Operator:

Good morning. My name is Daniel, and I will be your conference facilitator today. Welcome to T. Rowe Price's Second Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode until the question-and-answer period. I will give you instructions on how to ask questions at that time. As a reminder, this call is being recorded and will be available for replay on T. Rowe Price's website shortly after the call concludes. I will now turn the call over to Linsley Carruth, T. Rowe Price's Director of Investor Relations.

Rob Sharps:

Linsley, thank you and thank you all for joining us today. As we shared in our earnings release, we ended the quarter with just under $1.57 trillion in assets under management and $3.7 billion in net outflows. While market gains continued to support our financial results, I'm pleased to say that we are making steady progress in flows and investment performance. Our sales pipeline is healthy, redemption pressure is stabilizing, and our associates are driving our strategic initiatives forward. We continue to be on track to substantially reduce net outflows this year. Overall, our investment performance remained solid in the second quarter with two-thirds of our funds beating their peer group one-year medians and over 40% of our funds in the top quartile. In our equity franchise, US equity research, US mid-cap value, international value, financial services, integrated US small mid-cap core equity and integrated global equity are all top-quartile performers for the one-year, three-year and five-year time periods. The transparent equity ETFs we launched last year are demonstrating strong performance with the growth, value and small mid-cap ETFs, all top-quartile performers versus peers for the one-year time period. In our fixed income franchise, several of our muni funds as well as our institutional floating rate and credit opportunities funds have one-year, three-year and five-year top quartile performance. Both our flagship retirement funds and the newer retirement blend version of the strategy continued to deliver strong performance across multiple time periods. Returns across alternative strategies continued to be strong with alpha generated across the portfolios, primarily due to effective individual credit selection. Jen will discuss our flows and financials in more detail shortly, but I wanted to take a moment to highlight our ETF business. As of June 30, we reached $5.3 billion in assets under management, up from $1.2 billion in June 2023. In the first half of this year, we've had $2.4 billion of inflows to our ETFs. We are excited by this growth in our ETFs and that we are attracting diverse investors across wealth management, institutional, direct retail and investors outside the United States. We expect that the appetite for our ETFs will continue to grow throughout the year as five of our 16 ETFs, including US equity research and blue chip growth have each grown to over $300 million in assets, which is the size eligible for many platforms. Our transparent equity ETFs now have a one-year track record, a requirement for most platforms. We are broadening the product lineup, including the recently launched T. Rowe Price Intermediate Municipal Income ETF, which is our sixth fixed income ETF and our first federal tax-free fixed income ETF. And we are planning to make additional investment strategies available as ETFs over time. Our associates are driving this progress and it extends beyond our ETF business. I'll highlight a few recent milestones. We filed the launch of the T. Rowe Price OHA Flexible Credit Income Fund or OFLEX, our first interval fund. We were named a strategic partner to one of the largest independent broker-dealers in the United States, allowing us to bring our products and insights to their more than 10,000 financial advisors and their 2 million end clients. Our SMA franchise grew to more than $8 billion in assets as of June 30 with $1 billion in net flows year-to-date. After seeing strong demand for the ETF version of capital appreciation equity, we launched this strategy as an SMA. We unveiled our retirement income solutions 5D framework. This new patent-pending framework will help define the contribution plan sponsors evaluate retirement income offerings and quantify which solutions may best fit the needs and preferences of their planned participants. I'd like to finish by noting that I spent time in Europe, Asia and the Middle East in the second quarter. The constant across our offices is our associates' deep commitment to delivering results for our clients and to advancing our strategic initiatives. We are seeing their efforts reflected in our results, and I want to thank associates across all of our locations for their hard work to deliver value for our clients and our firm. I'll now turn to Jen for our financial results.

Operator:

[Operator Instructions] Our first question comes from Glenn Schorr with Evercore ISI. Your line is now open.

Rob Sharps:

Yeah, Glenn, this is Rob. I'll start. It's predominantly client-driven. In our individual investor business, clients have multiple options for money market funds. We don't have a big sweep business in the retirement plan services business, where we're the record keeper and also on other platforms, if the plan sponsor elects, we offer stable value as a short-duration option and a highly liquid option. And we also offer money market funds. So I think the issue that you're referring to is one that really doesn't touch us as much as it does many of the wealth platforms that have sweep approaches.

Dan Fannon:

Thanks. Good morning. Rob, I was hoping you could just expand upon the sales pipeline that you've talked about. Clearly, flow is getting better. You had a large institutional fixed income win. But was hoping you could talk about the breadth, maybe, of the sales pipeline, some of the geographical differences. You had inflows outside the US. So just a little more granularity around, not so much the quarter, but the conversations in the prospective outlook around the sales and how that compares to previous periods.

Operator:

Thank you. Our next question comes from Ken Worthington with JPMorgan. Your line is now open.

Rob Sharps:

Yeah, Ken, we have partnership arrangements with most of the large wealth platforms in the US. Each of them is bespoke, and I'm not going to get into the particular terms. But needless to say, I think given our breadth of offering, our scale, our investment performance in brand, we've got a big opportunity as we've continued to build out our field coverage to further penetrate those accounts. We assess each of these individual opportunities standalone and kind of ultimately engage where we think there's a win-win and where it's mutually beneficial. This particular opportunity is a platform that we've worked with in the past, but this will give us additional shelf space and placement and additional opportunity to engage with their advisors, which should allow us to grow our share. It's a relationship where I think historically our share isn't what it could be. And I think this gives us the opportunity to meaningfully gain share over time. I'm optimistic about the impact of it, but again, this is one of many of these sorts of relationships. I think we simply called it out because it's a new one.

Operator:

Thank you. And our next question comes from Patrick Davitt with Autonomous Research. Your line is now open.

Rob Sharps:

Specifically to the latter part of the question, they funded in the second quarter. Yeah. Again, I call that out partly just to say that I think we're really well positioned with buyers of scale and our pipeline would suggest that there are additional opportunities. But again, they'll be uneven. I'm not going to talk about the size of a particular mandate, but it was quite substantial. And I don't know, Jen, if we've said more about it.

Operator:

Thank you. Our next question comes from Brian Bedell with Deutsche Bank. Your line is now open.

Rob Sharps:

Sure. I think in general, look, all underlying investors are sensitive to performance, right? That's our value proposition as an active manager. But the cadence tends to happen differently in different channels. What I've observed is that in the -- our direct individual and in the wealth business, the reaction tends to happen a little bit more quickly. And in the institutional or large intermediary mandate channel, it tends to happen with more of a lag. I think we've observed in some of the areas where we had a performance challenge improvement in those areas that tend to leverage funds or commingled vehicles first and then subsequently, have started to see some improvement on the institutional or large mandate size. So if you think about institutional separate account, whether it's defined benefit mandate or defined contribution investment only, where it's on somebody else's recordkeeping platform or a big sub-advise mandate, those tend to react a little bit more slowly. So we first began to see improvement in the funds portion that tends to be leveraged in the wealth channel, and now we're beginning to see some improvement as well in the institutional channel.

Rob Sharps:

Yeah. And then, with regard to ETFs and the pipeline, we launched, I think just recently our 16th ETF, which is intermediate muni bond ETF offering. We've got a handful of others that we're working on launching, and we'll continue to evaluate where there is a sizable opportunity and where we believe we can deliver a differentiated or compelling offering. It would be my intention to broaden the number of strategies that we offer as ETFs over time, but I think we'll do it in a thoughtful way. We want to do it kind of in areas that our clients value and where we can deliver something that's differentiated and durable.

Michael Cyprys:

Great, thank you. Maybe just continuing with the ETF topic here. You seem to be having some good traction and success there. Just want to drill down a little more. Hoping you could elaborate on your sales and distribution approach with ETFs. How that differs from your approach to sale of more traditional mutual funds for you? And then more broadly, if you could just comment on your strategy and approach, including the way that you are going to market with, in some cases, replications of what you already offer in mutual funds, versus opportunities with other strategies that are different from what you already have. How you think about that approach and navigate certain challenges in the marketplace that may or may not create. Thank you.

Rob Sharps:

Yeah, I'd just add that we find that there are certain clients that really value the clone, semitransparent approach because they're able to access known strategy with long tenure track record in the ETF vehicle. I think there are other clients that are much more familiar and comfortable with the fully transparent approach. And I think we are now in a place where we are comfortable delivering a range of investment strategies across both approaches and feel both approaches have merit.

Rob Sharps:

I'd say I've been pleased and maybe a little surprised at the range of investors that the ETFs have appealed to. As Eric said, we're targeting a number of RIAs that are ETF power users, as well as more traditional wealth platforms and broker-dealers. And we've got some interesting placements that I think kind of really present a big opportunity. But we've also had some institutional investors, some investors based outside the US that have been attracted to the ETF vehicle. So I think it's encouraging. It's still relatively small in the context of our overall AUM base, but I think it's a huge and compelling opportunity for us, and it's one we're really leaning into.

Brennan Hawken:

Good morning. Thanks for taking my question. I actually have a request and then a question. So one thing just to consider, many of your peers provide an adjusted income statement, which really would reduce the potential for misunderstandings and errors around interpreting your results. And I'd like to just please ask you to request putting that together because of the way the disclosure now is a little -- I'm worried it could lead to some confusion. My question is on OCREDIT. So we hear it's a bit of a me too product and given that it came after some firmly established products in the marketplace. I'd love to hear you lay out for me the case for how it's differentiated from established offerings such as BCRED and maybe how you're explaining that differentiation to your distribution partners. Thanks.

Operator:

[Operator Instructions] Our next question comes from Alexander Blostein with Goldman Sachs. Your line is now open.

