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Item 2. Management’s Discussion and Analysis

2023-05-02 compared with 2022-10-27 · 213 added, 342 removed, 465 unchanged (54% of the section changed)

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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 affiliated products.

The other affiliated products include:

mutual funds, subadvised funds, separately managed accounts, collective investment trusts, and other sponsored products.

The other sponsored products include:

open-ended investment products offered to investors outside the U.S., products offered through variable annuity life insurance plans in the U.S., affiliated private investment funds, and collateralized loan obligations.

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Additionally, we derive revenue from our interests in general partners of certain affiliated private investment funds that are entitled to a disproportionate allocation of income through capital allocation-based arrangements also known as carried interest.

We manage a broad range of U.S., international and global stock, bond, money market mutual funds, collective investment trusts and other investment products as well as affiliated private investment funds or private accounts, and collateralized loan obligations, which meet the varied needs and objectives of individual and institutional investors.

We manage a broad mix of equity, fixed income, multi-asset, alternative and money market asset classes and solutions that 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.

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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.

On December 29, 2021, we completed our acquisition of Oak Hill Advisors, L.P., a leading alternative credit manager, and other entities that had common ownership (collectively, “OHA”).

We acquired 100% of the equity interests of Oak Hill Advisors, L.P., 100% of the equity interests in entities that make co-investments in certain affiliated private investment funds (the "co-investment entities") and a majority of the equity interests in entities that have interests in general partners of affiliated private investment funds and are entitled to a disproportionate allocation of income (the "carried interest entities").

As of September 30, 2022, OHA had $56 billion of capital under management (which includes net asset value, portfolio value and/or unfunded capital).

On April 20, 2023, we completed our acquisition of Retiree, Inc., a fintech firm that offers innovative retirement income planning software.

The terms of the transaction are not material.

MARKET TRENDS.

stock indexes declined in the third quarter of 2022.

Shares advanced through mid-August, helped by second-quarter corporate earnings reports that were better than expected.

Investors were also hopeful that the Federal Reserve, which raised short-term interest rates in late July, would slow the pace of its rate increases in response to tentative signs that inflation was retreating from recent peaks.

However, equities plunged and U.S.

Treasury yields rose in the second half of the third quarter of 2022, as comments from Federal Reserve officials indicated that they would be willing to risk causing a recession by raising rates and keeping them at a higher level in order to bring inflation down.

Toward the end of September 2022, investor sentiment deteriorated further as the Federal Reserve raised rates again, Treasury yields reached multi-year highs, and UK government bond yields surged in reaction to the UK government’s plan to cut taxes, increase energy subsidies, and boost borrowing.

Stocks in developed non-U.S.

markets underperformed U.S.

shares, as a stronger U.S.

dollar reduced overseas returns to U.S.

Developed markets in Asia were broadly negative.

Shares in Singapore fell only about 1.5%, while Hong Kong stocks plunged about 17%.

In Europe, UK shares dropped almost 11% in dollar terms.

Two of the worst-performing European markets were Austria and Norway, where stocks fell about 15%.

Stocks in emerging markets generally performed worse than their counterparts in developed markets.

In Asia, Chinese stocks plunged amid concerns about slower growth in the world’s second-largest economy.

In emerging Europe, most major markets declined, but Turkish stocks surged 16% in dollar terms as the central bank reduced interest rates twice despite year-over-year inflation of about 80%.

Markets in Latin America were mixed.

Mexican stocks slipped 5%, while Brazilian stocks advanced more than 8%.

stock indexes rose in the first quarter of 2023.

Large-cap shares surpassed their smaller-cap peers, and growth stocks outperformed value stocks across all market classes.

After a strong January, the market surrendered some of its gains in February due to concerns that the Federal Reserve—which raised short-term interest rates on February 1—would continue ramping up rates to combat elevated inflation.

Equities fell sharply in the first half of March, as two of the largest bank failures in U.S.

history raised concerns about the stability of the U.S.

banking industry.

Although financial regulators acted quickly to protect all Silicon Valley Bank and Signature Bank depositors from losses and to restore confidence in other banks, investors had lingering concerns—following a year of aggressive interest rate increases—that other regional banks could be toppled by losses from their bond holdings or a flight of depositors’ capital.

As investors’ concerns diminished in the second half of March, however, equities rebounded strongly.

Developed non-U.S.

equity markets outperformed U.S.

equities, as a weaker dollar versus some currencies enhanced returns to U.S.

