31 percent return for the 12 months ended in April as well as an average annual return of 15.2 percent in the past 10 years.

Price usually gives notice months in advance of a manager leaving. Last summer, for instance, Price announced that Preston Athey would step down as manager of the Small-Cap Value Fund — in June 2014.

But Jenner, 51, left suddenly in mid-February, accompanied by two of his fund's analysts, G. Mark Bussard and Graham M. McPhail. The trio reportedly has raised more than $100 million to start a Baltimore-based hedge fund called Rock Springs Capital, which will have a similar investment strategy as the Health Sciences Fund.

Taymour Tamaddon, who had been an analyst on the health care team, replaced Jenner.

Morningstar analysts had awarded the Health Sciences Fund a gold rating, the highest possible. But after Jenner's exit, the rating was dropped to "neutral" as analysts review the fund under Tamaddon, who has no experience as a portfolio manager, Lallos said. "It's a wait-and-see [situation]," she said.

The other two managers announced their exit this month.

Timothy E. Parker, manager of the New Era Fund for the past three years, plans to leave Price by the end of September. The natural resources fund, with $4.48 billion in assets, returned an average of 2.62 percent annually over the past three years ended in April, and 12 percent annually over 10 years.

Parker, 38, said he is exploring his options and has no set plans of what he will do post-Price. He said he might remain in the industry or switch fields and go into charity work or teaching. His replacement will be Shawn T. Driscoll, an energy analyst with the fund.

One week after Parker's announcement, Joseph M. Milano, 40, suddenly left the New America Growth Fund he had been managing since 2002. The fund invests in U.S. companies in the fastest-growing sectors.

Milano said he was leaving the firm to pursue other investment management opportunities, most likely on his own, said Price spokesman Brian Lewbart. Milano could not be reached for comment.

Daniel Martino, manager of the Media & Telecommunications Fund, took over for Milano. He also will continue to co-manage his old fund.

The $3.97 billion New America fund had a 9.15 percent average annual return over 10 years, and 13.89 percent so far this year.

Lallos said New America's rating had been gold; it is now under review, given the change in managers.

The New Era Fund, still under Parker's direction, is rated neutral by Morningstar. The manager has a fairly aggressive approach with high turnover of its holdings and long-term results that have been mediocre compared with peers, Lallos said.

Losing a star manager could hurt a company if he or she controlled a significant percentage of a firm's total assets, and most shareholders are institutions, which are sensitive to management changes and more likely to move their money if they don't like the switch, said Jeffrey Hopson, senior analyst with Stifel, Nicolaus & Co. in St. Louis.

But that's not the case with Jenner, who had the highest profile of the three, Hopson said. The Health Sciences Fund has a large number of small investors who are less likely to bolt, and despite the loss of the manager and two analysts, others on the fund's team remain, he said.

According to Price, the Health Sciences Fund gained about $700 million in assets since Jenner's departure, a mix of new money and market appreciation.

Price still has had to make adjustments.

"Clearly, there is going to be an internal reorganization, and they will try to shore up confidence to their investor base," said Jim Kyung-Soo Liew, a finance professor at Johns Hopkins' Carey Business School.

Price might have to do more if the stock market continues to reach new heights, luring more managers to go out on their own, Liew added.

They may try to follow in the footsteps of Jeff Vinik, Liew said. The onetime manager of Fidelity's famed Magellan Fund left in 1996 to launch a successful hedge fund and later bought the Tampa Bay Lightning of the National Hockey League.

Vinik told investors this month that he would be shutting down the hedge fund, taking a break from day-to-day competition in the market to focus instead on hockey.

"That is the American money manager's dream," Liew said.

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