T. Rowe Price Group - Q2 2023

Transcript

Moderator 1 (participant)

Good morning. My name is Gigi. 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.

Linsley Carruth (VP, Director of Investor Relations)

Hello, and thank you for joining us today for our second quarter earnings call. The press release and a supplemental materials document can be found on our IR website at investors.troweprice.com. Today's call will last approximately 45 minutes. Our CEO and President, Rob Sharps, and CFO, Jen Dardis, will discuss the company's results for about 15 minutes, then we'll open it up to your questions. We ask that you limit it to one question per participant. I'd like to remind you that during the course of this call, we may make a number of forward-looking statements and reference certain non-GAAP financial measures. Please refer to the forward-looking statement language and the reconciliations to GAAP in the supplemental materials, as well as in our press release and 10-Q. Now, I'll turn it over to Rob.

Rob Sharps (CEO and President)

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 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, Growth Stock, and Large Cap Growth posting top quartile results versus peers and beating their benchmarks. Our US 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're 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 and 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 continue 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 15th, we launched 5 fully transparent, active equity ETFs, which are already generating client interest and inflows. Our existing line-up 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 4 muni and 2 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 30th. 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.

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.

Jen Dardis (CFO and Treasurer)

Thank you, Rob, hello, everyone. I will begin today by reviewing our financial results and will provide additional detail on our expense management efforts before we open the line for questions. As reported, our adjusted earnings per share was $2.02 for Q2 2023, versus $1.69 in Q1 2023, an increase from both higher revenues and carefully managed expense growth. Q2 2023 EPS was also favorably impacted by a lower quarterly effective tax rate. We ended the quarter with $1.4 trillion in AUM, an increase of $58 billion from March 31, 2023, driven by market appreciation and partially offset by net outflows. Our average assets for the quarter were $1.36 trillion, up from Q1 2023, but down almost $50 billion from Q2 2022.

As Rob mentioned, we posted $20 billion in net outflows for the quarter. Across the entire complex, we continue to see clients taking longer to make decisions based on current market volatility, which is resulting in lower sales and net inflows than we've seen in prior years. Industry-wide, active equity and fixed income fund flows have been muted for over a year. We expect that this slowdown is cyclical and will revert to more normal patterns as the direction of interest rates, inflation, and the likelihood of a recession become clearer. Also consistent with last quarter, our U.S. Large Cap Growth equity products drove a majority of the outflows, and we are seeing performance-related lower sales and elevated redemptions from a range of clients. It will take some time for the recent performance improvement in these products to slow the outflows.

Positive inflows for the quarter included U.S. Equity Research, Capital Appreciation, International Core, and All-Cap Opportunities. We also had net inflows to international fixed income, driven by Global Investment Grade, Global Multisector, and Euro Corporate Bond. However, the inflows to international fixed income were more than offset by outflows from our U.S. fixed income, Stable Value, and Floating Rate products. Our Target Date net inflows were $2.4 billion for the quarter. While this was down from Q1, keep in mind that first quarter flows are typically the strongest, given that a higher proportion of planned decisions happen around year-end. In the first half of the year, we recorded $9.9 billion of net inflows to our Target Date products.

In response to changing market conditions and more available capacity, we have reopened to new investors some of our previously closed products, including Mid-Cap Growth, Small-Cap Growth, and Emerging Markets Equity, which we expect will support future sales and net flows. We also continue to evaluate the capacity levels for other closed strategies and will consider reopening these in the future. Our Q2 adjusted net revenues were $1.6 billion, including $1.4 billion of investment advisory revenue that was up from Q1, 2023, on equity market gains. Our effective fee rate was 42.3 basis points, back to the same level it was in Q4, 2022, after a slight uptick in the first quarter of 2023.

