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: 811-05833
| T. Rowe Price Institutional International Funds, Inc. |
|
|
| (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 |
|
|
| (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, 2013
Item 1. Report to Shareholders
 |
|
Institutional International Growth Equity Fund |
April 30,
2013 |
| Highlights |
- International stock markets posted strong
returns in the six months ended April 30, 2013.
- Your fund gained 10.33% but underperformed
its benchmark index.
- We continue to focus on buying companies with
durable global franchises that can grow their earnings and cash flow at
a double-digit rate over the long
term.
- Our research is uncovering attractive growth opportunities across a broad array of international stock markets, and we remain optimistic about the long-term prospects for emerging markets.
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 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.
Upcoming Shareholder Meeting
The T. Rowe Price funds will be holding a shareholder meeting in October. Shareholders will be asked to elect directors and consider changes to certain fundamental policies to permit the funds greater flexibility in managing their investment strategies.
Manager’s Letter
T. Rowe Price Institutional International Growth Equity
Fund
Dear Investor
During the past six months, international markets powered ahead, driven by monetary easing in key markets and the search for equities with above-average yield. During the period, we bought high-quality companies that generate solid cash flow and have long-term revenue and income growth potential. While our performance was strong, the strategy did not keep pace with the defensive rally. Slower-than-expected economic growth in several markets also hurt the prospects for select holdings. While the short term has been frustrating, we believe that our approach and our current portfolio offer the potential to generate solid returns over time.
Performance Review
The Institutional International Growth Equity Fund returned 10.33% for the six months ended April 30, 2013. As shown in the Performance Comparison table, the fund underperformed the benchmark MSCI All Country World Index ex USA and the Lipper International Multi-Cap Growth Funds Average. Performance versus the MSCI index benefited from stock selection in the telecommunication services, industrials and business services, and consumer staples sectors. However, stock picking in the financials and consumer discretionary sectors hurt our relative results. Overall, our sector allocation decisions generated strong positive contributions, although underweight allocations in health care, consumer staples, and financials detracted from our comparison with the benchmark. We did a good job selecting stocks in continental Europe and North America, but stock selection and an underweight allocation to Japan hurt the fund’s relative performance.
Portfolio Strategy and Market Environment
In this report, we decided to diverge from our previous format of separating strategy from environment since the two seem to be at odds in some areas. We will explain why they were at odds, where it has helped or hurt your portfolio’s results, and what we are doing now. To begin with, I will restate our stock selection process and philosophy.
Our investment strategy is to buy and hold high-quality growth companies with a durable competitive advantage in their respective markets. The fund focuses on long-term performance and shuns fad investments and momentum trading. We believe that over the long term, stock prices move with earnings and cash flow growth, meaning simply that if a company grows free cash flow by 15% a year, its stock should appreciate at roughly the same rate. We search for companies we think can generate double-digit earnings growth over time by participating in expanding markets, taking market share, or improving profitability faster than sales. We think that if we can find those companies and pay a fair price for their stock, we can compound absolute returns at double-digit levels and provide solid long-term relative results.
In the past six months, several trends that we’d mentioned in prior letters persisted. We continued to see money moving into stable, high-cash-generative equities in mature international markets, including Europe, Canada, and Australia. We think that near-term cash flow is now valued at a larger-than-warranted premium versus long-term cash flow generation. This trend helped us a little in Europe and has been a generally neutral factor in Canada and Australia. Because cyclical growth stocks have underperformed, we have tilted the portfolio toward these areas by establishing positions in Banco Bilbao Vizcaya Argentaria (Spain) and Holcim (Switzerland). At the same time, we took profits and eliminated some of our more stable consumer staples names, including Danone (France) and Tesco (UK). On a near-term basis, we are finding fewer compelling ideas in developed markets. (Please refer to the fund’s portfolio of investments for a complete list of holdings and the amount each represents in the portfolio.)
