UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act File Number: 811-02958
T. Rowe Price International Funds, Inc. |
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(Exact name of registrant as specified in charter) |
100 East Pratt Street, Baltimore, MD 21202 |
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(Address of principal executive offices) |
David Oestreicher |
100 East Pratt Street, Baltimore, MD 21202 |
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(Name and address of agent for service) |
Registrants telephone number, including
area code: (410) 345-2000
Date of fiscal year end:
October 31
Date of reporting period: April 30, 2013
Item 1. Report to Shareholders
International Discovery Fund |
April 30, 2013 |
The views and opinions in this report were current as of April 30, 2013. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the funds future investment intent. The report is certified under the Sarbanes-Oxley Act, which requires mutual funds and other public companies to affirm that, to the best of their knowledge, the information in their financial reports is fairly and accurately stated in all material respects.
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.
REPORTS ON THE WEB
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Managers Letter
Fellow Shareholders
International equity markets powered ahead during the past six months. Japan was exceptional as small-cap shares there gained nearly 30%. Emerging markets did not fare as well overall but produced positive returns during the period. Stocks rose despite a sluggish U.S. economy, slowing growth in China, and stagnation throughout much of Europe.
Except for November, when investors were concerned about fiscal cliff negotiations in the U.S., and commodity-induced wobbles in April, this was a strong six months for international equities. Your fund returned 13.38% during the period, modestly lagging its primary benchmark, the S&P Global ex-U.S. Small Cap Index. Performance relative to the benchmark was hampered by some of our technology holdings and stock selection in China. An underweight to segments of the natural resources sector along with holdings in asset managers benefited results.
MARKET REVIEW
The period was defined by the energy being given to risk assets by central bankers worldwide through almost universally accommodative monetary policy. The period was also marked by the renaissance of Japanese equities, long an underperforming and much-maligned asset class, a topic I will return to later.
Monetary policy globally is aimed at reflating economies. In the U.S., the Feds bond-buying programs continue to keep interest rates at extremely low levels. In Japan, new Prime Minister Shinzo Abes similar planknown as Abenomicsseeks the same objective. And in Europe, the European Central Banks efforts to infuse liquidity into the banking system have now been supplemented by a more dovish tone on inflation. Central bankers agendas everywhere are turning from managing to an inflationary target to more growth- and employment-friendly policies. Like Odysseus in the Greek legend, policymakerswhen given the choice between the Scylla of inflation and the Charybdis of a deflationary bustwill choose inflation every time. So far, the outcomes achieved have been favorable: Contrary to the popular view, growth expectations outside of indebted Europe are rising, asset prices are climbing, and interest rates remain suppressed. The upshot is that investors are being drawn from the cover of cash and money market funds into riskier assets, such as equities. Put another way, as long as the central bank music is playing, investors are compelled to get up and dance.
FOCUS ON JAPAN
The catalyst for the turnaround in the erstwhile moribund Japanese equity market was the election of Prime Minister Abe (for the second time) in the fall. Abes three arrow agenda is to eradicate the chronic deflation that Japan has endured for many years. His first arrow was to talk down the yen, which has been successfully achieved, going from below 80 to the U.S. dollar to its current level of just around 100.
The desired outcome is to make Japan Inc. more competitive and, secondly, through higher input costs, raise inflation. Abes second arrow was the appointment of a reflationist at the Bank of Japan. His new man, Haruhiko Kuroda, hit the ground running by announcing a package of measures that will enable him to double the monetary base in Japan by buying (mostly but not exclusively) Japanese government bonds to the tune of around 30% of gross domestic product. We think that, having ceded some of their independence to politicians, officials at the Bank of Japan will press for structural reforms to the Japanese economy quid pro quo. These potential measuresAbes third arroware likely to be directed at industrial competitiveness, labor, and health care reforms. So far so good; Abenomics has produced some initial signs of rising consumption and rising inflation expectations. The net effect on the market so far has been impressive: Since no less than 30% of Japanese households net worth is held in money (versus 2% in the U.S.) and a further 40% is held in time and savings deposits (versus 17% in the U.S.), the renaissance of equities could go further.
Regarding rising inflation, I am reminded of 1999, which was the last time Japan managed to inject some inflation back into the system. Japanese corporations tend to have high fixed costs and their capital stock is very well invested, meaning that when the topline or revenue inflates, the operating leverage effect on earnings can be profound, as it was in 1999. In light of this assessment, we have actively increased our Japanese weighting from 14% six months ago to its current level of 18%.
