T Rowe Price Group Stock

Good morning. My name is Daniel, and I will be your conference facilitator today. Welcome to T. Rowe Price's Third Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded and will be available for replay on T Rowe Price's website shortly after the call concludes. I will now turn the call over to Linsley Carruth, T. Rowe Price's Director of Investor Relations.

Hello, and thank you for joining us today for our third quarter earnings call. The press release and the supplemental materials document can be found on our IR website at investors.price.com. We'll start our call with our Chair and CEO, Rob Sharps and CFO, Jen Dardis, discussing the company's results. Dee Sawyer, our Head of Global Distribution, will then share an update on our ETF SMA and model businesses. Then we'll open it up to your questions at which time will be joined by our President, Co-Head of Global Investments and CIO, Eric Veiel. We ask that you limit it to 1 question per participant. I'd like to remind you that during the course of this call, we may make a number of forward-looking statements and reference certain non-GAAP financial measures.

Please refer to the forward-looking statement language and the reconciliations to GAAP in the supplemental materials as well as in our press release and 10-Q. Discussions related to the funds is intended to demonstrate their contribution to the organization's results and are not recommendations. All investment performance references to peer groups on today's call are using Morningstar peer groups and for the quarter that ended September 30, 2026. Now I'll turn it over to Rob.

Thank you, Linsley. I'm joined today by Dee Sawyer, Head of Global Distribution; who will share an update on our ETF, SMA and model portfolio businesses, areas where we are investing, innovating and gaining traction. Before we hear from Dee, I'll share a few thoughts on the quarter and then Jen Dardis, our Chief Financial Officer, will take you through our financial results. We ended the quarter with $1.86 trillion in assets under management and $28.3 billion in net outflows. Looking ahead, we anticipate some sequential improvement in net flows in the fourth quarter with outflows moderating from third quarter levels but remaining elevated.

Regardless, we're making notable progress with improving performance, innovative product launches and continued advancements across our partnerships. Let me start with investment performance. Over 50% of our fund assets beat their peer groups on the 1-, 3- and 10-year time periods. The 5-year time period fell short of that mark with 44% of fund assets outperforming. Results improved notably from last quarter for the 1- and 3-year time periods, particularly in equities, with 48% and 58% of fund assets outperforming their peers, respectively.

For the 5 and 10 year, 37% and 60% outperformed. Our Large Cap Growth Suite delivered a strong quarter, with all 3 funds beating their peer group, reversing the underperformance we saw in the prior quarter. U.S. equity research remains a top quartile performer for the 3-, 5- and 10-year time periods and the 1 year just missed coming in at the 26 percentile. Both capital appreciation and global stock beat their peer groups across all reported time periods. Capital appreciation is top decile for the 5 and 10-year and global stock is top decile for the 1 in 10 year.

Fixed income performance remained strong with 85%, 74%, 76%and 82% of fund assets beating their peer groups for the 1-, 3-, 5- and 10-year time periods, respectively. Global multisector floating rate in several municipal strategies stood out. In target date, 80% of assets outperformed their peers for the 1- and 3-year time periods, 55% for the 5 year and 98% for the 10-year. Nearly all the Target data assets outperformed in the third quarter, driven by the retirement Glidepath higher relative equity exposure, a tactical underweight to bonds and our allocation to inflation mitigating assets.

Shifting to alternatives. Performance across OHA strategies was strong in Q3. Among the underlying drivers with strength in software exposures, both public and private, this dynamic contributed to strong performance across private credit, both in institutional and wealth and CLOs as well as positive relative performance in loans and multi-asset credit. Distressed and opportunistic funds also generated gains driven by positive idiosyncratic developments.

In addition to strong investment performance, there were a number of other highlights from the quarter. In August, we announced that we plan to acquire FM investments with the closing expected early in 2027. FM is a fixed income asset manager and ETF specialist with approximately $20 billion in assets under management across exchange-traded funds, institutional separate accounts and both taxable and municipal separately managed accounts. With this transaction, we will enhance our fixed income platform and accelerate growth in our ETFs and solutions. This is consistent with our overall approach to M&A, extending our capabilities with limited overlap, strengthening our competitive position and adding top talent.

We're also growing our fixed income franchise organically, where we had another strong quarter with $3.4 billion of net inflows. Earlier this year, we extended our platform with 2 TRO price managed CLOs. The most recent CLO, which closed in August issued approximately $400 million in notes. We are also making progress through our strategic partnerships. As part of our relationship with Aspida, we launched the first index strategy in a Aspida's fixed index annuity suite, which extends our investment capabilities into the growing retirement and insurance marketplace.

We also reached several milestones in our collaboration with Goldman Sachs. We launched 2 interval funds in the quarter, the T. Rowe Price Goldman Sachs private markets fund launched early in the quarter and is now available on several external platforms. All Equity Access Fund received SEC approval in late August and launched in early September. The fund brings together our public equity research and late-stage venture investing experience with Goldman Sachs Asset Management's institutional private equity expertise.

We added a sixth model the Goldman Sachs T. Rowe Price dynamic ETF and alts portfolio, which includes the private markets interval fund as a building block. And we continue to build momentum toward the launch of our Target Date sister series. T. Rowe Price Goldman Sachs Retirement Blend Plus. We have an active pipeline of interested plan sponsors with several progressing toward implementation. The product is operationally ready, and we are working closely with these sponsors to finalize launch time lines. In early October, Robinhood announced plans to bring tokenized versions of actively managed ETFs on chain for eligible investors outside the U.S. We're pleased that Robinhood has chosen T. Rowe Price's active ETF strategies to be first. This initiative offers a valuable opportunity to learn how tokenization is developing and how investors may engage with established investment strategies in new ways.

Being able to explore this opportunity with Robinhood reflects the growing strength of our active ETF capabilities and our commitment to innovation. We're also advancing our use of AI through our strategic relationship with anthropic. The relationship is expanding our enterprise capabilities by giving portfolio managers and analysts access to Claude and co-work and developers access to Claude code. AI is moving into the core of how we invest, helping our teams enhance research, synthesize information and create capacity for the judgment that drives client outcomes. We're moving beyond broad adoption toward AI-enabled workflows with measurable business value across investments, distribution and operations.

Every application is governed by the firm's standards for responsible use and built to keep human judgment and accountability at the center of our work. We also refined our AI leadership model embedding AI leaders in investments in global distribution and charging T. Rowe Price Labs, our enterprise AI innovation hub with evaluating and scaling AI across the firm with strong governance and risk oversight.

While the environment for active equity is difficult, we are broadening how clients can access our capabilities and investing in the partnerships and technology that will differentiate us over time. I remain confident in where we're headed. I want to thank our associates for their focus and commitment to our clients. And now Jen will share an update on our financial results.

Thank you, Rob, and hello, everyone. I'll review our third quarter financial results before turning the call over to Dee. Our adjusted diluted earnings per share for Q3 2026 was $2.86, up from $2.57 in Q2 2026 and $2.81 in Q3 2025. The increases over both prior periods were driven by higher average AUM. A lower share count was also a factor in the year-over-year increase. As Rob mentioned, we had $28.3 billion in net outflows during the third quarter. This was driven by continued outflows from our strategies and mutual funds. Multi-asset net outflows were $7.6 billion, primarily from our target date strategies. This included a previously disclosed large redemption from a defined contribution plan in our active target date series in September.

Fixed income and alternatives were positive during the quarter, and we saw net inflows from clients in APAC. Within our expanding ETF lineup, net inflows were $3.8 billion, bringing year-to-date ETF net inflows to $11 billion. These results demonstrate the breadth of client demand across several areas of our business. Moving to the income statement. Our third quarter adjusted net revenue was $2 billion, up 5.3% from Q3 2025 and up 5.1% from the prior quarter. Investment advisory revenue of $1.8 billion was up 5.8% from Q3 2025 and 3% from the prior quarter on higher average AUM, partially offset by a lower effective fee rate.

Adjusted carried interest was $63.1 million compared with $15.2 million in Q2 2026. This includes carry earned on OHA's private credit products in addition to our late-stage venture fund that launched in Q1 2026. Our Q3 annualized effective fee rate, excluding performance-based fees, was 37.8 basis points compared with 38.1 basis points in Q2 2026. About 2/3 of the decline was driven by the continued growth in our Target Date Blend and hybrid suite with the remainder reflecting ongoing outflows from U.S. equities and vehicle mix shift. These trends continue to reflect client demand for solution-oriented products and lower fee vehicles.

We continue to invest in these areas and broaden our range of offerings. Looking at expenses. Q3 adjusted operating expenses, excluding carried interest expense, were nearly $1.2 billion, down 1.6% from Q2 2026 and up 5.7% from Q3 2025. The decrease from the prior quarter reflects lower compensation and related costs. The third quarter of 2026 also included the reversal of about $10 million of accrued technology-related expenses for work that's now expected to occur in future periods. The increase from Q3 of last year was primarily due to expenses that track with AUM and revenues, including higher compensation and related costs and higher distribution and servicing expenses.

Based on the third quarter's average AUM, we continue to expect 2026 adjusted operating expenses excluding carried interest expense to be up 4% to 7% over 2025, $4.6 billion. We are trending towards the middle of that range. Turning to capital management. Our balance sheet remains strong with $4.9 billion in cash and discretionary investments. From this position, we can continue to invest in growth initiatives and seed capital support our dividend and opportunistically repurchase shares. And now I'll turn it over to Dee.

Thank you, Jen. I'm pleased to join today's call to highlight how we're expanding the ways clients can access our investment capabilities through EPS and model portfolios. Across our global wealth channels, clients tell us that they want more choice, more personalization, more tax efficiency and more control. And advisers need ways to deliver that consistently and efficiently across our entire client base. ETFs, SMAs and models are a few of the ways we are meeting these needs. Our active ETF franchise has become an important growth platform for us with strong recent flows and market share momentum in the rapidly growing active ETF marketplace and we're investing in our ETF franchise by adding sales roles to further this growth.

We've launched 6 new ETFs in the third quarter, 2 new fixed income ETF securitized income and dynamic emerging market bond, 3 new equity ETFs, mid-cap equity research, SmallCap and biotech and our active crypto ETF. That brings our lineup to 39 ETFs, including 11 with more than $1 billion in assets under management. Our total ETF AUM has grown to $33.8 billion, up from just $6.9 billion, 2 years ago. That growth, which was driven by over $23 billion of net flows over those 2 years demonstrates strong demand for the products we've launched. We generated $3.8 billion in ETF net inflows this quarter, and we've averaged over $1 billion a month since the start of the year.

We are pleased that our organic growth rate has outpaced the active ETF industry every month since March, and we're now the 13th largest active ETF manager. Put us together, and it tells you 2 things: We're gaining share in a market that's growing quickly and we're winning in a market where assets remain concentrated among a relatively small number of firms. Our goal isn't to maximize the number of ETFs we offer. It's to build a coherent lineup around client portfolio needs, focusing on areas where we have differentiated capabilities and a credible path to scale. That starts with covering the core.

We have offerings across the major categories, asset classes and style boxes that form the foundation of most client portfolios. This includes our fully transparent growth, value, international equity and small mid-cap ETFs that all reached 3-year track records in June as well as 12 taxable and municipal fixed income ETF. From there, we innovate to meet client needs, adding satellite and differentiated exposures where we have a strong investment proposition behind them. That includes our active Crypto EPS, which is an actively managed multi-token exchange-traded products, sector ETFs that include technology, health care, natural resources, financials and the recently launched biotech ETF.

And our multi-sector income ETFs that leverages our deep credit research capabilities to identify differentiated sources of income across a broad range of fixed income markets. In addition to new stand-alone ETFs that we've launched, selective mutual fund ETF conversions are a key priority. We are focusing on funds where the ETF wrapper has the potential to improve outcomes for existing fund shareholders, including potentially lower costs and greater tax efficiency while maintaining continuity of the strategy and performance history.

And now that there is regulatory approval, we are considering opportunities for ETF share classes, however, we hear from intermediaries and other industry participants that the broader ecosystem is not yet fully ready to support dual share classes at scale. We're also starting to extend our active ETF capabilities beyond the United States, and we're doing it in the same disciplined way we've built our U.S.-based lineup, starting with the core.

In Europe, we're beginning with core equity building blocks in the largest categories. Earlier this month, we launched Integrated Global Equity and integrated U.S. Equity enhanced index as UCITS ETF. These first 2 ETFs built on proven strategies. By combining quantitative and fundamental research insights, our integrated equity approach broadens the source of potential alpha as well as enabling downside protection. We plan to launch additional core exposures first and then move into more differentiated thematic outcome-oriented strategies.

Additionally, Robinhood announced pending regulatory approval, they are planning to launch a stock token that has economic exposure to T. Rowe Price active ETFs. SMAs are another important way we're delivering our active capabilities into the wealth channel. And in SMA, the client owns the underlying securities directly rather than shares in a pool of fund. That distinction matters for tax management and customization.

We've expanded our SMA lineup, launching U.S. core bond, U.S. short-duration bond, U.S. investment-grade corporate bond, active core U.S. equity and diversified mid-cap growth SMAs in the third quarter, bringing us to 44 externally available SMA strategies. On scale, SMA assets reached $20.6 billion as of the end of September, up from $16.8 billion at year-end, driven in part by $2.2 billion in net flows to our SMAs year-to-date.

We now have roughly 36,000 funded SMA accounts, up over 50% from the prior year and more than double where we were in mid-2023. Currently, these strategies are available across 40 wealth and platform relationships, and we continue to add new relationships and expand the number of strategies available across existing platforms. At the heart of it, we're combining T. Rowe Price's fundamental active investment capabilities with technology that can personalize implementation at the individual account level. That means to the extent possible, daily tax of harvesting, tax-aware transitions, concentrated physician management, client-specific restrictions and tax reporting.

We use each client's own cost basis and realize gains as we seek to preserve the active exposure they look to us to provide. As Rob mentioned, we're excited about the pending F/M acquisition. This will accelerate growth in both our ETF and SMA businesses, building on the strong momentum that I've described. I'll turn now to model. which are becoming 1 of the most important ways advisers construct and manage client portfolios, and therefore, create a significant distribution opportunity for both our EPS and SMA. We participate in models in 2 ways.

First, we build our own tier price developed asset allocation models that combine our investment building blocks into complete portfolio solutions. These include our risk-based and completion models. In our retail direct business, T Rowe Price developed models, which use our mutual funds and ETFs building blocks are the foundation of our retirement advisory services. Through our financial intermediary partners, these models help advisers deliver consistent portfolio construction, while they retain responsibility for the broader client relationship.

We also have a team within our multi-asset division that works with advisers to develop custom models based on their objectives or constraints. Second, our products show up as building blocks inside other firms' models. Our ETFs, SMAs and other capabilities get selected as components within intermediary or partner models. For example, in the third quarter, our international value SMA was selected for placement in a large wealth management firms model. And winning a position inside a model is a different kind of win than winning an individual account.

It's broader and more repeatable as it extends across many accounts and has the potential to build over time. In addition, Models are an important part of our collaboration with Goldman Sachs. T Rowe Price products, including OHA-managed strategies are building blocks across 6 Goldman models. Overall, we aim to earn a place in the portfolio construction frameworks that advisers rely on to manage client portfolios. Let me close with 4 key points. Clients increasingly want choice, personalization, tax efficiency and greater control. Advisers want scalable ways to deliver those capabilities to their clients. T. Rowe Price's combining deep active investment expertise with ETFs, SMAs and models to meet these needs.

We're investing thoughtfully to build durable growth platforms for the long term. We believe ETFs, SMAs and models represent important long-term growth opportunities for T. Rowe Price. They let us meet clients where clients want to invest and help advisers deliver increasingly personalized solutions at scale. Importantly, they let us extend to T. Rowe Price's active investment management expertise to more clients through a broader range of solutions.

We see substantial runway ahead in ETFs, SMAs and models, and we're committed to continuing to invest in the capabilities that will sustain back growth. Now we'll open the line for questions.

[Operator Instructions] Our first question comes from Glenn Schorr with Evercore.

I thought that was a very helpful conversation with ETF SMAs and models. It's interesting because I have a similar question for the institutional side. So I wanted to pick your brains on how we should be thinking about LP thought process as we go into next year. So the active to passive trend is probably a dominant thing is going to continue. But levering the conversation you just had on ETFs, SMAs and models, LPs are also thinking about having control and taking a big portfolio solution approach. And so as they're balancing big AI CapEx to chain, the move up in interest rates.

I'm curious on how you see allocations changing as we head into '27. Is it the same also? Or are these same themes taking place. I'm just curious how much of that conversation applies to the institutional side.

Yes, Glenn, thank you for the question. I think the facts and circumstances of each individual institutional clients often are different. And it's hard to discern an overall theme. At a high level, as you said, the shift from actively managed equity portfolios to index-based portfolios is something that's been underway across client type for some period of time. I think that's partly reflective of the composition of market returns and perhaps is something that's likely to continue. I think we have seen a resurgence in interest in broader strategy approaches, more interest in value-based approaches we've kind of shifted away from the returns being dominated just by hyperscalers and broadening out to all of the beneficiaries of AI CapEx.

I think there is also a greater interest in fixed income, as you said, rates are higher. I think there's a greater sensitivity to inflation. So among certain client types, we've seen a real interest in portfolios that provide exposure to inflation hedges or asset classes that will be resilient in an environment where you have more persistent inflation. Within alternatives this year, I think we've seen kind of more interest in infrastructure or more interest in secondaries than we certainly have in traditional PE and in private credit. I do think that there is pretty significant opportunity from a private credit perspective.

I guess the last thing I would say is that there is, I think, significant opportunity in late-stage venture, which is an area where we're active given a lot of the really dynamic newer businesses and business models that AI is enabling.

