The Price of success

For nearly 70 years T. Rowe Price Group has proudly done things its way. Start with founder Thomas Rowe Price Jr. Trained as a chemist, he launched the firm in, of all places, Baltimore, Maryland, in 1937, in the midst of the Great Depression. He immediately defied convention by charging fees based on investments with his firm, not commissions. Decades later, when other money managers were loading up on high-flying Nasdaq stocks and rushing out new technology funds in the dotty-com 1990s, T. Rowe resisted, holding firm to its value-oriented discipline even as it lost sales to rivals. And as some other mutual fund houses blithely let hedge fund managers engage in late trading and so-called market timing of their funds, T. Rowe shunned the practice.

Today, thanks to its independent streak, T. Rowe stands triumphant. Its stock-picking approach is back in vogue, and it sailed through the recent mutual fund scandals without a scratch.

Remarkably profitable, the $258 billion-in-assets money manager boasts operating margins that are the envy of the business (41 percent, versus the 31 percent industry average). It reports strong asset growth, top-tier portfolio performance and steady inflows of client money. The firm controls a cash trove of nearly $800 million and is free of debt. Competitors respect it; investors give it their loyalty. With 14 offices and nearly 4,300 employees, it earned $411 million on revenues of $1.5 billion for the 12 months ended September 30. Its share price is up nearly sevenfold over the past decade. (The Standard & Poor's 500 stock index gained 109 percent during that period.) This year through November 21, T. Rowe stock is up 17 percent, versus 3.5 percent for the S&P 500.

Is it any wonder chief executive George Roche feels those results vindicate the firm's inspired iconoclasm? He attributes much of the money manager's success, in fact, to a decades-long history of staunch independence.

"You're better off as an independent firm," Roche says. "Independents have proven to be more successful."

Yet these are tough times for money managers, and Roche and T. Rowe Price now confront a host of challenges, each more sobering than the next. Declining fees, rising distribution costs and worries over compliance are all roiling the money management industry.

Although some financial services companies are moving out of asset management (Citigroup, American Express Co.), others are staking bigger claims to the business (Legg Mason acquired Citi's $437 billion money management operation; Wells Fargo & Co. purchased $29 billion in assets from Strong Financial) even as long-only managers face growing competition from the rapidly swelling ranks of hedge funds, promising outperformance, and indexers, offering security. How all this asset-shuffling will ultimately play out is unclear, but it adds to the instability of an industry already buffeted by a fast-changing business climate -- and puts particular pressure on a traditionalist like T. Rowe.

The firm is especially vulnerable because its traditional modus operandi for gathering retail assets -- selling funds directly to consumers, which has accounted for roughly one quarter of total assets -- is under assault. Just four other major mutual fund companies -- Dodge & Cox, Fidelity Investments, Janus Capital Group and Vanguard Group -- continue to pull in significant revenues from direct fund sales.

"The burden of regulation is heavier," Roche says. "The burden of having a conflict is heavier. That's putting pressure on a lot of firms. There may be more spin-outs, outright sales, conglomerations. This is a very tough, competitive business. Your numbers are right there, and the markets are unforgiving."

Then there is the gnawing question of succession. As the seas grow stormier, who will steer the ship now anchored serenely in Baltimore Harbor? Roche, a 37-year company man and CEO since 1997, turns 65 in mid-2006; he says he will retire some time around then. Some investors and industry observers had expected that Roche's No. 2, James Riepe, 62, a 24-year veteran of the firm and vice chairman since 1997, might step in to ease the transition to a new CEO. But in late October, Riepe announced that he would retire at the end of the year in what T. Rowe terms "part of a planned management transition."

Roche divulges only that three executives will become more prominent within the firm when he retires: one in investments (Brian Rogers, now 50 and the chief investment officer), one in marketing and the fund boards (Edward Bernard, 49, who runs fund distribution and marketing as president of investment services) and one other.

"Whatever we do will be well thought out," says CIO Rogers, "and I will be involved in some way with it."

T. Rowe rarely recruits from the outside, and neither the firm's executives nor outside analysts can imagine the firm's doing so for as important an avatar of the corporate culture as a CEO. Rogers and Bernard are contenders for the top job. So are their fellow management committee members: equities director James Kennedy, fixed-income director Mary Miller and international head David Warren. Only one of the three, Kennedy, 52, is also on the board of directors.

