T. Rowe Price Executive Stares Down Threat From Private Markets

(Bloomberg Markets) — One point seems to be lost in the mania over index-based investing: Stockpicking can actually be a lot of fun. At least this is how Stephon Jackson feels about the subject. As he becomes head of a new investment adviser at T. Rowe Price Group Inc., due to transition in 2022, he’s looking to work with managers who share his enthusiasm for active management. The strategies that will move to the new division accounted for about $167 billion as of Sept. 30. The group, called T. Rowe Price Investment Management (TRPIM), will pursue six strategies and operate as a standalone business, providing portfolio managers with more freedom to control the size of stakes they take in certain companies.

Jackson, 58, a 13‑year veteran of T. Rowe Price’s equities division, relocated from London to his hometown of Baltimore in March as worldwide pandemic lockdowns took hold. He spoke with Bloomberg Markets’ Annie Massa about his plans in his new position as head of TRPIM and some of the challenges on the horizon for T. Rowe Price. As an active investor in public markets, the $1.3 trillion fund management company is staring down a problem: Fewer and fewer companies are going public.

ANNIE MASSA: This has been a year of flux. What are some of the biggest changes in your job and lifestyle during the pandemic?

STEPHON JACKSON: Clearly, the work-from-home environment and the change in the more casual interactions with my colleagues. I also transitioned back from our London office to Baltimore, so it was a major change for my family as well. That happened in March. The virus was spreading in Europe, and we felt the wave coming toward the U.K. And so we thought it was important—I was relocating anyway, but we accelerated our move—just to avoid getting locked into the country.

AM: What was it like to make that leap?

SJ: I grew up in West Baltimore, which, if you know anything about Baltimore, means something. I loved London, but this is my home. And, you know, I care a lot about the city and care a lot about handling and improving on some of the challenges out here.

AM: You’re becoming the head of T. Rowe Price Investment Management. What will the role entail for you?

SJ: I was made aware of this particular project in 2018. So it’s been a while. I was not aware of my role until well into 2019.

Capacity management is always going to be an issue for larger asset managers. As we looked into our future, we began to see potential challenges around capacity management. Historically we’ve done all the right things by our clients: closing strategies where appropriate, limiting position sizes where appropriate on individual securities and portfolios, putting those internal limits in place. And we’re at the point where we think this very natural next step of standing up a separate operation is really in the best interest of our clients.

AM: How would you describe capacity management to someone who works outside the finance industry? Why was that an important consideration in creating this new group?

SJ: It allows us to own as much of an individual security as we would like to own. If you get to a certain size and you want to raise positions in a particular holding, you might run the risk as one single organization [of ] owning what you might describe as “too much” of a given security. This idea of being able to manage our capacity helps us to do that. So, for example, T. Rowe Price Associates has self-imposed ownership limits on most securities registered with the [Securities and Exchange Commission]. They’re self-imposed and internal. We don’t want to be in that position of saying you own so much of the company that now you control it.

AM: How did you select which six funds to include under this new umbrella of T. Rowe Price Investment Management?

SJ: Most folks in the industry are familiar with the “style box” configuration. So we looked across market cap—small-, mid-, large-. And of course, style—growth, core, and value. We looked at a constellation of several combinations to see where we would find the most relief. And we were determined that, by taking the strategies that we did take, we would provide immediate relief not only to those strategies but also to the strategies that would remain at T. Rowe Price Associates.

AM: What are some of the challenges you think you’ll face under this separate structure?

SJ: As we look down the road, a big stress has to do with the number of publicly traded securities that are available for us to invest in. We’ve begun to see a significant shrinkage in the number of publicly traded names since 2006. You know, the number of publicly traded companies out there has shrunk by about 36% when you look at the Wilshire 5000 [Total Market Index], for example.

AM: For a firm like T. Rowe Price, that seems like an existential crisis.

SJ: That’s too strong a term.

AM: What would you call it?

SJ: [Laughs.] I would call it changing market conditions. And adjusting based on those changing market conditions.

AM: It seems like another one of those changing market conditions is a power shift toward venture capital firms and other privateinvestors. How does that affect your firm?

SJ: We’ve noted that. The trend toward disruption and technological innovation has done a couple of things: It’s created business models that have allowed those companies to remain private longer, but the level of disruption has rendered some companies uninvestable from our perspective. Just because their business models have been so disrupted—or, you know, disabled.

AM: What do you see as the biggest differences between the two T. Rowe Price investment groups?

SJ: First and foremost, we think the most important things to focus on are how similar the two will be. They’re still separate but have central research platforms to support the strategies that sit on those platforms. So that is something that is going to be quite similar.

One difference is TRPIM will be smaller. We only have six strategies going over there, and [we] will only be about 30 analysts. So the number of registered investment professionals will be smaller over at TRPIM. We think both platforms will benefit from some reduction in complexity. Because if you’re an analyst working on a platform with just six strategies, you have fewer nodes of communication, vs., if we were to remain a combined entity, you’re dealing with 24-plus portfolio managers. So this definitely simplifies things for our analysts as well as our PMs.

AM: Active managers have been saying for years that they’d turn around their performance once more volatility hit financial markets. In your view, have they lived up to that promise?

