T. Rowe Price Group has historically traded at a premium when compared to its peers BlackRock (BLK), Invesco (IVZ), Franklin Resources (BEN), Legg Mason (LM), and Affiliated Managers (AMG). Together, these companies make up 2.77% of the Financial Select Sector SPDR Fund (XLF).
T. Rowe Price Group is currently trading at a one-year-forward-price-to-earnings multiple of 16.7x. In comparison, the industry average is 15.2x. T. Rowe’s strong active fund management, combined with higher EPS (earnings per share) growth rates than what passive fund managers offer, contributes to the premium valuation.
Diversification and valuation
In recent years, the spread has declined marginally due to slower managed asset growth combined with less presence in the fast-growing ETF market. T. Rowe Price Group was trading at 19.3x on a one-year-forward-earnings basis in 2010. Then, the industry average was 15.6x.
T. Rowe Price Group (TROW) has consistently led the pack in terms of its mutual funds’ performance. Mutual funds have been the biggest contributor to its expansion of assets under management. In a three-year period, 78% of the mutual funds managed by the company have outperformed their comparable Lipper averages.
In our view, how T. Rowe diversifies its mutual fund portfolio in the short term will determine the premium it continues to command. The company needs to reduce the risks arising from economic slowdowns in certain countries and regions. Diversification is also needed in the company’s product portfolio. A focus on fast-growing markets like ETFs and other innovative products will affect T. Rowe’s overall performance.