Jen Dardis:

Yeah, thanks Alex. I'll start. We've said that over time we see fee compression of about 1% to 1.5%. That's what we've seen over the past several years. Quarter-to-quarter you can see some noise. And so in any given quarter, we can see the impact of clients choosing lower fee products, which could be vehicles or asset classes or individual strategies. You can also see periodically we'll do some realignments of clients into vehicles, so that'll be existing clients moving from one vehicle to another, and that can create kind of more noise in a specific quarter. We saw both of that during this quarter. And again, so I think over a longer period of time we've seen that continued trend, but this particular quarter you saw both of those things.

Operator:

Thank you. And our final question comes from Bill Katz with TD Cowen. Your line is now open.

Jen Dardis:

Well, I think, starting with the redemptions question, I think seasonally we look at our flows and so it's both sales and redemptions and I think Rob had specifically referenced earlier the target date franchise. There it's less about redemptions, and it's more about the pace of sales and the pipeline that we see in the second half of the year. We've talked in the past about it's not fully seasonal, it's not that everything happens in the first quarter of the year, but you do see more activity in the first quarter of the year. You can see plan size changes in just smaller amounts through the balance of the year. I think -- yes?

Operator:

Thank you. This concludes the question-and-answer session and today's conference call. Thank you for participating. You may now disconnect.

Operator:

Good morning. My name is Norma, and I will be your conference facilitator today. Welcome to T. Rowe Price's First Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded and will be available for replay on T. Rowe Price's website shortly after the call concludes.

Linsley Carruth:

Hello, and thank you for joining us today for our first quarter earnings call. The press release and the supplemental materials document can be found on our IR website at investors.troweprice.com.

Robert Sharps:

Linsley, thank you. And thank you all for joining us this morning for our first quarter update. Before I get started, I'm pleased to say that Dee Sawyer, our Head of Global Distribution and a member of our firm's Management Committee, will be joining us today. Dee will provide an overview of our Retirement business, which is critical to our clients and integral to our firm's long-term success. We'll hear from Dee after Jen's update on our financial results.

Jen Dardis:

Thank you, Rob, and hello, everyone. I'll review our first quarter results before turning to Dee for a look at our Retirement business.

Dorothy Sawyer:

Thank you, Jen. I am pleased to join today's call to talk about our Retirement business. As Rob noted, our clients have entrusted us with $1.54 trillion in assets. Of that, over $1 trillion, more than 2/3, are identifiable as retirement assets, demonstrating that retirement is a critical component of our business. Slides 15 and 16 in the supplemental deck provide a detailed view of our retirement assets.

Operator:

[Operator Instructions] Our first question comes from the line of Craig Siegenthaler with Bank of America.

Dorothy Sawyer:

With regard to alternatives, this is an area we have been actively researching. Given preferences and regulatory guidance, there are some complexity around adding alternatives within a 401(k) plan such as the daily NAV. However, if we were to introduce alternatives for our Target Date strategy, we could act quickly with Target Date solutions, including T. Rowe price solutions or OHA solutions or others because we have a long list of partners that would be able to work with us in order to do that.

Operator:

Our next question comes from the line of Michael Cyprys with Morgan Stanley.

Operator:

Our next question comes from the line of Dan Fannon with Jefferies.

Robert Sharps:

Yes. Dan, thanks for the question. At a high level, I would say that our outlook for flows for the year really hasn't changed from what we discussed in January on the fourth quarter call. Although I would say that we have higher conviction now that our outflows this year will be substantially lower than they were last year.

Operator:

Our next question comes from the line of Patrick Davitt with Autonomous Research.

Jen Dardis:

Yes. Thanks, Patrick. We -- similar to last quarter, we used first quarter average as an estimate for our expense growth guide, and we try to give a range around reasonable assumptions for market movement from that average in our percentage guide. And as you noted, we've had some decrease in markets in the first start of the -- in the start of April in the quarter, but that puts us back around the place we started from an average perspective.

Brian Bedell:

Maybe just to go back to the retirement business. Can you talk a little bit about how you viewed the DCIO segment versus the full-service record-keeping segment in terms of economics to T. Rowe Price? I know full service is more costly, can be lower margin, but you, I think, have a better ability to capture IRA rollovers there. So if you can talk about that dynamic.

Dorothy Sawyer:

Sure. So thanks for the question. Let me offer a couple of points. So the first point that I would offer is when you look at our U.S. defined contribution assets under management, roughly 75% of those defined contribution assets are our DCIO channel. And so we feel really strongly about the fact that we continue to offer solutions across many different types of record-keepers and through many different types of accounts in that DCIO channel, and that's through hard work with partners on the intermediary side of our business.

Operator:

And our next question will come from the line of Alexander Blostein with Goldman Sachs.

Operator:

Our next question comes from the line of Ken Worthington with JPMorgan.

Operator:

Our next question comes from the line of Brennan Hawken with UBS.

Jen Dardis:

I think for the first part of the question, just maybe to clarify, it wasn't about a capitalization of labor. This was related to our U.K. entity where we moved into a new building at the end of last year, and we had a nonrecurring benefit in the first quarter of this year related to that. It's not material in terms of operations and really wouldn't be expected going forward. We just called it out as a onetime benefit.

Robert Sharps:

Yes, that mix is really driven by the regulatory environment and client preference.

Aidan Hall:

Just wondering if you could provide us with some color on the trajectory of fee rates by asset class, just given some of the mix shift that's taking place in the asset base. And then it was nice to see the contribution of performance fees this quarter. I know it's tough to predict, but should we be thinking about that as a more normal contributor on a go-forward basis? Have you seen some stronger performance from your products?

Robert Sharps:

Yes. We use our scale to invest in our value proposition. And I would say that within asset classes, the trend of fee compression has -- is something that we've navigated for a very long time and is comparatively stable right now.

Operator:

And this completes our Q&A portion. I'll now turn the call back over to Mr. Rob Sharps for closing remarks.

Operator:

Good morning. My name is [Mona] (ph), and I'll be your conference facilitator today. Welcome to T. Rowe Price's Fourth Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer period. I'll give you instructions on how to ask questions at that time. As a reminder, this call is being recorded and will be available for replay on T. Rowe Price's website shortly after the call concludes. I will now turn the call over to Linsley Carruth, T. Rowe Price's Director of Investor Relations. Please go ahead.

Robert Sharps:

Thank you, Linsley. And thanks to all of you for joining us. Before we get started, I want to share that in late November, Eric was named Head of Global Investments in recognition of his strong leadership, as well as his extensive investment experience. I know he will continue to focus on pursuing superior outcomes for our clients, and both Jen and I congratulate him on his expanded role. Eric will provide today's update on our investment organization, followed by Jen who will cover our financial results. With that, I will turn to 2023 results. While 2023 was a challenging year for us with substantial net outflows, it also brought progress. Investment performance improved, and we advanced important work to ensure our firm is positioned for future growth. We are already seeing a number of early indicators that support our confidence that better days are ahead. We have a long and solid track record of putting clients first and pursuing excellence. As we near our 88th anniversary, I am confident that we will build on this tradition, delivering compelling value for our clients, our associates and our shareholders. As I mentioned, we made meaningful progress against our strategic priorities in 2023. Our active ETF business is gaining traction, with assets under management over $2.7 billion at the end of January. We launched the T. Rowe Price OHA Select Private Credit Fund, or OCREDIT, with over $1.5 billion of investable capital, and are in the early stages of bringing this product to the wealth management channel. We acquired Retiree, Inc. to enhance our ability to expand and retain relationships with pre-retiree and retiree clients by providing tax-aware retirement income and Social Security claiming strategies. This acquisition demonstrates our commitment to broadening and evolving our already strong retirement capabilities and deepens our position as a retirement leader. We partnered with the International Finance Corporation to create the T. Rowe Price Emerging Markets Blue Economy Bond Strategy, a pioneering blue bond strategy that will focus on private companies operating in emerging markets. We expanded our Capital Appreciation suite with the launch of the T. Rowe Price Capital Appreciation and Income Fund for investors seeking an income-oriented fund. We have an industry-leading position in our Target Date franchise, with strong investment performance and net inflows of $13.1 billion last year. Building on this strength, we continue to innovate and add new capabilities, including moving beyond accumulation. The engagement and collaboration among our investment teams got back to what I would characterize as healthy pre-pandemic levels. Our culture thrives on the energy around our teams engaging with corporate management teams, traveling together, and debating risks and opportunities. This is how our investment platform delivers its best for clients. We are evolving as markets and our clients demand more, and we are ready to compete with additional vehicles, new capabilities and new experiences. Leading indicators support our confidence that there will be a slower pace of net outflows this year. We are seeing improved performance in large-cap growth funds and expect that the rebound in 2023 will reduce redemptions in 2024. Key elements of strategic initiatives are delivering. We're seeing improving gross sales in our Individual Investor channel, with Q4 having the highest gross sales of any quarter over the last two years. We saw positive momentum for net flows in our US Wealth Management Platform segment in Q4. And in EMEA, we were recently selected by a large UK wealth management firm to manage a custom multi-asset income fund. Despite a challenging year, our balance sheet remains solid with $2.5 billion of cash and discretionary investments at the end of 2023. We continue to prioritize the dividend, while maintaining ample liquidity to support our seed capital program, opportunistic buybacks and potential M&A. We recently announced a quarterly dividend of $1.24, which increased for the 38th consecutive year. I want to underscore that the progress I've highlighted is a result of our associates commitment to investment excellence, to superb client service and to driving our corporate strategy forward. We are grateful for their hard work, and are confident that together we will return the firm to organic growth. I'll now turn to Eric.

