Price started his second fund in 1960. His objective for this fund was to buy stocks of smaller, emerging growth firms that had great potential for success. For a few years after its inception, the emerging growth fund did not perform well. In 1962, when the S&P 500 Index was off 9 percent, emerging growth stocks had a far worse correction and the fund dropped 29 percent. Clients complained and Price became disap- pointed and distraught. But he stayed with it, and performance improved. Five years later, the fund gained 44 percent; the S&P 500 increased only 9 percent. Price’s investments in H&R Block, Xerox, Texas Instru- ments, and other firms became profitable as investors recognized their value and bought those stocks. By 1968, small growth stocks were so popular and money poured in so quickly that Price had to close the fund temporarily to protect shareholders. He didn’t want to be under pres- sure to make investments when stock prices were at such high levels.
In a series of bulletins written for his firm in the late 1960s, Price said there would be “a new era for investors.” He was concerned about the U.S. balance of international trade, high inflation and interest rates, and the low liquidity of financial institutions and many corporations.
“If a business recession occurs and unemployment increases mate- rially, our social problems will become even more serious,” Price warned. “Interest rates will have a bearing on earnings growth. If high rates of interest prevail (as would be expected during accelerated infla- tion), earnings per share may decline for companies that have to bor- row money to provide for expansion and pay a rate of interest above the rate of return they receive on their invested capital.”
Price correctly predicted that inflation and interest rates would climb and a major bear market would occur in future years. He started a third fund with the objective of protecting investments against infla- tion. For this fund, Price continued purchasing growth stocks, but the major change was that he bought stocks of natural resource–related firms owning or developing forest products, oil, and real estate. Price’s plan was to adjust the number of natural resource stocks he held, depending on the level of inflation, interest rates, and the market cli- mate. This strategy contradicted his buy-and-hold strategy for growth stocks. Analysts who worked for T. Rowe Price Associates disagreed and wanted to continue buying only growth stocks for the long term. Criticizing them, Price pointed out that investors must have the flex- ibility to change when conditions warrant change.
When gold was $35 an ounce in 1966, Price started buying. In 1975, the price of gold seemed high to many investors at $300 an ounce, but Price predicted that it would go a great deal higher. He was right. In 1980, gold reached a high of $850 an ounce.
Interest rates increased, stocks dropped sharply, and bonds became popular with investors. In 1967, three-month Treasury bills paid 4 percent; between 1973 and 1974, 8 percent; and between 1980 and 1981, the rate rose as high as 16 percent. Subsequently, interest rates began to fall and three-month Treasury bills paid about 6 percent by 1987.
Before the 1970s, Price and his colleagues bought some bonds for clients, but generally referred their clients to other reputable profes- sionals who handled bonds. George Collins, a money manager spe-
cializing in bonds, was hired in 1971 to start a bond division for the firm. Collins purchased short-term bonds, Treasuries, and government agency obligations for the firm’s clients, which allowed him to take advantage of the rise in interest rates. When the bonds and notes matured, with rates going up as they did, he could roll the money over and get higher yields. During this time, prices of stock funds dropped, but the bond portfolio produced excellent returns for clients.
In 1976, Collins created one of the first tax-free municipal bond funds. Tax-exempt bonds, issued by cities, states, and municipalities, had been around for a long time. The money raised by these bonds helps support government or local schools, airports, hospitals, roads, or highways. Interest paid on the bonds is generally exempt from fed- eral income taxes. The reason there had been no tax-exempt bond funds was that prior to 1976, interest paid to shareholders of mutual funds was taxed as if it were taxable dividend income. Collins and others in the mutual fund industry were instrumental in getting Con- gress to change this. The Tax Reform Act of 1976 contained a provi- sion allowing tax-exempt bond funds to pass through the tax-exempt interest in the form of tax-exempt dividends to shareholders.
T. Rowe Price Associates’ first money market fund was started the same year. Money market funds are pools of assets invested in short-term debt obligations, usually maturing in less than a year. These funds are used as cash reserves for specific short-term needs and as a parking place for money until it can be invested. The main types of money market mutual funds are government money markets, general money markets, and tax-exempt money markets. Government money market funds own short-term government instruments such as Trea- sury bills. General money market funds may hold certificates of deposits, bank notes, short-term corporate debt, Treasury bills, and other short-term debt instruments. Tax-exempt money market funds own short-term debt obligations of municipalities, cities, and states. Although they are considered safe, money markets are not FDIC insured like bank accounts.
Today, T. Rowe Price Associates has a wide array of domestic, international, and global stock and bond mutual funds. Some of the firm’s mutual funds are geared toward conservative investors for sta- bility, income, and/or some growth, while others are appropriate for moderate or aggressive investors for greater growth.