filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW.
Our revenues and net income are derived primarily from investment advisory services provided to individual and institutional investors in U.S. mutual funds, subadvised funds, separately managed accounts, collective investment trusts, and other T. Rowe Price products. The other T. Rowe Price products include open-ended investment products offered to investors outside the U.S., and products offered through variable annuity life insurance plans in the U.S. We also provide certain investment advisory clients with related administrative services, including distribution, mutual fund transfer agent, accounting, and shareholder services; participant recordkeeping and transfer agent services for defined contribution retirement plans; brokerage; trust services; and non-discretionary advisory services through model delivery.
We manage a broad range of U.S., international and global stock, bond, and money market mutual funds and collective investment trusts and other investment products, which meet the varied needs and objectives of individual and institutional investors. Investment advisory revenues depend largely on the total value and composition of assets under our management. Accordingly, fluctuations in financial markets and in the composition of assets under management affect our revenues and results of operations. Additionally, approximately 30% of our operating expenses are impacted by fluctuations in our assets under management.
We incur significant expenditures to develop new products and services and improve and expand our capabilities and distribution channels in order to attract new investment advisory clients and additional investments from our existing clients. These efforts often involve costs that precede any future revenues that we may recognize from an increase to our assets under management.
The general trend to passive investing has been persistent and accelerated in recent years, which has negatively impacted our new client inflows. However, over the long term we expect well-executed active management to play an important role for investors. In this regard, we remain debt-free with ample liquidity and resources that allow us to take advantage of attractive growth opportunities. We are investing in key capabilities, including investment professionals, distribution professionals, technologies, and new product offerings in order to provide our clients with strong investment management expertise and service.
MARKET TRENDS.
Major U.S. stock market indexes were mixed in the third quarter. Large-cap shares outperformed. Stocks generally rose through early September, supported by favorable second-quarter corporate earnings reports. However, the spread of the delta variant of the coronavirus weighed on the economic recovery. Toward the end of the quarter, investors turned cautious as longer-term U.S. Treasury yields climbed amid growing expectations that the Federal Reserve could soon begin to taper its monthly asset purchases. Investors were also concerned that Congress had not yet passed legislation that raises or eliminates the debt ceiling, which is the statutory limit on the federal government’s borrowing ability.
European stock markets were widely mixed in U.S. dollar terms; UK shares fell marginally. Developed Asian and Far East markets were also mixed. Japanese shares rose close to 5%, whereas Hong Kong stocks slumped more than 9% due in part to Chinese regulatory developments.
Emerging markets equities generally declined. In Latin America, Brazilian shares tumbled more than 20% in U.S. dollar terms; in Asia, South Korean shares slumped 13%. Emerging European markets rose broadly, though Turkish stocks trailed the region with a 2% gain.
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Returns of several major equity market indexes were as follows:
| Three months ended | Nine months ended | |||||||||||||
| Index | 9/30/2021 | 9/30/2021 | ||||||||||||
| S&P 500 Index | .6% | 15.9% | ||||||||||||
| NASDAQ Composite Index(1) | (.4)% | 12.1% | ||||||||||||
| Russell 2000 Index | (4.4)% | 12.4% | ||||||||||||
| MSCI EAFE (Europe, Australasia, and Far East) Index | (.4)% | 8.8% | ||||||||||||
| MSCI Emerging Markets Index | (8.0)% | (1.0)% |
(1) Returns exclude dividends
Global bond returns produced mostly flat or negative returns in U.S. dollar terms. In the U.S., long-term Treasury yields initially declined, but they rose in late September after the Federal Reserve signaled that it could soon moderate the pace of its monthly asset purchases. The 10-year U.S. Treasury yield increased from 1.45% to 1.52% during the quarter.
In the taxable investment-grade bond universe, all major segments—including Treasuries, corporate bonds, and mortgage- and asset-backed securities—were essentially flat. Tax-free municipal securities fell slightly and trailed the taxable investment-grade bond market. High yield bonds produced slight positive returns and outperformed high-quality issues.
Bonds in developed non-U.S. markets declined as longer-term interest rates in various countries rose and a stronger U.S. dollar reduced local returns to U.S investors. The Japanese yen fell about .5% versus the greenback, while the euro and British pound dropped more than 2%.
Emerging markets bonds also declined. Local currency issues fared worse than dollar-denominated debt, as the South African rand, the South Korean won, and several Latin American currencies fell materially against the U.S. dollar.
Returns for several major bond market indexes were as follows:
| Three months ended | Nine months ended | |||||||||||||
| Index | 9/30/2021 | 9/30/2021 | ||||||||||||
| Bloomberg Barclays U.S. Aggregate Bond Index | .1% | (1.6)% | ||||||||||||
| JPMorgan Global High Yield Index | .6% | 4.6% | ||||||||||||
| Bloomberg Barclays Municipal Bond Index | (.3)% | .8% | ||||||||||||
| Bloomberg Barclays Global Aggregate Ex-U.S. Dollar Bond Index | (1.6)% | (5.9)% | ||||||||||||
| JPMorgan Emerging Markets Bond Index Plus | (1.1)% | (4.2)% |
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ASSETS UNDER MANAGEMENT.
Assets under management ended the third quarter of 2021 at $1,612.3 billion, a decrease of $10.8 billion from June 30, 2021, and an increase of $141.8 billion from the end of 2020. For the three months ended September 30, 2021, the decrease in assets under management was driven by net cash outflows of $6.4 billion and market depreciation, including distributions not reinvested, of $4.4 billion. Clients transferred $3.6 billion in net assets from the U.S. mutual funds primarily to collective investment trusts and other investment products, of which $1.9 billion transferred into the retirement date trusts.
For the nine months ended September 30, 2021, the increase in assets under management was driven by market appreciation, net of distributions not reinvested, of $147.6 billion, partially offset by net cash outflows of $5.8 billion. Clients transferred $18.4 billion in net assets from the U.S. mutual funds primarily to collective investment trusts and other investment products, of which $12.7 billion transferred into the retirement date trusts.
The following tables detail changes in our assets under management, by vehicle and asset class, during the three- and nine-month periods ended September 30, 2021:
| Three months ended 9/30/2021 | Nine months ended 9/30/2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| (in billions) | U.S. mutual funds | Subadvised funds and separate accounts | Collective investment trusts and other investment products | Total | U.S. mutual funds | Subadvised funds and separate accounts | Collective investment trusts and other investment products | Total | ||||||||||||||||||||||||||||||||||||||||||
| Assets under management at beginning of period | $ | 865.8 | $ | 426.9 | $ | 330.4 | $ | 1,623.1 | $ | 794.6 | $ | 400.1 | $ | 275.8 | $ | 1,470.5 | ||||||||||||||||||||||||||||||||||
| Net cash flows before client transfers | .1 | (5.8) | (.7) | (6.4) | 3.2 | (21.9) | 12.9 | (5.8) | ||||||||||||||||||||||||||||||||||||||||||
| Client transfers | (3.6) | .5 | 3.1 | — | (18.4) | 2.0 | 16.4 | — | ||||||||||||||||||||||||||||||||||||||||||
| Net cash flows after client transfers | (3.5) | (5.3) | 2.4 | (6.4) | (15.2) | (19.9) | 29.3 | (5.8) | ||||||||||||||||||||||||||||||||||||||||||
| Net market (depreciation)/appreciation and (losses)/gains | (1.1) | (.8) | (2.3) | (4.2) | 82.1 | 40.6 | 25.4 | 148.1 | ||||||||||||||||||||||||||||||||||||||||||
| Net distributions not reinvested | (.2) | — | — | (.2) | (.5) | — | — | (.5) | ||||||||||||||||||||||||||||||||||||||||||
| Change during the period | (4.8) | (6.1) | .1 | (10.8) | 66.4 | 20.7 | 54.7 | 141.8 | ||||||||||||||||||||||||||||||||||||||||||
| Assets under management at September 30, 2021 | $ | 861.0 | $ | 420.8 | $ | 330.5 | $ | 1,612.3 | $ | 861.0 | $ | 420.8 | $ | 330.5 | $ | 1,612.3 |
| Three months ended 9/30/2021 | Nine months ended 9/30/2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| (in billions) | Equity | Fixed income, including money market | Multi-asset**(1)** | Total | Equity | Fixed income, including money market | Multi-asset**(2)** | Total | ||||||||||||||||||||||||||||||||||||||||||
| Assets under management at beginning of period | $ | 985.1 | $ | 178.7 | $ | 459.3 | $ | 1,623.1 | $ | 895.8 | $ | 168.7 | $ | 406.0 | $ | 1,470.5 | ||||||||||||||||||||||||||||||||||
| Net cash flows | (8.4) | 2.1 | (.1) | (6.4) | (28.8) | 11.2 | 11.8 | (5.8) | ||||||||||||||||||||||||||||||||||||||||||
| Net market (depreciation)/appreciation and (losses)/gains(2) | (2.0) | (.1) | (2.3) | (4.4) | 107.7 | .8 | 39.1 | 147.6 | ||||||||||||||||||||||||||||||||||||||||||
| Change during the period | (10.4) | 2.0 | (2.4) | (10.8) | 78.9 | 12.0 | 50.9 | 141.8 | ||||||||||||||||||||||||||||||||||||||||||
| Assets under management at September 30, 2021 | $ | 974.7 | $ | 180.7 | $ | 456.9 | $ | 1,612.3 | $ | 974.7 | $ | 180.7 | $ | 456.9 | $ | 1,612.3 |
(1) The underlying assets under management of the multi-asset portfolios have been aggregated and presented in this category and not reported in the equity and fixed income columns.
(2) Includes distributions reinvested and not reinvested.
Investment advisory clients outside the United States account for 8.8% of our assets under management at September 30, 2021, 9.0% at June 30, 2021, and 9.3% at December 31, 2020.
