TikTok, T. Rowe, and Last Call for Bonds

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Bonds are back. The yields are attractive. You can get 4 or 5% in relatively low-risk investments, whether they're treasuries or investment-grade corporate bonds. And that's a pretty solid foundation for many portfolios.

Hello and welcome to the Barron's Streetwise Podcast. I'm Jack Howe, and the voice you just heard is Kathy Jones. She's the chief fixed income strategist at the Schwab Center for Financial Research, and she says it's not too late to buy bonds, even though yields have come down a bit over the past month. We'll hear more about that in a moment. And talk with the head of global equity at T. Rowe Price. And we'll say a few words about TikTok. Listening in is our audio producer, Jackson. Hi, Jackson.

Hi, Jack.

You scrolling any TikTok these days?

Oh, this is the time for the few words about TikTok, huh?

Yeah, we're wasting no time.

Okay. I mean, it's honestly now I've kind of been off TikTok for a little bit.

I deleted it. You know, I wrote something about TikTok a couple of years ago. I went on a TikTok scrolling spree. But, you know, it's the parent company is a China-based company. There were concerns over, you know, could the government there want to use your data ultimately in ways that you would object to? I don't know. There was that. Plus, my thumbs were getting a little crampy from all the scrolling. And also, I'm a busy man. I can't be scrolling TikTok videos. So I deleted the app.

So less spying and auto-scroll are the features that you're requesting.

That's a minimum of what I demand. I took my first look this past week, YouTube Shorts. You know about Shorts? It's right there in your YouTube app. It's got a section, Shorts.

It's the kind of thing where I didn't sign up for this and all of a sudden you're like half an hour into watching farm videos.

It's not videos about shorts, if that's what you're thinking. It's basically Alphabet's answer to TikTok. And so I opened it up, started right away with a firewood stacking tip. And anyone who knows me knows I'm in. If it's about firewood, you've got me. And then after that, there's a Letterman appearance from the late comic Norm MacDonald. Right. And of course, I want to see Norm. So YouTube knows somewhere in my past, I've been looking up things about firewood and I probably watched some Norm MacDonald clips. And so They've got me right off the bat. But, but then I think the algorithm turned kind of cold after that. I felt like I was, I was getting over-normed. It was a bit of a two-trick pony, wood and norm. Like, how much can you do with both? But, but the— and then the ads were not remotely interesting to me. It was like total, you know, merchandise stuff that I'm not interested in. But there was one, there was a video actually with Shaq, Shaquille O'Neal, and he was telling the story about his first car purchase back when he didn't have any money. I think he said he had $1,500 or something like that, and he was shopping around for a vehicle and he had to really stretch to make it work. And I thought, here's a nice little anecdote. And it turns out to be a covert pitch for the General Insurance. You know, Shaq's a pitchman for the General. And at the end of this sort of heartwarming story, you know, here comes the pitch. I'm like, oh, the big man got me. I totally thought that— I thought that was pure content. That's YouTube Shorts. I don't— I'm not on Facebook, but Facebook has— my wife is, and she says she's, you know, most of her time on Facebook now when she opens the app on her phone is spent watching short videos on something called Reels. That started on Instagram 2 years ago. It went over to Facebook last year, and she says 90% of her time now is just, you know, kind of flipping through videos on Reels. The reason I mentioned all this is because there was a big report out from Bank of America this past week. They call rising short-form video consumption the biggest shift in internet usage that's going to happen over the coming 5 years. They say by 2024, short videos will account for more than 12% of time spent on the internet. That'll be up from 5.4% last year. And they say by 2028, short videos will fetch $108 billion in advertising. That's even assuming that the ad rates are lower than they are for traditional video. I mean, for context here, TikTok is an early leader and TikTok is still the market share leader here. When I first wrote about them in the Streetwise column in Barron's a couple of years ago, they were bringing in annual revenue of $1 billion and change. This year they're going to top $10 billion. That's, you know, multiplying that quickly over just 2 years. So the revenue is starting to really ramp up quickly here. And it's basically a 3-way race. Take a look at the market share here. 2 years ago, TikTok was at a 67% market share in short-form video. And the giants. If you take Facebook and Instagram together, single-digit share. If you take YouTube, single-digit share. And so this year, TikTok's share is going to drop below 50% for the first time. And if you look forward to next year, BofA predicts that TikTok and the combination of Facebook and Instagram, again, that's owned by Meta Platforms, That combination, along with TikTok, they'll each have about a 1/3 share of this short-form video market. And YouTube Shorts, they'll have a share that's somewhere in the high teens. So in other words, the giants are catching up to TikTok now. And I wrote about this in this week's column because there's a lot at stake here. If you're thinking that that Meta and Alphabet are too big for this to matter, that this is chump change to them. First of all, it's not chump change anymore. And second, look at what's happening to the stocks. The stocks are getting clobbered because growth is down. And part of the reason growth is down is because users have turned their attention to short-form videos. So Alphabet and Meta are now all in on short-form videos to try to hold on to the attention they have and gain some of it back. And to capture this quickly rising revenue stream from these ads. The ads can take the form of video advertisements or people like Shaq who go on there and they tell you a tearjerker story about a car purchase and they end up pitching you some insurance. It can go either way. At the same time this is happening, you might have seen the news this past week that the governor of Texas, Greg Abbott, he banned TikTok on government devices. That joins the governors of Maryland, South Dakota, South Carolina, and Nebraska. They cite data harvesting risks. So there are these state-level limited bans. I think people are wondering whether we'll ever get a federal ban. Remember that Donald Trump did issue a 2020 executive order banning TikTok, but then it got overturned by a federal judge. At the time that that happened, TikTok solicited a bid from Microsoft. We've talked about that, I believe, at that time. TikTok then rejected the offer it got from Microsoft and it went instead with a deal with Oracle and Walmart. And then that deal never happened. So there was no deal. There's no ban on the federal level. BofA doesn't think there'll be a federal ban, but they say if there was one, it would be great news for— I mean, it would be good for these other players, but they say Snap in particular, because it's kind of a smaller player that would have the quickest benefit from that kind of ban. They say more likely there could be new rules that limit TikTok's access to user data, and that could really give the others a boost in their efforts to monetize their content faster than TikTok. So we'll see. If you're looking to handicap the race, YouTube has the video experience, right? They're the longtime video player. But what they don't have is this platform that is built for the purpose of networking and sharing like social media, like, like Facebook and like Instagram, right? But, but they do have video and they have a lot of know-how when it comes to artificial intelligence and machine learning and building their recommendation engine. So Meta is spending gobs of money on AI right now., to do just that, make better recommendations on video. And they have, you'd have to say, the sharing edge when it comes to traditional social networking. So we'll see who'll come to dominate short-form video. Kathy Jones, she's the chief fixed income strategist at the Schwab Center for Jackson Financial Research. Schwab Center for Financial Research. And she's Schwab's bond guru. And I caught up with her recently. If you look at the 10-year Treasury yield, it was over 4% like a month ago. Now it's around 3.5%. Is the getting still good? The getting obviously was good a month ago. Is it still good? Kathy says yes.