Jen Dardis:

Thank you, Eric. I'll review our financial results and then we will open the line for questions. Our adjusted earnings per share for Q4 2023 was $1.72, bringing us to $7.59 for the year. 2023 was down from $8.02 in 2022 from lower average AUM and investment advisory revenue and higher expenses. We had $28.3 billion in net outflows this quarter, bringing full year outflows to $81.8 billion. During the fourth quarter, we had a handful of large redemptions in our sub-advisory and institutional channels that elevated net outflows. From an asset class perspective, US Equity continues to be the main driver of net outflows. In our DC channels, Stable Value posted sizable net outflows in 2023 after delivering strong positive net flows in 2022, a sign that retirement investors may be seeking higher yield or reorienting toward a risk appetite. We are seeing encouraging signs in our smaller ticket retail business, with improving net flows in both our direct and intermediary channels. Our Target Date suite ended the year with $13.1 billion of positive net flows, and Alternatives also posted positive flows for the year. Additional detail on Alternatives' flows can be found on page 20 of the annual version of our supplemental materials. There are also some signs of strength across our individual equity and fixed-income products, with Capital Appreciation, All-Cap Opportunities, International Core, and Global Multi-Sector Bond all delivering over $1 billion in positive net flows in 2023. Looking at our income statement. Q4 adjusted net revenues were $1.7 billion for the quarter, bringing our full year adjusted total revenue to $6.5 billion. Our Q4 investment advisory revenue of about $1.5 billion was higher than Q4 of last year, but the $5.7 billion earned for the full year was lower than 2022 overall based on the trend in average assets. Our effective fee rate of 42.2 basis points in Q4 was up due to a little over $25 million in performance-based fees predominantly on Alternatives products that crystallized in the fourth quarter. Without these performance-based fees, our Q4 effective fee rate would have been more in line with the Q3 2023 fee rate. Turning to expenses. Q4 adjusted operating expenses were $1.2 billion. As I mentioned last quarter, Q4 included higher expenses compared to Q3, related to seasonal advertising and promotion, stock-based compensation and professional fees. As equity markets improved in 2023, we increased the investment in our brands to support future growth. Q3 2023 also included a non-recurring benefit in G&A expenses. Full-year 2023 adjusted operating expenses, excluding the carried interest expense, were $4.19 billion, up 3% over 2022's $4.07 billion, and within the previously provided 2023 guidance range of 2% to 4%. Based on average market conditions over the last quarter, we expect 2024 adjusted operating expenses, excluding carried interest expense, to be up 3% to 5% over 2023's $4.19 billion. This is up slightly from previously provided 2024 guidance due to the increase in equity markets and the impact this is expected to have on our market-driven expenses in 2024. We anticipate the 2024 non-GAAP effective tax rate will be in the range of 23% to 26%, reflecting lower expected valuation allowances related to our UK-based business, and a lower state tax rate associated with income apportionment rules in certain jurisdictions. Despite a challenging year, we remain committed to maintaining our strong balance sheet and returning capital to stockholders. We bought back $103 million worth of shares during the fourth quarter, bringing 2023 total buybacks to $254 million. And we've continued to buy back shares during the start of 2024. As Rob mentioned, last week we announced a quarterly dividend of $1.24 per share, a $0.02 per share increase. Between the dividend and buybacks, we've returned $1.38 billion to stockholders over the course of 2023, while also increasing our cash position over $300 million from the end of 2022. This strong financial position allows us continued flexibility to support the annual dividend and to pursue opportunistic share buybacks, while also strategically investing in seed capital or M&A as opportunities arise. We remain focused on proactively managing our expenses to allow for the continued investment in our strategic priorities while ensuring our cost structure is appropriate for the size and scale of the firm. This financial discipline, along with our commitment to efficiency and process improvement, positions us to fund our future growth through modest increases in expenses and the reallocation of existing expenditures. With that, I'd like to ask the operator to open the line for questions.

Daniel Fannon:

Thanks. Good morning. Rob, I was hoping you could enhance or expand upon your comments around 2024 improvements. I think you highlighted some gross sales trends in the fourth quarter improving, plus we know investment performance has gotten better. So curious about maybe the sales profile as we start the year, how redemptions maybe are tracking? And just a little more color around the positive outlook.

Operator:

Thank you. One moment for our next question please. Our next question comes from the line of Mike Brown with KBW. Your line is now open.

Robert Sharps:

Sure. Thank you for the question. Specifically with regard to OCredit, OCredit’s raised over $100 million since the end of September, when we went effective with the SEC and we expect a similar amount throughout the course of Q1 and momentum to build throughout the course of the year as we launch on additional adviser and broker-dealer platforms. I'd say it's a very competitive market for private credit in the wealth channel and nontraded BDCs and the benign credit environment made it difficult to differentiate on performance. But we continue to be very confident that the combination of T. Rowe Price and OHA's home office relationships in the wealth channel, and T. Rowe Price field support, combined with OHA's long-term track record in private credit and relationships with issuers will lead to success with both OCredit and follow-on products. We are hearing from the wealth platforms that they're interested in follow-on products as they build their relationship with T. Rowe Price and OHA and private market alternatives and we're evaluating our alternatives there. Again, if you take a step back with regard to OHA, fee-basis AUM in alternatives for us was up 10% in 2023. They have just under $12 billion in capital commitments that are uninvested at this point. You will see a redemption in January when we report monthly for slightly over $1 billion in the alternatives category. But even despite that, we're pretty confident that we'll see OHA building momentum in 2024, and we expect an acceleration in flows this year. I think it's important to remember that some of the capital raised for OHA in 2023 was for distressed and deployment is trigger-based. So that only will go into flows as it's deployed. But if you look at the underlying performance of OHA strategies, it's very strong. If you look at our pipeline, it's healthy and as strong as it's been since we closed the deal in private credit in particular, and OHA is in the market launching Olin, which is a dedicated senior private lending fund, and that's a part of the market where demand has been strong. It's very early days there, but I would say initially, interest has been encouraging from seed and anchor investors. So collectively, when we look at the contribution from OHA in 2024 and beyond, we're confident that it will build and become more substantial over the course of this year and years to come.

Craig Siegenthaler:

Good morning, Rob, Eric. Hope everyone is doing well. My question is on the fixed income flows, which inflected negatively in the quarter. So some of that, I think, was seasonal and related to tax loss harvesting, so not reoccurring, but how should we think about the forward trajectory, especially given the potential for industry rebalancings and duration extensions with Fed rate cuts around the quarter and also record money market AUM on the sidelines?

Eric Veiel:

I would just simply add, I think Rob covered it well. [indiscernible], who is leading our fixed income team is highly motivated. The team is highly motivated to really emphasize to the market broadly, our capabilities, and I think have put together a plan to do that. And as Rob mentioned, the sectors where I think we have a very strong performance. I would just add to that, to the extent that taxes come back into view for folks as the year winds on, our municipal team is also very strong, and we have some interesting product in that area as well.

Kenneth Worthington:

Hi. Good morning. Thanks for taking the question. Investors domiciled outside the U.S. account for, I think, 8.6% of your business today. Where do you expect that to go -- I'm sorry, first, what portion of your resources are focused outside the U.S? Second, you announced some management changes on the non-U.S. side of the business. Can you flesh out the opportunity there and what you hope the new managers will accomplish? And third, what do you expect for growth in the non-U.S. business versus the U.S over the intermediate term.

Kenneth Worthington:

Yes. The first is what portion of your resources are focused on the non-U.S. business. And you announced some management changes to the non-U.S. business, I think, earlier this week or late last week. What are the opportunities you want those new managers to focus on?

Operator:

Thank you. One moment for our next question please. Our next question comes from the line of Brennan Hawken with UBS. Your line is now open.

Jen Dardis:

So I think the number I've given in the commentary. Thanks, Brennan, for the question, was $25 million was the amount for Q4. And as you know, OHA has a number of performance-based fees. These are the ones specifically that crystallize in year. And yes, that's typically the kind of accounts it would be. And yes, most of those happened during the fourth quarter, but they can happen through the year.

Alexander Blostein:

Hi. Good morning, everybody. Thanks for the question. I was hoping you could expand on your buyback commentary, seeing a bit of a pickup, I guess, in the fourth quarter, and I think you alluded to remaining active on share repurchases so far in the first quarter. Given T. Rowe's robust balance sheet and obviously strong cash flow generation, can you just kind of help us frame what the buyback opportunity is for 2024? Thanks.

Operator:

Thank you. One moment for our next question please. Our next question comes from the line of Michael Cyprus with Morgan Stanley. Your line is now open.

Robert Sharps:

Yes. Specifically, as it relates to Retiree, they have a set of proprietary algorithms that help retirement investors make the transition from accumulation to decumulation and look at optimizing social security elections, as well as which assets to liquidate first and when to take withdrawals from your tax deferred retirement investments. We showed a slide in the supplement with regard to the portion of our AUM that are in defined contribution plans as well as retirement-related overall. And if you think about our individual investor business, one of our strategic initiatives is retirement advisory services. So for our advisory capabilities to be able to incorporate differentiated guidance with regard to how to most tax efficiently support your lifestyle and cash flow needs in retirement, that's value add. And that's really where we've rolled it out initially. Longer term, we see a tremendous amount of opportunity to incorporate it into, for instance, our record-keeping offerings to differentiate the offering for plan sponsors and participants. But also, I think we have a meaningful potential to partner with people in the wealth channel with our intermediary partners. So I think it's very early days for us exploring kind of what the potential is. In terms of our approach to M&A, it's still the same. We're looking for things that add capabilities that make us more important to our clients and that fits strategically and culturally and make financial sense.

Robert Sharps:

All right. Very good. Thank you. Well, thank you all for joining us today and for your interest in T. Rowe Price. As I said at the outset, 2023 was a challenging year for us, but we also made a lot of progress, better investment performance, a lot of advancement with regard to our strategic work to position us for future growth, and that's beginning to translate into results that give us some confidence that we do see better days ahead and have the potential to continue to deliver great value for clients, associates and shareholders. So again, thank you, and good day.

