Item 2. Management’s Discussion and Analysis
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW.
Our revenues and net income are derived primarily from investment advisory services provided to individual and institutional investors in U.S. mutual funds , subadvised funds, separately managed accounts, and other T. Rowe Price products. The other T. Rowe Price products include: collective investment trusts, open-ended investment products offered to investors outside the U.S., and products offered through variable annuity life insurance plans in the U.S. We also provide certain investment advisory clients with related administrative services, including distribution, mutual fund transfer agent, accounting, and shareholder services; participant recordkeeping and transfer agent services for defined contribution retirement plans; brokerage; and trust services.
We manage a broad range of U.S., international and global stock, bond, and money market mutual funds and other investment products , which meet the varied needs and objectives of individual and institutional investors. Investment advisory revenues depend largely on the total value and composition of assets under our management. Accordingly, fluctuations in financial markets and in the composition of assets under management affect our revenues and results of operations. Additionally, approximately 30% of our operating expenses are impacted by fluctuations in our assets under management.
We incur significant expenditures to develop new products and services and improve and expand our capabilities and distribution channels in order to attract new investment advisory clients and additional investments from our existing clients. These efforts often involve costs that precede any future revenues that we may recognize from an increase to our assets under management.
The general trend to passive investing has been persistent and accelerated in recent years, which has negatively impacted our new client inflows. However, over the long term we expect well-executed active management to play an important role for investors. In this regard, we remain debt-free with ample liquidity and resources that allow us to take advantage of attractive growth opportunities. We are investing in key capabilities, including investment professionals, technologies, and new product offerings; and, most importantly, we provide our clients with strong investment management expertise and service both now and in the future.
MARKET TRENDS.
U.S. equities surged during the second quarter 2020, bouncing back sharply to recover some of their steep losses in February and March. Massive stimulus efforts from the Federal Reserve and the federal government as well as the gradual lifting of lockdowns and the reopening of economies drove the market’s vigorous gains during the quarter. While most U.S. economic data were dismal, some better-than-expected readings later in the quarter boosted investor sentiment. However, as the quarter ended, investors were somewhat concerned about increasing coronavirus cases in a number of states, which prompted some governors to stop or reverse some of their reopening efforts.
Stocks in developed non-U.S. equity markets advanced but underperformed U.S. shares. European stock markets were positive in U.S. dollar terms, with German stocks leading the way. All developed Asian and Far East markets were positive, with Australia and New Zealand displaying the best returns. Japanese stocks returned almost 12% in U.S. dollar terms.
Emerging markets stocks outperformed developed non-U.S. markets. Asian markets were positive, with Indonesian shares leading the region. Latin American shares were also very strong, led by Argentina and Brazil. In emerging Europe, Russian and Turkish stocks returned about 19% in U.S. dollar terms.
Page 20
Returns of several major equity market indexes for the three- and six-month periods ended June 30, 2020 , were as follows:
Three months ended
Six months ended
Index
6/30/2020
6/30/2020
S&P 500 Index
20.5%
(3.1)%
NASDAQ Composite Index (1)
30.6%
12.1%
Russell 2000 Index
25.4%
(13.0)%
MSCI EAFE (Europe, Australasia, and Far East) Index
15.1%
(11.1)%
MSCI Emerging Markets Index
18.2%
(9.7)%
(1) Returns exclude dividends
Global bonds produced positive returns. In the U.S. investment-grade market, corporate bonds fared best as credit spreads narrowed in part because the Federal Reserve announced that it would begin buying a broad portfolio of U.S. corporate bonds. Asset-backed securities rose to a lesser extent, while mortgage-backed securities and Treasuries lagged with modest returns. The Fed kept short-term interest rates near zero percent; the 10-year Treasury note yield decreased from .70% to .66%. Tax-free municipal bonds produced positive returns but narrowly underperformed the broad taxable bond market. High yield bonds easily outperformed the investment-grade market.
Bonds in developed non-U.S. markets produced gains in U.S. dollar terms. Eurozone bond returns to U.S. investors were helped by dollar weakness against the Euro.
Emerging markets bonds displayed strong positive returns. Bonds denominated in U.S. dollars outperformed local currency issues, as weakness in certain currencies, such as the Brazilian real and the Turkish lira, weighed on local bond performance in U.S. dollar terms.
Returns for several major bond market indexes for the three- and six-month periods ended June 30, 2020 , were as follows:
Three months ended
Six months ended
Index
6/30/2020
6/30/2020
Bloomberg Barclays U.S. Aggregate Bond Index
2.9%
6.1%
JPMorgan Global High Yield Index
10.8%
(5.7)%
Bloomberg Barclays Municipal Bond Index
2.7%
2.1%
Bloomberg Barclays Global Aggregate Ex-U.S. Dollar Bond Index
3.4%
.6%
JPMorgan Emerging Markets Bond Index Plus
9.1%
(.4)%
Page 21
ASSETS UNDER MANAGEMENT.
Assets under management ended the second quarter of 2020 at $1,220.0 billion , an increase of $211.2 billion from March 31, 2020 and $13.2 billion from the end of 2019 . Net cash inflows were $14.7 billion , including large subscriptions from institutional clients into U.S. equity and multi-asset, and clients transferred $4.4 billion in net assets from the U.S. mutual funds to other investment products , of which $1.8 billion transferred into the retirement date trusts. Market appreciation and income, net of dividends not reinvested, increased our assets under management by $196.5 billion in the second quarter of 2020 .
For the six months ended June 30, 2020 , net cash inflows were $8.7 billion , and clients transferred $8.8 billion in net assets from the U.S. mutual funds to other investment products , of which $6.1 billion transferred into the retirement date trusts. Market appreciation and income, net of dividends not reinvested, increased our assets under management by $4.5 billion in the six months ended June 30, 2020 .
The following tables detail changes in our assets under management, by vehicle and asset class during the three- and six-month periods ended June 30, 2020 :
Three months ended 6/30/2020
Six months ended 6/30/2020
(in billions)
U.S. mutual funds
Subadvised and separate accounts
Other investment products
Total
U.S. mutual funds
Subadvised and separate accounts
Other investment products
Total
Assets under management at beginning of period
$
562.3
$
261.1
$
185.4
$
1,008.8
$
682.7
$
313.8
$
210.3
$
1,206.8
Net cash flows before client transfers
3.4
12.1
(.8
)
14.7
(4.1
)
8.4
4.4
8.7
Client transfers
(4.4
)
—
4.4
—
(8.8
)
.2
8.6
—
Net cash flows after client transfers
(1.0
)
12.1
3.6
14.7
(12.9
)
8.6
13.0
8.7
Net market appreciation (depreciation) and income
109.7
54.3
32.7
196.7
1.3
5.1
(1.6
)
4.8
Net distributions not reinvested
(.2
)
—
—
(.2
)
(.3
)
—
—
(.3
)
Change during the period
108.5
66.4
36.3
211.2
(11.9
)
13.7
11.4
13.2
Assets under management at June 30, 2020
$
670.8
$
327.5
$
221.7
$
1,220.0
$
670.8
$
327.5
$
221.7
$
1,220.0
Three months ended 6/30/2020
Six months ended 6/30/2020
(in billions)
Equity
Fixed income, including money market
Multi-asset (1)
Total
Equity
Fixed income, including money market
Multi-asset (1)
Total
Assets under management at beginning of period
$
569.3
$
146.3
$
293.2
$
1,008.8
$
698.9
$
147.9
$
360.0
$
1,206.8
Net cash flows
9.8
2.3
2.6
14.7
4.1
5.3
(.7
)
8.7
Net market appreciation (depreciation) and income (2)
139.8
4.4
52.3
196.5
15.9
(.2
)
(11.2
)
4.5
Change during the period
149.6
6.7
54.9
211.2
20.0
5.1
(11.9
)
13.2
Assets under management at June 30, 2020
$
718.9
$
153.0
$
348.1
$
1,220.0
$
718.9
$
153.0
$
348.1
$
1,220.0
(1) The underlying assets under management of the multi-asset portfolios have been aggregated and presented in this category and not reported in the equity and fixed income columns.