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Our target date retirement products, which are included in the multi-asset totals shown above, continue to be a significant part of our assets under management. Assets under management in these portfolios, as well as net cash inflows (outflows), by vehicle, were as follows:
| Net cash inflows (outflows) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assets under management | Three months ended | Nine months ended | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (in billions) | 9/30/2021 | 6/30/2021 | 12/31/2020 | 9/30/2021 | 9/30/2020 | 9/30/2021 | 9/30/2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| U.S. mutual funds | $ | 183.4 | $ | 185.0 | $ | 176.1 | $ | (.7) | $ | (2.9) | $ | (9.4) | $ | (9.6) | |||||||||||||||||||||||||||||||||||||||
| Collective investment trusts | 182.2 | 182.0 | 145.4 | 1.4 | (2.8) | 21.7 | 4.1 | ||||||||||||||||||||||||||||||||||||||||||||||
| Subadvised and separately managed accounts | 12.1 | 12.2 | 10.7 | — | .2 | .4 | .5 | ||||||||||||||||||||||||||||||||||||||||||||||
| $ | 377.7 | $ | 379.2 | $ | 332.2 | $ | .7 | $ | (5.5) | $ | 12.7 | $ | (5.0) |
We provide participant accounting and plan administration for defined contribution retirement plans that invest in the firm's U.S. mutual funds, collective investment trusts and funds outside of the firm's complex. As of September 30, 2021, our assets under administration were $260 billion, of which nearly $173 billion are assets we manage.
In recent years, the firm began offering non-discretionary advisory services through model delivery and multi-asset solutions for providers to implement. We record the revenue earned on these services in administrative fees. The assets under advisement in these portfolios, predominantly in the United States, were $8 billion at September 30, 2021.
INVESTMENT PERFORMANCE.
Strong investment performance and brand awareness is a key driver to attracting and retaining assets—and to our long-term success. Our performance disclosures include specific asset classes, assets under management weighted performance, mutual fund performance against passive peers and composite performance against benchmarks. The following tables present investment performance for the one-, three-, five-, and 10-years ended September 30, 2021. Past performance is no guarantee of future results.
| % of U.S. mutual funds that outperformed Morningstar median**(1),(2)** | ||||||||||||||||||||||||||
| 1 year | 3 years | 5 years | 10 years | |||||||||||||||||||||||
| Equity | 56% | 74% | 68% | 85% | ||||||||||||||||||||||
| Fixed Income | 71% | 58% | 53% | 60% | ||||||||||||||||||||||
| Multi-Asset | 89% | 94% | 85% | 90% | ||||||||||||||||||||||
| All Funds | 70% | 75% | 68% | 78% | ||||||||||||||||||||||
| % of U.S. mutual funds that outperformed passive peer median**(1),(3)** | ||||||||||||||||||||||||||
| 1 year | 3 years | 5 years | 10 years | |||||||||||||||||||||||
| Equity | 53% | 68% | 68% | 71% | ||||||||||||||||||||||
| Fixed Income | 88% | 68% | 57% | 47% | ||||||||||||||||||||||
| Multi-Asset | 89% | 92% | 81% | 86% | ||||||||||||||||||||||
| All Funds | 74% | 76% | 69% | 68% | ||||||||||||||||||||||
| % of composites that outperformed benchmarks**(4)** | ||||||||||||||||||||||||||
| 1 year | 3 years | 5 years | 10 years | |||||||||||||||||||||||
| Equity | 48% | 63% | 72% | 73% | ||||||||||||||||||||||
| Fixed Income | 85% | 79% | 81% | 85% | ||||||||||||||||||||||
| All Composites | 63% | 69% | 76% | 78% | ||||||||||||||||||||||
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| AUM Weighted Performance | ||||||||||||||||||||||||||
| % of U.S. mutual funds AUM that outperformed Morningstar median**(1),(2)** | ||||||||||||||||||||||||||
| 1 year | 3 years | 5 years | 10 years | |||||||||||||||||||||||
| Equity | 58% | 68% | 80% | 92% | ||||||||||||||||||||||
| Fixed Income | 77% | 52% | 55% | 69% | ||||||||||||||||||||||
| Multi-Asset | 98% | 96% | 96% | 96% | ||||||||||||||||||||||
| All Funds | 69% | 73% | 81% | 91% | ||||||||||||||||||||||
| % of U.S. mutual funds AUM that outperformed passive peer median**(1),(3)** | ||||||||||||||||||||||||||
| 1 year | 3 years | 5 years | 10 years | |||||||||||||||||||||||
| Equity | 39% | 62% | 84% | 81% | ||||||||||||||||||||||
| Fixed Income | 96% | 61% | 58% | 43% | ||||||||||||||||||||||
| Multi-Asset | 94% | 92% | 95% | 96% | ||||||||||||||||||||||
| All Funds | 56% | 70% | 85% | 82% | ||||||||||||||||||||||
| % of composites AUM that outperformed benchmarks**(4)** | ||||||||||||||||||||||||||
| 1 year | 3 years | 5 years | 10 years | |||||||||||||||||||||||
| Equity | 35% | 65% | 71% | 71% | ||||||||||||||||||||||
| Fixed Income | 86% | 85% | 77% | 80% | ||||||||||||||||||||||
| All Composites | 44% | 68% | 72% | 72% | ||||||||||||||||||||||
As of September 30, 2021, 73 of 123 (59.3%) of the firm's rated U.S. mutual funds (across primary share classes) received an overall rating of 4 or 5 stars. By comparison, 32.5% of Morningstar's fund population is given a rating of 4 or 5 stars(5). In addition, 86%(5) of AUM in the firm's rated U.S. mutual funds (across primary share classes) ended September 30, 2021 with an overall rating of 4 or 5 stars.
(1) Source: © 2021 Morningstar, Inc. All rights reserved. The information contained herein: 1) is proprietary to Morningstar and/or its content providers; 2) may not be copied or distributed; and 3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.
(2) Source: Morningstar. Primary share class only. Excludes money market mutual funds, funds with an operating history of less than one year, T. Rowe Price passive funds, and T. Rowe Price funds that are clones of other funds. The top chart reflects the percentage of T. Rowe Price funds with 1 year, 3 year, 5 year, and 10 year track record that are outperforming the Morningstar category median. The bottom chart reflects the percentage of T. Rowe Price funds AUM that has outperformed for the time periods indicated. Total AUM included for this analysis includes $518B for 1 year, $518B for 3 years, $518B for 5 years, and $508B for 10 years.
(3) Passive Peer Median was created by T. Rowe Price using data from Morningstar. Primary share class only. Excludes money market mutual funds, funds with an operating history of less than one year, funds with fewer than three peers, T. Rowe Price passive funds, and T. Rowe Price funds that are clones of other funds. This analysis compares T. Rowe Price active funds to the applicable universe of passive/index open-end funds and ETFs of peer firms. The top chart reflects the percentage of T. Rowe Price funds with 1 year, 3 year, 5 year, and 10 year track record that are outperforming the passive peer universe. The bottom chart reflects the percentage of T. Rowe Price funds AUM that has outperformed for the time periods indicated. Total AUM included for this analysis includes $504B for 1 year, $498B for 3 years, $490B for 5 years, and $422B for 10 years.
*(4)*Composite net returns are calculated using the highest applicable separate account fee schedule. Excludes money market composites. All composites compared to official GIPS composite primary benchmark. The top chart reflects the percentage of T. Rowe Price composites with 1 year, 3 year, 5 year, and 10 year track record that are outperforming their benchmarks. The bottom chart reflects the percentage of T. Rowe Price composite AUM that has outperformed for the time periods indicated. Total AUM included for this analysis includes $1,501B for 1 year, $1,498B for 3 years, $1,482B for 5 years, and $1,446B for 10 years.
(5) The Morningstar Rating™ for funds is calculated for funds with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. Morningstar gives its best ratings of 5 or 4 stars to the top 32.5% of all funds (of the 32.5%,10% get 5 stars and 22.5% get 4 stars). The Overall Morningstar Rating™ is derived from a weighted average of the performance figures associated with a fund’s 3, 5, and 10 year (if applicable) Morningstar Rating™ metrics.
RESULTS OF OPERATIONS.
The following table and discussion sets forth information regarding our consolidated financial results for the three and nine months ended September 30, 2021 and 2020 on a U.S. GAAP basis as well as a non-GAAP basis. The non-GAAP basis adjusts for the impact of our consolidated T. Rowe Price investment products, the impact of market movements on the supplemental savings plan liability and related economic hedges, investment income related to certain other investments, and certain nonrecurring charges and gains, if any.
