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Manager’s Letter
Fellow Shareholders
Developing Asian stock markets rose
in the past six months as accommodative monetary policies deployed by central
banks in the U.S., Europe, and Japan lured investors into emerging markets and
other higher-yielding assets. Sentiment generally improved since our report at
the end of last October, when worries about Europe’s debt crisis and a weak U.S.
recovery weighed on global markets. Despite these lingering risks, commitments
from major central banks to stick with their easy money policies restored some
confidence among investors, although developed market stocks have benefited more
from revived confidence than Asian stocks.
The New Asia Fund returned 6.57% for
the six months ended April 30, 2013, trailing the 7.40% return of its benchmark,
the MSCI
All Country Asia ex Japan Index,
and the Lipper Pacific Ex Japan Funds Average. Positioning in Thailand, the
Philippines, and China contributed the most to relative performance. On the flip
side, stock selection in Hong Kong and South Korea detracted the most from
relative returns. From a sector viewpoint,
utilities and materials were the biggest contributors to relative performance;
conversely, consumer discretionary and information technology stocks hurt the
most. In terms of absolute performance, financials was the top contributor,
while industrials and business services stocks added the least value.
China and India remain the two
biggest country allocations, but we raised our exposure to India and
significantly scaled back our China exposure over the period. We have a
favorable view of most Southeast Asian markets but reduced our exposure to
Thailand to lock in
gains after a big rally.
We are underweight to Taiwan, South Korea, and Singapore, all mature economies
that offer fewer good growth opportunities than other Asian markets. Our sector
allocations continue to reflect our bias toward areas driven by domestic
consumption. Consumer discretionary and consumer staples represented our top
overweight sectors at the end of April.
MARKET ENVIRONMENT
Asia ex-Japan stocks enjoyed a
supportive backdrop over the past six months, thanks to accommodative measures
implemented by the Federal Reserve and the European Central Bank in last year’s
second half. More recently, the Bank of Japan announced on April 4 that it would
embark on its own massive bond-buying program in an effort to revive its
stagnant economy and end 15 years of deflation. Risk appetite rebounded strongly
since the end of 2012 as global investors
appeared less sensitive to flare-ups in the eurozone debt crisis and
other macroeconomic worries.
Country performance varied widely
across the region. Stocks in the Philippines, Thailand, and Indonesia led the
region with double-digit gains. These Southeast Asian economies have experienced
buoyant domestic demand and proved to be surprisingly resilient despite uneven
global growth. All three economies posted GDP growth in excess of 6% last year.
Malaysia, another
solid economic performer
in Southeast Asia, lagged its peers amid uncertainty about the outcome of a
tightly contested national election in May. Singapore, Hong Kong, and
Taiwan—which rank among the region’s most mature economies—posted returns of
at least 10% reflecting the stronger performance of developed markets.
Indian stocks advanced slightly more
than 6%. India’s market cooled as investors worried about the implementation of
economic reforms following a strong run at the end of our last reporting period.
Stocks in China edged up roughly 3%. China is in the midst of a long-term
transition to slower growth, and weaker-than-expected data this spring dampened
hopes for renewed growth. In any case, China has telegraphed for many months
that it wants to move to a more sustainable economy after three decades of
double-digit annual GDP gains. Rather than being alarmed by China’s slowdown, we
believe it is consistent with the government’s long-term goals.
PORTFOLIO REVIEW
Developed Asia (Hong Kong,
Singapore, South Korea, and Taiwan)
The fund has significant exposure to developed Asian countries (42% as of
the end of April). Aside from Hong Kong, however, we are underweight in these
more mature markets as they offer fewer attractive opportunities compared with
faster-growing Asian countries. Still, the region is home to numerous
world-class companies that are leaders in their respective industries and
gaining global market share, such as
Taiwan Semiconductor Manufacturing
and
Hyundai Motor
. Additionally, many outward-focused Taiwan companies
offer good and relatively inexpensive ways to gain exposure to China and other
high-growth markets in the region. For example,
President Chain Store
owns the
7-Eleven convenience store chain in Taiwan and the Philippines and operates
Starbucks coffee shops in Shanghai, while
Taiwan Cement
, the country’s
largest cement producer, has sizable operations in China. Finally, many global
businesses with top-notch management, solid balance sheets, and diversified
earnings sources are domiciled in developed Asia. These include Hong Kong
conglomerate
Jardine
Matheson
, whose businesses encompass
property development, Indonesia’s biggest car dealership, and a range of
pan-Asian consumer businesses; and
Singapore Telecommunications
,
which operates across Southeast Asia, Australia, and Africa through stakes in
several regional mobile operators. All of these companies ranked among the
fund’s biggest holdings, as shown in the Twenty-Five Largest Holdings on page
10. (Please refer to the portfolio of investments for a complete list of
holdings and the amount each represents in the portfolio.)
Our developed Asian holdings hurt
relative performance over the past six months. Hong Kong was the largest
detractor due to unfavorable stock selection led by luxury men’s clothing
retailer
Trinity
and trading company
Li & Fung
, which supplies
merchandise to big box retailers like Walmart and Target. Trinity shares
declined amid a pullback in high-end consumption in mainland China, while Li
& Fung shares fell as weaker U.S. consumer spending and rising manufacturing
costs in China, its biggest sourcing market, weighed on profits. South Korea
also hurt relative returns due to stock selection, particularly engineering
group
Samsung Engineering
, whose shares fell sharply after reporting earnings cuts
to projects in the U.S. and the Middle East. On the bright side, many of our
core holdings in developed Asia ranked among the period’s biggest contributors.
