PRICE T ROWE GROUP INC 10-Q

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, collective investment trusts, and other T. Rowe Price products. The other T. Rowe Price products include 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; trust services; and non-discretionary advisory services through model delivery. We manage a broad range of U.S., international and global stock, bond, and money market mutual funds and collective investment trusts and other investment products, which meet the varied needs and objectives of individual and institutional investors. Investment advisory revenues depend largely on the total value and composition of assets under our management. Accordingly, fluctuations in financial markets and in the composition of assets under management affect our revenues and results of operations. Additionally, approximately 30% of our operating expenses are impacted by fluctuations in our assets under management. We incur significant expenditures to develop new products and services and improve and expand our capabilities and distribution channels in order to attract new investment advisory clients and additional investments from our existing clients. These efforts often involve costs that precede any future revenues that we may recognize from an increase to our assets under management. The general trend to passive investing has been persistent and accelerated in recent years, which has negatively impacted our new client inflows. However, over the long term we expect well-executed active management to play an important role for investors. In this regard, we remain debt-free with ample liquidity and resources that allow us to take advantage of attractive growth opportunities. We are investing in key capabilities, including investment professionals, distribution professionals, technologies, and new product offerings in order to provide our clients with strong investment management expertise and service. MARKET TRENDS. U.S. equities generated strong returns in the first quarter of 2021, a continuation of a remarkably robust stock market given the pandemic and related economic dislocations. Most major U.S. equity indexes hit all-time highs during the quarter, although the market was led by shares of smaller companies as well as value stocks and cyclical businesses that are closely tied to the health of the economy. Technology and other growth stocks trailed. In general, equities were lifted by the accelerating rollout of coronavirus vaccines, favorable economic data and corporate earnings reports, and expectations for new federal fiscal stimulus measures. Although Congress passed a $1.9 trillion coronavirus relief bill in March and the Biden administration prepared to pursue a significant increase in infrastructure spending, some investors were concerned about a sharp increase in longer-term U.S. Treasury yields during the quarter and possibly higher inflation later in 2021. Stocks in developed non-U.S. equity markets advanced but underperformed U.S. equities; a stronger U.S. dollar versus several key currencies weighed on local returns in U.S. dollar terms. European stock markets were mostly positive despite the reinstatement of lockdown measures in some countries. Most developed Asian and Far East markets posted gains; Japanese shares rose less than 2%. Emerging markets stocks also advanced but underperformed developed markets, hurt in part by rising U.S. Treasury yields and a stronger U.S. dollar against many currencies. Latin American markets were mostly negative in dollar terms. Asian market returns varied widely. In emerging Europe, Turkish shares and the lira tumbled as the Turkish president unexpectedly replaced the head of the central bank shortly after an interest rate increase in March. Page 17 Returns of several major equity market indexes were as follows: Three months ended Index 3/31/2021 S&P 500 Index 6.2% NASDAQ Composite Index (1) 2.8% Russell 2000 Index 12.7% MSCI EAFE (Europe, Australasia, and Far East) Index 3.6% MSCI Emerging Markets Index 2.3% (1) Returns exclude dividends Global bond returns were mostly negative in U.S. dollar terms. In the U.S., high yield securities benefited from favorable corporate earnings and expectations of a stronger economy to post gains. Higher-quality securities with greater interest rate sensitivity were hurt by a sharp increase in intermediate- and long-term U.S. Treasury yields. The Federal Reserve kept short-term interest rates near 0%, but the 10-year U.S. Treasury note yield increased from 0.93% to 1.74%. Longer-term corporate and U.S. Treasury bonds were among the worst performers. Mortgage- and asset-backed securities fell to a lesser extent. Tax-free municipal bonds held up relatively well, helped by the prospect of more federal aid to shore up state and local finances. Bonds in developed non-U.S. markets declined in U.S. dollar terms, hurt by rising longer-term interest rates in local markets and weaker currencies versus the U.S. dollar. The British pound, however, appreciated about 1% versus the dollar. Emerging markets bonds also produced negative returns as longer-term interest rates generally increased and a few countries also