Money managers have faced strong headwinds over the past eighteen months as asset values plunged and many investors fled to cash rather than endure the vagaries of the market. Withdrawals and portfolio losses have weighed on smaller firms, several of which are teetering on the brink of insolvency. Although share prices throughout the industry have taken a hit, this old standby continues to turn a profit.

Founded in 1937, T. Rowe Price Group (NSDQ: TROW) is one of the oldest money managers in the US. Best known for the breadth of its mutual fund offerings, the company also offers sub-advisory services for funds as well as separately managed accounts and investment planning. And it’s one of the largest providers of 401k plans and other retirement accounts.

Prior to the market meltdown, assets under management (AUM) swelled at the well-regarded firm; the lure of easy profits attracted new money to the seemingly inextinguishable bull market, while advisors hammered home the importance of saving for retirement to a rapt audience. These factors spelled big profits for T. Rowe Price, which generates much of its revenue through fees charged as a percentage of AUM.

Of course, an overheated market will inevitably cool down. Steep declines in stock prices cut into assets under management and sparked massive redemptions; at T. Rowe Price, AUM declined by 30 percent from 2007 levels to $276.3 billion. Investment advisory fees followed suit, falling 6.3 percent to $1.76 billion in 2008.

That’s not great news for T. Rowe Price, but there are plenty of positives to outweigh those negatives.

The company carries no debt and doesn’t utilize any credit lines, leaving it with no exposure to the credit markets. And as of the end of the fourth quarter, the company had a cushion of $1.1 billion–including $619 million in cash. T. Rowe Price also benefited from its focus on retirement accounts, which tend to be very sticky and account for about two-thirds of AUM; falling asset values, not redemptions, shrank the firm’s AUM. Unlike many of its competitors, T. Rowe Price actually attracted a positive inflow of $17.1 billion last year.

The company has also taken steps to reduce operating expenses, which are expected to fall below 2007 levels this year, and thus far it’s avoided massive personnel cuts. Its cash position is also likely to improve this year. Last year the board of directors changed the company’s dividend policy, which resulted in the firm paying five dividends in the 2008 fiscal year. That increased cash outflows by $132 million, though the schedule will normalize this year.

Although T. Rowe Price isn’t immune to the bad markets–fourth quarter profit declined by 87 percent–it’s still one of the best positioned money managers. The company’s core staff remains intact, and because its AUM decline is largely attributable to asset devaluation, earnings should respond almost immediately to improving market conditions.

President Obama’s proposal to establish automatic investment accounts for all American workers could drive rapid growth. Workers at companies that offer retirement plans would be automatically enrolled, and those employers who don’t offer plans would be required to enroll workers in individual retirement accounts. Unlike today’s opt-in system for retirement plans, workers that don’t wish to participate would have to opt out. Another feature of Obama’s proposal is an expanded tax credit that would increase the incentive for low- and moderate-income workers to save in tax-advantaged retirement accounts.

The plan has elicited some pushback from small businesses worried about higher expenses, but it’s met little resistance on the political front where there’s a broadening consensus that today’s workers can’t rely on Social Security to fund their retirement years. Although the details may change, it appears likely to pass in some form and that would be a huge boon for T. Rowe Price.

WHY TO BUY
T. ROWE PRICE GROUP (NSDQ: TROW)
*Retirement accounts could be mandated
*Sticky asset base
*Annual dividend increase since 1986