Samsung Electronics
, the world’s biggest mobile phone maker, benefited from
surging smartphone sales and record earnings. Taiwan Semiconductor
Manufacturing, the world’s top custom chipmaker, also benefited from rising
global smartphone demand, which drove mobile chip orders. We have begun to
substantially reduce our Samsung Electronics position after the stock’s strong
performance, as we believe the smartphone upgrade cycle will start to ease this
year. We used proceeds to increase our position in Taiwan Semiconductor
Manufacturing and other names that we believe have greater upside potential in
the medium term.
Southeast Asia (Thailand,
Malaysia, Philippines, Indonesia)
Developing countries of Southeast Asia produced some of the best returns
over the past six months. As we mentioned in our last letter, the business
environment has vastly improved since the 1997 currency crisis ravaged the
region’s economies, thanks to stable political leadership and sound
macroeconomic policies. This newfound stability has pushed down interest rates
and the cost of doing business in Southeast Asia, raising expectations that the
region is entering a new growth phase. Stock markets in Thailand and the
Philippines were particularly strong as domestic growth outpaced estimates,
consumption stayed strong, and central banks kept interest rates low. The
Philippines also got a big boost after winning investment-grade credit ratings
from Fitch and Standard & Poor’s this spring. We have a positive long-term
view of Southeast Asia’s growth prospects but recognize that stock prices have
become somewhat expensive in the near term. Stock markets in Indonesia,
Malaysia, and the Philippines reached record highs at the end of our reporting
period, and we are closely monitoring the pace of earnings growth in these
markets to determine if it supports their relatively high valuations. Given the
strong economic backdrop, we believe that many quality companies
will continue to deliver good earnings. Indonesia’s
economy is relatively more exposed to commodity prices, and we are mindful of
how weakness in coal and other commodities might impact its economy. As a
result, we have a more neutral position in Indonesia.
Our overweight allocations to
Thailand and the Philippines, both of which rallied in excess of 20%, made them
the top contributors to relative returns. We have reduced positions in both
countries to lock in gains after their strong performance. In Thailand, we
eliminated
CP ALL
, which runs the 7-Eleven chain, after it announced a
costly acquisition of questionable value. In Malaysia, we eliminated
Genting Berhad
, a casino operator that we believe is expanding in too
many places around the world at the same time. Despite these sales, we still
maintain exposure to Southeast Asia through sizable positions in Thai lender
Kasikornbank
,
Malaysian financial
services company
CIMB Group
Holdings
, and Indonesian packaged food
company
Indofood Sukses
Makmur
, the world’s second-largest
instant noodles producer that has been gaining market share.
India and
China
Asia’s economic heavyweights
continued to struggle with slowdowns in recent months. India’s GDP rose 5% in
the fiscal year ended March 31, the slowest pace in a decade, and its central
bank cut interest rates for the third time this year in May after our reporting
period ended. China’s stock market rallied in the final quarter of 2012 as
investors took advantage of depressed valuations and anticipated better economic
data. Despite ample liquidity supporting the economy, recent indicators have
been stable rather than improving, surprising many who had expected a
first-quarter recovery. India and China remain the two biggest country
allocations and accounted for 35% of the fund at the end of April. However, we
significantly increased our Indian holdings while reducing our China exposure in
the past six months. In the case of India, our decisions were driven more by
attractive valuations
at the stock level
rather than a fundamental change in our view of the country. We still have a
cautious view of India, where perpetual political gridlock has long stymied
economic reform. But a decline in commodity prices—particularly for crude oil
and gold, two of India’s biggest imports—should help reduce its large trade
deficit and tame inflation, two things that have most worried investors in
recent years. We initiated positions in lenders
ICICI Bank
and
Yes Bank
and
carmakers
Maruti Suzuki
India
and
Mahindra & Mahindra
, which ranked among our biggest purchases over the period. We also
increased our position in mobile phone leader
Bharti Airtel
, whose shares fell
to attractive levels late last year following a series of disappointing
earnings. Its stock price has since recovered, and Bharti was one of the top
contributors.
Our view of China remains largely
unchanged despite the reduction in our positions. We continue to believe that
China will manage a gradual deceleration as it shifts to an economy driven by
domestic consumption and winds down the government spending that has fueled
growth in recent years. As we have said before, we expect the transition will
take many years and produce periods of uneven economic growth and stock market
performance. Over the long term, we believe
that China’s economic growth will gradually decline, in keeping with the
government’s policy objectives. In March, China completed a once-in-a-decade
leadership transition, and its new president has signaled a willingness to
implement significant economic reforms. Even if the government is successful in
pushing through major reforms, however, we don’t automatically assume this would
be a major catalyst for the stock market. China’s efforts to retool the drivers
of economic growth and diminish the
state’s role in the economy, while certainly welcome news, may in fact take
several years to translate into consistently strong stock market performance. In
the meantime, we believe China remains an interesting market for stock pickers.
