Upcoming Shareholder
Meeting
The T. Rowe Price funds will be
holding a shareholder meeting in October. Shareholders will be asked to elect
directors and consider changes to certain fundamental policies to permit the
funds greater flexibility in managing their investment strategies.
Manager’s Letter
T. Rowe Price Institutional Emerging Markets Equity
Fund
Dear Investor
Stock markets in the developing world
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 in the global economic outlook.
The Institutional Emerging Markets
Equity Fund returned 4.66% for the six months ended April 30, 2013, trailing the
5.40% return of the MSCI Emerging Markets Index, its primary benchmark, and the
Lipper Emerging Markets Funds Average. Stock selection and positioning in the
Philippines, Russia, Thailand, and South Africa lifted relative performance.
However, our holdings of a few out-of-benchmark names that operate in Latin
America weighed on relative returns, as did stock selection in China. From a
sector viewpoint, consumer staples and utilities, respectively, contributed the
most to relative performance, while consumer discretionary followed by
information technology were the biggest detractors. In terms of absolute
performance, financials contributed the most to returns, while materials added
the least value.
The fund is widely diversified in its
country and sector allocations, which generally stayed unchanged over the
period. As of the end of April, the fund was underweight in emerging Asia and
Latin America, roughly even with the benchmark in the Middle East and Africa,
and overweight in emerging Europe. We are overweight in the dominant BRIC
countries of Brazil, Russia, India, and China, although our exposure to China
declined over the period. Our sector allocations continue to reflect our bias
for areas driven by domestic consumption, which should see solid long-term
growth as the middle class expands and wealth increases in the developing world.
Market Environment
Emerging markets 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. While emerging markets stocks
endured some setbacks this spring, including a banking crisis in Cyprus and a
surprisingly poor first-quarter gross domestic product (GDP) report in China,
easy money policies in the developed world whetted investors’ risk appetite and
encouraged them to move into higher-yielding assets overseas.
Returns varied widely across the
emerging markets universe. Southeast Asian countries ranked among the best
performers with double-digit gains as domestic demand stayed surprisingly strong
and central banks kept interest rates low. Many Southeast Asian stock markets
traded at record highs as our reporting period ended. China and India posted
slimmer returns in the single digits as each contended with slowdowns in the
past year. China is trying to engineer a transition to slower long-term growth,
while India continues to suffer from persistent inflation, a record trade gap,
and inefficient policymaking. In Latin America, Mexico was the region’s standout
performer, rising more than 10% amid strong economic growth and high
expectations of its new president, who took office last December and pledged to
push through major reforms. Brazil posted a more modest gain as its economy has
responded unevenly to numerous stimulus measures from its government, which has
been trying to revive growth for the past two years.
The emerging Europe, Middle East, and
Africa (EMEA) region lagged the returns of other developing regions. Russian
stocks edged up over the period but have performed poorly in the past year as
the economy slowed amid weak energy prices, rising capital outflows, and
flagging domestic consumption. Stocks in South Africa declined, weighed by
concerns about ongoing labor unrest in the mining sector and the government’s
ability to curb spending. In contrast, Turkey’s market surged more than 18% as
resilient domestic demand and strengthening fundamentals drew increasing inflows
from global investors. Last November, the country received its first
investment-grade credit rating in 18 years from Fitch, a move that was followed
by Moody’s in May after our reporting period ended.
Asia
Southeast Asia lifted relative performance largely due to overweight
allocations in the Philippines and Thailand, whose markets surged about 32% and
22%, respectively, during the period. Stock selection in both markets also
helped performance. The Philippines produced several of the fund’s top
contributors, including packaged food maker
Universal Robina
;
infrastructure
holding company
Metro Pacific
Investments
; and
SM Investments
,
which owns extensive retail and commercial properties and the country’s leading
bank. All these names benefited from a big rally in the Philippines, whose stock
market rose to an all-time high as our reporting period ended. In Thailand,
lender
Kasikornbank
was a top contributor. We have a sizable position in
Kasikornbank, which has a strong fee-generating business and the best growth
outlook among Thai banks, in our view. We maintained our overweight allocations
to both countries. (Please refer to the portfolio of investments for a complete
list of holdings and the amount each represents in the portfolio.)