"It's not the deepest bench in the world," says UBS financial services analyst Glenn Schorr, who before the Riepe announcement was betting on Kennedy but now thinks it's a "reasonable" guess that Bernard might get the nod.

Whoever it is, the person will no doubt be steeped in T. Rowe's collegial culture (the nickname "T. Rowe Nice" is apt) and so is unlikely to do anything -- or be allowed to do anything by the powerful management committee -- to set the firm off on some wacky new tack.

But will Roche's successor keep T. Rowe independent? The current CEO certainly hopes and expects so.

"There's absolutely no reason the company would sell out if it can do a good job and grow," he says.

Meanwhile, it has fallen squarely to Roche, late in his tenure, to redefine T. Rowe's fundamental mission while preserving its ethos. Say this for the CEO: He recognizes that the firm must change.

Known for his consensual leadership style, Roche has no interest in making sweeping strategic pronouncements or striking a big deal merely for the sake of doing so. Yet he certainly has the wherewithal to make a transforming acquisition, although T. Rowe has never attempted such a feat in its 68 years.

"Di-worse-ification," Roche says, as he raises his bushy eyebrows and chuckles. "We are still in only one business, and we have no intention of going into another."

UBS analyst Schorr observes: "T. Rowe is a very conservatively run franchise that has a good thing going. They are going to be extremely selective on the purchase front." Five months ago, for example, the firm made a characteristically modest deal, acquiring $400 million in index fund assets from TD Waterhouse Group for just $200,000.

Roche is moving guardedly to change the firm from within. "We'll proceed very deliberately to grow the areas that need growing," he says.

The CEO is campaigning on three fronts. First, he is pushing T. Rowe to expand its non-401(k) institutional business, which represents about one quarter of total assets. Second, he's working to boost intermediary and third-party retail sales, which account for an additional 25 percent of assets. Third and most ambitious, he's determined to make the U.S.-focused firm a global player. T. Rowe claims just $13 billion, or 5 percent of its total assets, from non-U.S. clients. (Fidelity, by contrast, manages $189 billion for international clients.)

Roche's strategy looks sound, albeit conservative. But he is up against formidable obstacles.

Overseas, T. Rowe is trying to make up for lost time. The firm was unable to sell its own investment products outside the U.S. until 2000 because of a joint venture with Robert Fleming Holdings dating back to 1979 under which the two firms co-branded investment funds. T. Rowe had exclusive rights to market them to U.S. investors and could not compete with Fleming outside the U.S.

The venture ended when the U.K. asset manager was acquired by Chase Manhattan Corp. five years ago and T. Rowe paid $704 million to buy out Fleming's 50 percent. The venture now operates in London under the T. Rowe name and serves as the firm's hub for targeting Europe and Asia.

T. Rowe today sells investment products in just 20 countries. It has a minimal presence in the all-important U.K. market and barely any in France, Germany or Italy.

Give it time, says R. Todd Ruppert, head of T. Rowe's institutional business. "Non-U.S. growth will be very powerful for us," he insists. T. Rowe does not measure its success by the size of its asset base, Ruppert says. He also believes that the firm's international push comes at a particularly propitious moment, as European institutional investors are becoming receptive to specialist managers like T. Rowe.

The firm doesn't break out financials for its international operations, nor will it reveal what it has invested to build up its presence outside the U.S. But Don Putnam, managing partner of New York­based merchant bank Grail Partners and the co-founder and former CEO of Putnam Lovell, an investment bank that represented Chase in the Fleming deal, believes that T. Rowe has held back from spending overseas to break even on its international operations.

"Their Baltimore-based low-ego approach is always admirable but not always successful," he says. "An international business may take a little more hubris than they have brought to it."

On the U.S. retail front, the money manager has been more successful at persuading brokerages to sell its funds; in all, it has relationships with about 500 firms. T. Rowe's impressive performance is a major advantage. As of September 2005 at least 69 percent of T. Rowe retail funds (excluding index funds) beat their Lipper peer group averages for the one-, three-, five- and ten-year periods.