Our next question comes from Alex Blostein with Goldman Sachs.

So lots of interesting growth dynamics underneath the surface. So Rob, I was hoping if you take a slightly broader step back and, sort of, you think about all the new wrappers and new partnerships, new initiatives. And as you think about T. Rowe's organic growth over the next kind of 2 to 3 years, how much do you expect these initiatives to ultimately add to the organic growth profile, acknowledging that obviously, the active equity business continues to be still somewhat challenged.

Yes, Alex, thank you for the question. I mean we're clearly navigating significant structural change. And we do expect pressure on active equities and mutual funds to persist. I think we fully recognize these trends and we're investing to compete successfully as the industry evolves. And as these comments reflected, I do think we're seeing tangible results, not just in ETF, SMA and models, but I would point out in fixed income, we've had 11 quarters of net inflow. As you noted, we continue to expand our alternative offerings, late-stage venture the collaboration with Goldman, a lot of growth opportunity with OHA.

We're strengthening distribution to go-to-market and connect with clients in all of those areas. And we're also broadening our retirement offerings. I would say in each of these areas, we have the opportunity and, frankly, need to be bigger. We need to deliver great performance, which will allow the more mature businesses to be more stable. And then we need to scale these businesses where client demand is growing. I will also say that given the growing importance of distribution, we have a significant opportunity to invest in our direct business and our record-keeping platforms and our advice capabilities to drive great, more direct wealth and workplace experiences with our clients.

So we're very focused on all of these. And I'd say not to confuse the near-term flow outlook with our confidence in the business over time. I do think that we have a very solid foundation, and we have the opportunity to return the business to growth. There are, as I said, we're getting traction in a number of these things. They need to be bigger. I think we have the opportunity to make them bigger organically, but we'll also use M&A as a tool where appropriate. And again, selectively, I'm with a high bar to allow us to evolve the overall portfolio and business mix.

Our next question comes from Dan Fannon with Jefferies.

So sticking with you, Rob and kind of your comments around the sequential improvement in flows. Just unpacking that a bit, is that just kind of the lack of a large redemption, which happened in the third quarter? Or is there some gross sales trends that maybe are improving that you could talk about, obviously, ETFs, I would assume as part of that. And then also just in the fourth quarter, typically, there is some DC changes. And wondering just how that pipeline looks at this point in time as well.

Yes, Dan, thank you. Yes, as you said, we do expect sequential improvement in Q4 relative to Q3 and relative to Q4 '25, but I think given the trends in active equity in particular, we would expect flows to remain at an elevated level relative to the run rate that we experienced in the first half of the year. October is weak, but we see based on the pipeline, better results in November and December. As you said, there's a lot of year-end related plan activity. And that makes Q4 difficult to predict in the sense that there are instances where operationally those things can slip into early next year.

But we have a really good engagement with clients and I think a very healthy set of opportunities across the business to at least partially offset the ongoing active growth equity and mutual fund related headwinds. In terms of the specifics sequentially, we did have RDF plan termination in Q3 that impacted the results. It's probably worth spending a few minutes on the target date flow dynamic. I think there are 2 trends that we see impacting retirement date flows.

The first is participant flows where contributions and distributions are increasingly reflecting an aging participant base. So you have baby boomers retiring, taking distributions or rolling plan balances over into IRAs and often particularly given the market dynamic over the last couple of years, those balances are quite large. That means that there's less of a tailwind from participant net contributions than there has been in the past. And I think that's an industry-wide trend that's likely to persist for a couple of years.

What that means is that our growth opportunity will be more dependent on winning net new plans. And the second trend I would say is in that area, we're seeing tremendous interest in blend and hybrid right now. I would say, across our lineup, we feel very good about the investment performance over all time frames. But kind of particularly, I think if you look at 98% of our AUM outperforming over a 10-year time horizon, we feel it's a very compelling value proposition. We'll continue to innovate in the retirement area with retirement income-oriented solutions with the Goldman Sister Series incorporating alternatives into the target date building blocks.

So we see substantial opportunity in retirement solutions going forward. But I think it would be fair to characterize our target date flows is more dependent on winning new plans which means there'll be more uneven. And you saw that unfold over the difference between Q2 and Q3, where in Q2, we brought on a sizable new plan. And in Q3, we had, as I said, a sizable termination.

Our next question comes from Michael Cho with JPMorgan.

I just wanted to drill down on the active ETF conversation. Do you appreciate all the discussion and comprehensive overview there on the active ETF. You noted that T. Rowe is the 13th largest factor ETF manager. When you think about some of these initiatives in place in terms of magnitude of impact, can you just help us think through the execution road map from a distribution perspective from taking here on T. Rowe on 13 on list to maybe getting to top 5, if that's even the goal.

Sure. Thank you for the question. So as I said earlier, we do have 39 ETFs in the market, which represents 72% of the Morningstar category. So we feel really good about our lineup, but we will continue to add to our lineup, particularly where we see opportunities to meet client needs. And you've seen that we have really good momentum in the lineup that we have. We have 11 ETFs that have more than $1 billion in AUM, and we have -- even if you look at our net flows for the past year 4 ETF have $1 billion in net flows over the course of the year. So we feel really good about where we are. We are particularly focused in terms of kind of where we are on the leaderboard.

What we really want to make sure is that we have a lineup that is meeting client needs and that we continue to see the strength in our lineup by the assets, and then that closes that as a result of meeting those client needs. So we don't have a particular goal in terms of the leader board, but we are looking to continue to accelerate our overall flows, and we have good momentum and expect that to continue over time.

I would just say, I think we do expect to move up the leader board in the sense that I think we have a significant opportunity to gain share in the category. We're -- our growth over the course of the last couple of years has been substantial. And as we've broadened our lineup as we scale that line up as we get more placement on wealth platforms as we get more placement in models as more of our ETF models are placed on those platforms. We think there's a very significant opportunity to move up the ranks. Although, as Dee said, there isn't a specific objective to be top 3 or top 5.

I think we have a big opportunity to gain market share. I would also say that we've been able to build this business largely organically without converting existing mutual fund assets or doing ETF as a share class. But as Dee said in her prepared remarks, those are also opportunities, and we'll do that where but we think that it's the right thing to do for the underlying client and where we have the opportunity to preserve a track record and potentially access a broader base of clients and client interest for a set of strategies that have particularly compelling underlying investment results. And I think there are a number of things in fixed income that we're evaluating in that regard right now.

Our next question comes from Alex Bond with KBW.

I wanted to follow up on the model portfolio build-out. So as this build-out continues, can you just elaborate on the different opportunities that you see between the T. Rowe designed asset allocation models versus having your ETFs fit into third-party models. I think this was touched on a little bit, but hoping to drill down there. And also just wondering where you're seeing greater traction to date between those 2 routes and then also thinking how you're thinking about the distribution investment between those 2 avenues as well moving forward.

Sure. So a couple of things to note. So we think about models in multiple ways, as I mentioned earlier. And one of the things that we're seeing traction on is our own proprietary developed models. And as I mentioned, we see this in our individual investor retail direct business, but we also see this in the intermediary channel, and we expect continued growth there. The second part that I think is exciting and compelling, and we're investing behind it is continued growth in home office model. So this is where T. Rowe Price participates as a building block.

But the last one that I think is most compelling and exciting where we see incredible demand from advisers is around customized models. And customized models are designed to meet specific client needs. This is an area of focus, and this is where you can see greater customization at the client level, which we think is really compelling. And so what I think is exciting about our value proposition is that we have multiple ways to deliver models, and we're investing behind it.

From your question on distribution, you may have seen that we recently announced that we're adding to our intermediary business with an additional 50 associates. And that also is about our belief and expansion of our model business.

Our next question comes from Ben Budish with Barclays.

I wanted to ask one on the buyback. I noticed that there wasn't any this quarter. It looks like you've been very consistently buying back your shares for, I think, many quarters now. So just curious if there's any color there on where should we think about towards? Anything you could add would be helpful.

Thanks for the question. It broke up a little bit at the end, but I think we got the gist of the question is where are we on the buybacks and any change in posture. So thanks for the question. Taking a step back, I mean, there's no change in our posture. Our priorities for capital haven't changed. Our goals are to maintain financial strength, invest in the business, make sure we have seed capital available to be able to invest for growth, support the dividend and then return excess capital to stockholders over time.

So if you look at where we are this quarter, sitting at just about $4.9 billion in cash and discretionary investments I just -- 1 thing to point out that that's a high watermark for us during the year. We have fourth quarter payoffs of our variable compensation plans and the quarterly dividend that will come in the fourth quarter. So this is a high watermark from a capital perspective. But specifically from the buybacks, we made really good progress in the first half of the year. We bought just over -- just about 5.3 million shares for just under $500 million.

So as we got into the third quarter, we took a bit of a pause.

Yes. I'll just add that we've been pretty consistent in describing our approach to share repurchase as opportunistic, which means that the activity can vary from quarter-to-quarter. We continue to have the same approach where we have every intention of returning excess capital to shareholders through the regular dividend, through repurchases, but also want to maintain a very strong balance sheet, which we think gives us flexibility and optionality around whether it's M&A or the ability to seed and launch new strategies.

For us it is providing the equity behind the CLOs that were mentioned earlier in the prepared remarks, seeding things like the integral funds that we launched through the Goldman Sachs collaboration. Ultimately, that seed capital as the strategy scale will be recycled, but it is a commitment of capital. So we have a holistic approach to basically how we use our balance sheet and how we return capital to shareholders. And as I said, our buyback approach will continue to be opportunistic, but it is our intent to continue to return excess capital to shareholders.

Our next question comes from Michael Cyprys with Morgan Stanley.

I want to just circle back to some of the commentary earlier on AI. I was hoping you could elaborate a little bit on the AI-enabled workflows. Where that is today relative to where you'd like that to be. Talk about the steps you guys are going to be taking over the next 12 to 24 months. Curious any sort of early lessons learned on that and ultimately, how you see this translating to top and bottom line results at T. Rowe?

Yes. I'll take that. This is Eric here. We've invested heavily in our AI capabilities, and I would focus on sort of 2 main areas. First is on our investment process and getting these tools into the hands of our teams so that they can use it across their work to enhance research, synthesize information and frankly, create capacity for the judgment that drives client outcomes. The second area that we're very focused on is value creation for clients and part of that is some of these workflow discussions that you're talking about there.

That work is really important, but to do it really well, you've got to think about your processes from a ground-up basis and really and think about them from scratch. And I was just in an event with a bunch of executives across different industries. And this is a journey that every company and every industry is going on as they think about the workflows that they have. For us, specifically, I think there's a lot of opportunity for some of the things that we do in our middle and back office. And we've engaged in those journeys right now with some of our best people working on those. And they're going to come through over the next kind of 12 to 24 months as we really think thoughtfully about how to improve our processes. So you'll see impact on the investment side, and you'll also over time, see impact on the efficiency side.

Yes. I would just add quickly, I think investing in AI is a competitive necessity. Everybody is going to have access to these tools. I think the nature of how their use. The context is really going to be the opportunity to differentiate. And I think we believe, particularly in investments that we have the opportunity to deliver differentiated results. I think if you combine the power of these tools with the insight that our research platform brings into the organization that we really can improve the outcomes that we're delivering for clients. And I'd say we're beginning to see some early signs of that, but it will take time for that to prove out.

Yes, it's a really good point, Rob, one of the things I should have mentioned is ultimately what's going to drive differentiation and success here is your data, your proprietary data because everybody is going to have access to the same public sources. We have 20 years of unique research and trading information proprietary to us, and we're reloading that every year with thousands of new research insights, meetings with CEOs and that proprietary data, coupled with our tools, I think, will be something that's special for us.

Our next question comes from Bill Katz with TD Cowen.

So I just want to sort of come back to capital management for a moment. A couple of things aren't really adding up to me. You mentioned that you didn't buy any stock since June, but the stock is down significantly from the July highs. I'm sort of curious as to how you're thinking about value opportunity. But I think the broader question is, as I think about your business model, the active equity book is going down at very high fee rates and probably higher growing margins. You're growing nicely, but small in ETFs and SMAs and you see subscale in the credit platform with Oak kill, even though it's growing a little bit.

Why not more strident in terms of M&A opportunity to potentially accelerate the reshift of the business, particularly given your comments on the target date fund and how that seems the second bit of slowing down, and there will be more aggressive on buyback to help shrink the share count.

Yes, Bill, thanks for the question. I would say, first, you could maybe look at the pattern of the share price over the period of time since the end of the second quarter, and I think that would probably inform your answer. There's also a blackout period associated with kind of certain things that occurred during the quarter as well as from the period of time from quarter end until we report earnings. So I think there's really nothing more to read into it than that. In terms of understanding the challenges around active equity and the need to make some of these higher growth areas bigger, but we understand it.

As I said, I view M&A as a tool. I think you can do more harm than good, if you do M&A for M&A's sake. I don't think M&A can be a strategy. We have a very high bar, but kind of where we see opportunity to accelerate our growth in whether it's alts ETF SMA to expand our investment capabilities to reach more clients who are to really garner more share with existing clients, then we absolutely will lean in. The pace of activity in the industry right now is frenetic. So I think there is a lot of potential opportunity.

And our teams are very, very busy evaluating that. But again, we're going to have a high bar. I think to do M&A and do it right, you have to have alignment culturally, it has to be financially compelling. It has to fit with your strategy. You have to be very careful not to disrupt your existing client, your existing commitment to clients. So we understand the question. We understand that the industry is consolidating. And kind of all I would say is that we do have a vision to evolve the business to be bigger in many of these areas that are growing and M&A is a tool that is available where we see a compelling opportunity to deploy it.

And our final question comes from Patrick Davitt with Autonomous Research.

I have a follow-up on the sequential 4Q flow improvement comment. As you said, October looks pretty bad in the public data we can see. But as we think about December, when I think you typically have some lumpier redemptions and/or planned losses. When do you usually find out about those year-end redemptions when they come through? Like how much lead time do you usually get?

Thanks for the question. We typically do see a fair amount of lead time in the short term, around new plan wins as well as planned terminations. And so there's a fair amount of visibility in the quarter around that. And it depends, of course, on the client, it depends on whether that's consultant-driven search, but we tend to get a fair amount of lead time looking for -- in 4 to 6 months would be the approximate time I would give you.

Yes. Patrick, I would say there is some variability, particularly right around year-end. And kind of while that can impact the -- our quarterly reported results, I mean whether we get the business the last week of December or the first week of January, kind of really doesn't have much of an impact fundamentally on the underlying business.

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

Good morning. My name is Howard, and I will be your conference facilitator today. Welcome to T. Rowe Price's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded and will be available for replay on T. Rowe Price's website short after the call concludes. I will now turn the call over to Linsley Carruth, T. Rowe Price's Director of Investor Relations.

Hello, and thank you for joining us today for our second quarter earnings call. The press release and the supplemental materials and documents can be found on our IR website at investors.troweprice.com. Today's call will last approximately 45 minutes. We'll start the call with our Chair and CEO, Rob Sharps; CFO, Jen Dardis, and President, Co-Head of Global Investments and CIO, Eric Veiel discussing the company's results. Then we'll open it up to your questions. We ask that you limit it to one question per participant.

I'd like to remind you that during the course of this call, we may make a number of forward-looking statements and reference certain non-GAAP financial measures. Please refer to the forward-looking statement language and the reconciliations to GAAP and supplemental materials as well as in our press release and 10-Q. Discussions related to the funds is intended to demonstrate their contribution to the organization's results and are not recognitions. All investment performance references to peer groups on today's call are using Morningstar peer groups and for the quarter that ended June 30, 2026.

Now I'll turn it over to Rob.

Thank you, Linsley. I'm joined today by Jen Dardis, Chief Financial Officer; and Eric Veiel, Co-Head of Global Investments, Chief Investment Officer and newly named President of T. Rowe Price. Before Jen and Eric provide an overview of our financials and investment performance, I'd like to share a few thoughts on the quarter and the progress we are seeing across the business.

Markets rebounded in the second quarter after a difficult start to the year. We ended the quarter with $1.9 trillion in assets under management and $6.5 billion in Q2 net outflows. Fundamental active equity remains under pressure, and we expect that to continue in the second half of the year. Positive was in May and June, including a large sub-advisory win, reflect client demand in areas where we are investing and gaining traction. For example, we are seeing growing demand for strategies that integrate our fundamentals and quantitative platforms and directly leverage our equity research platform. Our integrated equity and fixed income strategies combined fundamental research, quantitative insights and aim to generate differentiated consistent returns.

Earlier this year, we extended this franchise with 2 lower tracking error active core equity ETFs. We have also expanded our long-standing equity research franchise, applying our analyst-driven fundamental investment approach across a broader submarket and asset classes. In addition to our flagship U.S. strategy, the platform now includes international, global, emerging markets, U.S. mid cap and SMID strategies. We believe these integrated and risk-controlled active approaches offered through a variety of investment vehicles, appeal to clients seeking the benefits of active management with lower tracking error. Together, these approaches account for about $200 billion of our assets under management and have added $16 billion of net inflows year-to-date.

We are also seeing momentum in active ETFs and SMAs, where we're expanding to meet the evolving needs of clients [indiscernible]. In June, we launched the T. Rowe Price Capital Appreciation Market Opportunities ETF, further extending one of our well-established investment suite. In mid-July, we launched T. Rowe Price Active Crypto ETF, which is an actively managed multi token exchange traded product and our first non-investment company, [ ETF ]. With these launches, our ETF business has grown to 34 funds and $30 billion in assets under management. In addition, we celebrated the 3-year anniversary of our first 4 fully transparent ETFs.