In Europe, equity markets were mostly positive in dollar terms, though financials sector concerns centered on Switzerland’s Credit Suisse, which was acquired by UBS Group in a government-brokered deal, rocked the markets in March.

Developed Asian market returns were mostly positive but lagged European markets.

Stocks in emerging markets underperformed equities in developed non-U.S.

markets in dollar terms.

Markets in the major emerging regions were widely mixed.

In Latin America, for example, Mexican shares surged more than 20%,

while Colombian shares slumped 13%.

In Asia, stocks in Taiwan and South Korea outperformed with gains of about 15% and 10%, respectively, while Indian shares fell more than 6%.

In emerging Europe, Turkish shares slipped 9%, as the country recovered from a massive early-February earthquake and continued to struggle with elevated inflation, while Greek shares jumped about 16%.

Returns of several major equity market indexes were as follows:

Three months ended Nine months ended

Three months ended

Index 3/31/2023

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NASDAQ Composite Index (1)

(4.1)% (32.4)%

Russell 2000 Index 2.7%

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(1) Returns exclude dividends

Global bond prices declined in the third quarter of 2022, as bond yields rose and central banks increased short-term interest rates in many countries due to elevated inflation.

In the U.S., Treasury yields reached levels unseen since 2007-2008 and the Federal Reserve increased official short-term interest rates twice.

The fed funds target rate range at the end of September was 3.00% to 3.25%.

Global bonds produced mostly positive returns in dollar terms in the first quarter.

In the U.S., three- and six-month U.S.

Treasury bill yields rose as the Federal Reserve raised the fed funds target rate by 25 basis points in February and in March.

The fed funds target rate range at the end of the quarter was 4.75% to 5.00%.

However, U.S.

Treasury note and bond yields declined roughly 30 to 40 basis points for the quarter, as regional bank distress resulted in a flight to safety in mid-March and raised expectations that the Fed would temper future interest rate increases.

The 10-year U.S.

Treasury note yield increased from 2.98% to 3.83% during the quarter.

In the investment-grade universe, corporate and mortgage-backed securities were among the worst-performing issues.

Treasury and commercial mortgage-backed securities also declined considerably.

Asset-backed securities lost value but held up better than other investment-grade segments.

Tax-free municipal bonds declined but outperformed the taxable bond market.

High yield bonds, which have less sensitivity to rising interest rates than higher-quality issues, held up well.

Treasury note yield fell from 3.88% to 3.48% during the quarter.

investment-grade universe, corporate bonds and Treasuries performed best.

Mortgage-backed securities also did well, but asset-backed and commercial mortgage-backed securities trailed with milder gains.

Tax-free municipal bonds rose but slightly lagged the taxable investment-grade bond market.

High yield issues outperformed higher-quality fixed income securities.

Bonds in developed non-U.S.

markets fell sharply;

losses to U.S.

investors were exacerbated by a stronger dollar.

The euro fell more than 6%, even though the European Central Bank raised short-term interest rates in July and September.

The British pound plunged 8%, and UK government bond yields surged in September, resulting in the Bank of England purchasing long-term UK government debt in an effort to stabilize the market.

The Japanese yen slumped more than 6%—to levels not seen in more than two decades—which prompted the Bank of Japan to intervene in the currency market in late September in an attempt to support the yen.

Emerging markets bonds declined as central banks in many developing countries raised interest rates to fight inflation and defend their weakening currencies.

Local currency bonds fared slightly worse than dollar-denominated debt, as most emerging markets currencies depreciated versus the dollar.

markets appreciated in dollar terms, thanks to strength in March amid falling yields in various countries.

Returns to U.S.

investors were lifted by stronger European currencies versus the dollar.

The Japanese yen, however, fell close to 1% versus the dollar, as Japanese monetary authorities kept monetary policy very stimulative.

Emerging markets bonds produced positive returns in dollar terms, as various central banks continued raising short-term rates to fight inflation.

Bonds denominated in local currencies fared better than dollar-denominated issues, as the U.S.

dollar retreated versus many emerging markets currencies.

Returns for several major bond market indexes were as follows:

Three months ended Nine months ended

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Index 3/31/2023

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JPMorgan Emerging Markets Bond Index Plus 1.9%

Bank of America U.S.

ICE Bank of America U.S.

