One on One is a weekly feature offering excerpts of interviews conducted by The Evening Sun with newsworthy business leaders. George J. Collins is president and chief executive officer of T. Rowe Price Associates Inc., a Baltimore-based mutual funds company.
Q.Sales in mutual stock funds have been shooting up in the past few months. How much have they increased for T. Rowe Price since January and why are they going up?
A.Sales in our funds are up $2.1 billion roughly in the first quarter and in fact our net cash flow for the first quarter is around $520 million. I think for all of last year our net cash flow was $260 million for stock funds, roughly $50 million for bond funds, so about $310 million in total [excluding dividend reinvestments in individual accounts]. So this has been an extraordinary quarter and it has been particularly good on the equity side. And of course performance on a number of our stocks funds has been absolutely super in the first quarter. It has been since October when the market turned. New Horizon's [fund] year-to-date is up 28 percent, Growth and Income is up 21 percent, New America Growth is up 26 percent, and the real winner has been the Science & Technology Fund, which is up 44 percent in the first quarter. Those are big, big returns.
Q. So why are they going up in your opinion?
A. The market has a better tone to it because the Federal Reserve Bank has eased, the investor is of the belief that the economy is showing some early signs of coming out of the recession. . . . The war definitely helped. That was a big question mark in everybody's mind. Whether we were going to get bogged down in a land war and it's going to be devastating. It soon became clear that we were not going to get bogged down in a long land war. Consumer confidence has returned also, and consumer confidence is better, and investor confidence is better.
Q. I also understand that high-yield bonds generally known as junk bonds are also on the way back. How have they been faring lately and are they becoming more popular?
A. We went from a negative cash flow to a very positive cash flow position in the high-yield fund sometime back in the fall. Just looking at the returns in the high-yield fund, the return last year was minus 11 percent but it is now up 12 percent since the beginning of the year. That sector suffered last year with the thought that the recession was going to hit, and hit hard, and that those companies would have great difficulties. Liquidity has come back to the market; there's more buy interest. Part of it is companies buying in their debt. Some companies that were in trouble have had better-than-expected cash flows. They've been buying the debt at very cheap prices because the investor bailed out and bailed out big. . . . So that's been very positive; it's created more liquidity in that market, plus with the economy, with people thinking that the economy is going to improve, that in itself has helped these companies. So the investor's returns are better, and we're seeing positive cash flow in the fund for the first time in a long time. Our high-yield fund peaked at $1.2 billion and went as low as $540 million and it is now $680 million with a good steady cash flow. Yields are still very attractive in that area.
Q. When I came in here, I just noticed that your office is nice and comfortable, yet it's not exactly the palatial office of the CEO. I also talked to you in the past, and you
told me that the executives in your company fly coach, they don't have a company jet. Is there a particular philosophy behind the way executives are treated in this company as opposed to other companies?
A. We think they are treated well. I certainly hope so. One could tell from the turnover rate that we treat them pretty well. We tend to keep the people we want to keep, and we don't have too many problems trying to hire the young talent that we see out there when we want to hire it. But, you have to watch your costs and particularly in an environment like this. . . . We don't own a corporate jet. At one time, we flew first class on long flights. I'm sure that a number of people in the firm that do quite a bit of flying, I would say myself, would like to fly first class, but it's a big cost differential, and we hope some of that savings comes back to the shareholder. You mentioned office space. We are either the best or the worst users of office space in town, I think. Probably more people are crammed in a smaller space than anywhere else. If I wanted a larger office, I don't think I could have it. . . . We have management committees, a very effective way of managing a business such as ours. The major players are making the major decisions. The quality of the decision tends to be better with a management committee type situation.
Q. Another common feature among some companies are golden parachute agreements and also what's known as the golden handcuff agreements. Do you have anything like that in T. Rowe Price?
A. No, we don't. We have a standard package that if things don't work out they get one month or a year [of severance] with a maximum of 12 months. And that's pretty much it. We don't make special deals.
Q. You don't find that to get the quality of executives that you need, that you have to cut these special deals?
A. We don't have that problem. In some of these parachutes I've seen, I question whether the company should have paid that large amount of money, given the "contribution" that individual gave to the company. I won't cite specifics, but some of them are quite large, and they're unreasonable, and they run against stockholder value.
Q. In light of T. Rowe Price's experience with the Mortgage and Realty Trust commercial paper, should people be concerned about the fact that money markets are not insured by the government?
A. The money market funds do a very capable job of finding good quality for their portfolios. There haven't been any losses. Under the new SEC [Securities and Exchange Commission] Reg. 2A7, that quality is going to be an even higher standard. We go to unbelievable extremes to scrutinize the debt in our portfolio. We've beefed up the credit staff even more in the past 12 months, since MRT, and MRT we think in our case in buying that debt, we think it's a full plan payout. We will get our money. It was a very technical default. It was very unfortunate, and as I say, we think it will pay off full-time. But I don't see the risk in money funds, and taxable money funds. I think most of them are extremely high quality. In fact most all of them are extremely high quality. If people are constantly doing the credit work and scrutinizing the credits carefully, they shouldn't have problems.
Q. On the MRT, do you believe that you will be able to recover the $4 million you took on your income?
A. Yes I do. I think it's, in saying that's it a full plan payout, I think we will recover everything. Principal as well as interest.
Q. Unlike other investment firms, T. Rowe Price is actually hiring people in recent months. I believe you hired an extra 75 workers for your new investment services operation out in Owings Mills. Can you tell me what's behind the hiring and why you're doing your own clerical work or customer service work rather than relying on the vendors that you had before?
A. Our hiring has been quite specific. There are a number of areas we've tried to beef up. I mentioned the credit area. We've added investment analysts in certain spots where we felt we needed more coverage and to cover new products. The areas you're talking about out in Owings Mills, these are new services that we're bringing down from Boston. We were unhappy with the service we were getting and we felt that we could do a better job, and that of course is why we're doing the hiring. This is a new business for us. We've been gradually doing some of these services over the number of years, but this year, of course, with what we see in the transfer agency function, that's quite a bit. Now the other area we're hiring also is in our Retirement Plan Services. And that's to serve the 401(k) [retirement plan] market, and that has been a very strong market and it looks like at the present that the president and the Congress see eye to eye and go through with making some changes in 401(k) it could be it will spur growth even more, and we're hoping that we'll continue to get good growth in that area. That building technologically, it's .. pretty far advanced design, and you have to serve the hell out of these clients to keep them. It's extremely important that we do a good job and we do with a lot of consistency and so we're putting a lot of emphasis out there and trying to improve the quality of the product and serving those accounts.
Q. You just came out with your 35th fund and you have two on the pipeline right now. How many more do you think you're going to be coming out with this year, and is there any limit to how many funds you will be coming out with or are you just going to keep coming?
A. This is a very difficult business to forecast and predict. We did a chart at the annual meeting that showed the growth in new assets over the past 10 years, and new funds, but it was an astonishing number. If you go back 10 years, every 10 years, and you ask, what do you see that looks good going forward or in looking back, would you have thought that the company had kind of reformed itself that way or assets would have been positioned where they are, and 99 percent of the time, you would have been absolutely wrong. . . . So I can't predict how many
funds we'll have in five or 10 years. Every time we've looked back, we've been wrong. The market is so dynamic, it's so quick. You don't have to be first, but you've got to be there as Patton or somebody said, maybe it was Grant, that you've got to be there with the mostest. It's hard to predict. There's just no way of knowing. It's a highly unpredictable business and extremely dynamic business, and if one is not focused and one is not innovative, one is going to get left behind.