Our SMA platform now includes 43 products and $20 billion in assets under management. We are also advancing our strategic alliance with Goldman Sachs. On the first of July, we launched T. Rowe Price Goldman Sachs Private Markets Fund, our first interval fund in collaboration with Goldman Sachs. We completed the first filing for the second fund a public, private equity interval fund, that we expect to launch later this year. And we are hearing positive client feedback on the target date sister series and are operationally ready to launch as a CIT when client demand materializes.

Finally, we continue to see strong interest in our T. Rowe Price managed late-stage venture fund and expect to exceed our target fund size later this year, providing a foundation to build on this platform with a second fund anticipated in 2027.

We are making meaningful progress in how we use artificial intelligence across the firm. We are moving beyond isolated use cases and tools and embedding AI directly into end-to-end business workflows, with more than 130 AI solutions deployed across the firm and over 70% associated adoption. We are scaling advanced agent-driven capabilities from AI-powered investment research and portfolio insights to sales and client workflows, enhancing decision-making speed and consistency while keeping investment judgment and fiduciary responsibility firmly with our associates. Importantly, this progress is supported by a robust governance framework strong controls and ongoing associated upskilling so we can scale AI responsibly.

Before I turn to Jen, I want to highlight several recent leadership appointments. As I mentioned, Eric Veiel has been named President. In his expanded role, Eric will help drive enterprise execution and our most critical initiatives and strengthen connection of investments, global distribution and technology data and operations. He will retain his leadership responsibilities in Global Investments. And Sébastien Page, Head of Global Multi-Asset, is now Co-Head of Global Investments. With his deep multi-asset experience, Seb is well positioned to advance our work on solutions and outcomes. As we approach our 90th anniversary next year, these changes will sharpen execution across our highest priority initiatives and position the firm for continued growth in the years ahead.

Finally, I want to thank our associates for their focus, teamwork and commitment to our clients. Their work is building momentum and strengthening the firm for the long term.

With that, I will ask Jen to cover our financials.

Thank you, Rob, and hello, everyone. I'll review our second quarter financial results, before turning it over to Eric for comments on Investments performance. Our adjusted diluted earnings per share for Q2 2026 was $2.57, up to $2.52 in Q1 2026 and $2.24 in Q2 2025. The increase over both prior periods was driven primarily by higher average AUM and higher investments advisory revenue, coupled with lower share count, offset in part by higher expenses.

As previously reported, we had $6.5 billion in net outflows in Q2. While we experienced elevated outflows in April, we saw positive flows in both May and June. May flows were driven by a large defined contribution investment-only win into our hybrid target date series and June flows benefited from a large sub-advisory win into 2 of the research and integrated equity strategies that Rob discussed. We also saw positive flows from clients in both EMEA and APAC during the quarter. Fixed income, multi-asset and alternatives each delivered positive net flows in Q2, continuing to demonstrate the breadth of client demand across several areas of our business.

Within our growing ETF business, we had $4.4 billion in net inflows. We also continue to see steps in our hybrid and blend retirement strategies, which now account for about 25% of our overall target date assets. Our Q2 adjusted net revenue was $1.9 billion, up 2.7% from Q1 2026 and up 8.5% from Q2 2025. The increase was driven by higher AUM, partially offset by a lower change in accrued carried interest, which now includes the carry earned on our late-stage venture fund in addition to the private credit strategies.

Investment advisory revenue for the quarter was $1.7 billion, up from both the prior quarter and the prior year quarter on higher AUM levels. Our annualized active fee rate, excluding performance-based fees, was 38.1 basis points compared with 38.4 basis points in Q1 2026. The ongoing trend in our effective fee rate continues to reflect changes in asset and vehicle mix, including client demand for lower fee strategies and vehicles as well as continued pressure from redemptions in higher fee equity strategies and mutual funds.

Turning to expenses. Q2 adjusted operating expenses were $1.2 billion, up 4.2% from Q1 2026 and up 4.9% from Q2 2025, compared to both prior periods, higher market-driven expenses, product and recordkeeping and nonrecurring G&A costs were primary drivers of the increase. As a reminder, market-driven expenses correlate to changes in AUM or revenue and include variable compensation and costs related to assets distributed through third-party intermediaries. The increase in product and record-keeping costs is largely related to costs reimbursed from our products and offset in administrative fee revenue.

Also contributing to the increase from Q2 last year were higher technology, occupancy and facilities expenses, partially offset by cost savings initiatives. As we noted in Q1 2026, to better reflect technology spend executed by third parties, we began reporting technology-related professional fees in technology, occupancy and facilities, and we adjusted all prior periods presented. Based on the sustained average AUM and revenue trend in the first half of the year, we now expect full year adjusted operating expenses, excluding carried interest expense, to be up 4% to 7% over 2025 $4.6 billion. This increase, coupled with ongoing savings efforts, will allow us to continue to invest in areas of future growth, including ETFs and SMAs, delivering outcome-oriented solutions for clients, enhancing our advice blood offerings and investing in AI to improve research, decision-making and operational efficiency.

Turning to capital management. During Q2, we bought back [ $157 million ] worth of shares, bringing year-to-date buybacks to over $497 million, or nearly 2.5% of our outstanding shares. This brought our share count at the end of Q2 to 213.3 million shares. Our balance sheet remains strong with $4.4 billion of cash and discretionary investments. Our ample cash position gives us the ability to invest in the business and also pursue opportunities that strengthen our long-term competitive position.

And now I'll turn it over to Eric for comments on Investments performance.

5 Thank you, Jen. I'll start by saying that our investment platform remains strong with deep research capabilities, a long-term track record of outperformance and expanding capabilities across equities, fixed income, multi-asset and alternatives, powered by world-class talent and driven by a steadfast commitment to clients, investment excellence remains our top priority.

Turning to performance. In the second quarter, over half of our funds beat their peer groups for the 1-, 3- and 10-year time periods, while the 5-year missed this mark with 44% of funds beating their peer groups. On an asset-weighted basis, 10-year performance remained strong with 79% of funds outperforming. On a 1-, 3- and 5-year basis, 44%, 57% and 43% outperformed, respectively. Our equity funds mirrored the overall fund range with over half of the equity funds beating their peers for the 1-, 3- and 10-year time periods, while 5-year time period fell below this threshold. On an asset-weighted basis, equity funds continued to deliver strong performance for 10-year time period, while the near-term time periods are more challenged. Within our equity franchise, U.S. equity research, global stock, global value and mid-cap value stood out as strong performers, [indiscernible] quartile performance for the 3-, 5- and 10-year time periods.

Our fixed income funds continued to deliver strong performance. On an asset-weighted basis, over 75% of the funds outperformed for all reported time periods. Within our fixed income franchise, global multisector, institutional floating rate and several of the muni strategies stood out as strong performers with top quartile performance for the 3-, 5- and 10-year time periods. In our target date franchise, long-term performance remained strong with 80%, 54% and 98% of AUM outperforming their peers on a 3-, 5- and 10-year basis. The 1-year target date performance rebounded with 80% of AUM outperforming peers, driven by strong performance in the second quarter when 79% of AUM outperformed peers. Last quarter's strong performance was due to our retirement glide paths higher relative equity exposure as well as our tactical asset allocation decisions.

Turning to alternatives, despite the negativity continuing to surround private credit, OHA's funds generated gains across both institutional and wealth products. CLO's strategies rebounded following challenging performance in Q1, but remain down on a year-to-date basis. Distressed and opportunistic funds mostly generated losses in Q2 and had mixed first half results reflecting the uneven market environment. OHA's liquid credit funds and mandates generated gains on an absolute basis but underperformed their benchmarks, largely driven by several high conviction positions that experienced increased volatility.

Before we take questions, I want to say a word about the 2026 Russell reconstitution. What we saw with the reconstitution in June was not a routine rebalance. It was a significant reshaping of benchmark risk characteristics. There was over $300 billion of turnover, but more importantly, there was a substantial migration of AI-related exposures, momentum factors and technology leadership across benchmarks. As a result, in the Russell large and mid-cap growth benchmarks, AI-related exposure increased materially, while small cap and value benchmarks simultaneously lost exposure to many of the recent market's strongest performance drivers.

The rebalance did not simply reshuffle stocks. It effectively reassigned exposures to some of the most influential themes and factors. That reassignment brought new buyers and sellers into stocks moving across benchmarks, adding volatility to both the broader market and individual names. When benchmark changes are this abrupt and risk profile shift meaningfully, it creates opportunity for active management assess changes through a research-driven lens.

And now we'll open the line up for questions.

[Operator Instructions] Our first question or comment comes from the line of Bill Katz from TD Securities.

Eric, once again, congratulations on a new position. Maybe a big picture question for you. As I listened to your prepared comments, I hear a lot of growth in lower fee vehicles, and your comments that active equity is going to remain under pressure. So how are you thinking strategically to reshape the business given the fee rate is going down and the expense growth is still pretty high, all else being equal? And how might M&A help shape that thought process?

Yes, Bill, I'll start. From a strategic perspective, we want to make sure that we're delivering world-class investment capabilities in ways that are aligned with our clients' needs. I would acknowledge that over a relatively long period of time, active equities lost meaningful share to passive and you've had a pretty meaningful vehicle migration away from open-ended mutual funds in the taxable wealth channel, in particular, to ETF and SMA, which has put pressure on fees. In retirement, I would say we're seeing a similar trend where you have a shift from fully active to blended hybrid, which also is putting pressure on fees.

I think, strategically, what we'd really like to do is, first of all, invest in maintaining our world-class capabilities from an investment perspective and make sure that we can deliver on our existing client commitments, that we have the talent and resources to continue to generate great results. The active equity business, even though it's been in outflow, is extraordinarily important to us. $900 billion of our AUM is in direct active equity, and it also has an impact on the underlying target date fund business. So we're in no way, shape or form going to deemphasize that business. We think it's going to continue to be important for a very, very long period of time.

That said, we do want to grow in fixed income, which is balancing just from a market exposure perspective, active fixed income continues to grow. And I think we're making very substantial progress there. We want to grow in alternatives. And we've talked about our approach to that, whether it's organic with our late-stage venture capability, whether it's through acquisition, for example, OHA or through partnership with our Goldman collaboration. And in each of those instances, I feel we're making substantial progress. I would say, strategically, we also want to invest in our direct platforms. We see having modern digital interfacing capability advice in our direct to individual and our recordkeeping platforms as increasingly important and as a substantial opportunity. Advice is an opportunity to diversify the revenue stream of the organization.

And I would say in each of those priorities, whether it's diversification from an asset class and capability perspective, fixed income and alternatives, whether it's diversification from a vehicle perspective, ETF and SMA, or as we lean into our direct platforms, there will be organic investment in those businesses and that may be part of what you're referring to with regard to expense growth, and we can go into that in a little bit more detail to the extent that there is interest. But we'll also continue to evaluate inorganic opportunities.

Industry consolidation continues at pace. We see a lot of things. We have a very high bar, but to the extent that there are things that we think are financially compelling and strategically aligned with those objectives, then I can certainly see strategic M&A playing a part in reshaping the business.

Our next question or comment comes from the line of Michael Cyprys from Morgan Stanley.

With the launch of your actively managed crypto ETF, you're taking a big step in building your digital asset capabilities. As you look out over the next several years, how do you see that strategy evolving alongside potential emergence of tokenize stocks and bonds? And have tokenized assets become more widely adopted? Do you expect digital wallets to become an important client interface? And how does that influence your long-term distribution and wallet strategy?

Yes. Mike, this is Eric. Happy to take that one. We think tokenization represents a structurally important evolution investment management industry overall. And our digital assets group, which we stood up 4 years ago, is actively engaging with industry groups, partners and intermediaries as we explore opportunities into organization. To your question, specifically, if tokenized assets become more widely adopted, then yes, I think digital wallets will become an increasingly important client interface? The direction of travel here seen in the growth of tokenize stocks and the work that the DTCC is pursuing towards tokenizing underlying securities and ultimately, funds, I think, is real.

We have hands on digital asset capabilities. We've been working with digital asset wallets, and we see the potential here. Ultimately, as with our broader digital assets approach, our goal is to align our tokenization strategy with our broader firm-wide objectives. That means identifying ways to use this technology, I would say, in 3 ways: first, helping us to meet the needs of our clients; second, reaching new investors; and then third, increasing operational efficiency. And I think there's opportunities in all of these areas. Digital asset wallets and tokenized assets and funds will ultimately, I think, allow us to deliver more customized solutions across client relationships. So we recognize this is going to take time, but we do think it's an incredibly promising area, and we are investing behind it.

Next question or comment comes from the line of Glenn Schorr from Evercore.

So I guess a question wrapping up some of the flow stuff. So maybe you had the large D.C. win in May, you had the big equity strategies in June. Maybe you could size those as we build towards -- getting towards the second half outlook, meaning active equity, less outflow is good, but you do have some seasonality potentially in rebalancing in the back half in equity land. And then a little color on July flows, the institutional pipeline and your thoughts on second half overall, that would be great.

Yes, Glenn, thank you for the question. We're pleased that we made some progress and brought some substantial new relationships on to -- into the organization in the second quarter. But I would say we clearly have more work to do. We expect net flows in the second half of the year to be meaningfully more challenging than the first half, primarily due to a number of the things that you've cited. Ongoing outflows in active equity, especially in open-ended mutual funds and a handful of our growth strategies. The absence of those outsized mandates, which funded in May and June and benefited first half flows.

As you alluded to, portfolio rebalancing away from equities, reflecting the significant year-to-date gains, and that will largely impact flows in the third quarter. And then finally, I'd note that despite the fact that our overall target date pipeline is up substantially, there's an air pocket in the late-stage pipeline, which would suggest that we'll see a lull in RDF flows in the second half. So that should kind of give you a sense for what we see in Q3 and Q4. I do want to highlight, though, that we see significant positives. We expect 2026 to be a record year for gross flows, reflecting strong interest in a broad range of our investment strategies. As I talked about in my earlier remarks, we have very strong interest in our lower tracking offerings, integrated equity and our equity research suite. We're seeing substantial progress in active ETFs, and we think there's a very long runway there.

In fixed income, I think we're anticipating consistent and sustained net flows across a range of strategies and vehicles. We're anticipating building momentum in alternatives as OHA and our late-stage venture capability, invest committed capital and continue to raise additional capital, and we begin to scale the T. Rowe Price Goldman Sachs public private strategies. I'd also note the good work that our EMEA and APAC teams are doing and the fact that we have had positive net flows in those geographies. So there's a lot of good in a number of areas, but kind of given the size of our active equity book and our mutual fund book, as I said at the outset, we've got substantial more work to do.

Our next question or comment comes from the line of Alexander Blostein from Goldman Sachs.

I wanted to get your perspective on maybe longer-term expense management approach, especially in light of some of the advances we see with technology and AI. Broadly, TROW had a fairly consistent framework. I think about 1/3 of your expense base is variable, about 2/3 is fixed. You guys are investing in the business, obviously, to improve the growth.

But in light of your comments around the top line and we obviously know the organic growth challenges there, are there more significant actions you could take to bring down the pace of expense growth more structurally?

Thanks for the question. So we'll start by saying we have been focused on purposeful expense management, looking at ways to drive productivity and efficiency. And as you mentioned, technology and AI are a critical part of that. What we've been doing, though, is allowing -- having steps to be able to allow us to both invest behind our strategic priorities and maintain controllable expense growth in the low single digits. We focused right now on '26 and '27. That was some guidance we gave last year, and we continue to stand behind those numbers.

As you mentioned, about 1/3 of our expense base is market driven, and that will correlate with asset or revenue growth over time, those controllable expenses make up about 2/3 of our expense base. As we think about that 1/3 of expenses, the 2 biggest items in there, year-end variable compensation and expenses related to assets distributed through third parties, and the variability of those expenses is what's driven the guide to 4% to 7% in 2026. As we think about the expense management efforts we're taking, we do want that to be a balance, again, focused on things that will drive longer-term productivity and efficiency. Things that we've talked about over the last 2 years have been things like leveraging trusted third parties for tech functions where they can provide scale. These are things like our help desk and infrastructure. We've been doing broader reviews of processes to streamline and leverage technology to introduce automation. We've had a thoughtful review of certain vehicles and strategies where we have minimal client interest or impact to be able to close those, and then managing down some of our excess capacity in our real estate portfolio, to match our associate population where we've had changes in headcount.

So I think we'll continue to take those steps to be able to balance. But again, the purpose of doing this is to allow us to continue to invest back in the business in areas for growth. So on a net basis, we think that puts us in a low single digit cost here for controllable expense.

Yes. I'll add a little bit here. I mean we're balancing the short term and the long term. In the short term, we are laser-focused on using shareholder resources efficiently and continuing to drive cost savings. But we need to create the capacity to invest in our business. As Jen mentioned, we have a program underway, which we've talked about in the past from a cost savings perspective. And I think we're executing against that.

And directly to your question, I believe we'll find ways to extend that, leveraging technology and in particular, AI. I think that should allow us to limit growth in our base expenses and free up resources for us to continue investing in the business. We want to invest in our talent. We want to invest in new capabilities. We want to invest in deeper connectivity with clients. We've talked about a number of those areas and a number of those priorities. And I think that AI is a differentiating technology that will allow us to accelerate the pace of improvement in those areas and with those priorities.

Our next question or comment comes from the line of Dan Fannon from Jefferies, LLC.

So I wanted to talk about the SMA opportunity. I think you mentioned, Rob, you've got $20 billion in AUM. That's pretty small relative to your peers, and kind of we think about tax efficiency and the kind of growth and demand for that process or investment strategy. Can you talk about your go-to-market or how you expect or plan to kind of scale the SMA business for you over the next couple of years? .