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| Three months ended | Q3 2021 vs. Q3 2020 | Nine months ended | YTD 2021 vs. YTD 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| (in millions, except per-share data) | 9/30/2021 | 9/30/2020 | $ change | % change | 9/30/2021 | 9/30/2020 | $ change | % change | ||||||||||||||||||||||||||||||||||||||||||
| U.S. GAAP basis | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Investment advisory fees | $ | 1,813.4 | $ | 1,469.3 | $ | 344.1 | 23.4 | % | $ | 5,288.4 | $ | 4,090.9 | $ | 1,197.5 | 29.3 | % | ||||||||||||||||||||||||||||||||||
| Net revenues | $ | 1,954.1 | $ | 1,595.8 | $ | 358.3 | 22.5 | % | $ | 5,710.2 | $ | 4,473.8 | $ | 1,236.4 | 27.6 | % | ||||||||||||||||||||||||||||||||||
| Operating expenses | $ | 957.9 | $ | 866.9 | $ | 91.0 | 10.5 | % | $ | 2,862.7 | $ | 2,484.0 | $ | 378.7 | 15.2 | % | ||||||||||||||||||||||||||||||||||
| Net operating income | $ | 996.2 | $ | 728.9 | $ | 267.3 | 36.7 | % | $ | 2,847.5 | $ | 1,989.8 | $ | 857.7 | 43.1 | % | ||||||||||||||||||||||||||||||||||
| Non-operating income (loss)(1) | $ | (11.5) | $ | 191.6 | $ | (203.1) | n/m | $ | 234.5 | $ | 106.4 | $ | 128.1 | n/m | ||||||||||||||||||||||||||||||||||||
| Net income attributable to T. Rowe Price | $ | 777.2 | $ | 643.2 | $ | 134.0 | 20.8 | % | $ | 2,342.3 | $ | 1,589.3 | $ | 753.0 | 47.4 | % | ||||||||||||||||||||||||||||||||||
| Diluted earnings per common share | $ | 3.31 | $ | 2.73 | $ | .58 | 21.2 | % | $ | 9.94 | $ | 6.66 | $ | 3.3 | 49.2 | % | ||||||||||||||||||||||||||||||||||
| Weighted average common shares outstanding assuming dilution | 229.1 | 229.4 | $ | (.3) | (.1) | % | 229.4 | 231.9 | $ | (2.5) | (1.1) | % | ||||||||||||||||||||||||||||||||||||||
| Adjusted non-GAAP basis**(2)** | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating expenses | $ | 957.2 | $ | 830.5 | $ | 126.7 | 15.3 | % | $ | 2,798.2 | $ | 2,434.2 | $ | 364.0 | 15.0 | % | ||||||||||||||||||||||||||||||||||
| Net operating income | $ | 998.7 | $ | 768.0 | $ | 230.7 | 30.0 | % | $ | 2,916.2 | $ | 2,046.9 | $ | 869.3 | 42.5 | % | ||||||||||||||||||||||||||||||||||
| Non-operating income (loss)(1) | $ | (3.0) | $ | 25.6 | $ | (28.6) | n/m | $ | 28.5 | $ | 50.2 | $ | (21.7) | n/m | ||||||||||||||||||||||||||||||||||||
| Net income attributable to T. Rowe Price | $ | 767.6 | $ | 602.7 | $ | 164.9 | 27.4 | % | $ | 2,258.6 | $ | 1,596.6 | $ | 662.0 | 41.5 | % | ||||||||||||||||||||||||||||||||||
| Diluted earnings per common share | $ | 3.27 | $ | 2.55 | $ | .72 | 28.2 | % | $ | 9.59 | $ | 6.69 | $ | 2.90 | 43.3 | % | ||||||||||||||||||||||||||||||||||
| Assets under management (in billions) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Average assets under management | $ | 1,648.7 | $ | 1,292.9 | $ | 355.8 | 27.5 | % | $ | 1,581.3 | $ | 1,198.9 | $ | 382.4 | 31.9 | % | ||||||||||||||||||||||||||||||||||
| Ending assets under management | $ | 1,612.3 | $ | 1,310.4 | $ | 301.9 | 23.0 | % | $ | 1,612.3 | $ | 1,310.4 | $ | 301.9 | 23.0 | % |
(1) The percentage change in non-operating income (loss) is not meaningful (n/m).
(2) See the reconciliation to the comparable U.S. GAAP measures at the end of the Results of Operations section of this Management’s Discussion and Analysis.
Results Overview - Quarter ended September 30, 2021
Investment advisory revenues. Investment advisory fees are earned based on the value and composition of our assets under management, which change based on fluctuations in financial markets and net cash flows. As our average assets under management increase or decrease in a given period, the level of our investment advisory fee revenue for that same period generally fluctuates in a similar manner. Our annualized effective fee rates can be impacted by market or cash flow related shifts among asset and share classes, price changes in existing products, and asset level changes in products with tiered-fee structures.
Investment advisory revenues earned in the third quarter of 2021 increased over the comparable 2020 quarter as average assets under our management increased $355.8 billion, or 27.5%, to $1,648.7 billion. In the third quarter of 2021, we voluntarily waived $13.7 million, or less than 1%, of our investment advisory fees in order to continue to maintain a positive yield for investors. At September 30, 2021, combined net assets of the investment portfolios in which we waived fees in the third quarter of 2021 were $23.7 billion. We anticipate that the waivers in the fourth quarter of 2021 will be at a similar level to the third quarter of 2021 and expect to continue to waive fees into 2022.
The average annualized effective fee rate earned during the third quarter of 2021 was 43.6 basis points, compared with 45.2 basis points earned during both the third quarter of 2020 and the second quarter of 2021. In comparison to the third quarter of 2020, our annualized effective fee rate declined primarily due to the July 2021 fee reductions in our target-date products, client transfers within the complex to lower fee vehicles or share classes over the last twelve months and the money market fee waivers. These fee pressures were partially offset as higher market valuations led to an asset class shift towards equity strategies.
Operating expenses. Operating expenses were $957.9 million in the third quarter of 2021 compared with $866.9 million in the third quarter of 2020. The increase in our operating expenses was primarily due to higher compensation costs and higher distribution and servicing costs as average assets under management increased over prior year. Also contributing to the increase in operating expenses during the quarter were costs incurred as a
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result of our previously announced expanded relationship with FIS, a global technology leader, in which FIS assumed responsibility for managing retirement technology development and core operations for our full-service recordkeeping offering on August 1, 2021. During the quarter, the firm incurred recordkeeping costs, which were partially offset by a reduction in the compensation expenses related to the approximately 800 associates who transitioned to FIS, as well as transition costs associated with the expanded relationship.
These increases were partially offset by lower compensation expenses related to the supplemental savings plan. For the third quarter of 2021, the decrease in the supplemental savings plan expense was entirely offset by a corresponding decrease in the non-operating gains earned on the investments used to economically hedge the related liability.
The firm employed 7,124 associates at September 30, 2021, a decrease of 7.2% from the end of 2020 and 6.7% from September 30, 2020. Excluding the approximate 800 associates that became employees of FIS on August 1, 2021, headcount would have increased approximately 3% from both the end of 2020 and from September 30, 2020.
On a non-GAAP basis, our operating expenses in the third quarter of 2021 increased 15.3% to $957.2 million compared to the third quarter of 2020. Our non-GAAP operating expenses exclude the impact of our supplemental savings plan and consolidated sponsored investment products. See our non-GAAP reconciliations later in this Management’s Discussion and Analysis section.
Operating margin. Our operating margin in the third quarter of 2021 was 51.0%, compared to 45.7% earned in the 2020 quarter. The increase in our operating margin for the third quarter of 2021 compared to the 2020 period was primarily driven by higher investment advisory fee revenue and lower expense related to our supplemental savings plan, partially offset by higher product and recordkeeping expenses as well as distribution and servicing costs.
Diluted earnings per share. Diluted earnings per share was $3.31 for the third quarter of 2021 as compared to $2.73 for the third quarter of 2020. The 21.2% increase was primarily driven by higher operating income, as strong markets since the end of the third quarter of 2020 have increased average assets under management resulting in higher investment advisory fee revenue, and a lower effective tax rate. This increase was partially offset by net investment losses recognized in the third quarter of 2021 as compared to significant net investment gains in the third quarter of 2020, as the sharp market returns in 2020 quarterly outpaced the market performance in the third quarter of 2021.
On a non-GAAP basis, diluted earnings per share was $3.27 for the third quarter of 2021 as compared to $2.55 for the third quarter of 2020. Similar to our GAAP diluted earnings, the increase is largely attributable to higher operating income compared to 2021 period.
Results Overview - Year-to-Date ended September 30, 2021
Investment advisory revenues. Investment advisory revenues earned in the nine months ended September 30, 2021 increased over the comparable 2020 period as average assets under our management increased $382.4 billion, or 31.9%, to $1,581.3 billion. We waived $43.0 million, or less than 1%, of total investment advisory fees from certain of our money market mutual funds, trusts and other investment portfolios during the nine months ended September 30, 2021.
The average annualized effective fee rate earned on our assets under management during the nine months ended September 30, 2021 was 44.7 basis points compared with 45.6 basis points earned during the same period of 2020. Our annualized effective fee rate declined primarily due to the July 2021 fee reductions in our target-date products, client transfers within the complex to lower fee vehicles or share classes over the last twelve months and the money market fee waivers. These fee pressures were partially offset as higher market valuations led to an asset class shift towards equity strategies.
Operating expenses. Operating expenses were $2,862.7 million in the nine months ended September 30, 2021 compared with $2,484.0 million in the 2020 period. More than half of the increase in operating expenses was due to higher compensation expenses, including higher interim bonus accrual, increased salaries and benefits, and a $14.2 million increase in operating expenses related to the supplemental savings plan due to higher market returns in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. For the nine months ended September 30, 2021, the increase in the supplemental savings plan expense was entirely offset by a corresponding increase in the non-operating gains earned on the investments used to economically hedge the
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related liability. Also contributing to the increase in operating expenses were higher distribution and servicing costs due to higher average assets under management and higher product and recordkeeping costs due to the expanded FIS arrangement.
On a non-GAAP basis, our operating expenses for the nine months ended September 30, 2021 increased 15.0% to $2,798.2 million compared to the 2020 period. Our non-GAAP operating expenses exclude the impact of our supplemental savings plan and consolidated sponsored investment products. See our non-GAAP reconciliations later in this Management’s Discussion and Analysis section.
In 2021 and beyond, we expect to advance our strategic priorities to maintain our position as a global and diversified asset manager, a global partner for retirement investors and a provider of integrated investment solutions; to embed environmental, social and governance and sustainability principles across the firm; to maintain effective processes and controls while becoming a more adaptive and agile firm; and to become a destination of choice for top talent with a diverse workforce and inclusive culture. We narrowed our 2021 non-GAAP operating expense growth guidance from a range of 12% - 15% to a range of 13% - 15% to reflect results year-to-date and expectations for the fourth quarter of 2021. This expense excludes any acquisition costs expected to be incurred in relation to the announced agreement to acquire OHA. We can elect to adjust our expense growth in the future should unforeseen circumstances arise, including significant market movements. As discussed in July 2021, the impact of our expanded partnership with FIS is reflected in the expense growth guidance above.