PORTFOLIO AND STRATEGY REVIEW
I have alluded in my last two letters to both the premium on safe assets and the stylistic bias toward quality growth stocks, with the latter suiting our method and positioning. Market extremes never last forever, and mean reversion is inevitable: The last six months have seen more balance, with cyclical sectors and more risky countries performing relatively betterthough noticeably this did not extend to materials and resources, which were the worst sectors over the period. Our structural underweight to junior miners, a subset of resources, was helpful, and it is interesting to note that the long-observed correlation between industrials and metals and mining has broken down, perhaps symbolizing the end of the era of the so-called commodities supercycle. We also had good exposure to rising equity markets through our position in London-listed equity specialist Aberdeen Asset Management, Australian funds group BT Investment Management, and Italian funds distribution platform Banca Generali, which were all top 20 contributors over the period. (Please refer to the portfolio of investments for a complete list of holdings and the amount each represents in the portfolio.)
There are two threads to where we did less well. Some of our technology positionsan area that, as a team of analysts, has been a strong suit of ourscame unstuck over the period. IQE (UK) suffered from being part of the Apple supply chain and because of a perceived threat of increased competition from industry giant Qualcomm. For software companies Software (Germany) and SDL (UK) and specialty tech chemicals company AZ Electronic Materials (Luxembourg), weakness was more their own doing due to successive downgrades to earnings. Stock selection in China was poor over the period, although this was partially offset by our Hong Kong-listed Chinese stocks, with Pacific Textiles being the single largest contributor to performance and our largest position by weighting at period-end. As you might expect from this narrative, Japanese stocks accounted for three of the top five contributors over the period. Finally, in emerging markets, the BRIC countriesBrazil, Russia, India, and China, which have the depth of opportunity we seekunderperformed materially, with India (4.0% weighted) actually being down in U.S. dollar terms, while the smaller, more exotic markets outperformed. We had good exposure to this effect through the Association of Southeast Asian Nations (ASEAN) markets of Thailand, the Philippines, and Indonesia.
The broad strategic thrust of the fund remains unchanged. To recap: We look for the most compelling business models regardless of domicile and those businesses that can generate and sustain returns above the cost of capital by virtue of skill, intellectual property, scale, market share, brand equity, or reputation. In other words, durable. We seek to buy these companies early or in a contrarian way and hold them as they grow and mature into mid- and, occasionally, large-cap companies. This tends to manifest in sector preferences such as information technology, health care, and consumer discretionary (all current overweights).
By having locally based research teams, we are attuned to local factors, and by being part of a larger research platform, we can benefit from the identification of global themes. Where we can identify a clear macro angle, we will rebalance the portfolio. The corollary to our upweighting of Japan was a lower European weighting that accounts for 47% of the portfolio. By sector, our consumer discretionary weighting rose while energy and reserves fell.
Our single largest stock purchase was the Belgian firm DIeteren, which has built a unique presence in glass windshield repair, where scale and know-how afford it a sustainable competitive advantage and a still-fragmented market should allow it to grow further. In Japan, most of our activity focused on reflation of the domestic economy: Residential real estate investment trust (REIT) Nippon Accommodations Fund, IT services company NS Solutions, and cement producer Taiheiyo Cement all conform to that theme.
We participated in four initial public offerings during the period: GPL J-REIT and Nippon Prologis are both Japanese REITs; Hero Supermarket is an Indonesian chain that plays into the fast-growing consumer segment in that country; and Pegasus Airlines is a low-cost Turkish airline with exciting growth prospects. Our holdings did not receive any takeover proposals during the six months, but Samsung Electronics took a strategic (5%) stake in Japanese pen/tablet technology company Wacom, which did well over the period.
OUTLOOK
Small-cap equity markets, particularly developed markets, have been good for several semesters, and, as noted in my last letter, the patient investor has been rewarded. You dont have to look very hard for the risk in markets: Japanese government bonds are belatedly reacting to a weaker yen, European economies are at stall speed, and the indications we have from our companies was that calendar first-quarter business trends were soft. Growth in China is decelerating, and commodity markets seem to be confirming just that. It is just too early to tell whether markets are going to have the seasonal swoon associated with a growth lull or pauseit is May, after all. Meanwhile markets have climbed the wall of worry and equity risk premiums have fallen (i.e., valuations have increased) but are still supportive. Credit markets are open, and record-low yields in the corporate bond market could presage a pickup in merger and acquisition activity. We continue to strive for and believe we are finding good opportunities for capital appreciation.