We may not want to invest in the big banks that dominate the market or the
state-owned industrials that are suffering from excess capacity. However, we
continue to find many good growth opportunities in consumer-driven businesses
and the renewable energy sector. We reduced our exposure to China through
selling infrastructure company
Zhejiang
Expressway
,
China Oilfield Services
, and coal plant operator
China
Power Resources Holdings
after strong
outperformance in each. Our stock selection in China had a broadly neutral
impact, but our underweight to the country—one of Asia’s weakest
performers—helped relative performance.
Our sector exposures stayed largely
unchanged. Financials, information technology, and consumer discretionary
accounted for the largest sector allocations on an absolute basis at period-end.
However, relative to the benchmark, we are significantly underweight in
financials and overweight in consumer discretionary. We continue to favor areas
driven by domestic consumption, such as consumer discretionary and consumer
staples, which should see solid long-term growth as Asia’s middle class grows in
size and wealth. In China, which dominates the financials sector, we are
cautious about the banks due to rapidly rising government debt, a potential
uptick in nonperforming loans, and regulatory uncertainty.
OUTLOOK
Stocks in developing Asia have lagged
the stronger performance of developed markets stocks in the year-to-date period.
Developed markets have arguably been at a more positive inflection point for
growth, while companies—particularly in the U.S.—have made good progress cutting
costs and improving shareholder returns. While emerging Asian markets are still
growing rapidly relative to developed markets, the pace of growth in China and
India failed to match investors’ high expectations. Earnings growth in Asia last
year in the low single-digit range did not support strong stock market
performance.
Despite Asia’s recent
underperformance, we feel strongly that the reasons for investing in the region
are still intact. With lower commodity prices and inflation abating in some
countries, margins for many businesses should be firmer over the coming year,
which
will encourage stronger earnings
growth than what we saw in 2012. Growing urbanization, consumption, and upward
mobility are long-term secular trends that will drive strong and sustainable
growth in Asia for many years. However, many businesses in the region are still
in a capacity-readjustment process in response to slower revenue growth, which
is dampening their profitability. In this environment, we are acutely focused on
seeking the best growth opportunities in Asia and will continue to take
advantage of market declines to buy high-quality companies at attractive
prices.
Thank you for investing with T. Rowe
Price.
Respectfully
submitted,
Anh Lu
Portfolio manager and chairman of the fund’s Investment
Advisory Committee
May 15, 2013
The committee chairman has
day-to-day responsibility for managing the portfolio and works with committee
members in developing and executing its investment program.
R
ISKS OF
I
NTERNATIONAL
I
NVESTING
Funds that invest overseas generally
carry more risk than funds that invest strictly in U.S. assets. Funds investing
in a single country or in a limited geographic region tend to be riskier than
more diversified funds. Risks can result from varying stages of economic and
political development; differing regulatory environments, trading days, and
accounting standards; and higher transaction costs of non-U.S. markets. Non-U.S.
investments are also subject to currency risk, or a decline in the value of a
foreign currency versus the U.S. dollar, which reduces the dollar value of
securities denominated in that currency.
G
LOSSARY
Gross domestic product (GDP):
The total market value of all goods and
services produced in a country in a given year.
Lipper averages:
The averages of available mutual fund performance
returns for specified time periods in categories defined by Lipper
Inc.
MSCI All Country Asia ex Japan
Index:
An index that measures equity
market performance of developed and emerging countries in Asia, excluding
Japan.
Performance and Expenses
This chart shows the value of a
hypothetical $10,000 investment in the fund over the past 10 fiscal year periods
or since inception (for funds lacking 10-year records). The result is compared
with benchmarks, which may include a broad-based market index and a peer group
average or index. Market indexes do not include expenses, which are deducted
from fund returns as well as mutual fund averages and indexes.
As a mutual fund shareholder, you may
incur two types of costs: (1) transaction costs, such as redemption fees or
sales loads, and (2) ongoing costs, including management fees, distribution and
service (12b-1) fees, and other fund expenses. The following example is intended
to help you understand your ongoing costs (in dollars) of investing in the fund
and to compare these costs with the ongoing costs of investing in other mutual
funds. The example is based on an investment of $1,000 invested at the beginning
of the most recent six-month period and held for the entire period.
Actual
Expenses
The first line of the
following table (Actual) provides information about actual account values and
expenses based on the fund’s actual returns. You may use the information on this
line, together with your account balance, to estimate the expenses that you paid
over the period. Simply divide your account value by $1,000 (for example, an
$8,600 account value divided by $1,000 = 8.6), then multiply the result by the
number on the first line under the heading “Expenses Paid During Period” to
estimate the expenses you paid on your account during this period.
Hypothetical Example for
Comparison Purposes
The information
on the second line of the table (Hypothetical) is based on hypothetical account
values and expenses derived from the fund’s actual expense ratio and an assumed
5% per year rate of return before expenses (not the fund’s actual return). You
may compare the ongoing costs of investing in the fund with other funds by
contrasting this 5% hypothetical example and the 5% hypothetical examples that
appear in the shareholder reports of the other funds. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period.
Note:
T. Rowe Price charges an annual account service fee of
$20, generally for accounts with less than $10,000. The fee is waived for any
investor whose T. Rowe Price mutual fund accounts total $50,000 or more;
accounts electing to receive electronic delivery of account statements,
transaction confirmations, prospectuses, and shareholder reports; or accounts of
an investor who is a T. Rowe Price Preferred Services, Personal Services, or
Enhanced Personal Services client (enrollment in these programs generally
requires T. Rowe Price assets of at least $100,000). This fee is not included in
the accompanying table. If you are subject to the fee, keep it in mind when you
are estimating the ongoing expenses of investing in the fund and when comparing
the expenses of this fund with other funds.