raised short-term rates. Local currency issues underperformed bonds denominated in dollars as many currencies, especially the Turkish lira and the Brazilian real, weakened versus the dollar. Returns for several major bond market indexes were as follows: Three months ended Index 3/31/2021 Bloomberg Barclays U.S. Aggregate Bond Index (3.4)% JPMorgan Global High Yield Index 1.2% Bloomberg Barclays Municipal Bond Index (.4)% Bloomberg Barclays Global Aggregate Ex-U.S. Dollar Bond Index (5.3)% JPMorgan Emerging Markets Bond Index Plus (7.2)% Page 18 ASSETS UNDER MANAGEMENT. Assets under management ended the first quarter of 2021 at $1,518.0 billion, an increase of $47.5 billion from December 31, 2020. This increase was driven by market appreciation, net of distributions not reinvested, of $46.3 billion and net cash inflows of $1.2 billion. Clients transferred $5.6 billion in net assets from the U.S. mutual funds to collective investment trusts and other investment products, of which $4.9 billion transferred into the retirement date trusts. The following tables detail changes in our assets under management, by vehicle and asset class, during the first quarter of 2021: Three months ended 3/31/2021 (in billions) U.S. mutual funds Subadvised funds and separate accounts Collective investment trusts and other investment products Total Assets under management at beginning of period $ 794.6 $ 400.1 $ 275.8 $ 1,470.5 Net cash flows before client transfers 2.0 (8.2) 7.4 1.2 Client transfers (5.6) — 5.6 — Net cash flows after client transfers (3.6) (8.2) 13.0 1.2 Net market appreciation and gains 25.5 11.9 9.0 46.4 Net distributions not reinvested (.1) — — (.1) Change during the period 21.8 3.7 22.0 47.5 Assets under management at March 31, 2021 $ 816.4 $ 403.8 $ 297.8 $ 1,518.0 Three months ended 3/31/2021 (in billions) Equity Fixed income, including money market Multi-asset (1) Total Assets under management at beginning of period $ 895.8 $ 168.7 $ 406.0 $ 1,470.5 Net cash flows (8.9) 5.4 4.7 1.2 Net market appreciation and gains (2) 30.3 (1.3) 17.3 46.3 Change during the period 21.4 4.1 22.0 47.5 Assets under management at March 31, 2021 $ 917.2 $ 172.8 $ 428.0 $ 1,518.0 (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 United States account for about 8.8% of our assets under management at March 31, 2021 and 9.3% at December 31, 2020. Our target date retirement products, which are included in the multi-asset totals shown above, continue to be a significant part of our assets under management. Assets under management in these portfolios, as well as net cash inflows (outflows), by vehicle, were as follows: Assets under management Net cash inflows (outflows) for three months ended (in billions) 3/31/2021 12/31/2020 3/31/2021 3/31/2020 U.S. mutual funds $ 179.9 $ 176.1 $ (3.8) $ (5.0) Collective investment trusts 160.3 145.4 8.1 5.6 Separately managed accounts 11.4 10.7 .2 .1 $ 351.6 $ 332.2 $ 4.5 $ .7 We provide participant accounting and plan administration for defined contribution retirement plans that invest in the firm's U.S. mutual funds, collective investment trusts and funds outside of the firm's complex. As of March 31, 2021, our assets under administration were $248 billion, of which nearly $153 billion are assets we manage. In recent years, we began offering non-discretionary advisory services through model delivery, which are managed accounts where portfolio holdings and trades in the portfolio are provided to sponsor platforms to implement for their clients. Page 19 We record the revenue earned on these services in administrative fees. The assets under advisement in these portfolios, predominantly in the United States, is $3 billion at March 31, 2021. INVESTMENT PERFORMANCE. S trong investment performance and brand awareness is a key driver to attracting and retaining assets—and to our long-term success. Our performance disclosures include specific asset classes, assets under management weighted performance, mutual fund performance against passive peers and composite performance against benchmarks. The following table presents investment performance for the one-, three-, five-, and 10-years ended March 31, 2021. Past performance is no guarantee of future results. % of U.S. mutual funds that outperformed Morningstar median (1),(2) 1 year 3 years 5 years 10 years Equity 65% 68% 67% 87% Fixed Income 71% 60% 55% 57% Multi-Asset 94% 94% 91% 90% All Funds 75% 73% 70% 78% % of U.S. mutual funds that outperformed passive peer median (1),(3) 1 year 3 years 5 years 10 years Equity 57% 58% 62% 72% Fixed Income 91% 59% 57% 60% Multi-Asset 94% 91% 87% 86% All Funds 78% 68% 68% 72% % of composites that outperformed benchmarks (4) 1 year 3 years 5 years 10 years Equity 55% 60% 73% 78% Fixed Income 87% 69% 80% 72% All Composites 68% 63% 76% 76% AUM Weighted Performance % of U.S. mutual funds AUM that outperformed Morningstar median (1),(2) 1 year 3 years 5 years 10 years Equity 63% 65% 83% 94% Fixed Income 79% 58% 59% 60% Multi-Asset 100% 96% 96% 96% All Funds 73% 72% 84% 92% % of U.S. mutual funds AUM that outperformed passive peer median (1),(3) 1 year 3 years 5 years 10 years Equity 51% 53% 81% 81% Fixed Income 97% 52% 