High Yield Index 3.7%

JPMorgan Leveraged Loan Index 1.9% (2.0)%

Credit Suisse Leveraged Loan Index 3.1%

ASSETS UNDER MANAGEMENT.

Assets under management ended the third quarter of 2022 at $1,230.0 billion, a decrease of $79.7 billion from June 30, 2022 and $457.8 billion from the end of 2021.

The decrease in assets under management during the third quarter of 2022 was driven by market depreciation, including net distributions not reinvested, of $55.1 billion and net cash outflows of $24.6 billion.

Clients transferred $3.3 billion in net assets from the U.S.

mutual funds primarily to collective investment trusts and other investment products, of which $2.2 billion transferred into the retirement date trusts.

For the nine months ended September 30, 2022, the decrease in assets under management was driven by market depreciation, including net distributions not reinvested, of $413.2 billion and net cash outflows of $44.6 billion.

Clients transferred $10.3 billion in net assets from the U.S.

mutual funds primarily to collective investment trusts and other investment products, of which $7.1 billion transferred into the retirement date trusts.

The following tables detail changes in our assets under management, by vehicle and asset class, during the three- and nine-month periods ended September 30, 2022:

Three months ended 9/30/2022 Nine months ended 9/30/2022

(in billions) U.S.

mutual funds Subadvised funds and separate accounts Collective investment trusts and other investment products Total U.S.

mutual funds Subadvised funds and separate accounts Collective investment trusts and other investment products Total

Assets under management at beginning of period $ 657.1 $ 332.8 $ 319.8 $ 1,309.7 $ 871.4 $ 437.1 $ 379.3 $ 1,687.8

Net cash flows before client transfers (11.2) (14.4) 1.0 (24.6) (28.7) (22.5) 6.6 (44.6)

Client transfers (3.3) .5 2.8 — (10.3) 1.5 8.8 —

Net cash flows after client transfers (14.5) (13.9) 3.8 (24.6) (39.0) (21.0) 15.4 (44.6)

Net market depreciation and losses (27.9) (12.4) (14.6) (54.9) (217.1) (109.6) (85.7) (412.4)

Net distributions not reinvested (.2) — — (.2) (.8) — — (.8)

Change during the period (42.6) (26.3) (10.8) (79.7) (256.9) (130.6) (70.3) (457.8)

Assets under management at September 30, 2022 $ 614.5 $ 306.5 $ 309.0 $ 1,230.0 $ 614.5 $ 306.5 $ 309.0 $ 1,230.0

Three months ended 9/30/2022 Nine months ended 9/30/2022

Assets under management ended the first quarter of 2023 at $1,341.7 billion, an increase of $67.0 billion from December 31, 2022.

The increase in assets under management during the first quarter of 2023 was driven by market appreciation, including net distributions not reinvested, of $83.1 billion, offset by net cash outflows of $16.1 billion.

The following tables detail changes in our assets under management, by asset class, during the first quarter of 2023:

Three months ended 3/31/2023

(in billions) Equity Fixed income, including money market Multi-asset (2)

Alternatives (3)

Total Equity Fixed income, including money market Multi-asset (2)

Alternatives (3)

Assets under management at beginning of period $ 664.2 $ 167.0 $ 400.1 $ 43.4 $ 1,274.7

Net cash flows (4)

Net market depreciation and losses (4)

(23.5) .1 7.1 .2 (16.1)

Net market appreciation and gains (5)

54.4 3.3 24.7 .7 83.1

Change during the period 30.9 3.4 31.8 .9 67.0

Assets under management at September 30, 2022 $ 647.8 $ 165.4 $ 374.1 $ 42.7 $ 1,230.0 $ 647.8 $ 165.4 $ 374.1 $ 42.7 $ 1,230.0

Assets under management at March 31, 2023 $ 695.1 $ 170.4 $ 431.9 $ 44.3 $ 1,341.7

(1) Includes fee basis assets under management.

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Generally, only those strategies with longer than daily liquidity are included.

(4) Includes distributions reinvested and not reinvested.

Investment advisory clients outside the United States account for 9.0% of our assets under management at September 30, 2022, 9.4% at June 30, 2022, and 9.9% at December 31, 2021.

Unfunded capital commitments as of March 31, 2023 were $11.8 billion and are not reflected in fee basis AUM above.

(4) Alternatives net cash flows includes $0.4 billion in outflows that represent investment manager-driven distributions.