Our stock selection elsewhere in Asia
proved less helpful. In China, Internet search company
Baidu
led
decliners due to a string of surprisingly weak earnings and signs of rising
competition. Baidu has raised concerns by investing heavily in mobile
applications, but we believe the acquisitions will pay off as wireless Internet
use becomes more widespread and revenue from mobile ads catches up with desktop
online advertising. We still have a sizable position in Baidu.
Parkson Retail
was another big detractor as it suffered from weakening sales, rising
costs from expansion, and growing competition in mainland China, where it
operates more than 50 department stores. We maintain a small position in
Parkson, whose business we believe will turn around this year after a
disappointing 2012.
Li &
Fung
, a Hong Kong-listed trading company
that supplies merchandise to big box retailers like Walmart and Target, hurt
relative returns as sluggish U.S. consumer spending and rising manufacturing
costs in China, its biggest sourcing market, weighed on profits.
Our allocation to China fell over the
past six months, a shift that reflects company-specific developments rather than
a fundamental change in our view of the country. After three decades of
double-digit annual GDP growth, China is in the throes of a long-term transition
to a slower and more sustainable economy. The country’s new leadership, which
took power in March, has signaled a willingness to implement big economic
reforms. We are encouraged by the news, but periods of sweeping economic reform
in China have historically been accompanied by poor stock market performance,
and we believe that the government’s efforts to overhaul the drivers of economic
growth will inevitably harm some companies that previously outperformed. Over
the long term, we believe that China’s economic growth will gradually
decline—keeping with the government’s policy objectives. But in the near term,
we expect the transition to a consumer-driven economy will produce periods of
uneven growth and stock market performance.
We used proceeds from our sales in
China to fund purchases in India, where we initiated positions in new companies
and added to existing positions that had declined. We still have a guarded view
of India, which continues to struggle with high inflation, a ballooning trade
gap, and a fractious political system that has long resisted 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 in
the near term. Some of our largest purchases over the period were Indian
companies, including carmakers
Tata
Motors
and
Maruti Suzuki
India
;
Axis Bank
; and
mobile phone leader
Bharti
Airtel
, whose shares fell to attractive
levels last fall after a series of disappointing earnings and rising
competition. We expect the competitive pressures on Bharti to ease over time,
however. We increased our exposure to India as a result of these
purchases.
Latin America
Stock selection in Latin America detracted from relative
performance largely due to our positions in two London-listed mining companies
with significant operations in the region:
Fresnillo
, the world’s top
primary silver producer and Mexico’s second-largest gold producer, and
Antofagasta
, a copper mining group based in Chile. Shares of both
companies fell as commodity prices weakened over the period, exacerbated by a
weaker-than-expected GDP report from China on April 15 that sent prices of gold
and silver to multiyear lows and sparked a sell-off in mining companies. We
maintain a modest position in Fresnillo, which has a solid track record of mine
development, relatively low production costs, and a strong growth outlook even
given our conservative metals forecasts. However, we eliminated our Antofagasta
position after the company forecast worse-than-expected production and
surprisingly high costs for the current fiscal year. Elsewhere in the region,
Brazil had a broadly neutral impact on relative returns, while stock selection
in Mexico detracted. Telecommunications leader
America Movil
was a big detractor
amid worries that new competition laws would harm its business in Mexico, where
it has long held a virtual monopoly. We eliminated our America Movil position,
the biggest stock sale over the period.
Our allocation to Mexico fell in the
past six months. Mexico’s stock market has performed remarkably well since last
summer, making it difficult to find good growth stocks at reasonable prices.
