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 |
|
|
| (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) |
Registrant’s telephone number, including area
code: (410) 345-2000
Date of fiscal year end: October
31
Date of reporting period: April 30, 2015
Item 1. Report to Shareholders
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|
New Asia
Fund |
April 30,
2015 |
The views and opinions in this report were current as of April 30, 2015. 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 fund’s 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.
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Manager’s Letter
Fellow Shareholders
Developing Asian stock markets advanced over the past six months as a huge rally in China’s market more than offset declines in India and several Southeast Asian countries. The global slump in oil prices that started last fall had a positive economic impact on oil-importing countries like India but hurt commodity exporters like Indonesia and Malaysia. Lagging economic growth and low inflation allowed many Asian central banks to cut interest rates over the period. The exception was the Philippines, where solid domestic demand helped propel the country to Asia’s fastest-growing economy after China last year.
Against this divergent backdrop, the New Asia Fund rose 5.23% for the six months ended April 30, 2015, trailing the MSCI All Country Asia ex Japan Index’s 10.53% return and the 6.15% average return of its Lipper peer group. Our underperformance resulted from stock selection in China because we did not own many financials sector stocks that were swept up in the massive rally over the past year. Though our lack of exposure to Chinese financials hurt returns over the past six months, it reflects our long-held caution about China’s banking sector due to nonperforming loans risk. On the other hand, favorable positioning in Malaysia, Singapore, and Taiwan helped relative performance over the period.
Sector allocations reflect our preference for areas driven by domestic consumption. Information technology remains the largest sector on an absolute and relative basis due to positions in several Asian Internet companies. We maintained longstanding overweights in consumer discretionary and consumer staples for their exposure to a growing middle class and rising real wages across the region. Financials remains our biggest underweight due to our decision not to own mainland Chinese banks because we are uncertain about the precise level of non-performing loans in China’s financial system. While we disagree with the many analysts who think that China is on the brink of a financial crisis due to years of excess lending, we believe that Chinese banks have vastly underreported the level of bad loans they own, an issue that will likely hold back the economy in the coming years.
MARKET ENVIRONMENT
Developing Asian markets were mixed over the past six months. Based on total U.S. dollar returns, China was the top performer, surging roughly 30% as new investors piled into the stock market. Despite the impressive gains, China’s economy continued to slow over the period, and in March its government reduced its 2015 growth forecast from last year’s pace as it announced a “new normal” of lower growth. Hong Kong was the next-best gainer, adding nearly 12% amid strong demand for China-related stocks. The relatively developed markets of Taiwan, South Korea, and Singapore each rose at least 5%. In contrast, India’s market shed almost 6% as investors grew concerned about the slow pace of reform. Most Southeast Asian countries declined as growth weakened and political uncertainty increased, but the Philippines rallied as the country benefited from strong domestic demand and a stable economic and political environment. Currency weakness magnified losses in dollar terms. Nearly all emerging markets currencies fell against the dollar over the period as investors anticipated higher yields in the U.S., where the Federal Reserve has signaled its intention to raise short-term interest rates sometime in 2015.
PORTFOLIO REVIEW
Developed Asia (Hong Kong, Singapore,
South Korea, and Taiwan)
Our developed
Asia holdings tend to be industry-leading global companies that are gaining
market share; for example, Taiwan
Semiconductor Manufacturing Co. and life
insurer AIA Group, and companies domiciled in Asia with diversified businesses all over
the world, such as Hutchison Whampoa. These companies
rank among the fund’s largest holdings. (Please refer to the portfolio of
investments for a complete list of holdings and the amount each represents in
the portfolio.)
We have a large overweight in Hong Kong, which has many high-quality companies with strong capital structures and proven management teams that have experienced numerous cycles of growth followed by crisis. Our Hong Kong holdings are global businesses that provide exposure to growth opportunities beyond those in Hong Kong and mainland China. One of our biggest purchases was Techtronic Industries, a power tools and home hardware manufacturer whose brands include Ryobi, Hoover, and Dirt Devil. Techtronic is based in southern China but generates most of its sales in North America, and we view the company as a way to benefit from strengthening U.S. consumption. We also increased our position in HSBC. This UK bank has lately suffered from disappointing financial results and negative publicity about misconduct at its Swiss unit. Still, HSBC is undergoing a multiyear restructuring effort that should eventually produce improving returns. It also stands to benefit from a rising rate environment in the U.S., which will allow it to charge more for loans.