But the economics of fund distribution are tough because brokerages demand high tariffs for their critical sales networks. Many mutual fund companies have revenue-sharing arrangements with brokerages, using fund company money to pay for preferential distribution. T. Rowe won't engage in the practice, which it believes is not in the best interests of fundholders.

Instead, to win over financial advisers, the money manager relies on its three-year-old R Class mutual fund shares: Fundholders pay a 50-basis-point fee to the fund, which then pays the advisers to compensate them for including T. Rowe funds in their wrap programs or in their small 401(k) platforms. The firm's Advisor Class of shares, launched in March 2000 and used by financial advisers in individual client portfolios, carry a 25-basis-point 12(b)1 fee.

These are quite profitable offerings for T. Rowe, and sales have been strong in the past few years as demand for these products has dramatically increased. But in this competitive marketplace, future growth is far from guaranteed.

Cracking the pension market presents a singular challenge. Like all retail firms, T. Rowe confronts a snobbish aversion to its kind among plan sponsors. If you're handling the $1,000 accounts of the masses, the unspoken assumption goes, how can you possibly meet the demands of a sophisticated institution? That assumption is shared, too, by many investment consultants, pensiondom's gatekeepers.

Not that T. Rowe is alone among retail fund managers struggling to raise their profile in the institutional market. The firm's much larger rival, Fidelity, whose assets under management totaled $1.1 trillion on June 30, is a case in point. In March, Fidelity launched a reorganization, setting up a separate company, Fidelity Institutional Asset Management Group, for pension plans and corporate plan sponsors. Over the next several years, Fidelity says, it expects to invest upward of $100 million in the new company.

T. Rowe won't reveal what it is spending to grow its institutional operation, but building a pension business is a top priority for Roche and his team.

Over the past three years, Ruppert points out, T. Rowe has won almost 250 institutional mandates across asset classes, including emerging-markets equity commitments from the $32 billion Alaska Permanent Fund Corp. (in September 2005) and the $134 billion California State Teachers' Retirement System (in October 2005). Other money managers' emerging-markets portfolios have closed to new investors, so T. Rowe has benefited from spillover demand.

In both the retail and institutional arenas, the firm boasts impressive strengths: a research-driven investment culture, top-notch long-term portfolio performance and low fees. T. Rowe salaries are not spectacularly high (although the money goes further in Baltimore than it does in Boston or New York), but investment professionals can become rich through various stock option programs.

T. Rowe keeps a mix of growth and value funds and relies on in-house, primarily bottom-up research from its 92 analysts. They're mainly stock pickers: 76 percent of the firm's assets are in equities, 24 percent in bonds and money market funds. The 64 portfolio managers and 16 portfolio manager/analysts are known for their long tenures as well as their track records: They remain an average of 13 years, roughly twice the industry average.

Fidelity, for instance, has lost several rising stars to hedge funds in recent years; only one portfolio manager has left T. Rowe for the world of 2 and 20. Brian Stansky, manager of the firm's media and telecommunications fund (and the brother of ex­Fidelity Magellan manager Robert Stansky) left for Abacus Investments in 2000. Two years later he joined Integral Capital Partners, a venture firm.

The longevity of T. Rowe managers reflects the unusually collaborative character of the firm. For example, analysts act as portfolio managers of the structured research product, and high-yield bond analysts work with equity analysts to evaluate telecom companies. "This is a genuinely collegial culture," says Robert Boyda, senior vice president of John Hancock Investment Management Services, which hired the money manager as one of its first subadvisers in 1996. "We think the world of T. Rowe Price."

"It's a true investment culture," adds banker Putnam. "That's a particularly valuable asset in the institutional marketplace."

When Riepe retires, Bernard, president of investment services, will take on most of his management responsibilities, though not his vice chairman's title, while remaining an important guardian of the firm's investment culture. In the spring Bernard, who has been on the management committee since 2000, will be nominated to replace Riepe as chairman of all the mutual fund boards.