(2) Includes distributions reinvested and not reinvested.
Investment advisory clients outside the U.S. account for about 8.2% of our assets under management at June 30, 2020 and 6.9% at December 31, 2019 .
Page 22
Our target date retirement products , which are included in the multi-asset totals shown above, continue to be a significant part of our assets under management. Assets under management in these portfolios were as follows:
As of
(in billions)
6/30/2020
3/31/2020
12/31/2019
Target date retirement U.S. mutual funds
$
153.0
$
132.0
$
164.8
Target date separate accounts
8.5
7.1
8.4
Target date retirement trusts
122.7
103.1
119.2
$
284.2
$
242.2
$
292.4
Our target date retirement products experienced net cash outflows of $.2 billion in the second quarter of 2020 and net cash inflows of $.5 billion in the first six months of 2020 .
INVESTMENT PERFORMANCE.
Strong investment performance and brand awareness is a key driver to attracting and retaining assets—and to our long-term success. The percentage of our U.S. mutual funds (1) (across primary share classes) that outperformed their comparable Morningstar median on a total return basis and that are in the top Morningstar quartile for the one-, three-, five-, and 10-years ended June 30, 2020 , were:
1 year
3 years
5 years
10 years
Outperformed Morningstar median (2)
All funds
59%
63%
73%
77%
Multi-asset funds
58%
74%
88%
89%
Top Morningstar quartile (2)
All funds
29%
34%
46%
52%
Multi-asset funds
33%
40%
59%
74%
(1) Excludes passive and fund categories not ranked by Morningstar.
(2) Source: © 2020 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.
In addition, 79% of assets under management in our rated U.S. mutual funds (across primary share classes) ended the quarter with an overall rating of four or five stars from Morningstar. The performance of our institutional strategies against their benchmarks remains competitive, especially over longer time periods.
RESULTS OF OPERATIONS.
The following table and discussion sets forth information regarding our consolidated financial results for the three and six months ended June 30, 2020 and 2019 on a U.S. GAAP basis as well as a non-GAAP basis. The non-GAAP basis adjusts for the impact of our consolidated T. Rowe Price investment products , the impact of market movements on the supplemental savings plan liability and related economic hedges, investment income related to certain other investments, and certain nonrecurring charges and gains.
Page 23
Three months ended
Q2 2020 vs. Q2 2019
Six months ended
YTD 2020 vs. YTD 2019
(in millions, except per-share data)
6/30/2020
6/30/2019
$ change
% change
6/30/2020
6/30/2019
$ change
% change
U.S. GAAP basis
Investment advisory fees
$
1,293.8
$
1,270.2
$
23.6
1.9
%
$
2,621.6
$
2,464.4
$
157.2
6.4
%
Net revenues
$
1,415.4
$
1,395.2
$
20.2
1.4
%
$
2,878.0
$
2,722.5
$
155.5
5.7
%
Operating expenses
$
861.7
$
780.1
$
81.6
10.5
%
$
1,617.1
$
1,574.9
$
42.2
2.7
%
Net operating income
$
553.7
$
615.1
$
(61.4
)
(10.0
)%
$
1,260.9
$
1,147.6
$
113.3
9.9
%
Non-operating income (loss) (1)
$
415.1
$
124.5
$
290.6
n/m
$
(85.2
)
$
327.3
$
(412.5
)
n/m
Net income attributable to T. Rowe Price Group
$
603.0
$
527.5
$
75.5
14.3
%
$
946.1
$
1,040.1
$
(94.0
)
(9.0
)%
Diluted earnings per common share
$
2.55
$
2.15
$
.40
18.6
%
$
3.95
$
4.23
$
(.28
)
(6.6
)%
Weighted average common shares outstanding assuming dilution
229.5
239.2
(9.7
)
(4.1
)%
233.1
239.4
(6.3
)
(2.6
)%
Adjusted non-GAAP basis (2)
Operating expenses
$
785.8
$
764.6
$
21.2
2.8
%
$
1,603.7
$
1,521.2
$
82.5
5.4
%
Net operating income
$
631.7
$
632.8
$
(1.1
)
(.2
)%
$
1,278.9
$
1,205.0
$
73.9
6.1
%
Non-operating income (1)
$
85.8
$
35.8
$
50.0
n/m
$
24.6
$
80.0
$
(55.4
)
n/m
Net income attributable to T. Rowe Price Group
$
539.6
$
498.1
$
41.5
8.3
%
$
993.9
$
958.7
$
35.2
3.7
%
Diluted earnings per common share
$
2.29
$
2.03
$
.26
12.8
%
$
4.15
$
3.90
$
.25
6.4
%
Assets under management (in billions)
Average assets under management
$
1,140.2
$
1,099.8
$
40.4
3.7
%
$
1,151.4
$
1,071.8
$
79.6
7.4
%
Ending assets under management
$
1,220.0
$
1,125.0
$
95.0
8.4
%
$
1,220.0
$
1,125.0
$
95.0
8.4
%
(1) The percentage change in non-operating income (loss) is not meaningful (n/m).
(2) See the reconciliation to the comparable U.S. GAAP measures at the end of the Results of Operations section of this Management’s Discussion and Analysis.
Results Overview - Quarter ended June 30, 2020
Investment advisory revenues. Investment advisory fees are earned based on the value and composition of our assets under management, which change based on fluctuations in financial markets and net cash flows. As our average assets under management increase or decrease in a given period, the level of our investment advisory fee revenue for that same period generally fluctuates in a similar manner. Our annualized effective fee rates can be impacted by market or cash flow related shifts among asset and share classes, price changes in existing products, and asset level changes in products with tiered-fee structures.
Investment advisory revenues earned in the second quarter of 2020 increased over the comparable 2019 quarter as average assets under our management increase d $40.4 billion , or 3.7% , to $1,140.2 billion . The average annualized effective fee rate earned during the second quarter of 2020 was 45.6 basis points , compared with 46.3 basis points earned during the second quarter of 2019 .