Much of the rally has been driven by the country’s new president, who has
promised to reform the economy and enjoys the support of various opposition
parties. However, many Mexican stocks are trading at record levels and economic
indicators have lately slowed, raising concerns that current valuations reflect
high expectations that may be hard to meet. On the other hand, we increased our
exposure to Brazil. After underperforming Mexico’s market for the past several
years, we believe there are plenty of Brazilian stocks worth owning for their
attractive valuations and good earnings prospects. Accordingly, we increased our
positions in shopping mall operator
BR
Malls Participacoes
; department store
chain
Lojas Renner
; and
Itau
Unibanco
, the country’s biggest bank.
These names rank among the fund’s largest holdings, and we believe our positions
will pay off once the domestic economy improves.
Europe, Middle East, and
Africa
The EMEA region lifted
relative performance, driven by stock selection in Russia and South Africa. Our
stock picking was strongest in Russia as we concentrated on consumer-driven
names like food retailer
Magnit
and
Sberbank of Russia
and largely avoided the state-controlled energy companies that dominate
Russia’s stock market, most of which fared poorly. Economic growth in Russia has
fallen sharply over the past year as energy exports and government spending
declined and domestic demand weakened. In April, the government slashed its 2013
growth forecast to 2.4% from 3.7%, far below President Vladimir Putin’s
commitment to 5.0% annual GDP growth. Most analysts agree that Russia needs to
implement sweeping reforms and crack down on corruption before it can unlock its
growth potential, but we believe that Putin’s increasing political control and
entrenched interests in government and state-owned businesses make major changes
unlikely in the near term. In the meantime, we have taken advantage of declines
in Russian stocks and added to our positions in Magnit and Sberbank. We also
initiated a position in
Lukoil
, the biggest
non-state-owned oil producer, which recently unveiled a long-term strategy that
included hefty annual dividend increases. Although we are not optimistic about
political reforms, we believe that Putin will have to deliver good GDP growth to
stay in power, which will help support Russian stocks in the medium term.
In South Africa, brewing company
SABMiller
led contributors. This global company derives most of its revenue in
emerging markets, including Latin America and Africa, and has benefited from
growing beer demand in the developing world. We significantly increased our
position in
Shoprite
Holdings
, Africa’s largest food
retailer, following a steep decline in its shares earlier this year. Shoprite is
a high-quality company that has good exposure to Africa’s fast-growing formal
food retail market. However, we continue to have a cautious view of South
Africa, which remains one of our largest underweights. South Africa has many
deep problems, including high unemployment, widespread poverty, and a large
budget deficit; therefore, we have limited our holdings to a few high-quality,
consumer-driven companies that offer exposure to the country’s rising middle
class or to rapidly growing markets in sub-Saharan Africa.
Elsewhere in the EMEA region, Turkey
had a neutral impact on relative returns as our overweight to the country, one
of the best performing in the emerging world, offset the impact of unfavorable
stock selection. We own a sizable position in discount supermarket chain
BIM Birlesik Magazalar
and initiated a position in
Anadolu Efes Biracilik Ve Malt Sanayii
, the country’s dominant brewer; as a result, our
allocation to Turkey slightly increased over the period.
Outlook
Global stock markets generally had a
solid run in the year-to-date period. But in an unexpected twist, stocks in
emerging markets have lagged the stronger performance of developed markets
stocks. Some of the recent underperformance of emerging markets stocks can be
traced to a stronger U.S. dollar and weaker commodity prices, which weighed on
the outlook for resource-driven economies. Additionally, while emerging markets
are still growing rapidly relative to developed markets, the pace of growth in
some countries like China failed to match investors’ high expectations. Finally,
surprisingly good indicators and corporate earnings in the U.S. reassured many
investors that the U.S. economy was in less dire shape than expected. As a
result, many investors recently began to favor developed markets over emerging
markets, as seen in first-quarter fund flows.