IF ROCHE AND COMPANY PREFER TO DO THINGS their own way, so too did Thomas Rowe Price Jr., who after graduating from Swarthmore College with a degree in chemistry worked at E.I. du Pont de Nemours & Co. for a few years before he discovered that he liked financial ledgers better than the periodic table. Price went on to become the investment chief of a white-shoe Baltimore brokerage, Mackubin, Goodrich & Co., the precursor to Legg Mason, and stayed there for 12 years. In 1937, Price, then 39, left Mackubin to set up his own shop. At the time, most investors, stung by the 1929 crash and the Great Depression, steered clear of stocks; when they did buy they were looking for income potential. An instinctive contrarian, Price favored growth stocks and new technologies. He scored impressive gains with early investments in Haloid Co. -- later known as Xerox Corp. -- Honeywell, IBM Corp. and 3M.

Initially, T. Rowe managed money for wealthy individuals, but after World War II, it moved into the world of pension funds and other institutions, signing its first large client, American Cyanamid Co., in 1950. T. Rowe was the rare money manager in this crowd: At the time, the vast majority of pension assets were managed by large money-center banks.

Price introduced the firm's first retail mutual fund, the Growth Stock Fund, in 1950, largely to give clients' families a way to invest their personal money in his growth strategy. The fund reported $40 million in assets by 1960 and $250 million by the end of 1966.

As the go-go '60s got going, T. Rowe was perfectly positioned to exploit its expertise in high-octane growth stocks. By 1968, when the 26-year-old Roche arrived with his Harvard MBA and signed on as a natural-resources analyst, working closely with Mr. Price (as everyone still calls him) on the energy-focused New Era Fund, the firm's assets totaled $1.8 billion. But when the Nifty 50 unraveled and the early 1970s bear market set in, T. Rowe's growth stock funds fizzled fast.

By the time Roche took over the New Era Fund in 1979 (he would run it for the next 18 years, delivering a 13.5 percent annualized return during that period), equities had come back to life. At that point most growth fund managers were happy to pump up investor demand for aggressive stock portfolios, but Roche and his colleagues, still smarting from the 1973­'74 bear market, chose a different path. More concerned about valuation, in the early 1980s they introduced value equity and income funds as counterweights to the firm's still hefty growth-stock portfolios. Whereas Price had wanted to invest in the hot new growth companies of the day, T. Rowe analysts and managers began to pay more attention to price-earnings multiples -- and risk. In 1985 the firm launched the Equity Income Fund, a large-cap value offering.

In 1986, four years into the first leg of the bull market, T. Rowe decided to go public. In keeping with its history and to forestall any would-be takeover artists, the publicly traded firm retained a clause in its corporate charter saying that any shareholder who owns more than 15 percent of the shares of any class of stock can vote only 15 percent of that class. In addition, employee stock options are structured so that all outstanding and unvested options become fully vested upon a change in control of the ownership of the firm.

By the end of the 1980s, 401(k)s, which had appeared in 1981, were beginning to attract substantial assets. T. Rowe staked out territory as one of the early providers.

The asset manager entered the 1990s from a position of strength, reporting assets of $28.2 billion, ranking No. 41 on Institutional Investor's 1990 list of the 300 largest U.S. money managers. By 1995 the firm ranked No. 31 with assets of $57.8 billion.

Then came the bubble years, and T. Rowe found itself gasping for air. Roche, naturally cautious and with a keen memory of the collapse of the Nifty 50, shrugged off the exuberance that was everywhere around him. The firm's valuation discipline enabled it to avoid many of the Nasdaq darlings. In its high-yield bond portfolios, for example, T. Rowe was one of few mutual fund families to steer clear of all telecom blowups.

"Some smart equity analysts helped us see the big train wreck coming," says high-yield manager Mark Vaselkiv. "We were able to get out of exposures early."

In its marketing, too, T. Rowe shunned the hard sell of many of its competitors; it launched no Internet stock funds and no new technology funds between 1995 and 2000.

During those five years total assets grew, but at a slower pace than those of many of its peers. "I had lived through manias before," Roche remarks. "We were convinced this latest bubble would unwind at some stage."

Like other money managers that resisted the mass euphoria -- Grantham, Mayo, Van Otterloo & Co. and Sanford C. Bernstein & Co. were two high-profile holdouts -- T. Rowe came in for its share of scorn. On March 6, 2000, the Wall Street Journal published a story that still rankles T. Rowe executives. It argued that "the gears of the investing machine that helped make T. Rowe one of the nation's ten biggest mutual fund firms have gotten stuck over the past few years, especially in the fast-growing field of technology stocks."