Sure. Thank you for the question. We see a lot of interest and a lot of opportunity here. As you said, $20 billion in AUM, yes, may be small relative to peers. And I'd say we were a latecomer to this business, but we're building momentum rapidly. We've got 43 strategies in market, placed with 35 sponsors. We're available on a number of partner platforms. From a tax efficiency perspective, next week, we will launch our own capability in conjunction with the vendor partner. And we are developing partnerships with most of the existing platforms. So T. Rowe Price managed SMAs will be available with tax optimization broadly as we work our way throughout the rest of this year and into next year.

So this is a priority for us. As I said, I would acknowledge that it is comparatively small when you look at our overall business and perhaps some of our peers that have met with success. But we're getting very, very encouraging feedback and very encouraging reactivity as we place more emphasis on this and have invested behind it. We've made it a pretty significant priority. We brought on talent from the outside to focus on this. and I'm looking forward to the progress that we'll make going forward.

Our next question or comment comes from the line of Ben Budish from Barclays.

I wondered if you could talk maybe a little bit about the distribution strategy for the T. Rowe Goldman Sachs Fund. Just curious the marketing and distribution coordination will work, any kind of economic details you can share? I know it's still quite early, but just curious what we should maybe expect as we watch this hold out over the next couple of months.

Yes. If you take a step back, there are a number of components to the work that we're doing with Goldman. And I would say that overall, we're very pleased with the joint progress. From a model-account perspective, we have 5 models launched. We're approaching $0.5 trillion -- or $0.5 billion in AUM. They continue to grow. We're very, very focused on platform placement. So kind of that was the product that was first to market and the one where I would say that we've made the most progress.

We are in market also with a T. Rowe Price Advised Multi-Alternative Interval Fund. So that really just went effective at the beginning of the month. We are -- we and Goldman are taking that directly to the wealth channel. We're kind of educating our regional investment consultants and the opportunity here, and feel like the feedback that we've gotten so far is encouraging, but it's very, very early days. We're also in registration for a public-private equity interval fund that we hope to bring to market later this year. And again, the distribution responsibility is joint, but as the adviser, T. Rowe Price will be on point for coordinating that. Goldman is more taken the lead with regard to the model accounts.

And then the final component is the target date series, which will incorporate alternatives. We are -- T. Rowe Price is on point for that. It will launch as the CIT. We're operationally ready. And at this point, we've engaged with a number of clients and prospects. I would say the feedback is strong, and the clients are interested, so kind of stay tuned for more updates with regard to progress there.

I'm not sure if Eric or Jen, you'd have anything to add?

No. The only thing I might say, from an economic perspective, I mean we designed this so that we were each contributing both from an investment management perspective and from a distribution perspective, so that it would be fair and balanced in terms of the economics that are shared between the 2 firms.

Yes, I do think we have some complementary strengths, which was one of the reasons that made Goldman Sachs an attractive partner here. There are a number of places in wealth where we have very deep relationships, in a number of places where Goldman has very deep relationships. So I think together, we should be able to drive adoption and get more attention than either of us would be able to individually.

Our next question or comment comes from the line of Alex Bond from KBW.

I wanted to ask around the ETF suite. You highlighted the $4 billion of flows in the quarter. And with momentum continuing to grow there, just wondering if you can update us on how you're thinking about the path forward here in terms of launching new funds versus focusing on scaling your existing funds? And also maybe if there are other areas here? I guess, in light of the recent launch of the actively managed crypto strategy, where you think you can provide differentiated products that can drive [indiscernible] demand?

Yes. Well, first, thank you for the question. I mean this is among our top priorities, and I would say, among our biggest opportunities. I mean active ETFs are -- it's a category that we still think is in relative early innings, has a very long runway and very substantial growth in an area where we believe we have the right to win. As you mentioned, $4.4 billion in flows in the quarter, over $30 billion in AUM. We have 34 ETFs in our lineup now with strong overall investment performance.

I would say from a product road map perspective, this is a priority that you should anticipate that the pace of launch will slow to an extent, particularly as it relates to the U.S., we're looking at ETFs in other geographies. And we're really going to focus on scaling our existing portfolios of ETFs. We feel like we're in a place where we have coverage of all of the key Morningstar categories. We have component building blocks for asset allocation models, which we think is a very big opportunity and a big driver of the growth of active ETFs. And we also have a number of innovative offerings, including satellite and thematic offerings. I would point to what we're doing in -- with our crypto offering, what we're doing in a number of sector-oriented or thematic ETFs with things like innovation leaders or in healthcare technology or in natural resources.

So we think this is a very big opportunity. We think it's an area that we really can deliver differentiated performance and a differentiated value proposition. So ultimately, it's our objective to make this a much, much bigger business than it is today.

Yes. I would just add, specific to our crypto aspirations, we intentionally designed this strategy, [ TKNZ ], to have an investable universe that can expand over time. to provide broad asset class exposure in this very rapidly evolving market. So we'll consider additional follow-on strategies there as and when we see the opportunity to add value through active management. We're also looking at different opportunities for ETF conversion, where we think that makes sense where it fits in with our existing clients and we can do it in a way that is beneficial both to them and to us. So we're looking at some other opportunities as well.

I would think that one of the areas that we're really focused on unlocking is ETFs is building blocks in model accounts. There's a lot of work that we're doing here to make sure that we're partnered with the right platforms that we have the right sales specialists supporting our regional investment consultants in the field that we're leveraging our multi-asset and strategic portfolio design, tactical asset allocation capability. And this is a big opportunity for us to really bring all of our credentials as a solutions provider to our partners in the wealth channel and deliver kind of across a number of value drivers.

Our next question or comment comes from the line of Patrick Davitt from Autonomous Research.

Jen, on the expense guide, I think you said it was based on first half average AUM. So if we're modeling off of end of period, which is 5% higher, should we be thinking like 1% to 2% higher than that guide? Or is that not the right way to think about it?

No. Thanks for the question. I mean this is always tricky given volatility in markets, but we try to set the range based on the range of market levels that we see during the quarter. So we said -- we think about the middle based on the average and then there's a range around that.

Our next comes from the line of Michael Cho from JPMorgan.

I wanted to follow up on the active ETF discussion. You gave some color around the product focus and priorities. And I guess, as you think about demand and areas for incremental or further penetration from a distribution perspective, I also think you mentioned non-U.S. as well, but -- and I was wondering if you have more opportunities or thinking about areas for deeper partnerships where TRO can actually drive more growth and take some more share?

Yes, Michael, thanks for the question. I think it's really important to just reemphasize something that we were discussing earlier, which is that when you look at the active ETF industry, a significant amount of that growth is coming through model delivery. And in model delivery, you have both custom models and you have off-the-shelf models. We're pushing hard on both of those areas. And in those areas, your relationships with the different technology providers is really important. So we're working hard on building out those relationships and developing those as deep as we can because that ultimately gets you access to those advisers.

We're also working on some technology that will give our portfolio managers the ability to use that solutions capability that we have developed through the years, through our multi-asset team in a more effective and efficient way, we think, to really do well in the customized model area. So we are certainly looking at partnerships and engagements with different providers in the ecosystem to try to drive that ETF growth specific to models.

Yes. I would highlight a handful of other things. I mean, one, I think if you look at areas where we've got a very strong investment track record, and we've been strong in mutual funds and where there's a big opportunity in ETF, I would highlight, municipal, in fixed income is an area where we think there's a very, very substantial opportunity. I think our equity research offerings. We have the U.S. equity research offering in market as an ETF. I think we'll look to expand that range over a period of time.

I want also to say where you've seen substantial growth or where you have category leaders with a unique investment proposition or a unique value proposition that kind of people access to risk-reward profile or an asset class that they otherwise might not be able to get access to as conveniently. And I do think we have a number of things that we're developing or have a launch but are yet to scale that would fit into that category. So look, again, as I said at the outset, this is one of our biggest opportunities and one of our highest priorities. And I think the opportunity as it stands primarily is in the U.S. wealth channel, but we are looking at opportunities outside of the U.S. where kind of this is a trend in other geographies as well.

Thank you. I'm showing no additional questions in the queue at this time. Ladies and gentlemen, this concludes today's presentation. I'd like to thank you for your participation. You may now disconnect.

Everyone, have a wonderful day. Speakers, stand by.

Good morning. My name is Victor, and I'll be your conference facilitator today. Welcome to T. Rowe Price's First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded and will be available for replay on T. Rowe Price's website shortly after the call concludes.

I will now turn the call over to Linsley Carruth, T. Rowe Price's Director of Investor Relations.

Hello, and thank you for joining us today for our first quarter earnings call. The press release and a supplemental materials document can be found on our IR website at investors.troweprice.com. We'll start the call with our Chair CEO and President, Rob Sharps and CFO, Jen Dardis discussing the company results, after which [ Glenn August ], CEO of OHA, will provide an update on our alternatives business. Then we'll open it up to your questions at which time will be joined by Head of Global Investments, Eric Veiel. We ask that you limit it to one question per participant.

I'd like to remind you that during the course of this call, we may make a number of forward-looking statements and reference certain non-GAAP financial measures. Please refer to the forward-looking statement language and the reconciliations to GAAP in the supplemental materials, as well as in our press release and 10-Q. Discussions related to the funds is intended to demonstrate their contribution to the organization's results and are not recognitions. All investment performance references to peer groups on today's call are using Morningstar [indiscernible] for the quarter that ended March 31, 2026.

Now I'll turn it over to Rob.

Thank you, Linsley. Before I get started, I'm pleased that [ Glenn August ], CEO of OHA and member of our Board, is with us today. He will provide an update on our Alternatives business and the opportunities we see across wealth, insurance and the broader institutional market. We will hear from Glenn after Jen's update on our financial results.

After a relatively stable first 2 months in the quarter, markets declined in March in response to the conflict with Iran, which pushed energy prices sharply higher and introduced additional uncertainty into global economic growth expectations. Though these declines have reversed in the early part of the second quarter with the market recently reaching new highs.

With recent volatility and broadening of markets, our active management approach, [ rooted ] in strong fundamental research and a consistent long-term focus, positions us to take advantage of the opportunities this climate brings. While we continue to face outflows in our equity and mutual fund businesses, our teams are making progress in stabilizing flows and are advancing innovative strategies, new vehicles and compelling solutions to meet the needs of our clients.

Around half of our funds outperformed with [ 39, 56, 43 ] and 59% of our funds beating their peer group medians on a 1-, 3-, 5- and 10-year basis. On an asset-weighted basis, our long-term performance remained strong with 71%, 46% and 78% of our funds outperforming on the 3-, 5- and 10-year basis. However, the 1-year time period remains challenged. Across our equity funds on an asset-weighted basis, 63% outperformed for the 3 year and 73% for the 10-year time periods. Performance was softer for the 5-year, with 41% of fund assets outperforming and 21% for the 1 year.

Our fixed income funds continued to deliver strong performance. On an asset-weighted basis, over 3/4 of the funds outperformed for the 1-, 3-, 5- and 10-year time periods. In our target date franchise, long-term performance remains strong. with 94%, 54% and 98% of fund AUM outperforming their peers on a 3-, 5- and 10-year basis. The 1-year performance remains challenged with only 8% of AUM outperforming, but the most recent quarter had strong performance with 86% of AUM outperforming peers. Last quarter's strong performance was driven by security selection and our active equity strategies, as well as our tactical asset allocation decisions.

We advanced a number of important initiatives in the first quarter that strengthen our ability to deliver outcome-oriented solutions and expand our distribution relationships. A few examples of this work include, our target date franchise continues to resonate in the market with notable growth in blend and hybrid products. Our collaboration with Goldman Sachs is progressing with momentum building in model portfolios and product development advancing for the launch of an interval fund and Target Date sister series later this year.

Our ETF and SMA businesses continue to grow. We launched 2 ETFs this quarter, bringing our line up to 32 ETFs. 8 of the 32 ETFs had scaled to [indiscernible] $1 billion in AUM at the end of March. Our ETFs generated over $2.8 billion in net flows in the first quarter. As of last week, our ETF assets under management surpassed $25 billion. We are also developing plans to launch our first ETFs in Europe.

Our SMA platform expanded to 42 offerings with more than $17 billion in AUM and over $900 million in net flows in the [indiscernible] quarter. We closed our first T. Rowe Price managed CLO in early April, extending our floating rate capabilities into larger markets and diversifying our opportunity set. We advanced our partnership with First Abu Dhabi Bank from planning into execution, with preparations underway across marketing, training and client support for a targeted mid 2026 launch.

We are making progress in our partnership with [ Aspida ] for which we manage both public and private assets totaling over $0.5 billion at the end of March. Our experience with Aspida is informing our approach to the substantial opportunity in insurance more broadly. We also formalized a new operating arrangement with OHA, and are excited about our ongoing collaboration and the capabilities their team brings to the overall T. Rowe Price business. None of this progress would be possible without the exceptional talent and dedication of our associates, whose focus on clients and disciplined execution drives us forward.

And now Jen will share an update on our financial results.

Thank you, Rob, and hello, everyone. I'll review our first quarter financial results before turning it over to Glenn.

Our adjusted earnings per share of $2.52 for Q1, 2026 is up 3% from Q4, 2025, and up 13% from Q1, 2025. The increase from the prior year was driven by higher revenue growth from higher average AUM, while lower expenses drove the increase in EPS from Q4, 2025. A lower tax rate and a reduced share count also contributed to the increase in this quarter's adjusted EPS.

As previously reported, we ended the quarter with $1.71 trillion in AUM, and $13.7 billion in net outflows. Our average AUM of $1.78 trillion remained nearly flat from the prior quarter after [indiscernible] the period and is up 9.6% from Q1, 2025. Multi-asset, fixed income and alternatives all delivered positive net flows for the quarter, while equities, particularly U.S. growth-oriented strategies remained in outflows.

Our Target Date franchise continued to deliver solid growth with $4.9 billion in net inflows, driven by the sustained momentum in our blend products. International bond and U.S. equity research also had strong net flows in the quarter, and our ETF and SME businesses were positive was $2.8 billion and $962 million of net inflows, respectively.

Moving to the income statement. Our Q1 adjusted net revenue of over $1.8 billion was up 5% from Q1, 2025, driven by higher investment advisory fees and accrued carried interest. Investment Advisory revenue for the quarter was almost $1.7 billion, up 5.3% from Q1, 2025, and down 3.2% from Q4, 2025. The decrease over the prior quarter primarily reflects the decline in our effective fee rate, as well as 2 fewer days in the quarter. Our Q1 annualized effective fee rate, excluding performance-based fees of 38.4 basis points is down from Q4, 2025.

From an investment strategy basis, the effective fee rate decline is driven by the growth of our Target Date franchise, including the [ Blend ] series and outflows from our higher fee equity strategies. On a vehicle basis, the growth of trust and separate accounts, coupled with outflows from the mutual fund vehicle are also compressing effective fee rate. These ongoing trends align with the current demand for and our investment in solutions-oriented products and lower fee vehicles.

Our Q1 adjusted operating expenses, excluding accrued carried interest were $1.14 billion, a 1% increase from Q1 2025, and a 7% decrease from Q4, 2025, as certain expense categories run seasonally higher in the fourth quarter. Adjusted operating expenses in both the current and prior quarters also reflect cost savings delivered through our ongoing excess management program. We continue to expect 2026 adjusted operating expenses, excluding carried interest expense, to be up 3% to 6% over 2025 [indiscernible] $4.6 billion. While it's still too early to narrow our guidance, our expense forecast, which includes our investment in strategic priorities and market-driven expenses, remains comfortably within this range even with the market volatility experienced year-to-date.

Following the outsourcing of certain technology capabilities in connection with our expense management program, we have reclassified third-party technology-related costs from G&A to technology, occupancy and facilities costs to better reflect the nature of the expenses. Page 20 of the supplement includes recasted operating expense categories, reflecting this change for 2025 and 2024.

Turning to capital management. Our balance sheet is strong, with over $4.1 billion of cash and discretionary investments. Returning capital to our stockholders continues to be a priority, highlighted by our 40th consecutive annual increase in the quarterly dividend to $1.30 per share. During Q1, we leveraged periods of market dislocation to increase our level of stock buybacks, purchasing $340 million worth of stock, largely toward the end of the quarter. As of March 31, we had 214.9 million common shares outstanding.

And now I'll turn it over to Glenn.

Thanks, Jen. As everyone knows, we are in a particularly dynamic period for the credit markets. So I am particularly pleased to join today's call to share my perspectives on the current environment and discuss how OHA is seizing on the opportunity. First, I'd like to provide a quick overview of OHA.

For more than 30 years, OHA has been one of the leading credit-focused alternative asset managers. We invest across four main strategies. First, private credit comprised mainly of senior direct lending and junior capital for larger corporate borrowers. Second, opportunistic credit with a focus on distressed investments, special situations and real assets. Third, structured credit, which is primarily OHA-managed CLOs and third-party CLO debt and equity. And finally, liquid credit, which is leveraged loans, high-yield bonds and multi-asset credit.

Our client base is global and predominantly institutional. We mainly serve pension funds, sovereign wealth funds, endowments and family offices. In fact, we manage capital for 7 of the 10 largest U.S. state pensions, 8 of the 10 largest global sovereign wealth funds, as well as many of the largest insurance companies. While the institutional market is the core of our business, we also have a growing presence in the wealth channel, which I will comment on later.

Geographically, North America is currently our largest market with nearly 60% of our capital, where we also have a large investor base across Europe, the Middle East and Asia. As of March 31, we have $112 billion of total assets under management, which includes committed capital and leverage, up meaningfully from approximately $88 billion at year-end 2024.

