US asset management giant T Rowe Price enters semi-transparent active ETF sector

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Earlier this month saw asset management giant T Rowe Price, with USD1.22 trillion under management, enter the ETF arena, in the US, with four semi-transparent ETF products that largely mirror their existing mutual fund offerings.

Tim Coyne, head of ETFs at T Rowe Price, explains that the firm was a pioneer in growth investing with the launch of the T Rowe Price Growth Stock Fund in 1950. The firm has been looking at entering the ETF market for some years, but waited until it received regulatory approval for an ETF model to align with its active management approach.

T Rowe Price has created its own structure to protect the IP of its four funds. 

“In absolute terms, the approach we are taking only just got approved,” Coyne says. “We are an active manager and we started filing for this product structure in 2013, having lots of conversations and engagements but nothing was the right structure to bring our active strategies to market.

“Now there is a product structure, approved by the regulators, that allows us to shield our investment intellectual property, while providing enough information for market participants to make markets in our products.”

Commenting on the launch of the four ETFs, Frank Koudelka, Global ETF Product Specialist as State Street Corporation, which is the ETF service provider for the funds, said that his firm has supported T Rowe Price in the development of service models and launch planning. 

“T. Rowe Price was the first investment manager to create and file with the Securities and Exchange Commission (SEC) for a model that allows ETFs to be actively managed while it also protects the intellectual property of the funds’ investment management process. The model underlying T Rowe Price’s ETFs includes high-quality intraday pricing signals developed in consultation with market makers.”

“We are part of the first wave of new active ETFs,” Coyne says. “There will be a daily holdings file, however it will be a proxy basket. The proxy will have a minimum 80 per cent overlap with fund holdings, but in practice will have a higher percentage of overlap. We worked with other industry participants, including market makers, back testing and working collaboratively to make sure we have the appropriate shielding but enough information for market participants to price throughout the day.”

The products are very much drawn from the heart of T Rowe Price’s investment offering, with the Blue Chip product originally launched in mutual fund form in 1993 and many of the managers having spent their careers managing money for the firm. 

The T Rowe Price Blue Chip Growth ETF (TCHP), with a net expense ratio of 0.57 per cent, is managed by Larry Puglia, who maintains a 27-year tenure as portfolio manager of the T Rowe Price Blue Chip Growth Fund, including 30 years of total investment experience, 29 of which have been with the firm.

The T Rowe Price Dividend Growth ETF (TDVG), with a net expense ratio of 0.50 per cent, seeks dividend income and capital growth and is managed by Thomas Huber, who has 25 years of experience at T. Rowe Price and has been portfolio manager of the T Rowe Price Dividend Growth Fund since 2000.

The T Rowe Price Equity Income ETF (TEQI), with a net expense ratio of 0.54 per cent, is managed by John Linehan, who has served as portfolio manager of T Rowe Price Equity Income Fund for four years, and has 30 years of investment experience, 21 at T Rowe Price, and is the former head of the firm’s US Equity division.

The final product is the T Rowe Price Growth Stock ETF (TGRW), with a net expense ratio of 0.52 per cent, which is managed by Joseph Fath, who has 19 years of investment experience, 17 at T Rowe Price, and who has been portfolio manager of  the T Rowe Price Growth Stock Fund for six years.

The products are initially aimed at the adviser and retail community. “Like any ETF there is appeal across client segments and it’s early days, but we are going to be putting a heavy emphasis on working with advisers and individual retail investors in the first phase of growth, but over time as the product matures and gains some assets and builds a liquidity profile you will start to see institutions looking at the product.”

There have been concerns for other US firms launching ETF versions of their mutual fund offerings that investors will move out of the mutual fund product, given that in the US, ETFs carry a tax advantage and globally tend to have lower fees.

Coyne says: “We are doing this to provide clients with extra choice and ETFs represent a new pathway for investors to access our investment management capabilities with the ETF’s tax efficiency, lower offering costs and added flexibility.

“This just complements our product suite over the past several years as we have brought products to market through different product structures – it’s a natural extension, a new way for clients to access us.”

Coyne believes that the approach of these four funds is different from passive ETFs. “With active ETFs, our expectation is our products will resonate with clients as a buy and hold product for investors with longer term and strategic aims.”

Future plans include building a more comprehensive product suite, across all asset classes and other geographies.

“This is our first step on a number of internal projects that are running in parallel,” Coyne says. “We recognise that T. Rowe Price is building out our global presence and ETF investors are global so we are assessing the different markets in a step by step process.

“We want to provide clients with added choice, flexibility and the opportunity to engage with the product they have a preference for.”

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