Just four days later the Nasdaq peaked. Soon the bear market settled in.

During the 2000­'02 downturn T. Rowe suffered net outflows from its retail funds, but proportionately less than other large fund families. Its net outflows hit $493 million in 2000 and $786 million in 2001. The years of caution paid off: In 2001 the flagship Equity Income Fund, run by Brian Rogers since its inception, was up 1.6 percent, while the S&P 500 dropped 11.9 percent. By comparison, Franklin Templeton Equity Income Fund fell 1.3 percent that year, while Fidelity Equity-Income Fund dropped 5 percent.

T. Rowe's fortunes began to turn up in 2002, when it brought in $3.3 billion in net new inflows. In 2003, with the S&P 500 up 28.7 percent, the firm enjoyed a 41 percent increase in assets, from $76 billion to $107 billion, ranking it No. 33 on the II 300. (The Equity Income Fund was up 25.8 percent in 2003.)

Just as industry executives were beginning to savor the market comeback, scandal struck. In September 2003, New York State Attorney General Eliot Spitzer announced his investigation of mutual fund market timing. Eventually, 14 mutual fund companies agreed to pay more than $3 billion to settle charges that they had allowed improper trading.

As one of the few major fund families uncontaminated by scandal, T. Rowe won renewed admiration from retail and institutional investors. "We like that they didn't have any scandal-related issues and that they weathered the bear market pretty well with a conservative approach," says Mark Turner, co-founder and president of Turner Investment Partners, a major T. Rowe shareholder.

But while the firm's positioning among retail investors is strong, the mutual fund business is moving away from direct sales, T. Rowe's historic strength. "Industrywide direct sales are flat if not negative," says Ben Phillips, director of research at Boston-based consulting firm Cerulli Associates. "There is growing demand for advice."

Phillips believes that the three biggest direct sellers -- Fidelity, T. Rowe and Vanguard -- can continue to reel in some of their assets through direct sales. But the channel will become less productive and more expensive.

Today T. Rowe's fee-based share classes account for an extremely small portion of the total sold to individual investors. Executives won't make any estimates about the future, but it's a good bet that those shares will represent a larger and larger part of total fund flows. As that happens, the firm's business mix will shift: Banker Putnam figures that broker-sold funds could account for two thirds to three quarters of T. Rowe's retail assets within five to ten years.

Over the past several years, in fact, these broker-sold funds have been growing rapidly. Assets in the Advisor Class, introduced in March 2000 and used by brokers and financial advisers, grew from $900 million in September 2001 to $9.3 billion four years later. The firm's R Class shares, which financial advisers use in wrap programs and small 401(k)s, launched in September 2002 with eight funds. A year later assets totaled a modest $50 million. By September 2005 the shares were used in 14 funds, and assets totaled $1.1 billion.

"The trend is the trend, and the trend says you have to do it," says Charles (Chip) Roame, managing principal of Tiburon Strategic Advisors, an industry consulting firm. "Broker-sold funds will probably become a greater share of T. Rowe's business whether they want it to or not, because it is a booming market. But they've probably had to do some soul-searching about offering more expensive class funds. This has got to be a gut-wrenching decision for them."

"It wasn't gut-wrenching, because it evolved over a period of time," investment services chief Bernard says. "Our religion has never been about no-load," he continues. "[Vanguard founder] Jack Bogle has a religion about no-load. He views himself as a missionary. He also created a not-for-profit company. We have very strong principles, but we don't have any religious aversion to someone who relies on an adviser paying fees to support the adviser."

Roche is also pushing the firm's subadvisory business, another retail market that he hopes will make up for lost direct sales. T. Rowe began subadvising back in 1994, managing equity portfolios for insurer Aegon, ING Group and Toronto Dominion Bank, all still clients.

Today it manages 80 funds sold under other firms' brand names. Among them: John Hancock's JHT Equity-Income Trust and Optimum Large Cap Growth Fund. Third-party assets total about $70 billion, more than double what they were five years ago. About half of those assets come from insurers like John Hancock and Principal Group; the remainder are split among broker-dealers, private banks, fund supermarkets and advisers.

Tiburon's Roame figures that the third-party business is probably more profitable than direct sales, because the fees are built in and advisers assume the burden of sending paperwork to countless small investors.