Operating margin. Our operating margin in the nine months ended September 30, 2021 was 49.9%, compared to 44.5% earned in the 2020 period. The increase in our operating margin for the nine months ended September 30, 2021 compared to the 2020 period was primarily driven by higher net revenues, partially offset by higher compensation costs and product and recordkeeping costs as well as distribution and servicing costs.
Diluted earnings per share. Diluted earnings per share was $9.94 for the nine months ended September 30, 2021 as compared to $6.66 for the nine months ended September 30, 2020. The 49.2% increase was primarily driven by higher net income, lower weighted average outstanding shares, and a lower effective tax rate.
On a non-GAAP basis, diluted earnings per share was $9.59 for the nine months ended September 30, 2021 as compared to $6.69 for the 2020 period. The increase in adjusted diluted earnings per share was primarily due to higher operating income and lower weighted average outstanding shares. See our non-GAAP reconciliations later in this Management’s Discussion and Analysis section.
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Net revenues
| Three months ended | Q3 2021 vs. Q3 2020 | Nine months ended | YTD 2021 vs. YTD 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | 9/30/2021 | 9/30/2020 | $ change | % change | 9/30/2021 | 9/30/2020 | $ change | % change | ||||||||||||||||||||||||||||||||||||||||||
| Investment advisory fees | ||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. mutual funds | $ | 1,125.5 | $ | 939.5 | $ | 186.0 | 19.8 | % | $ | 3,273.2 | $ | 2,638.8 | $ | 634.4 | 24.0 | % | ||||||||||||||||||||||||||||||||||
| Subadvised funds, separate accounts, collective investment trusts, and other investment products | 687.9 | 529.8 | 158.1 | 29.8 | % | 2,015.2 | 1,452.1 | 563.1 | 38.8 | % | ||||||||||||||||||||||||||||||||||||||||
| 1,813.4 | 1,469.3 | 344.1 | 23.4 | % | 5,288.4 | 4,090.9 | 1,197.5 | 29.3 | % | |||||||||||||||||||||||||||||||||||||||||
| Administrative, distribution, and servicing fees | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Administrative fees | 109.8 | 98.0 | 11.8 | 12.0 | % | 331.8 | 300.8 | 31.0 | 10.3 | % | ||||||||||||||||||||||||||||||||||||||||
| Distribution and servicing fees | 30.9 | 28.5 | 2.4 | 8.4 | % | 90.0 | 82.1 | 7.9 | 9.6 | % | ||||||||||||||||||||||||||||||||||||||||
| 140.7 | 126.5 | 14.2 | 11.2 | % | 421.8 | 382.9 | 38.9 | 10.2 | % | |||||||||||||||||||||||||||||||||||||||||
| Net revenues | $ | 1,954.1 | $ | 1,595.8 | $ | 358.3 | 22.5 | % | $ | 5,710.2 | $ | 4,473.8 | $ | 1,236.4 | 27.6 | % | ||||||||||||||||||||||||||||||||||
| Average assets under management (in billions) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. mutual funds | $ | 881.0 | $ | 708.8 | $ | 172.2 | 24.3 | % | $ | 848.1 | $ | 664.0 | $ | 184.1 | 27.7 | % | ||||||||||||||||||||||||||||||||||
| Subadvised funds, separate accounts, collective investment trusts, and other investment products | 767.7 | 584.1 | 183.6 | 31.4 | % | 733.2 | 534.9 | 198.3 | 37.1 | % | ||||||||||||||||||||||||||||||||||||||||
| $ | 1,648.7 | $ | 1,292.9 | 355.8 | 27.5 | % | $ | 1,581.3 | $ | 1,198.9 | 382.4 | 31.9 | % |
Investment advisory fees.
U.S. mutual funds
Investment advisory revenues earned in the third quarter of 2021 from our U.S. mutual funds were $1,125.5 million, an increase of 19.8% from the comparable 2020 quarter. Average assets under management in these funds for the third quarter of 2021 increased 24.3% from the 2020 quarter to $881 billion. The annualized effective fee rate of 50.7 basis points for the third quarter of 2021 decreased from 52.7 basis points in the third quarter of 2020. In comparison to the third quarter of 2020, our annualized effective fee rate for U.S. mutual funds decreased primarily due to the July 2021 fee reductions in our target date products and increased money market fee waivers.
For the nine months ended September 30, 2021, investment advisory revenues earned from the firm's U.S. mutual funds were $3,273.2 million, an increase of 24.0% from the comparable 2020 period. Average assets under management in these funds for the nine months ended September 30, 2021 increased 27.7% from the 2020 period to $848.0 billion. The annualized effective fee rate of 51.6 basis points for the nine months ended September 30, 2021 decreased from 53.1 basis points for the nine months ended September 30, 2020. Our annualized effective fee rate for our U.S. mutual funds decreased primarily due to the July 2021 fee reductions in our target date products and increased money market fee waivers. In addition, strong market returns contributed to a relative decrease in the percentage fee earned as the asset levels of certain tiered-fee funds crossed a new tier.
Subadvised funds, separate accounts, collective investment trusts and other investment products (other portfolios)
Investment advisory revenues earned in the third quarter of 2021 from these other portfolios were $687.9 million, an increase of 29.8% from the comparable 2020 quarter. Average assets under management for these products increased 31.4% from the 2020 quarter to $767.7 billion. The annualized effective fee rate of 35.5 basis points for the third quarter of 2021 decreased from 36.1 basis points in the third quarter of 2020. In comparison to the third quarter of 2020, our annualized effective fee rate for our other portfolios was primarily due to the July 2021 fee reductions in our target date products.
For the nine months ended September 30, 2021, investment advisory revenues earned from subadvised and separate accounts as well as collective investment trusts and other investment products were $2,015.2 million, an increase of 38.8% from the 2020 period. Average assets under management for these products increased 37.1% from the 2020 period to $733.3 billion. The annualized effective fee rate of 36.7 basis points for the nine months ended September 30, 2021 increased from 36.3 basis points for the nine months ended September 30, 2020. Our
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annualized effective fee rate for our other portfolios increased primarily due to the mix shift towards equities and flows into our international products offset slightly by the July 2021 fee reductions in our target date products.
Administrative, distribution, and servicing fees. Administrative, distribution, and servicing fees in the third quarter of 2021 were $140.7 million, an increase of $14.2 million, or 11.2%, from the comparable 2020 quarter. For the nine months ended September 30, 2021, these fees were $421.8 million, an increase of $38.9 million, or 10.2%, from the 2020 period. The increase was primarily due to higher transfer agent servicing activities provided to the U.S. mutual funds, higher model delivery revenue, as well as higher 12b-1 revenue earned on the Advisor and R share classes of the U.S. mutual funds as a result of increased assets under management in these share classes. The increase in 12b-1 revenue is offset entirely by an increase in the costs paid to third-party intermediaries that source these assets and are reported in distribution and servicing expense.
Our net revenues reflect the elimination of advisory and administrative fee revenue earned from our consolidated
T. Rowe Price investment products. The corresponding expenses recognized by these products, and consolidated in our financial statements, were also eliminated from operating expenses. For the third quarter, we eliminated net revenue of $1.6 million in 2021 and $2.7 million in 2020. For the nine months ended September 30, we eliminated net revenue of $4.0 million in 2021 and $7.3 million in 2020
Operating expenses
| Three months ended | Q3 2021 vs. Q3 2020 | Nine months ended | YTD 2021 vs. YTD 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | 9/30/2021 | 9/30/2020 | $ change | % change | 9/30/2021 | 9/30/2020 | $ change | % change | ||||||||||||||||||||||||||||||||||||||||||
| Compensation and related costs, excluding supplemental savings plan | $ | 564.9 | $ | 517.6 | $ | 47.3 | 9.1 | % | $ | 1,692.3 | $ | 1,496.6 | $ | 195.7 | 13.1 | % | ||||||||||||||||||||||||||||||||||
| Supplemental savings plan(1) | (.3) | 34.7 | (35.0) | n/m | 59.6 | 45.4 | $ | 14.2 | 31.3 | % | ||||||||||||||||||||||||||||||||||||||||
| Total compensation and related costs | 564.6 | 552.3 | 12.3 | 2.2 | % | 1,751.9 | 1,542.0 | 209.9 | 13.6 | % | ||||||||||||||||||||||||||||||||||||||||
| Distribution and servicing | 96.0 | 73.5 | 22.5 | 30.6 | % | 274.3 | 201.2 | 73.1 | 36.3 | % | ||||||||||||||||||||||||||||||||||||||||
| Advertising and promotion | 22.1 | 14.2 | 7.9 | 55.6 | % | 61.4 | 52.5 | 8.9 | 17.0 | % | ||||||||||||||||||||||||||||||||||||||||
| Product and recordkeeping related costs | 70.3 | 36.8 | 33.5 | 91.0 | % | 154.6 | 118.0 | 36.6 | 31.0 | % | ||||||||||||||||||||||||||||||||||||||||
| Technology, occupancy, and facility costs | 123.1 | 115.6 | 7.5 | 6.5 | % | 359.7 | 332.3 | 27.4 | 8.2 | % | ||||||||||||||||||||||||||||||||||||||||
| General, administrative, and other | 81.8 | 74.5 | 7.3 | 9.8 | % | 260.8 | 238.0 | 22.8 | 9.6 | % | ||||||||||||||||||||||||||||||||||||||||
| Total operating expenses | $ | 957.9 | $ | 866.9 | $ | 91.0 | 10.5 | % | $ | 2,862.7 | $ | 2,484.0 | $ | 378.7 | 15.2 | % |
(1) The impact of the market on the supplemental savings plan liability drives the expense recognized each period.
