T. Rowe Price (Photo: Shutterstock)

T. Rowe Price announced it will be establishing a separate SEC-registered investment adviser with its own investment platform, portfolio managers and analysts to help the firm address longstanding capacity challenges.

The new entity, T. Rowe Price Investment Management, is expected to launch in the second quarter of 2022, following regulatory approval and internal restructuring. TRPIM will initially offer six existing investment strategies that will be transferred from T. Rowe Price Associates: U.S. Capital Appreciation, U.S. Mid-Cap Growth Equity, U.S. Small-Cap Core Equity, U.S. Small-Cap Value Equity, U.S. High Yield Bond and U.S. Summer Companies Equity (available only to non-U.S. investors) whose total AUM was $167 billion as of Sept. 30, 2020.

The portfolio managers of the six strategies will also be transferred to the new entity along with about 100 other investment professionals, including analysts and traders. TRPIM will have its own research teams and trading desk.

Stephon Jackson, currently associate head of the U.S. equity division at T. Rowe Price, will head the new entity and join the T. Rowe Price Group management committee effective Jan. 1, 2021, and David Giroux, currently the chief investment officer for equity and multi-asset strategies at T. Rowe Price, will become its chief investment officer and lead the U.S. Capital Appreciation Strategy. 

In an analyst call following the announcement, Eric Veiel, co-head of Global Equity and Head of U.S. Equity at T. Rowe Price Associates, described the firm’s pending move as “a natural step” in managing the firm’s investment capacity, noting that 10 of its existing strategies, accounting for 30% of AUM, are closed to new investors.

The establishment of TRPIM will help the firm “preserve its ability to generate alpha” by allowing investments that would otherwise be subject to regulatory limitations for a single investment firm or subject to limits by T. Rowe Price itself. The limits will increase with the advent of two separate investment entities.

This could be especially useful in a world where investments in the small- and mid-cap equity universe are shrinking. Since 2006 the universe of small and mid-cap companies with less than $5 billion in assets has decreased by over one-third, said Jackston.

Morningstar analyst Katie Rushkewicz Reichart said the T. Rowe Price move “is a logical solution to the firm’s long-standing capacity challenges that have particularly concentrated its renowned small- and mid-cap strategies.”

Splitting into two entities, similar to Capital Group’s model, allows each side to adhere to its  own company ownership limits and provides more bandwidth for the portfolio managers to claim bigger stakes in companies than they would be able to under the current setup,” wrote  Reichert in a new note on the Morningstar website.

She said the mix of strategies moving to TRPIM is “well-reasoned” and allows each strategy to benefit from increased capacity, though there will be some tradeoffs, among them the end of a collaboration between certain portfolio managers and analysts. T. Rowe Price Mid-Cap Growth managers and analysts, for example, will no longer learn about promising small-cap companies from their counterparts on T. Rowe Price New Horizons strategy because they will function independently in two different investment firms.

— Check out 3 Reasons to Rethink Portfolio Construction on ThinkAdvisor.