Our adjusted operating expenses were a little over $1 billion, which was generally flat to the first quarter of this year, but up 8.3% from the second quarter of 2022. The year-over-year change was largely driven by the change in capital allocation-based income-related compensation. As a reminder, in the second quarter last year, there was negative capital allocation-based income, which created an expense offset. Excluding the compensation expense related to capital allocation-based income, adjusted operating expenses were up 1.8% over the same period last year, with compensation and related costs up less than 1% year-over-year. We continue to forecast our 2023 adjusted operating expense growth, excluding capital allocation-based income-related compensation expense, will be in the range of 2%-6% over the comparable full year, 2022 amount of $4.1 billion.

Based on current market conditions, we still expect to land at or below the midpoint of this range. As Rob mentioned, we are pursuing a number of efforts to proactively manage our expense growth and drive efficiency. Last week, we internally communicated the difficult decision to eliminate approximately 2% of our existing positions globally. We have also slowed the pace of hiring and headcount growth by closing select open positions across the firm. All of these actions have been based on a careful review to make sure we are aligning our resources to best support our clients and drive long-term growth for the firm. Based on our current pace of hiring against our strategic initiatives, we expect headcount at the end of 2023 to be modestly higher than the start of the year, even with the reductions I just mentioned.

Most of the costs related to the recent reduction in force will be incurred in the third quarter and are already included in our expense guidance. As we move forward, we remain committed to finding ways to be more efficient and drive a culture of continuous improvement. For example, we are evaluating our current real estate use in light of our new hybrid work approach, with the objective of slowing our occupancy and facilities expense growth. It will be some time, however, before any impact to expenses from real estate would be realized. In total, between the expense efforts we took last year and this year, we will have removed or reallocated over $200 million in operating expenses versus the run rate for 2024.

This financial discipline will allow us to continue investing in our strategic initiatives to support future growth while positioning us for low single-digit adjusted operating expense growth in 2024, excluding the impact of capital allocation-based income-related compensation. We will refine these estimates as we get closer to year-end. As always, this estimate is based on current market levels, and we could choose to adjust it if markets rise or fall significantly. Shifting to capital management, we found some buying opportunities in May and June, bringing our year-to-date share repurchases to over 420,000 shares at an average price of just over $107 per share, for $45 million total. We remain opportunistic in our approach to buybacks. However, given continued market uncertainty, we are being patient in the process.

Supporting our recurring dividend remains a top priority, and in the first half of 2023, we returned over $600 million to stockholders. Our balance sheet remains strong, and we have ample liquidity to support both our seed capital program and potential M&A. We are confident in the efforts we've identified to drive efficiency and slow our expense growth as we continue to manage the business to support our clients and return the firm to organic growth over time. As Rob said, institutionalizing this work will allow us to better invest in our corporate strategy and continue to deliver value for our clients, even in challenging times. With that, I'll ask the operator to open the line for Q&A.

Operator (participant)

Thank you. As a reminder, to ask a question, please press *11 on your telephone and wait for your name to be announced. To withdraw your question, please press *11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Ken Worthington from JPMorgan.

Kenneth Worthington (Senior Equity Research Analyst)

Hi, good morning, and thanks for taking my question. Performance has improved in a number of your most prominent growth funds, and while outflows were still elevated in 2Q, are you seeing any early indications that the better near-term performance is starting to positively impact the net sales outlook? If so, what distribution channels are benefiting? If not, which channels would you expect to come back more quickly to reflect the improved performance, given your comments that the timeline for decision-making has been extended?

Rob Sharps (CEO and President)

Yeah, 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 to better flows, the direct answer is at the margin, but it's way too early to, to call this a trend. Our, our experience suggests that performance impacts flows with a lag, that for institutional buyers, the 3 and 5-year numbers are important considerations. While, you know, we have very compelling performance on a year-to-date basis and, and attractive performance on a 1-year basis, we do have further work to do on the, the 3 and 5-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, 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, 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, you know, kind of have an appropriate level of expense growth....

for now, at least, the market's given us a lift in revenues, and, you know, 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.

You know, my sense is, if you look at historical patterns, if we execute against those things, investors come off the sidelines and begin to invest with a more long-term orientation again, we, we should see meaningfully less in the way of outflows in 2024, 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.