Compensation and related costs, excluding supplemental savings plan. Compensation and related costs, excluding supplemental savings plan, were $564.9 million in the third quarter of 2021, an increase of $47.3 million, or 9.1%, compared to the 2020 quarter. The increase from the 2020 quarter was primarily due to a $32.5 million increase in our interim bonus accrual. We recognize the interim bonus accrual ratably over the year using the ratio of recognized quarterly net revenues to currently forecasted annual net revenues. Also contributing to the increase in 2021 costs compared to the third quarter of 2020 was a $16.1 million increase in salaries and benefits due to modest increases in base salaries at the beginning of the year and an increase in our average staff size before the transition of approximately 800 T. Rowe Price operations and technology associates to FIS on August 1, 2021.
For the nine months ended September 30, 2021, compensation and related costs, excluding supplemental savings plan, were $1,692.3 million, an increase of $195.7 million, or 13.1%, compared to the 2020 period. The increase in compensation and related costs from the 2020 period was primarily due to a $121.7 million increase in our interim bonus accrual. Also contributing to the increase in costs compared to 2020 was a $78.1 million increase in salaries and benefits due to modest increases in base salaries at the beginning of the year and an increase in our average staff size before the transition of approximately 800 operations and technology associates to FIS on August 1, 2021. These increases in compensation and related costs were offset in part by $11.7 million in higher labor capitalization related to internally developed software in 2021 period.
Distribution and servicing. Distribution and servicing costs were $96.0 million for the third quarter of 2021, an increase of 30.6% from the $73.5 million recognized in the 2020 quarter. For the nine months ended September 30, 2021, these costs were $274.3 million, an increase of 36.3% over the $201.2 million recognized in the comparable 2020 period. The increase is primarily driven by higher AUM-based distribution costs as a result of continued market
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appreciation and inflows in our international products, including our Japanese Investment Trusts (ITMs), and SICAVs. Also contributing to the increase are higher costs incurred to distribute certain other products through U.S. financial intermediaries, as assets under management in these products have increased from prior year.
The amounts paid to third-party intermediaries that source the assets of the Advisor and R share classes of our U.S. mutual funds and our international products, such as our Japanese ITMs and SICAVs, are recognized in the distribution and servicing expense category. Both of these costs are offset entirely by the revenue we earn and report in net revenues: 12b-1 revenue recognized in administrative, distribution, and servicing fees for the U.S. mutual funds and investment advisory fee revenue for our international products.
Advertising and promotion. Advertising and promotion costs were $22.1 million in the third quarter of 2021, an increase of $7.9 million, or 55.6%, compared to the $14.2 million recognized in the 2020 quarter. For the nine months ended September 30, 2021, these costs were $61.4 million, an increase of $8.9 million, or 17.0%, compared to the 2020 period. The increase in both the third quarter and nine months ended September 30, 2021 was driven primarily by the media spend related to the launch of a new brand marketing campaign and the promotion of the firm's target date solutions, along with lower spending in 2020 due to the impact of the coronavirus pandemic.
Product and recordkeeping related costs. Product and recordkeeping costs were $70.3 million in the third quarter of 2021, an increase of $33.5 million, or 91%, compared to the $36.8 million in the 2020 quarter. For the nine months ended September 30, 2021, these costs were $154.6 million, an increase of $36.6 million, or 31%, compared to the 2020 period. More than 85% of the increase in the third quarter and more than 80% of the increase in the nine months ended September 30, 2021 was driven primarily by the recordkeeping costs incurred as part of our expanded FIS relationship, including certain transition expenses that will extend into the fourth quarter of 2021 but not recur in 2022. While these transition expenses will not recur, we do expect to incur certain technology-related costs as part of this expanded relationship with FIS over the next few years. These will be reported as technology, occupancy, and facility costs.
Technology, occupancy, and facility costs. Technology, occupancy, and facility costs were $123.1 million in the third quarter of 2021, an increase of $7.5 million, or 6.5%, compared to the $115.6 million recognized in the 2020 quarter. For the nine months ended September 30, 2021, these costs were $359.7 million, an increase of $27.4 million, or 8.2%, compared to the 2020 period. The increase is due primarily to the ongoing investment in our technology capabilities, including hosted solution licenses and depreciation. Increased facility-related costs also contributed to the increase for the nine months ended September 30, 2021.
General, administrative, and other. General, administrative, and other expenses were $81.8 million in the third quarter of 2021, an increase of $7.3 million, or 6.1%, compared to the $74.5 million recognized in the 2020 quarter. Higher research costs primarily due to additional investment professional headcount, higher information services and travel-related costs were the primary contributors to the higher costs in the third quarter of 2021 compared to 2020.
For the nine months ended September 30, 2021, general, administrative, and other expenses were $260.8 million, an increase of $22.8 million, or 9.6%, compared to the 2020 period. Higher information services and research costs were primary contributors to the higher costs in 2021 as compared to 2020. Travel-related expenses were lower compared to the nine months ended September 30, 2020, due to the impact of the coronavirus pandemic.
Non-operating income (loss)
Non-operating loss for the third quarter of 2021 was $11.5 million, a decrease of $203.1 million from non-operating income of $191.6 million in the 2020 quarter. For the nine months ended September 30, 2021, non-operating income was $234.5 million, an increase of $128.1 million from non-operating income of $106.4 million in the comparable 2020 period. The following table details the components of non-operating income for both the third quarter and nine months ended September 30, 2021 and 2020.
Page 29
| Three months ended | Nine months ended | ||||||||||||||||||||||
| (in millions) | 9/30/2021 | 9/30/2020 | 9/30/2021 | 9/30/2020 | |||||||||||||||||||
| Net gains (losses) from non-consolidated T. Rowe Price investment products | |||||||||||||||||||||||
| Cash and discretionary investments | |||||||||||||||||||||||
| Dividend income | $ | 4.0 | $ | 4.3 | $ | 14.0 | $ | 19.7 | |||||||||||||||
| Market related gains (losses) and equity in earnings (losses) | (7.0) | 21.3 | 14.5 | 30.5 | |||||||||||||||||||
| Total cash and discretionary investments | (3.0) | 25.6 | 28.5 | 50.2 | |||||||||||||||||||
| Seed capital investments | |||||||||||||||||||||||
| Dividend income | — | .2 | .1 | 1.4 | |||||||||||||||||||
| Market related gains (losses) and equity in earnings (losses) | (2.4) | 14.3 | 27.0 | 8.3 | |||||||||||||||||||
| Net gains recognized upon deconsolidation | — | — | 2.6 | .1 | |||||||||||||||||||
| Investments used to hedge the supplemental savings plan liability | .1 | 33.3 | 59.3 | 29.2 | |||||||||||||||||||
| Total net gains (losses) from non-consolidated T. Rowe Price investment products | (5.3) | 73.4 | 117.5 | 89.2 | |||||||||||||||||||
| Other investment income | 14.0 | 11.2 | 47.5 | 11.4 | |||||||||||||||||||
| Net gains on investments | 8.7 | 84.6 | 165.0 | 100.6 | |||||||||||||||||||
| Net gains (losses) on consolidated sponsored investment portfolios | (17.1) | 101.2 | 75.7 | 13.3 | |||||||||||||||||||
| Other income (loss), including foreign currency gains and losses | (3.1) | 5.8 | (6.2) | (7.5) | |||||||||||||||||||
| Non-operating income (loss) | $ | (11.5) | $ | 191.6 | $ | 234.5 | $ | 106.4 |
The significant investment portfolio gains in the third quarter of 2020 outperformed the slight investment portfolio losses in the third quarter of 2021 as the spread of the delta variant of the coronavirus weighed on the global economy and markets resulting in lower valuations at the end of the third quarter. The cash and discretionary investment portfolio also experienced net investment losses of $3.0 million during the third quarter of 2021.
Our investment portfolio for the nine months ended September 30, 2021, outperformed the same period in 2020 as a result of the significant market losses experienced in the first quarter of 2020. Our consolidated investment products and supplemental savings plan hedge portfolio comprised approximately 60% of the net gains recognized during the nine months ended September 30, 2021.
The table above includes the net investment income of the underlying portfolios included in the consolidated T. Rowe Price investment products and not just the net investment income related to our interest. The table below shows the impact that the consolidated T. Rowe Price investment products had on the individual lines of our unaudited condensed consolidated statements of income and the portion attributable to our interest:
| Three months ended | Nine months ended | ||||||||||||||||||||||
| (in millions) | 9/30/2021 | 9/30/2020 | 9/30/2021 | 9/30/2020 | |||||||||||||||||||
| Operating expenses reflected in net operating income | $ | (2.8) | $ | (4.4) | $ | (9.1) | $ | (11.7) | |||||||||||||||
| Net investment income (loss) reflected in non-operating income | (17.1) | 101.2 | 75.6 | 13.3 | |||||||||||||||||||
| Impact on income before taxes | $ | (19.9) | $ | 96.8 | $ | 66.5 | $ | 1.6 | |||||||||||||||
| Net income (loss) attributable to our interest in the consolidated T. Rowe Price investment products | $ | (.1) | $ | 41.4 | $ | 43.9 | $ | 4.4 | |||||||||||||||
| Net income (loss) attributable to redeemable non-controlling interests (unrelated third-party investors) | (19.8) | 55.4 | 22.6 | (2.8) | |||||||||||||||||||
| $ | (19.9) | $ | 96.8 | $ | 66.5 | $ | 1.6 |
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Provision for income taxes
Our GAAP effective tax rate for the third quarter of 2021 was 23.1%, compared with 24.1% in the 2020 quarter. For the nine months ended September 30, 2021, our GAAP effective tax rate was 23.3%, compared with 24.0% in the 2020 period.