The recent volatility we have witnessed across financial markets has been driven by a confluence of factors. First, market was shaken by the [indiscernible] risks that emerged in Q3, Q4 last year on several high-profile frauds [indiscernible]. This led to broader concerns that the easy financial conditions of the past several years may have resulted in [indiscernible] underwriting standards and that further issues could emerge. At the start of this year, markets were [indiscernible] by rapid AI advancements that resulted in concerns at disruption risk among the incumbent software providers. These concerns were most acute in the syndicate and private loan markets, which have financed a number of large software deals in recent years. This, in turn, created a flurry of negative headlines and elevated redemption activity in non-traded [ BDCs ].

The Iran war [indiscernible] another driver of uncertainty and geopolitical risks. The war has disrupted global trade, upended energy supplies and caused a massive spike in energy prices. This has resulted in renewed inflation concerns and a recalibration [indiscernible] Fed strategy. The combination of all these events has resulted in heightened volatility across markets. However, in our view, market fundamentals generally remain positive, and the economy has again shown [indiscernible] macro and geopolitical shocks. And while the impact of AI disruption will create winners and losers, these dynamics will play out over time.

The strong rebound in equity markets reinforces that risk appetites remain healthy and that investors are willing to look beyond the current set of issues. Ultimately, we believe the challenges in the credit markets, including AI risk are idiosyncratic, not systemic. We also believe that the current market backdrop is creating opportunity for OHA to show greater differentiation among managers.

We have been engaging with our clients throughout the period. In general, they are continuing to seek the benefits of alternative and private market investments to complement other exposures in their portfolios. We are seeing significant interest across our product suite, and we are engaged in constructive dialogues on how to capitalize on the current opportunity set. We believe there is a distinction to be made in the behavior of institutional clients versus individual investors.

Institutional clients have a longer time horizon and they are viewing the current environment as an opportunity to lean in. Meanwhile, individual investors have shown to be highly sentiment driven and more reactive to negative headlines. Request for liquidity across non-traded BDCs, which [indiscernible] products have increased meaningfully across the industry with many vehicles receiving requests in excess of the 5% quarterly limit.

However, it's important to put these developments in context. Retail products only represent approximately 20% of the broader corporate private credit market and the liquidity mechanics exist in these vehicles to prevent an asset liability mismatch. That, combined with the cash flow generation of the underlying investments is therefore unlikely in our opinion, to result in widespread for selling of BDC assets.

While the retail segment is a relatively small part of OHA's overall business today, we and T. Rowe Price jointly [indiscernible] as an important growth opportunity, and we currently have two co-branded wealth products. OCREDIT is our perpetual nontraded BDC with approximately $3 billion of investments at fair value as of [indiscernible] The fund was launched in 2023, generated regular distributions and has had zero defaults since inception. In fact, the fund had redemptions well below the 5% limit during the first quarter and generated positive net flows for the period.

Our second product for the wealth channel is [ OFlex ], a new multi-strategy credit interval fund that was recently registered. This strategy has exposure to various asset classes, including private credit, structured products, special situations, and liquid credit among others as part of its mandate.

On the insurance front, T. Rowe Price invested in a strategic partnership with [indiscernible] in early 2025, and [ TRP ] and OHA now manage certain public and private assets on behalf of Aspida, a $30 billion life insurance and annuity platform. This partnership is 1 example of OHA's growing presence in the insurance market, and the broader convergence of asset management and insurance. We have seen interest from many insurance clients for private credit CLOs and asset-backed strategies as well, and believe this sector represents another growth opportunity.

I believe that OHA is well positioned for the current market environment. We have a 30-plus [indiscernible] record of generating attractive results for our investors across multiple economic cycles and market environments. We also have demonstrated the ability to introduce innovative products that provide solutions for our clients and allow us to capitalize on compelling investment opportunities.

One example is [ OLED ], fund focused on senior direct lending. In Q4 2025, we held the final closing with a total of $17.7 billion in capital. This was the largest single fundraise in our firm's history. [indiscernible] contributed to 2 consecutive years of record fundraising at OHA with nearly $40 billion of capital raised in 2024 and 2025 combined, including leverage. In aggregate, we currently have over $30 billion in dry powder across our various strategies. This positions us exceptionally well to be front-footed and opportunistic in deploying capital in an environment where spreads have widened, liquidity premiums have increased and documentation and terms are more favorable for lenders.

We also are confident in our existing portfolios. We have always utilized a highly selective and disciplined investment approach, characterized by robust underwriting and a focus on downside protection. This rigorous approach has led to investments in resilient portfolio companies that have generally been faring well in the current environment. We are excited about being a part of T. Rowe Price and the collaboration between the teams at OHA and T. Rowe Price continues to deepen. [ TRP's ] distribution platform, including its retirement wealth and institutional channels, has been an important accelerant for OHA's growth, and we're still in the early innings.

The Goldman Sachs strategic collaboration announced last September further expands OHA's opportunity set with co-branded target date strategies, model portfolios and multi-asset offerings, incorporating private investments, all in development, several of which are expected [indiscernible] mid-'26. These partnerships position our investment capabilities in front of an even broader set of investors. None of this happens without the exceptional people at OHA. We have 435 professionals across 6 global offices with deep continuity across our leadership team.

Our culture of close collaboration, fundamental underwriting and deep partnership with our clients and our borrowers is what has driven our results for more than 3 decades, that's what will continue to drive them in the future. I'm excited about the opportunities ahead. Thank you. We will now take your questions.

[Operator Instructions] Our first question will come from the line of Dan Fannon from Jefferies.

Glenn, I appreciate your comments and I was hoping you could expand upon a few topics, specifically on the deployment opportunity you're seeing today with spreads being a bit wider, maybe some less competition, if you could talk about that. And then also, you talked about some of the challenges private [indiscernible] seeing. But could you discuss what OHA's exposure is to software and some of this AI disruption that's clearly an overhang here?

Sure. Thanks for the question, Dan. I'm delighted to be part of this call. The market clearly has widened in spread based on kind of classic supply-demand dynamics with demand a little lower were meaningfully lower in the wealth channel, the spread widening on new deals is probably in the neighborhood of 25 to 50 basis points, and it could widen out.

On the other side, the supply of new deals, the private equity market has been relatively quiet during this period given the given the [indiscernible] disruption. And so I think that the market is waiting, I think, for the war to be over to see more deal activity, and I think we'll see a lot more interest in.

With regard to the AI disruption, what I'd say is that we've been doing software credit for 40 years. We have $40 billion track record over a 9% unlevered return. And I think there's real differentiation in the credit space in software. We've avoided ARR loans, we've avoided technology risk. Excuse me, we focus on [indiscernible] mission-critical software and contractual recurring revenue models. And so we feel very well positioned.

Our next question will come from the line of Ken Worthington from JPMorgan.

So credit spreads late last year were at record, or near record tight levels. And while spreads, as you've mentioned, have widened a little, they're still very narrow by historic standards. Can you give us a sense of what a turn to normal spreads over the course of, say, a year might do to returns? To what extent are institutional and wealth investors prepared for a return to normal in credit spreads. And if we're in a more normal spread environment, how are Oak Hill products positioned to perform relative to peers?

So credit spreads have moved over the decades. I've been doing this now for almost 40 years, as I said. And while credit spreads are narrower today, they're actually in line with historic averages. Again, you need to separate out the moments of wide -- spread widening during a period like COVID, or during the [ GFC ] and the credit quality underlying today's leverage finance market is better than it was.

If you look at the high-yield market as an example, over 55% of the market is BB today. And so you really need to do that adjustment on credit spreads. And you also need to look at the backdrop of the public equity market, which is at record highs. And so from our perspective, the deals are getting done today with 50% to 60% equity cushion. The credit spreads are reasonable. So I don't see necessarily a return to spread widening. And in fact, we're seeing a lot of institutional demand from around the world who basically look at the opportunity to say, if I can make 300 to 400 basis points in the liquid credit market or 500 basis points in the private credit market off of today's absolute rates, that's a very attractive risk-adjusted return profile. So I don't see -- I don't have a major concern of a moment here of spread widening in general.

And our next question will come from the line of Michael Cyprys from Morgan Stanley.

I was hoping to ask about ETFs and the success that you're seeing there. I was hoping maybe you could help unpack how much of your ETF growth is coming from new client acquisition versus migration from existing mutual fund assets?

And then more broadly, if you can just update us on your ETF strategy, how you're finding success and some of the key initiatives as you look out over the next 12 to 24 months? I think you mentioned Europe as well.

Yes, thanks for the question. Growing our ETF platform is one of our top priorities. Our data shows that we're both reaching new clients and serving existing clients, which does include some direct switching. It's pretty clear that much of the flow into active [ ETFs is ] coming from investors that historically used open-ended mutual funds. Regardless, we believe that a significant portion, and I'd go as far as to say a majority of our ETF business is coming from investors that we would not have reached with traditional open-ended funds.

In terms of our product strategy, we have 3 core tenets. The first is making sure that we have compelling active ETF offerings that cover all of the Morningstar categories. The second is providing key components for asset allocation models, both proprietary models, as well as home office models given the increasing role that models are playing in overall active ETF flows. And then finally, developing innovative and new strategies to deliver our evolving investment capabilities.

We're also exploring both mutual fund ETF conversions and over time, ETF share classes in certain of our mutual funds. And I think we're making substantial progress. Real time, we're over $25 billion in AUM. We now have 32 tickers across asset classes, representing versions of many of our most broadly placed strategies on wealth platforms across equity and fixed income, so think large cap growth, capital appreciation, municipal bond. Sector-oriented offerings, leveraging our deep research in areas like technology, health care, natural resources, but also unique offerings, things that we haven't offered in open-ended fund, such as [ Active core ], capital appreciation, premium income, innovation leaders.

So as the scale and build compelling track records, we're going to invest in our ability to support our clients, emphasizing gaining placement on more platforms, earning more focused less recommendations at the home office, while also providing more focused sales support in the field to help advisers serve their clients. And again, we're really focused on the role that our active ETFs can play in models going forward. So we think we have a really big opportunity there. And I'll see if any of the rest of the team has anything to add.

Next question will come from the line of Glenn Schorr from Evercore ISI.

[indiscernible] big picture one first. We have end markets at all-time highs in a really strong April. I heard all Glenn's comments on the credit side with wider spreads and some interesting opportunities. So my biggest question is you could spill in a little, hey, what's going on in April so far? What have you seen? But the big part of it is what is the institutional pipeline shaping up to be? Are we -- should we expect to see really big reallocations in client portfolios? Or is that more of a slow-moving train?

Yes, Glenn, thanks for the question. I would characterize the institutional pipeline more as the latter. I mean, I think institutions are very deliberate with regard to their underlying asset allocation and the construction of their overall portfolio. They tend to be relatively disciplined with regard to rebalancing. And I would say that that's true not only for traditional institutions, sovereign wealth funds, line benefit tons of plans, endowments foundations but also a number of the large wealth platforms that we serve where they have home office models. They have a very disciplined approach to making sure that their clients have balanced portfolios with attractive risk reward in certain instances, employing tactical asset allocation.

I have not seen any -- kind of any significant shift in the nature of interest of the institutional pipeline based on the market dynamic. What I would say is that the equity markets, in particular, feel like there is a new dynamic where you have return from parts of the market away from the hyperscalers where energy has performed well, where sectors that are exposed to the AI infrastructure build-out, whether it's semiconductors in technology, or areas like power, or kind of certain componentry have really, really benefited from the accelerating CapEx of the hyperscalers and of the AI-oriented firms.

So it's a dynamic where the market is broadening. We've seen better performance from some cyclical areas of the market. We've seen better performance from some different parts of the market cap spectrum. And my sense is that, that can really play to our strengths given the depth and breadth of our research coverage across equities and our active approach.

Yes. The only thing -- I agree with what Rob said. The only thing I would add is we did see a trend towards non-U.S. assets beginning back at the end of last year. There was a bit of a pause on that trend. But I think that is something that has picked back up again in the most recent sort of [ 4 or 5 weeks ].

[indiscernible] to make one comment on the credit front on the institutional side. I will tell you that during this period over the last couple of months with all the [indiscernible], we are getting incredible inquiry from around the world from our largest institutional investors. Many have come to us asking to make proposals on dislocation funds. If the market softens a little bit more, many are allocating capital to us right now. And so it is just the juxtaposition of where the institutional market is versus the retail/wealth market is really striking to me.

Our next question will come from the line of Alex Bond from KBW.

Glenn, maybe a question for you on how you're thinking about the path forward in terms of retail offerings. You mentioned you think this is an important growth area, an opportunity for OHA despite what's going on in terms of the elevated redemption requests across the industry at the moment. Are there additional products in the prospective pipeline that maybe you can speak to? And also, are there certain areas in the retail space where you feel like OHA can really stand out and provide a unique offering.

[indiscernible] I think that OHA story is still in the process of being told in the wealth channel, and we've made a lot of progress over the last couple of years. We [indiscernible] of the Year award. We -- T. Rowe has made additional investments in our distribution team. And I do think the whole story of OHA being one of the world's leading alternative credit managers for the institutional market, as I mentioned in my prepared remarks, having gated the top 10 sovereign wealth funds, having 7 of the top 10 U.S. pension plans.

We manage capital for the largest investors in the world. And I think we are out there telling our story. And there was a perspective in the market that there was very little differentiation between managers. And I think when you look at the BDC market today, both public and private, you're starting to see that differentiation. And so I'm actually quite excited about our ability to tell our story and to show what has basically been nearly 4 decades of differentiation in credit selection. And I do think there will be different performances by the different managers.

In terms of new products, we're excited about our [ OFlex ] product which is an interval fund and a multi-strategy fund across the credit spectrum, not just senior direct lending, we think investors are looking for ways to add to their exposure in the interval fund format is exciting. We're certainly in development with T. Rowe and at OHA internally about thinking about other products to add to the channel. And I do think that we will ultimately, together with T. Rowe build a global brand in the wealth channel, that we are building today, and we're looking forward to build meaningfully, and I'm excited about that.

I would just add that I'm really optimistic about our opportunity to continue to work with Glenn and his team to grow our presence in alternative credit and alternatives more broadly across channels. I think we have a very big opportunity in wealth. I'm excited that [ Bill Cashes ] joined us to lead our alternatives effort in the wealth channel. I also see substantial opportunity in insurance and retirement. And while OHA is certainly front and center, and deeply involved with our collaboration with Goldman Sachs, I think across OCREDIT, [ OFlex ], other things that we have the option to develop with OHA, we have a product road map with Goldman with our interval funds with models, as well as delivering our own late-stage venture capability that's really beginning to build out our alternatives offering and giving us the opportunity to engage with and support our wealth partners as they incorporate more private market alternatives into their solution set, from ultra-high net worth to all the way down ultimately to mass affluent.

And our next question will come from the line of Ben Budish from Barclays.

Maybe Jen, if you could give us a little bit color on the expense outlook for the year. It looks like in the first quarter, at least you came in pretty below what the Street was expecting. Just anything you could share on the shape of expenses? What does the recovery in markets mean for comp in Q2? Just anything else that would kind of help us as we're fine-tuning our models here.

Yes. Thanks for the question. I think typically, what you'll see is Q1 expenses will be softer than Q4 because our compensation -- our year-end compensation is struck in Q4. So that's one impact that we'll typically see coming from Q4 into Q1.

The other thing I would say is we came into Q1 with some tailwinds from our expense management exercises. So things that we executed either at the late part of Q4, or the early part of Q1 where we saw some [indiscernible] related to that. Those are things like some realignment within our marketing teams continued execution against our sourcing strategy, where we've looked at certain capabilities where we can leverage vendors and also rationalization of our real estate footprint.

Offsetting that, as we go forward for the balance of the year, setting into the 36% expense guide range is our continued investment in strategic initiatives. So I expect we'll see some of that pick up through the year as we absorb some of these tailwinds in Q1.

Yes. I would just add that we are very focused on driving efficiency but also committed to investing in our business and particularly our strategic areas of focus. Retirement-oriented outcomes and solutions, modern portfolio of building blocks with ETF, SMA and interval funds and developing advice capability for our individual inter and retirement plan services businesses. So I feel like we've got a lot to do. I feel like we have the capacity to drive efficiency to self-fund a significant portion of that. But we're really focused on investing in growth areas to drive the business forward.

Our next question will come from the line of Brennan Hawken from BMO.

Glenn, I'd like to circle back on the question around software and AI disruption. It was pretty standard disclosure for all [indiscernible] disclosed the software exposure across the portfolio. I don't think you talked about it aside from talking about your comfort. So it would be great to get that number.

And also, just more importantly, process-wise, AI is not new. The disruption in the public market sort of concern about it is far more elevated than it had been. But I'd be interested in hearing about how you integrate the assessment of AI risk into your underwriting process? Because usually, the exposure to potential disruption goes way beyond software and tech is really an integral part of a lot of private equity portfolios. So I really think that understanding the process would be really helpful here.

Happy to do that. So first, with regard to your first question on allocation. We are basically in line with the market. The market has been in the neighborhood of 15% to 20% allocation to software credit. There's a broad range. There's also, what I would say, to your point, software and AI disruption as a theme is much broader than what's going on in software. And I share your view that there's been all this attention on the private credit markets, but the reality is if you look at software equities, they've gone down dramatically. If you look [indiscernible] EM stock, which went down $80 in a 6-week period because of an [indiscernible] threat to its [ cobalt ] business.

So -- so to our perspective, AI disruption is a major, major theme, and it didn't just happen overnight. Although it seemed like in February with [indiscernible] issuing its new [indiscernible] version, there seem to be a lot more attention to it.