As we work our way through 2024, we think we'll see, as I say, noticeably less in the way of net outflows. 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.

Moderator 2 (participant)

Thank you. One moment for our next question. Our next question comes from the line of Finian O'Shea from Wells Fargo Securities.

Finian O'Shea (Director, Senior Equity Research Analyst)

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? 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.

Rob Sharps (CEO and President)

Yeah, look, at a high level, I am encouraged by what we've been seeing more recently. I think active strategies delivered in the ETF vehicle have really started to garner more attention and interest across the industry, and we've continued to expand our lineup. You know, kind of we now have a broader range across equity and fixed income, and, you know, as noted, launched a series of new ETFs this quarter. We have particular early traction in the Capital Appreciation equity ETF offering. You know, kind of broadly, we're getting more and more engagement and are increasingly encouraged by interest in ETFs. With regard to whether it's just cannibalizing the open-ended 40 Act business, I think there's an element of that, but I also think we're attracting a lot of new investors.

What you find is that there are certain advisors that, that use ETFs exclusively, until we had an ETF lineup, we weren't able to engage or deliver our strategies to those advisors. Okay, Tim Coyne and our USI Wealth broker-dealer financial advisory team have done a really good job of getting out into the marketplace and ultimately, you know, kind of giving people a sense for our strategies and why they could be appropriate in their clients' portfolios. We're, we're really pleased with, with how they're performing. We think there's a long way to go there. It's early days, I would say for us, the momentum has really just started to build, frankly, you know, kind of over the course of the last several months.

Operator (participant)

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

Dan Fannon (Managing Director, Senior Research Analyst)

Thanks. Good morning. Jen, I was hoping to expand a bit upon the expense commentary. At or below the midpoint of this year, I assume that's based on kind of, June 30th AUM levels, and then also would be curious about what kind of one-time or severance might be included in 3Q as you think about the actions that have been taken. Further, just on the commentary for next year, low single digits at this point, does that include some of the real estate and longer-term dynamic, potentials, cost-saving things, actions that you mentioned, or would that be above and beyond as we think about 2025 and further?

Jen Dardis (CFO and Treasurer)

Thanks, Dan. I'll, I'll try to make sure I get all of those. 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, as you might have noticed in this particular quarter, the markets went straight up into the end of the quarter. We tend to look at about a 30-day rolling average to, to look at what the balance might be for the balance of the year. In terms of severance, there's about $15 million-$20 million worth of severance costs that would be reflected in Q3.

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. Last, as we look into next year, that low single digit guidance, it includes much of what I just mentioned. That includes the $200 million. The real estate savings would roll in over time.

I would expect that would probably be more into the late 2024 or early 2025 timeframe. 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.

Rob Sharps (CEO and President)

Yeah, I'll just say a few words with regard to expense management. We're trying to take an approach that really reflects our long-term priorities. We do want to invest against our strategic initiatives and invest for growth. We want to invest in our talent and maintain our culture, and have the ability to be central to our clients and reach more clients. In order to do that and sustain profitability in various market environments, we're going to have to be more efficient. We're going to have to be better at prioritization. We're going to have to make space to invest in and acquire new skills.

you know, we should be able to drive additional savings through process improvement and optimization over time, but we're going to want to be able to use that to invest in our business and to, to put the company in a position to be successful over the long term.

Operator (participant)

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

Craig Siegenthaler (Managing Director, Head of North American Diversified Financials)

Good morning. We're coming up on the 2-year anniversary of the Oaktree acquisition announcement. Maybe this is a good time to provide us an update on the M&A effort, and also get your thoughts on potentially acquiring another private markets manager, maybe one with a focus on real estate or infrastructure.