Across emerging markets, and particularly in the largest countries, investors have largely remained on the sidelines due to worries about changes in government leadership, policy issues, and slower-than-expected economic growth. Emerging markets underperformed in the period, and we admit that we were too early in expecting these markets to perform better. However, we continue to find attractive stocks for the long term at what we believe are compelling prices. We’ve maintained most of our positions in developing markets, anticipating that these holdings will generate long-term growth and reward investors for their patience. In the past six months, we added to our position in Astro Malaysia Holdings and established a new position in BR Malls Participacoes (Brazil). Although these stocks were underwhelming in the reporting period, we view their growth potential as compelling.
Our Japanese holdings generated solid gains in the last six months. This reversal of fortune was spurred by a significant fiscal and monetary policy shift, which drove the Japanese stocks in the benchmark by more than 30% in dollar terms in the reporting period—particularly the companies that had been troubled by weak domestic growth and the negative impact of a strong yen over many years. We feel comfortable that our holdings will continue to perform well in this environment, and while we are encouraged by the government’s initiatives, our focus is on finding companies that we think can prosper over the intermediate to long term at a fair price.
We added several holdings in Japan, including Japan Tobacco, Nissan Motor, and FamilyMart, and eliminated several companies that participated in the market rally but had, in our assessment, limited prospects for fundamental improvement. Although our underweight allocation to Japan hurt our comparison with the benchmark, we are reluctant to drastically increase our allocation after such a steep runup. There is no arguing that we did not see and appreciate the real change in Japan soon enough. As well, we were wrong on the structural profitability of several emerging markets holdings. In our opinion, investors are underappreciating future growth and are too focused on dividends and the perceived safety in “defensive” stocks.
Portfolio Review
I’ll start off the portfolio review discussion with a couple of examples of decisions I made that hurt the portfolio’s near-term performance. The first was holding on to our stake in Baidu, a world-class Internet company and the leading Chinese-language search engine. Although we trimmed our position because we expected near-term earnings to be flat due to investments in video and mobile applications, we should have sold more. However, we still like the company’s long-term prospects and believe that, over time, the company and the stock will benefit from increased revenue and profit opportunities. I remain confident that Baidu will be a strong positive contributor over the long term.
Another decision I made was not to shift the portfolio toward defensive, higher-yielding companies. Roche Holdings, for example, has been a “market darling” over the past year. It is a solid company, is a global leader in pharmaceuticals and diagnostics, and pays a fat dividend. However, we didn’t buy or own it because we think it offers modest earnings and cash flow growth and has limited uses for its cash. Its earnings are not expected to grow significantly, but it has chosen to pay out more cash/dividends to shareholders, which the market has rewarded by bidding the shares higher. We view the divergent performance of Baidu and Roche as extreme and shortsighted.
Consumer discretionary and financials, as shown in the Sector Diversification table below, represent more than 40% of the portfolio’s assets and generated the strongest absolute performance contributions. Consumer discretionary was the fund’s best sector contributor thanks in large part to media holdings, which were the top industry group. The sector’s performance benefited from two exceptionally strong stocks: longtime holding WPP (UK), which is a holding company for hundreds of advertising and marketing firms, and Bridgestone, a Japanese tire and rubber products manufacturer.
Among our financials sector holdings, the top performers were Mitsui Fudosan, a Japanese real estate developer, and Credit Suisse, the Swiss financial services giant. In contrast to consumer discretionary, which is our largest overweight allocation, the financials sector is our largest underweight. We added to both sectors over the past six months. We increased our stake in real estate developers, adding to our holding in Kerry Properties (Hong Kong) and establishing a position in BR Malls early in the year, but both stocks detracted. Sony Financial (Japan) fell after it missed its sales and earnings targets. However, it is taking market share in its life insurance segment and trades at a discount to its intrinsic value. We believe that, over time, the company can grow its franchise value in the high single digits and the stock’s discount should narrow.
Our industrials and business services sector holdings were also solid contributors. The portfolio is focused on companies that can generate durable growth in industries that display positive secular attributes, such as trading companies, professional services, and construction and engineering firms. Germany-based industrial and specialty chemicals distributor Brenntag was among our best contributors. It buys bulk chemicals and repackages them for sale to smaller companies. The company has a large global footprint and markets products in 160 countries in Asia, Europe, and the Americas. It has done a good job of taking market share and exploiting the “middle man” role. Brenntag also adds value to its products by combining chemicals for resale. In addition, it has grown through acquisitions, buying companies and then cutting costs and improving margins. Investors have rewarded this well-managed company for generating steady growth.