Operator:

Good morning. My name is Norma, and I'll be your conference facilitator today. Welcome to T. Rowe Price's Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer period. I will give you instructions on how to ask questions at that time. As a reminder, this call is being recorded, and will be available for replay on T. Rowe Price's website shortly after the call concludes. I will now turn the call over to Linsley Carruth, T Rowe Price's Director of Investor Relations. Please go ahead.

Robert Sharps:

Thank you, Linsley, and thank you all for joining us today. Third quarter trends were largely similar to what we experienced earlier in the year. Relative investment performance was solid and particularly strong in our largest franchises. We made progress on our strategic initiatives and we executed on planned cost savings efforts. At the same time, we haven't seen any improvement in net flows and don't expect to for the balance of the year. That said, we do expect flow trends to recover somewhat in 2024 as improved performance takes the pressure off of redemptions from US large cap equity products. Investors come off the sidelines, and we realize the impact of our strategic investments. Turning now to investment performance. As you know, most equity and fixed income markets fell in the third quarter as investors grew increasingly concerned about a prolonged period of higher interest rates. During these choppy markets, we posted another quarter of solid investment performance relative to peers, particularly in many of our US equity and multi-asset strategies. Our US equity products were resilient with more than 70% of the mutual funds outperforming their peer group medians. All three of our large cap growth products were above the median and beat their benchmarks in the quarter and each have top quartile performance for the year-to-date time period. Other strong performers in our US equity range included all cap opportunities, US large cap core and science and technology, which all had top quartile performance versus peers for the quarter, adding to their solid multi-year track records. International equity products continued to have solid long-term relative peer results, despite losing some ground during the quarter. We launched five new active ETFs in June, and our four active US equity ETFs got off to a strong start with all beating their benchmarks in the first full quarter since launching. Our capital appreciation fund continues to deliver consistent outperformance relative to peers and is in the top decile versus peers in the 1, 3, 5, and 10-year time periods. Our target date products added another strong quarter, largely driven by our active security selection and differentiated portfolio construction. All vintages of the flagship retirement funds were in the top quartile versus peers, adding to their strong long-term track record. Fixed income performance was solid with over 60% of our mutual funds outperforming their peer group medians. Topping the list were our Dynamic Credit Bond Fund, which was recently added to our target date building blocks and the Global High Income Bond Fund, both of which were top decile performers in the quarter. Alternative strategies generated solid absolute and relative performance during the quarter with strong results in private market strategies. OHA liquid credit strategies outperformed their benchmarks as well. While I'm encouraged by improvements in our investment performance, as I mentioned at the outset, we continue to see net outflows. Third quarter flows and negative $17.4 billion were largely consistent with recent levels. The asset class trends remain the same, with US large cap equity accounting for a majority of the net outflows. Looking ahead, we expect fourth quarter flows to be worse than recent trends with further weakness concentrated in November and December. Our forecast considers that December has been particularly weak over the last few years, and reflects notified terminations and redemptions, including those related to a handful of large sub-advisory mandates. We continue to proactively manage expenses to create a cost structure appropriate for the size and scale of the firm today and to allow for continued investment in our strategic priorities. Jen will talk more about these expense efforts in a moment. But first, I'd like to highlight a few of our accomplishments during the quarter. We launched our first joint investment offering with OHA, the T. Rowe Price OHA select Private Credit Fund, offered as a non-traded perpetual life business development company or BDC structure. We are focused on building a durable and repeatable process to deliver alternative investments to the wealth management channel. OCredit launched with $1.5 billion of investable capital, making it one of the industry's largest non-traded BDC launches. This includes over $600 million raised in equity commitments from T. Rowe Price in a group of global institutional investors in addition to $875 million in credit facility commitments. Our ETF franchise is expanding with AUM totaling $1.7 billion as of September 30. Our new capital appreciation equity ETF, or TCAP, has attracted strong interest since launching in June with over $190 million in net flows and placement with 12 broker/dealer clients. In the third quarter, associates in London moved to our new office in Warwick Court on Pattern Oster Square, and we marked the end of exterior construction of our new global headquarters at Harbor Point in Baltimore, Maryland, with a ceremonial beam signing. Both offices are an investment in the associate experience and have been designed to foster collaboration, a cornerstone of our culture. It's our culture and the dedication and hard work of our associates that are driving our progress on our path to return the firm to organic growth. We have some of the best talent in the industry, and we're squarely focused on delivering consistently strong long-term investment performance and world-class service for our clients, sustaining our culture of excellence and collaboration and carefully managing our financial results through this environment. I'm grateful to our teams for keeping our clients at the center of all we do. I'll now turn to Jen to cover our financial results for the quarter.

Operator:

Thank you. [Operator Instructions] Question comes from the line of Alexander Blostein with Goldman Sachs. Your line is now open.

Robert Sharps:

Yeah. Alex, good morning. And thank you for the question. Look, I did note in the prepared remarks that we expect November and December to have elevated outflows. And November, in particular, is impacted by a single large mandate. December should be consistent with what we've seen in December for the last couple of years. So I do think it's logical to ask given that weakness, why are we confident that outflows should be lower next year. And the first thing I would say is that we're already seeing some year-over-year improvement in flows in certain channels. In particular, channels that tend to respond a little more quickly to changes in performance. And that's despite what I would characterize as a pretty challenging industry backdrop. That is specific -- that improvement -- I'd say you can point to a number of areas. If you just look at trends in Q3, we had just under $3 billion of inflows in the retirement date funds and gross sales up 10% year-over-year. We have positive flows in fixed income, multi-asset broadly and alternatives. You mentioned ETFs. We had our best quarter for ETF sales. It's still small in building. I think it can be a contributor in 2024, but I don't think it will be the most meaningful driver of performance or improvement in flows. I think the most meaningful driver will be one, I think if some of the money on the sidelines from an industry perspective extends their time horizon or risk appetite, and you have more flows in equities broadly. Two, I think a broadening of performance in the US equity market would be helpful for active relative to passive. Three, ultimately, the longer term performance numbers as they flow through will really begin to impact flows. And four, we've highlighted a number of different strategic initiatives that we're working on. Alternatives being one of them. So we do think that OCredit will contribute next year. But in the overall scale of our organization, I wouldn't necessarily say that I think either OCredit or ETF will be a predominant driver of improved flows. I think they'll be additive. But we're going to have to see improvement in the core asset classes and in the core channels to really have 2024 kind of be a better picture with regard to flows than 2023.

Craig Siegenthaler:

Good morning, Rob, Eric. Hope everyone is doing well. We have a question on another flow question, but focusing more on the redemption side of the equation. Most of your key equity flagship funds, and we're looking at blue-chip gross stock and mid-cap growth, they generated very strong performance over the last 12 months. And you're actually seeing this translate into month-over-month improvement in the flows from June to September. So my question is, how is this impacting client discussions, the better 12-month numbers? And if you strip out the large institutional sub-advisory redemptions that you're expecting at year-end, why can't this lead to continued monthly net flow improvement in 2024?

Operator:

Thank you. One moment for your next question, please. Our next question comes from the line of Patrick Davitt with Autonomous. Your line is now open.

RobertSharps:

I'll start and then Jen or Eric can add any perspective. Look, our sub-advisory business is broad. We have sub-advisory opportunities in the wealth channel, and we have a meaningful variable annuity sub-advisory business. The variable annuity sub-advisory business over time is likely to be under more pressure. In terms of sizing it, it is meaningful, but kind of well less than 10% of our overall book. Overall, sub-advisory is a very, very good business for us and a business that we are committed to. We think it's a channel that values our brand. We think it's a channel that values performance. We do see some additional opportunity over the long-term in sub-advisory, particularly in the wealth channel, but we don't anticipate that there'll be much opportunity for growth outside of perhaps consolidating some market share, which is really dependent on very good service, as well as excellent performance in that VA channel.

Robert Sharps:

Yeah. I would note quickly with regard to the VA channel, the challenges in the VA channel, something that we've navigated for a very long period of time. So that's not something that's new or specific to the elevated outflows this year. It may be in a particular month or a particular quarter. But it's a part of the book that we've navigated some pressure over a relatively long period of time.

Brian Bedell:

Great. Thanks. Good morning, folks. Thanks for taking my question. Maybe just one on the investment process, good to see the improved performance. But if you can comment on -- have there been any major changes to how you incorporate ESG risks? I know that's something that's been -- you've been working on for several years, particularly this year, and given the political backlash against ESG, is that changing how you incorporate that into the investment process? And then similarly, what are you hearing from distribution partners in terms of demand for either ESG products or the inclusion within the investment process. Particularly, I know in Europe, it was -- it has always been table stakes there. Are you seeing any change in the institutional demand in Europe?

Operator:

Thank you. One moment for our next question, please. Our next question comes from the line of Ken Worthington with JPMorgan. Your line is now open.

Eric Veiel:

Yeah. Hey, Ken. This is Eric. I'll start, and then Rob or Jen may want to come in as well. The way we've approached this market has been, I think, a very thoughtful one. As you know, we started first with five semitransparent active ETFs, which were clones of existing strategies that we're well known for. We then added five fixed income fully transparent ETFs and then this year launched five fully transparent active equity ETFs. Our approach to marketing these is to target the channels where we think that there's the most uptake for the improved structure that the ETF offers, especially for taxable accounts. So that would be ideally the US wealth channel. And within that, the RIA channels as well as now we're starting to gain some traction on the larger broker/dealers as we get to our 12-month track records across this different suite. In the case of TCAF, because the capital appreciation strategy and the portfolio manager, David Drew, are quite well known. We've been able to accelerate some of the placements with that specific strategy. We've also backed this with targeted marketing campaigns and some dedicated sales function as well. So we feel good about the approach that we're taking. And I think long-term, over the next, call it, three to five-plus years, there's no reason why this can't be a very large and important business for us, and I think we'll grow meaningfully. I'm not going to comment about how we'll do versus other specific competitors. I'm very comfortable with the approach that we're taking, and I'm bullish on our long-term prospects here.