Rob Sharps (CEO and President)

Yeah, Craig, good morning. Thank you for the question. Look, our, our priorities with regard to M&A typically don't change quarter to quarter. We're 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. We're evaluating strategic opportunities. It's a stated goal of ours to build our alternatives business over time. It's natural that as opportunities present themselves in areas like real estate and infrastructure, as you suggest, that we would, we would evaluate them. Look, we're, we're only going to do things that we believe are compelling. We're, 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. You know, when those opportunities present themselves, we're going to do work and ultimately feel like, ultimately determine whether or not we, we should engage and do more work, and whether it's something that we might move forward with. There isn't anything that's eminent right now, you know, 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. You know, 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's 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 that 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 capital and are building a pipeline of intermediaries to partner with for distribution. Again, demand is muted in this space right now, but, you know, we think it's a compelling product. It's an area that we didn't serve in the past, either.

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.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Glenn Schorr from Evercore.

Glenn Schorr (Senior Managing Director, Senior Research Analyst)

Hi, thanks very much. 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. 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? As your performance started to improve, we should see things slow. That would be what history would say, 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 intermediary distribution might be in, in charge of, of making happen.

Appreciate it. Thanks.

Rob Sharps (CEO and President)

Yeah, Glenn, it's, it's a good question. It is an unusual moment in time. You know, if you look at where most of the inflows have come in the industry, it's been in passive, a lot of that in ETF and in money market. You know, people are getting yields on money market funds that they haven't had in 15 years or more, and it's an uncertain environment. I think there are a lot of investors that are on the sidelines that are waiting for the Fed to get out of the way or waiting for a more attractive buying opportunity. I'd also say that it's been a narrow market. You'd note that the market's up quite a bit. It's been driven by, you know, kind of a very narrow portion of the market and, and a small number of overall names.

There hasn't been as broad participation as you might expect. Look, I still believe that good performance will drive flows across vehicles, and we saw this quarter inflows into a number of strategies, including funds, where performance was good. You know, again, I think longer term, there is a shift away from open-ended '40 Act mutual funds in favor of other vehicles. You see that in fund-to-trust migration in our retirement business, and as you noted, SMA and ETF are both growing more rapidly. We're, I think, moving quickly to offer a broader range of strategies across those vehicles.

you know, kind of while the, the trends that you note are, are, are real, in terms of a shift to SMA with lower account minimums, more customization, tax loss optimization, shift to ETF, to some extent, a shift to thematic, a shift to passive. I think those are things that we can navigate if we leverage our, I, I think, best-in-class global investment platform, global research platform across equities and fixed income. All of those are opportunities that, that we should be able to address, that I think we've made progress in building out our, our shelf space and availability, and we'll make further progress with going forward. look, I, I deeply believe that there will always be a, a market for active management, that, that excellent security selection will drive value.

I think it's incumbent on us to engage with our clients to understand, you know, kind of how we can deliver that value to them. I think there's an element of this, Glenn, that is cyclical, that, that is kind of where we are today. you know, kind of ultimately, you, you'll see behavior change and, and money flow back to strategies where you have a very good performance. there's also an element of it that I think is likely to be more enduring, which is why we're working hard on SMA, ETF, things like the OCREDIT BDC. we, we want to be more present and better represented in areas where we've been less well represented in the past because there are some changing, demand trends.

Operator (participant)

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

Brian Bedell (Managing Director, Senior Equity Analyst)

Great. Thanks. Good morning, folks. Thanks for taking my questions. If I could just dive deeper in on two channels, the, the 401(k) channel, both, both DCIO and, and, and record keeping, and then maybe contrasting that with, the online brokerage, plat-platform channel. So, so like, like, for example, a Charles Schwab as just one of them. In the 401(k) channel, you know, we saw elevated outflows in the institutional side of your business, so I assume that's, that's concentrating in your 401(k). Maybe if you can just talk about whether there were any lumpy, either mandate losses or, or something that drove, that in the second quarter.

Are you seeing better potential trends or in the DCIO versus the record keeping? On the online brokerage platforms, are, are you seeing better trends there? They're more retail-focused, they may be more performance sensitive. Not sure if it's a big enough contribution yet, but if you can just provide some color on those. Thanks.