In terms of the underwriting, I want to just take a step back from the beginning question of this call and add [indiscernible] a bit here. So I mentioned that we've done software investing for [indiscernible] for basically 20 years, $40 billion of capital. And it really has all been about a theme of large-cap mission-critical players that are really embedded. And if you look at our portfolios versus many of our peers, they're very, very differentiated.

We averaged probably $300 million to $350 million of EBITDA in our companies. We are senior -- the senior positions at 40%, [ 35%, 35% ], 40% loan to value. They're actually performing quite well today. And again, one of my comments I often make is that proving against a hypothetical and the future product that might come out in a few years is a challenge.

But we feel like we have very, very good businesses. And so we are continually underwriting and reunderwriting. We have AI risk management -- risk management tools in terms of rating each one of our companies. And to your point, it's not just software. It's what happens in a bunch of the services sectors like accounting, other areas. And we continuously we underwrite our [ Oak Hill's ] track record over 4 decades is having extremely low default experience, our credit selection as example, in the bank loan area over 25 years in our CLO business. We averaged about 30 basis points of default rate for the market that was [ 2.25% ].

So the reason why we believe large institutional investors have chosen us to be one of their major credit partners is because of the rigor of our underwriting process.

Yes, we see that, that was a big part of what attracted T. Rowe to OHA when we first engaged over 5 years ago. And I think they have deep fundamental research capabilities and are extraordinarily exacting in their credit underwriting process. And I think that's really aligned with T. Rowe Price's culture and our focus on fundamental expertise.

And our next question will come from the line of Patrick David from Autonomous Research.

You mentioned an aspiration to being bigger in alternatives and some of your competitors have been successful in becoming more relevant there inorganically. So could you update us on your appetite to use your strong balance sheet position to get aggressive with M&A and accelerate that shift?

Yes. We have said that the industry is consolidating, and we believe that we'll participate in that consolidation over time to the extent that we find the right opportunities, the right opportunities have to have cultural fit. They have to bring additional capabilities to us, or allow us to reach new clients or, kind of, have deeper relationships with our existing clients. And from an alternative perspective, I think we've talked pretty consistently about [indiscernible], about partnership and about organic options to develop our -- the breadth of our capabilities.

So we continue to evaluate opportunities across each of those and have ultimately have aspirations, not only to be bigger but to be excellent in alternatives, to deliver differentiated investment outcomes and capabilities to partners across the different channels.

Yes. I might just add that clients ultimately, whether it's the wealth channel, the institutional channel, the insurance channel, they want to have deeper, stronger relationships with firms that offer multiple products. And what we've seen over the years as we've grown our product capability to OHA, we do more with the largest clients in the world. And so again, whether it's buy, whether it's build, whether it's team lift-outs, to add additional capabilities, I think that we will look to do that over the next number of years [indiscernible] our platform. But not growth for growth's sake growth, because we think we can service our clients better and add to our capabilities.

And to the broader question, just with regard to capital allocation, I mean, as -- we reported [indiscernible] noted, we purchased $340 million worth of T. Rowe Price stock in Q1. Year-to-date, we've repurchased over 4 million shares for just under $400 million. And you'll note that that's a higher pace than we've had in recent history, and I think that reflects the value that we see in our share price.

We do have the capacity to deploy a significant amount of capital both from ongoing cash flow as well as from our balance sheet, and we're constantly evaluating our options. In addition to M&A, include more share repurchase or investing in our business in multiple different ways, including through seed and co-invest. And at a high level, we're going to be opportunistic and selective, but we should be active in each of those areas.

I don't see any need for our cash levels to build from here. But look, I do feel strongly that having significant deployable capital has real value. And that value kind of often manifests itself during periods of market stress and dislocation. So they will evaluate opportunities to deploy capital. We acknowledge that we have significant cash. And we're going to be really judicious with regard to ultimately how we deploy that.

And this concludes the question-and-answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.

Good morning. My name is Daniel, and I will be your conference facilitator today. Welcome to T. Rowe Price's Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded and will be available for replay on T. Rowe Price's website shortly after the call concludes.

I will now turn the call over to Linsley Carruth, T. Rowe Price's Director of Investor Relations.

Hello, and thank you for joining us today for our fourth quarter earnings call. The press release and the supplemental materials document can be found on our IR website at investors.troweprice.com. Today's call will last approximately 45 minutes. Our Chair, CEO and President, Rob Sharps and CFO, Jen Dardis, will discuss the company's results for about 15 minutes. Then we'll open it up to your questions. at which time we'll be joined by our Head of Global Investments, Eric Veiel. We ask that you limit it to one question per participant.

I'd like to remind you that during the course of this call, we may make a number of forward-looking statements and reference certain non-GAAP financial measures. Please refer to the forward-looking statement language and the reconciliations to GAAP in the supplemental materials as well as in our press release. Discussions related to the funds is intended to demonstrate their contribution to the organization's results and are not recommendations. All investment performance references to peer groups on today's call are using Morningstar peer groups and for the quarter that ended December 31, 2025.

Now I'll turn it over to Rob.

Thank you, Linsley, and thank you all for joining today's call. 2025 brought a third straight year of strong global market returns, though it remains a narrow market dominated by a handful of mega cap stocks and with riskier names, outperforming quality and value. While this market growth served as a tailwind for our assets under management and investment advisory revenue, it was not an environment that was highly conducive to fundamental research, active management and long-term investing. But we did see some evidence of the market broadening in the fourth quarter, which would be a positive for fundamental research-driven active management.

We closed the year with $1.78 trillion in assets under management, up over 10% from the start of the year despite $56.9 billion in net outflows. Net outflows were concentrated in our equity and mutual fund business with $75 billion of net outflows from equity and on a vehicle basis, almost $64 billion from mutual funds in 2025. Importantly, we saw an increase in gross sales which were higher than 2024 and up over 40% from 2023. Offsetting these higher gross sales were redemptions that were greater than anticipated and were driven by performance shortfalls in certain strategies and from portfolio rebalancing due to elevated equity markets.

We generated over $2 billion of free cash flow in 2025 and returned nearly $1.8 billion of cash to our stockholders. We also extended our long history of increasing our regular dividend, marking our 39th consecutive year of increases since our IPO in 1986. We are building momentum across our strategic initiatives. I remain confident in our plan and our people, and I look forward to what's ahead.

With that, I'll turn to investment performance. We are seeing improvement in the performance of several key strategies and continue to have strong long-term performance across a range of strategies and asset classes. While we're headed in the right direction, there remains room for further improvement.

About half of our funds beat their peer groups across the time periods with 49%, 56%, 46% and 61% outperforming on the 1-, 3-, 5- and 10-year time periods, respectively. For the 3-, 5- and 10-year time periods, asset-weighted performance is stronger with 72%, 54% and 79% of fund assets beating their peer groups for the respective periods. For the 1-year time period, 42% of fund assets beat their peer groups.

On an asset-weighted basis, over half of our equity funds beat their peer groups on a 3- and 5-year basis and over 70% beat their peers for the 10-year time period. Fixed income continued to deliver strong performance with over 75% of fund assets beating their peer groups across the 1-, 3-, 5- and 10-year time periods. Long-term performance in our Target Date franchise remained strong, with 81%, 55% and 98% of fund assets outperforming the 3-, 5- and 10-year time periods, respectively.

Several very strong quarters in 2020 that have been rolling off have been a recent drag on the 5-year performance numbers. Returns for the 1-year time period were weaker with 29% of fund assets outperforming peers. This was driven by a slightly lower weight to international equities than some peers and by security selection in some of the underlying portfolios, primarily in the second and third quarters of 2025.

Across alternatives, performance for the quarter was generally strong amid a more discerning credit backdrop. Credit selection continued to be highly effective as it successfully avoided any exposure to widely publicized frauds or failures. Beyond investment performance, in 2025, we continue to make progress on our strategic initiatives. We established a strategic collaboration with Goldman Sachs to pursue opportunities in wealth and retirement through co-developed public private offerings and advice solutions. And in the fourth quarter, we launched the first co-branded model portfolios, including 4 portfolios that are now live on the GO Wealth platform and a fifth expected in the first half of 2026.

In January, we launched one of the model series, the Goldman Sachs T. Rowe Price Dynamic ETF portfolio on the Morgan Stanley platform. We extended our retirement leadership globally with a sub-advised retirement date fund series in partnership with the Japanese asset manager and 2 new retirement allocation funds with a strategic partner in Asia, marking the first time a U.S. asset manager offered retirement-focused products to retail investors in Hong Kong and Singapore. Additionally, we saw growth in the Canadian Target Date series we launched in 2024.

We maintained our position as an industry leader in active Target Date solutions, building on over 20 years of product innovation and surpassing $560 billion in assets under management, across a diverse suite of solutions. We also helped clients navigate change and achieve better outcomes with the breadth of retirement solutions, including the launch of our innovative social security analyzer tool. We grew our active ETF business with the recent launch of 2 new active core ETFs, one focused on the U.S. and one on international. These active core strategies combine quantitative and fundamental research for alpha generation, and we believe this approach will compete effectively with passive.

We also expanded our fixed income ETF range with 3 new muni strategies and 1 multi-sector ETF. All told, we launched 13 ETFs in 2025, bringing our total to 30, and we grew assets under management to over $21 billion at year-end. We continue to expand our alternatives business. At the start of January 2026, we had the first close for a T. Rowe Price managed private equity fund. This strategy is a closed-end drawdown fund and seeks to create a portfolio of approximately 25 category-leading private companies. T. Rowe Price has exceptional access to late-stage private companies given our successful 18-year track record of investing over $24 billion across approximately 300 private companies. and our reputation for being thoughtful, long-term and value-added shareholders well beyond the IPO.

OHA enjoyed a second consecutive record fundraising year with over $16 billion of capital raising across the platform, led by private lending strategies. Private credit deployment experienced a strong finish to the year, reflecting increased sponsor activity, and looking ahead, there continues to be an expectation of an acceleration in deal volume as the pipeline of pending private credit transactions remains robust.

We made key organizational changes including the creation of the technology data and operations function to focus on integrating digital capabilities, data strategy and enterprise operations to accelerate execution, and the global strategy function to sharpen our strategic vision, integrate corporate development and product strategy and support our growth agenda.

We advanced our use of artificial intelligence across the firm, amplifying our investment professionals' capabilities without replacing their judgment, improving the speed and personalization of client service and adopting new technologies with disciplined governance and thoughtful onboarding. The momentum we built in 2025 carried into 2026 with our announcement in January of a new strategic partnership with First Abu Dhabi Bank. Leveraging our collective strengths and capabilities, our partnership with FAB aims to deliver world-class investment solutions across public and private markets, tailored to meet the needs of investors throughout the Middle East.

While we have had an institutional business in the Middle East for some time, this is our first strategic partnership in the region, and it reflects our commitment to growing and diversifying our business through innovative global partnerships. This partnership and all the progress we made in 2025 is a reflection of our associates' steadfast commitment to our clients, and I want to thank each of them for their dedication.

And now Jen will share an update on our financial results.

Thank you, Rob, and hello, everyone. I'll review our financial results before opening the line for Q&A. Our adjusted diluted earnings per share for Q4 2025 was $2.44, bringing full year adjusted diluted EPS to $9.72, which is up 4.2% from 2024 on higher average AUM, investment advisory revenue and lower average share count. As previously reported, we had $25.5 billion in net outflows Q4, bringing the full year to $56.9 billion. As Rob noted, in 2025, we experienced elevated redemptions from our legacy equity and mutual fund business. Despite these redemptions, strong equity market returns more than offset the net outflows and we ended the year with nearly $50 billion in additional equity assets under management. This trend where equity market appreciation has exceeded equity net outflows has been consistent over the past 3 years.

We saw encouraging momentum and signs of strength this quarter. And in a few areas of our business, we ended the year with positive net flows. Fixed income and alternatives had positive net flows for the quarter and along with multi-asset, had positive net flows for the full year. Fixed income has now delivered 8 consecutive quarters of positive net flows. And our Target Date franchise ended the year with net inflows of $5.2 billion.

Our ETF business remains strong with $1.8 billion in net inflows during the quarter. This brings 2025 net inflows to nearly $10.5 billion. Within other investment vehicles for the full year, trust continued to see strong net inflows in the DC channel, and we saw positive net flows to SMAs. In 2025, strong equity markets lifted the growth of our average AUM, increasing our investment advisory fees, net revenues and diluted EPS over the prior year.

Our Q4 adjusted net revenue of $1.9 billion raised our full year adjusted net revenue to nearly $7.4 billion, an increase of 2.8% from 2024. Our Q4 investment advisory revenue of $1.7 billion increased 2.3% from the prior quarter and 4.2% from Q4 2024, driven by higher average AUM and partially offset by a lower effective fee rate. Our full year investment advisory revenues of $6.6 billion were up 3.1% from the prior year. Our Q4 annualized effective fee rate, excluding performance-based fees, was 38.8 basis points, which is down from 39.1 basis points in Q3 2025.

The decline in average effective fee rate continues to be driven by changes in our asset and vehicle mix. As client demand increasingly shifts towards lower-priced vehicles and strategies, we remain focused on delivering our investment strategies in our clients' vehicles of choice, while maintaining competitive fee rates. Slide 19 in the supplement illustrates the changes in our vehicle mix over the past 5 years.

Over time, we've seen a growing proportion of our gross sales going to fixed income and multi-asset and to lower-priced vehicles like ETFs, trusts and SMAs, while redemptions remain primarily concentrated in higher-priced equity strategies and mutual funds. These sales and redemption patterns drive the change in our asset and vehicle mix.

Performance-based fees in Q4 of $14.2 million were predominantly from alternative strategies and were up from the prior quarter, but down from Q4 2024. Full year performance-based fees of $37.4 million were down from 2024's $59.3 million.

Turning to expenses. Q4 adjusted operating expenses were $1.2 billion, bringing 2025 adjusted operating expenses, excluding carried interest expense to $4.6 billion, which is up 3.4% from 2024's $4.46 billion, and within the previously provided guidance of 2% to 4%. Based on normal market conditions and assets at the end of 2025, we anticipate 2026 adjusted operating expenses, excluding carried interest expense, will be up 3% to 6% over 2025's $4.6 billion. This range includes our ongoing expense management program that allows us to continue investing in growth areas of the market.

We remain committed to maintaining a strong cash position and returning capital to stockholders. During Q4, we bought back $141 million worth of shares, bringing buybacks for 2025 to $624.6 million or 2.8% of our shares outstanding. We closed the year with a strong balance sheet, holding $3.8 billion of cash and discretionary investments, up $735 million from the start of the year. This allows us to support our recurring dividend while preserving the ability to pursue opportunistic acquisitions or partnerships and execute share buybacks.

Our long-term approach to managing our business enables us to invest strategically in areas that strengthen our capabilities and drive meaningful results for our clients. Combined with our continued focus on prudent expense oversight, we remain well positioned to navigate changing market cycles and evolving trends.

And now we will open the line for Q&A.

[Operator Instructions] Our first question comes from Alexander Blostein with Goldman Sachs.

So maybe starting with just a question around how you guys are planning from an operating perspective for 2026. I heard this expense guide. So maybe just remind us the ability to flex up or down in the environment for equities is maybe flattish for the year. I just want to understand the key assumptions there.

And then bigger picture, when you guys zoom out, obviously, the overall margins remain relatively healthy, but below where you guys have been in the past with prospects of organic base growth still somewhat challenged. How do you guys think about the margins for T. Rowe Price in totality kind of over the medium term over the next couple of years?

Yes, Alex, thank you for the question. The biggest factor in any single year on our operating margin is equity market return. As we've discussed in the past, there's a portion of our expense base, about 1/3 of it that's variable. But the biggest driver of our revenue is equity market returns. That said, we understand the dynamic of the revenue outlook with regard to flow and fee pressure, and we're going to need to balance going forward investing to position ourselves for success long term and ensuring that we have world-class talent with a commitment to being a highly efficient organization with an ongoing focus on productivity.

So we have a number of initiatives to drive cost savings to fund those investments. But I'm really not going to comment on what I think the margin profile will look like over time because, as I said, the market return has such a significant influence on that.

And maybe if I can talk specifically about expenses and the guide for 2026. We had talked last time about the 2/3 of our controllable expenses that we were managing towards low single-digit growth, that's included in this plan. And as Rob mentioned, that's a balance of cost savings efforts and also earmarking funds to be able to invest in some of our growth areas, new vehicles such as ETFs, SMAs, models, in alternatives and in our partnerships where we're introducing new products and also in things like advice.

And then if you look at our market-driven expenses, that's what's driving it slightly higher into the range. And it's really 2 big drivers there. One is on what we call distribution expenses. That's things like 12b-1 trailer fees or revenue share. Those increase with assets under management as opposed to revenue, and we saw tailwinds in growth in AUM at the end of the year, and we have our normal market growth assumptions, kind of moderate equity market growth in 2026 as well as modest fixed income growth.

The second thing that's within there is our year-end compensation. And again, that generally runs with revenue, but there are some accounting implications from our LTI program that are driving that a little higher this year.

Our next question comes from Michael Cyprys with Morgan Stanley.

More of a longer-term question for you just on tokenization. Just curious if you could just talk a little bit about how you're experimenting with tokenization and blockchain. Where do you see some of the most compelling use cases and value to be unlocked? I'm curious how you see this all playing out over the next 12, 24 months versus longer term? And where might there be scope for differentiation?

Yes, Michael, it's Eric. I'll take that one. We're -- first of all, we've been investing in our digitization capabilities going back to '22 when we first brought on a team and have built it out internally to develop expertise in this area. We think about it along 3 different vectors. First, there is an efficiency opportunity within tokenization for middle and back office savings that I think could be consequential in time. There's a product opportunity as you move more traditional finance assets on chain, you open up opportunity to accelerate some of the trends that we're seeing, whether that's the convergence of public and private, whether it's fractionalization or mass customization.