(5) Includes net distributions not reinvested of $0.2 billion.

Investment advisory clients outside the United States account for 8.9% of our assets under management at March 31, 2023 and 9.1% at December 31, 2022.

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.

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Net cash inflows (outflows)

Assets under management Three months ended Nine months ended

Assets under management Three months ended

(in billions) 3/31/2023 12/31/2022 3/31/2023 3/31/2022

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We also offer advice solutions through retail separately managed accounts and separately managed accounts model delivery.

As of September 30, 2022, total assets in these solutions were $383 billion, of which $376 billion are included in our reported assets under management in the tables above.

As of March 31, 2023, total assets in these solutions were $443 billion, of which $435 billion are included in our reported assets under management in the tables above.

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 September 30, 2022, our assets under administration were $206 billion, of which nearly $125 billion are assets we manage.

As of March 31, 2023, our assets under administration were $229 billion, of which nearly $140 billion are assets we manage.

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 tables present investment performance for the one-, three-, five-, and 10-years ended September 30, 2022.

Our performance disclosures include specific asset classes, assets under management weighted performance, mutual fund performance against passive peers and composite performance against

The following tables present investment performance for the one-, three-, five-, and 10-years ended March 31, 2023.

Past performance is no guarantee of future results.

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All Composites 35% 44% 40% 56%

As of September 30, 2022, 73 of 124 (58.9%) of the firm's rated U.S.

As of March 31, 2023, 61 of 125 (48.8%) of the firm's rated U.S.

mutual funds (across primary share classes) received an overall rating of 4 or 5 stars.

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In addition, 65% (5) of AUM in the firm's rated U.S.

mutual funds (across primary share classes) ended September 30, 2022 with an overall rating of 4 or 5 stars.

mutual funds (across primary share classes) ended March 31, 2023 with an overall rating of 4 or 5 stars.

(1) The investment performance reflects that of T.

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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.

Rowe Price funds with 1-, 3-, 5-, and 10-year track record that are outperforming the Morningstar category median.

The bottom chart reflects the percentage of T.

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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.

Rowe Price funds with 1-, 3-, 5-, and 10-year track record that are outperforming the passive peer universe.

The bottom chart reflects the percentage of T.

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Excludes money market composites.

All composites compared to official GIPS composite primary benchmark.

All composites compared with the 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.

Rowe Price composites with 1-, 3-, 5-, and 10-year track record that are outperforming their benchmarks.

The bottom chart reflects the percentage of T.

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RESULTS OF OPERATIONS.

The following table and discussion sets forth information regarding our consolidated financial results for the three and nine months ended September 30, 2022 and 2021 on a U.S.

The following table and discussion sets forth information regarding our consolidated financial results for the three months ended March 31, 2023 and 2022 on a U.S.

GAAP basis as well as a non-GAAP basis.

The 2022 periods reflect the operating results of OHA, which was acquired at the end of 2021.

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, acquisition-related amortization and costs, and certain nonrecurring charges and gains.

The non-GAAP basis adjusts for the impact of our consolidated sponsored investment products, the impact of market movements on the supplemental savings plan liability and related economic hedges, investment income related to certain other investments, acquisition-related amortization and costs, impairment charges, and certain nonrecurring charges and gains.

Three months ended Q1 2023 vs.

Q3 2021 Nine months ended YTD 2022 vs.

(in millions, except per-share data) 9/30/2022 9/30/2021 $ change % change 9/30/2022 9/30/2021 $ change % change

(in millions, except per-share data) 3/31/2023 3/31/2022 $ change % change

Investment advisory fees $ 1,391.8 $ 1,662.1 $ (270.3) (16.3) %

Capital allocation-based income $ 16.9 $ 44.4 $ (27.5) (61.9) %

$ 1.1 $ — $ 1.1 n/m $ (80.8) $ — $ (80.8) n/m

Net revenues $ 1,537.6 $ 1,863.0 $ (325.4) (17.5) %

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Non-operating income (loss) (1)

$ (82.8) $ (11.5) $ (71.3) n/m $ (561.2) $ 234.5 $ (795.7) n/m

Net income attributable to

$ 135.4 $ (198.5) $ 333.9 n/m

Net income attributable to T.

Rowe Price $ 421.5 $ 567.9 $ (146.4) (25.8) %

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Non-operating income (loss) (1)

$ (3.7) $ (3.0) $ (.7) n/m $ (58.1) $ 28.5 $ (86.6) n/m

Net income attributable to

$ 30.8 $ (23.8) $ 54.6 n/m

Net income attributable to T.