We remain underweight in South Korea but added to Samsung Electronics to take advantage of stock price weakness in the company, the biggest constituent in the MSCI Asia ex Japan benchmark. On the other hand, we eliminated Shinhan Financial Group and Kia Motors. We sold Shinhan as we believed that looser monetary policy resulting from the Bank of Korea’s repeated interest rate cuts over the past year will hurt its net interest margin. We sold Kia due to its exposure to Russia, where the depreciating ruble posed a threat to earnings. We also had reservations about corporate governance after the Hyundai Group, which controls Kia, bid $10 billion for a plot of land in Seoul for a new headquarters. The decision to pay a sum that was roughly three times the land’s assessed value caused a furor among Hyundai investors and underscored the lack of outside oversight and transparency at many Korean companies. Last year, Korea’s government announced new tax measures aimed at pressuring companies to increase dividend payouts, and a few companies are starting to be more responsive to shareholder interests. We are closely monitoring corporate governance developments in Korea, which offers some good investment opportunities if companies can deliver better shareholder returns.
Southeast Asia (Thailand, Malaysia,
Philippines, and Indonesia)
Most Southeast
Asian markets fell over the past six months as their economies slowed, and we
expect below-potential growth for Indonesia, Thailand, and Malaysia for the rest
of 2015. The exception is the Philippines, which is benefiting from strong
growth, a current account surplus, tame
inflation, and a stable government. Despite the weaker near-term outlook, we
have a positive view of Southeast Asia due to favorable demographics, growing
domestic consumption, and fundamentally stronger economies since the 1997–1998
Asian financial crisis.
We maintained slightly overweight allocations in the Philippines and Indonesia. Our exposure to the Philippines rose over the period as the country’s benchmark stock index rose for the sixth straight year in 2014, pushing up the value of our holdings. As we stated in our last letter, we are reluctant to add to our Philippine positions given their relatively expensive valuations. Our key positions include BDO Unibank, Philippine Long Distance Telephone, and real estate developer Ayala Land. We are cautiously optimistic about the outlook for Indonesia. Investor expectations for Indonesia surged after the reform-minded candidate Joko Widodo won a tightly contested presidential election last July, though the economy has slowed sharply since he took office in October amid the commodities downturn. While the pace of reform has been disappointing, we believe that investors have underappreciated Indonesia’s potential. We hold a large position in Bank Central Asia, the country’s biggest bank by market value, and maintain smaller positions in government-owned Bank Mandiri and TV broadcasting company Surya Citra Media, a play on rising domestic consumption. Indonesia’s politics remain a significant obstacle to economic growth, and Widodo’s ability to overcome the opposition and implement reforms remains uncertain. However, we believe that Indonesia could be a powerful growth story in the next few years if Widodo can successfully execute his agenda.
We remain underweight in Thailand and Malaysia. Thailand’s economy has long demonstrated a knack for bouncing back from setbacks, but the latest political crisis appears to have taken a toll on near-term growth. Thailand’s economy has steadied since the military seized power last May but a lasting resolution to the crisis appears to be a long way off, which has damaged investor confidence and discouraged corporate spending. We initiated a position in Siam City Cement, which stands to benefit from the government’s plans to ramp up infrastructure spending in the next few years.
Our Malaysian exposure fell as we eliminated power company Tenaga Nasional after its stock price reached our target. Malaysia is a big oil and natural gas exporter and one of Asia’s most vulnerable countries to falling energy prices, and its economy may face considerable headwinds for years if oil and gas prices remain under pressure. We reduced our position in cable TV company Astro Malaysia due to signs of subdued discretionary spending, which was already weak before a new consumption tax became effective in April. We have long been underweight in Malaysia due to its lack of steady-growth, consumer-driven companies. More recently, negative headlines regarding 1Malaysia Development Bhd (1MDB), a state investment fund that is struggling to repay creditors, have stirred popular discontent and highlighted Malaysia’s increasingly tenuous political situation, another reason for our cautious view.