We strongly believe that the solid
fundamentals underpinning the emerging markets companies and economies in which
we invest are still intact, despite their recent underperformance. Growing
urbanization, consumption, and upward mobility are long-term secular trends that
will drive strong and sustainable growth in emerging markets for many years. The
growth of a middle class and the ensuing rise in domestic demand are a source of
huge economic potential in the developing world. While developed markets may
continue to outperform emerging markets in the near term, we are optimistic that
growth in emerging markets is still on track to outpace that of developed
markets over the long haul. In the meantime, we will continue to take advantage
of recent underperformance in the asset class to buy high-quality growth
companies at attractive prices.
Thank you for investing with T. Rowe
Price.
Respectfully
submitted,
Gonzalo Pángaro
Portfolio manager and chairman of the fund’s Investment
Advisory Committee
May 17, 2013
The committee chairman has
day-to-day responsibility for managing the portfolio and executing the fund’s
investment program.
|
Risks of International
Investing
|
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.
Lipper averages:
The averages of available mutual fund performance
returns for specified time periods in categories defined by Lipper
Inc.
MSCI Emerging Markets
Index:
A capitalization-weighted index
of stocks from 26 emerging market countries that only includes securities that
may be traded by foreign investors.
Price-to-earnings
ratio:
A valuation measure calculated by
dividing the price of a stock by its reported earnings per share. The ratio is a
measure of how much investors are willing to pay for the company’s
earnings.
Portfolio
Highlights
Performance and
Expenses
T. Rowe Price Institutional
Emerging Markets Equity Fund
This chart shows the value of a
hypothetical $1 million 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.
Fund Expense Example
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
actual expenses. 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.
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.
Financial Highlights
T. Rowe Price Institutional Emerging Markets Equity Fund
(Unaudited)
The accompanying notes are an
integral part of these financial statements.
Portfolio of
Investments
‡
T. Rowe Price Institutional Emerging Markets Equity Fund
April 30, 2013 (Unaudited)
The accompanying notes are an
integral part of these financial statements.
Statement of Assets and
Liabilities
T. Rowe Price
Institutional Emerging Markets Equity Fund
April 30, 2013 (Unaudited)
($000s, except shares and per share
amounts)
The accompanying notes are an
integral part of these financial statements.
Statement of
Operations
T. Rowe Price
Institutional Emerging Markets Equity Fund
(Unaudited)
($000s)
The accompanying notes are an
integral part of these financial statements.
Statement of Changes in Net
Assets
T. Rowe Price Institutional
Emerging Markets Equity Fund
(Unaudited)
($000s)
The accompanying notes are an
integral part of these financial statements.
Notes to Financial
Statements
T. Rowe Price
Institutional Emerging Markets Equity Fund
April 30, 2013
(Unaudited)
T. Rowe Price Institutional
International Funds, Inc. (the corporation), is registered under the Investment
Company Act of 1940 (the 1940 Act). The Institutional Emerging Markets Equity
Fund (the fund) is a diversified, open-end management investment company
established by the corporation. The fund commenced operations on October 31,
2002. The fund seeks long-term growth of capital through investments primarily
in the common stocks of companies located (or with primary operations) in
emerging markets.
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.
Credits
Credits are earned on the fund’s temporarily uninvested
cash balances held at the custodian and such credits reduce the amount paid by
the manager for custody of the fund’s assets. In order to pass the benefit of
custody credits to the fund, the manager has voluntarily reduced its investment
management and administrative expense in the accompanying financial
statements.
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.
In-Kind Redemptions
In accordance with guidelines described
in the fund’s prospectus, the fund may distribute portfolio securities rather
than cash as payment for a redemption of fund shares (in-kind redemption). For
financial reporting purposes, the fund recognizes a gain on in-kind redemptions
to the extent the value of the distributed securities on the date of redemption
exceeds the cost of those securities. Gains and losses realized on in-kind
redemptions are not recognized for tax purposes and are reclassified from
undistributed realized gain (loss) to paid-in capital. During the six months
ended April 30, 2013, the fund realized $36,744,000 of net gain on $63,684,000
of in-kind redemptions.
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 92% 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.