"We've hit a tipping point in the industry," says John Cammack, T. Rowe's director of third-party distribution. "More and more retail money is going to have some institutional process wrapped around it."

The defined contribution market -- a quasi-institutional, quasiretail territory -- has been a growing business for T. Rowe, although its operating margins are likely far from the firm's overall 41 percent. Analysts nevertheless estimate that they're still well above the average 16 percent operating margin for 401(k) providers, in part because T. Rowe made substantial investments in its 401(k) infrastructure and can thus operate more efficiently than many of its rivals.

T. Rowe's defined contribution assets have doubled in the past six years, to $116 billion in 401(k)s under administration as of September 30. Assets under management total $88.8 billion. Growth has been fueled by a new line of retirement funds and a move toward automatic 401(k) sign-ups, which 17 percent of plans now offer. Ranked by assets under management, T. Rowe is the No. 3 provider of 401(k)s, behind Fidelity and Vanguard and ahead of ING, J.P. Morgan Asset Management, MFS Investment Management, Principal Global Investors, Prudential Financial and Putnam Investments, among others.

But as baby boomers age, a major battle is brewing over a vital pool of assets: rollover IRAs (Institutional Investor, November 2005). Stamford, Connecticut­based consulting firm Brightwork Partners estimates that this year retirees and job changers will move nearly $200 billion out of 401(k)s and into rollover IRAs. T. Rowe, like all plan providers, is fighting to hold on to its 401(k) assets -- persuading participants in its plans to open T. Rowe rollover IRAs, while simultaneously persuading participants in rival 401(k)s to choose T. Rowe for their new IRAs.

"The rollover business is a big challenge, and it is very important to our overall cash flow," says Charles Vieth, head of T. Rowe's defined contribution business.

The firm also figures its strong connections to 401(k) plan sponsors should give it a leg up in getting a piece of their defined benefit pension business. The money manager is a known quantity to plan sponsors, but snaring a pension mandate involves winning over consultants and company executives.

T. Rowe's identity as a retail firm is a handicap but not always a deal breaker. Maria Tsu, manager of equity investments at the Alaska Permanent Fund, says that she and her colleagues are skeptical about hiring other retail managers but didn't hesitate in signing T. Rowe to an emerging-markets mandate in September.

"They know who their audience is," Tsu notes. "They know what to do for an institutional client."

T. Rowe makes a simple pitch: Hire us and gain access to a much-admired investment culture and a top-tier track record. For example, the institutional equity product, a large-cap growth portfolio, boasts a three-year average annual return of 21.2 percent through September 30, 6.5 percentage points above its benchmark, the Russell large-cap growth index.

The firm has 420 global institutional clients, excluding 401(k) sponsors, on its roster. Ruppert says that's up "significantly" -- he won't be more specific -- from five years ago. In the past three years, he adds, T. Rowe has won 250 new institutional mandates from U.S. and international clients. "That's a lot more than we won in the prior three years," Ruppert says.

Among the names on the lineup is $25 billion-in-assets Victorian Funds Management Corp., which gave T. Rowe a mandate to manage a $125 million emerging-markets portfolio in 2004. "We are quite comfortable with the management culture and happy that the returns are there," says Jeff Rogers, head of investment at Victorian Funds.

To boost its institutional business, T. Rowe has introduced a number of new products in the past three years. In the U.S the firm has done well with a large-cap growth strategy and an emerging-markets portfolio. Overseas the strongest sellers are structured research, all-cap U.S. equity and global media and telecom.

In the past two years, though, T. Rowe's international equity portfolios have underperformed. Its Global Stock fund, for example, trailed the EAFE index by 8.5 percentage points in 2003 and by another 6 percentage points in 2004. This April, T. Rowe moved one of its star managers, Robert Gensler, formerly manager of the media and telecom fund, to take over that fund and its corresponding institutional portfolios. T. Rowe had previously made changes in the management of its lagging International Stock fund, giving the lead manager role to Mark Bickford-Smith.

T. Rowe characteristically refuses to chase passing fads. Says Ruppert, "Demand for certain products has proved fleeting, and we don't want to get into those areas." In early 2005, he says, the firm encountered considerable demand for a concentrated portfolio of Brazilian, Russian, Indian and Chinese equities -- known as BRIC funds in industry jargon. But T. Rowe didn't bite. "We felt that the money would flow in rapidly when those markets are performing well and flow out rapidly when those markets are not performing well," Ruppert says.