Further, beginning in the second quarter of 2020 , we voluntarily waived a portion of our money market advisory fees and fund expenses in order to maintain a positive yield for investors. We waived $2.7 million, or less than 1% of total investment advisory fees from certain of our money market mutual funds, trusts and other investment portfolios during the second quarter of 2020 . At June 30, 2020 , combined net assets of the funds and trusts in which we waived fees in the second quarter of 2020 were $22.4 billion. We expect to continue to waive fees for at least the remainder of 2020 .
Our annualized effective fee rate declined primarily due to client transfers within the complex to lower fee vehicles or share classes over the last twelve months.
Page 24
Operating expenses. Operating expenses were $861.7 million in the second quarter of 2020 compared with $780.1 million in the second quarter of 2019 . The increase in operating expenses for the second quarter of 2020 was primarily due to an increase in market-related compensation expense of $60.5 million related to the increase in the supplemental savings plan liability and, to a lesser extent, higher salaries and the firm’s continued strategic investments. For the second quarter of 2020 , the higher compensation expense related to the supplemental savings plan was largely offset by the non-operating gains earned on the investments used to economically hedge the related liability.
On a non-GAAP basis, our operating expenses in the second quarter of 2020 increased 2.8% to $785.8 million compared to the second quarter of 2019 . Our non-GAAP operating expenses do not include the impact of our supplemental savings plan and consolidated sponsored investment products. See our non-GAAP reconciliations later in this Management’s Discussion and Analysis section.
Operating margin. Our operating margin in the second quarter of 2020 was 39.1% , compared to 44.1% earned in the 2019 quarter. The decrease in our operating margin for the second quarter of 2020 compared to the 2019 period was primarily driven by the higher compensation expense related to our supplemental savings plan as markets in the second quarter of 2020 outperformed the same period in 2019 .
Diluted earnings per share. Diluted earnings per share was $2.55 for the second quarter of 2020 as compared to $2.15 for the second quarter of 2019 . The 18.6% increase was primarily driven by the significantly higher investment gains recognized in the second quarter of 2020 as compared to the second quarter of 2019 as well as a 4.1% decline in weighted average shares outstanding. These drivers of the increase in diluted earnings per share were partially offset by lower operating income in the second quarter of 2020.
On a non-GAAP basis, diluted earnings per share was $2.29 for the second quarter of 2020 as compared to $2.03 for the second quarter of 2019 . The increase in diluted earnings per share was primarily due to higher investment gains and lower shares outstanding.
Results Overview - Year-to-Date ended June 30, 2020
Investment advisory revenues. Investment advisory revenues earned in the six months ended June 30, 2020 increased over the comparable 2019 period as average assets under our management increased $79.6 billion , or 7.4% , to $1,151.4 billion . The average annualized effective fee rate earned on our assets under management during the six months ended June 30, 2020 was 45.8 basis points compared with 46.4 basis points earned during the same period of 2019 .
Our annualized effective fee rate declined primarily due to client transfers within the complex to lower fee vehicles or share classes over the last twelve months.
Operating expenses. Operating expenses were $1,617.1 million in the six months ended June 30, 2020 compared with $1,574.9 million in the 2019 period. The increase in operating expenses was primarily due to higher salary and benefits expense, interim bonus accrual, stock-based compensation expense and our continued strategic investments. These increases were partially offset by lower market-related compensation expense of $39.8 million related to the supplemental savings plan.
On a non-GAAP basis, our operating expenses for the six months ended June 30, 2020 increased 5.4% to $1,603.7 million compared to the 2019 period. Our non-GAAP operating expenses do not include the impact of our supplemental savings plan and consolidated sponsored investment products. See our non-GAAP reconciliations later in this Management’s Discussion and Analysis section.
While we anticipate that the coronavirus pandemic will continue to reduce certain expense categories, such as travel, we have changed our expected full-year 2020 non-GAAP operating expense growth to 3%-6%, from the 1%-4% provided in April 2020 as the sharp market recovery in the second quarter of 2020 has increased our AUM-related expenses. This range includes investments in our critical strategic initiatives to promote long-term growth of the business. We could elect to further adjust our expense growth should unforeseen circumstances arise, including significant market movements and ongoing disruption resulting from the coronavirus pandemic.
Operating margin. Our operating margin in the six months ended June 30, 2020 was 43.8% , compared to 42.2% earned in the 2019 period. The increase in our operating margin for the six months ended June 30, 2020 compared
Page 25
to the 2019 period was primarily driven by the lower compensation expense related to our supplemental savings plan as markets in the first half of 2020 underperformed the same period in 2019 as global markets were disrupted by the coronavirus pandemic during 2020.
Diluted earnings per share. Diluted earnings per share was $3.95 for the six months ended June 30, 2020 as compared to $4.23 for the six months ended June 30, 2019 . The 6.6% decrease was primarily driven by investment losses recognized in the six months ended June 30, 2020 as compared to gains generated in the six months ended June 30, 2019 . Higher operating income, lower outstanding shares, and a lower effective tax rate in the first half of 2020 reduced the impact of the investment losses.
Diluted earnings per share on a non-GAAP basis was $4.15 for the six months ended June 30, 2020 as compared to $3.90 for the six months ended June 30, 2019 . The increase in adjusted diluted earnings per share was primarily due to higher operating income, lower shares outstanding, and a lower effective tax rate. The impact of these drivers were partially offset by investment losses recognized in the 2020 period. See our non-GAAP reconciliations later in this Management’s Discussion and Analysis section.
Net revenues
Three months ended
Q2 2020 vs. Q2 2019
Six months ended
YTD 2020 vs. YTD 2019
(in millions)
6/30/2020
6/30/2019
$ change
% change
6/30/2020
6/30/2019
$ change
% change
Investment advisory fees
U.S. mutual funds
$
823.1
$
860.7
$
(37.6
)
(4.4
)%
$
1,699.3
$
1,676.6
$
22.7
1.4
%
Subadvised and separate accounts and other investment products
470.7
409.5
61.2
14.9
%
922.3
787.8
134.5
17.1
%
1,293.8
1,270.2
23.6
1.9
%
2,621.6
2,464.4
157.2
6.4
%
Administrative, distribution, and servicing fees
Administrative fees
95.9
94.9
1.0
1.1
%
202.8
197.8
5.0
2.5
%
Distribution and servicing fees
25.7
30.1
(4.4
)
(14.6
)%
53.6
60.3
(6.7
)
(11.1
)%
121.6
125.0
(3.4
)
(2.7
)%
256.4
258.1
(1.7
)
(.7
)%
Net revenues
$
1,415.4
$
1,395.2
$
20.2
1.4
%
$
2,878.0
$
2,722.5
$
155.5
5.7
%
Investment advisory fees.
U.S. mutual funds
Investment advisory revenues earned in the second quarter of 2020 from our U.S. mutual funds were $823.1 million , a decrease of 4.4% from the comparable 2019 quarter. Average assets under management in these funds for the second quarter of 2020 decreased 1.6% from the 2019 quarter to $628.6 billion .
Investment advisory revenues earned in the six months ended June 30, 2020 from the firm's U.S. mutual funds were $1,699.3 million , an increase of 1.4% from the comparable 2019 period. Average assets under management in these funds for the six months ended June 30, 2020 increased 2.7% from the 2019 period to $641.5 billion .