And then there's a distribution opportunity. It opens up a new generation of investors who are native to mobile and crypto. We're working on all 3 of those. I would say on the efficiency front within investments, we're doing a lot of work on end-to-end processes. that we think will really impact over time from a cost savings perspective, our middle and back office and potentially even some front-office opportunity.

On the product side, we've already talked about how we've registered with the SEC, our active crypto ETF that we hope to have in market in '26 that will use a blend of fundamental and quantitative analysis to bring a multi token ETF to the market. And then on the distribution side, I think that's a more open opportunity for us, and we'll explore everything from partnerships to de novo builds.

Our next question comes from Craig Siegenthaler with Bank of America.

My question is on the update on the potential migration of privates into the 401(k) channel. So we should be getting the DOL update shortly, maybe not this month as planned due to the government shutdown. But how do you think this plays out across the industry with single partnerships or multi-partner models, and also, where is T. Rowe Price on the product launch front with your new Goldman Sachs partnership, which will also include some OHA and credit?

Yes, Craig, thank you for the question. So not a lot new since we've commented on this in the last few calls. Our multi-asset team has really researched the investment case for -- including private market alternatives in defined contribution solutions, including Target Date funds. And they believe that the investment case is strong. That said, there is a mixed view among plan sponsors based on lack of clarity with regard to fiduciary risk, and change, just kind of not only around fee but also around liquidity. And it's a dynamic ultimately that we're going to need to navigate.

As you said, the DOL comments are due to come back from the OMB. There'll be a public comment period. We may not get real clarity on what the ultimate guidance looks like for several months. What we want to do is have a flexible approach that's responsive to our clients' interest. So with regard to the specific question about the Goldman Sachs T. Rowe Price retirement date offering, we continue to work on product design and plan to have the offering in market in -- around midyear this year. We think there's a segment of the market that will be early adopters and kind of ultimately kind of feel that interest could grow. But my sense is that penetration of the overall opportunity set will evolve relatively slowly and won't be substantial for some period of time.

Our next question comes from Dan Fannon with Jefferies.

I wanted to talk about the Target Date business. You showed some outflows in the fourth quarter, something we haven't seen in a few years. So I wanted to get a little bit more context around the momentum and/or outlook for that business as we think about 2026, whether that's kind of backlog, kind of new win opportunities and/or losses that might be within the periphery as of now.

Yes, Dan, thanks for the question. And if I may, maybe I'll take the opportunity to zoom out and talk about flows more broadly and then drill down on the Target Date business. Flows in the fourth quarter were meaningfully softer than we anticipated, especially in the month of December. The weakness was largely driven by equities with particular pressure in growth equity portfolios driven by a handful of institutional losses and some rebalancing given the robust equity market returns in 2025. But as you cite, outflows in the retirement date funds, which are not necessarily unusual for the month of December, but are unusual for the full fourth quarter were also a factor.

About 1/3 of the Q4 retirement date outflows were driven by M&A activity where our client was acquired and the plans were consolidated and we ended up losing the mandate. We also lost a handful of lumpy or larger mandates that weren't M&A related. But if you look at the broader trend, I think what you see is that fully active Target Date funds are losing share to passive and blend. Given our position as the largest fully active Target Date fund manager, that's going to be a headwind for us.

On the positive side, I think we're really well positioned to mitigate or offset that headwind with our very strong blend and hybrid offerings, which incorporate a component of passive. The blend area is the fastest-growing category within Target Date. It's actually growing faster than passive. And T. Rowe Price is gaining market share in the blend category.

So we believe that we'll continue to grow our retirement date franchise going forward. Whether or not that growth is consistent with the levels that it's been in the past, I think, to some extent, will depend on the intensity of the shift away from active and our ability to capture a portion of that with our blend and hybrid offering, but also to grow and gain market share from a new dollar perspective within that category. Just as a more current data point, we did have $1.7 billion of Target Date inflows in the month of January.

I'll also kind of take the opportunity to share some perspective on the 2026 flow outlook. Flows have been volatile and difficult for us to predict. But our base case reflects continued pressure in equities, partially offset by inflows in retirement date fund and consistent with the previous comment with a continued shift towards blend, steady growth in fixed income and accelerating growth in alternatives.

The intensity of equity outflows is the biggest factor for our overall flows. To get back to positive flows, we need equity outflows to moderate. We're confident that, that will happen over time with strong performance. In January, we did have just under $6 billion of outflows, but the pipeline suggests that the rest of the quarter being February and March has the potential to improve from those levels.

Our next question comes from Ben Budish with Barclays.

Maybe, Rob, just following up on that last point. I know the market had a bit of a shock just yesterday, and I would expect your comments are sort of higher level thinking over the course of the year. But just curious, how would you expect that sort of impact to translate to near-term equity flows? How do advisers and retail customers tend to respond to that sort of disruption? And could you maybe talk about the sort of mix across the equity franchise? How exposed is the business to software and services and the areas which at least the market is sort of worrying maybe under some kind of near-term threat from AI developments?

Yes, I'll start and welcome input from Eric and Jen, who I'm sure have a perspective on the topic. With regard to how equity market returns impact flows, it depends by client type. I think there are certain client types that tend to react more quickly and other client types that have a commitment to the asset class and allocation framework that kind of in some instance with the drawdown in the market may actually be inclined to rebalance and add to equities. I would say the net effect to us over a period longer than days or weeks really isn't that substantial.

I think in the very short term, you may see a knee-jerk reaction to a sharp drawdown in the market in certain segments. But ultimately, there are a number of puts and takes. And as I've said in my earlier comment, despite robust market returns last year, that actually caused a bit of a drag as some of our clients rebalanced away from strategies that had significant absolute returns. So -- that's -- again, I'd say not something that is a meaningful factor in our outlook from a flow perspective.

In terms of our exposure to software and services, I'll ask Eric to offer his perspective. I think a lot of the consternation in the market is over some of the private equity sponsors having significant deals and exposure to PE firms. There's an active largely liquid public manager, we have the ability to adapt and adjust to changing market environment. So our positioning can obviously be very fluid. I would say that our overall mix is no more exposed than the market as a whole. But I'll ask for Eric to give a little bit more specific commentary in terms of software exposure.

Sure. So with almost roughly $1 trillion in equity assets across a wide variety of different types of portfolios, we're obviously going to have a lot of different types of mandates with different types of exposure to software. As you think about what happened yesterday and the disruption risk of AI, specifically some very unique opportunities that were brought forward by Anthropic, we have been studying these opportunities and risks for a long time and have very deep research on them and have been positioned for events like this in many of our portfolios. That doesn't mean that in every portfolio, we're perfectly positioned for what happened in a single day of market action. But what happened yesterday in terms of the potential disruption of AI across different parts of the software industry is not a surprise to us.

Our next question comes from Ken Worthington with JPMorgan.

Along those same lines on the AI disruption, what is Oak Hill's exposure to investments potentially disrupted by AI? And ultimately, do you think the problems could be big enough in private credit to drive market share shifts? And where might T. Rowe fit into those share shifts if they're big enough to discuss here today?

Yes. Look, I'm not going to comment on OHA's underlying exposures. But what I will say is that they have an extraordinary rigorous credit process. And to the extent that we go into a credit environment where defaults are more prevalent, we think that OHA's process and performance will be a differentiating factor relative to the rest of the industry.

I might just take the opportunity to comment on OHA more broadly. OHA is doing well. They had a second consecutive year of record capital raising with particular strength in private lending. The T. Rowe Price and OHA teams are working very well together on opportunities across wealth, insurance and the broader institutional market. As a matter of fact, the T. Rowe Price client-facing teams helped OHA bring in over $3 billion in new institutional commitments with much of that in 2025.

As we referenced earlier, OHA is deeply involved in our collaboration with Goldman Sachs. Their private credit capabilities are designed into several of the investment strategies, including the co-branded retirement date fund and multi-assets offering for wealth. We do plan to do a spotlight on OHA and our efforts in alternatives on one of the earnings calls later this year and anticipate having Glenn August join us for that call.

Our next question comes from Brennan Hawken with BMO Capital Markets.

You were speaking earlier to M&A and the sort of noise created in the Target Date sort of DC plan sales process plus maybe a few misses on some plans. A couple of questions on that, a couple of follow-ups. Were there any particular factors that caused the misses? And how are you adjusting your offering in order to enhance your competitive positioning? And can you speak to the pipeline? I know those sales cycles are likely pretty long. So how are we looking as we move forward on that front?

Yes. In terms of the Q4 activity, I think it's relatively straightforward. When one of our plan sponsors get acquired, eventually the acquirer consolidates the plans. In certain instances, we're given the opportunity to compete for the combined plan. And in certain instances, the acquirer makes the decision that they automatically want to consolidate with their incumbent Target Date fund provider. So -- I mean, at the end of the day, that kind of really is all the color on that, that I have. I don't really have any more color on the dynamic in the marketplace outside of saying that we're seeing less interest in new opportunities for fully active Target Date fund and a significant increase in opportunities in blend and hybrid.

I think to some extent, that's a reflection of where the market has been, where the power of the returns in the market cap-weighted benchmarks, particularly in U.S. large-cap equity. Ultimately, if that market dynamic changes and you have a backdrop that is more conducive to alpha generation from active management, then I think the fully active proposition will have more of an opportunity to stand out and be differentiated.

In terms of the pipeline for Target Date funds, it would again be consistent with the comment. The overall activity is robust, but we have more interest and more opportunity in blend and hybrid than we do in fully active.

Our next question comes from Patrick Davitt with Autonomous Research.

Most of them have been asked. Just a quick follow-up on that again. Can you remind -- on the Target, can you remind on the cadence each year on when those lumpier planned losses can occur? I know mostly December, but I seem to remember there are a couple of other months where they can come through in the past as well.

Yes. Outside of elevated activity around year-end, I would say that it really -- there really is no specific seasonality to plan activity and it really can happen throughout the course of the year.

Thank you. I'm showing no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.

Good morning. My name is Daniel, and I will be your conference facilitator today. Welcome to T. Rowe Price's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded and will be available for replay on T. Rowe Price's website shortly after the call concludes.

I will now turn the call over to Linsley Carruth, T. Rowe Price's Director of Investor Relations.

Hello, and thank you for joining us today for our third quarter earnings call. The press release and the supplemental materials document can be found on our IR website at investors.troweprice.com. Today's call will last approximately 45 minutes. Our Chair, CEO and President, Rob Sharps; and CFO, Jen Dardis, will discuss the company's results for about 15 minutes. Then we'll open it up to your questions, at which time will be joined by Head of Global Investments, Eric Veiel. We ask that you limit it to 1 question per participant.

I'd like to remind you that during the course of this call, we may make a number of forward-looking statements and reference certain non-GAAP financial measures. Please refer to the forward-looking statement language and the reconciliations to GAAP in the supplemental materials as well as in our press release and 10-Q. Discussions related to the funds is intended to demonstrate their contribution to the organization's results and are not recommendations. All investment performance references to peer groups on today's call are using Morningstar peer groups and for the quarter that ended September 30, 2025.

I'll now turn it over to Rob.

Thank you, Linsley, and thank you for joining today's call. Third quarter returns were strong across equity markets with concentration in mega cap growth sectors remaining near peak levels. We reached an end-of-period high of $1.77 trillion in assets under management as of September 30 and created an opportunity to bring innovative new solutions to market for our clients, with our recently announced strategic collaboration with Goldman Sachs. I'll talk in more detail about this collaboration in a minute, but first, I'll share an update on investment performance.

Our long-term investment performance is solid with 50% or more of our funds beating their peer groups on the 3-, 5- and 10-year basis. On an asset-weighted basis, results were stronger with 64%, 57% and 78% of our fund assets beating their peer groups on the 3-, 5- and 10-year basis.

While we have always believed that focusing on the long term is the right lens for investment performance, I want to call out improvement in our 1-year numbers with 53% of fund assets now beating their peer groups. We're encouraged by this improvement and the momentum we are building.

I'd like to share a few other highlights. On an asset-weighted basis, over half of our equity fund assets beat their peer groups for the 1-, 3- and 5-year time periods and over 70% beat their peers over 10 years. Fixed income performance is even stronger with over 70% of fund assets beating their peer groups in all reported time periods. In our Target Date franchise, 81%, 71% and 98% of fund assets beat their peer groups on a 3-, 5- and 10-year basis. 1-year results were weaker with 43% of Target Date fund assets beating their peers as underlying security selection in some of the equity building blocks impacted performance.

Across alternatives, performance in senior direct lending strategies was strong and distressed mandates outperformed their targets. Liquid credit strategies generally performed in line with their benchmarks, while results in certain opportunistic funds were modestly below target. Importantly, individual credit selection continued to be strong, and portfolios did not have any exposure to the high-profile credit issues that have dominated headlines.

While private credit deployment was roughly similar with the prior quarter, there was a noticeable acceleration in deal activity leading to a more robust pipeline of pending transactions.

I'd like to spend a few minutes on our strategic collaboration with Goldman Sachs. A collaboration that aims to deliver a range of diversified public and private market solutions designed for the unique needs of retirement and wealth investors. Initially, we will focus on 4 areas: a co-branded sister series for the Target Date franchise, model portfolios, multi-asset offerings and personalized advice solutions and adviser managed accounts. Given that the sister series for the Target Date franchise and the retirement opportunity have been covered broadly since the announcement, I thought I would focus on the products we're designing for the wealth channel, starting with model portfolios.

We are developing a co-branded series of asset allocation model portfolios with alternative investment allocations with plans underway to be on the first platform before year-end, followed by other platforms in 2026. Goldman Sachs will be the adviser, providing tactical and strategic allocation for the models and some of the underlying products. OHA will provide the private credit exposure and T. Rowe Price will provide the balance of the other underlying products. We are also working on multi-asset public private market solutions that will allow advisers to easily incorporate alternative investments into their clients' portfolios. The first 2 offerings, a public private equity strategy and a multi-alternative strategy are expected to launch by mid-2026. T. Rowe Price will be the adviser on these solutions, which will incorporate capabilities from T. Rowe Price, OHA and Goldman Sachs.

Moving to our third focus area. We will offer a managed account platform for independent advisers so they can deliver participant advice in plans on T. Rowe Price's recordkeeping platform and for retirement savers out of plan in the latter half of 2026. These personalized accounts will combine T. Rowe Price's investment and advice capabilities and Goldman Sachs Asset Management's digital planning and personalized management account technology enabling independent advisers to manage individual accounts at scale. These solutions will include allocations to both T. Rowe Price and Goldman Sachs products.

Finally, and as I mentioned at the start, the co-branded sister series for the Target Date franchise, which will include allocations to T. Rowe Price public equities and fixed income, OHA private credit and other alternatives from Goldman Sachs has received significant attention. Work is ongoing, and we expect to launch in mid-2026. We believe that exposure to high-quality alternatives at the right price in professionally managed retirement accounts can improve results for retirement savers by providing diversified sources of returns. And we believe our co-branded Target Date series will be a highly competitive solution in the marketplace.

Before I hand it to Jen, I want to share a few additional highlights from the quarter. We introduced 2 new retirement allocation funds with a strategic partner in Asia, marking the first time a U.S. asset manager is making retirement-focused products available to retail investors in Hong Kong and Singapore. We continue to grow our ETF business, with $19 billion in AUM as of September 30. 12 of our ETFs surpassed $500 million with 5 reaching over $1 billion.

Together with the International Finance Corporation, a member of the World Bank Group, we launched the Emerging Markets Blue Economy Bond strategy, aiming to address water challenges by investing in corporate blue bonds in emerging markets. With over $200 million in commitments from partners, the strategy supports projects such as clean water infrastructure. And we hosted our inaugural investor development program, a week-long investment training program for large strategic clients. Over the course of a week, we provided insight into our investment process and research platform, while also gaining a better understanding of what matters to them as clients.

We are focused on delivering excellent investment performance while partnering more closely with our clients and developing broader solutions that meet their financial objectives. At the same time, we are running our business efficiently and keeping pace with the change in our industry.

I want to thank our dedicated and talented associates for their continued work on behalf of our clients. And with that, I will ask Jen to share an update on the third quarter financial results.

Thanks, Rob, and hello, everyone. I'll review our third quarter results before opening the line for questions. Our adjusted diluted earnings per share of $2.81 for Q3 2025 is up over the prior quarter and Q3 2024 from higher revenue driven by higher average AUM. As previously reported, we had $7.9 billion of net outflows in Q3. Outflows in our retail and intermediary channels were partially offset by several large institutional wins. This quarter, we saw strong net inflows for our U.S. equity research strategy for multiple clients, including a large SMA model delivery win in July that we mentioned last quarter. However, U.S. equities overall continue to drive net outflows.

Fixed income, multi-asset and alternatives had positive net flows this quarter and we also saw positive net flows from clients in EMEA and APAC. Fixed income included a large institutional win for our global multi-sector bond strategy. Our Target Date franchise had $2.6 billion of net inflows as our blend products continue to generate strong client demand. And within our growing ETF business, we saw nearly $2 billion of net inflows into our products.

Investment advisory fees of $1.7 billion were up over 4% from Q3 2024 and over 8% from the prior quarter on higher average AUM. Adjusted deferred carried interest revenue of $56.2 million was up from the prior quarter, reflecting higher relative investment returns. In Q3, we began including SMA model delivery assets in our reported AUM. As a result, related revenue is now reported as investment advisory fees. This change was the primary driver behind the decline in administrative, distribution, service and other fees from prior quarters.