The energy and materials sectors posted losses. It was a tough environment for these companies as oil and commodity prices were sharply lower. We have below-benchmark allocations in both sectors, which contributed to relative performance, but stock selection detracted. We added to our positions in Tullow Oil (UK), Santos (Australia), and Petrobras (Brazil) on price weakness in the first quarter of 2013. Similarly, we added to several Canadian materials companies that declined, including Eldorado Gold and Potash Corporation of Saskatchewan.
Investment Outlook
The last six months have been a dynamic period. It was an unusual time when stocks rallied as economic growth remained subdued, and concerns about European policy and uncertainty about growth in Japan and the U.S. affected sentiment. As the period progressed, investors became more confident and increasingly shifted assets from the safety of money funds to equities. I think we saw the markets breathe a collective sigh of relief when gold prices plummeted. For many investors, gold represents an inflation hedge and a form of insurance against catastrophe, and when gold tumbled, many investors viewed it as a “green light” for equities. Inflation may become an issue at some point due to the loose monetary policies pursued by many central banks, but it is unlikely to become a problem for many months.
During the reporting period, investors warmed to stocks, particularly high-yielding companies in mature markets, and after a long period of indifference, to Japan. We think that in the not-too-distant future this optimism will spread, and investors will begin to feel more comfortable about investing in emerging markets and companies that have the potential to generate above-average cash flow growth. This shift should be beneficial for the portfolio as it suits our bottom-up stock selection process and investment philosophy.
As always, we continue to work diligently on your behalf. We will attempt to identify and invest in what we believe are the most attractive companies for long-term investors, while maintaining a broadly diversified portfolio across sectors and countries.
Respectfully submitted,
Robert W. Smith
Chairman of the Investment Advisory
Committee
May 13, 2013
The committee chairman has day-to-day responsibility for managing the portfolio and works with committee members in developing and executing the fund’s investment program.
| Risks of International Investing |
Funds that invest overseas generally carry more risk than funds that invest strictly in U.S. assets. Funds investing in a single country or in a limited geographic region tend to be riskier than more diversified funds. Risks can result from varying stages of economic and political development; differing regulatory environments, trading days, and accounting standards; and higher transaction costs of non-U.S. markets. Non-U.S. investments are also subject to currency risk, or a decline in the value of a foreign currency versus the U.S. dollar, which reduces the dollar value of securities denominated in that currency.
| Glossary |
Lipper averages: The averages of available mutual fund performance returns for specified time periods in categories defined by Lipper Inc.
MSCI All Country World Index ex USA: An index that measures equity market performance of developed and emerging countries, excluding the U.S.
Portfolio Highlights
Performance and
Expenses
T. Rowe Price Institutional
International Growth Equity Fund
| Performance Comparison |
This chart shows the value of a hypothetical $1 million investment in the fund over the past 10 fiscal year periods or since inception (for funds lacking 10-year records). The result is compared with benchmarks, which may include a broad-based market index and a peer group average or index. Market indexes do not include expenses, which are deducted from fund returns as well as mutual fund averages and indexes.
Fund Expense Example
As a mutual fund shareholder, you may incur two types of costs: (1) transaction costs, such as redemption fees or sales loads, and (2) ongoing costs, including management fees, distribution and service (12b-1) fees, and other fund expenses. The following example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the most recent six-month period and held for the entire period.
Actual
Expenses
The first line of the
following table (Actual) provides information about actual account values and
actual expenses. You may use the information on this line, together with your
account balance, to estimate the expenses that you paid over the period. Simply
divide your account value by $1,000 (for example, an $8,600 account value
divided by $1,000 = 8.6), then multiply the result by the number on the first
line under the heading “Expenses Paid During Period” to estimate the expenses
you paid on your account during this period.
Hypothetical Example for
Comparison Purposes
The information
on the second line of the table (Hypothetical) is based on hypothetical account
values and expenses derived from the fund’s actual expense ratio and an assumed
5% per year rate of return before expenses (not the fund’s actual return). You
may compare the ongoing costs of investing in the fund with other funds by
contrasting this 5% hypothetical example and the 5% hypothetical examples that
appear in the shareholder reports of the other funds. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period.