China and India
Our lack of exposure to many Chinese banks and state-owned
enterprises (SOEs) that dominate the benchmark was the chief detractor from
relative returns, as these companies benefited from the rally in Chinese stocks
that began in mid-2014. Several factors have driven the upswing, including
government efforts to promote the stock market as an investment alternative to
property; access to margin financing, which has fueled speculative trading; and
an expansion of the Shanghai-Hong Kong Stock Connect, a cross-border trading
link launched last year as part of a major reform effort to open up the
mainland’s capital markets. Under the Connect link, foreign investors can buy
companies listed on China’s domestic A-shares market that, until recently, was
largely restricted to mainland Chinese investors. We believe that the A-shares
market will provide more opportunities in the coming years as China’s investment
universe expands, and have devoted more research to uncovering lesser-known
companies in this promising market. Ironically, weak economic data in China
contributed to the rally, since it has fed expectations that China’s government
will loosen monetary policy and introduce more stimulus measures to support the economy. Some investors believe that looser
policy has created a better growth environment in China. Our view, however, is
that the government’s gradual easing measures since last November are aimed at
stabilizing growth and preventing a sharp downturn in the economy, which will
continue to slow in the coming years.
We see China’s recent rally as momentum driven and not based on any real improvement in corporate earnings or the overall economy. Given that our investment process focuses on fundamental research and selecting companies for their individual merits and a favorable risk/reward profile, it is hard for us to justify owning many of the stocks that have participated in the rally. For example, China’s biggest banks posted double-digit gains in April, yet are weighed by an uncertain level of bad loans, rising debt service costs, and mounting earnings pressure after recent rate cuts. We expect that the volatility in Hong Kong and Chinese stocks will persist for a while—possibly pushing stock prices even higher from current levels—but are reluctant to chase the market’s upswing. Rather, we are sticking to our focus on quality companies with solid fundamentals and earnings growth and have opted to trim or eliminate stocks in cases where our conviction in the company declined or when we believed the stock price significantly overvalued its business.
Our positioning in China remained broadly unchanged. We continue to favor businesses that benefit from rising domestic consumption, particularly select Internet, consumer staples, and clean energy names, as well as a few SOEs whose management teams are making a concerted effort to improve profitability in the coming years. We own positions in Internet companies Tencent, Baidu, and Vipshop Holdings. Baidu, the dominant online search engine, was the largest detractor for the period after strong performance in 2014, but we think it has good upside potential and have a large position in the company.
We initiated positions in China Cinda Asset Management, one of four government-owned companies set up to clean up bad debts from domestic banks, real estate, and other companies, and Weifu High-Technology, which makes catalytic converters for trucks. Cinda—which makes money from acquiring, restructuring, and servicing bad loans—offers an attractive growth story and a resilient business model. We were impressed by management’s resourcefulness in its approach to debt restructuring and view Cinda as a positive way to invest in China’s nonperforming loans. Weifu makes the key parts for vehicles complying with a stricter emission standard in China that became effective in 2015. Trucks generate a large part of the air pollution that has become an urgent issue for China’s leaders, and we believe that increasingly stringent emission standards will drive strong demand for Weifu’s products for several years.
Our positions stayed broadly unchanged in India, whose benchmark stock index climbed to record highs early this year after the election of a new government headed by Prime Minister Narendra Modi lifted reform expectations. Though we believe that India’s economy is heading in the right direction after several years of stalled growth, we think that much of the good news has been factored into stock prices. Positive sentiment following last spring’s elections has not yet affected corporate earnings in India, which were largely disappointing last year. Our holdings are concentrated in financials such as private sector lenders HDFC Bank and ICICI Bank, which have good growth potential due to India’s under-penetrated banking sector. We also favor export-oriented names in information technology and have large positions in software services companies Infosys and Tata Consultancy.
OUTLOOK
Rising U.S. interest rates are a potential near-term risk for developing Asian economies, which are bracing for the Federal Reserve’s first interest rate hike in many years sometime in 2015. U.S. rate increases have historically had a mixed impact on Asian markets, though they sold off sharply in 2013 after the Fed first signaled its intention to start tapering its monthly asset purchases. We expect that the pace of looming U.S. rate hikes will be gradual and the terminal rate fairly low, giving markets time to adjust to the new environment. Moreover, most of the region’s economies are fundamentally stronger than they were prior to the 1997–1998 Asian financial crisis, with current account surpluses, much less foreign debt, and substantial foreign currency reserves. Short-term capital flows are hard to predict, but we do not think that rising U.S. rates will precipitate a financial crisis in Asia this time. Instead, we believe that any market weakness around the Fed’s liftoff will present a good buying opportunity.