This is my 30th International Discovery Fund shareholder letter. Twenty-seven of those have been edited by our senior writer Tom Siedell, and his considerable experience and expertise in shareholder communications will be missed as he heads toward retirement. On behalf of those who regularly read this far, thank you Tom.
Thank you for your ongoing trust and support.
Respectfully submitted,
Justin Thomson
Lead portfolio manager
May 14, 2013
The lead portfolio manager has day-to-day responsibility for managing the portfolio and works with committee members in developing and executing the funds investment program.
RISKS OF INTERNATIONAL INVESTING
Funds that invest overseas generally carry more risk than funds that invest strictly in U.S. assets. Small and medium-sized companies are generally riskier because they may have limited product lines, capital, and managerial resources. Their securities may trade less frequently and with greater price swings. 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.
GLOSSARY
Association of Southeast Asian Nations (ASEAN): A political, economic, and trade organization of 10 Southeast Asian countries.
Gross domestic product: 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 in categories defined by Lipper Inc.
MSCI EAFE Small Cap Index: A market capitalization-weighted index of small-cap stocks in developed world markets.
Price/earnings (P/E) ratio: A valuation measure calculated by dividing the price of a stock by its current or projected earnings per share. The ratio is a measure of how much investors are willing to pay for the companys earnings.
Real estate investment trusts (REITs): Publicly traded companies that own, develop, and operate apartment complexes, hotels, office buildings, and other commercial properties.
S&P Global ex-U.S. Small Cap Index: An index that tracks the performance of smaller companies in developed markets outside the U.S.
Performance and Expenses
Growth of $10,000 |
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.
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
expenses based on the funds 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 funds actual expense ratio and an assumed
5% per year rate of return before expenses (not the funds 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 International Discovery Fund (the fund) is a diversified, open-end management investment company established by the corporation. The fund commenced operations on December 30, 1988. The fund seeks long-term growth of capital through investments primarily in the common stocks of rapidly growing, small- to medium-sized companies outside the U.S.
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 The fund earns credits on temporarily uninvested cash balances held at the custodian, which reduce the funds 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 funds net assets or results of operations.
NOTE 2 - VALUATION
The funds 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 funds 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 funds 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 funds Board; is chaired by the funds 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 days 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 funds 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 issuers 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 arms 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 funds 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 funds prospectus and Statement of Additional Information.
Emerging Markets At April 30, 2013, approximately 24% of the funds 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 funds 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 funds 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 funds 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 $180,896,000; the value of cash collateral and related investments was $189,814,000.
Other Purchases and sales of portfolio securities other than short-term securities aggregated $757,633,000 and $616,753,000, 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 funds pre-effective capital loss carryforwards could expire unused. As of October 31, 2012, the fund had $107,917,000 of available capital loss carryforwards, which expire as follows: $90,556,000 in fiscal 2017; $17,361,000 have no expiration.
At April 30, 2013, the cost of investments for federal income tax purposes was $2,706,009,000. Net unrealized gain aggregated $760,067,000 at period-end, of which $894,202,000 related to appreciated investments and $134,135,000 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 $6,040,000 of foreign capital loss carryforwards, including $1,996,000 that expire in 2017 and $4,044,000 that expire in 2020.
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 0.75% of the funds 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 funds group fee is determined by applying the group fee rate to the funds 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 funds 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; $500,000 for T. Rowe Price Services, Inc.; and $211,000 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 $19,000 of Spectrum Funds expenses, of which $12,000 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. $1,000 of redemption fees reflected in the accompanying financial statements were received from the Spectrum Funds. At April 30, 2013, approximately 1% 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.
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 funds Statement of Additional Information. You may request this document by calling 1-800-225-5132 or by accessing the SECs 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 funds most recent annual proxy voting record is available on our website and through the SECs 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.
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 funds Form N-Q is available electronically on the SECs website (sec.gov); hard copies may be reviewed and copied at the SECs 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 |
On March 5, 2013, the funds Board of Directors (Board), including a majority of the funds 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 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 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 funds investments in accordance with its investment program and
the overall management of the funds portfolio, as well as a variety of related
activities such as financial, investment operations, and administrative
services; compliance; maintaining the funds records and registrations; and
shareholder communications. The Board also reviewed the background and
experience of the Advisors and Subadvisors senior management teams and
investment personnel involved in the management of the fund, as well as the
Advisors compliance record. The Board concluded that it was satisfied with the
nature, quality, and extent of the services provided by the Advisor and
Subadvisors.