You should also be aware that the expenses shown in the table highlight only your ongoing costs and do not reflect any transaction costs, such as redemption fees or sales loads. Therefore, the second line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. To the extent a fund charges transaction costs, however, the total cost of owning that fund is higher.
Financial Highlights
T. Rowe Price Institutional International Growth Equity
Fund
(Unaudited)
The accompanying notes are an integral part of these financial statements.
Portfolio of
Investments‡
T. Rowe Price Institutional International Growth Equity
Fund
April 30, 2013 (Unaudited)
The accompanying notes are an integral part of these financial statements.
Statement of Assets and
Liabilities
T. Rowe Price
Institutional International Growth Equity Fund
April 30, 2013
(Unaudited)
($000s, except shares and per
share amounts)
The accompanying notes are an integral part of these financial statements.
Statement of
Operations
T. Rowe Price
Institutional International Growth Equity Fund
(Unaudited)
($000s)
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Net
Assets
T. Rowe Price Institutional
International Growth Equity Fund
(Unaudited)
($000s)
The accompanying notes are an integral part of these financial statements.
Notes to Financial
Statements
T. Rowe Price
Institutional International Growth Equity Fund
April 30, 2013
(Unaudited)
T. Rowe Price Institutional International Funds, Inc. (the corporation), is registered under the Investment Company Act of 1940 (the 1940 Act). The Institutional International Growth Equity Fund (the fund) is a diversified, open-end management investment company established by the corporation. The fund commenced operations on September 7, 1989. The fund seeks long-term growth of capital through investments primarily in the common stocks of established, non-U.S. companies.
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.
Redemption Fees A 2% fee is assessed on redemptions of fund shares held for 90 days or less to deter short-term trading and to protect the interests of long-term shareholders. Redemption fees are withheld from proceeds that shareholders receive from the sale or exchange of fund shares. The fees are paid to the fund and are recorded as an increase to paid-in capital. The fees may cause the redemption price per share to differ from the net asset value per share.
New Accounting Guidance In December 2011, the Financial Accounting Standards Board issued amended guidance requiring an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The guidance is effective for fiscal years and interim periods beginning on or after January 1, 2013. Adoption will have no effect on the fund’s net assets or results of operations.
NOTE 2 - VALUATION
The fund’s financial instruments are valued and its net asset value (NAV) per share is computed at the close of the New York Stock Exchange (NYSE), normally 4 p.m. ET, each day the NYSE is open for business.
Fair Value The fund’s financial instruments are reported at fair value, which GAAP defines as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The T. Rowe Price Valuation Committee (the Valuation Committee) has been established by the fund’s Board of Directors (the Board) to ensure that financial instruments are appropriately priced at fair value in accordance with GAAP and the 1940 Act. Subject to oversight by the Board, the Valuation Committee develops and oversees pricing-related policies and procedures and approves all fair value determinations. Specifically, the Valuation Committee establishes procedures to value securities; determines pricing techniques, sources, and persons eligible to effect fair value pricing actions; oversees the selection, services, and performance of pricing vendors; oversees valuation-related business continuity practices; and provides guidance on internal controls and valuation-related matters. The Valuation Committee reports to the fund’s Board; is chaired by the fund’s treasurer; and has representation from legal, portfolio management and trading, operations, and risk management.
Various valuation techniques and inputs are used to determine the fair value of financial instruments. GAAP establishes the following fair value hierarchy that categorizes the inputs used to measure fair value:
Level 1 – quoted prices (unadjusted) in active markets for identical financial instruments that the fund can access at the reporting date
Level 2 – inputs other than Level 1 quoted prices that are observable, either directly or indirectly (including, but not limited to, quoted prices for similar financial instruments in active markets, quoted prices for identical or similar financial instruments in inactive markets, interest rates and yield curves, implied volatilities, and credit spreads)
Level 3 – unobservable inputs
Observable inputs are developed using market data, such as publicly available information about actual events or transactions, and reflect the assumptions that market participants would use to price the financial instrument. Unobservable inputs are those for which market data are not available and are developed using the best information available about the assumptions that market participants would use to price the financial instrument. GAAP requires valuation techniques to maximize the use of relevant observable inputs and minimize the use of unobservable inputs. When multiple inputs are used to derive fair value, the financial instrument is assigned to the level within the fair value hierarchy based on the lowest-level input that is significant to the fair value of the financial instrument. Input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level but rather the degree of judgment used in determining those values.