JenDardis:

I'd also add. I think thematically, as Eric talked about ESG and being able to be a point we can talk with clients about their needs and meeting where they are, ETFs are similar in the sense it's another capability where we can have conversations with clients about where they have gaps in their lineups and how we can meet those with the capabilities that we can develop, given the suite of products we already have.

Brennan Hawken:

Good morning. Thanks for taking my question. I was hoping you spoke to a 4Q uplift in some expenses. So it would be helpful if you can maybe size that versus the 1% year-to-date expense growth next to the carry, you also said that it's seasonal and shouldn't carry it in 2024. So just hoping to clarify, are you saying that you don't expect a seasonal uplift in 4Q 2024 from similar items because of your expense efforts? Or were you just saying that it won't carry into the first quarter? Thanks.

Operator:

Thank you. One moment for our next question. [Operator Instructions] Our next question comes from the line of Michael Cyprys with Morgan Stanley. Your line is now open.

Robert Sharps:

Yeah. Brendan, this is an important element of our strategic initiative with regard to US wealth. And we've worked pretty hard to bring a broader number of strategies to market. Today, we are over 20% in terms of the number of investment strategies that we offer in retail SMA, and we are getting traction as we broaden the availability and broaden our offering. It's going to take some time. This is a part of the market where manager rosters and lineups are, in many instances, reasonably well established. I do think that many of our wealth partners want T. Rowe Price strategies available in SMA and are looking for opportunities for us to get new placements. We have seen a number of new placements this year. So it is a focus. Jen, any specifics with regard to AUA or flows that we share?

Robert Sharps:

Yeah. With regard to specific successes or launches this year, we did bring a muni SMA that was developed specifically for a single distribution partner. We also launched earlier this year two additional equity SMAs, US all-cap opportunities and global focused growth. As I said, this continues to be a big opportunity. I think we disclosed an AUA number that is roundly $10 billion. But you have to remember that, that includes not only model account submission in retail SMA, but also where we do glide path advisory and custom target date funds. So that wouldn't all be the sort of SMA that you're necessarily referring to or that we're talking about in terms of addressing the channel -- the opportunity in the wealth channel.

Glenn Schorr:

Hi. Thanks very much. I guess, straightforward one. Target date allocations to you all have normally or traditionally been very long equity. It's helped you have great performance, your flows are great, kind of no complaints. But I'm curious if you've made or contemplated making any shifts in allocation given the rise in yields and flows into fixed income. Just curious how you're thinking about that as the world has obviously shifted some? Thanks.

Operator:

Thank you. Our final question comes from the line of Daniel Fannon with Jefferies. Your line is now open.

Robert Sharps:

Yeah. Dan, thank you for the question. Look, we feel like our flagship retirement date funds are the best offering in the business. If you look at the strategic portfolio design, if you look at the underlying building blocks, a number of alpha rich diversifiers in there, areas like bank loan, areas like high yield. It's been a big focus for us. We made a substantial investment in 2021 in the competitiveness of our fees. And we also have a broad range. For those plans that are particularly fee sensitive, we have a blend series that does use passive in US -- in large cap US equity and in core fixed income. So we really believe we have a great value proposition to take on passive. And I think if you look at the performance of the T. Rowe Price fund, whether it's the flagship or whether it's blend and you compare that to passive, I think the numbers really stand for themselves. It's an important area for us. It's an area that we dedicate specific marketing dollars and support to and it's an area where we have momentum right now. We have record flows on a year-to-date basis in the target date franchise. There are always some planned dynamics around year-end, where you might have a plan that's terminated oftentimes, new ones on board in January. So I'm not going to comment on -- and sometimes there's not even a lot of visibility as you go into year-end with regard to whether or not something kind of either going out or coming in will land in December or land in January. But if you take the longer view, we feel really good about the value proposition. We feel really good about our momentum. It feels like our retirement date franchise as a whole is really resonating in the marketplace, and we're excited to carry that momentum forward into 2024.

Operator:

Thank you. I actually have 1 more question. One moment please for our next question. Our next question comes from the line of Finian O'Shea with Wells Fargo Securities. Your line is now open.

Robert Sharps:

Yeah. Finian, thank you for the question. Okay. In terms of trends, we actually just reached effectiveness at the end of the third quarter. So this is really our first month. And our current focus is on building a wide distribution syndicate of wealth platforms by leveraging our strong existing relationships in the wealth channel. So we have regional investment consultants in the field that have relationships with brokers and advisers. We've got the home office relationships, and we're really just getting started. I think what we've heard is that the combination of OHA's 30-year history of delivering great performance in alternative credit and T. Rowe Price's presence in the wealth channel and resources in the wealth channel should be pretty powerful. Before we worry about kind of thinking about what we're going to do next, I think we're really, really focused on executing with regard to OCredit. We think it is a very well-designed, excellent value proposition in a way to bring the OHA capabilities to the wealth channel. We will, in time, think about what our product pipeline is and kind of ultimately, I think, build on the success of this with follow-on offerings and we'll engage with our wealth clients to see where there are opportunities to do some things that are unique and it will be in demand. We -- as we go out, we do have a handful of top advisory platforms that we're launching on in Q4 and have some visibility with regard to launch -- with regard to other partners as we get into early 2024. So for now, we're really excited about OCredit. I'd say much too early to comment on kind of monthly flows, but we're encouraged by the platforms that we're launching on. And our team will be working hard on what the right follow-on will be in this marketplace, but it will be some time until our focus pivots from being really successful with OCredit to what the next offering will be.

Operator:

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.

Operator:

Good morning. My name is Gigi, and I'll be your conference facilitator today. Welcome to T. Rowe Price's Second Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer period. I will give you instructions on how to ask questions at that time. As a reminder, this call is being recorded, and will be available for replay on T. Rowe Price's website shortly after the call concludes. I will now turn the call over to Linsley Carruth, T Rowe Price's Director of Investor Relations.

Rob Sharps:

Thank you, Linsley, and thank you all for joining us today. While equity outflows continued in the second quarter, we saw improved performance in a number of important investment strategies. Stronger equity markets helped lift revenue from first quarter levels, and we identified substantial cost savings that will allow us to meaningfully slow expense growth while continuing to pursue our strategic initiatives. On today's call, I'll give an overview of our investment performance followed by a brief update on the key milestones we've reached in advancing our strategic initiatives. Jen will then provide a detailed view of our financial results before we take your questions. Overall, second quarter investment performance was encouraging with reasonably solid results across asset classes and the percentage of funds outperforming their peers increasing from the prior quarter. The U.S. large-cap growth franchise outperformed this quarter, with blue chip growth stock and large-cap growth posting top-quartile results versus peers and beating their benchmarks. Our U.S. equity research and mid-cap value strategies continued to deliver strong performance. In contrast, the large-cap value franchise, a bright spot in 2022, gave back some of its relative outperformance in the first half of 2023. However, the long-term results remain favorable. Our target date franchise delivered another strong quarter of performance with all of our flagship retirement funds ranking in the top quartile. Performance in fixed income and international equity was solid as well, with the majority of funds in both segments outperforming peer groups and a number of products, including global multisector bond and U.S. high yield, in the top decile for the quarter. Our global stock, overseas stock and several of our municipal bond strategies were top-quartile performers in the second quarter and all have strong three-, five- and 10-year performance track records. Despite these gains, organic growth remains under pressure. As we reported, net outflows for the second quarter were $20 billion. The sales and redemption patterns that we saw in the first quarter largely continued in the second. U.S. equity outflows were primarily driven by U.S. large-cap growth strategies as market demand remained muted and we saw the lagging impact of past investment performance on sales and redemptions. International and global outflows slowed with improved market demand and better performance. Fixed income net flows declined from the prior quarter as rates rose and demand softened. Target date products had net inflows of $2.4 billion for the quarter. To protect our ability to invest in our corporate strategy and deliver for our clients, we are proactively managing expense growth. We are pursuing a number of efforts to manage expenses, drive efficiency and create a cost structure that's appropriate for the size and scale of our firm today. Jen will discuss these efforts in greater detail, but since the fourth quarter of 2022, we have taken steps to remove or reallocate over $200 million in run rate costs for 2024. This work partly reflects ongoing company and industry challenges, but also reflects a broader commitment to efficiency, process improvement and durability, driving a culture of continuous improvement in innovation with an agile mindset. Institutionalizing this work will allow us to better invest in our corporate strategy and continue to deliver for our clients even in challenging times. Our corporate strategy is focused on areas where we believe we have the greatest opportunity for growth and long-term success. In the second quarter, we advanced efforts to deepen our client partnerships, expand our investment in operational capabilities, and continued to broaden our global reach. We've made important hires and met some key milestones. We are making steady progress in bolstering our USI Wealth channel by fortifying partnerships with the largest intermediary firms in the industry. Clients expect compelling investment strategies offered in a variety of vehicles to meet their needs, and we made progress delivering on both this quarter. On June 15, we launched five fully-transparent active equity ETFs, which are already generating client interest and inflows. Our existing lineup of 15 ETFs now at $1.5 billion in AUM is steadily building momentum. We continue to fill out our roster of SMA strategies with the addition of four muni and two equity SMA strategies this quarter. We finalized the seed commitment for our first joint co-branded product with OHA, T. Rowe Price OHA Select Private Credit Fund, or OCredit, and closed for our business development company, or BDC, election filing on June 30. The filing is a key legal milestone for the launch, which is planned for later this year. We also hired a Head of U.S. Intermediary Alternative Sales and we'll continue to invest in resources and expertise to support this effort. We closed on our acquisition of Retiree, Inc., which will enhance our ability to expand and retain relationships with pre-retiree and retiree clients by providing tax aware retirement income and social security claiming strategies. With this acquisition, we demonstrate our commitment to expanding and evolving our already strong retirement capabilities. So, while our flows continue to reflect lingering challenges, we are making clear progress. Our work on driving efficiencies and managing expenses will allow us to continue to invest to deliver for our clients and support future growth. I'm impressed by the resiliency and commitment of our associates and I remain confident in the long-term fundamental value that a global active investment management firm like T. Rowe Price can deliver no matter the environment. I'll now turn to Jen to cover our financial results for the second quarter.