Selling investment products -- and then servicing the client relationship -- is key to a successful institutional business. Here T. Rowe is making some headway. Since 2000 more than 50 people have been hired to boost the firm's institutional business, including five salespeople in the U.S. and nine overseas and eight client service reps in the U.S. and seven abroad.

Two senior executives are working with Ruppert to expand T. Rowe's U.S. pension business: Keith Lewis, an 18-year company veteran, took charge of the U.S. institutional sales team in early 2001; later that year Robert Birch, a former principal at Mercer Consulting and chief investment officer of a multiemployer pension plan, took the helm of the U.S. client services group. Says Birch, "We're bringing in individuals with experience in client servicing and investment consulting or people who have sat on the side of the plan sponsor." Working closely with Lewis and Birch is Chip Wendler, who heads consultant relations worldwide.

At the moment, T. Rowe is a firm without the hottest product of the day: hedge funds.

"They're a compensation strategy, not an asset class," says vice chairman Riepe. "We don't think hedge funds are compatible with mutual funds because there are such disproportionate objectives in time horizon and fee structure. It's not something that we want to do under the same roof."

T. Rowe has just begun what will surely be a long slog to build up a significant international business. For the moment it's entirely institutional and third-party and will likely remain so. "Let's face it, we're not going to try to build retail from the ground up outside the U.S.," says marketing chief Bernard.

Once T. Rowe ended its relationship with Fleming -- the break was complete in early 2001 -- and became free to sell its own investment products in foreign markets, Roche chose to make his first concerted push in Scandinavia. Because the market was not consultant-driven and the dominant money managers were still mostly local banks and not rival global firms, it seemed a comfortable place to start. Between 2001 and 2003, T. Rowe won 65 mandates from Nordic clients.

And it picked up a high-profile assignment in early 2005 when Pen-Sam, the $7 billion retirement plan for Denmark's public employees, gave the money manager an approximately $200 million U.S. equity portfolio to handle. As of October 31 it was above its benchmark by more than 100 basis points.

At the beginning of this year too, T. Rowe made two high-profile appointments that kicked its international business into higher gear. In January, Ruppert hired Philip Garcia, a British executive who was the former head of Towers Perrin's U.K. investment consulting business, to become head of non-U.S. client services. The following month he promoted Peter Preisler, a Dane who was previously head of Nordic sales, to become head of European sales. Before joining T. Rowe, Preisler was managing director of Danske Bank International and head of client relations at Danske Capital.

"Those appointments signal a commitment to the market -- that they've identified this as an area that they want to grow and that the status quo is not satisfactory," says one consultant.

Denis Bastin, a director in the corporate and institutional banking practice at London-based consulting firm Mercer Oliver Wyman, thinks the recent changes in the European pension market -- the move from balanced to specialist managers and the shift to more-open architecture -- should help T. Rowe as they have helped other U.S.-based asset managers. He estimates that the firm's non-U.S. assets could reach 10 to 15 percent of the total within the next few years.

T. Rowe executives argue that success is not only measured in assets and that they prefer slow, measured growth. Ultimately, though, to be a player in Europe and Asia, the firm will need to become much bigger. Making a major acquisition is the obvious approach, but T. Rowe Price has never done that, and it's not likely to start now.

Industry veteran Putnam thinks T. Rowe can get the scale it needs without a huge acquisition but not without committing a lot more capital. "They are trying to go international on the cheap. They need to have three times as many people overseas as they do," he says. T. Rowe currently has 139 employees outside the U.S. "Success internationally is very hard to bootstrap," Putnam continues. "They need to stop fiddling around the edges and experimenting with international and do something."

At home and abroad T. Rowe sometimes struggles with its own conservative nature. But as Roche moves the firm deeper into the pension market and the world of brokerage fund distribution, as well as overseas, he's determined to protect the firm's investment culture. It is, after all, its greatest asset.

"Expanding into international and institutional is going to be a challenge," concludes Turner of Turner Investment Partners, the major T. Rowe shareholder. "But if anybody can do it, it's T. Rowe Price."