You should also be aware that the
expenses shown in the table highlight only your ongoing costs and do not reflect
any transaction costs, such as redemption fees or sales loads. Therefore, the
second line of the table is useful in comparing ongoing costs only and will not
help you determine the relative total costs of owning different funds. To the
extent a fund charges transaction costs, however, the total cost of owning that
fund is higher.
Unaudited
The accompanying notes are an
integral part of these financial statements.
Unaudited
The accompanying notes are an
integral part of these financial statements.
Unaudited
The accompanying notes are an
integral part of these financial statements.
Unaudited
The accompanying notes are an
integral part of these financial statements.
Unaudited
The accompanying notes are an
integral part of these financial statements.
Unaudited
|
Notes to
Financial Statements
|
T. Rowe Price International Funds,
Inc. (the corporation), is registered under the Investment Company Act of 1940
(the 1940 Act). The New Asia Fund (the fund) is a nondiversified, open-end
management investment company established by the corporation. The fund commenced
operations on September 28, 1990. The fund seeks long-term growth of capital
through investments primarily in the common stocks of companies located (or with
primary operations) in Asia (excluding Japan).
NOTE 1 - SIGNIFICANT ACCOUNTING
POLICIES
Basis of
Preparation
The accompanying financial
statements were prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP), which require the use of
estimates made by management. Management believes that estimates and valuations
are appropriate; however, actual results may differ from those estimates, and
the valuations reflected in the accompanying financial statements may differ
from the value ultimately realized upon sale or maturity.
Investment Transactions,
Investment Income, and Distributions
Income and expenses are recorded on the accrual basis. Dividends received from
mutual fund investments are reflected as dividend income; capital gain
distributions are reflected as realized gain/loss. Dividend income and capital
gain distributions are recorded on the ex-dividend date. Income tax-related
interest and penalties, if incurred, would be recorded as income tax expense.
Investment transactions are accounted for on the trade date. Realized gains and
losses are reported on the identified cost basis. Distributions to shareholders
are recorded on the ex-dividend date. Income distributions are declared and paid
annually. Capital gain distributions, if any, are generally declared and paid by
the fund annually.
Currency
Translation
Assets, including
investments, and liabilities denominated in foreign currencies are translated
into U.S. dollar values each day at the prevailing exchange rate, using the mean
of the bid and asked prices of such currencies against U.S. dollars as quoted by
a major bank. Purchases and sales of securities, income, and expenses are
translated into U.S. dollars at the prevailing exchange rate on the date of the
transaction. The effect of changes in foreign currency exchange rates on
realized and unrealized security gains and losses is reflected as a component of
security gains and losses.
Rebates and
Credits
Subject to best execution, the
fund may direct certain security trades to brokers who have agreed to rebate a
portion of the related brokerage commission to the fund in cash. Commission
rebates are reflected as realized gain on securities in the accompanying
financial statements. Additionally, the fund earns credits on temporarily
uninvested cash balances held at the custodian, which reduce the fund’s custody
charges. Custody expense in the accompanying financial statements is presented
before reduction for credits.
Redemption Fees
A 2% fee is assessed on redemptions of fund shares held
for 90 days or less to deter short-term trading and to protect the interests of
long-term shareholders. Redemption fees are withheld from proceeds that
shareholders receive from the sale or exchange of fund shares. The fees are paid
to the fund and are recorded as an increase to paid-in capital. The fees may
cause the redemption price per share to differ from the net asset value
per share.
New Accounting
Guidance
In December 2011, the Financial
Accounting Standards Board issued amended guidance requiring an entity to
disclose information about offsetting and related arrangements to enable users
of its financial statements to understand the effect of those arrangements on
its financial position. The guidance is effective for fiscal years and interim
periods beginning on or after January 1, 2013. Adoption will have no effect on
the fund’s net assets or results of operations.
NOTE 2 - VALUATION
The fund’s financial instruments are
valued and its net asset value (NAV) per share is computed at the close of the
New York Stock Exchange (NYSE), normally 4 p.m. ET, each day the NYSE is open
for business.
Fair Value
The fund’s financial instruments are reported at fair
value, which GAAP defines as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The T. Rowe Price Valuation Committee (the
Valuation Committee) has been established by the fund’s Board of Directors (the
Board) to ensure that financial instruments are appropriately priced at fair
value in accordance with GAAP and the 1940 Act. Subject to oversight by the
Board, the Valuation Committee develops and oversees pricing-related policies
and procedures and approves all fair value determinations. Specifically, the
Valuation Committee establishes procedures to value securities; determines
pricing techniques, sources, and persons
eligible to effect fair value pricing actions; oversees the selection, services,
and performance of pricing vendors; oversees valuation-related business
continuity practices; and provides guidance on internal controls and
valuation-related matters. The Valuation Committee reports to the fund’s Board;
is chaired by the fund’s treasurer; and has representation from legal, portfolio
management and trading, operations, and risk management.