Well, first, she seemed more interested in the cartoon in her research report.

I'm gonna skip right to the cartoon, which I always like to do. There's a cartoon drawing about halfway down, and I'm looking at a runway model, and he's got the word "Bonds" printed across his chest, and there's a, like, a designer guy holding a dog with a bow tie over on the side, and he's leaning over and whispering, "Bonds are so in right now." So let's start there. Why? What makes bonds so in? I want to be fashionable, Kathy. What makes bonds so in right now?

Well, it's a little bit of a play on Zoolander, if you've ever seen the movie. I have, yeah. But really what we wanted to convey is, you know, the last couple of years, really for a long time, bonds have not been all that popular with investors because either the yields were so low that they weren't appealing and investors went elsewhere to find attractive yields, or then of course 2022, when bonds really did very poorly because the Fed went into rate hiking mode, you know, very, very fast in a very short period of time. So bonds sold off. So what we're trying to say about 2023 is bonds are back. The yields are attractive. You can get 4 or 5% in relatively low-risk investments, whether they're Treasuries or investment-grade corporate bonds. And that's a pretty solid foundation for many portfolios, especially retirees or people investing for income. So we feel like this is the year when bonds come back and they'll be back in fashion.

What should I do if I want to get the best yields I can possibly get for the risk? Should I go out a little further on high-quality bonds, or should I dip into some lower-quality ratings? Which would you prefer right now?

We would definitely say up in quality and go out a bit in duration. We are concerned about the economy and the potential for recession. We feel like the market hasn't priced in some of the risk of default and lower quality bonds like high yield. So we really want to stick with the stronger issuers, say, in the municipal world or the corporate bond world and treasuries, where you can still get very attractive returns and you don't have to take a tremendous amount of credit risk. You can go out to durations of 5 to 6 years and get pretty nice returns.

I asked Kathy if she thinks that inflation is heading lower, and she says yes, but it could be a bumpy ride. And I asked if lower inflation means that we'll soon get back to the ultra-low interest rates that we saw over the past decade.