The difference in the percentage of change in revenue compared with assets under management for both the 2020 quarter and year-to-date periods from the 2019 period is primarily due to client transfers within the complex to lower fee vehicles or shares classes during the last twelve months.
Subadvised and separate accounts and other investment products
Investment advisory revenues earned in the second quarter of 2020 from subadvised and separate accounts and other investment products were $470.7 million , an increase of 14.9% from the comparable 2019 quarter. Average assets under management for these products increase d 10.9% from the 2019 quarter to $511.6 billion .
Page 26
Investment advisory revenues earned in the six months ended June 30, 2020 from subadvised and separate accounts as well as other investment products were $922.3 million , an increase of 17.1% from the 2019 period. Average assets under management for these products increased 14.0% from the 2019 period to $509.9 billion .
Inflows into the Japanese ITMs, which have a higher than average fee rate have caused investment advisory fees in these portfolios to increase at a rate greater than the increase in their average assets under management. The fee rate earned on the Japanese ITMs is substantially offset by the costs incurred to distribute these products. Those costs are recorded as part of distribution and servicing expenses.
Administrative, distribution, and servicing fees. Administrative, distribution, and servicing fees in the second quarter of 2020 were $121.6 million , a decrease of $3.4 million , or 2.7% , from the comparable 2019 quarter. For the six months ended June 30, 2020 , these fees were $256.4 million , a decrease of $1.7 million , or .7% , from the 2019 period. In this line, we recognize fees earned from providing administrative and distribution services to our investment advisory clients, primarily our U.S. mutual funds and their investors. The decrease for both periods was primarily due to lower 12b-1 revenue earned on certain share classes, including the Advisor and R classes, of the U.S. mutual funds as lower markets in 2020 as well as client transfers to lower fee vehicles and share classes over the last twelve months have reduced assets under management in these share classes. The decline in 12b-1 revenue is offset entirely by a reduction in the costs paid to third-party intermediaries that source these assets and reported in distribution and servicing expense. For the six months ended June 30, 2020 compared to the same period of 2019 , the lower 12b-1 revenue was partially offset by increased retail transfer agent servicing activities and higher administrative services provided to fund shareholders.
Our second quarter net revenues reflect the elimination of $2.1 million in 2020 and $2.2 million in 2019 , of revenue earned from our consolidated T. Rowe Price investment products . For the six months ended June 30, 2020 and 2019 , we eliminated $4.6 million in 2020 and $3.7 million in 2019 of net revenue. The corresponding expenses recognized by these products, and consolidated in our financial statements, were eliminated from operating expenses.
Operating expenses
Three months ended
Q2 2020 vs. Q2 2019
Six months ended
YTD 2020 vs. YTD 2019
(in millions)
6/30/2020
6/30/2019
$ change
% change
6/30/2020
6/30/2019
$ change
% change
Compensation and related costs
$
549.0
$
483.2
$
65.8
13.6
%
$
989.7
$
974.7
$
15.0
1.5
%
Distribution and servicing
62.0
64.4
(2.4
)
(3.7
)%
127.7
130.8
(3.1
)
(2.4
)%
Advertising and promotion
13.4
19.8
(6.4
)
(32.3
)%
38.3
41.4
(3.1
)
(7.5
)%
Product-related costs
39.6
33.4
6.2
18.6
%
81.2
77.6
3.6
4.6
%
Technology, occupancy, and facility costs
111.3
104.9
6.4
6.1
%
216.7
203.0
13.7
6.7
%
General, administrative, and other
86.4
74.4
12.0
16.1
%
163.5
147.4
16.1
10.9
%
Total operating expenses
$
861.7
$
780.1
$
81.6
10.5
%
$
1,617.1
$
1,574.9
$
42.2
2.7
%
Compensation and related costs. Compensation and related costs were $ 549.0 million in the second quarter of 2020 , an increase of $ 65.8 million , or 13.6% , compared to the 2019 quarter. The increase was primarily due to an increase in market-related expense of $ 60.5 million related to our supplemental savings plan as the sharp market recovery in the second quarter of 2020 increased the liability. Additionally, increases in base salaries and related employee costs, due to a 5.1% increase in our average staff size and, to a lesser extent, the modest increases in base salaries at the beginning of 2020 , and higher non-cash stock-based compensation expense contributed to the increase in compensation and related costs in the 2020 period. These increases in compensation and related costs were offset in part by higher labor capitalization related to internally developed software and a lower interim accrual for annual variable compensation, primarily bonus compensation, from the 2019 quarter. We recognize the interim bonus accrual ratably over the year using the ratio of recognized quarterly net revenues to currently forecasted annual net revenues.
Compensation and related costs were $989.7 million in the six months ended June 30, 2020 , an increase of $15.0 million , or 1.5% , compared to the 2019 period. The increase in compensation and related costs was primarily due to an increase in salaries, benefits and related employee costs, which have increased $32.2 million from the 2019
Page 27
period. An increase of 5.4% in our average staff size and modest increases in base salaries at the beginning of 2020 have contributed to higher associate-related costs. Our interim accrual for annual variable compensation, primarily bonus compensation, also increased $10.8 million in 2020 from the 2019 period. These increases in compensation and related costs were offset in part by $39.8 million in lower market-related expense related to our supplemental savings plan and $13.0 million in higher labor capitalization related to internally developed software in 2020 period.
Distribution and servicing. Distribution and servicing includes those costs incurred to distribute T. Rowe Price products as well as client and shareholder servicing, recordkeeping, and administrative services. These costs were $ 62.0 million for the second quarter of 2020 , a decrease of 3.7% from the $ 64.4 million recognized in the 2019 quarter. For the six months ended June 30, 2020 , these costs were $127.7 million , a decrease of 2.4% over the $130.8 million recognized in the comparable 2019 period. The decrease for both periods is primarily driven by lower assets under management in those mutual funds for which we pay distribution and servicing costs as lower markets and client transfers to lower fee vehicles or share classes over the last twelve months reduced assets under management for these share classes. The decreases in costs related to these products were partially offset by higher distribution costs as a result of inflows into our Japanese ITMs.
Distribution and servicing costs paid to third-party intermediaries that source the assets of certain share classes of our U.S. mutual funds are recognized in this expense line and are offset entirely by the 12b-1 revenue we earn and report in administrative, distribution, and servicing fees.
Advertising and promotion. Advertising and promotion costs were $13.4 million in the second quarter of 2020 , a decrease of $6.4 million , or 32.3% , compared to the $19.8 million recognized in the 2019 quarter. For the six months ended June 30, 2020 , these costs were $38.3 million , a decrease of $3.1 million , or 7.5% , compared to the 2019 period. The decrease for both periods is due primarily to lower media activity and fewer conference events in 2020 as compared to 2019.
Technology, occupancy, and facility costs. Technology, occupancy, and facility costs consists of depreciation expense, technology equipment and maintenance, software, and costs related to our facilities. These costs were $ 111.3 million in the second quarter of 2020 , an increase of $ 6.4 million , or 6.1% , compared to the $ 104.9 million recognized in the 2019 quarter. For the six months ended June 30, 2020 , these costs were $216.7 million , an increase of $13.7 million , or 6.7% , compared to the 2019 period. The increase for both periods is due primarily to the ongoing investment in our technology capabilities, including related depreciation and hosted solution licenses.