Operator:

Thank you. [Operator Instructions] Our first question comes from the line of Ken Worthington from JPMorgan.

Rob Sharps:

Yes, Ken. Good morning. Thank you for the question. This is Rob. With regard to the large-cap growth franchise, as you note, meaningfully better performance in the second quarter and year-to-date. With regard to whether the improved performance is translating into better flows, the direct answer is, at the margin, but it's way too early to call this a trend. Our experience suggests that performance impacts flows with a lag that for institutional buyers, the three- and five-year numbers are important considerations. And while we have a very compelling performance on a year-to-date basis and attractive performance on a one-year basis, we do have further work to do on the three- and five-year numbers. In terms of what channels you might pick the early signals up or where you would expect it to improve earliest, it would be in USI Wealth and in the individual investor business. I think, again, the more sizable institutional decision making tends to more heavily weigh three- and five-year. I think the pattern we would expect to see is a lessening of redemptions and then eventually a more meaningful pickup in gross sales. If I take a step back and talk about flows broadly, it's clearly the missing ingredient. Overall, I'm feeling better about things. I think we've been very front-footed in putting ourself in a position where we can invest against our strategic initiatives yet kind of have an appropriate level of expense growth. For now at least the market has given us a lift in revenues and we're working really hard to put ourselves in a position where we can return to organic growth. As it stands today, the industry conditions are challenging. There is a lot of money on the sidelines. I don't think that will last forever, but it's difficult to know when it will ultimately come back. We'll need to continue to drive improved performance. And ultimately, we'll need to execute against our strategic initiatives to become more central with our existing clients and to reach more clients. My sense is if you look at historical patterns, if we execute against those things and investors come off the sidelines and begin to invest with a more long-term orientation again, we should see meaningfully less in the way of outflows in 2024 and demonstrate that we can put the company on a path back to organic growth at some point in 2025. If I look at all of the leading indicators that I'm seeing right now, it suggests to me that we're experiencing the worst of the pressure on flows, which is another way of saying I wouldn't expect the run rate in the back half of the year to be greater than what we saw in the first half of the year. And as we work our way through '24, we think we'll see, as I say, noticeably less in the way of net outflows. But again, there are some things that have to happen in terms of the industry backdrop, in terms of our investment performance, which we're deeply focused on and I'm encouraged by, and again, with regard to execution against all of our strategic initiatives.

Finian O'Shea:

Hi, everyone. Good morning. A question on the active ETF launches. Can you talk about the success so far there as to the extent that they capture the outflows, say, of their sister mutual funds? And also on a high level, are you encouraged by what you're seeing, or are there roadblocks for that strategy to gain traction? Thank you.

Operator:

Thank you. One moment for our next question. Our next question comes from the line of Dan Fannon from Jefferies.

Jen Dardis:

Thanks, Dan. I'll try to make sure I get all of those. So, first, on the midpoint of the range, the at or below the midpoint of the range, as usual, we tend to look at an average of the month as you might have noticed in this particular quarter, the markets went straight up into the end of the quarter. So, we tend to look at about a 30-day rolling average to look at what the balance might be for the balance of the year. In terms of severance, there's about $15 million to $20 million worth of severance costs that would be reflected in Q3. And we would expect for the balance of the year, if you look at how things would roll into Q4, you would have that partially offset by some of the lower salaries based on the roles that departed in July. Just remember, as we think about how that expense guidance would roll into the end of the year, fourth quarter typically has our long-term incentive plans where new LTI plans are issued and that tends to create a bit of a pop along with ad promo that tends to be more seasonal in the fourth quarter. And last, as we look into next year, that low-single digit guidance, it includes much of what I just mentioned. It includes the $200 million. The real estate savings would roll in over time. I would expect that would probably be more into the late '24 or early '25 timeframe. But again, we're still going through planning for the year. We just wanted to give you a general sense for where next year might land.

Operator:

Thank you. One moment for our next question. Our next question comes from the line of Craig Siegenthaler from Bank of America.

Rob Sharps:

Yes, Craig, good morning. Thank you for the question. Look, our priorities with regard to M&A typically don't change quarter-to-quarter. We are constantly evaluating opportunities to add new capabilities that we don't currently offer and that are important to our clients. We typically evaluate that relative to developing something organically. So, we're evaluating strategic opportunities. It's a stated goal of ours to build our alternatives business over time. So, it's natural that as opportunities present themselves in areas like real estate and infrastructure, as you suggest, that we would evaluate them. Look, we're only going to do things that we believe are compelling. We're only going to do things where we believe there is real cultural fit. We want to associate ourselves with investors and teams that are performance-oriented, that are client-focused and that have a long-term orientation. So, when those opportunities present themselves, we're going to do work and, ultimately, feel like -- ultimately determine whether or not we should engage and do more work and whether it's something that we might move forward with. There isn't anything that's imminent right now, but this is an active time in the industry from a consolidation perspective. With regard to OHA, the Board and I continue to be very happy with the acquisition overall. I think the market backdrop is a little more challenging with regard to capital raising and deployment across private markets, private credit and private equity, but it's a moment in time. I'm very enthusiastic about OHA business in the long term. They are talented investors with solid performance and a very strong reputation and great client relationships. I'm also encouraged by the work that our distribution teams are doing around the globe as they've spent time learning OHA's offering and they are beginning to bring new opportunities from our client relationships to OHA. Last thing I'd say about this is I'm really excited about our joint BDC, where we've noted we've secured $600 million of seed cap and are building a pipeline of intermediaries to partner with for distribution. Again, demand is muted in this space right now. But we think it's a compelling product. It's an area that we didn't serve in the past, either T. Rowe Price or OHA. So, we feel like we can have a preeminent product on those platforms when demand for the private credit BDC type vehicle comes back.

Glenn Schorr:

Hi. Thanks very much. So, I want to take a step back on the intermediary channel, because it's a little bit weird time where the markets go up a lot, yet you have a bunch of outflows. So, the question I have is, is the same performance drives flows on a lag basis? Is that relationship still what's driving things in here, and as your performance started to improve, we should see things slow? That would be what history would say, but is it bigger than that now? Are you seeing like just a massive product preference change in the channel hence the ETFs and SMAs that you've been putting out, maybe you could weave in what the responsibilities of your new Head of Intermediate Distribution might be in charge of making happen? Appreciate it. Thanks.

Operator:

Thank you. One moment for our next question. Our next question comes from the line of Brian Bedell from Deutsche Bank.

Rob Sharps:

Yes, I'll start and ask Jen to offer her perspective as well. I'll start with our retirement plan services business or our bundled 401(k) recordkeeping business. It's a business that overall I would characterize as healthy. We are growing in what we call the core market, which is below the large enterprise market. We're expanding our coverage of advisors that specialize in retirement and recordkeeping for small-, medium-sized businesses. And kind of overall, I think it's a business that is executing quite well for us. Where we have some challenges is in, we often have planned deconversions when there is consolidation where you have one of those large enterprises by a midcap or more medium-sized company that's one of our clients. So that's pressured that business to some extent, but we've largely been able to set that with growth in the core market. And I feel good about our momentum there. So, I'll leave that for the 401(k) recordkeeping business. In terms of the DC investment only or institutional defined contribution business, I'd say it's more mixed. We continue to meet with success in the retirement date franchise there. But it's an area where we were very well represented in large-cap growth. And that we have had some terminations from plans as a result of performance in that channel and that has put some pressure on close. It's part of the reason why we've called it out. I think it's been particularly elevated or acute in the first part of this year. I don't think we're out of the woods yet with regard to that. But I think if we continue to drive performance and get back to our historical standards, eventually that will run its course.

Operator:

Thank you. One moment for our next question. Our next question comes from the line of Brennan Hawken from UBS.

Rob Sharps:

Yes, I'm not going to comment on specifically what the underlying drivers are of the compensation accrual. I will say that our approach and philosophy around incentive compensation does emphasize longer-term track records. And kind of how you define that really depends on the tenure of the investment professional. But we look not only at the current year results, but at three-, five- and even 10-year results for long-tenured portfolio managers. So, our incentives are basically designed to reflect the long-term performance for investment proposals. But you've got to remember, we have 8,000 associates. And we have people that are doing a lot of different things in the organization. We also have a very broad range of strategies. So kind of while we might have delivered disappointing three- and five-year results in certain strategies, we have other strategies where you have excellent results. So, kind of at the end of the day, as I've said before, we're really focused on, from an expense perspective overall, making sure that we have the capacity to attract and retain world-class diverse talent and maintain our culture. And those are the things that I think are really essential for us to be able to deliver for our clients over time and to be able to deliver for our shareholders.

Operator:

Thank you. One moment for our next question. Our next question comes from the line of Mike Brown from KBW.