We believe that companies’ margins will improve this year and next after declining over the past several years due to wage inflation, higher commodity prices, and the waning impact of stimulus measures in China. This expected recovery in margins, along with greater capital spending discipline, should support earnings growth this year. Finding attractively valued, high-quality companies is challenging in Asia as it is elsewhere around the world. We see some good opportunities in turnaround stories and corporate restructurings, as many Asian companies have yet to adapt to the “new normal” of slower topline growth and stepped-up reforms. Reform progress has been encouraging, but most governments in Asia have more work to do on the reform front, which is critical for ensuring that companies and economies can fulfill their growth potential. Meanwhile, rising domestic consumption and a growing middle class are powerful secular trends that should drive economic growth for many years to come. We remain confident that cyclical and secular trends in Asia will drive strong and sustainable economic and earnings growth over the long term.
Thank you for investing with T. Rowe Price.
Respectfully submitted,
Anh Lu
Portfolio manager and chairman of the fund’s Investment Advisory
Committee
May 15, 2015
The committee chairman has day-to-day responsibility for managing the portfolio and works with committee members in developing and executing its 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.
GLOSSARY
Lipper averages: The averages of available mutual fund performance returns for specified time periods in categories defined by Lipper Inc.
MSCI All Country Asia ex Japan Index: An index that measures equity market performance of developed and emerging countries in Asia, excluding Japan.
Note: MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
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 fund’s actual
returns. You may use the information on this line, together with your account
balance, to estimate the expenses that you paid over the period. Simply divide
your account value by $1,000 (for example, an $8,600 account value divided by
$1,000 = 8.6), then multiply the result by the number on the first line under
the heading “Expenses Paid During Period” to estimate the expenses you paid on
your account during this period.
Hypothetical Example for Comparison
Purposes
The information on the second
line of the table (Hypothetical) is based on hypothetical account values and
expenses derived from the fund’s actual expense ratio and an assumed 5% per year
rate of return before expenses (not the fund’s actual return). You may compare
the ongoing costs of investing in the fund with other funds by contrasting this
5% hypothetical example and the 5% hypothetical examples that appear in the
shareholder reports of the other funds. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period.
Note: T. Rowe Price charges an annual account service fee of $20, generally for accounts with less than $10,000. The fee is waived for any investor whose T. Rowe Price mutual fund accounts total $50,000 or more; accounts electing to receive electronic delivery of account statements, transaction confirmations, prospectuses, and shareholder reports; or accounts of an investor who is a T. Rowe Price Preferred Services, Personal Services, or Enhanced Personal Services client (enrollment in these programs generally requires T. Rowe Price assets of at least $100,000). This fee is not included in the accompanying table. If you are subject to the fee, keep it in mind when you are estimating the ongoing expenses of investing in the fund and when comparing the expenses of this fund with other funds.
You should also be aware that the expenses shown in the table highlight only your ongoing costs and do not reflect any transaction costs, such as redemption fees or sales loads. Therefore, the second line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. To the extent a fund charges transaction costs, however, the total cost of owning that fund is higher.
Unaudited
The accompanying notes are an integral part of these financial statements.
Unaudited
The accompanying notes are an integral part of these financial statements.
Unaudited
The accompanying notes are an integral part of these financial statements.
Unaudited
The accompanying notes are an integral part of these financial statements.
Unaudited
The accompanying notes are an integral part of these financial statements.
Unaudited
| Notes to Financial Statements |
T. Rowe Price International Funds, Inc. (the corporation), is registered under the Investment Company Act of 1940 (the 1940 Act). The New Asia Fund (the fund) is a nondiversified, open-end management investment company established by the corporation. The fund commenced operations on September 28, 1990. The fund seeks long-term growth of capital through investments primarily in the common stocks of companies located (or with primary operations) in Asia (excluding Japan).
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation The fund is an investment company and follows accounting and reporting guidance in the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 (ASC 946). The accompanying financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (GAAP), including but not limited to ASC 946. GAAP requires 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.