56% 64% Multi-Asset 98% 96% 96% 96% All Funds 66% 63% 83% 84% % of composites AUM that outperformed benchmarks (4) 1 year 3 years 5 years 10 years Equity 51% 65% 72% 79% Fixed Income 88% 54% 73% 72% All Composites 57% 64% 73% 79% Page 20 As of March 31, 2021, 80 of 123 (65.0%) of the firm's rated U.S. mutual funds (across primary share classes) received an overall rating of 4 or 5 stars. By comparison, 32.5% of Morningstar's fund population is given a rate of 4 or 5 stars (5) . In addition, 88% (5) of AUM in the firm's rated U.S. mutual funds (across primary share classes) ended March 31, 2021 with an overall rating of 4 or 5 stars. (1) Source: © 2021 Morningstar, Inc. All rights reserved. The information contained herein: 1) is proprietary to Morningstar and/or its content providers; 2) may not be copied or distributed; and 3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. (2) Source: Morningstar. Primary share class only. Excludes money market mutual funds, funds with an operating history of less than one year, T. Rowe Price passive funds, and T. Rowe Price funds that are clones of other funds. The top chart reflects the percentage of T. Rowe Price funds with 1 year, 3 year, 5 year, and 10 year track record that are outperforming the Morningstar category median. The bottom chart reflects the percentage of T. Rowe Price funds AUM that has outperformed for the time periods indicated. Total AUM included for this analysis includes $503B for 1 year, $503B for 3 years, $503B for 5 years, and $493B for 10 years. (3) Passive Peer Median was created by T. Rowe Price using data from Morningstar. Primary share class only. Excludes money market mutual funds, funds with an operating history of less than one year, funds with fewer than three peers, T. Rowe Price passive funds, and T. Rowe Price funds that are clones of other funds. This analysis compares T. Rowe Price active funds to the applicable universe of passive/index open-end funds and ETFs of peer firms. The top chart reflects the percentage of T. Rowe Price funds with 1 year, 3 year, 5 year, and 10 year track record that are outperforming the passive peer universe. The bottom chart reflects the percentage of T. Rowe Price funds AUM that has outperformed for the time periods indicated. Total AUM included for this analysis includes $491B for 1 year, $482B for 3 years, $439B for 5 years, and $416B for 10 years. (4) Composite net returns are calculated using the highest applicable separate account fee schedule. Excludes money market composites. All composites compared to official GIPS composite primary benchmark. The top chart reflects the percentage of T. Rowe Price composites with 1 year, 3 year, 5 year, and 10 year track record that are outperforming their benchmarks. The bottom chart reflects the percentage of T. Rowe Price composite AUM that has outperformed for the time periods indicated. Total AUM included for this analysis includes $1,392B for 1 year, $1,388B for 3 years, $1,364B for 5 years, and $1,316B for 10 years. (5) The Morningstar Rating™ for funds is calculated for funds with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. Morningstar gives its best ratings of 5 or 4 stars to the top 32.5% of all funds (of the 32.5%,10% get 5 stars and 22.5% get 4 stars). The Overall Morningstar Rating™ is derived from a weighted average of the performance figures associated with a fund’s 3, 5, and 10 year (if applicable) Morningstar Rating™ metrics. RESULTS OF OPERATIONS. The following table and discussion sets forth information regarding our consolidated financial results for the three months ended March 31, 2021 and 2020 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, if any. Three months ended Q1 2021 vs. Q1 2020 (in millions, except per-share data) 3/31/2021 3/31/2020 $ change % change U.S. GAAP basis Investment advisory fees $ 1,687.8 $ 1,327.8 $ 360.0 27.1 % Net revenues $ 1,826.8 $ 1,462.6 $ 364.2 24.9 % Operating expenses $ 933.6 $ 755.4 $ 178.2 23.6 % Net operating income $ 893.2 $ 707.2 $ 186.0 26.3 % Non-operating income (loss) (1) $ 102.1 $ (500.3) $ 602.4 n/m Net income attributable to T. Rowe Price Group $ 749.4 $ 343.1 $ 406.3 118.4 % Diluted earnings per common share $ 3.17 $ 1.41 $ 1.76 124.8 % Weighted average common shares outstanding assuming dilution 230.0 236.8 (6.8) (2.9) % Adjusted non-GAAP basis (2) Operating expenses $ 909.2 $ 817.9 $ 91.3 11.2 % Net operating income $ 918.9 $ 647.2 $ 271.7 42.0 % Non-operating income (loss) (1) $ 13.7 $ (61.2) $ 74.9 n/m Net income attributable to T. Rowe Price Group $ 712.0 $ 454.3 $ 257.7 56.7 % Diluted earnings per common share $ 3.01 $ 1.87 $ 1.14 61.0 % Assets under management (in billions) Average assets under management $ 1,508.8 $ 1,162.7 $ 346.1 29.8 % Ending assets under management $ 1,518.0 $ 1,008.8 $ 509.2 50.5 % (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 March 31, 2021 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 Page 21 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 first quarter of 2021 increased over the comparable 2020 quarter as average assets under our management increased $346.1 billion, or 29.8%, to $1,508.8 billion. In the first quarter