Total adjusted revenues of $1.9 billion were up 6% over Q3 2024 and up almost 10% from the prior quarter. The Q3 effective fee rate, excluding performance-based fees of 39.1 basis points was down from Q2 2025 due to the continued shift to lower-priced vehicles and strategies. This is driven primarily by ongoing outflows in U.S. equities and mutual funds, which have higher than average fees and the growth of our Target Date trust and the blend series.

Turning to expenses. Q3 2025 adjusted operating expenses of $1.1 billion were up a little over 3% from Q3 2024, largely from higher technology and depreciation costs, but down 1.1% from the prior quarter on lower compensation and related costs and lower advertising and promotional expenses. We continue to expect 2025 adjusted operating expenses, excluding carried interest expense to be up 2% to 4% over 2024's, $4.46 billion. Similar to recent years, in Q4, we anticipate increases in our long-term incentive compensation expense, reflecting the timing of our annual grants in December and seasonally higher advertising and promotional and G&A expenses. These increases will not carry into the Q1 2026 run rate.

As we discussed last quarter, we developed a broad and ongoing expense management program that will allow us to continue investing in our future, while keeping our controllable expense growth rate in the low single digits in 2026 and 2027. We have taken several steps to execute on this plan, including eliminating a number of roles across the firm in July, and outsourcing and expanding some of our technology capabilities through trusted vendor partnerships. As a result, headcount as of September 30 is down 4% from December 31, 2024.

In Q3, we incurred $28.5 million in nonrecurring costs, primarily severance and related compensation associated with these actions. These onetime costs were excluded from our adjusted operating expenses. The reduction in average headcount also contributed to a decline in compensation, benefits and related costs to $632.5 million in Q3 compared to prior quarters. We have also identified several opportunities to better manage our real estate portfolio, including transitioning over time from owning to leasing certain properties. In some smaller locations, we will also transition to service offices. As part of this effort, we've made the decision to exit 2 of the 6 buildings on our Owings Mills campus, which are currently unoccupied. This will result in a nonrecurring charge of approximately $100 million in Q4, which will be excluded from our non-GAAP measures.

Looking at capital management, our financial position remains strong with over $4.3 billion in cash and discretionary investments on our balance sheet. As a reminder, the third quarter is often a high watermark for cash prior to paying our variable compensation in December. We bought back $158 million worth of shares during the third quarter, bringing buybacks through September 30 to $484 million or 4.8 million shares. Notably, this figure is twice the number of shares repurchased in the full year 2023. We continue to buy back in October and have surpassed $525 million worth of shares year-to-date.

We're pleased with the progress we have made to advance several initiatives in our ongoing expense management program, allowing us to better align our revenue and expense growth and preserve capacity to attract and retain talent, enhance our client experience and invest in strategic growth opportunities. And now I'll ask the operator to open the line for questions.

[Operator Instructions] Our first question comes from Michael Cyprys with Morgan Stanley.

I wanted to ask about digital assets, I saw that you filed for a multi-token crypto ETF. So I was hoping you could talk about how you see crypto fitting into client portfolios, how you're seeing demand trends evolve? And if you could talk about your strategy, aspirations and the steps that you're taking in the digital asset space?

Yes. Michael, this is Eric. I'll be happy to take that question. We started on the journey in digital assets back in 2022, working on our investment capabilities with the premise that the digital asset space will have both operational and investment alpha available there. And we've been focusing on building our expertise internally before launching a product, investing a small amount of our internal seed capital across multiple tokens and blockchains, really using our own fit-for-purpose digital asset platform. The ETF that we're going to launch technically in ETP, we're confident will be an important building block across different parts of the value chain for our clients.

Ultimately, we're a solutions provider. And we think that digital assets will be a growing part of what clients are interested in and will play a role in different portfolios. Our team, our multi-asset team has studied momentum, volatility, tail risk characteristics of these assets, and we think it will be a part of these portfolios over time.

In terms of demand, it's certainly growing. We see it when we talk to advisers and gatekeepers, and so we're really happy to be a part of it and think that we've got something innovative here.

Our next question comes from Ben Budish with Barclays.

Rob, you gave some helpful detail on the partnership with Goldman Sachs in your prepared remarks. I was wondering if you could unpack a little bit more -- any details you could share on the economic arrangements. So T. Rowe will be acting as an adviser. There will be some OHA credit assets. I know it's probably still early, perhaps those discussions are still ongoing, and it will obviously be some time before these products launch, but anything you can share there in terms of how we should think about the ultimate economic impact given an assumed level of flows would be helpful.

Sure. I'm not going to get into the specifics with regard to the economics for obvious reasons. I will say that the economics are balanced and equitable and appropriately incent both our team and Goldman to put resources behind the collaboration. I think the collaboration really will feature strong capabilities across a range of liquid public and private market alternative offerings including capabilities from OHA. OHA private credit is incorporated into the offerings across wealth and retirement.

So kind of overall, I would characterize the economics as balanced. And look, I'm really enthusiastic about this opportunity. I think Goldman is going to be a great partner. They do bring strong capabilities and returns across a range of private market alternative offerings. They bring complementary distribution. They bring additional expertise around things like advice and technology.

In terms of your question with regard to who will be the adviser. On the sister series, T. Rowe Price will be the adviser. On the multi-asset solutions, T. Rowe Price will be the adviser. On the model accounts, Goldman Sachs will be the adviser and we'll work together on the advice offerings.

I might just add from a timing perspective, we're moving at pace. A lot of the discussion -- we had a lot of the discussions ahead of time on product construction and how the fees might work. And so we're moving at pace to try to get some of the first offerings into market over the next 6 months. Obviously, those take time to scale, but we are moving at pace.

Our next question comes from Dan Fannon with Jefferies.

Rob, I was hoping you could just talk a little bit more broadly about flows and kind of trends. We obviously have the seasonal impacts going into year-end and maybe how that might transpire in terms of the near-term momentum. But also then looking into next year, you've highlighted improving performance. I guess, areas where you think there could be emerging strength and then obviously, the U.S. equity headwinds, do you see that persisting at a similar rate as you look ahead? Or is there some changes underneath that maybe are a little more encouraging?

Yes, Dan, thanks for the question. A number of puts and takes. At this point, our outlook for Q4 flows is weaker at the margin. The month of October is looking more like August than July or September. And the weakness can largely be attributed to higher redemptions in equities. We're seeing rebalancing after strong equity market returns. I think given the concentration of returns and the benefit to the cap-weighted benchmarks, it's continued to drive passive share gains. And our institutional pipeline right now is softer than it's been when we've given updates in previous quarters.

To your point about kind of some of the positives, I think there are a number of positives. From a gross sale perspective, our gross sales were up substantially in the quarter relative to Q3 '24, and we're up in every channel. As Jen pointed out in her prepared remarks, we've had strong flows year-to-date in Retirement Date Fund, in global fixed income. I would say our suite of ETFs and SMA are also building momentum. In alternatives, OHA is having a record capital raising year with particular success in private credit. They have raised over $6 billion of gross capital commitments in the quarter on an unlevered basis. Ultimately, that will convert to flow and fee basis AUM as they selectively deploy it.

So look, I think there are a number of positives. But I would say in the near to intermediate term, those need to continue to build and become a bigger portion of the book, before we get to a point that growth in those areas will be significant enough to offset what we're seeing from an equity redemption perspective.

Our next question comes from Craig Siegenthaler with Bank of America.

We have a follow-up on the potential migration of privates into 401(k)s and your newly formed partnership with Goldman. So I heard your commentary that a co-branded sister series will be launched very soon. But when will you start marketing these strategies to DC plan sponsors, both via your DCIO relationships and also with plans where T. Rowe Price is the record keeper. And from your recent conversations with clients, do you have an idea of the level of substituting that you expect with the new strategy from your legacy Target Date strategies?

So in terms of timing, the sister series will be launched in collective trust. And ultimately, the launch will coincide with the initial client. Look, in terms of interest, our engagement with clients suggest that they understand and embrace the investment case. But fees and fiduciary risk remain a very meaningful concern. So I would say particularly among large plan sponsors where ERISA is a meaningful consideration, this is going to develop slowly, and a lot will depend on what we hear in response to the executive order from the DOL and the SEC coming at some point after the first of the year.

I think to the extent that you get clarity from a safe harbor perspective, interest will build in time. But my sense is that, that uptake will be relatively slow at the outset. Our objective with the sister series is to be in market with a best-in-class product, building and demonstrating track records. So ultimately, as enthusiasm for this builds, we have something that can be a leader in the market.

Our next question comes from Ken Worthington with JPMorgan.

Can you help us better gauge the potential sales you could generate from the 3 strategies you highlighted this morning. I think it's the co-branded, the public private and the managed account. I would think that the addressable market for these 3 are substantial. But if we look at a few years, what does success look like in terms of assets under management from these products? Are we talking success looking like a couple of billion? Could it be far greater than that if we look at a couple of years? Like help us sort of size what you're thinking with these 3, I don't know, come strategies?

Yes. Ken, as you point out, wealth and retirement are very large markets. We think these are well designed and compelling solutions. And in time, I would say our aspirations are meaningfully greater than a couple of billion dollars. I would caution you that we'll be launching them with the first model product available in market late this year, but throughout the course of next year. And ultimately, we'll have to build track record. We'll have to build scale. We'll have to get placement on platforms, but I would be really disappointed if you used a 3-year time horizon if we'd only raised in these strategies, a couple of billion dollars. I think my ambitions would be significantly greater than that.

Our next question comes from Bill Katz with TD Cowen.

I appreciate the commentary. Just coming back to expenses a little bit. Just sort of wondering, as we look into next year, obviously, a really good belt tightening quarter this quarter. Can you maybe frame out some of the savings you could see on the real estate side? Or maybe just if you want to frame it out relative to the 2% to 4% growth rate that you still anticipate for this year?

Thanks for the question. I'll start in. So we did say as part of my prepared remarks that we are -- we have had this broad expense management program that we've been executing. We're a few months into it. Obviously, we've seen some good success already in terms of our ability to execute into the third quarter. We have set the plans in place such that we would be able to have our controllable expenses, which as a reminder, make up about 2/3 of our expense base grow in the low single digits in 2026 and 2027.

So there are a series of plans that we're continuing to execute. I'd highlight the ones that we've done thus far this year. Number one, we did the reduction in force in July. Number two, we've been refining our sourcing strategy, particularly in technology. And that's just executing in-house where we're differentiated and looking at using third parties where it makes sense to leverage scale and capabilities to better support our clients. And then third, as you mentioned, our real estate portfolio, that will take some time to execute. The largest piece of which though is the Owings Mills campus change that I mentioned in my prepared remarks.

Yes. On expenses, I think it's important to understand that this is purposeful. And the objective here is to allow us to invest behind our strategic priorities. So the savings that were generated are going to be reinvested in extending our leadership in retirement with a focus on solutions and advice, broadening our investment capabilities, whether you look at it from a vehicle lens with ETF and SMA, when you look at our product road map, we continue to broaden our ETF offering and are confident that by the end of '26, we'll have ETFs in market that cover over 3/4 of the Morningstar AUM universe, broadening our capabilities in alternatives, in digital and combining those capabilities to deliver solutions.

I also would say that we are freeing up resources to invest in our AI capabilities enterprise-wide, which I think, to some extent, can give us payback from a productivity perspective. But I think also can help us execute and deliver better on behalf of our clients over time. So what you characterize as belt tightening, I would say, is kind of very purposeful focus on driving productivity and efficiency in order to have the resources to invest in our strategic priorities.

Our next question comes from Alex Bond with KBW.

Hoping to drill down a bit on the ETF offerings. Wondering how traction has been here more recently and where you're seeing relative strength. And then also curious just to get your take on how big of an opportunity you think this could be -- the active ETF space could be for both T. Rowe and the broader industry?

Yes. Thanks, Alex. This is Eric. As we talked about, we've filed for 8 new ETFs, active ETFs, 4 on the equity side and 4 on the fixed income side. Two of those on the equity side open up a new market for us in the active core, the lower fee, lower tracking error piece of the market where we have not had an offering, and it's a very large and growing part of the market, and we feel like we have a right to win in that space. So we're moving into it with those 2 specific ETFs.

In terms of our existing growth in the ETF arena, we're seeing it across both individual investors and RIAs and advisers increasingly as we build track record and we build time and market, we're being added to platforms across a host of different strategies that we've launched. And as we look into 2026, we have over a dozen ETFs in plan that we have not filed yet, but that we are working towards filing. So we have a lot more to go.

In terms of the overall size, I mean this can and should be a very big business for us through time. We're very much happy with the wrapper. We've learned how to use it well from an active management perspective, and so we think we have a right to win here and we should see growth continue.

Yes. I would add a handful of things. One, it's a growing market, and we've doubled our market share in each of the 2 previous years. We think we have about 1.5% share of the active ETF market in the U.S. I think in order to continue growing market share, we are going to need to have success with our third-party asset allocation models, incorporating a range of ETFs. We're going to need to continue to scale them. And get placement across the wealth platforms and our wealth partners.

We also see an opportunity in ETFs outside of the U.S. in time. I don't expect that, that will be a meaningful driver of flow for us in the near term. But there's potential kind of certainly in Europe and potentially also in Australia to offer ETF product in time. The appetite and demand for ETFs in those geographies also continues to grow.

I would also say that I think in order to accelerate our growth, we're going to need to have some success with some innovative and differentiated solutions. We talked earlier about the multi-token ETP. So digital could be an area that could be additive for us over time. We launched earlier this year, TCAL, which I think is an innovative solution. So look, I think, as Eric said, there is a very big opportunity here, and this should be a much bigger business for us in time across equity, fixed income, models and innovative solutions.

I might only add, as Rob talked about, investing in capabilities, we've talked a lot about product and the wrapper itself. But we've also been investing in the distribution and marketing behind ETFs. It's a different ecosystem, and that's been part of our overall plan. We're seeing some uplift from those efforts.

So to support our regional investment consultants, we've got ETF specialists that ultimately can help them engage with advisers, but also can focus on RIAs and power users of ETFs. So it's a very good point, Jen makes that we're also making an investment not just behind the investment capability, but our go-to-market approach in these areas that are more specialized.

Our next question comes from Brennan Hawken with BMO.

I totally appreciate that performance is a little hard to speak to. I know Rob, you spoke to the improvement versus last quarter. But it's still down pretty substantially versus even just 6 months ago, the performance versus the benchmarks and the passive is also still rather weak and actually deteriorated. So is it possible to give some color around the sources and attribution around some of that weakness and possible -- I know it's challenging to take steps -- possible steps that you could take to address that?

Yes. I'll ask Eric to start on that one.

Yes, for sure. Thanks for the question, Brennan. Obviously, delivering investment performance for our clients is the #1 focus of the investment organization, no matter how much we talk about different products across the ecosystem, delivering alpha has to be the single biggest focus that we have, and it is. When you look at the market environment that we've been operating in, especially since back to November of 2024, it's been a very narrow market. It's been one in which quality and value have been the worst performing factors and frankly, risky -- the riskiest quintile of stocks have been the best performers. That's not an environment that is particularly conducive to our longer-term investment approach. So that's been a bit of a headwind for us from a market backdrop.

But I would also tell you that we're being very introspective about the decisioning that we've made. We have fallen short in some sectors where we've had some stock selection issues. We've had some errors of omission. Some stocks that have really performed at exceptional levels that we were underweight or didn't own. And we're making sure that we're re-underwriting those decisions. A lot of the fundamentals of those companies are hard to justify. When you look at -- or the valuation of those companies are hard to justify given where their fundamentals are. But we're not just throwing our hands up and saying, well, it's a hard market and we can't -- we have to really think about how we're making our decisions and the teams are incredibly focused on that.

The last thing I would say is that in some situations, we have made some changes at the portfolio manager level where we felt like it was the right long-term decision for our clients.

Our next question comes from Patrick Davitt with Autonomous Research.

I have a follow-up on the sister Target Date series. Any early read on how you think the mix between T. Rowe and GS managed products will look like? And if you're adding more higher fee alts to the mix, do you think you'll need to barbell that with more passive to keep the all-in costs more palatable for platforms? Or will they just be higher fee products?

Yes. Maybe before we take that one, a handful of other points on performance that I would make. Our performance in fixed income right now is very, very strong. Performance in retirement date lend is very, very strong. There are a number of equity strategies with really compelling multiyear performance and a number with compelling near-term performance. We've had -- we've got very good recent performance in global focused growth. I think if you look over a 3-, 5- and 10-year horizon, our structured research strategy is now over $100 billion, our U.S. equity research strategy, the results are very compelling. We've gotten a lot of traction with international value.

So right now, it is a very difficult market backdrop. There is a lot of momentum in the hyperscalers where you have multitrillion dollar market cap dominating the benchmark weighted returns. My sense is there's a lot of idiosyncratic risk in going passive right now. And if you look at the opportunity for alpha generation, post concentration peaks in the past, whether you're looking at the Nifty 50, whether you're looking at Japan as a percent of EPA in the late 80s, whether you're looking at the TMT bubble, there's a very significant opportunity for alpha generation. I'm not saying we're at a concentration peak. There are kind of obvious differences today relative to those periods of time. But the fact pattern would suggest that once concentration peaks, there will be a very significant alpha generation opportunity, and that it will be kind of a period of time where active management can meaningfully outperform.

Going to the question with regard to sister series, the product design at this point is largely set. We think that the all-in fee can be very, very competitive. And we'll -- the product design incorporates the underlying cost of the private market alternatives. So again, I think we'll be able to deliver something that is consistent with offerings in the marketplace today, despite having allocations that are kind of up to mid- to high teens in private market alternatives at certain points along the glide path.

And our final question comes from Glenn Schorr with Evercore.

With that, this concludes today's conference call. Thank you for participating. You may now disconnect.