Other
Purchases and sales of portfolio securities other than
short-term securities aggregated $271,603,000 and $211,958,000, 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. As a result of the
Regulated Investment Company Modernization Act of 2010, net capital losses
realized on or after November 1, 2011 (effective date) may be carried forward
indefinitely to offset future realized capital gains; however, post-effective
losses must be used before pre-effective capital loss carryforwards with
expiration dates. Accordingly, it is possible that all or a portion of the
fund’s pre-effective capital loss carryforwards could expire unused. As of
October 31, 2012, the fund had $179,803,000 of available capital loss
carryforwards, which expire as follows: $20,924,000 in fiscal 2016, $124,951,000
in fiscal 2017, $2,830,000 in fiscal 2018, and $1,881,000 in fiscal 2019;
$29,217,000 have no expiration.
At April 30, 2013, the cost of
investments for federal income tax purposes was $862,773,000. Net unrealized
gain aggregated $194,157,000 at period-end, of which $240,280,000 related to
appreciated investments and $46,123,000 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 $4,059,000 of
foreign capital loss carryforwards, including $3,086,000 that expire in 2017,
$965,000 that expire in 2020, and 8,000 that expire in 2022.
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 a subadvisory
agreement with T. Rowe Price International Ltd, a wholly owned subsidiary of
Price Associates, to provide investment advisory services to the fund; the
subadvisory agreement provides that Price Associates may pay the subadvisor up
to 60% of the management fee that Price Associates receives from the fund. The
investment management and administrative agreement between the fund and Price
Associates provides for an all-inclusive annual fee equal to 1.10% of the fund’s
average daily net assets. The fee is computed daily and paid monthly. The
all-inclusive fee covers investment management, shareholder servicing, transfer
agency, accounting, and custody services provided to the fund, as well as fund
directors’ fees and expenses. Interest, taxes, brokerage commissions, and
extraordinary expenses are paid directly by the fund.
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.
As of April 30, 2013, T. Rowe Price
Group, Inc., and/or its wholly owned subsidiaries owned 232,470 shares of the
fund, representing 1% of the fund’s net assets.
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Information on Proxy Voting
Policies, Procedures, and
Records
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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 directions above 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
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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.
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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). The Board also unanimously approved the continuation of the
investment subadvisory agreement (Subadvisory Contract) that the Advisor has
entered into with T. Rowe Price International Ltd (Subadvisor) on behalf of the
fund. In connection with its 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 Contract,
also taking into account information provided by the Advisor during the course
of the year, as discussed below:
Services Provided by the Advisor
and Subadvisor
The Board considered
the nature, quality, and extent of the services provided to the fund by the
Advisor and Subadvisor. 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 Subadvisor’s 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
Subadvisor.
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 Subadvisor) 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 Subadvisor 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. The Board noted that, under the
Advisory Contract, the fund pays the Advisor a single fee based on the fund’s
average daily net assets that includes investment management services and
provides for the Advisor to pay all expenses of the fund’s operations except for
interest, taxes, portfolio transaction fees, and any nonrecurring extraordinary
expenses that may arise. Under the Subadvisory Contract, the Advisor may pay the
Subadvisor up to 60% of the advisory fee that the Advisor receives from the
fund. The Board concluded that the fund’s single fee structure continued to be
appropriate.
Fees
The Board was provided with information regarding
industry trends in management fees and expenses, and the Board reviewed the
fund’s single fee structure in comparison with fees and expenses of other
comparable funds based on information and data supplied by Lipper. For these
purposes, the Board assumed that the fund’s management fee rate was equal to the
single fee less the fund’s operating expenses. The information provided to the
Board indicated that the fund’s management fee rate was above the median for
comparable funds and the fund’s total expense ratio was 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 Contract
As noted,
the Board approved the continuation of the Advisory Contract and Subadvisory
Contract. 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 Contract (including the fees to be charged for services
thereunder). The independent directors were advised throughout the process by
independent legal counsel.