of 2021, we voluntarily waived $15.0 million, or less than 1%, of our investment advisory fees in order to continue to maintain a positive yield for investors. At March 31, 2021, combined net assets of the investment portfolios in which we waived fees in the first quarter of 2021 were $29.5 billion. We expect to continue to waive fees for all of 2021 and anticipate that the waivers in each of the next three quarters of 2021 will be at similar levels. The average annualized effective fee rate earned during the first quarter of 2021 was 45.4 basis points, compared with 45.9 basis points earned during the first quarter of 2020 and 45.7 basis points during the fourth quarter of 2020. In comparison to the first quarter 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 and the money market fee waivers. In comparison to the fourth quarter of 2020, our average annualized effective fee rate declined primarily due to lower performance fees earned in 2021. Operating expenses. Operating expenses were $933.6 million in the first quarter of 2021 compared with $755.4 million in the first quarter of 2020. Nearly half of the increase in operating expenses for the first quarter of 2021 compared to the first quarter of 2020 was due to an $85.9 million increase in expense related to the supplemental savings plan from higher market returns. The remaining increase was due primarily to higher compensation expenses as well as distribution and servicing costs. For the first quarter of 2021, the higher expense related to the supplemental savings plan was almost entirely 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 first quarter of 2021 increased 11.2% to $909.2 million compared to the first quarter of 2020. 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. In 2021 and beyond, we expect to advance our strategic priorities to maintain our position as a global and diversified asset manager, a global partner for retirement investors and a provider of integrated investment solutions; to embed environmental, social and governance principles across the firm; to maintain effective processes and controls while becoming a more adaptive and agile firm; and to become a destination of choice for top talent with a diverse workforce and inclusive culture. We updated our 2021 non-GAAP operating expense growth guidance from a range of 8% - 12% to a range of 10% - 14% to reflect an increase in our expectations for AUM-related expenses. We can elect to adjust our expense growth in the future should unforeseen circumstances arise, including significant market movements. Operating margin. Our operating margin in the first quarter of 2021 was 48.9%, compared to 48.4% earned in the 2020 quarter. The increase in our operating margin for the first quarter of 2021 compared to the 2020 period was primarily driven by higher investment advisory fee revenue, partially offset by the higher expense related to our supplemental savings plan, as market returns in the first quarter of 2021 outperformed the same period in 2020. Diluted earnings per share. Diluted earnings per share was $3.17 for the first quarter of 2021 as compared to $1.41 for the first quarter of 2020. The 124.8% increase was primarily driven by the net investment gains recognized in the first quarter of 2021 as compared to significant investment losses recognized in the first quarter of 2020 following sharp market declines at the end of March 2020. On a non-GAAP basis, diluted earnings per share was $3.01 for the first quarter of 2021 as compared to $1.87 for the first quarter of 2020. The increase in diluted earnings per share was primarily due to higher operating income as well as net gains earned on our cash and discretionary investments in the 2021 quarter compared with investment losses in the 2020 period. Page 22 Net revenues Three months ended Q1 2021 vs. Q1 2020 (in millions) 3/31/2021 3/31/2020 $ change % change Investment advisory fees U.S. mutual funds $ 1,050.2 $ 876.2 $ 174.0 19.9 % Subadvised funds, separate accounts, collective investment trusts, and other investment products 637.6 451.6 186.0 41.2 % 1,687.8 1,327.8 360.0 27.1 % Administrative, distribution, and servicing fees Administrative fees 109.9 106.9 3.0 2.8 % Distribution and servicing fees 29.1 27.9 1.2 4.3 % 139.0 134.8 4.2 3.1 % Net revenues $ 1,826.8 $ 1,462.6 $ 364.2 24.9 % Investment advisory fees. U.S. mutual funds Investment advisory revenues earned in the first quarter of 2021 from our U.S. mutual funds were $1,050.2 million, an increase of 19.9% from the comparable 2020 quarter. Average assets under management in these funds for the first quarter of 2021 increased 24.5% from the 2020 quarter to $814.5 billion. For the first quarter of 2021, the relationship between U.S. mutual funds’ average assets under management and investment advisory fee growth was impacted primarily by the money market fee waivers. In addition, strong market returns led to a decrease in the fee earned as the asset levels of certain tiered-fee funds crossed a new tier. Subadvised funds, separate accounts, collective investment trusts and other investment products (other portfolios) Investment advisory revenues earned in the