PRICE T ROWE GROUP INC Q3 FY2026 earnings call

• Investment Performance: Over 50% of fund assets beat peer groups on 1, 3, and 10-year periods. U.S. equity research remains top quartile for 3, 5, and 10-year periods. Fixed income performance was strong, with 74-85% of assets outperforming peers across various timeframes. Target date funds saw 80% of assets outperform on 1 and 3-year periods.
• Strategic Acquisitions: Announced plans to acquire FM Investments, a fixed income asset manager and ETF specialist with ~$20 billion in AUM, expected to close in early 2027 to enhance fixed income and ETF capabilities.
• Product Innovation & Partnerships: Launched two interval funds with Goldman Sachs (Private Markets Fund and All Equity Access Fund). Added a sixth model portfolio via Goldman Sachs partnership. Expanded AI capabilities through a strategic relationship with Anthropic, integrating AI into investment workflows and enterprise operations.
• Distribution Growth: Active ETF franchise grew significantly, with total AUM reaching $33.8 billion (up from $6.9 billion two years ago). Launched six new ETFs in Q3, bringing the lineup to 39. Became the 13th largest active ETF manager.
• SMA Expansion: SMA assets reached $20.6 billion, with 44 externally available strategies and roughly 36,000 funded accounts. Focus on tax efficiency and customization.
• Operational Efficiency: Investing in record-keeping platforms and advice capabilities to drive direct wealth experiences. Refining AI leadership model by embedding AI leaders in key business units.

T. Rowe Price reported adjusted diluted earnings per share of $2.86 for Q3 2026, an increase from $2.57 in Q2 2026 and $2.81 in Q3 2025, driven by higher average assets under management (AUM) and a lower share count. Adjusted net revenue was $2 billion, up 5.3% year-over-year and 5.1% sequentially. Investment advisory revenue stood at $1.8 billion (up 5.8% YoY), while adjusted carried interest surged to $63.1 million from $15.2 million in the prior quarter due to private credit and venture fund performance. Adjusted operating expenses were approximately $1.2 billion, down 1.6% sequentially but up 5.7% year-over-year. The company ended the quarter with $1.86 trillion in AUM, though it experienced $28.3 billion in net outflows, primarily from equity strategies and multi-asset target date funds. ETF net inflows were strong at $3.8 billion for the quarter, contributing to year-to-date ETF inflows of $11 billion.

• Net Flows: Anticipate sequential improvement in net flows in Q4 2026, with outflows moderating from Q3 levels but remaining elevated relative to historical norms.
• Operating Expenses: Expect 2026 adjusted operating expenses (excluding carried interest) to be up 4-7% over 2025 levels ($4.6 billion), currently trending toward the middle of that range.
• Share Repurchases: Maintain an opportunistic approach to share buybacks; no repurchases occurred in Q3, but the intent to return excess capital to shareholders remains unchanged.
• Long-term Growth: Confident in returning the business to organic growth through expansion in ETFs, SMAs, models, fixed income, and alternatives, despite headwinds in active equity.

• Persistent Outflows: Continued net outflows from equity strategies and mutual funds, particularly affecting target date funds due to an aging participant base taking distributions.
• Active Equity Headwinds: Structural shift from active to passive investing continues to pressure traditional active equity businesses.
• Market Volatility: Sensitivity to inflation and interest rate environments impacting fixed income and alternative asset allocations.
• Execution Risk: Success depends on effectively scaling new distribution channels (ETFs, SMAs, models) and integrating acquisitions like FM Investments without disrupting existing client relationships.

Q: Glenn Schorr asked how institutional allocations might change in 2027 given the active-to-passive trend, AI capex cycle, and rising rates. Rob Sharps noted that while the shift to indexing persists, there is renewed interest in value-based approaches and broadening beyond hyperscalers. He highlighted increased demand for fixed income due to higher rates and inflation sensitivity, as well as opportunities in infrastructure, secondaries, private credit, and late-stage venture capital enabled by AI.

A: Management indicated that institutional clients are diversifying away from pure large-cap growth, seeking resilience against inflation and exposure to AI beneficiaries beyond big tech. Private credit and late-stage venture are seen as significant growth areas, reflecting a search for yield and innovation-driven returns in a changing macro environment.

Q: Alex Blostein asked how much the new wrappers (ETFs, SMAs, models) and partnerships will contribute to organic growth over the next 2-3 years, acknowledging challenges in active equity. Rob Sharps emphasized that while active equity pressure will persist, tangible results are emerging in fixed income (11 quarters of inflows), alternatives, and retirement solutions. He stated that these new platforms need to scale significantly to offset headwinds and that M&A will be used selectively to accelerate this growth.

A: The company views ETFs, SMAs, and models as critical long-term growth engines. While near-term flows remain pressured by active equity outflows, management is confident that expanding distribution capabilities, strategic partnerships (e.g., Goldman Sachs), and product innovation will drive substantial organic growth and restore overall business momentum.

Q: Dan Fannin asked about the drivers of the expected sequential flow improvement in Q4, specifically whether it was just the absence of a large redemption or if gross sales are improving. Rob Sharps explained that Q4 flows depend heavily on winning new plans rather than participant contributions, which are declining due to retirements. He noted that target date flows are becoming more uneven, relying on new plan wins, and that October data suggests better trends in November/December, though year-end activity can be lumpy.

A: The improvement is structural, driven by a shift in target date dynamics where growth comes from new plan acquisitions rather than ongoing contributions. Management sees strong interest in blend/hybrid retirement solutions and expects continued engagement with plan sponsors to offset the tailwind loss from aging demographics.

Q: Michael Cho asked about T. Rowe Price’s position in the active ETF market, noting they are the 13th largest manager. Dee Sawyer responded that they do not focus on leaderboard rankings but on building a coherent lineup meeting client needs. With 39 ETFs covering core categories and differentiated satellites, they have gained significant market share organically. Rob Sharps added that placement in third-party models and potential mutual fund-to-ETF conversions offer further upside to move up the ranks.

A: T. Rowe Price prioritizes product fit and client outcomes over specific market share rankings. Their disciplined approach to launching ETFs has resulted in strong organic growth and deep penetration across core asset classes. Future growth is expected to come from broader platform adoption and converting existing mutual fund assets to ETF structures where beneficial.

Q: Bill Katz questioned why the company paused share buybacks despite a stock price decline and suggested more aggressive M&A or buybacks to shrink the share count amid active equity challenges. Rob Sharps clarified that the pause was due to blackout periods and standard timing, not a change in strategy. He reiterated that M&A is a tool used only when culturally and financially compelling, not as a primary strategy, and that buybacks remain opportunistic. The focus is on evolving the business mix through organic growth and selective deals.

A: Management maintains a strict discipline regarding capital allocation, prioritizing financial strength and seed capital for growth initiatives. They reject using M&A purely for size or buybacks solely to offset dilution, preferring a holistic approach that balances dividend support, reinvestment, and opportunistic returns to shareholders.