Rowe Price $ 389.4 $ 616.9 $ (227.5) (36.9) %

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GAAP measures at the end of the Results of Operations section of this Management’s Discussion and Analysis.

Results Overview - Quarter ended September 30, 2022

Results Overview - Quarter ended March 31, 2023

Net revenues consist of investment advisory revenues;

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and capital allocation-based income.

Total net revenues were $1,588.2 million in the third quarter of 2022 compared with $1,954.1 million in the third quarter of 2021.

More than 90% of our net revenues are related to investment advisory fees.

Total net revenues were $1,537.6 million in the first quarter of 2023, a 17.5% decline compared with $1,863.0 million in the first quarter of 2022.

The decline was primarily due to a 16.3% decrease in investment advisory fee revenue as average assets under management declined 15.2%.

Investment advisory fees are generally earned based on the value and composition of our assets under management, which change based on fluctuations in financial markets and net cash flows.

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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.

Capital allocation income will fluctuate quarter-to-quarter to reflect the adjustment to accrued carried interest for the change in value of the affiliated funds assuming the funds’ underlying investments were realized as of September 30, 2022, regardless of whether the funds’ underlying investments have been realized.

Capital allocation income will fluctuate quarter-to-quarter to reflect the adjustment to accrued carried interest for the change in value of the affiliated funds assuming the funds’ underlying investments were realized as of March 31, 2023, regardless of whether the funds’ underlying investments have been realized.

Operating expenses on a U.S.

GAAP basis were $1,013.6 million in the third quarter of 2022 compared with $957.9 million in the third quarter of 2021.

On a non-GAAP basis, operating expenses were $1,028.2 million, a 7.4% increase over the comparable 2021 period.

Our operating expenses in the third quarter of 2022 include OHA's operating expenses, including the accrued carried interest compensation associated with the capital allocation-based income.

OHA's operating expenses primarily impact compensation expense;

technology, occupancy, and facility costs;

and general, administrative and other costs.

In comparison to the third quarter of 2021, the increase in our non-GAAP operating expenses was primarily attributable to higher salaries and benefits, including higher non-cash stock-based compensation expense;

the addition of OHA operating expenses;

and higher costs related to the ongoing investment in our technology capabilities.

These increases were partially offset by lower distribution and servicing costs due to lower average assets under management and a lower interim bonus accrual.

Operating margin in the third quarter of 2022 was 36.2%, compared to 51.0% earned in the 2021 quarter.

The decrease in our operating margin for the third quarter of 2022 compared to the 2021 period was primarily driven by the decrease in investment advisory fee revenue and the increases in operating expenses, primarily due to the increase in the compensation expenses, in the third quarter of 2022.

Further, the impacts of capital allocation-based income and related compensation are reflected in the operating margin for the third quarter of 2022.

Diluted earnings per share was $1.66 for the third quarter of 2022 as compared to $3.31 for the third quarter of 2021.

The decrease was primarily driven by lower operating income and by higher net investment losses recognized in the third quarter of 2022 as compared to the third quarter of 2021, as market returns in the third quarter of 2022 were weaker than market returns in 2021.

On a non-GAAP basis, diluted earnings per share was $1.86 for the third quarter of 2022 as compared to $3.27 for the third quarter of 2021.

GAAP basis were $1,053.4 million in the first quarter of 2023 compared with $985.6 million in the first quarter of 2022.

On a non-GAAP basis, operating expenses were $1,022.5 million, a 1.6% decrease over the comparable 2022 period.

In comparison to the first quarter of 2022, higher salaries and related benefits, along with higher costs related to the ongoing investments in our technology capabilities, were more than offset by lower distribution and servicing costs due to lower average assets under management, a lower interim bonus accrual, and lower stock-based compensation expense.

Operating margin in the first quarter of 2023 was 31.5% on a U.S.

GAAP basis, compared to 47.1% earned in the 2022 quarter.

The decrease in our U.S.

GAAP operating margin for the first quarter of 2023 compared to the 2022 period was primarily driven by the decrease in investment advisory fee revenue and the increase in operating expenses, primarily due to the increase in the supplemental savings plan liability, which increased expenses.

Diluted earnings per share was $1.83 for the first quarter of 2023 as compared to $2.41 for the first quarter of 2022.