The following table reconciles the statutory federal income tax rate to our effective tax rate for both the three- and nine-months ended September 30, 2021 and 2020:
| Three months ended | Nine months ended | ||||||||||||||||||||||
| 9/30/2021 | 9/30/2020 | 9/30/2021 | 9/30/2020 | ||||||||||||||||||||
| Statutory U.S. federal income tax rate | 21.0 | % | 21.0 | % | 21.0 | % | 21.0 | % | |||||||||||||||
| State income taxes for current year, net of federal income tax benefits(1) | 3.8 | 3.9 | 3.8 | 4.1 | |||||||||||||||||||
| Net (income) losses attributable to redeemable non-controlling interests | .1 | (.3) | (.2) | — | |||||||||||||||||||
| Net excess tax benefits from stock-based compensation plans activity | (1.6) | (.8) | (1.1) | (1.3) | |||||||||||||||||||
| Other items | (.2) | .3 | (.2) | .2 | |||||||||||||||||||
| Effective income tax rate | 23.1 | % | 24.1 | % | 23.3 | % | 24.0 | % |
(1) State income tax benefits are reflected in the total benefits for net income attributable to redeemable non-controlling interests and stock-based compensation plans activity.
The non-GAAP tax rate primarily adjusts for the impact of the consolidated investment products, including the net income attributable to the redeemable non-controlling interests. Our non-GAAP effective tax rate was 23.1% in the third quarter of 2021 compared with 24.1% in third quarter of 2020, and was 23.4% for the nine months ended September 30, 2021 compared with 23.9% for the nine months ended September 30, 2020. The non-GAAP effective tax rate for the third quarter of 2021 was favorably impacted by higher discrete discrete tax benefits associated with the settlement of stock-based awards. The non-GAAP effective tax rate for the nine months ended September 30, 2021 was favorably impacted by a lower state effective tax rate.
The firm continues to see the phased-in benefit of the 2018 Maryland state tax legislation in which we expect to reduce our effective state rate over the five-year phase-in period to less than 3% by the end of 2022.
Our effective tax rate will continue to experience volatility in future periods as the discrete tax benefits recognized from option exercises are impacted by market fluctuations in our stock price and timing of option exercises. Our GAAP rate will also be impacted by net investment income recognized on our consolidated investment products that are driven by market fluctuations and changes in the proportion of their net income that is attributable to non-controlling interests.
We currently estimate that our effective tax rate for the full year 2021, on a GAAP and non-GAAP basis, will be in the range of 22.0% to 24.0%.
NON-GAAP INFORMATION AND RECONCILIATION.
We believe the non-GAAP financial measures below provide relevant and meaningful information to investors about our core operating results. These measures have been established in order to increase transparency for the purpose of evaluating our core business, for comparing current results with prior period results, and to enable more appropriate comparison with industry peers. However, non-GAAP financial measures should not be considered a substitute for financial measures calculated in accordance with U.S. GAAP and may be calculated differently by other companies.
Page 31
The following schedules reconcile certain U.S. GAAP financial measures for the three months ended
September 30, 2021 and 2020.
| Three months ended 9/30/2021 | |||||||||||||||||||||||||||||||||||
| Operating expenses | Net operating income | Non-operating income (loss) | Provision (benefit) for income taxes**(4)** | Net income attributable to T. Rowe Price | Diluted earnings per share**(5)** | ||||||||||||||||||||||||||||||
| U.S. GAAP Basis | $ | 957.9 | $ | 996.2 | $ | (11.5) | $ | 227.3 | $ | 777.2 | $ | 3.31 | |||||||||||||||||||||||
| Non-GAAP adjustments: | |||||||||||||||||||||||||||||||||||
| Consolidated T. Rowe Price investment products(1) | (1.0) | 2.8 | 17.1 | — | .1 | — | |||||||||||||||||||||||||||||
| Supplemental savings plan liability(2) | .3 | (.3) | (.1) | — | (.5) | — | |||||||||||||||||||||||||||||
| Other non-operating income(3) | — | — | (8.5) | .8 | (9.2) | (.04) | |||||||||||||||||||||||||||||
| Adjusted Non-GAAP Basis | $ | 957.2 | $ | 998.7 | $ | (3.0) | $ | 228.1 | $ | 767.6 | $ | 3.27 |
| Three months ended 9/30/2020 | |||||||||||||||||||||||||||||||||||
| Operating expenses | Net operating income | Non-operating income (loss) | Provision (benefit) for income taxes**(4)** | Net income attributable to T. Rowe Price | Diluted earnings per share**(5)** | ||||||||||||||||||||||||||||||
| U.S. GAAP Basis | $ | 866.9 | $ | 728.9 | $ | 191.6 | $ | 221.9 | $ | 643.2 | $ | 2.73 | |||||||||||||||||||||||
| Non-GAAP adjustments: | |||||||||||||||||||||||||||||||||||
| Consolidated T. Rowe Price investment products(1) | (1.7) | 4.4 | (101.2) | (18.1) | (23.3) | (.10) | |||||||||||||||||||||||||||||
| Supplemental savings plan liability(2) | (34.7) | 34.7 | (33.3) | .6 | .8 | — | |||||||||||||||||||||||||||||
| Other non-operating income(3) | — | — | (31.5) | (13.5) | (18.0) | (.08) | |||||||||||||||||||||||||||||
| Adjusted Non-GAAP Basis | $ | 830.5 | $ | 768.0 | $ | 25.6 | $ | 190.9 | $ | 602.7 | $ | 2.55 |
The following schedules reconcile certain U.S. GAAP financial measures for the nine months ended September 30, 2021 and 2020.
| Nine months ended 9/30/2021 | |||||||||||||||||||||||||||||||||||
| Operating expenses | Net operating income | Non-operating income (loss) | Provision (benefit) for income taxes**(4)** | Net income attributable to T. Rowe Price | Diluted earnings per share**(5)** | ||||||||||||||||||||||||||||||
| U.S. GAAP Basis | $ | 2,862.7 | $ | 2,847.5 | $ | 234.5 | $ | 717.1 | $ | 2,342.3 | $ | 9.94 | |||||||||||||||||||||||
| Non-GAAP adjustments: | |||||||||||||||||||||||||||||||||||
| Consolidated T. Rowe Price investment products(1) | (4.9) | 9.1 | (75.7) | (13.5) | (30.5) | (.13) | |||||||||||||||||||||||||||||
| Supplemental savings plan liability(2) | (59.6) | 59.6 | (59.3) | .3 | — | — | |||||||||||||||||||||||||||||
| Other non-operating income(3) | — | — | (71.0) | (17.8) | (53.2) | (.22) | |||||||||||||||||||||||||||||
| Adjusted Non-GAAP Basis | $ | 2,798.2 | $ | 2,916.2 | $ | 28.5 | $ | 686.1 | $ | 2,258.6 | $ | 9.59 |
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| Nine months ended 9/30/2020 | |||||||||||||||||||||||||||||||||||
| Operating expenses | Net operating income | Non-operating income (loss) | Provision (benefit) for income taxes**(4)** | Net income attributable to T. Rowe Price | Diluted earnings per share**(5)** | ||||||||||||||||||||||||||||||
| U.S. GAAP Basis | $ | 2,484.0 | $ | 1,989.8 | $ | 106.4 | $ | 502.5 | $ | 1,589.3 | $ | 6.66 | |||||||||||||||||||||||
| Non-GAAP adjustments: | |||||||||||||||||||||||||||||||||||
| Consolidated T. Rowe Price investment products(1) | (4.4) | 11.7 | (13.3) | (1.3) | 4.1 | .02 | |||||||||||||||||||||||||||||
| Supplemental savings plan liability(2) | (45.4) | 45.4 | (29.2) | 6.2 | 10.0 | .04 | |||||||||||||||||||||||||||||
| Other non-operating income(3) | — | — | (13.7) | (6.9) | (6.8) | (.03) | |||||||||||||||||||||||||||||
| Adjusted Non-GAAP Basis | $ | 2,434.2 | $ | 2,046.9 | $ | 50.2 | $ | 500.5 | $ | 1,596.6 | $ | 6.69 |
(1) These non-GAAP adjustments remove the impact that the consolidated T. Rowe Price investment products have on our U.S. GAAP consolidated statements of income. Specifically, we add back the operating expenses and subtract the investment income of the consolidated T. Rowe Price investment products. The adjustment to our operating expenses represents the operating expenses of the consolidated products, net of the elimination of related management and administrative fees. The adjustment to net income attributable to T. Rowe Price represents the net income of the consolidated products, net of redeemable non-controlling interest. We remove the impact of the consolidated T. Rowe Price investment products as we believe they impact the reader’s ability to understand our core operating results.
(2) These non-GAAP adjustments remove the compensation expense impact from market valuation changes in the supplemental savings plan liability and the related net gains (losses) on investments designated as an economic hedge against the related liability. Amounts deferred under the supplemental savings plan are adjusted for appreciation (depreciation) of hypothetical investments chosen by participants. We use T. Rowe Price investment products to economically hedge the exposure to these market movements. We believe it is useful to offset the non-operating investment income (loss) realized on the economic hedges against the related compensation expense and remove the net impact to help the reader's ability to understand our core operating results and to increase comparability period to period.
(3) This non-GAAP adjustment represents the other non-operating income (loss) and the net gains (losses) earned on our non-consolidated investment portfolio that are not designated as economic hedges of the supplemental savings plan liability, and non-consolidated seed investments and other investments that are not part of the cash and discretionary investment portfolio. We retain the investment gains recognized on our non-consolidated cash and discretionary investments as these assets and related income (loss) are considered part of our core operations. We believe adjusting for these non-operating income (loss) items helps the reader’s ability to understand our core operating results and increases comparability to prior years. Additionally, we do not emphasize the impact of the portion of non-operating income (loss) removed when managing and evaluating our core performance.