Jen Dardis:

No. I'd say, look, if you look at our trend over the last several years, five-plus, we've had modest fee compression rates over the past several years in the range of 1% to 2%, depending on the actions that we've been taking to lower fees across different product lines and be competitive. So, I would expect that wouldn't change. Obviously, in times of market rally, you'll see a little bit of an uptick as the business mix shifts, but nothing really specific to call out that's different from trends.

Patrick Davitt:

Hey, good morning, everyone. So, T. Rowe is widely known to be one of the best places to work in asset management and you've obviously been able to maintain that strong culture and strong pay packages through the last decades plus bull market. But history would suggest that asset managers to start cutting more aggressively, start to impact the investment management process and then, ultimately, performance. So, after now two, I guess, waves of layoffs in a year, how are you balancing this new restraint on expenses with the risk that you negatively impact the investment franchise?

Jen Dardis:

Yes, I think it's also important to put it in context. If we look at the last five years, we were coming off a period of very rapid investment in the business. We've added a number of capabilities across investments, distribution, technology, operations and globalization of the business over the -- again, over the past five-plus years, to the tune of increasing operating expenses over $1 billion in run rate during that timeframe. So these adjustments, I think these are nice moments in time to be able to take a look, make sure that we're doing things as efficiently as we can. And if we look at the -- particularly on the role side of things, there were three things we were trying to do. One was increasing efficiency in the way we work. So trying to look at processes, rebalancing work, making sure that we have -- we're doing things in the right ways with the most beneficial technology that we can. The second is just looking at a need for changing skill sets. As we look at places that Rob mentioned, new vehicles, making sure that we have our skills decked against the places where the business is going. And then the last thing is about pivoting and reprioritizing resources against these strategic priorities that we've been talking about. So, some of this is about expense reduction. Some of this is about expense reallocation. And to help put it into context, for next year, as we started the baseline work, our expense growth next year would have been somewhere in the neighborhood of 300 basis points to 400 basis points higher from an expense growth perspective, if we were just investing in all new things in the business. So, we view this, again, not only as an expense-cutting exercise, but also as a reallocation to make sure we're investing in the right spot.

Operator:

Thank you. Our last question comes from the line of Michael Cyprys from Morgan Stanley. Your line will be opened momentarily. Your line is now open.

Jen Dardis:

Sure. Thanks for the question. I think it's important here that I know a lot of people are talking about generative AI and the capabilities that have been rapidly evolving over the past several quarters versus machine learning AI. I'd say we've been investing behind that in certain parts of our business for some time now and our investment data insight team is an example, to make sure that we're using the benefits of machine learning in all of our processes. Specifically with regard to generative AI, we're looking at it across two fronts. One is from a risk perspective, just making sure that we have appropriate safeguards in place to protect data. And that's been one of the important things that we've been focused on in the early days. And then, the second piece of that, we've been establishing pilots across the business just to evaluate what the capabilities are to make sure that we can implement generative AI in ways that will improve our ability to generate insights for clients, the ability to reach and impact new clients and also to drive efficiency across the business. So, I'd say we're looking at pilots across our investment organization, across our distribution channels and within our technology organization specifically to look at how we can use that to drive efficiencies. So, I think the opportunities are potentially significant over time, but it's early days, and we want to do it in a way that is durable.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator:

Good morning. My name is Shannon, and I will be your conference facilitator today. Welcome to T. Rowe Price's First Quarter Earnings Conference Call. All participants will be in listen-only mode until the question-and-answer period. [Operator Instructions] As a reminder, this call is being recorded and will be available for replay on T. Rowe's website shortly after the call concludes. I will now turn the call over to Linsley Carruth, T. Rowe Price's Director of Investor Relations.

Rob Sharps:

Thank you, Linsley and welcome to everyone joining us today for our inaugural earnings call. I'd like to start by saying that in rapidly evolving market conditions like the ones we experienced this quarter, what we deliver for our clients matters more than ever. Our clients have entrusted us with over $1.3 trillion of assets and we are deeply focused on helping them meet their long-term financial objectives. I'm pleased by how our teams have responded in these times, staying close to our clients, sharing insights, and helping them navigate uncertainty. Our first quarter shows some encouraging signs. Markets posted gains and our investment performance showed signs of improvement. However, the market environment remains uncertain, and our flows remain under pressure. In light of this uneven backdrop, we continue to carefully manage our financials to preserve our ability to invest in long-term initiatives to support growth. I remain confident in the long-term fundamental value that a global active investment management firm like T. Rowe Price can deliver, no matter the environment. With that, I'll provide an overview of the market context and our investment performance as well as an update on our strategic priorities before turning it over to Jen to review the quarterly financial results. Stocks in the US and most other major equity markets recorded solid gains in the first quarter, although returns were trimmed by the banking turmoil in the US and later Switzerland. Bonds also offered good returns as growth and interest rate expectations moderated. A flight to safety following the banking turmoil led to a sharp decrease in US treasury yields, especially in the two-year yield. The yield curve stayed inverted, however, which may be an indicator of the coming recession. Stock returns in the US vary markedly. Turmoil in the banking sector and signs of ebbing growth and inflation pressures led to lower treasury yields and boosted gross shares by increasingly implied value of future earnings. The NASDAQ Composite Index jumped nearly 17% and technology shares within the S&P 500 Index returned nearly 22%, including dividends during the first quarter. Conversely, declines in bank stocks and oil prices contributed to a modest overall decline in the small-cap Russell 2000 Value Index. Monetary and fiscal tightening, healing supply chains and easing energy prices helped lower inflation in most major economies, even if not yet to central banker satisfaction. The annual headline inflation rate fell from 6.4% to 5% over the quarter in the US and from 9.2% to 6.9% in the Eurozone with UK inflation being an outlier in both direction and magnitude. In this choppy market environment, we saw our investment performance improve for some of our equity and fixed income strategies did struggle last year. While it was reassuring to see performance rebound in a number of key strategies in the first quarter, we are keenly aware that one quarter does not make a trend, especially in such an unsettled macro environment. Periods of market transition and elevated uncertainty can work to the advantage of quality active managers. Near-term dislocations often create long-term opportunities, as the market refocuses on fundamental drivers such as valuation and earnings quality. Our firm has navigated both sides of the investment performance cycle before. We persevered by adhering to our rigorous investment process and leveraging the insights generated by our global research platform. The solid long-term track record of our target date franchise reflects these strengths, as does the performance of our value and core equity strategies last year. And I'm encouraged by the resilience of our US equity research strategy, where more than 25 of our TRPA research analysts contribute to the portfolio in their focused area of expertise. As a fundamental research-driven investment organization, our deep sector expertise and long-standing engagement with management teams is pivotal to understanding the long-term strategy and goals of the companies we invest in. We are proud that among more than 330 asset management firms nominated, we came in a very close second in institutional investors inaugural 2023 ranking of America's Top Asset Management Firms. I am pleased that so many corporate voters recognized our differentiated research and corporate access model. Despite these bright spots, net flows continue to be under pressure. As we reported, net outflows for the first quarter were $16.1 billion. The primary driver was net outflows in our large-cap growth equity strategies, reflecting both continued weak industry demand and the lagging impact of investment performance challenges in these strategies. While those net outflows were broad based, they were particularly apparent in our United States defined contribution investment only and broker-dealer channels. We continue to face headwinds with net flows to our large-cap growth strategies, but we expect that they will abate with sustained investment performance and time. On the positive side, we recorded $7.5 billion of net inflows into the target date franchise and over $250 million in net flows in each of global multi-sector bond, US dividend growth, US taxable cash management, US all-cap opportunities and US short-term bond strategies during the quarter. We expect that we will return the firm to positive organic growth over time with a combination of more constructive markets, sustained improved performance in key strategies, traction with a broader range of vehicles and continued progress with our strategic initiatives. Although, excellent investment performance is central to our long-term success, our industry has gotten more competitive. We are committed to investing in the areas where we have scaled businesses such as our leading retirement franchise and to building capabilities to support future growth. We see an opportunity to elevate our focus on areas where we have already invested resources over many years and where we believe we have the greatest opportunity for growth and long-term success. I would like to highlight some areas of focus and our progress against our strategic initiatives. We are bolstering our US intermediary wealth channel, leveraging and extending the partnerships we have built. This quarter, we were named a top tier provider to another one of the largest intermediary firms in the industry. With this decision, we are now a top-tier partner with six of the 10 largest intermediary firms in this space. We are also broadening our range of products to ensure we deliver our investment strategies in the vehicle of choice. As more advisers look to do more with fewer investment management partners, we are well-positioned to build on these deep partnerships. We are accelerating growth in international markets with a focus on unlocking growth in select countries where we have existing businesses that offer the greatest opportunity. During this quarter, I spent two weeks in Asia where we have 365 associates and clients representing $50 billion of assets under management. I had a chance to spend time with several of our clients and it reinforced for me the depth of relationships that we are building in the region and the opportunity that we have to do much more with them over time. In our direct retail business, we are enhancing our individual investor client experience through an improved digital experience and differentiated service offering. We recently completed the acquisition of Retiree, Inc. a fintech firm that offers innovative retirement income planning software. This acquisition will complement and expand our retirement income capabilities across our audiences with planning tools for individuals and practitioner tools for financial professionals. We expect to use the technology in our retail direct, defined contribution and wealth management channels. Finally, we are expanding our private markets and alternative capabilities by leveraging our distribution channels and OHA's investment capabilities. As we previously shared, we acquired OHA to accelerate our expansion into alternative investments. Our first joint co-branded product, T. Rowe Price OHA Select Private Credit Fund, or OCredit [ph], is advancing. This business development company is a retail product developed to leverage OHA's private credit investment expertise with T. Rowe Price's distribution capabilities. We expect to close the seed round in the second quarter and launch OCredit more broadly later this year. I am grateful to our associates around the world for focusing on delivering for our existing clients and for continuing to find new ways to bring what we do to a broader, more global base of clients. I will now turn to Jen to cover our financial results for Q1.