Various valuation techniques and
inputs are used to determine the fair value of financial instruments. GAAP
establishes the following fair value hierarchy that categorizes the inputs used
to measure fair value:
Level 1 – quoted prices (unadjusted)
in active markets for identical financial instruments that the fund can access
at the reporting date
Level 2 – inputs other than Level 1
quoted prices that are observable, either directly or indirectly (including, but
not limited to, quoted prices for similar financial instruments in active
markets, quoted prices for identical or similar financial instruments in
inactive markets, interest rates and yield curves, implied volatilities, and
credit spreads)
Level 3 – unobservable inputs
Observable inputs are developed using
market data, such as publicly available information about actual events or
transactions, and reflect the assumptions that market participants would use to
price the financial instrument. Unobservable inputs are those for which market
data are not available and are developed using the best information available
about the assumptions that market participants would use to price the financial
instrument. GAAP requires valuation techniques to maximize the use of relevant
observable inputs and minimize the use of unobservable inputs. When multiple
inputs are used to derive fair value, the financial instrument is assigned to
the level within the fair value hierarchy based on the lowest-level input that
is significant to the fair value of the financial instrument. Input levels are
not necessarily an indication of the risk or liquidity associated with financial
instruments at that level but rather the degree of judgment used in determining
those values.
Valuation
Techniques
Equity securities listed or
regularly traded on a securities exchange or in the over-the-counter (OTC)
market are valued at the last quoted sale price or, for certain markets, the
official closing price at the time the valuations are made. OTC Bulletin Board
securities are valued at the mean of the closing bid and asked prices. A
security that is listed or traded on more than
one exchange is valued at the quotation on the exchange determined to be
the primary market for such security. Listed securities not traded on a
particular day are valued at the mean of the closing bid and asked prices for
domestic securities and the last quoted sale or closing price for international
securities.
For valuation purposes, the last
quoted prices of non-U.S. equity securities may be adjusted to reflect the fair
value of such securities at the close of the NYSE. If the fund determines that
developments between the close of a foreign market and the close of the NYSE
will, in its judgment, materially affect the value of some or all of its
portfolio securities, the fund will adjust the previous quoted prices to reflect
what it believes to be the fair value of the securities as of the close of the
NYSE. In deciding whether it is necessary to adjust quoted prices to reflect
fair value, the fund reviews a variety of factors, including developments in
foreign markets, the performance of U.S. securities markets, and the performance
of instruments trading in U.S. markets that represent foreign securities and
baskets of foreign securities. The fund may also fair value securities in other
situations, such as when a particular foreign market is closed but the fund is
open. The fund uses outside pricing services to provide it with quoted prices
and information to evaluate and/or adjust those prices. The fund cannot predict
how often it will use quoted prices and how often it will determine it necessary
to adjust those prices to reflect fair value. As a means of evaluating its
security valuation process, the fund routinely compares quoted prices, the next
day’s opening prices in the same markets, and adjusted prices.
Actively traded domestic equity
securities generally are categorized in Level 1 of the fair value hierarchy.
Non-U.S. equity securities generally are categorized in Level 2 of the fair
value hierarchy despite the availability of quoted prices because, as described
above, the fund evaluates and determines whether those quoted prices reflect
fair value at the close of the NYSE or require adjustment. OTC Bulletin Board
securities, certain preferred securities, and equity securities traded in
inactive markets generally are categorized in Level 2 of the fair
value hierarchy.
Investments in mutual funds are
valued at the mutual fund’s closing net asset value per share on the day of
valuation and are categorized in Level 1 of the fair value hierarchy.
Assets and liabilities other than
financial instruments, including short-term receivables and payables, are
carried at cost, or estimated realizable value, if less, which approximates fair
value.
Thinly traded financial instruments
and those for which the above valuation procedures are inappropriate or are
deemed not to reflect fair value are stated at fair value as determined in good
faith by the Valuation Committee. The objective of any fair value pricing
determination is to arrive at a price that could reasonably be expected from a
current sale. Financial instruments fair valued by the Valuation Committee are
primarily private placements, restricted securities, warrants, rights, and other
securities that are not publicly traded.
Subject to oversight by the Board,
the Valuation Committee regularly makes good faith judgments to establish and
adjust the fair valuations of certain securities as events occur and
circumstances warrant. For instance, in determining the fair value of an equity
investment with limited market activity, such as a private placement or a thinly
traded public company stock, the Valuation Committee considers a variety of
factors, which may include, but are not limited to, the issuer’s business
prospects, its financial standing and performance, recent investment
transactions in the issuer, new rounds of financing, negotiated transactions of
significant size between other investors in the company, relevant market
valuations of peer companies, strategic events affecting the company, market
liquidity for the issuer, and general economic conditions and events. In
consultation with the investment and pricing teams, the Valuation Committee will
determine an appropriate valuation technique based on available information,
which may include both observable and unobservable inputs. The Valuation
Committee typically will afford greatest weight to actual prices in arm’s length
transactions, to the extent they represent orderly transactions between market
participants; transaction information can be reliably obtained; and prices are
deemed representative of fair value. However, the Valuation Committee may also
consider other valuation methods such as market-based valuation multiples; a
discount or premium from market value of a similar, freely traded security of
the same issuer; or some combination. Fair value determinations are reviewed on
a regular basis and updated as information becomes available, including actual
purchase and sale transactions of the issue. Because any fair value
determination involves a significant amount of judgment, there is a degree of
subjectivity inherent in such pricing decisions and fair value prices determined
by the Valuation Committee could differ from those of other market participants.