first quarter of 2021 from these other portfolios were $637.6 million, an increase of 41.2% from the comparable 2020 quarter. Average assets under management for these products increased 36.6% from the 2020 quarter to $694.3 billion. For the other portfolios, inflows into our international products, which have a higher fee rate relative to other products, and performance-based fees earned on certain separate accounts drove investment advisory revenues to outpace the increase in average assets under management. These investment advisory revenues include distribution-related services we provide to the international products and then contract with third-party intermediaries to distribute these products. The costs we incur to pay the third-party intermediaries are recorded as part of distribution and servicing expenses. Administrative, distribution, and servicing fees. Administrative, distribution, and servicing fees in the first quarter of 2021 were $139.0 million, an increase of $4.2 million, or 3.1%, from the comparable 2020 quarter. The increase was primarily due to higher transfer agent servicing activities provided to the U.S. mutual funds, higher model delivery revenue, as well as higher 12b-1 revenue earned on the R share class of the U.S. mutual funds as a result of increased assets under management in this share class. The increase in 12b-1 revenue is offset entirely by an increase in the costs paid to third-party intermediaries that source these assets and reported in distribution and servicing expense. Our net revenues reflect the elimination of advisory and administrative fee revenue earned from our consolidated T. Rowe Price investment products. The corresponding expenses recognized by these products, and consolidated in our financial statements, were also eliminated from operating expenses. For the first quarter, we eliminated net revenue of $1.3 million in 2021 and $2.5 million in 2020. Page 23 Operating expenses Three months ended Q1 2021 vs. Q1 2020 (in millions) 3/31/2021 3/31/2020 $ change % change Compensation and related costs, excluding supplemental savings plan $ 561.3 $ 504.4 $ 56.9 11.3 % Supplemental savings plan (1) 22.2 (63.7) 85.9 n/m Total compensation and related costs 583.5 440.7 142.8 32.4 % Distribution and servicing 85.6 65.7 19.9 30.3 % Advertising and promotion 18.9 24.9 (6.0) (24.1) % Product-related costs 41.0 41.6 (.6) (1.4) % Technology, occupancy, and facility costs 117.3 105.4 11.9 11.3 % General, administrative, and other 87.3 77.1 10.2 13.2 % Total operating expenses $ 933.6 $ 755.4 $ 178.2 23.6 % (1) The impact of the market on the supplemental savings plan liability drives the expense recognized each period. Compensation and related costs, excluding supplemental savings plan. Compensation and related costs, excluding supplemental savings plan, were $561.3 million in the first quarter of 2021, an increase of $56.9 million, or 11.3%, compared to the 2020 quarter. The increase from the 2020 quarter was primarily due to strong operating results in the first quarter of 2021 that led to a $36.3 million increase in our interim accrual for annual variable compensation, primarily bonus compensation. Also contributing to the increase in 2021 costs compared to the first quarter of 2020 was a $22.6 million increase in salaries and benefits due to a 3.4% increase in our average staff size and modest increases in base salaries at the beginning of the year. These increases in compensation and related costs were offset in part by higher labor capitalization related to internally developed software. Distribution and servicing. Distribution and servicing costs were $85.6 million for the first quarter of 2021, an increase of 30.3% from the $65.7 million recognized in the 2020 quarter. The increase is primarily driven by higher distribution costs as a result of continued inflows and market appreciation in our international products, including our Japanese Investment Trusts (ITMs) and SICAVs. Distribution and servicing costs paid to third-party intermediaries that source the assets of certain share classes of our U.S. mutual funds and our international products, such as our Japanese ITMs and SICAVs, are recognized in this expense. Both of these costs are offset entirely by the revenue we earn and report in net revenues: 12b-1 revenue recognized in administrative, distribution, and servicing fees for the U.S. mutual funds and investment advisory fee revenue for our international products. Advertising and promotion. Advertising and promotion costs were $18.9 million in the first quarter of 2021, a decrease of $6.0 million, or 24.1%, compared to the $24.9 million recognized in the 2020 quarter. The decrease is driven primarily by the timing of media-related spend as well as fewer conference and promotional events since the later part of the first quarter of 2020 due to the coronavirus pandemic. Technology, occupancy, and facility costs. Technology, occupancy, and facility costs were $117.3 million in the first quarter of 2021, an increase of $11.9 million, or 11.3%, compared to the $105.4 million recognized in the 2020 quarter. The increase is due primarily to the ongoing investment in