General, administrative, and other. General, administrative, and other expenses were $86.4 million in the second quarter of 2020 , an increase of $12.0 million , or 16.1% , compared to the $74.4 million recognized in the 2019 quarter. For the six months ended June 30, 2020 , these costs were $163.5 million , an increase of $16.1 million , or 10.9% , compared to the 2019 period. The increase for both periods is primarily due to certain nonrecurring administrative expenses, along with higher third-party investment research costs and higher professional fees. These increases were partially offset by lower travel expenses in the second quarter of 2020.
Non-operating income (loss)
Non-operating income for the second quarter of 2020 was $415.1 million , an increase of $290.6 million from non-operating income in the second quarter of 2019 of $124.5 million . Non-operating loss for the six months ended June 30, 2020 was $85.2 million , a decrease of $412.5 million from non-operating income in the comparable 2019 period of $327.3 million . The following table details the components of non-operating income for the quarter and year-to-date periods.
Page 28
Three months ended
Six months ended
(in millions)
6/30/2020
6/30/2019
6/30/2020
6/30/2019
Net gains (losses) from non-consolidated T. Rowe Price investment products
Cash and discretionary investments
Dividend income
$
5.0
$
17.9
$
15.4
$
34.1
Market related gains and equity in earnings
80.8
17.9
9.2
45.9
Seed capital investments
Dividend income
.5
.3
1.2
.8
Market related gains (losses) and equity in earnings (losses)
28.1
8.7
(6.0
)
28.3
Net gain recognized upon deconsolidation
—
.1
.1
.2
Investments used to hedge the supplemental savings plan liability
64.4
12.1
(4.1
)
43.1
Total net gains from non-consolidated T. Rowe Price investment products
178.8
57.0
15.8
152.4
Other investment income (loss)
(8.2
)
4.8
.2
9.5
Net gains (losses) on investments
170.6
61.8
16.0
161.9
Net gains (losses) on consolidated sponsored investment portfolios
242.4
62.8
(87.9
)
164.7
Other income (loss), including foreign currency gains and losses
2.1
(.1
)
(13.3
)
.7
Non-operating income (loss)
$
415.1
$
124.5
$
(85.2
)
$
327.3
Our investment portfolio recognized significant gains in the second quarter of 2020 as the markets rebounded sharply from the market losses experienced in the first quarter of 2020. Our consolidated investment products and supplemental savings plan hedge portfolio comprised about 75% of the net gains recognized during the second quarter of 2020 . The cash and discretionary investment portfolio also experienced net investment gains of $85.8 million in the second quarter of 2020 .
Despite the sharp market recovery in the second quarter of 2020 , our investment portfolio for the six months ended June 30, 2020 has experienced net losses due to the global economies and markets disruption caused by the coronavirus pandemic in the first quarter of 2020. Our consolidated investment products and supplemental savings plan hedge portfolio comprised most of the net losses recognized during the six months ended June 30, 2020 . The cash and discretionary investment portfolio partially offset these losses with net investment gains of $24.6 million in the six months ended June 30, 2020 .
The table above includes the net investment income of the underlying portfolios included in the consolidated T. Rowe Price investment products and not just the net investment income related to our interest. The table below shows the impact that the consolidated T. Rowe Price investment products had on the individual lines of our unaudited condensed consolidated statements of income and the portion attributable to our interest:
Three months ended
Six months ended
(in millions)
6/30/2020
6/30/2019
6/30/2020
6/30/2019
Operating expenses reflected in net operating income
$
(3.6
)
$
(3.8
)
$
(7.3
)
$
(6.9
)
Net investment income (loss) reflected in non-operating income (loss)
242.4
62.8
(87.9
)
164.7
Impact on income before taxes
$
238.8
$
59.0
$
(95.2
)
$
157.8
Net income (loss) attributable to our interest in the consolidated T. Rowe Price investment products
$
113.3
$
30.6
$
(44.2
)
$
88.0
Net income (loss) attributable to redeemable non-controlling interests (unrelated third-party investors)
125.5
28.4
(51.0
)
69.8
$
238.8
$
59.0
$
(95.2
)
$
157.8
Page 29
Provision for income taxes
Our effective tax rate for the second quarter of 2020 and 2019 was 24.8% . The effective tax rate for the second quarter of 2020 was impacted by a lower state effective tax rate, resulting primarily from the remeasurement of deferred tax liabilities related to the firm's investment portfolio, higher net gains attributable to redeemable non-controlling interests held in the firm's consolidated investment products, which are not taxable to the firm despite being included in pre-tax income, and lower discrete tax benefits associated with option exercises.
Our effective tax rate for the six months ended June 30, 2020 was 23.9% , compared with 24.7% in the 2019 period. The year-to-date 2020 effective tax rate was lower than the 2019 period primarily due to higher discrete tax benefits associated with option exercises in the 2020 period.
The following table reconciles the statutory federal income tax rate to our effective tax rate for both the three- and six- months ended June 30, 2020 and 2019 :
Three months ended
Six months ended
6/30/2020
6/30/2019
6/30/2020
6/30/2019
Statutory U.S. federal income tax rate
21.0
%
21.0
%
21.0
%
21.0
%
State income taxes for current year, net of federal income tax benefits (1)
3.7
4.6
4.2
4.4
Net (income) losses attributable to redeemable non-controlling interests
(.3
)
(.7
)
.3
(.7
)
Net excess tax benefits from stock-based compensation plans activity
(.4
)
(.7
)
(1.7
)
(.7
)
Other items
.8
.6
.1
.7
Effective income tax rate
24.8
%
24.8
%
23.9
%
24.7
%
(1) State income tax benefits are reflected in the total benefits for net income attributable to redeemable non-controlling interests and stock-based compensation plans activity.
We currently estimate our effective tax rate for the full-year 2020 will be in the range of 23% to 26% . Our effective tax rate will continue to experience volatility in future periods as the discrete tax benefits recognized from option exercises are impacted by market fluctuations in our stock price and timing of option exercises. The rate will also be impacted by net investment income recognized on our consolidated investment products that are driven by market fluctuations and changes in the proportion of their net income that is attributable to non-controlling interests.
Our non-GAAP effective tax rate for the second quarter of 2020 and 2019 was 24.8% and 25.5% , respectively. Our non-GAAP effective tax rate for the six months ended June 30, 2020 and 2019 was 23.8% and 25.4% , respectively. The non-GAAP tax rate primarily adjusts for the impact of the consolidated investment products, including the significant net losses attributable to the redeemable non-controlling interests. The decrease in the non-GAAP effective tax rate is primarily due to the lower state effective rate, slightly offset by lower discrete tax benefits associated with option exercises. We currently estimate our non-GAAP effective tax rate for the full-year 2020 will be in the range of 23% to 25% .
NON-GAAP INFORMATION AND RECONCILIATION.