Depending on the relative significance of unobservable inputs, including the
valuation technique(s) used, fair valued securities may be categorized in Level
2 or 3 of the fair value hierarchy.
Valuation Inputs
The following table summarizes the fund’s financial
instruments, based on the inputs used to determine their fair values on
April 30, 2013:
There were no material transfers
between Levels 1 and 2 during the period.
NOTE 3 - OTHER INVESTMENT
TRANSACTIONS
Consistent with its investment
objective, the fund engages in the following practices to manage exposure to
certain risks and/or to enhance performance. The investment objective, policies,
program, and risk factors of the fund are described more fully in the fund’s
prospectus and Statement of Additional Information.
Emerging Markets
At April 30, 2013, approximately 77% of the fund’s net
assets were invested, either directly or through investments in T. Rowe Price
institutional funds, in securities of companies located in emerging markets,
securities issued by governments of emerging market countries, and/or securities
denominated in or linked to the currencies of emerging market countries.
Emerging market securities are often subject to greater price volatility, less
liquidity, and higher rates of inflation than U.S. securities. In addition,
emerging markets may be subject to greater political, economic, and social
uncertainty, and differing regulatory environments that may potentially impact
the fund’s ability to buy or sell certain securities or repatriate proceeds to
U.S. dollars.
China A shares
During the six months ended April 30, 2013, the fund
invested in certain Chinese equity securities (A shares) available only to local
Chinese investors and Qualified Foreign Institutional Investors (QFII). The fund
gains access to the A-share market through T. Rowe Price Associates, Inc., which
serves as the registered QFII for all participating T. Rowe Price-sponsored
products (each a participating account). Investment decisions related to
A shares are specific to each participating account, and each account bears the
resultant economic and tax consequences of its holdings and transactions in
A shares. The fund is subject to certain restrictions and administrative
processes relating to its ability to repatriate cash balances, investment
proceeds, and earnings associated with its A shares and may incur substantial
delays in gaining access to its assets or a loss of value in the event of
noncompliance with applicable Chinese rules or requirements. Current Chinese tax
law is unclear whether capital gains realized on the fund’s investments in A
shares will be subject to tax. Because management believes it more likely than
not that Chinese capital gains tax ultimately will not be imposed, there are no
accrued taxes reflected in the accompanying financial statements.
Securities Lending
The fund lends its securities to approved brokers to
earn additional income. It receives as collateral cash and U.S. government
securities valued at 102% to 105% of the value of the securities on loan.
Collateral is maintained over the life of the loan in an amount not less than
the value of loaned securities; any additional collateral required due to
changes in security values is delivered to the fund the next business day. Cash
collateral is invested by the fund’s lending agent(s) in accordance with
investment guidelines approved by management. Although risk is mitigated by the
collateral, the fund could experience a delay in recovering its securities and a
possible loss of income or value if the borrower fails to return the securities
or if collateral investments decline in value. Securities lending revenue
recognized by the fund consists of earnings on invested collateral and borrowing
fees, net of any rebates to the borrower, compensation to the lending agent and
other administrative costs. In accordance with GAAP, investments made with cash
collateral are reflected in the accompanying financial statements, but
collateral received in the form of securities is not. At April 30, 2013, the
value of loaned securities was $29,214,000; the value of cash collateral and
related investments was $31,375,000.
Other
Purchases and sales of portfolio securities other than
short-term securities aggregated $1,164,125,000 and $1,084,762,000,
respectively, for the six months ended April 30, 2013.
NOTE 4 - FEDERAL INCOME
TAXES
No provision for federal income taxes
is required since the fund intends to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code and
distribute to shareholders all of its taxable income and gains. Distributions
determined in accordance with federal income tax regulations may differ in
amount or character from net investment income and realized gains for financial
reporting purposes. Financial reporting records are adjusted for permanent
book/tax differences to reflect tax character but are not adjusted for temporary
differences. The amount and character of tax-basis distributions and composition
of net assets are finalized at fiscal year-end; accordingly, tax-basis balances
have not been determined as of the date of this report.
The fund intends to retain realized
gains to the extent of available capital loss carryforwards. Net realized
capital losses may be carried forward indefinitely to offset future realized
capital gains.
At April 30, 2013, the cost of
investments for federal income tax purposes was $4,230,343,000. Net unrealized
gain aggregated $655,744,000 at period-end, of which $940,928,000 related to
appreciated investments and $285,184,000 related to depreciated
investments.
NOTE 5 - FOREIGN
TAXES
The fund is subject to foreign income
taxes imposed by certain countries in which it invests. Acquisition of certain
foreign currencies related to security transactions are also subject to tax.
Additionally, capital gains realized by the fund upon disposition of securities
issued in or by certain foreign countries are subject to capital gains tax
imposed by those countries. All taxes are computed in accordance with the
applicable foreign tax law, and, to the extent permitted, capital losses are
used to offset capital gains. Taxes attributable to income are accrued by the
fund as a reduction of income. Taxes incurred on the purchase of foreign
currencies are recorded as realized loss on foreign currency transactions.