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 June 2014, FASB issued Accounting Standards Update (ASU) No. 2014-11, Transfers and Servicing (Topic 860), Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The ASU changes the accounting for certain repurchase agreements and expands disclosure requirements related to repurchase agreements, securities lending, repurchase-to-maturity and similar transactions. The ASU is effective for interim and annual reporting periods beginning after December 15, 2014. Adoption will have no effect on the fund’s net assets or results of operations.
In May 2015, FASB issued ASU No. 2015-07, Fair Value Measurement (Topic 820), Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The ASU removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient and amends certain disclosure requirements for such investments. The ASU is effective for interim and annual reporting periods beginning after December 15, 2015. 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 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 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 NAV 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, 2015:
There were no material transfers between Levels 1 and 2 during the six months ended April 30, 2015.
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 The fund may invest, either directly or through investments in T. Rowe Price institutional funds, in securities of companies located in, issued by governments of, or denominated in or linked to the currencies of emerging market countries; at period-end, approximately 71% of the fund’s net assets were invested in emerging markets. These 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. Such securities are often subject to greater price volatility, less liquidity, and higher rates of inflation than U.S. securities.
China A shares The fund invests in certain Chinese equity securities (A shares) that have limited availability to investors outside of China. The fund gains access to the A-share market either through a wholly owned subsidiary of Price Associates, which serves as the registered Qualified Foreign Institutional Investor (QFII) for all participating T. Rowe Price-sponsored products (each a participating account), or through the Shanghai-Hong Kong Stock Connect program (Stock Connect). Investment decisions related to A shares held through the QFII are specific to each participating account, and each account bears the economic consequences of its holdings and transactions in A shares. The fund’s ability to repatriate cash from investment activities associated with its A shares held through the QFII is subject to certain restrictions and administrative processes involving the Chinese government; consequently the fund may experience substantial delays in gaining access to its assets or incur a loss of value in the event of noncompliance with governmental requirements. A shares acquired through the QFII are valued using the onshore renminbi exchange rate (CNY) and those acquired through Stock Connect are valued using the offshore renminbi exchange rate (CNH). CNY and CNH exchange rates may differ; accordingly, A shares of the same issue purchased through different channels may not have the same U.S. dollar value. Management believes that the tax treaty between the U.S. and China exempts the fund from any Chinese capital gain tax related to its A shares investments.
Securities Lending The fund may lend its securities to approved brokers to earn additional income. Its securities lending activities are administered by a lending agent in accordance with a securities lending agreement. Security loans generally do not have stated maturity dates and the fund may recall a security at any time. The fund receives collateral in the form of cash or 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 lending agent(s) in accordance with investment guidelines approved by fund management. Additionally, the lending agent indemnifies the fund against losses resulting from borrower default. Although risk is mitigated by the collateral and indemnification, 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, collateral investments decline in value and the lending agent fails to perform. Securities lending revenue 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, 2015, the value of loaned securities was $23,560,000; the value of cash collateral and related investments was $24,542,000.
Other Purchases and sales of portfolio securities other than short-term securities aggregated $1,227,772,000 and $962,124,000, respectively, for the six months ended April 30, 2015.
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.
At April 30, 2015, the cost of investments for federal income tax purposes was $3,770,807,000. Net unrealized gain aggregated $914,623,000 at period-end, of which $1,036,068,000 related to appreciated investments and $121,445,000 related to depreciated investments.
NOTE 5 - FOREIGN TAXES
The fund is subject to foreign income taxes imposed by certain countries in which it invests. Additionally, certain foreign currency transactions are subject to tax and capital gains realized upon disposition of securities issued in or by certain foreign countries and 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 capital gains is reflected as a component of realized or change in unrealized gain/loss on securities in the accompanying financial statements. At April 30, 2015, the fund had no deferred tax liability attributable to foreign securities and $32,891,000 of foreign capital loss carryforwards, all of which 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(s) with one or more of its wholly owned subsidiaries, to provide investment advisory services to the fund. The investment management agreement between the fund and Price Associates provides for an annual investment management fee, which is computed daily and paid monthly. The fee consists of an individual fund fee, equal to 0.50% of the fund’s average daily net assets, and a group fee. The group fee rate is calculated based on the combined net assets of certain mutual funds sponsored by Price Associates (the group) applied to a graduated fee schedule, with rates ranging from 0.48% for the first $1 billion of assets to 0.275% for assets in excess of $400 billion. The fund’s group fee is determined by applying the group fee rate to the fund’s average daily net assets. At April 30, 2015, the effective annual group fee rate was 0.29%.
