Objective and strategy
The fund seeks “strong long-term risk adjusted returns.” The managers may employ a wide variety of strategies in pursuit of gains that are independent of the movement of the global stock and bond markets.
T. Rowe Price. Founded in 1937 by Thomas Rowe Price and headquartered in Baltimore, Price manages more than $1 trillion in assets for investors in 51 countries. The firm advises, or sub-advises, 117 US mutual funds, none of which are negatively rated by Morningstar and 60% of which carry “Gold” or “Silver” designations. The firm’s culture is renowned for its stability, innovation, risk-consciousness, and team focus. It’s always had the antithesis of the “star manager” culture. Morningstar and MFO both give the firm their highest overall rating, “high” and “top tier,” respectively. Morningstar also presented Price with its 2020 U.S. Morningstar Exemplary Stewardship Award. The firm’s AUM has grown from $400 billion in 2009 making it, according to Bloomberg, “one of the rare winners” among active managers.
Richard de los Reyes and Stefan Hubrich. Mr. de los Reyes spent 10 years as an investment analyst following metals and mining companies prior to joining the Multi-Asset Division in 2016. Before working at T. Rowe Price, he was an analyst for Soros Fund Management.
Mr. Hubrich is a Director of Research in the Multi-Asset Division. He began working at Price as an equity analyst in 2005. Prior to that, he was employed by McKinsey & Company, Inc. He earned both his M.A. and Ph.D. in economics from the University of Maryland, College Park.
Both managers also have some responsibility for underlying components. Mr. de los Reyes ovesees Macro and Absolute Return Strategies (MARS), and Mr. Hubrich oversees the Style Premia and Equity Long/Short Strategies. This is the sole fund that either manages though they serve as members of the Investment Advisory Committee for a large number of funds.
Strategy capacity and closure
“Ample.” Mr. Hubrich notes that T. Rowe Price is a trillion-dollar firm, so they needed to design a strategy liquid enough that it could have an impact on the firm’s ability to serve its investors. While understandably reluctant to pin a dollar amount, he allows that it’s certainly in the billions, that the portfolio is highly liquid, and that they have the ability to add new strategies to the portfolio which has the effect of extending its capacity.
Management’s stake in the fund
Mr. Reyes has invested in excess of $1 million in the fund, and Mr. Hubrich has invested between $500,000-1,000,000. There is a vast amount of inside ownership, with T Rowe Price or its employees holding 80% of the Investor shares and 60% of the Institutional shares, as of the last SAI.
February 23, 2018
$2,500 for Investor shares
1.22%, after waivers, for Investor shares on assets of $70 million (as of June 2020).
In normal times, the average investor’s best friend is the predictable advance – the “rising tide” – of the equity and fixed income markets. Even ardent fans of active management discover that 70-99% of their returns – captured by their funds’ r-squared value – are driven by the market’s movement.
These are not normal times. Most analysts seem to think one of two conditions will predominate in the years ahead: (1) sub-par returns with unsettling volatility or (2) wretched returns with unsettling volatility. (Some, admittedly, foresee the same “permanently high plateau” that economist Irving Fisher discovered in October 1929.) For prudent investors, the question becomes: if not “the market,” what?
T. Rowe Price attempts to answer that question with their Multi-Strategy Total Return Fund, which they refer to as MSTR. MSTR seeks to invest in “non-market sources of return,” that is, returns that can be delivered whether the market rises or not. That’s possible by choosing investments that are intrinsically uncorrelated with the market or by using hedges to offset market exposure. If, for example, you have a stock investor who is capable of using good security selection to produce returns 4% higher than the market’s, you would then hedge your market exposure so that you could harvest the 4%. When the market rises or falls by 10%, you would still earn 4%.
The strategies currently available to the managers include Macro and Absolute Return; Fixed Income Absolute Return; Equity Research Long/Short; Quantitative Equity Long/Short; Volatility Relative Value; Style Premia; Dynamic Global FX; Dynamic Credit; and Global Stock. Mr. Hubrich explains that “there is a spectrum, where on one end you have strategies (like Style Premia) that are ‘born’ as absolute return strategies and require no additional hedging at all, while on the other end you have strategies (like global stock) where a traditional long-only investment is paired with an explicit, meaningful hedge.” While the constellation of strategies included in the portfolio changes with evolving market conditions, the goal remains to provide an absolute return portfolio throughout.