No, we don't think so. So my view is that we're back to the old normal where there is actually a positive interest rate, a real cost of capital. And I think that if we saw some sort of imminent crisis, like as we had with the great financial crisis, or where mortgages melted down and housing market went into a tailspin, or there was some sort of global crisis that caused a downturn like the pandemic. But we're not— those are really hard to forecast. So it's not in our forecast. So I think that we may be back now to what is considered more normal. Now we do see yields coming down and the Fed, once they reach that 5% or 5.25%, maybe come back down. We might be looking at something more like 3% in a year or so, but that's still a positive return. And that's still a positive cost of capital. And that's really the way the market's supposed to work.

I've seen a lot of headlines this year about the death of the 60/40 stock bond portfolio. And when people say that, they usually mean both stocks and bonds have stunk this year. That's not the way it's supposed to work. When your stocks stink, your bonds are supposed to hold up. That's why they're there. But I find this talk about the death of 60/40 confusing because if they've both done poorly, that means prices are down for both. It's a better starting point for both. I would have thought maybe it died at the beginning of this year and now it's coming back to life. I asked Cathie about that and she agrees.

If you go back to, say, 1976, the modern era, the number of times both stocks and bonds have declined together is just a handful. So this year is an anomaly and it was an extreme anomaly in the sense that both stocks and bonds have gone down significantly. But it's not the normal course of events. But if you start with a positive yield and a positive coupon, then that means that, you know, your risk of a negative return is pretty low. And I think that that is what people look for in fixed income to balance off of the risk in equity. So I think we're back in a world where 60/40 is a good starting place for a lot of investors.

I asked Kathy how urgent it is that a US investor add international bonds to their portfolio. The world seems so simple when we're talking about treasuries and we're talking about high-quality, sturdy US companies. And we're talking about municipalities. But when we talk about overseas investing, now we've got to know geopolitics, we've got to know currency swings, we've got to know different inflation rates, and the world gets very complicated in a hurry. How important is it for US investors to have money in bonds overseas? Kathy says, eh, it's not crucial.

I'm not sure that for many investors that is a crucial element of their portfolios. It's okay for diversification. I don't know that it's necessary.

Finally, I asked Cathy about municipal bonds. Remember, those are ones that are issued by state and local governments, and they have big tax benefits. She says they're attractive now, especially for investors in higher tax brackets.

If you're adding long-term bonds to portfolio and you're in a high tax bracket, munis might actually be a better option than, say, Treasuries or investment-grade corporate bonds. So shorter term, you know, we've had a lot of ups and downs in the muni market on the short end of the yield spectrum. So I would say if you're inclined to look at muni bonds and you fit that tax bracket, that income bracket, I would look a little bit longer term for good valuations there.

Thank you, Kathy. Coming up, Asset manager T. Rowe Price has a long record of beating both the stock market and its rivals when it comes to picking stocks for its funds. But it's having a lousy year. There's really no two ways about that. And its shares are way down. Is that a buying opportunity for investors who are either thinking about putting money into T. Rowe funds or thinking about a purchase of the company shares? We'll talk about that next.

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Welcome back. T. Rowe Price Group, the money manager, has fallen way out of favor on Wall Street. There are 15 analysts covering the stock. None say to buy it. More say to sell than hold. That's approaching GameStop-level rejection by Wall Street, and that's not how this is supposed to work. Money management is a dream business. Revenue is based on how much customer cash you put to work, but your costs aren't. If you have an office building or two that's filled with big brains they can just as easily allocate a 12-figure sum as a 9-figure one. So fund companies can become incredibly prosperous as they grow. T. Rowe, for example, last year it turned 50 cents of each revenue dollar into operating profit. That's 20 cents more than Apple, and Apple was riding a pandemic boom in demand for its gadgets. Assets under management for T. Rowe ended the year at $1.69 $1.2 trillion. That's triple what they were a decade ago. And then two things went wrong in a hurry for asset managers in general and T. Rowe in particular. The first is that inflation soared and the Federal Reserve quickly ramped up interest rates from historically low levels to ones that are approaching normal. And stocks tumbled and bonds went with them, and pretty much everything else followed. For asset managers, of course, market declines mean that assets under management shrink, and so do fees that are based on those assets. And that means that profit margins dip, but hopefully they bounce back once markets recover. T. Rowe has a second problem: its funds are growthy. It's not a firm-wide directive or anything.

