T. Rowe Price Group, Inc. (NASDAQ-GS: TROW) today reported its results for the second quarter of 2019.

Assets under management end Q2 2019 at $1.125 trillion

• Net revenues of $1.4 billion for Q2 2019
• Diluted earnings per common share of $2.15 for Q2 2019
• Adjusted non-GAAP diluted earnings per common share of $2.03 for Q2 2019
• Long-term investment performance remains strong
• Net client inflows of $2.5 billion for Q2 2019

Management Commentary

William J. Stromberg, president and chief executive officer, commented: "Our investment teams continued to deliver solid performance for our clients in Q2 2019. Healthy returns in global stock and bond markets combined with $2.5 billion of net client inflows drove total assets under management to $1.125 trillion.

“We were pleased that net flows were once again positive in all regions. Q2 was particularly strong for our multi- asset franchise and U.S. Intermediaries channel. We were also encouraged by strong receptions to our recently- launched Japanese Investment Trusts (ITM), and we continue to be pleased with overall client demand for our strategies. We remained opportunistic in our approach to share repurchases and bought back 1.6 million shares in Q2 2019.

“Our teams continued to diligently execute our strategic plan across investment capabilities, products, distribution, and technology, and delivered on planned operating efficiency goals. Recent highlights include:

Investment Capabilities and Product - We further strengthened our investment teams globally. We continued to expand our SICAV and OEIC lineups and launched our Global Focused Growth ITM in Japan. In addition, we remain in active dialogue with the SEC regarding our application for semi-transparent active exchange-traded funds.

Distribution Capabilities - We continue to invest in key regions and channels to help drive diversified growth for the firm. Examples in this quarter include:

Continued build-out of our broker-dealer channel in the U.S., with additional hires planned in the balance of the year.

Continued investment in our global consultant relations team.

The hiring of a head of intermediary business for Greater China, a newly-created role which will serve the growing demand in the region for top-quality, long-term investment solutions.

The hiring of a vice president of institutional sales in Canada, which will provide investment solutions and sales support to defined contribution consultants, brokers, and clients.

Client Experience - Furthering our efforts to transform our clients' digital experiences, we recently launched a significant redesign of our mobile app for individual investors.

“I am proud of all that our associates have accomplished this year and thank them for the critical role that each of them plays within our organization. I especially salute the dedicated work of our associates who brilliantly served our clients as we transitioned away from our Tampa facility over the last year. We remain highly focused on delivering for our clients and stockholders over the long term."

Assets Under Management

Assets under management increased $43.3 billion in Q2 2019 to $1.125 trillion at June 30, 2019. Net cash inflows were $2.5 billion. Clients transferred $5.9 billion in net assets from the U.S. mutual funds to other investment products, primarily the target-date trusts, in Q2 2019. The components of the change in assets under management, by vehicle and asset class, are shown in the tables below.

Assets under management in the firm's target date retirement products, which are reported as part of the multi- asset column in the table above, were $268.7 billion at June 30, 2019, compared with $257.8 billion at March 31, 2019 and $230.4 billion at December 31, 2018. Net cash inflows into these portfolios were $1.6 billion in the second quarter of 2019 and $4.6 billion for the first half of 2019.

Investors domiciled outside the United States accounted for 6.4% of the firm's assets under management at June 30, 2019 and 6.2% at December 31, 2018.

Financial Results

Net Revenues earned in Q2 2019 were $1.4 billion, up 3.7% from Q2 2018.

Investment advisory revenues earned in Q2 2019 from the firm's U.S. mutual funds were $860.7 million, an increase of 1.6% from Q2 2018. Average assets under management in these funds increased 2.2% to $638.5 billion in Q2 2019.

Investment advisory revenues earned in Q2 2019 from subadvised and separate accounts as well as other investment products were $409.5 million, an increase of 11.4% from Q2 2018. Average assets under management for these products increased 12.0% to $461.3 billion in Q2 2019.

The effective fee rate of 46.3 basis points in Q2 2019 decreased slightly from Q1 2019 and was lower than the 47.0 basis points in Q2 2018. The decline in the effective fee rate from Q2 2018 was primarily due to client transfers to lower fee vehicles or share classes over the last twelve months. Over time, the firm's effective fee rate can be impacted by market or cash flow related shifts among asset and share classes, price changes in existing products, and asset level changes in products with tiered-fee structures.

Administrative, distribution, and servicing fees in Q2 2019 were $125.0 million, a decrease of $5.6 million from Q2 2018. The decrease was primarily attributable to lower 12b-1 revenue earned on certain share classes of the U.S. mutual funds as client transfers to lower fee vehicles and share classes has reduced assets under management in these share classes. This decline is offset entirely by a reduction in the costs paid to third-party intermediaries that source these assets and reported in distribution and servicing expense.

Operating expenses were $780.1 million in Q2 2019 compared with $750.3 million in Q2 2018. The increase in operating expenses for this quarter was primarily due to higher salary, annual bonus accrual, and benefits expense; higher compensation expense related to the supplemental savings plan as markets continued to see appreciation in the second quarter of 2019; and the firm's continued strategic investments. The higher expense related to the supplemental savings plan is partially offset by the non-operating gains earned on the investments used to hedge the related liability.