We believe the non-GAAP financial measures below provide relevant and meaningful information to investors about our core operating results. These measures have been established in order to increase transparency for the purpose of evaluating our core business, for comparing current results with prior period results, and to enable more appropriate comparison with industry peers. However, non-GAAP financial measures should not be considered a substitute for financial measures calculated in accordance with U.S. GAAP and may be calculated differently by other companies.
Page 30
The following schedules reconcile certain U.S. GAAP financial measures for the three months ended
June 30, 2020 and 2019 .
Three months ended 6/30/2020
Operating expenses
Net operating income
Non-operating income (loss)
Provision (benefit) for income taxes (4)
Net income attributable to T. Rowe Price Group
Diluted earnings per share (5)
U.S. GAAP Basis
$
861.7
$
553.7
$
415.1
$
240.3
$
603.0
$
2.55
Non-GAAP adjustments:
Consolidated T. Rowe Price
investment products (1)
(1.5
)
3.6
(242.4
)
(54.4
)
(58.9
)
(.25
)
Supplemental savings plan liability (2)
(74.4
)
74.4
(64.4
)
3.4
6.6
.03
Other non-operating income (3)
—
—
(22.5
)
(11.4
)
(11.1
)
(.04
)
Adjusted Non-GAAP Basis
$
785.8
$
631.7
$
85.8
$
177.9
$
539.6
$
2.29
Three months ended 6/30/2019
Operating expenses
Net operating income
Non-operating income (loss)
Provision (benefit) for income taxes (4)
Net income attributable to T. Rowe Price Group
Diluted earnings per share (5)
U.S. GAAP Basis
$
780.1
$
615.1
$
124.5
$
183.7
$
527.5
$
2.15
Non-GAAP adjustments:
Consolidated T. Rowe Price
investment products (1)
(1.6
)
3.8
(62.8
)
(9.5
)
(21.1
)
(.09
)
Supplemental savings plan liability (2)
(13.9
)
13.9
(12.1
)
.5
1.3
.01
Other non-operating income (3)
—
—
(13.8
)
(4.2
)
(9.6
)
(.04
)
Adjusted Non-GAAP Basis
$
764.6
$
632.8
$
35.8
$
170.5
$
498.1
$
2.03
The following schedules reconcile certain U.S. GAAP financial measures for the six months ended June 30, 2020 and 2019 .
Six months ended 6/30/2020
Operating expenses
Net operating income
Non-operating income (loss)
Provision (benefit) for income taxes (4)
Net income attributable to T. Rowe Price Group
Diluted earnings per share (5)
U.S. GAAP Basis
$
1,617.1
$
1,260.9
$
(85.2
)
$
280.6
$
946.1
$
3.95
Non-GAAP adjustments:
Consolidated T. Rowe Price
investment products (1)
(2.7
)
7.3
87.9
16.7
27.5
.11
Supplemental savings plan liability (2)
(10.7
)
10.7
4.1
5.6
9.2
.04
Other non-operating income (3)
—
—
17.8
6.7
11.1
.05
Adjusted Non-GAAP Basis
$
1,603.7
$
1,278.9
$
24.6
$
309.6
$
993.9
$
4.15
Page 31
Six months ended 6/30/2019
Operating expenses
Net operating income
Non-operating income (loss)
Provision (benefit) for income taxes (4)
Net income attributable to T. Rowe Price Group
Diluted earnings per share (5)
U.S. GAAP Basis
$
1,574.9
$
1,147.6
$
327.3
$
365.0
$
1,040.1
$
4.23
Non-GAAP adjustments:
Consolidated T. Rowe Price
investment products (1)
(3.2
)
6.9
(164.7
)
(28.4
)
(59.6
)
(.24
)
Supplemental savings plan liability (2)
(50.5
)
50.5
(43.1
)
2.4
5.0
.02
Other non-operating income (3)
—
—
(39.5
)
(12.7
)
(26.8
)
(.11
)
Adjusted Non-GAAP Basis
$
1,521.2
$
1,205.0
$
80.0
$
326.3
$
958.7
$
3.90
(1)
These non-GAAP adjustments remove the impact that the consolidated T. Rowe Price investment products have on our U.S. GAAP consolidated statements of income. Specifically, we add back the operating expenses and subtract the investment income of the consolidated T. Rowe Price investment products. The adjustment to our operating expenses represents the operating expenses of the consolidated products, net of the elimination of related management and administrative fees. The adjustment to net income attributable to T. Rowe Price Group represents the net income of the consolidated products, net of redeemable non-controlling interest. We remove the impact of the consolidated
T. Rowe Price investment products as we believe they impact the reader’s ability to understand our core operating results.
(2)
These non-GAAP adjustments remove the compensation expense impact from market valuation changes in the supplemental savings plan liability and the related net gains (losses) on investments designated as an economic hedge against the related liability. Amounts deferred under the supplemental savings plan are adjusted for appreciation (depreciation) of hypothetical investments chosen by participants. We use T. Rowe Price investment products to economically hedge the exposure to these market movements. We believe it is useful to offset the non-operating investment income (loss) realized on the hedges against the related compensation expense and remove the net impact to help the reader's ability to understand our core operating results and to increase comparability period to period.
(3)
This non-GAAP adjustment represents the other non-operating income (loss) and the net gains (losses) earned on our non-consolidated investment portfolio that are not designated as economic hedges of the supplemental savings plan liability, and non-consolidated seed investments and other investments that are not part of the cash and discretionary investment portfolio. We retain the investment gains recognized on our non-consolidated cash and discretionary investments as these assets and related income (loss) are considered part of our core operations. We believe adjusting for these non-operating income (loss) items helps the reader’s ability to understand our core operating results and increases comparability to prior years. Additionally, we do not emphasize the impact of the portion of non-operating income (loss) removed when managing and evaluating our core performance.
(4)
The income tax impacts were calculated in order to achieve an overall non-GAAP effective tax rate of 23.8% for the first half of 2020 and 25.4% for the first half of 2019 . As such, the non-GAAP effective tax rate for the second quarter was 24.8% for 2020 and 25.5% for 2019. We estimate that our effective tax rate for the full-year 2020 on a non-GAAP basis will be in the range of 23% to 25% .
(5)
This non-GAAP measure was calculated by applying the two-class method to adjusted net income attributable to T. Rowe Price Group divided by the weighted-average common shares outstanding assuming dilution. The calculation of adjusted net income allocated to common stockholders is as follows:
Three months ended
Six months ended
6/30/2020
6/30/2019
6/30/2020
6/30/2019
Adjusted net income attributable to T. Rowe Price Group
$
539.6
$
498.1
$
993.9
$
958.7
Less: adjusted net income allocated to outstanding restricted stock and stock unit holders
15.0
12.8
27.4
24.4
Adjusted net income allocated to common stockholders
$
524.6
$
485.3
$
966.5
$
934.3
Page 32
CAPITAL RESOURCES AND LIQUIDITY.
