UPDATE 2-T. Rowe reports lower earnings, beats expectations

* Q2 net income down 38 pct, but beats Street view

* Company pulled in $4.1 billion to its mutual funds

* Shares fall 3.5 pct as other asset managers also sink (Adds details on earnings, CEO quotes, stock activity)

By Svea Herbst-Bayliss

BOSTON, July 24 (Reuters) - Asset management company T. Rowe Price Group Inc (TROW.O) reported a 38 percent drop in quarterly profit on Friday because it earned lower fees during the financial crisis, but the results beat analysts' expectations.

During the quarter the Baltimore-based company, one of the 10 largest publicly traded U.S. fund managers, took in $3.5 billion of new money during the quarter, including $4.1 billion that investors added to its mutual funds.

"What worked this quarter was that our investment performance has been outstanding," James Kennedy, the company's chief executive said in an interview.

One of the company's largest portfolios, the T. Rowe Price Value Fund, which invests about $7 billion, returned 24.2 percent during the second quarter.

Investors however pushed T. Rowe's stock price lower along with most other asset managers.

T. Rowe Price, which doesn't hold analysts calls or offer forecasts, said second-quarter net income declined to $100 million, or 38 cents per share, from $162.2 million, or 59 cents a share, a year earlier.

Wall Street analysts had expected earnings of 35 cents a share.

"I am happy with the quarter but we are not resting on our laurels one iota," Kennedy said.

Like many of its rivals, T. Rowe Price reported lower quarterly revenue, announcing $442.2 million down from $586.5 million largely because investment advisory fees declined 27 percent to $360.3 million.

The company managed $315.6 billion in assets at the end of the quarter, an increase from the previous quarter but down from a year earlier.

Kennedy expects retail investors, who had withdrawn billions of dollars from U.S. mutual funds at the height of the financial crisis, to slowly put money back into stock and bond portfolios. "There is potential for money to come to us based on our performance," he said.

The company's target-date-retirement funds, which make up roughly 10 percent of the company's assets, pulled in $1.8 billion during the quarter.

Investors reacted to the earnings by sending the share price up nearly 4 percent in trading before the market opened. But in early trading, the stock price, which has climbed 23.3 percent since January, fell back 3.5 percent to trade at $44.63. Other asset managers were also off as analysts said investors were taking profits at the end of the week. (Reporting by Svea Herbst-Bayliss; Editing by Lisa Von Ahn and Derek Caney)