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Hi Phil:

David wrote today: "We must all constantly ask ourselves, "Is MY money invested right now the best way it can be?"

My question is: Do you still believe in T Rowe?

Thanks,
Jacques
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Jacques --

I'm wondering if tonight's (4/1/99) column by Phil, by explicitly mentioning Vanguard when TROW has its own 500 Index fund, is an answer (conscious or subconscious) to your question.

-- johnmd3

From the 4/1/99 RM Report, by Phil Weiss:

"The S&P 500 index has crushed the returns of nearly 90% of all other equity funds over the past decade (according to Lipper Analytical Services). Many fund companies offer S&P 500 index funds, but the Vanguard 500 Index Fund seems to offer the lowest expense ratio -- only 0.18% for 1998. "
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I'm wondering if tonight's (4/1/99) column by Phil, by explicitly mentioning Vanguard when TROW has its own 500 Index fund, is an answer (conscious or subconscious) to your question.

Actually, I edited Phil's column and added the info about Vanguard. This plug for Vanguard's S&P Index fund certainly represents my opinion that Vanguard is *the* force to reckoned with in the mutual fund world. My belief in Vanguard is based on the convincing evidence that managed funds are at an irreconcilable disadvantage to index funds. Higher taxes, trading expenses, and management expenses create a hurdle that actively managed funds simply can't o'erleap. If Vanguard were a publicly traded company, I think it's safe to say that it would be in our portfolio instead of T. Rowe. Of course, this is all just my opinion. The Rule Maker managers are an opinionated bunch, and we sometimes disagree on certain issues.

-Matt
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David wrote today: "We must all constantly ask ourselves, "Is MY money invested right now the best way it can be?"

My question is: Do you still believe in T Rowe?



Hi all,

I've got a new user name here. I'm no longer going by MrShihTzu (though IMHO, it will always be the best breed of dog there is). I just figured a change might be nice, so I now go with my favorite food, rather than my favorite breed of dog. Both of our ShihTzus love grapes as well, so the connection is still there :-)

I saw there were a few questions on T. Rowe (including this one). I have been thinking about it a bit myself lately.

When we bought it, my reasons for supporting it from a business perspective were basically as follows:

-- Despite the best intentions of TMF, there will still be people that invest in mutual funds rather than stocks.

-- Of the public fund companies, T. Rowe was the one that I respected the most.

-- T. Rowe's funds have relatively low expense ratios, something that I believe is very important.

-- The majority of 401(k)'s offered by companies require that employees invest in the mutual funds that are offered rather than individual stocks.

-- T. Rowe has a strong position in the 401(k) market (as a matter of fact, that's the provider that my wife's company uses).

That's the business advantages that I saw. The question is then, do those things still apply and/or are there better places to put my money.

Right now the biggest question that I have is whether or not I still have respect for management. As you'll see if you read the annual report, it looks as if management is being a bit too generous with stock options. Plus, I know from some other reading that I've done that many fund directors are paid way too much in relation to their responsibilities. In reading through the proxy I was compelled to vote against all directors (something that I can't recall doing before).

I also didn't like the fact that the proxy didn't include any other issues specifically, just a request that shareholders agree to let their shares be voted as the company saw fit on all other issues that might come up. AND, you could only abstain or vote for that. A blanket no was not allowed. I've never seen that on a proxy before. I'm left with a bad taste in my mouth.

I think the other reasons I liked the business model still hold though. But, I can't deny that I feel a bit uncomfortable owning this company right now.

Yes, the company has underperformed badly since we bought it, too. As a long-term investor, that doesn't mean all that much to me yet. The original commitment was for 10 years. We've been through about 14 months so far. A lot can happen between now and then.

From what I can tell the business model still seems intact. I do have less trust/faith in management than I did when we bought for this port. (I bought some, too, as I own every stock we own in this portfolio personally as well.)

Looking at what I've written above, I can say that an argument can be made that we might have a reason to sell. Of course, my reaction to what I've come across in terms of losing some respect for T. Rowe's management may not be the same as that of my fellow managers. If it's not, then there's no reason to sell if one believes that the business model is still intact. However, if the concern is shared, then further discussion is merited.