Current and deferred tax expense attributable to net capital gains is reflected
as a component of realized and/or change in unrealized gain/loss on securities
in the accompanying financial statements. At April 30, 2013, the fund had no
deferred tax liability attributable to foreign securities and less than $1,000
of foreign capital loss carryforwards that expire in 2019.
NOTE 6 - RELATED PARTY
TRANSACTIONS
The fund is managed by T. Rowe Price
Associates, Inc. (Price Associates), a wholly owned subsidiary of T. Rowe Price
Group, Inc. (Price Group). Price Associates has entered into subadvisory
agreements with T. Rowe Price International Ltd and T. Rowe Price Hong Kong
Limited, wholly owned subsidiaries of Price Associates, to provide investment
advisory services to the fund; the subadvisory agreements provide that Price
Associates may pay the subadvisors up to 60% of the management fee that Price
Associates receives from the fund. The investment management agreement between
the fund and Price Associates provides for an annual investment management fee,
which is computed daily and paid monthly. The fee consists of an individual fund
fee, equal to 0.50% of the fund’s average daily net assets, and a group fee. The
group fee rate is calculated based on the combined net assets of certain mutual
funds sponsored by Price Associates (the group) applied to a graduated fee
schedule, with rates ranging from 0.48% for the first $1 billion of assets to
0.28% for assets in excess of $300 billion. The fund’s group fee is determined
by applying the group fee rate to the fund’s average daily net assets. At April
30, 2013, the effective annual group fee rate was 0.30%.
In addition, the fund has entered
into service agreements with Price Associates and two wholly owned subsidiaries
of Price Associates (collectively, Price). Price Associates computes the daily
share price and provides certain other administrative services to the fund. T.
Rowe Price Services, Inc., provides shareholder and administrative services in
its capacity as the fund’s transfer and dividend disbursing agent. T. Rowe Price
Retirement Plan Services, Inc., provides subaccounting and recordkeeping
services for certain retirement accounts invested in the fund. For the six
months ended April 30, 2013, expenses incurred pursuant to these service
agreements were $74,000 for Price Associates; $804,000 for T. Rowe Price
Services, Inc.; and $87,000 for T. Rowe Price Retirement Plan Services, Inc. The
total amount payable at period-end pursuant to these service agreements is
reflected as Due to Affiliates in the accompanying financial
statements.
The fund is also one of several
mutual funds sponsored by Price Associates (underlying Price funds) in which the
T. Rowe Price Spectrum Funds (Spectrum Funds) may invest. The Spectrum Funds do
not invest in the underlying Price funds for the purpose of exercising
management or control. Pursuant to a special servicing agreement, expenses
associated with the operation of the Spectrum Funds are borne by each underlying
Price fund to the extent of estimated savings to it and in proportion to the
average daily value of its shares owned by the Spectrum Funds. Expenses
allocated under this agreement are reflected as shareholder servicing expense in
the accompanying financial statements. For the six months ended April 30, 2013,
the fund was allocated $69,000 of Spectrum Funds’ expenses, of which $42,000
related to services provided by Price. The amount payable at period-end pursuant
to this agreement is reflected as Due to Affiliates in the accompanying
financial statements. Additionally, redemption fees received by the Spectrum
Funds are allocated to each underlying Price fund in proportion to the average
daily value of its shares owned by the Spectrum Funds. $3,000 of redemption fees
reflected in the accompanying financial statements were received from the
Spectrum Funds. At April 30, 2013, approximately 2% of the outstanding shares of
the fund were held by the Spectrum Funds.
The fund may invest in the T. Rowe
Price Reserve Investment Fund and the T. Rowe Price Government Reserve
Investment Fund (collectively, the T. Rowe Price Reserve Investment Funds),
open-end management investment companies managed by Price Associates and
considered affiliates of the fund. The T. Rowe Price Reserve Investment Funds
are offered as cash management options to mutual funds, trusts, and other
accounts managed by Price Associates and/or its affiliates and are not available
for direct purchase by members of the public. The T. Rowe Price Reserve
Investment Funds pay no investment management fees.
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Information on Proxy Voting Policies, Procedures, and
Records
|
A description of the policies and
procedures used by T. Rowe Price funds and portfolios to determine how to vote
proxies relating to portfolio securities is available in each fund’s Statement
of Additional Information. You may request this document by calling
1-800-225-5132 or by accessing the SEC’s website, sec.gov.
The description of our proxy voting
policies and procedures is also available on our website, troweprice.com. To
access it, click on the words “Social Responsibility” at the top of our
corporate homepage. Next, click on the words “Conducting Business Responsibly”
on the left side of the page that appears. Finally, click on the words “Proxy
Voting Policies” on the left side of the page that appears.
Each fund’s most recent annual proxy
voting record is available on our website and through the SEC’s website. To
access it through our website, follow the above directions to reach the
“Conducting Business Responsibly” page. Click on the words “Proxy Voting
Records” on the left side of that page, and then click on the “View Proxy Voting
Records” link at the bottom of the page that appears.
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How to
Obtain Quarterly Portfolio Holdings
|
The fund files a complete schedule of
portfolio holdings with the Securities and Exchange Commission for the first and
third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available
electronically on the SEC’s website (sec.gov); hard copies may be reviewed and
copied at the SEC’s Public Reference Room, 100 F St. N.E., Washington, DC 20549.
For more information on the Public Reference Room, call 1-800-SEC-0330.