our technology capabilities, including hosted solution licenses and depreciation, and higher office lease costs. General, administrative, and other. General, administrative, and other expenses were $87.3 million in the first quarter of 2021, a decrease of $10.2 million, or 13.2%, compared to the $77.1 million recognized in the 2020 quarter. The timing of when certain general and administrative costs were incurred in the first quarter of 2021 compared to the 2020 period contributed to the higher costs. Lower travel-related expenses nearly offset increases in other general and administrative costs. Non-operating income (loss) Non-operating income for the first quarter of 2021 was $102.1 million, an increase of $602.4 million from non-operating loss of $500.3 million in the 2020 quarter. The following table details the components of non-operating income (loss) for both the first quarter of March 31, 2021 and 2020. Page 24 Three months ended (in millions) 3/31/2021 3/31/2020 Net gains (losses) from non-consolidated T. Rowe Price investment products Cash and discretionary investments Dividend income $ 5.1 $ 10.4 Market related gains (losses) and equity in earnings (losses) 8.6 (71.6) Total cash and discretionary investments 13.7 (61.2) Seed capital investments Dividend income .1 .7 Market related gains (losses) and equity in earnings (losses) 11.9 (34.1) Net gain recognized upon deconsolidation 2.6 .1 Investments used to hedge the supplemental savings plan liability 22.1 (68.5) Total net gains (losses) from non-consolidated T. Rowe Price investment products 50.4 (163.0) Other investment income 18.2 8.4 Net gains (losses) on investments 68.6 (154.6) Net gains (losses) on consolidated sponsored investment portfolios 37.2 (330.3) Other income (loss), including foreign currency gains and losses (3.7) (15.4) Non-operating income (loss) $ 102.1 $ (500.3) The impact of strong market returns on our investment portfolio in the first quarter of 2021 compared with significant market losses in the first quarter of 2020 drove the increase in non-operating income. Our consolidated investment products and supplemental savings plan hedge portfolio comprised more than half of the net gains recognized during the first quarter of 2021. Our cash and discretionary investment portfolio also experienced net investment gains of $13.7 million in the first quarter of 2021. 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 (in millions) 3/31/2021 3/31/2020 Operating expenses reflected in net operating income $ (3.5) $ (3.7) Net investment income (loss) reflected in non-operating income 37.2 (330.3) Impact on income before taxes $ 33.7 $ (334.0) Net income (loss) attributable to our interest in the consolidated T. Rowe Price investment products $ 18.3 $ (157.5) Net income (loss) attributable to redeemable non-controlling interests (unrelated third-party investors) 15.4 (176.5) $ 33.7 $ (334.0) Provision for income taxes Our effective tax rate for the first quarter of 2021 was 23.2%, compared with 19.5% in the 2020 quarter. The increase in our effective tax rate for the first quarter of 2021 as compared to the first quarter of 2020 is primarily due to lower discrete tax benefits associated with option exercises as well as the impact of these benefits relative to the higher pre-tax income in the first quarter of 2021 as compared to the comparable 2020 quarter. These benefits were partially offset by 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 a lower state effective tax rate. The state effective rate in the first quarter of 2020 was unfavorably impacted by the remeasurement of deferred state tax assets and liabilities related to our investment portfolio. Page 25 The following table reconciles the statutory federal income tax rate to our effective tax rate for both the three months ended March 31, 2021 and 2020: Three months ended 3/31/2021 3/31/2020 Statutory U.S. federal income tax rate 21.0 % 21.0 % State income taxes for current year, net of federal income tax benefits (1) 3.8 6.4 Net (income) losses attributable to redeemable non-controlling interests (.6) 3.1 Net excess tax benefits from stock-based compensation plans activity (1.2) (8.1) Other items .2 (2.9) Effective income tax rate 23.2 % 19.5 % (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. 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. The non-GAAP tax rate primarily adjusts for the impact of the consolidated investment products, including the net income attributable to the redeemable non-controlling interests. Our non-GAAP effective tax rate increased to 23.7% in the first quarter of 2021 compared with 22.5% in first quarter of 2020, primarily due to lower discrete tax benefits associated with option exercises in the first quarter of 2021 as well as the impact of these benefits relative to the higher pre-tax income in the first quarter of 2021 as compared to the comparable 2020 quarter and a lower effective state tax rate. The firm continues to see the phased-in benefit of the 2018 Maryland state tax legislation in which we expect to reduce our effective state rate over the five-year phase-in period to less than 3% by the end of 2022. We currently