Rob Sharps (CEO and President)

Yeah. I'll, I'll, I'll start and ask Jen to offer her perspective as well. I'll, I'll start with our Retirement Plan Services business or our bundled 401(k) record-keeping 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 record keeping for small, medium-sized businesses. You know, 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 plan deconversions when there is consolidation, where you have one of those large enterprises buy a mid-cap or more medium-sized company that's one of our clients.

That's pressured that business to some extent, but we've largely been able to offset that with, with growth in the core market, and I, I feel good about our momentum there. I'll, I'll, I'll leave that for the 401(k) record-keeping business. In terms of the DC investment only or institutional defined contribution business, I, 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, some pressure on flows. It's part of the reason why we've called it out.

you know, 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.

Jen Dardis (CFO and Treasurer)

Yeah, I'd, I'd add to that. If we think about-- we've been asked previously about trends in the DC, the defined contribution investment only versus our record kept business. Those are both important business lines for us, and we actually see the benefits of the work that we do representing plan sponsors in that 401(k) record-keeping business is able to help us think about plan design, it's able to help us think about product design, and it's really helped us to stay front of mind from an innovation perspective in both our Target Date products and in thinking about retirement income products going forward.

Operator (participant)

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

Brennan Hawken (Senior Analyst, Equity Research)

Good morning. Thanks for taking my questions, or question, I guess. My understanding of T. Rowe's incentive comp is that you tend to skew to longer-term performance track records on the investment professional side. Just wanted to confirm, if that's right and whether or not we, number one, like what track records or which time periods are more important and have a bigger impact? Was the better-than-expected compensation expense this quarter beginning to reflect the fact that some of the longer-term track records have begun to deteriorate, and therefore, you know, we could expect to see some continued tailwinds on the expense side from that dynamic?

Rob Sharps (CEO and President)

Yeah, 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. You know, kind of how you define that really depends on the tenure of the investment professional. You know, we look not only at the current year results, but at, at, at 3, 5, and, and even 10-year results for long-tenured portfolio managers. Our, our incentives are basically designed to reflect the, the long-term performance for investment professionals. You've got to remember, we have 8,000 associates, and, you know, we have people that are doing a lot of different things in the organization. We also have a very broad range of strategies.

You know, kind of while we might have delivered disappointing 3- and 5-year results in certain strategies, we have other strategies where you have excellent results. You know, at the end of the day, as I'd said before, we're, we're really focused on, you know, from an expense perspective overall, making sure that we have the capacity to attract and retain world-class, diverse talent and maintain our culture. 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.

Jen Dardis (CFO and Treasurer)

I think it is worth noting, as we talked about, the steps that we've been taking from an expense perspective. We, we had the notable announcement where we took the actions with the 2% of existing roles, but in leading up to that, we've been working for the past several months at looking how we can actually slow down and close open roles, and that will have an impact on the expense growth rate in salaries. You know, trying to manage that over a period of time allows us to do that through closing open roles, not necessarily having to eliminate roles that have people in them. You would see that flowing through in the impact of salaries.

Operator (participant)

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

Mike Brown (Managing Director, Equity Research)

Hi, good morning. Jen, as you noted, the market rally was particularly strong at the end of the quarter. Just wanted to see if you had any color about the exit fee rate here relative to the 2Q and any puts and takes we should really consider here for the 2H.

Jen Dardis (CFO and Treasurer)

No, I'd say, look, if you look at our trend over the last several years, 5-plus, we've had modest fee compression rates over the past several years in the range of 1%-2%, depending on the actions that we've been taking to lower fees across different product lines and be competitive. 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 trend.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Patrick Davitt from Autonomous Research.

Patrick Davitt (Senior Analyst)

Hey, good morning, everyone. T. Rowe is widely known to be one of the best places to work in asset management, and you, and you've obviously been able to maintain that strong culture and strong pay packages through the last decades, plus bull market. History would suggest that asset managers that start cutting more aggressively start to impact the investment management process and then ultimately performance. After, now 2, 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?