We definitely have strategies across the full style spectrum, and we have portfolio managers and analysts who are as value-oriented as you can get. And we clearly have folks who are growth-oriented.

That's Eric Vale. He's T. Rowe's Chief Investment Officer. Growth stocks had beaten up on value stocks for a decade, and that paid off richly for T. Rowe, but it's recently dragged down performance.

We definitely have some strategies, and some of our bigger strategies are in the growth category. And some of those strategies have a growth tilt even within the growth category and did heading into this most recent period, which did not serve them well.

One of T. Rowe's flagship funds is called T. Rowe Price Blue Chip Growth Fund, ticker TRBCX. That was recently down 33% for the year versus a 25% decline for the large-cap growth category. That's according to Morningstar. Another big fund called T. Rowe Price Growth Stock, PRGFX, that's done a percentage point worse. Among that fund's top holdings are some stalwarts like Microsoft, Apple, and Amazon. Those have suffered pretty big market setbacks. There are also more adventurous names like electric vehicle makers Tesla and Rivian Automotive, and those are down even more. That means assets are getting doubly hit, once from the market declines and a second time from performance-chasing investors who take their money and they go elsewhere. Wall Street predicts that the firm will end the year with $1.26 trillion under management. That's down 25% and includes $59 billion of net outflows or money leaving faster than it's coming in. So that's why I wanted to talk with Erik to find out what T. Rowe does here. Does it stick with the stocks that are dragging down returns and say, wait a second, these are even cheaper now, we like them even more? Or does it change some of its tactics? Eric says they're doing some of both.

Stubbornness and great portfolio management rarely go hand in hand. So you need to have conviction, but it needs to be well placed. The other expression we like to use around here is strong views held lightly, right? So you need to believe in what you believe in, but you can't be dogmatic about it. And that, that applies to the individual stocks in these large portfolios as well.

T. Rowe is sticking with long-term winners like Microsoft, but one example of a stock it has cut is Snap.

Snap, we owned in some pretty significant size, and we've decided that the underlying fundamentals of that one, due to the changes that Apple made to their ad tracking transparency issues, are just going to be, we think, at least for the foreseeable future, too difficult to overcome. So we've, we've reduced some position sizes there.

I asked Eric if he thinks now is a good time for investors to jump back into growth stocks. He says not yet.

The best time to own growth stocks, um, is when you have inflation, uh, peaking and decelerating and you have growth accelerating. Um, we are not in that environment right now, but if you're in that environment, the hit rate over the past 25 years is like 70% of the time growth stocks outperform.

T. Rowe as a firm would like to remind you that it's good at this. It recently published an analysis of 20 years of returns for its 124 actively managed funds and thousands of rival funds. Overall, its funds beat their benchmarks in 73% of rolling 10-year time periods versus 47% for other firms. On average, T. Rowe's stock funds beat benchmarks by more than a percentage point a year over 10-year periods. They outperformed during average 1, 3, and 5-year periods, just not the latest ones. T. Rowe stock is down about $100 a share since last spring to a recent $120. I have no idea where the bottom is for the stock. I'll leave that for listeners to judge for themselves, but I wonder if the pessimism on the company is overdone. As for other stocks, I asked Eric what he thinks returns for investors will look like over the next 10 years. Do you think that they will be more generous than average, as generous than average, not as generous, or what's your view?

It kind of depends on how long you go back over that average. If you say the next 10 years versus the previous 10 years, the previous 10 years were a pretty uniquely favorable environment for stocks, especially US stocks with an incredibly accommodative Federal Reserve coming off of really low starting point with the GFC. Global financial crisis positioning. I think the next 10 years, we are actually at a pretty good starting point right here, right? Markets have sold off. We've, we've burned off a big part of the COVID bubble in equity markets. Valuations are more reasonable now across both growth and value. If you just look at the market in general, we're kind of at an average multiple. So I think we're looking for what I would call very, over a 10-year period, average type returns. It's not clear to me that we're set up for them to be meaningfully better. We're definitely not set up to be meaningfully worse, and I would definitely not be getting out of the market now if I had a 10-year horizon. I would be working my way into the market.

Thank you, Kathy, Eric, and Shaq, and thank all of you for listening. Jackson Cantrell is our producer. Don't forget to tell your friends about the podcast. We're not on TikTok or YouTube Shorts or Reels. We are audio-only influencers, right, Jackson?

I'd say we're ear-fluencers.

Ear-fluencers. Send me your investing questions. Just record on your phone, use the voice memo app, and send them to jack.hough, that's H-O-U-G-H, @barons.com. And send complaints to Jackson. See you next week.

Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.