On a non-GAAP basis, the firm's operating expenses in Q2 2019 increased 2.6% to $764.6 million compared with Q2 2018. Though first half 2019 non-GAAP operating expense growth was 2.3%, the firm continues to expect its full-year 2019 non-GAAP operating expense growth to be in the range of 4% to 7%. This range includes continued investments in the business, the firm's cost optimization efforts, and the phased implementation of paying for all third-party investment research. The firm currently expects that its 2020 operating expenses will reflect a full year of all third-party investment research costs. The firm could elect to adjust its expense growth should unforeseen circumstances arise, including significant market movements.

Compensation and related costs were $483.2 million in Q2 2019, an increase of 6.0% over Q2 2018. The increase in compensation expense relative to the second quarter of 2018 was primarily related to increases in average headcount, the annual bonus accrual, and the expense related to the supplemental savings plan. Partially offsetting the increase in these costs is the absence in Q2 2019 of the $9.0 million one-time bonus funded by U.S. tax reform benefits that was paid to certain associates in Q2 2018. The firm's average staff size increased 3.5% from Q2 2018, and it employed 7,225 associates at June 30, 2019. The firm's staff size decreased by approximately 170 on July 1, 2019, following the Tampa office closure on June 30.

Distribution and servicing includes those costs incurred to distribute T. Rowe Price products and to provide client or shareholder servicing, recordkeeping, and administrative services. These costs were $64.4 million in Q2 2019, a decrease of 10.1% from the $71.6 million recognized in Q2 2018. The decrease was primarily driven by client transfers to lower fee vehicles or share classes over the last twelve months.

Technology, occupancy, and facility costs were $104.9 million in Q2 2019, an increase of 12.6% compared with the $93.2 million recognized in Q2 2018. The increase was due primarily to incremental investment in the firm's technology capabilities, including related depreciation, hosted solution licenses, and maintenance programs.

General, administrative, and other costs were $74.4 million in Q2 2019, an increase of 1.4% compared with the $73.4 million recognized in Q2 2018. The increase was primarily a result of higher third-party investment research costs that were partially offset by lower professional fees.

Non-operating income was $124.5 million in Q2 2019, compared to $34.1 million in Q2 2018, as strong equity markets led to significant net gains in our investment portfolio. The firm's consolidated investment products comprised a little more than half of the net gains recognized during Q2 2019, while the firm's non-consolidated investments, including its cash and discretionary investments and those used to hedge the supplemental savings plan liability, comprised the remaining net gains. The firm recognized $35.8 million in net gains during Q2 2019 related to its non-consolidated cash and discretionary investments portfolio. The components of non-operating income for the second quarter and the first half of 2019 and 2018 are included in the tables at the end of this release. 

Income Taxes. The firm's effective tax rate for Q2 2019 was 24.8% compared with 26.9% for Q2 2018. These rates contribute to effective tax rates for the first half of 2019 and 2018 of 24.7% and 25.5%, respectively. The income tax provision for Q2 2018 includes nonrecurring charges totaling $28.7 million related to the enactment of U.S. tax reform and Maryland state tax legislation. The following reconciles the statutory federal income tax rate to the firm's effective tax rate for the second quarter and the first half of 2019 and 2018:

Capital Management

T. Rowe Price remains debt-free with ample liquidity, including cash and investments in T. Rowe Price products as follows:

The firm's common shares outstanding were 235.5 million at June 30, 2019, compared with 238.1 million at the end of 2018.

In the first half of 2019, the firm expended $393.6 million to repurchase 4.1 million shares, or 1.7%, of its outstanding common shares at an average price of $96.50, including $163.8 million to repurchase 1.6 million shares during Q2 2019.

The firm invested $94.5 million during the first half of 2019 in capitalized facilities and technology and expects capital expenditures for 2019 to be up to $200 million, of which about two-thirds is planned for technology initiatives. These expenditures are expected to continue to be funded from operating resources.

Investment Performance(1)

The percentage of the firm's U.S. mutual funds(2) (across primary share classes) that outperformed their comparable Morningstar median on a total return basis and that are in the top Morningstar quartile for the one-, three-, five-, and

10-years ended June 30, 2019, were:

In addition, 86.2% of the firm's rated U.S. mutual funds' assets under management ended the quarter with an overall rating of four or five stars from Morningstar. The performance of the firm's institutional strategies against their benchmarks remains competitive, especially over longer time periods.

Other Matters

The financial results presented in this release are unaudited. The firm expects that it will file its Form 10-Q Quarterly Report for the second quarter of 2019 with the U.S. Securities and Exchange Commission later today. The Form 10-Q will include additional information on the firm's unaudited consolidated financial results at June 30, 2019.

Certain statements in this earnings release may represent “forward-looking information,” including information relating to anticipated changes in revenues, net income and earnings per common share, anticipated changes in the amount and composition of assets under management, anticipated expense levels, estimated tax rates, and expectations regarding financial results, future transactions, new products and services, investments, capital expenditures, dividends, stock repurchases, the timing of the assumption of all third party research payments, changes in our effective fee rate, and other market conditions. For a discussion concerning risks and other factors that could affect future results, see the firm's 2018 Form 10-K.

Founded in 1937, Baltimore-based T. Rowe Price (troweprice.com) is a global investment management organization that provides a broad array of mutual funds, subadvisory services, and separate account management for individual and institutional investors, retirement plans, and financial intermediaries. The organization also offers a variety of sophisticated investment planning and guidance tools. T. Rowe Price's disciplined, risk-aware investment approach focuses on diversification, style consistency, and fundamental research.