(4) The income tax impacts were calculated in order to achieve an overall year-to-date non-GAAP effective tax rate of 23.4% for the first nine months of 2021 and 23.9% for the first nine months of 2020. As such, the non-GAAP effective tax rate for three months ended September 30, 2021 and 2020 was 23.1% and 24.1%, respectively. The firm estimates that its effective tax rate for the full-year 2021 on a non-GAAP basis will be in the range of 22.0% to 24.0%.
(5) This non-GAAP measure was calculated by applying the two-class method to adjusted net income attributable to T. Rowe Price divided by the weighted-average common shares outstanding assuming dilution. The calculation of adjusted net income allocated to common stockholders is as follows:
| Three months ended | Nine months ended | |||||||||||||||||||
| 9/30/2021 | 9/30/2020 | 9/30/2021 | 9/30/2020 | |||||||||||||||||
| Adjusted net income attributable to T. Rowe Price | $ | 767.6 | $ | 602.7 | $ | 2,258.6 | $ | 1,596.6 | ||||||||||||
| Less: adjusted net income allocated to outstanding restricted stock and stock unit holders | 19.4 | 16.8 | 59.5 | 44.1 | ||||||||||||||||
| Adjusted net income allocated to common stockholders | $ | 748.2 | $ | 585.9 | $ | 2,199.1 | $ | 1,552.5 |
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CAPITAL RESOURCES AND LIQUIDITY.
Sources of Liquidity
We remain debt-free with ample liquidity, including cash and investments in T. Rowe Price products, as follows:
| (in millions) | 9/30/2021 | 12/31/2020 | ||||||||||||
| Cash and cash equivalents | $ | 3,418.5 | $ | 2,151.7 | ||||||||||
| Discretionary investments | 1,925.1 | 2,095.7 | ||||||||||||
| Total cash and discretionary investments | 5,343.6 | 4,247.4 | ||||||||||||
| Redeemable seed capital investments | 1,188.7 | 1,219.1 | ||||||||||||
| Investments used to hedge the supplemental savings plan liability | 795.5 | 768.1 | ||||||||||||
| Total cash and investments in T. Rowe Price products | $ | 7,327.8 | $ | 6,234.6 |
Our discretionary investment portfolio is comprised primarily of short duration bond funds, which typically yield higher than money market rates, and asset allocation products. Cash and discretionary investments experienced $3.0 million in market losses and $28.5 million in market gains in the three- and nine-months ended September 30, 2021, respectively, as compared to investment gains of $25.6 million and $50.2 million in the three- and nine-months ended September 30, 2020. Cash and discretionary investments in T. Rowe Price products held by our subsidiaries outside the United States were $927.1 million at September 30, 2021 and $675.8 million at December 31, 2020. Given the availability of our financial resources and cash expected to be generated through future operations, we do not maintain an available external source of additional liquidity.
Our seed capital investments are redeemable, although we generally expect to be invested for several years for the products to build an investment performance history and until unrelated third-party investors substantially reduce our relative ownership percentage.
The cash and investment presentation on the unaudited condensed consolidated balance sheet is based on the accounting treatment for the cash equivalent or investment item. The following table details how T. Rowe Price’s interests in cash and investments relate to where they are presented on the unaudited condensed consolidated balance sheet as of September 30, 2021.
| (in millions) | Cash and cash equivalents | Investments | Net assets of consolidated T. Rowe Price investment products**(1)** | 9/30/2021 | ||||||||||||||||||||||
| Cash and discretionary investments | $ | 3,418.5 | $ | 1,864.3 | $ | 60.8 | $ | 5,343.6 | ||||||||||||||||||
| Seed capital investments | — | 401.5 | 787.2 | 1,188.7 | ||||||||||||||||||||||
| Investments used to hedge the supplemental savings plan liability | — | 795.5 | — | 795.5 | ||||||||||||||||||||||
| Total cash and investments in T. Rowe Price products attributable to T. Rowe Price | 3,418.5 | 3,061.3 | 848.0 | 7,327.8 | ||||||||||||||||||||||
| Investment in UTI and other investments | — | 269.0 | — | 269.0 | ||||||||||||||||||||||
| Total cash and investments attributable to T. Rowe Price | 3,418.5 | 3,330.3 | 848.0 | 7,596.8 | ||||||||||||||||||||||
| Redeemable non-controlling interests | — | — | 1,086.6 | 1,086.6 | ||||||||||||||||||||||
| As reported on unaudited condensed consolidated balance sheet at September 30, 2021 | $ | 3,418.5 | $ | 3,330.3 | $ | 1,934.6 | $ | 8,683.4 |
(1) The consolidated T. Rowe Price investment products are generally those products we provided seed capital at the time of their formation and we have a controlling interest. These products generally represent U.S. mutual funds as well as those funds regulated outside the U.S. The $60.8 million and the $787.2 million represent the total value at September 30, 2021 of our interest in the consolidated T. Rowe Price investment products. The total net assets of the T. Rowe Price investment products at September 30, 2021 of $1,934.6 million includes assets of $2,026.7 million, less liabilities of $92.1 million as reflected in our unaudited condensed consolidated balance sheets.
Our unaudited condensed consolidated balance sheet reflects the cash and cash equivalents, investments, other assets and liabilities of those T. Rowe Price investment products we consolidate, as well as redeemable non-
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controlling interests for the portion of these T. Rowe Price investment products that are held by unrelated third-party investors. Although we can redeem our net interest in these T. Rowe Price investment products at any time, we cannot directly access or sell the assets held by the products to obtain cash for general operations. Additionally, the assets of these T. Rowe Price investment products are not available to our general creditors. Our interest in these
T. Rowe Price investment products was used as initial seed capital and is recategorized as discretionary when it is determined by management that the seed capital is no longer needed. We assess the discretionary investment products and, when we decide to liquidate our interest, we seek to do so in a way as to not impact the product and, ultimately, the unrelated third-party investors.
Uses of Liquidity
We increased our quarterly recurring dividend per common share in February 2021 by 20.0% to $1.08 per common share from $.90 per common share. Additionally, our Board of Directors declared a special cash dividend of $3.00 per common share, or $699.8 million, on June 14, 2021, that was paid on July 7, 2021. Further, we expended $526.6 million in the first nine months of 2021 to repurchase 2.9 million shares, or 1.3% of our outstanding common stock, at an average price of $182.27 per share. These dividends and repurchases were expended using existing cash balances and cash generated from operations. While opportunistic in our approach to stock buybacks, we will generally repurchase our common stock over time to offset the dilution created by our equity-based compensation plans.
Since the end of 2018, we have returned $5.5 billion to stockholders through stock repurchases, regular quarterly dividends, and special dividends, as follows:
| (in millions) | Recurring dividend | Special dividend**(1)** | Stock repurchases | Total cash returned to stockholders | |||||||||||||||||||
| 2019 | $ | 733.6 | $ | — | $ | 708.8 | $ | 1,442.4 | |||||||||||||||
| 2020 | 846.0 | — | 1,192.2 | 2,038.2 | |||||||||||||||||||
| Nine months ended 9/30/2021 | 755.0 | 699.8 | 526.6 | 1,981.4 | |||||||||||||||||||
| Total | $ | 2,334.6 | $ | 699.8 | $ | 2,427.6 | $ | 5,462.0 |
(1) Special cash dividend declared in June 2021 was paid in July 2021.
We anticipate property, equipment and other capital expenditures, including internal labor capitalization, for the full-year 2021 to be about $250 million, of which more than three-quarters is planned for technology initiatives. We expect to fund our anticipated capital expenditures with operating cash flows and other available resources.
On October 28, 2021, we entered into an agreement to acquire 100% of the equity of OHA, and certain other entities that have common ownership. We will acquire OHA for a purchase price of up to $4.2 billion, with $3.3 billion payable at closing, approximately 74% in cash and 26% in T. Rowe Price Group, Inc. common stock, and up to an additional $900 million in cash upon the achievement of defined business milestones starting in 2025. We expect that the acquisition will close in the fourth quarter of 2021.
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Cash Flows
The following table summarizes the cash flows for the nine months ended September 30, 2021 and 2020, that are attributable to T. Rowe Price, our consolidated T. Rowe Price investment products, and the related eliminations required in preparing the statement.
