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T. Rowe Price's profit fell but it's still a peer leader

The Baltimore Sun

Baltimore's T. Rowe Price Group saw its quarterly profit drop for the first time in five years as continued market volatility hurt the value of its assets and clients pulled back on making new investments.

The money manager, which analysts said still performed better than many of its peers, reported yesterday that net income fell 12.6 percent to $152.8 million, or 56 cents per diluted share, in the three months that ended Sept. 30, compared with a profit of $174.8 million, or 63 cents per diluted share, in the year-ago period.

The last time Price saw a year-over-year decline in net income was the first quarter of 2003.

But shares gained 51 cents, or 1.65 percent, to close at $31.47 yesterday. Its stock is down 46 percent since the beginning of the year.

Price's results reflect how the volatile market is leaving almost every financial institution under pressure. Asset managers have been especially hit hard as skittish investors pulled money out of mutual funds and looked for safer investments.

"All these firms have fewer assets under management and this is happening industrywide," said Loren Fox, a research analyst at Strategic Insight, a mutual fund research and consulting firm. "There's no mutual fund firm out there that's doing great."

While Price investors poured $1.7 billion of new money into its funds and other investments in the third quarter, net inflows were down from $8.1 billion in the second quarter. Still, Price was one of the few money managers that reported positive inflows for the quarter, analysts say.

"Clearly, they held up well versus their peers, given the environment," said J. Jeffrey Hopson, an analyst at Stifel Nicolaus. "But the outlook from here is challenged."

FBR Capital Markets analyst Matt Snowling cut his 12-month stock price target to $24 from $50 yesterday to reflect a lower earnings forecast amid the market instability.

Price's assets under management fell 11 percent to $345 billion in the third quarter, from $387.7 billion in the second quarter. The net inflows of $1.7 billion were offset by market losses of $44.4 billion.

James A.C. Kennedy, Price's chief executive and president, said yesterday that the company expects lower earnings in the fourth quarter and into next year. But the company maintains a strong balance sheet and a capable work force to weather the financial turmoil, he said.

"Our employees ... [are] not worried about their jobs or worried about the stability of the company because the company is very stable," he said in an interview. "Therefore, they have the luxury of remaining focused on the clients."

Several competitors, such as BlackRock, AllianceBernstein and Janus Capital Group, reported a drop in quarterly profit this week as market losses and client redemptions hurt them. Alliance and Janus also announced job cuts to control costs.

Stock and bond fund outflows reached a record $72 billion in September, according to TrimTabs Investment Research in Sausalito, Calif.

Fox, of Strategic Insight, said his company's data showed investors pulled $47 billion from actively managed equity funds in September, or 1 percent of U.S. stock fund assets, a smaller redemption rate compared with the 1987 stock market crash.

Price has been "tapping on the brakes of expenses" since November and more so in recent months, so that will "help us avoid doing a reduction in work force," Kennedy said.

Kennedy said the company has seen an increase in client calls amid the volatility, but "most of the calls are not for redemption."

"Less than 20 percent are redeeming," he said of clients who are calling in. "That's a good sign."

Price built its reputation around a conservative and teamwork approach, selling dependable products such as its popular target-date retirement funds, which adjust to become more conservative as the investor ages.

These investments remained solid in the third quarter, bringing in $1.5 billion in net inflows. They now account for 14.5 percent of its mutual fund assets and 9 percent of total assets under management.

Net inflows to Price mutual funds in the third quarter were flat as $1.3 billion investment in bond and money funds was offset by the same amount in stock fund outflows. Net revenue fell nearly 3 percent to $554.8 million, down from $571 million.

Operating expenses rose $8.8 million, to $316 million, in part due to increased compensation costs. Advertising and promotion expenses, though, were down $1.7 million, to $16.7 million.

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