Operator:

Thank you. [Operator Instructions] We ask that you please limit yourself to one question. Please standby while we compile the Q&A roster. Our first question comes from the line of Daniel Fannon with Jefferies LLC. Your line is now open.

Rob Sharps:

Good morning, Dan. Thank you for the question. I would characterize our first year with OHA at a high level as very successful. We've integrated the appropriate functions and worked really hard to identify distribution synergies, the ability to take their strategies to institutional clients and prospects around the globe and also to take OHA capabilities into the wealth channel. I think the specific product that you're referring to is our T. Rowe Price OHA Credit BDC. We've made a lot of progress with regard to the institutional seed and expect to launch it late this year in the wealth channel. In terms of their performance, it's remained quite strong. Their absolute results have been impacted by the difficult overall fixed income and credit markets over the course of the last year. And that's also impacted their incentive income and fees and carry, but their relative performance has remained very, very strong. So we're really pleased right now with the progress that we've made and feel very confident with regard to the opportunity and potential that our teams have together.

Glenn Schorr:

Thank you. Maybe a follow-on on OHA and broadened a little bit. I'm curious on how OHA and the T. Rowe Price fixed income teams can work together, can learn from each other? And maybe any observations you might have on trends in private versus public credit markets? And how you can design products, how you can learn from each other from that? Thanks, Rob.

Operator:

Thank you. Our next question comes from the line of Patrick Davitt with Autonomous Research. Your line is now open.

Rob Sharps:

Yes, I'll take the second part of the question first. We're very engaged and generally have the opportunity to share our outlook and give a performance update. I think that's not the case in every instance. We reach plans in a number of ways. In some instances, we are the record keeper and we have direct interaction. In some instances, we go directly to the plan sponsor. And in those instances, have through a direct DCIO opportunity on another record keepers platform have the opportunity to interact with the client or prospect. And in a number of instances, we work through aggregators or advisers. And there, we really are able to articulate our value proposition with those folks, and it's more indirect to the end client. When I think about the target date business, first thing I would say is that, in general, people are less sensitive to near-term performance than they might be with single strategies. People tend to focus much more on three, five, and 10-year results just given the nature of the objective being retirement and the long-dated return objective of retirement investing and savings. If you look at our flows in Q1, as you mentioned, they were very strong. I think our pipeline remains very robust. Long-term performance is important and when you have an active offering, ultimately, you're going to need to deliver it. I think if you look at our retirement date fund, it is -- it offers the strongest value proposition in the industry. We have a number of alpha-rich diversifiers in our building block lineup from non-investment-grade credit to emerging markets in small and mid-cap equity areas where you can add a tremendous amount of value as an active manager. And I'm very confident that if you continue to look at rolling three and five-year periods that our retirement date franchise will sort to the top and that we can continue to grow that franchise. And yes, I feel quite good about it.

Brennan Hawken:

Good morning. Thanks for taking my questions and thanks for hosting the earnings call. Really appreciate the increased transparency and chance to engage regularly. So on expenses, no change to the growth expectations. That's helpful and helpful to get the color around what the profile of the quarter -- the year will look like? Could you maybe give a breakdown of how much of this expense growth is tied to core inflation, maybe impact of the market-sensitive expenses? And then how much of the growth you are allocating to continued investments in the firm? Thank you.

Rob Sharps:

Yes. I would just say, we really believe we have a big opportunity to drive share in US wealth and in our focus markets around the world, but we also recognize that we need to drive efficiency and productivity in order to fund those investments going forward, and we're laser-focused on doing that.

Alexander Blostein:

Hey, good morning. Thanks for taking the question as well. Rob, a little bit maybe bigger picture question about sort of the firms or EPS and operating income growth algorithm over the next couple of years. So, as you sort of think about your comments regarding organic growth and organic base, your growth being maybe challenged for some period of time, expense growth, is it kind of like in this mid-single-digit range? So that obviously just kind of comes down to the market, but do you see areas where you could flex expenses more where the sort of earnings growth algorithm can improve even if organic growth remains challenged for some time?

Operator:

Thank you. Our next question comes from the line of Kenneth Worthington with JPMorgan. Your line is now open.

Jen Dardis:

Thanks, Ken, and I appreciate the question. So as we look at the business outside the US, obviously, it's not a single market. Those are a number of individual markets, and we've been investing across a series of focused markets outside the US. I would say, over the long term, we continue to see growth out in those markets as an important leg of area for potential growth, particularly in core markets in Japan and Australia, the UK, Italy, Germany and Canada as we think about opportunities to grow the business. If we think about the near term and you're referencing, I believe, the first quarter flows, you can see some lumpiness within that business, because there are some institutional flows. And, obviously, if we think about the intersection between the comments we made on the large cap equity business and the flows there, we have exposure to those asset classes in all of those markets as well. So in the short term, you can see the impact of the same trends that we saw across the broader part of the business. But over the long term, we expect that that's an opportunity for growth for us. And specifically about the results that we're seeing for what we've invested there, I think we've been very pleased with the places where we've made core investments. Rob mentioned during his comments, the client meetings that he had had while he was in Asia, and we think there are some really good opportunities for us over the long term.

Operator:

Thank you. Our next question comes from the line of Bill Katz with Credit Suisse. Your line is now open.

Rob Sharps:

Thanks for the question, Bill. The first thing I would say is in terms of share, there's a meaningful element of it that is mix related. I'll note that we have had positive flows in fixed income overall, which is above category. I think our target date results continue to be robust. We've had positive flows turn in this category. But you're right, we have had meaningful outflows in parts of our equity franchise, and those parts of our equity franchise are a substantial part of the business. So kind of ultimately, I think if you look at that in aggregate, it has led to share loss over the more recent time horizon. Look, we want to manage this business with a very long-term lens. I think that we do want to have more exposure to parts of the business, whether it is product or vehicle or asset class or geography that have more tailwinds of growth, and we think we can do that organically. But we also will continue to look very seriously at acquisition opportunities. But I think we have a very high bar for acquisitions. They need to have minimal disruption to our ability to deliver on our existing commitments to clients and our culture. They have to be a strategic fit. They have to make financial sense. Most deals in this industry, the weight of the evidence would suggest that they haven't been compelling. So, again, I think we will continue to look. And I think OHA and Retiree were both examples of the sorts of things that can be meaningfully additive. OHA obviously much, much greater in scale and scope. But nonetheless, I mean, we think that M&A is a tool that can help us evolve our business mix and kind of help us build more growth into the business in time.

Michael Cyprys:

Great. Thank you. You mentioned that you're looking to broaden out the range of products and vehicles. I was hoping you could elaborate on that where you see white space from a product standpoint and vehicle standpoint. And maybe you could talk a little bit about how you're building out the SMA platform and also active ETFs and some of the actions that you could take there to accelerate growth?

Jen Dardis:

I would just add to that, beyond the products themselves and the vehicles that they're offered in, this intersects with the investments that Rob mentioned earlier, where we're making investments behind our distribution, sales, marketing teams with the US wealth channel, where a lot of these vehicles are sold. And so, it's not just developing the products and putting them out there, but actually putting the marketing and sales resources behind it to make sure that we can pull those vehicles all the way through to the end client.

Finian O'Shea:

Hi, everyone. Good morning. Another for Oak Hill. Can you give us a sense of employee retention as the firm integrates into T. Rowe? And is OCREDIT intended to expand into direct lending as many of your peers focus on, or might you draw on more of a mix of the firm's private credit capabilities? Thank you.

Operator:

Thank you. Our last question comes from the line of Craig Siegenthaler with Bank of America. Your line is now open.

Rob Sharps:

Craig, I think it's difficult to say. This is a trend that's been unfolding for a relatively long period of time, and there continues to be consolidation in the record-keeping business. Recordkeeping is a scale business. That said, I think T. Rowe Price has a very compelling value proposition in RPS. And particularly in core market, we're growing the number of plans and continuing to get attractive economics with the majority of the AUM on the plan managed by T. Rowe Price and in particular, having very strong representation of our target date funds. So, look, I think the trend towards consolidation and unbundling of asset management and record keeping is probably fairly far along. I also would say, I think, there will always be a place for a well done bundled recordkeeping offering in parts of the market, particularly in what we characterize as the core markets, so below the large enterprise level, where I think you can really deliver a very compelling value proposition. And if you were to look at our plan count, if you were to look at our flows, I mean the core RPS market is a market that we're investing in. We're investing in our coverage and territories and one that we think will be a growth driver for us over the course of the next several years. So while the unbundling trend, I think, is particularly important at the very large enterprise level, I don't think it's something that is a meaningful threat to our business. Again, as you mentioned, we have a very sizable representation in DCIO. We interact with the 401(k) market in a number of different ways, right? DCIO direct to the plan sponsor, DCIO through consultants and advisers, record-keeping where we sell directly to the plan sponsor, record-keeping through aggregators and advisers. Over 60% of our AUM is retirement related, and we've got a multi-pronged strategy to penetrate that opportunity. I think we've got a great value proposition with, as I've mentioned before, our range of retirement date funds. So this is a business that I'm pretty enthusiastic about. And I would say I don't spend a lot of time thinking about the disaggregation of recordkeeping and asset management at the very large plan level. And that's something that we've lived with for a decade or more.

Rob Sharps:

Okay. I think that was the last question. In closing, I just thank you all for joining us today and for your interest in T. Rowe Price. As we shared, I think Q1 showed promising signs in the market backdrop and also some improved investment performance as well as strong target date net flows. And while the market environment remains uncertain, I'm very pleased with how our associates and our teams are responding. And we remain deeply committed and focused on helping our clients meet their long-term financial objectives. So, again, thank you.