In addition, the fund has entered into service agreements with Price Associates and two wholly owned subsidiaries of Price Associates (collectively, Price). Price Associates computes the daily share price and provides certain other administrative services to the fund. T. Rowe Price Services, Inc., provides shareholder and administrative services in its capacity as the fund’s transfer and dividend-disbursing agent. T. Rowe Price Retirement Plan Services, Inc., provides subaccounting and recordkeeping services for certain retirement accounts invested in the fund. For the six months ended April 30, 2015, expenses incurred pursuant to these service agreements were $73,000 for Price Associates; $851,000 for T. Rowe Price Services, Inc.; and $69,000 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, 2015, the fund was allocated $78,000 of Spectrum Funds’ expenses, of which $54,000 related to services provided by Price. At period-end, the amount payable to Price 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. Approximately $2,000 of redemption fees reflected in the accompanying financial statements were received from the Spectrum Funds. At April 30, 2015, approximately 3% 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, the T. Rowe Price Government Reserve Investment Fund, or the T. Rowe Price Short-Term Reserve Fund (collectively, the Price Reserve Investment Funds), open-end management investment companies managed by Price Associates and considered affiliates of the fund. The Price Reserve Investment Funds are offered as short-term investment options to mutual funds, trusts, and other accounts managed by Price Associates or its affiliates and are not available for direct purchase by members of the public. The 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 fund’s Statement of Additional Information. You may request this document by calling 1-800-225-5132 or by accessing the SEC’s website, sec.gov.
The description of our proxy voting policies and procedures is also available on our website, troweprice.com. To access it, click on the words “Social Responsibility” at the top of our corporate homepage. Next, click on the words “Conducting Business Responsibly” on the left side of the page that appears. Finally, click on the words “Proxy Voting Policies” on the left side of the page that appears.
Each fund’s most recent annual proxy voting record is available on our website and through the SEC’s website. To access it through our website, follow the above directions to reach the “Conducting Business Responsibly” page. Click on the words “Proxy Voting Records” on the left side of that page, and then click on the “View Proxy Voting Records” link at the bottom of the page that appears.
| How to Obtain Quarterly Portfolio Holdings |
The fund files a complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available electronically on the SEC’s website (sec.gov); hard copies may be reviewed and copied at the SEC’s Public Reference Room, 100 F St. N.E., Washington, DC 20549. For more information on the Public Reference Room, call 1-800-SEC-0330.
| Approval
of Investment Management Agreement and Subadvisory Agreement |
On March 13, 2015, the fund’s Board of Directors (Board), including a majority of the fund’s independent directors, approved the continuation of the investment management agreement (Advisory Contract) between the fund and its investment advisor, T. Rowe Price Associates, Inc. (Advisor), as well as the continuation of the investment subadvisory agreements (Subadvisory Contracts) that the Advisor has entered into with T. Rowe Price International Ltd and T. Rowe Price Hong Kong Limited (Subadvisors) on behalf of the fund. In connection with 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
fund’s investments in accordance with its investment program and the overall
management of the fund’s portfolio, as well as a variety of related activities
such as financial, investment operations, and administrative services;
compliance; maintaining the fund’s records and registrations; and shareholder
communications. The Board also reviewed the background and experience of the
Advisor’s and Subadvisors’ senior management teams and investment personnel
involved in the management of the fund, as well as the Advisor’s compliance
record. The Board concluded that it was satisfied with the nature, quality, and
extent of the services provided by the Advisor and Subadvisors.
Investment Performance of the
Fund
The Board reviewed the fund’s
three-month, one-year, and year-by-year returns, as well as the fund’s average
annualized total returns over the 3-, 5-, and 10-year periods, and compared
these returns with a wide variety of previously agreed-upon comparable
performance measures and market data, including those supplied by Lipper and
Morningstar, which are independent providers of mutual fund data.
On the basis of this evaluation and the Board’s ongoing review of investment results, and factoring in the relative market conditions during certain of the performance periods, the Board concluded that the fund’s performance was satisfactory.
