Strong Flows and Market Gains Lift T. Rowe Price's AUM

While there was little in wide-moat T. Rowe Price's second-quarter results that would alter our long-term view of the firm, we are likely to raise our $114 fair value estimate on improvements seen in the firm's near-term results that will positively impact our medium-term forecast. T. Rowe Price closed out the June quarter with a record $1.220 trillion in managed assets, up 20.9% sequentially and 8.4% on a year-over-year basis. Net inflows of $14.7 billion during the quarter were better than our expectations, as well as the positive $2.4 billion quarterly run rate we've seen for net flows at T. Rowe Price since the end of the 2008-09 financial crisis. Target-date funds saw an uncharacteristic $200 million in outflows during the second quarter, with most of the positive flows actually coming from the firm's subadvisory and separate account portfolios.

Even though average AUM was up 8.4% year over year during the June quarter, T. Rowe Price reported a 1.4% increase in revenue when compared with the prior-year's period, due to product mix shift and a decline in the firm's effective fee rate to 0.456% from 0.463% during the second quarter of 2019. First-half top-line growth of 5.7% was much better than our full-year forecast, even after adjusting for a difficult back half of the year (as the firm faces higher AUM and revenue hurdles). As for profitability, adjusted GAAP operating margins of 43.8% during the first two quarters of 2020 were about 170 basis points higher than the year-ago period, as expenses rose at a slower rate than revenue during the first half of the year. Our current five-year forecast (which we may need to revise upward) calls for operating margins in a 38% to 40% range, as the firm continues to make upfront investments in key regions and channels to help drive growth (and is likely to continue to take advantage of its better margin profile relative to peers to make additional investments that will help spur organic growth).

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