Sources of Liquidity
We remain debt-free with ample liquidity, including cash and investments in T. Rowe Price products , as follows:
(in millions)
6/30/2020
12/31/2019
Cash and cash equivalents
$
2,058.1
$
1,781.8
Discretionary investments
2,021.9
1,899.6
Total cash and discretionary investments
4,080.0
3,681.4
Redeemable seed capital investments
1,074.2
1,325.6
Investments used to hedge the supplemental savings plan liability
564.5
561.1
Total cash and investments in T. Rowe Price products
$
5,718.7
$
5,568.1
Our discretionary investment portfolio is comprised primarily of short duration bond funds, which typically yield higher than money market rates, and asset allocation products. Cash and discretionary investments returned gains of $85.8 million and $24.6 million in the three- and six- months ended June 30, 2020 , respectively, as compared to generating income of $35.8 million and $80.0 million in the three- and six- months ended June 30, 2019 . Cash and discretionary investments in T. Rowe Price products held by our subsidiaries outside the U.S. were $720.5 million at June 30, 2020 and $665.8 million at December 31, 2019 . Given the availability of our financial resources and cash expected to be generated through future operations, we do not maintain an available external source of additional liquidity.
Our seed capital investments are redeemable, although we generally expect to be invested for several years for the products to build an investment performance history and until unrelated third-party investors substantially reduce our relative ownership percentage.
The cash and investment presentation on the unaudited condensed consolidated balance sheet is based on the accounting treatment for the cash equivalent or investment item. The following table details how T. Rowe Price Group’s interests in cash and investments relate to where they are presented on the unaudited condensed consolidated balance sheet as of June 30, 2020 .
(in millions)
Cash and cash equivalents
Investments
Net assets of consolidated T. Rowe Price investment products (1)
6/30/2020
Cash and discretionary investments
$
2,058.1
$
1,802.0
$
219.9
$
4,080.0
Seed capital investments
—
277.5
796.7
1,074.2
Investments used to hedge the supplemental savings plan liability
—
564.5
—
564.5
Total cash and investments in T. Rowe Price products attributable to T. Rowe Price Group
2,058.1
2,644.0
1,016.6
5,718.7
Investment in UTI and other investments
—
256.0
—
256.0
Total cash and investments attributable to T. Rowe Price Group
2,058.1
2,900.0
1,016.6
5,974.7
Redeemable non-controlling interests
—
—
1,090.1
1,090.1
As reported on unaudited condensed consolidated balance sheet at June 30, 2020
$
2,058.1
$
2,900.0
$
2,106.7
$
7,064.8
(1)
The T. Rowe Price investment products that we consolidate are generally those products we provided seed capital at the time of their formation and we have a controlling interest. These products generally represent U.S. mutual funds as well as those funds regulated outside the U.S. The net assets of the T. Rowe Price investment products at June 30, 2020 consist of product assets we consolidate on our unaudited condensed consolidated balance sheets of $2,161.5 million , less the liabilities of these products of $54.8 million .
Our unaudited condensed consolidated balance sheet reflects the cash and cash equivalents, investments, other assets and liabilities of those T. Rowe Price investment products we consolidate, as well as redeemable non-controlling interests for the portion of these T. Rowe Price investment products that are held by unrelated third-party investors. Although we can redeem our net interest in these T. Rowe Price investment products at any time, we
Page 33
cannot directly access or sell the assets held by the products to obtain cash for general operations. Additionally, the assets of these T. Rowe Price investment products are not available to our general creditors. Our interest in these
T. Rowe Price investment products was used as initial seed capital and is recategorized as discretionary when it is determined by management that the seed capital is no longer needed. We assess the discretionary investment products and, when we decide to liquidate our interest, we seek to do so in a way as to not impact the product and, ultimately, the unrelated third-party investors.
Uses of Liquidity
We increased our quarterly recurring dividend per common share in February 2020 by 18.4% to $.90 per common share from $.76 per common share. Additionally, we expended $1,028.7 million in the first half of 2020 to repurchase 9.6 million shares, or 4.1% , of our outstanding common stock at an average price of $106.43 per share. These dividends and repurchases were expended using existing cash balances and cash generated from operations. While opportunistic in our approach to stock buybacks, we will generally repurchase our common stock over time to offset the dilution created by our equity-based compensation plans.
Since the end of 2017 , we have returned $4.7 billion to stockholders through stock repurchases and our regular quarterly dividends, as follows:
(in millions)
Recurring dividend
Stock repurchases
Total cash returned to stockholders
2018
$
694.7
$
1,099.6
$
1,794.3
2019
733.6
708.8
1,442.4
Six months ended 6/30/2020
425.1
1,028.8
1,453.9
Total
$
1,853.4
$
2,837.2
$
4,690.6
We anticipate property and equipment expenditures for the full-year 2020 to be about $225 million , of which more than three-quarters is planned for technology initiatives. We expect to fund our anticipated capital expenditures with operating cash flows and other available resources.
Page 34
Cash Flows
The following table summarizes the cash flows for the six months ended June 30, 2020 and 2019 , that are attributable to T. Rowe Price Group, our consolidated T. Rowe Price investment products , and the related eliminations required in preparing the statement.
Six months ended
6/30/2020
6/30/2019
(in millions)
Cash flow attributable to T. Rowe Price Group
Cash flow attributable to consolidated T. Rowe Price investment products
Elims
As reported
Cash flow attributable to T. Rowe Price Group
Cash flow attributable to consolidated T. Rowe Price investment products
Elims
As reported
Cash flows from operating activities
Net income
$
946.1
$
(95.2
)
$
44.2
$
895.1
$
1,040.1
$
157.8
$
(88.0
)
$
1,109.9
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization of property and equipment
94.3
—
—
94.3
86.0
—
—
86.0
Stock-based compensation expense
111.6
—
—
111.6
90.7
—
—
90.7
Net (gains) losses recognized on investments
47.6
—
(44.2
)
3.4
(212.4
)
—
88.0
(124.4
)
Net investments in T. Rowe Price investment products used to economically hedge supplemental savings plan liability
(10.0
)
—
—
(10.0
)
(19.3
)
—
—
(19.3
)
Net change in trading securities held by consolidated T. Rowe Price investment products
—
40.8
—
40.8
—
(444.0
)
—
(444.0
)
Other changes in assets and liabilities
501.1
5.4
(1.0
)
505.5
257.9
(4.9
)
(3.1
)
249.9
Net cash provided by (used in) operating activities
1,690.7
(49.0
)
(1.0
)
1,640.7
1,243.0
(291.1
)
(3.1
)
948.8
Net cash provided by (used in) investing activities
(15.6
)
(9.2
)
27.2
2.4
(174.0
)
(5.1
)
150.0
(29.1
)
Net cash provided by (used in) financing activities
(1,398.8
)
113.9
(26.2
)
(1,311.1
)
(691.8
)
337.2
(146.9
)
(501.5
)
Effect of exchange rate changes on cash and cash equivalents of consolidated T. Rowe Price investment products
—
(7.4
)
—
(7.4
)
—
(.4
)
—
(.4
)
Net change in cash and cash equivalents during period
276.3
48.3
—
324.6
377.2
40.6
—
417.8
Cash and cash equivalents at beginning of year
1,781.8
76.5
—
1,858.3
1,425.2
70.1
—
1,495.3
Cash and cash equivalents at end of period
$
2,058.1
$
124.8
$
—
$
2,182.9
$
1,802.4
$
110.7
$
—
$
1,913.1
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Operating Activities
Operating activities attributable to T. Rowe Price Group during the first half of 2020 provided cash flows of $1,690.7 million as compared to $1,243.0 million during the first half of 2019 . Operating cash flows attributable to T. Rowe Price Group increased $447.7 million as $298.5 million in higher non-cash adjustments, including unrealized investment gains/losses, depreciation, and stock-based compensation expense, more than offset the $94.0 million decline in net income from the first half of 2019. The non-cash adjustments were driven by a $260.0 million change in net investment gains/losses as we recognized overall investment losses in the first half of 2020 compared with gains in the first half of 2019 . The overall investment losses in 2020, which are added back to net income, were a result of the market disruption caused by the coronavirus pandemic in 2020. Additionally, timing differences on the cash settlement of our assets and liabilities decreased cash flows by $243.2 million . Our interim operating cash flows do not include the cash impact of variable compensation that is accrued throughout the year before being substantially paid out in December. The remaining change in reported cash flows from operating activities was attributable to the net change in trading securities held in our consolidated investment products’ underlying portfolios.
