Corporate culture is, in my view, a key determinant of a fund company's success. This is just common sense. When people hate to come to work every morning, they don't usually do their best work. When they work together and share ideas, they tend to succeed more often than they fail.
I mention this because I was shocked to hear of the recent departures of three key U.S. stock fund managers, along with a couple of top analysts, from T. Rowe Price. I've always considered Baltimore-based T. Rowe one of the nation's best-run fund outfits. One manifestation of that is the company's low manager turnover — three managers typically leave about every five years, not in a few months. Many managers spend their entire careers at Price. So I can't help but worry whether the spate of departures signals a fundamental change at the company.
Take a look at the damage. Kris Jenner, manager of top-performing T. Rowe Price Health Sciences (symbol PRHSX), along with two health analysts, left to start a hedge fund. Under Jenner, who had run the fund since 2000, it returned an annualized 11.0% until his February 14 departure. That compares with an annualized 2.2%% over the same period for Standard & Poor's 500-stock index. Health Sciences' new manager is Taymour Tamaddon, previously an analyst at the fund.
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An equally big blow was the departure on May 10 of Joseph Milano, who had managed T. Rowe Price New America Growth (PRWAX) superbly since 2002. Under his stewardship, the fund returned an annualized 10.2% — an average of 1.5 percentage points per year better than the S&P 500. Milano may start a hedge fund, too.
Daniel Martino has taken over from Milano. Martino put up good numbers in 3½ years managing T. Rowe Price Media and Telecommunications Fund (PRMTX). But he lacks experience running a diversified fund or a fund as large as New America Growth, which contains $4 billion in assets.
Meanwhile, Tim Parker has announced his resignation as manager of T. Rowe Price New Era (PRNEX), a natural resources fund, after less than three years on the job. That's perplexing because Parker has worked at T. Rowe since 2001 and was groomed for years to take over New Era. Returns were mediocre under his leadership, however. Parker will leave by September 30 and be replaced by Shawn Driscoll, who has been a natural resources analyst at Price for the past seven years.
John Linehan, head of U.S. stock funds at Price, is unhappy about the cluster of resignations. But, he says, "we've seen this play before." In 2001 and 2002, four T. Rowe managers left in a short period. "Obviously, the recent turnover has been disappointing," Linehan says. "It's never any fun to go through. But it emphasizes the importance of having a deep bench. Which is why we go out and hire the best people we can find and then work hard to develop their talents so that they can be ready to take over a fund."
The company's culture hasn't changed at all, Linehan says: "Collegiality and collaboration are crucial to us. We reward people who work well with each other, trading insights and expanding on one another's investment ideas."
The manager is, of course, the most important person at any fund. Anytime a manager leaves, you need to take careful notice. At the same time, manager losses at big fund shops such as Price historically haven't been as devastating as manager departures from small firms, where the manager is pretty much synonymous with the fund.
The bottom line: I'm willing to give Linehan and T. Rowe the benefit of the doubt. But I see no reason to commit new money to any of the three affected funds. If you own them, you have a tough choice. It's hard to find a good health-sector fund as broad as T. Rowe's, which holds a healthy dose of biotech stocks as well as drug and health insurance companies. I'd probably give the new manager a year to prove himself. But I'd probably sell New America Growth — there are plenty of good growth funds. And I'd sell New Era — the natural resources sector doesn't appeal to me, anyway.
My favorite Price funds include Capital Appreciation (PRWCX), Mid-Cap Growth (RPMGX) and all of the firm's retirement funds. The retirement funds hold other Price funds, with their division between stock and bond funds becoming increasingly conservative as shareholders approach retirement. With the departures of Jenner and Milano, T. Rowe boasts fewer exceptional funds, but most are still pretty good.
Steven T. Goldberg is an investment adviser in the Washington, D.C. area.
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