estimate that our effective tax rate for the full year 2021, on a GAAP basis, will be in the range of 22% to 25%. On a non-GAAP basis, the range is 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. The following schedules reconcile certain U.S. GAAP financial measures for the three months ended March 31, 2021 and 2020. Three months ended 3/31/2021 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 $ 933.6 $ 893.2 $ 102.1 $ 230.5 $ 749.4 $ 3.17 Non-GAAP adjustments: Consolidated T. Rowe Price investment products (1) (2.2) 3.5 (37.2) (3.8) (14.5) (.06) Supplemental savings plan liability (2) (22.2) 22.2 (22.1) — .1 — Other non-operating income (3) — — (29.1) (6.1) (23.0) (.10) Adjusted Non-GAAP Basis $ 909.2 $ 918.9 $ 13.7 $ 220.6 $ 712.0 $ 3.01 Page 26 Three months ended 3/31/2020 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 $ 755.4 $ 707.2 $ (500.3) $ 40.3 $ 343.1 $ 1.41 Non-GAAP adjustments: Consolidated T. Rowe Price investment products (1) (1.2) 3.7 330.3 71.1 86.4 .36 Supplemental savings plan liability (2) 63.7 (63.7) 68.5 2.1 2.7 .01 Other non-operating income (3) — — 40.3 18.2 22.1 .09 Adjusted Non-GAAP Basis $ 817.9 $ 647.2 $ (61.2) $ 131.7 $ 454.3 $ 1.87 (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 economic 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 23.7% for 2021 and 22.5% for 2020. We estimate that our effective tax rate for the full-year 2021 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 3/31/2021 3/31/2020 Adjusted net income attributable to T. Rowe Price Group $ 712.0 $ 454.3 Less: adjusted net income allocated to outstanding restricted stock and stock unit holders 18.9 12.4 Adjusted net income allocated to common stockholders $ 693.1 $ 441.9 Page 27 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) 3/31/2021 12/31/2020 Cash and cash equivalents $ 2,830.1 $ 2,151.7 Discretionary investments 2,019.2 2,095.7 Total cash and discretionary investments 4,849.3 4,247.4 Redeemable seed capital investments 1,244.3 1,219.1 Investments used to hedge the supplemental savings plan liability 766.9 768.1 Total cash and investments in T. Rowe Price products $ 6,860.5 $ 6,234.6 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 $13.7 million in the three months ended March 31, 2021, as compared to investment losses of $61.2 million in the three months ended March 31, 2020. Cash and discretionary investments in T. Rowe Price products held by our subsidiaries outside the United States were $754.4 million at March 31, 2021 and $675.8 million at December 31, 2020. 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 March 31, 2021. (in millions) Cash and cash equivalents Investments Net assets of consolidated T. Rowe Price investment products (1) 3/31/2021 Cash and discretionary investments $ 2,830.1 $ 1,910.1 $ 109.1 $ 4,849.3 Seed capital investments — 473.2 771.1 1,244.3 Investments used to hedge the supplemental savings plan liability — 766.9 — 766.9 Total cash and investments in T. Rowe Price products attributable to T. Rowe Price Group 2,830.1 3,150.2 880.2 6,860.5 Investment in UTI and other investments — 253.4 — 253.4 Total cash and investments attributable to T. Rowe Price Group 2,830.1 3,403.6 880.2 7,113.9 Redeemable non-controlling interests — — 1,012.9 1,012.9 As reported on unaudited condensed consolidated balance sheet at March 31, 2021 $ 2,830.1 $ 3,403.6 $ 1,893.1 $ 8,126.8 (1) The consolidated T. Rowe Price investment products 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 $109.1 million and the $771.1 million represent the total value at March 31, 2021 of our interest in the consolidated T. Rowe Price investment products. The total net assets of the T. Rowe Price investment products at March 31, 2021 of $1,893.1 million includes assets of $1,946.8 million, less liabilities of $53.7 million as reflected in our unaudited condensed consolidated balance sheets. 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 28 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 2021 by 20.0% to $1.08 per common share from $.90 per common share. Additionally, we expended $.3 billion in the first quarter of 2021 to repurchase 1.6 million shares, or 0.7%, of our outstanding common stock at an average price of $164.22 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 2018, we have returned $4.0 billion to stockholders through stock repurchases and our regular quarterly dividends, as follows: (in millions) Recurring dividend Stock repurchases Total cash returned to stockholders 2019 $ 733.6 $ 708.8 $ 1,442.4 2020 846.0 1,192.2 2,038.2 Three months ended 3/31/2021 252.3 267.6 519.9 Total $ 1,831.9 $ 2,168.6 $ 4,000.5 We anticipate property, equipment and other capital expenditures, including internal labor capitalization, for the full-year 2021 to be about $265 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 29 Cash Flows The following table summarizes the cash flows for the three months ended March 31, 2021 and 2020, that are attributable to T. Rowe Price Group, our consolidated T. Rowe Price investment products, and the related eliminations required in preparing the statement. Three months ended 3/31/2021 3/31/2020 (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 $ 749.4 $ 33.7 $ (18.3) $ 764.8 $ 343.1 $ (334.0) $ 157.5 $ 166.6 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization of property and equipment 49.0 — — 49.0 46.1 — — 46.1 Stock-based compensation expense 57.5 — — 57.5 58.3 — — 58.3 Net (gains) losses recognized on investments (77.8) — 18.3 (59.5) 324.8 — (157.5) 167.3 Net change in T. Rowe Price investment products used to economically hedge supplemental savings plan liability 22.0 — — 22.0 (8.9) — — (8.9) Net change in trading securities held by consolidated T. Rowe Price investment products — (120.9) — (120.9) — 234.6 — 234.6 Other changes in assets and liabilities 338.5 (56.5) (.2) 281.8 100.6 23.7 (.6) 123.7 Net cash provided by (used in) operating activities 1,138.6 (143.7) (.2) 994.7 864.0 (75.7) (.6) 787.7 Net cash provided by (used in) investing activities 30.4 (27.3) (33.9) (30.8) (15.0) (.8) 43.4 27.6 Net cash provided by (used in) financing activities (490.6) 149.0 34.1 (307.5) (1,068.4) 118.9 (42.8) (992.3) Effect of exchange rate changes on cash and cash equivalents of consolidated T. Rowe Price investment products — .9 — .9 — (1.2) — (1.2) Net change in cash and cash equivalents during period 678.4 (21.1) — 657.3 (219.4) 41.2 — (178.2) Cash and cash equivalents at beginning of year 2,151.7 104.8 — 2,256.5 1,781.8 76.5 — 1,858.3 Cash and cash equivalents at end of period $ 2,830.1 $ 83.7 $ — $ 2,913.8 $ 1,562.4 $ 117.7 $ — $ 1,680.1 Page 30 Operating Activities Operating activities attributable to T. Rowe Price Group during the first quarter of 2021 provided cash flows of $1,138.6 million as compared to $864.0 million during the first quarter of 2020. Operating cash flows attributable to T. Rowe Price Group increased $274.6 million, including a $406.3 million increase in net income from the first quarter of 2020 and timing differences on the cash settlement of our assets and liabilities of $237.9 million. These increases were partially offset by $400.5 million in lower non-cash adjustments, including unrealized investment gains/losses, depreciation, and stock-based compensation expense. The non-cash adjustments were primarily driven by a $402.6 million increase in net investment gains in the first quarter of 2021 compared with net investment losses in the first quarter of 2020. Additionally, in 2021, we had net proceeds of $22.0 million from certain investment products that economically hedge our supplemental savings plan liability, while we had net investments of $8.9 million in the same period of 2020. 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 provided by investing activities that are attributable to T. Rowe Price Group totaled $30.4 million in the first quarter of 2021 compared with $15.0 million of cash used by investing activities in the 2020 period. During 2021, we decreased the level of seed capital provided by $77.3 million. We eliminate our seed capital in those T. Rowe Price investment products we consolidate in preparing our unaudited condensed consolidated statement of cash flows. Partially offsetting this increase to cash provided by investing activities were lower net proceeds from the sale of certain of our discretionary investments of $47.8 million compared to net proceeds of $74.0 million during 2020. In addition, we increased our property and equipment expenditures by $12.8 million. The remaining $26.5 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 $490.6 million in the first quarter of 2021 compared with $1,068.4 million in the 2020 period. During 2021, there was a $632.1 million decrease in cash paid for common stock repurchases as we repurchased 6.7 million less shares of common stock in the first quarter of 2021 as compared to the first quarter of 2020. Partially offsetting this decrease in cash used for financing activities was a $37.1 million increase in dividends paid in 2021 as a result of an 20.0% increase in our quarterly dividend per share. The remaining change in reported cash flows from financing activities is primarily attributable to a $107.0 million increase in net subscriptions received from redeemable non-controlling interest holders of our consolidated investment products during the first quarter of 2021 compared to the 2020 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 2020 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. Page 31 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, included in our Form 10-K Annual Report for 2020. 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, subadvised funds, separately managed accounts, collective investment trusts, 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 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, including our announced plan to establish T. Rowe Price Investment Management as a separate registered investment adviser. 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 level of third party research costs, 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. Page 32 Item 3. Quantitative and Qualitative Disclosures About Market Risk. There has been no material change in the total potential loss information provided in Item 7A of the Form 10-K Annual Report for 2020.