The decrease was primarily driven by lower operating income and a higher effective tax rate, partially offset by net investment gains recognized in the first quarter of 2023 as compared to net investment losses recognized in the first quarter of 2022, as market returns in the first quarter of 2023 were stronger than those in 2022.

On a non-GAAP basis, diluted earnings per share was $1.69 for the first quarter of 2023 as compared to $2.62 for the first quarter of 2022.

Similar to our U.S.

GAAP diluted earnings per share, the decrease is largely attributable to lower operating income compared to the 2021 period.

Results Overview - Year-to-Date ended September 30, 2022

Net revenues consist of investment advisory revenues;

administrative, distribution, and servicing fees;

and capital allocation-based income.

Total net revenues were $4,964.2 million in the nine months ended September 30, 2022 compared with $5,710.2 million in the nine months ended September 30, 2021.

Operating expenses were $2,843.6 million in the nine months ended September 30, 2022 compared with $2,862.7 million in the 2021 period.

On a non-GAAP basis, our operating expenses for the nine months ended September 30, 2022 increased 7.7% to $3,014.6 million compared to the 2021 period.

Our operating expenses for the nine months ended September 30, 2022 include OHA's operating expenses, including the accrued carried interest compensation associated with the capital allocation-based income.

OHA's operating expenses primarily impact compensation expense;

technology, occupancy, and facility costs;

and general, administrative and other costs.

The increase in our non-GAAP operating expenses for the nine months ended September 30, 2022 compared with the 2021 period was primarily due to higher salaries and benefits, including non-cash stock-based compensation;

the addition of OHA operating expenses;

and higher costs related to the ongoing investment in our technology capabilities.

These increases were mostly offset by lower distribution and servicing costs due to lower average assets under management and a lower interim bonus accrual.

We continue to expect our forecasted 2022 non-GAAP operating expenses growth to be in the range of 4% to 7%.

The range reflects lower market-related expenses and continued efforts to manage expense growth.

The addition of OHA's operating expenses, since the acquisition at end of 2021, is driving nearly all of the 2022 forecasted expense growth.

We could elect to further adjust our expense growth should unforeseen circumstances arise, including significant market movements.

Operating margin in the nine months ended September 30, 2022 was 42.7%, compared to 49.9% earned in the 2021 period.

The decrease in our operating margin for the nine months ended September 30, 2022 compared to the 2021 period was primarily driven by a larger decrease in investment advisory fee revenue as compared to the decrease in operating expenses, primarily the decrease in the supplemental savings plan liability, for the nine months ended September 30, 2022.

Further, the impacts of capital allocation-based income and carried interest-related compensation are reflected in the operating margin for the nine months ended September 30, 2022.

Diluted earnings per share was $5.54 for the nine months ended September 30, 2022 as compared to $9.94 for the nine months ended September 30, 2021.

The 44.3% decrease was primarily driven by net investment losses recognized in the nine months ended September 30, 2022, as compared to net investment gains in the nine months ended September 30, 2021, as market returns in the third quarter of 2022 were weaker than the market returns in 2021, and by lower operating income.

On a non-GAAP basis, diluted earnings per share was $6.28 for the nine months ended September 30, 2022 as compared to $9.59 for the 2021 period.

The decrease in adjusted diluted earnings per share was primarily due to lower operating income compared to 2021 period and net investment losses on our cash investment strategy recognized in the nine months ended September 30, 2022 as compared to net investment gains in the nine months ended September 30, 2021.

See our non-GAAP reconciliations later in this Management’s Discussion and Analysis section.

GAAP diluted earnings per share, the decrease is largely attributable to lower operating income and a higher effective tax rate compared to the 2022 period.

Three months ended Q1 2023 vs.

Q3 2021 Nine months ended YTD 2022 vs.