I know that I haven't given a definitive answer, but I really don't want to right now. What I would like to hear is more feedback.

Foolishly,

Phil
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>>I know that I haven't given a definitive answer, but I really don't want to right now. What I would like to hear is more feedback.<<

1) Brand Points (0-1)
Familiarity 1
Openness 1
Optimism 1
Legitimacy 1
Inevitability 0
Solitariness 0
Humor 0
Subtotal 4
2) Financial Location Points (0-2)
Mass Market Habit 2
Gross Margins 0
Net Margins 2
Sales Growth 2
Cash-to-Debt 2
Fool Flow Ratio 0
Your Interest 1
Subtotal 9
3) Financial Direction Points (0-3)
Gross Margins 3
Net Margins 3
Shares Outstanding 0
Cash-to-Debt 3
Fool Flow Ratio 2
Expansion Potential 1
Subtotal 12


4) Monopoly Status Points (0-4)
Gross Margins 0
Net Margins 2
Net Cash 2
Fool Flow Ratio 0
Convenience 2
Subtotal 6

5) Your Enjoyment 1
Total Score 32 Third Tier

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A 32!!

I agree with not feeling to comfortable owning it right now. We should only hang on to this stock if we think that it is a value investment that has nothing fundamentally wrong with it, and is simply out of favor, or has the ability to turn things around. I believe the market is moving towards individual investors, but I also believe that funds will ultimately still grow due to the fact that the growth of number of investors and the amount of monies being invested will nullify the effects of the current trend. There has been more recent news in regards to funds reopening (Vanguard Windsor) due to net withdrawals. This might only be a trend that continues until the fund companies react and offer more vogue type funds such as index funds of various types that have low internal costs (managers are overpaid relative to the value and effort they put forth—no question in my mind). The slowdown of monies being invested in mutual funds is partly because of the low commissions now offered to individual stock investors, and also partly because of the low performance of mutual funds that is more widely publicized.

Now for the answer.

I think we should sell. Not because I believe that TROW will not prosper, but because I strongly believe that our money, and in turn us, will be better served elsewhere. Companies such as Schwab and AMEX offer what TROW does and more. They will benefit from the demographic trends mentioned in TROW's Buy Report and then some. They also don't make their money solely on the heals of the uneducated consumer, or worse yet the consumer who is forced to invest in mutual funds because corporate pension plans don't allow otherwise. I t makes me sick when I see the abundance of wealth accumulated by the founders/managers of CERTAIN mutual fund companies that make their spoils by offering a product that is doomed for underperformance—where the “under” equals their profit. At least AMEX and others alike offer diversified financial services such as RIA arrangements, Internet Brokerage services, and planning in general. Don't get me wrong, I don't dislike all mutual funds. I happen to like sectoring funds and focusing funds that limit their diversity. For someone who has no interest in the market who doesn't have enough $$ to get into a RIA arrangement, a combination of the latter with index funds might not be a bad idea.
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Thanks for the analysis Leo. I do note a couple of differences though. I get a 2 for current gross margins and flow ratio (provided that it makes sense to use our standard metrics for this company). That's worth at least another 4 points and up to 8 for monopoly status (depending on who you compared it to).

Phil
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I compared it to Franklin. I did the ranking quite awhile ago so I'll go back and check the numbers.
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<Right now the biggest question that I have is whether or not I still have respect for management. As you'll see if you read the annual report, it looks as if management is being a bit too generous with stock options. Plus, I know from some other reading that I've done that many fund directors are paid way too much in relation to their responsibilities. In reading through the proxy I was compelled to vote against all directors (something that I can't recall doing before).