Rob Sharps (CEO and President)

I, I think I've said this now maybe the third time. Our approach here is to have a balanced, a balance between driving efficiency overall, and that's throughout the organization, making sure that we're getting value out of all of our roles, making sure that we're a company that is dynamic and in the long term, has growth opportunity in a way that will allow us to sustain our culture and have the resources to compensate and attract top diverse talent throughout the organization, but particularly in investments. Look, our, our retention is very strong. I think we have a, a, a very strong culture. Our compensation is based on all of the market data that we have, very competitive, if not compelling. I expect it will remain the case.

The, the vast majority of the headcount initiatives did not impact investments. Look, I, it seems to be something that is very much top of mind for a, a handful of you all, but it's not something that I particularly am overly concerned with. It's something that we're always very, very focused on, but there's no question in my mind that, that we have the, the capacity and intent to make sure that our compensation practices are very competitive, and that we have appropriate incentives in place for people throughout the organization. Again, the, the, the proof's in the pudding there. If you look at our investment professional retention, I, I think it's, it's excellent. Our retention throughout the organization is quite strong.

What we're doing, I think, is a very consistent with what you've seen throughout the organization in almost every one of our peers. In that way, I would say I do not think that, that we are, an outlier. Jen, I don't know if you, you'd have anything to add.

Jen Dardis (CFO and Treasurer)

Yeah, I think it's also important to put it into 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. 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, you know, new vehicles, making sure that we have our skills decked against the places where the business is going. The last thing is about pivoting and prioritizing resources against those strategic priorities that we've been talking about. Some of this is about expense reduction, some of this is about expense reallocation.

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 to 400 basis points higher from an expense growth perspective if we were just investing in all new things in the business. 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 spots.

Rob Sharps (CEO and President)

Just to, to close the loop on this, for context, the, the, the role eliminations were around 2% of our global workforce and impacted multiple functions. The, the impact across investment divisions was minimal. You're talking about d-dozens of people over a base of between 400 and 500 portfolio managers, associate portfolio managers, investment analysts, across our, our, in all of our investment divisions. I think it's also important to understand that we've invested very steadily over time a-a-across our base of investment professionals, and I-- we remain very confident in the strength of our global investment platform and the, and our ability to deliver for clients. You know, if you, if you look back just to the-- since the end of 2013 to June 30th of this year, our total number of investors has grown by o-over 25%.

You know, if there's any sense or concern that we're not investing in our platform or taking care of our investment talent, I think it's misplaced.

Operator (participant)

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

Michael Cyprys (Head of U.S. Brokers, Asset Managers and Exchanges Research)

Hey, good morning.

Operator (participant)

Your line is now open.

Michael Cyprys (Head of U.S. Brokers, Asset Managers and Exchanges Research)

Great. Thank you. Thanks for squeezing me in here. More of a big picture question for you. AI has been getting a lot of at- attention and focus across the world today. Just curious how you're thinking about the potential and opportunity from AI with respect to your business. Do you see this as more of a revenue or an expense play? What sort of impact could this have on the competitive landscape for the asset management industry? Maybe you could talk a little bit about how you're experimenting with this today or how you may experiment with that in the future. Thank you.

Jen Dardis (CFO and Treasurer)

Sure. Thanks for the question. I think it's important here that I, 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, for some time now, and our investment data insights team, as 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.

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. We're looking at pilots across our investments organization, across our distribution channels, and within our technology organization specifically, to look at how we can use that to drive efficiencies. The opportunities are potentially significant over time, but it's early days, and we want to do it in a way that is durable.

Rob Sharps (CEO and President)

All right. I think that was the last question, so I'll just close by thanking everyone for joining us and for their interest and good questions. A-as we, we noted, w-we're encouraged by investment performance. We continue to be deeply focused on it. W- I think we believe that while there are some lingering issues that will impact flows, we have a path to improvement a-as we work our way through 2024. We believe deeply in our corporate strategic initiatives, and I'm really encouraged by the dedication and commitment o-of our associates and their focus on delivering for our clients. Thank you.

Operator (participant)

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