Investing Activities
Net cash used in investing activities that are attributable to T. Rowe Price Group totaled $15.6 million in the first half of 2020 compared with $174.0 million in the 2019 period. During 2020, we received net proceeds from the sale of certain of our discretionary investments of $110.8 million compared to net proceeds of $68.9 million during 2019. In addition, while we increased our property and equipment expenditures by $10.8 million , we decreased the level of seed capital provided by $122.8 million . Since we consolidate the seed capital in T. Rowe Price investment products, our seed capital was eliminated in preparing our unaudited condensed consolidated statement of cash flows. The remaining $4.1 million change in reported cash flows from investing activities is related to the net cash removed from our balance sheet from consolidating and deconsolidating investment products.
Financing Activities
Net cash used in financing activities attributable to T. Rowe Price Group were $1,398.8 million in the first half of 2020 compared with $691.8 million in the 2019 period. During 2020, there was a $624.3 million increase in cash paid for common stock repurchases as we repurchased 5.5 million more shares of common stock in the first half of 2020 as compared to the first half of 2019 . Additionally, there was a $57.9 million increase in dividends paid in 2020 as a result of an 18.4% increase in our quarterly dividend per share. The remaining change in reported cash flows from financing activities is primarily attributable to a $102.6 million decrease in net subscriptions received from redeemable non-controlling interest holders of our consolidated investment products during the first half of 2020 compared to the 2019 period.
CRITICAL ACCOUNTING POLICIES.
The preparation of financial statements often requires the selection of specific accounting methods and policies from among several acceptable alternatives. Further, significant estimates and judgments may be required in selecting and applying those methods and policies in the recognition of the assets and liabilities in our unaudited condensed consolidated balance sheets, the revenues and expenses in our unaudited condensed consolidated statements of income, and the information that is contained in our significant accounting policies and notes to unaudited condensed consolidated financial statements. Making these estimates and judgments requires the analysis of information concerning events that may not yet be complete and of facts and circumstances that may change over time. Accordingly, actual amounts or future results can differ materially from those estimates that we include currently in our unaudited condensed consolidated financial statements, significant accounting policies, and notes.
There have been no material changes in the critical accounting policies previously identified in our 2019 Annual Report on Form 10-K.
NEWLY-ISSUED BUT NOT YET ADOPTED ACCOUNTING GUIDANCE.
See Note 1 - The Company and Basis of Preparation note within Item 1. Financial Statements for a discussion of newly issued but not yet adopted accounting guidance.
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FORWARD-LOOKING INFORMATION.
From time to time, information or statements provided by or on behalf of T. Rowe Price, including those within this report, may contain certain forward-looking information, including information or anticipated information relating to: our revenues, net income, and earnings per share on common stock; changes in the amount and composition of our assets under management; our expense levels; our tax rate; and our expectations regarding financial markets, future transactions, dividends, stock repurchases, investments, new products and services, capital expenditures, changes in our effective fee rate, the impact of the coronavirus pandemic, and other market conditions. Readers are cautioned that any forward-looking information provided by or on behalf of T. Rowe Price is not a guarantee of future performance. Actual results may differ materially from those in forward-looking information because of various factors including, but not limited to, those discussed below and in Item 1A, Risk Factors, of this Form 10-Q and our Form 10-K Annual Report for 2019 . Further, forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of unanticipated events.
Our future revenues and results of operations will fluctuate primarily due to changes in the total value and composition of assets under our management. Such changes result from many factors, including, among other things: cash inflows and outflows in the U.S. mutual funds and subadvised and separately managed funds and other investment products, fluctuations in global financial markets that result in appreciation or depreciation of the assets under our management, our introduction of new mutual funds and investment products, changes in retirement savings trends relative to participant-directed investments and defined contribution plans, and the impact of the recent coronavirus outbreak. The ability to attract and retain investors’ assets under our management is dependent on investor sentiment and confidence; the relative investment performance of the U.S. mutual funds and other managed investment products as compared with competing offerings and market indexes; the ability to maintain our investment management and administrative fees at appropriate levels; competitive conditions in the mutual fund, asset management, and broader financial services sectors; and our level of success in implementing our strategy to expand our business. Our revenues are substantially dependent on fees earned under contracts with the T. Rowe Price funds and could be adversely affected if the independent directors of one or more of the T. Rowe Price funds terminated or significantly altered the terms of the investment management or related administrative services agreements. Non-operating investment income will also fluctuate primarily due to the size of our investments, changes in their market valuations, and any other-than-temporary impairments that may arise or, in the case of our equity method investments, our proportionate share of the investees' net income.
Our future results are also dependent upon the level of our expenses, which are subject to fluctuation for the following or other reasons: changes in the level of our advertising and promotion expenses in response to market conditions, including our efforts to expand our investment advisory business to investors outside the U.S. and to further penetrate our distribution channels within the U.S.; the pace and level of spending to support key strategic priorities; variations in the level of total compensation expense due to, among other things, bonuses, restricted stock units and other equity grants, other incentive awards, our supplemental savings plan, changes in our employee count and mix, and competitive factors; any goodwill or other asset impairment that may arise; fluctuation in foreign currency exchange rates applicable to the costs of our international operations; expenses and capital costs, such as technology assets, depreciation, amortization, and research and development, incurred to maintain and enhance our administrative and operating services infrastructure; the timing of the assumption of all third party research payments, unanticipated costs that may be incurred to protect investor accounts and the goodwill of our clients; and disruptions of services, including those provided by third parties, such as fund and product recordkeeping, facilities, communications, power, and the mutual fund transfer agent and accounting systems.
Our business is also subject to substantial governmental regulation, and changes in legal, regulatory, accounting, tax, and compliance requirements may have a substantial effect on our operations and results, including, but not limited to, effects on costs that we incur and effects on investor interest in T. Rowe Price investment products and investing in general or in particular classes of mutual funds or other investments.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.