SJ: What I know about T. Rowe Price and our approach to active is that we understand that there is a value proposition that we are paid for by our clients. We have to hold up our end of the bargain of that value proposition. If we do not, then we don’t get—and we don’t deserve—to keep the business.

The problem with a lot of the conversation about active vs. passive is that people look at averages. And I don’t know about you, but I’ve never met an average manager. I’ve never met anyone who has said, “Yeah, I’m really average and, you know, on average, these are the returns that I deliver.” It’s about: Do you think you’re a superior manager? If you are, what is your proof statement around that?

For us, we like to look at our long-term track record, our consistency of performance, and it gives us some confidence that when people talk about active management, they’re not talking about superior active management.

I can’t really tell you anything you haven’t heard about why active is good. People say all kinds of horrible things. But we thinkthe death
of active management is largely overstated.

AM: How does that impression that active management is fading affect you at T. Rowe Price?

SJ: Surely it impacts our ability to attract talent. Some of the large passive shops are formidable competitors for investment talent. We think the value proposition we have to offer is more meaningful for those who consider themselves real practical risk takers.

But now it’s a reality that we’re talking to young MBA types who are trying to decide whether they want to take a role at one of these large passive shops vs. us.

Ultimately our edge on talent is that active is a lot of fun. People have forgotten active management is enjoyable, it’s intellectually stimulating, it’s hard to do—but very intellectually satisfying. That’s an extremely satisfying proposition for certain types of individuals. Those are the folks we’re looking for.

AM: You were formerly chair of Mosaic, where you focused on increasing the diversity of T. Rowe Price’s associates. What did you learn from that experience?

SJ: I’m African-American. I grew up as far from Wall Street as you can imagine. Having grown up in West Baltimore, I have an understanding of the structural limitations and disadvantages that have been part of the Black experience in the United States. So I wanted to help support our talent management strategy around attracting, developing, retaining, and promoting our diverse associates. Our mission was to address issues of attraction, development, and retention of talented ethnically diverse associates at T. Rowe Price. It’s all about taking advantage of these large pools of talent that have historically gone untapped. I know that because I’ve been part of those pools, where you may show up to interview for opportunities and you’re not sure you’re necessarily going to get a fair shake when there’s not a lot of people that look like you there.

T. Rowe has been very open-minded and willing to be self-reflective and consider the opportunity that we have been missing. What I do see is that, over the 13 years that I’ve been here, there’s been an enormous increase in the number of diverse associates, particularly Black associates and associates of African descent.

AM: How did you gravitate toward money management?

SJ: I was drawn to the world of business because I was good at math, and I had an opportunity to go to prep school here [in Baltimore] on scholarship. I went to the Gilman School, which was an academically rigorous college preparatory program. And as I went off to college, I thought to myself, “I know it’s a business I’d like to go into,” but I fundamentally had a sense that, being Black in America, you better have a skill that is unique and verifiable, and quantifiable. In order to be, you know, paid well, treated well, and to have opportunities. The investment business was the one I discovered where people don’t care what color you are, what your background is, as long as you can produce the numbers. And so that was one of the things that attracted me.

The intellectual challenges attracted me. It’s just you and your ideas and your hard work against the other guy or gal. Pretty much right out of undergraduate [school], I pursued being an investment manager—being an equity analyst initially and then moving to a position to manage money, which I enjoyed doing and produced pretty good results over the years.

AM: Are there people who inspired you personally or professionally along the way?

SJ: It’s not like investment banking, where you come in and there are training classes, and they walk you through how to put it all together, how to source a deal, how to serve clients, and so on and so forth. Asset management’s very different. It’s more of a cottage industry still, even with as large as it has become.

I was very much inspired by my father, who only had a ninth grade education but saw to it that I had an opportunity to go to college, and go to a prep school like Gilman, because he understood how important education was. He was a steelworker, and I was always fascinated by the steel industry. During that time it was very much in retreat in the United States, and it was undergoing a lot of stress. So it was fascinating for me to observe what his life had become and what it was becoming during that time, which made me very interested in business and finance.

AM: Are there any books you’ve found illuminating in this unusual year or recently?

SJ: Lies My Teacher Told Me by James W. Loewen covers a number of elements of American history, which he would describe as American myths. He does intellectually honest primary research to arrive at what you might describe as really more the truth. You get a more true understanding of who Columbus was, a true understanding of who Woodrow Wilson was, a true understanding of what happened during Reconstruction and slavery. I recommend that book to everybody who ever asks me.

I’m currently reading the Frederick Douglass biography that won a Pulitzer Prize, Frederick Douglass: Prophet of Freedom, by David W. Blight. I very recently read a book called Wilmington’s Lie, which was written by David Zucchino, another Pulitzer Prize winner, which talks about how the city of Wilmington, North Carolina, was the subject of basically a White supremacist coup during Reconstruction.

I’m just interested in anything that tells the truth about history and can be triangulated by newspaper clippings and sort of deep research. Which is really right in line with what we do at T. Rowe Price, you know. We’re looking for the truth. We’re looking for intellectually honest insights and conclusions.

Massa reports on investing and investment firms for Bloomberg News in New York.

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