(in millions) 9/30/2022 9/30/2021 $ change % change 9/30/2022 9/30/2021 $ change % change

(in millions) 3/31/2023 3/31/2022 $ change % change

Investment advisory fees

mutual funds $ 841.7 $ 1,125.5 $ (283.8) (25.2) % $ 2,694.4 $ 3,273.2 $ (578.8) (17.7) %

Subadvised funds, separate accounts, collective investment trusts, and other investment products 600.3 687.9 (87.6) (12.7) % 1,906.4 2,015.2 (108.8) (5.4) %

Equity $ 833.9 $ 1,086.0 $ (252.1) (23.2) %

Fixed income 102.4 106.6 (4.2) (3.9) %

Multi-asset 386.0 404.6 (18.6) (4.6) %

Alternatives 69.5 64.9 4.6 7.1 %

1,391.8 1,662.1 (270.3) (16.3) %

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Capital allocation-based income 16.9 44.4 (27.5) (61.9) %

1.1 — 1.1 n/m (80.8) — (80.8) n/m

Net revenues $ 1,537.6 $ 1,863.0 $ (325.4) (17.5) %

(1) The percentage change for capital allocation-based income is not meaningful (n/m) .

Average assets under management (in billions)

Equity $ 687.0 $ 886.5 $ (199.5) (22.5) %

Fixed income 169.6 177.8 (8.2) (4.6) %

Multi-asset 422.2 453.7 (31.5) (6.9) %

Alternatives 44.1 41.9 2.2 5.3 %

Average assets under management $ 1,322.9 $ 1,559.9 (237.0) (15.2) %

Investment advisory fees

Investment advisory revenues earned in the third quarter of 2022 decreased over the comparable 2021 quarter as average assets under management decreased $301.2 billion, or 18.3%, to $1,347.5 billion.

For the nine months ended September 30, 2022, investment advisory revenues decreased over the comparable 2021 period as average assets under management decreased $144.2 billion, or 9.1%, to $1,437.1 billion.

In the third quarter of 2022, we did not voluntarily waive money market investment advisory fees.

For the nine months ended September 30, 2022, we voluntarily waived $9.3 million, or less than 1%, of our investment advisory fees.

At September 30, 2022, combined net assets of the investment portfolios in which we waived fees for the nine months ended September 30, 2022 were $23.9 billion.

For the nine months ended September 30, 2021, we waived money market investment advisory fees of $43.0 million.

The total average annualized effective fee rate earned during the third quarter of 2022 was 42.5 basis points, compared with 43.6 basis points earned during the third quarter of 2021 and 42.7 basis points earned during the second quarter of 2022.

The total average annualized effective fee rate earned during the nine months ended September 30, 2022 was 42.8 basis points, compared with 44.7 basis points during the nine months ended September 30, 2021.

The total average annualized effective fee rate has declined in comparison to the second quarter of 2022 and the third quarter and year-to-date periods of 2021 due to a mix shift toward lower fee asset classes and vehicles as a result of market declines and net flows, partially offset slightly by a reduction in money market fee waivers.

Further, in comparison to third quarter and year-to-date period of 2021, the annualized effective fee rate was also impacted by a higher-than-average effective fee rate earned on the firm's alternative asset class.

Investment advisory revenues earned in the third quarter of 2022 from our U.S.

mutual funds were $841.7 million, a decrease of 25.2% from the comparable 2021 quarter.

Average assets under management in these funds for the third quarter of 2022 decreased 23.1% from the 2021 quarter to $677.6 billion.

The annualized effective fee rate of 49.3 basis points for the third quarter of 2022 decreased from 50.7 basis points in the third quarter 2021 primarily due to a mix shift towards lower fee asset and share classes as a result of market declines and net flows, including client transfers to the firm’s collective investment trusts.

For the nine months ended September 30, 2022, investment advisory revenues earned from the firm's U.S.

mutual funds were $2,694.4 million, a decrease of 17.7% from the 2021 period.

Average assets under management in these funds for the nine months ended September 30, 2022 decreased 14.1% from the 2021 period to $728.5 billion.

The annualized effective fee rate of 49.4 basis points for the nine months ended September 30, 2022 decreased from 51.6 basis points in the nine months ended September 30, 2021, primarily due to the July 2021 fee reductions in our target-date products and a mix shift towards lower fee asset classes as a result of market declines and net flows, partially offset by a reduction in money market fee waivers.

Subadvised funds, separate accounts, collective investment trusts and other investment products (other portfolios)

Investment advisory revenues earned in the third quarter of 2022 from these other portfolios were $600.3 million, a decrease of 12.7% from the comparable 2021 quarter.

Average assets under management for these products decreased 12.7% from the 2021 quarter to $669.9 billion.

Investment advisory revenues and average assets under management in Q2 2022 reflect OHA's revenue and related average assets under management.

The annualized effective fee rate of 35.6 basis points for the third quarter of 2022 increased from 35.5 basis points in the third quarter of 2021.