Costs, Benefits, Profits, and Economies
of Scale
The Board reviewed detailed
information regarding the revenues received by the Advisor under the Advisory
Contract and other benefits that the Advisor (and its affiliates, including the
Subadvisors) may have realized from its relationship with the fund, including
any research received under “soft dollar” agreements and commission-sharing
arrangements with broker-dealers. The Board considered that the Advisor and
Subadvisors may receive some benefit from soft-dollar arrangements pursuant to
which research is received from broker-dealers that execute the applicable
fund’s portfolio transactions. The Board received
information on the estimated costs incurred and profits realized by the Advisor
from managing T. Rowe Price mutual funds. The Board also reviewed estimates of
the profits realized from managing the fund in particular, and the Board
concluded that the Advisor’s profits were reasonable in light of the services
provided to the fund.
The Board also considered whether the fund benefits under the fee levels set forth in the Advisory Contract from any economies of scale realized by the Advisor. Under the Advisory Contract, the fund pays a fee to the Advisor for investment management services composed of two components—a group fee rate based on the combined average net assets of most of the T. Rowe Price mutual funds (including the fund) that declines at certain asset levels and an individual fund fee rate based on the fund’s average daily net assets—and the fund pays its own expenses of operations. Under the Subadvisory Contract, the Advisor may pay the Subadvisor up to 60% of the advisory fee that the Advisor receives from the fund. At the March 13, 2015, meeting, the Board approved an additional 0.005% breakpoint to the group fee schedule, effective May 1, 2015. The Board concluded that the advisory fee structure for the fund continued to provide for a reasonable sharing of benefits from any economies of scale with the fund’s investors.
Fees
The Board was provided with information regarding industry trends in
management fees and expenses, and the Board reviewed the fund’s management fee
rate, operating expenses, and total expense ratio in comparison 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 fund’s
management fee rate was above the median for certain groups of comparable funds
and at or below the median for other groups of comparable funds. The information
also indicated that the fund’s total expense ratio was at or below the median
for comparable funds.
The Board also reviewed the fee schedules for institutional accounts and private accounts with similar mandates that are advised or subadvised by the Advisor and its affiliates. Management provided the Board with information about the Advisor’s responsibilities and services provided to institutional account clients, including information about how the requirements and economics of the institutional business are fundamentally different from those of the mutual fund business. The Board considered information showing that the mutual fund business is generally more complex from a business and compliance perspective than the institutional business and that the Advisor generally performs significant additional services and assumes greater risk in managing the fund and other T. Rowe Price mutual funds than it does for institutional account clients.
On the basis of the information provided and the factors considered, the Board concluded that the fees paid by the fund under the Advisory Contract are reasonable.
Approval of the Advisory Contract and
Subadvisory Contracts
As noted, the Board
approved the continuation of the Advisory Contract and Subadvisory Contracts. No
single factor was considered in isolation or to be determinative to the
decision. Rather, the Board concluded, in light of a weighting and balancing of
all factors considered, that it was in the best interests of the fund and its
shareholders for the Board to approve the continuation of the Advisory Contract
and Subadvisory Contracts (including the fees to be charged for services
thereunder). The independent directors were advised throughout the process by
independent legal counsel.
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 registrant’s annual Form N-CSR. No substantive amendments were approved or waivers were granted to this code of ethics during the registrant’s most recent fiscal half-year.
Item 3. Audit Committee Financial Expert.
Disclosure required in registrant’s annual Form N-CSR.
Item 4. Principal Accountant Fees and Services.
Disclosure required in registrant’s 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 registrant’s principal executive officer and principal financial officer have evaluated the registrant’s disclosure controls and procedures within 90 days of this filing and have concluded that the registrant’s 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 registrant’s principal executive officer and principal financial officer are aware of no change in the registrant’s internal control over financial reporting that occurred during the registrant’s second fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
Item 12. Exhibits.
(a)(1) The registrant’s code of ethics pursuant to Item 2 of Form N-CSR is filed with the registrant’s 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 16, 2015 | ||
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 16, 2015 | ||
| By | /s/ Gregory K. Hinkle | |
| Gregory K. Hinkle | ||
| Principal Financial Officer | ||
| Date June 16, 2015 | ||