What does such a strategy give you? In the long-term, ultra-safe short-term Treasury bills yield about the same as the rate of inflation, barely 1% now but about 3.4% over the past century. In the long run, the managers anticipate being able to return on average about 5% more than cash before fund expenses, which means about 4% “real” returns. If short-term T-bills are earning 1%, the managers anticipate being about to return 5% after expenses. If interest rates, which follow inflation, spike, and T-bills are returning 3.5%, the fund might return 7.5%.
That’s paired with a similar annualized volatility (i.e., 5%) over a market cycle which translates to an expected long-run Sharpe Ratio of 0.8 to 1.0.
Price is not the first firm to assay a multi-strategy fund, but they are one of the firms best positioned to succeed with one. As a group, multi-strategy funds are a failure: the 34 funds with a five-year track record have returned, on average, negative 1.1% annually with a maximum drawdown in the 14-16% range. Only three funds managed annual returns over 3%.
Price has two substantial advantages:
- Price has a vast research and strategy capability. With over a trillion in assets, over 650 investment professionals, and a global presence, Price brings an analytic arsenal to bear that very few other firms can match. While Price’s stock selectors are very talented, they’re really distinguished by their ability to think differently about the ways in which various assets can be combined or targeted, which they’ve parlayed into a suite of highly-successful multi-asset funds. Mr. Hubrich’s assessment is that success in a strategy like this requires one of two conditions: (1) either a very small, capacity-constrained niche strategy or (2) a global firm with huge “alpha generation” capacity. Price meets that second condition.
- Price uses a “closed architecture” approach. Many multi-asset strategies are executed by creating an asset allocation strategy in-house then executing the strategy by buying ETFs or mutual funds, or by assigning parts of the portfolio to outside investors. That separation between the people choosing the strategies and the people executing them creates a problem: the decisions made by the outsiders are somewhat opaque so that the strategy manager doesn’t necessarily know what exactly is going on in each piece of the portfolio. By using only in-house strategies, the MSTR managers have nearly instant access to the people running each of the fund’s components; if their quant screens show something odd happening with the global focused equity component, they’re able to walk down the hall to portfolio manager David Eiswert’s office and ask him.
To date, the fund has performed well. The fund returned 4.14% in the first six months of 2020, while the average multi-strategy fund fell by 5.4% – a 958 bps advantage for Price over just six turbulent months.
In the fund’s last two years, it has been a top 10 performer in its Lipper alternative multi-strategy peer group. The screener at MFO Premium shows:
Annualized total return: 4.1%, 8 of 57
Maximum drawdown: 4.7%, 7th best
Standard deviation: 5.5%, 12th best
Sharpe ratio: 0.41, 8th best
The purpose of MSTR is to diversify your portfolio, not be your portfolio. Many investors over-diversify, adding one stock (or bond) fund after another with each new addition adding less and less to the robustness of the entire portfolio. At base, investors just add more exposure to the same sets of risks and the same return drivers. MSTR diversifies by tapping into other sources of alpha which is reflected in its relatively low correlation to the S&P 500 (0.58), very low correlation to the bond market (0.16), and low downside capture ratio (0.12) against the S&P 500.
Investors looking for a way out of high levels of volatility and inconsistent returns should add T. Rowe Price Multi-Strategy Total Return to their due-diligence list, just as many investment professionals at Price itself seem to have done.
By way of full disclosure: I reallocated a substantial fraction of my retirement investments to TMSRX in May 2020 and disclosed that allocation in our June 2020 issue. The core of my retirement account at T Rowe Price is T Rowe Price Retirement 2025 (TRRHX), supplemented by T. Rowe Price Emerging Markets Discovery (PRIJX, an EM value fund) and T. Rowe Price Multi-Strategy Total Return.