T. ROWE PRICE GROUP INC. OVERVIEW.
Our revenues and net income are derived primarily from investment advisory services provided to individual and institutional investors inU.S. mutual funds, subadvised funds, separately managed accounts, collective investment trusts, and otherT. Rowe Price products. The otherT. Rowe Price products include open-ended investment products offered to investors outside theU.S. , and products offered through variable annuity life insurance plans in theU.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 ofU.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.
MajorU.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-termU.S. Treasury yields climbed amid growing expectations that theFederal Reserve could soon begin to taper its monthly asset purchases. Investors were also concerned thatCongress 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 inU.S. dollar terms;UK shares fell marginally. Developed Asian and Far East markets were also mixed. Japanese shares rose close to 5%, whereasHong Kong stocks slumped more than 9% due in part to Chinese regulatory developments. Emerging markets equities generally declined. InLatin America , Brazilian shares tumbled more than 20% inU.S. dollar terms; inAsia , South Korean shares slumped 13%. Emerging European markets rose broadly, though Turkish stocks trailed the region with a 2% gain. Page 19
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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 inU.S. dollar terms. In theU.S. , long-termTreasury yields initially declined, but they rose in late September after theFederal Reserve signaled that it could soon moderate the pace of its monthly asset purchases. The 10-yearU.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 strongerU.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 theU.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 fromJune 30, 2021 , and an increase of$141.8 billion from the end of 2020. For the three months endedSeptember 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 theU.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 endedSeptember 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 theU.S. mutual funds primarily to collective investment trusts and other investment products, of which$12.7 billion transferred into the retirement date trusts. The following tables detail changes in our assets under management, by vehicle and asset class, during the three- and nine-month periods endedSeptember 30, 2021 : Three months ended 9/30/2021 Nine months ended 9/30/2021 Collective Collective investment investment trusts and trusts and Subadvised funds other Subadvised funds other U.S. mutual and separate investment U.S. mutual and separate investment (in billions) funds accounts products Total funds accounts products Total Assets under management at beginning of period$ 865.8 $ 426.9$ 330.4 $ 1,623.1 $ 794.6
$ 400.1
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 atSeptember 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
Fixed income, Fixed income,
including money including money
(in billions) Equity market Multi-asset(1) Total Equity 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
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 inthe United States , were$8 billion atSeptember 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 endedSeptember 30, 2021 . Past performance is no guarantee of future results.
% of
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
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%
Page 22-------------------------------------------------------------------------------- AUM Weighted Performance % ofU.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
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 endedSeptember 30, 2021 and 2020 on aU.S. GAAP basis as well as a non-GAAP basis. The non-GAAP basis adjusts for the impact of our consolidatedT. 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. Page 23 -------------------------------------------------------------------------------- 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
10.5 %$ 2,862.7 $ 2,484.0 $ 378.7 15.2 %
Net operating income
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
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 comparableU.S. GAAP measures at the end of the Results of Operations section of this Management's Discussion and Analysis.
Results Overview - Quarter ended
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. AtSeptember 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 theJuly 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 Page 24 -------------------------------------------------------------------------------- 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 onAugust 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 atSeptember 30, 2021 , a decrease of 7.2% from the end of 2020 and 6.7% fromSeptember 30, 2020 . Excluding the approximate 800 associates that became employees of FIS onAugust 1, 2021 , headcount would have increased approximately 3% from both the end of 2020 and fromSeptember 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 endedSeptember 30, 2021 Investment advisory revenues. Investment advisory revenues earned in the nine months endedSeptember 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 endedSeptember 30, 2021 . The average annualized effective fee rate earned on our assets under management during the nine months endedSeptember 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 theJuly 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 endedSeptember 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 endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 . For the nine months endedSeptember 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 Page 25 -------------------------------------------------------------------------------- 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 endedSeptember 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 inJuly 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 endedSeptember 30, 2021 was 49.9%, compared to 44.5% earned in the 2020 period. The increase in our operating margin for the nine months endedSeptember 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 endedSeptember 30, 2021 as compared to$6.66 for the nine months endedSeptember 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 endedSeptember 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. Page 26 --------------------------------------------------------------------------------
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
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 endedSeptember 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 theU.S. mutual funds, higher model delivery revenue, as well as higher 12b-1 revenue earned on the Advisor and R share classes of theU.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 consolidatedT. 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 endedSeptember 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 800T. Rowe Price operations and technology associates to FIS onAugust 1, 2021 . For the nine months endedSeptember 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 onAugust 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 endedSeptember 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 Page 28 --------------------------------------------------------------------------------
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
The amounts paid to third-party intermediaries that source the assets of the
Advisor and R share classes of our
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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 30, 2021 and 2020. Page 29
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