Investment Performance of the
Fund
The Board reviewed the funds
three-month, one-year, and year-by-year returns, as well as the funds 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 Boards ongoing review of investment results, and factoring in the relative market conditions during certain of the performance periods, the Board concluded that the funds 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 funds 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 Advisors 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 componentsa 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 funds average daily net assetsand 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 funds investors.
Fees
The Board was provided with information regarding
industry trends in management fees and expenses, and the Board reviewed the
funds management fee rate, operating expenses, and total expense ratio in
comparison with fees and expenses of other comparable funds based on information
and data supplied by Lipper. The information provided to the Board indicated
that the funds management fee rate was at or above the median for comparable
funds and that the funds 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 Advisors 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.
Item 2. Code of Ethics.
A code of ethics, as defined in Item 2 of Form N-CSR, applicable to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions is filed as an exhibit to the registrants annual Form N-CSR. No substantive amendments were approved or waivers were granted to this code of ethics during the registrants most recent fiscal half-year.
Item 3. Audit Committee Financial Expert.
Disclosure required in registrants annual Form N-CSR.
Item 4. Principal Accountant Fees and Services.
Disclosure required in registrants annual Form N-CSR.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Investments.
(a) Not applicable. The complete schedule of investments is included in Item 1 of this Form N-CSR.
(b) Not applicable.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 11. Controls and Procedures.
(a) The registrants principal executive officer and principal financial officer have evaluated the registrants disclosure controls and procedures within 90 days of this filing and have concluded that the registrants disclosure controls and procedures were effective, as of that date, in ensuring that information required to be disclosed by the registrant in this Form N-CSR was recorded, processed, summarized, and reported timely.
(b) The registrants principal executive officer and principal financial officer are aware of no change in the registrants internal control over financial reporting that occurred during the registrants second fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting.
Item 12. Exhibits.
(a)(1) The registrants code of ethics pursuant to Item 2 of Form N-CSR is filed with the registrants annual Form N-CSR.
(2) Separate certifications by the registrant's principal executive officer and principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(a) under the Investment Company Act of 1940, are attached.
(3) Written solicitation to repurchase securities issued by closed-end companies: not applicable.
(b) A certification by the registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(b) under the Investment Company Act of 1940, is attached.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
T. Rowe Price International Funds, Inc.
By | /s/ Edward C. Bernard | |
Edward C. Bernard | ||
Principal Executive Officer | ||
Date June 18, 2013 |
Pursuant to the
requirements of the Securities Exchange Act of 1934 and the Investment Company
Act of 1940, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
By | /s/ Edward C. Bernard | |
Edward C. Bernard | ||
Principal Executive Officer | ||
Date June 18, 2013 | ||
By | /s/ Gregory K. Hinkle | |
Gregory K. Hinkle | ||
Principal Financial Officer | ||
Date June 18, 2013 |
Item 12(a)(2).
CERTIFICATIONS
I, Edward C. Bernard, certify that:
1. | I have reviewed this report on Form N-CSR of T. Rowe Price International Discovery Fund; | |||
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |||
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; | |||
4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: | |||
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |||
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |||
(c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and | |||
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and | |||
5. | The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): | |||
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and | |||
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. | |||
Date: June 18, 2013 | /s/ Edward C. Bernard | |
Edward C. Bernard | ||
Principal Executive Officer |
CERTIFICATIONS
I, Gregory K. Hinkle, certify that:
1. | I have reviewed this report on Form N-CSR of T. Rowe Price International Discovery Fund; | |||
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |||
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; | |||
4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: | |||
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |||
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |||
(c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and | |||
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and | |||
5. | The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): | |||
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and | |||
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. | |||
Date: June 18, 2013 | /s/ Gregory K. Hinkle | |
Gregory K. Hinkle | ||
Principal Financial Officer |
Item 12(b).
CERTIFICATION UNDER SECTION 906 OF SARBANES-OXLEY ACT OF 2002 | ||
Name of Issuer: T. Rowe Price International Discovery Fund | ||
In connection with the Report on Form N-CSR for the above named Issuer, the undersigned hereby | ||
certifies, to the best of his knowledge, that: | ||
1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities | |
Exchange Act of 1934; | ||
2. | The information contained in the Report fairly presents, in all material respects, the financial | |
condition and results of operations of the Issuer. |
Date: June 18, 2013 | /s/ Edward C. Bernard | |
Edward C. Bernard | ||
Principal Executive Officer | ||
Date: June 18, 2013 | /s/ Gregory K. Hinkle | |
Gregory K. Hinkle | ||
Principal Financial Officer |