The increase was primarily due to the higher-than-average fee rate earned on our alternative asset class, mostly offset by a mix shift towards lower fee asset classes as a result of market declines and net flows, including client transfers

For the nine months ended September 30, 2022, investment advisory revenues earned from subadvised and separate accounts, as well as collective investment trusts and other investment products, were $1,906.4 million, a decrease of 5.4% from the 2021 period.

Average assets under management for these products decreased 3.4% from the 2021 period to $708.6 billion.

The annualized effective fee rate of 36.0 basis points for the nine months ended September 30, 2022 decreased from 36.7 basis points for the nine months ended September 30, 2021.

Our annualized effective fee rate for our other portfolios decreased primarily due to the July 2021 fee reductions in our target-date products and a mix shift towards lower fee asset classes and vehicles as a result of market declines and net flows.

These fee pressures were partially offset by the higher-than-average fee rate earned on our alternative asset class.

Administrative, distribution, and servicing fees in the third quarter of 2022 were $145.1 million, an increase of $4.4 million, or 3.1%, from the comparable 2021 quarter.

For the nine months ended September 30, 2022, these fees were $444.2 million, an increase of $22.4 million, or 5.3%, from the 2021 period.

The increase in both periods was primarily due to higher transfer agent servicing activities provided to the T.

Rowe Price mutual funds for retail shareholders and higher trustee services revenue.

These increases were partially offset by lower 12b-1 revenue earned primarily on the Advisor and R share classes of the U.S.

Investment advisory revenues earned in the first quarter of 2023 decreased over the comparable 2022 quarter as average assets under management decreased $237.0 billion or 15.2%, to $1,322.9 billion.

In the first quarter of 2022, we voluntarily waived $9.2 million, or less than 1%, of our investment advisory fees.

We did not waive money market investment advisory fees in the first quarter of 2023.

The total average annualized effective fee rate earned during the first quarter of 2023 was 42.7 basis points, compared with 43.2 basis points earned during the first quarter of 2022 and 42.3 basis points earned during the fourth quarter of 2022.

In comparison to the first quarter of 2022, the annualized effective fee rate was impacted by a mix shift to lower fee asset classes and vehicles as a result of overall market declines and net outflows over the last twelve months.

Administrative, distribution, and servicing fees in the first quarter of 2023 were $128.9 million, a decrease of $27.6 million, or 17.6%, from the comparable 2022 quarter.

The decrease was primarily due to lower transfer agent servicing activities provided to the T.

Rowe Price mutual funds and lower 12b-1 revenue earned primarily on the Advisor and R share classes of the U.S.

mutual funds as a result of lower assets under management in these share classes.

The decrease in 12b-1 revenue is offset entirely by a decrease in the costs paid to third-party intermediaries that source these assets and are reported in distribution and servicing expense.

Capital allocation-based income in the third quarter of 2022 increased net revenues by $1.1 million.

The third quarter of 2022 amount represents an increase of $14.3 million in accrued carried interest from investments in affiliated investment funds, substantially offset by $13.2 million in non-cash amortization associated with the difference in the closing date fair value and carrying value of investments acquired as part of the OHA acquisition.

For the nine months ended September 30, 2022, capital allocation-based income reduced net revenues by $80.8 million.

The nine months ended September 30, 2022 amount represents reductions of $41.1 million in accrued carried interest from investments in affiliated investment funds and $39.7 million in non-cash amortization associated with the difference in the closing date fair value and carrying value of investments acquired as part of the OHA acquisition.

Capital allocation-based income in the first quarter of 2023 increased net revenues by $16.9 million.

The first quarter of 2023 amount represents an increase of $29.2 million in accrued carried interest from investments in affiliated investment funds, partially offset by $12.3 million in non-cash acquisition-related amortization.

Comparatively, capital allocation-based income in the first quarter of 2022 increased net revenues by $44.4 million, which consists of an increase of $57.6 million in accrued carried interest, partially offset by $13.2 million in non-cash amortization.

A portion of the capital allocation-based income is passed through to certain associates as compensation and the related expense is recognized in compensation and related costs with the unpaid amount reported as non-controlling interest on the consolidated balance sheet.

Our net revenues reflect the elimination of advisory and administrative fee revenue earned from our consolidated

Rowe Price investment products.

What changed 10-Q

Item 2. Management’s Discussion and Analysis