Approval
of Investment Management Agreement and
Subadvisory
Agreement
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On March 5, 2013, the fund’s Board of
Directors (Board), including a majority of the fund’s independent directors,
approved the continuation of the investment management agreement (Advisory
Contract) between the fund and its investment advisor, T. Rowe Price Associates,
Inc. (Advisor), as well as the continuation of the investment Subadvisory
agreements (Subadvisory Contracts) that the Advisor has entered into with T.
Rowe Price International Ltd and T. Rowe Price Hong Kong Limited (Subadvisors)
on behalf of the fund. In connection with their deliberations, the Board
requested, and the Advisor provided, such information as the Board (with advice
from independent legal counsel) deemed reasonably necessary. The Board
considered a variety of factors in connection with its review of the Advisory
Contract and Subadvisory Contracts, also taking into account information
provided by the Advisor during the course of the year, as discussed
below:
Services Provided by the Advisor
and Subadvisors
The Board considered
the nature, quality, and extent of the services provided to the fund by the
Advisor and Subadvisors. These services included, but were not limited to,
directing the fund’s investments in accordance with its investment program and
the overall management of the fund’s portfolio, as well as a variety of related
activities such as financial, investment operations, and administrative
services; compliance; maintaining the fund’s records and registrations; and
shareholder communications. The Board also reviewed the background and
experience of the Advisor’s and Subadvisors’ senior management teams and
investment personnel involved in the management of the fund, as well as the
Advisor’s compliance record. The Board concluded that it was satisfied with the
nature, quality, and extent of the services provided by the Advisor and Sub
advisors.
Investment Performance of the
Fund
The Board reviewed the fund’s
three-month, one-year, and year-by-year returns, as well as the fund’s average
annualized total returns over the 3-, 5-, and 10-year periods, and compared
these returns with a wide variety of previously agreed upon comparable
performance measures and market data, including those supplied by Lipper and
Morningstar, which are independent providers of mutual fund data.
On the basis of this evaluation and
the Board’s ongoing review of investment results, and factoring in the relative
market conditions during certain of the performance periods, the Board concluded
that the fund’s performance was satisfactory.
Costs, Benefits, Profits, and
Economies of Scale
The Board reviewed
detailed information regarding the revenues received by the Advisor under the
Advisory Contract and other benefits that the Advisor (and its affiliates,
including the Subadvisors) may have realized from its relationship with the
fund, including any research received under “soft dollar” agreements and
commission-sharing arrangements with broker-dealers. The Board considered that
the Advisor and Subadvisors may receive some benefit from soft dollar
arrangements pursuant to which research is received
from broker-dealers that execute the applicable fund’s portfolio
transactions. The Board received information on the estimated costs incurred and
profits realized by the Advisor from managing T. Rowe Price mutual funds. The
Board also reviewed estimates of the profits realized from managing the fund in
particular, and the Board concluded that the Advisor’s profits were reasonable
in light of the services provided to the fund.
The Board also considered whether the
fund benefits under the fee levels set forth in the Advisory Contract from any
economies of scale realized by the Advisor. Under the Advisory Contract, the
fund pays a fee to the Advisor for investment management services composed of
two components—a group fee rate based on the combined average net assets of most
of the T. Rowe Price mutual funds (including the fund) that declines at certain
asset levels and an individual fund fee rate based on the fund’s average daily
net assets—and the fund pays its own expenses of operations. Under the
Subadvisory Contracts, the Advisor may pay each Subadvisor up to 60% of the
advisory fee that the Advisor receives from the fund. The Board concluded that
the advisory fee structure for the fund continued to provide for a reasonable
sharing of benefits from any economies of scale with the fund’s
investors.
Fees
The Board was provided with information regarding
industry trends in management fees and expenses, and the Board reviewed the
fund’s management fee rate, operating expenses, and total expense ratio in
comparison to fees and expenses of other comparable funds based on information
and data supplied by Lipper. The information provided to the Board indicated
that the fund’s management fee rate was above the median for certain groups of
comparable funds and below the median for other groups of comparable funds, and
the fund’s total expense ratio was at or below the median for comparable
funds.
The Board also reviewed the fee
schedules for institutional accounts and private accounts with similar mandates
that are advised or subadvised by the Advisor and its affiliates. Management
provided the Board with information about the Advisor’s responsibilities and
services provided to institutional account clients, including information about
how the requirements and economics of the institutional business are
fundamentally different from those of the mutual fund business. The Board
considered information showing that the mutual fund business is generally more
complex from a business and compliance perspective than the institutional
business, and that the Advisor generally performs significant additional
services and assumes greater risk in managing the fund and other T. Rowe Price
mutual funds than it does for institutional account clients.
On the basis of the information
provided and the factors considered, the Board concluded that the fees paid by
the fund under the Advisory Contract are reasonable.
Approval of the Advisory Contract
and Subadvisory Contracts
As noted,
the Board approved the continuation of the Advisory Contract and Subadvisory
Contracts. No single factor was considered in isolation or to be determinative
to the decision. Rather, the Board concluded, in light of a weighting and
balancing of all factors considered, that it was in the best interests of the
fund and its shareholders for the Board to approve the continuation of the
Advisory Contract and Subadvisory Contracts (including the fees to be charged
for services thereunder). The independent directors were advised throughout the
process by independent legal counsel.