| Nine months ended | |||||||||||||||||||||||||||||||||||||||||||||||
| 9/30/2021 | 9/30/2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | Cash flow attributable to T. Rowe Price | Cash flow attributable to consolidated T. Rowe Price investment products | Elims | As reported | Cash flow attributable to T. Rowe Price | Cash flow attributable to consolidated T. Rowe Price investment products | Elims | As reported | |||||||||||||||||||||||||||||||||||||||
| Cash flows from operating activities | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 2,342.3 | $ | 66.5 | $ | (43.9) | $ | 2,364.9 | $ | 1,589.3 | $ | 1.6 | $ | 2.8 | $ | 1,593.7 | |||||||||||||||||||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities | |||||||||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization of property and equipment | 151.1 | — | — | 151.1 | 144.0 | — | — | 144.0 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 166.3 | — | — | 166.3 | 164.5 | — | — | 164.5 | |||||||||||||||||||||||||||||||||||||||
| Net (gains) losses recognized on investments | (188.3) | — | 43.9 | (144.4) | (72.5) | — | (2.8) | (75.3) | |||||||||||||||||||||||||||||||||||||||
| Net (investments) redemptions in T. Rowe Price investment products used to economically hedge supplemental savings plan liability | 28.1 | — | — | 28.1 | (19.1) | — | — | (19.1) | |||||||||||||||||||||||||||||||||||||||
| Net change in trading securities held by consolidated T. Rowe Price investment products | (5.3) | — | (5.3) | — | (350.8) | — | (350.8) | ||||||||||||||||||||||||||||||||||||||||
| Other changes in assets and liabilities | 573.1 | (42.6) | (.5) | 530.0 | 458.8 | 2.5 | (1.4) | 459.9 | |||||||||||||||||||||||||||||||||||||||
| Net cash provided by (used in) operating activities | 3,072.6 | 18.6 | (.5) | 3,090.7 | 2,265.0 | (346.7) | (1.4) | 1,916.9 | |||||||||||||||||||||||||||||||||||||||
| Net cash provided by (used in) investing activities | 108.0 | (15.6) | (34.8) | 57.6 | (100.6) | (49.1) | 96.6 | (53.1) | |||||||||||||||||||||||||||||||||||||||
| Net cash provided by (used in) financing activities | (1,913.8) | (12.6) | 35.3 | (1,891.1) | (1,718.0) | 393.9 | (95.2) | (1,419.3) | |||||||||||||||||||||||||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents of consolidated T. Rowe Price investment products | — | (3.6) | — | (3.6) | — | 3.4 | — | 3.4 | |||||||||||||||||||||||||||||||||||||||
| Net change in cash and cash equivalents during period | 1,266.8 | (13.2) | — | 1,253.6 | 446.4 | 1.5 | — | 447.9 | |||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents at beginning of year | 2,151.7 | 104.8 | — | 2,256.5 | 1,781.8 | 76.5 | — | 1,858.3 | |||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents at end of period | $ | 3,418.5 | $ | 91.6 | $ | — | $ | 3,510.1 | $ | 2,228.2 | $ | 78.0 | $ | — | $ | 2,306.2 |
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Operating Activities
Operating activities attributable to T. Rowe Price during the first nine months of 2021 provided cash flows of $3,072.6 million as compared to $2,265.0 million during the first nine months of 2020. Operating cash flows attributable to T. Rowe Price increased $807.6 million, including a $753.0 million increase in net income from the first nine months of 2020 and timing differences on the cash settlement of our assets and liabilities of $114.3 million. This increase was partially offset by $106.9 million in lower non-cash adjustments, including unrealized investment gains/losses, depreciation, and stock-based compensation expense. The non-cash adjustments were primarily driven by a $115.8 million increase in net investment gains in the first nine months of 2021 compared with the first nine months of 2020. Additionally, in 2021, we had net proceeds of $28.1 million from certain investment products that economically hedge our supplemental savings plan liability, while we had net investments of $19.1 million in the same period of 2020. Our interim operating cash flows do not include the cash impact of variable compensation that is accrued throughout the year before being substantially paid out in December. The remaining change in reported cash flows from operating activities was attributable to the net change in trading securities held in our consolidated investment products’ underlying portfolios.
Investing Activities
Net cash provided by investing activities that are attributable to T. Rowe Price totaled $108.0 million in the first nine months of 2021 compared with $100.6 million of cash used by investing activities in the 2020 period. During 2021, we decreased the level of seed capital provided by $131.4 million. We eliminate our seed capital in those T. Rowe Price investment products we consolidate in preparing our unaudited condensed consolidated statement of cash flows. Further increasing the cash provided by investing activities were higher net proceeds from the sale of certain of our discretionary investments of $238.1 million compared to net proceeds of $141.6 million during 2020. Partially offsetting these increases were increased property and equipment expenditures of $23.3 million. The remaining $33.5 million change in reported cash flows from investing activities is related to the net cash removed from our balance sheet from consolidating and deconsolidating investment products.
Financing Activities
Net cash used in financing activities attributable to T. Rowe Price were $1,913.8 million in the first nine months of 2021 compared with $1,718.0 million in the 2020 period. During the first nine months of 2021, we used $526.6 million to repurchase 2.9 million shares compared to $1.2 billion to repurchase 10.8 million shares in the first nine months of 2020. Partially offsetting this decrease in cash used for stock repurchases was a $818.3 million increase in dividends paid in 2021 as a result of the special cash dividend paid in July 2021 and the 20.0% increase in our quarterly dividend per share. The remaining change in reported cash flows from financing activities is primarily attributable to a $276.0 million decrease in net subscriptions received from redeemable non-controlling interest holders of our consolidated investment products during the first nine months of 2021 compared to the 2020 period.
CRITICAL ACCOUNTING POLICIES.
The preparation of financial statements often requires the selection of specific accounting methods and policies from among several acceptable alternatives. Further, significant estimates and judgments may be required in selecting and applying those methods and policies in the recognition of the assets and liabilities in our unaudited condensed consolidated balance sheets, the revenues and expenses in our unaudited condensed consolidated statements of income, and the information that is contained in our significant accounting policies and notes to unaudited condensed consolidated financial statements. Making these estimates and judgments requires the analysis of information concerning events that may not yet be complete and of facts and circumstances that may change over time. Accordingly, actual amounts or future results can differ materially from those estimates that we include currently in our unaudited condensed consolidated financial statements, significant accounting policies, and notes.
There have been no material changes in the critical accounting policies previously identified in our 2020 Annual Report on Form 10-K.
NEWLY-ISSUED BUT NOT YET ADOPTED ACCOUNTING GUIDANCE.
See Note 1 - The Company and Basis of Preparation note within Item 1. Financial Statements for a discussion of newly issued but not yet adopted accounting guidance.
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FORWARD-LOOKING INFORMATION.
From time to time, information or statements provided by or on behalf of T. Rowe Price, including those within this report, may contain certain forward-looking information, including information or anticipated information relating to: our revenues, net income, and earnings per share on common stock; changes in the amount and composition of our assets under management; our expense levels; our tax rate; and our expectations regarding financial markets, strategic transactions, dividends, stock repurchases, investments, new products and services, capital expenditures, changes in our effective fee rate, the impact of the coronavirus pandemic, other market conditions and the acquisition of OHA. Readers are cautioned that any forward-looking information provided by or on behalf of T. Rowe Price is not a guarantee of future performance. Actual results may differ materially from those in forward-looking information because of various factors including, but not limited to, those discussed below and in Item 1A, Risk Factors, included in our Form 10-K Annual Report for 2020. Further, forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of unanticipated events.
Our future revenues and results of operations will fluctuate primarily due to changes in the total value and composition of assets under our management. Such changes result from many factors, including, among other things: cash inflows and outflows in the U.S. mutual funds, subadvised funds, separately managed accounts, collective investment trusts, and other investment products, fluctuations in global financial markets that result in appreciation or depreciation of the assets under our management, our introduction of new mutual funds and investment products, changes in retirement savings trends relative to participant-directed investments and defined contribution plans, and the impact of the coronavirus outbreak. The ability to attract and retain investors’ assets under our management is dependent on investor sentiment and confidence; the relative investment performance of the U.S. mutual funds and other managed investment products as compared with competing offerings and market indexes; the ability to maintain our investment management and administrative fees at appropriate levels; competitive conditions in the mutual fund, asset management, and broader financial services sectors; and our level of success in implementing our strategy to expand our business, including our announced plan to establish T. Rowe Price Investment Management as a separate registered investment adviser. Our revenues are substantially dependent on fees earned under contracts with the T. Rowe Price funds and could be adversely affected if the independent directors of one or more of the T. Rowe Price funds terminated or significantly altered the terms of the investment management or related administrative services agreements. Non-operating investment income will also fluctuate primarily due to the size of our investments, changes in their market valuations, and any other-than-temporary impairments that may arise or, in the case of our equity method investments, our proportionate share of the investees' net income.
Our future results are also dependent upon the level of our expenses, which are subject to fluctuation for the following or other reasons: changes in the level of our advertising and promotion expenses in response to market conditions, including our efforts to expand our investment advisory business to investors outside the U.S. and to further penetrate our distribution channels within the U.S.; the pace and level of spending to support key strategic priorities; variations in the level of total compensation expense due to, among other things, bonuses, restricted stock units and other equity grants, other incentive awards, our supplemental savings plan, changes in our employee count and mix, and competitive factors; any goodwill or other asset impairment that may arise; fluctuation in foreign currency exchange rates applicable to the costs of our international operations; expenses and capital costs, such as technology assets, depreciation, amortization, and research and development, incurred to maintain and enhance our administrative and operating services infrastructure; the level of third party research costs, unanticipated costs that may be incurred to protect investor accounts and the goodwill of our clients; and disruptions of services, including those provided by third parties, such as fund and product recordkeeping, facilities, communications, power, and the mutual fund transfer agent and accounting systems.
Our business is also subject to substantial governmental regulation, and changes in legal, regulatory, accounting, tax, and compliance requirements may have a substantial effect on our operations and results, including, but not limited to, effects on costs that we incur and effects on investor interest in T. Rowe Price investment products and investing in general or in particular classes of mutual funds or other investments.
Our acquisition of OHA is subject to various risks and uncertainties, which could impact the completion of the transaction and effect our results of operations, including: (i) the occurrence of any event, change, or other circumstances that could give rise to the termination of the purchase agreement; (ii) closing conditions may not be satisfied in a timely manner or at all, including due to the failure to obtain regulatory and client approvals; (iii) the announcement and pendency of the acquisition may disrupt our business operations (including the threatened or
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actual loss of employees, clients, or suppliers); (iv) we could experience financial or other setbacks if the transaction encounters unanticipated problems; (v) anticipated benefits of the transaction, including the realization of revenue, accretion, financial benefits or returns, and expense and other synergies, may not be fully realized or may take longer to realize than expected; (vi) client and investor interest in T. Rowe Price or the combined business’s products may be less than anticipated; and (vii) we may be unable to successfully integrate OHA’s businesses or to integrate the businesses within the anticipated time frame.
Previous: Item 1. Financial Statements. · Next: Item 3. Quantitative and Qualitative Disclosures About Market Risk.