I also didn't like the fact that the proxy didn't include any other issues specifically, just a request that shareholders agree to let their shares be voted as the company saw fit on all other issues that might come up. AND, you could only abstain or vote for that. A blanket no was not allowed. I've never seen that on a proxy before. I'm left with a bad taste in my mouth.>

Dear Phil,

Like the name change and adjusted my favorites fools.
Concerning T. Rowe Price I would go so far as call the management criminals. The options set up on page 30 of the annual report is unbelievable. You can read my post on it so that I don't have to rewrite it here. In my 25 years of analyzing stocks I have never seen a management grant itself options in this way. It reminds me of old Ron Perelman of Revlon, giving himself 95% of the companys voting stock, I hear Gabelli just did the same thing. I can see why Tom dislikes him so much.

Here is my post from AMA;

http://boards.fool.com/registered/Message.asp?id=1331118000443000&sort=postdate

Sorry if I made you upset with my comments but I would hate to see you hurt with this investment.

Your Friend

MYCROFT
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Current Period Year-ago Period
FYE 12/98 Dec-97
Income Statement . . .
Sales 886 755
Cost of Goods Sold 573 490
Net Income 174 144
Shares Outstanding 148 124

Balance Sheet . . .
Cash & Equivalents 284 200
Current Assets 577 460
Current Liabilities 130 109
Long-term Debt 0 0

Margins & Ratios . . .
Gross Margins 35.3% 35.1%
Net Margins 19.6% 19.1%
Cash-to-Debt No Debt! No Debt!
Fool Flow Ratio 2.25 2.39
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Mycroft,

No reason to think you upset me with your comments. One of the things that I like about this forum so much is that it allows for people with both similar and different viewpoints to discuss the merits of different approaches.

I had read your earlier post on T. Rowe (found a link on that board as well). I think my thoughts on management while not as strong as yours certainly are in the same general direction.

Fool on,

Phil
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Looks like we determine cost of sales and cash and equivalents differently.

You've added all expenses other than occupancy to determine cost of sales. I've seen some sources that would take only comp and related costs. I can see adding the int'l investment research fees I definitely exclude other opertating expenses and think that advertising & promo expense should be excluded as well. Once you do that gross margin is over 50%.

On the balance sheet we are probably looking at things differently as well. Zacks' only includes the cash and receivables as current assets. I'd say that it's possible that the investments in sponsored mutual funds and partnership and other investments could possibly be included in current as well as that would be consistent with how we treat other marketable security holdings (but I can't say for sure as the footnote doesn't give me enough information).

Doint that would improve the flowie as well.

Now that I've said that, I'll also say that as a financial company, I'm not sure that the way we traditionally look at Makers is the best way to look at T. Rowe.

Phil
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I'll add my voice to this chorus. Over time I've bought every one of the Rule Makers, except for the Dow Dividend group, Yahoo (still thinking about it), and TROW. TROW seemed to me like it didn't belong from the start. It is far from being a leader in the mutual fund industry. The clear leaders, head and shoulders above the rest, are Vanguard and Fidelity. Too bad they are not publicly traded, but that doesn't change the fact that TROW is a second tier player.

My candidate for replacing TROW would be Schwab. They have very strong financials (although I haven't scored them in detail) and the qualitative characteristics of a Rule Maker par excellence.

Elan
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I always wondered what TROW was doing in this portfolio because it always seemed out of place. I myself would rather hold DELL (which was recently rejected for Rule Maker status) than TROW.

the LanceMan
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>>Looks like we determine cost of sales and cash and equivalents differently.<<

Not really. As I said in my earlier post, I ranked TROW way back based on MSN Investor Web Site's financial statements (before I received my financials in the mail from TROW). The data was in summary--so as a result I did some estimating based on deduction. Now that I see the financial statement (hard copy form), some of the summary/general financial info. MSN gave was misleading. Hey, that's why there are notes to financials. Tax season has prevented my follow up ranking.

Elan, could you do the Rule Making Ranking of Schwab. If not, I'll get to it some time.... Maybe we can have a grass-roots effort to oust TROW and replace it with another financial entity.

Thanks,

Leo

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Total Score 32 Third Tier

DoubleEntry, Who did you compare them to for monopoly status?? 32 doesn't look so hot....

-MV
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>>DoubleEntry, Who did you compare them to for monopoly status??<<

Franklin
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