Valuation Techniques Equity securities listed or regularly traded on a securities exchange or in the over-the-counter (OTC) market are valued at the last quoted sale price or, for certain markets, the official closing price at the time the valuations are made. OTC Bulletin Board securities are valued at the mean of the closing bid and asked prices. A security that is listed or traded on more than one exchange is valued at the quotation on the exchange determined to be the primary market for such security. Listed securities not traded on a particular day are valued at the mean of the closing bid and asked prices for domestic securities and the last quoted sale or closing price for international securities.
For valuation purposes, the last quoted prices of non-U.S. equity securities may be adjusted to reflect the fair value of such securities at the close of the NYSE. If the fund determines that developments between the close of a foreign market and the close of the NYSE will, in its judgment, materially affect the value of some or all of its portfolio securities, the fund will adjust the previous quoted prices to reflect what it believes to be the fair value of the securities as of the close of the NYSE. In deciding whether it is necessary to adjust quoted prices to reflect fair value, the fund reviews a variety of factors, including developments in foreign markets, the performance of U.S. securities markets, and the performance of instruments trading in U.S. markets that represent foreign securities and baskets of foreign securities. The fund may also fair value securities in other situations, such as when a particular foreign market is closed but the fund is open. The fund uses outside pricing services to provide it with quoted prices and information to evaluate and/or adjust those prices. The fund cannot predict how often it will use quoted prices and how often it will determine it necessary to adjust those prices to reflect fair value. As a means of evaluating its security valuation process, the fund routinely compares quoted prices, the next day’s opening prices in the same markets, and adjusted prices.
Actively traded domestic equity securities generally are categorized in Level 1 of the fair value hierarchy. Non-U.S. equity securities generally are categorized in Level 2 of the fair value hierarchy despite the availability of quoted prices because, as described above, the fund evaluates and determines whether those quoted prices reflect fair value at the close of the NYSE or require adjustment. OTC Bulletin Board securities, certain preferred securities, and equity securities traded in inactive markets generally are categorized in Level 2 of the fair value hierarchy.
Investments in mutual funds are valued at the mutual fund’s closing net asset value per share on the day of valuation and are categorized in Level 1 of the fair value hierarchy.
Assets and liabilities other than financial instruments, including short-term receivables and payables, are carried at cost, or estimated realizable value, if less, which approximates fair value.
Thinly traded financial instruments and those for which the above valuation procedures are inappropriate or are deemed not to reflect fair value are stated at fair value as determined in good faith by the Valuation Committee. The objective of any fair value pricing determination is to arrive at a price that could reasonably be expected from a current sale. Financial instruments fair valued by the Valuation Committee are primarily private placements, restricted securities, warrants, rights, and other securities that are not publicly traded.
Subject to oversight by the Board, the Valuation Committee regularly makes good faith judgments to establish and adjust the fair valuations of certain securities as events occur and circumstances warrant. For instance, in determining the fair value of an equity investment with limited market activity, such as a private placement or a thinly traded public company stock, the Valuation Committee considers a variety of factors, which may include, but are not limited to, the issuer’s business prospects, its financial standing and performance, recent investment transactions in the issuer, new rounds of financing, negotiated transactions of significant size between other investors in the company, relevant market valuations of peer companies, strategic events affecting the company, market liquidity for the issuer, and general economic conditions and events. In consultation with the investment and pricing teams, the Valuation Committee will determine an appropriate valuation technique based on available information, which may include both observable and unobservable inputs. The Valuation Committee typically will afford greatest weight to actual prices in arm’s length transactions, to the extent they represent orderly transactions between market participants; transaction information can be reliably obtained; and prices are deemed representative of fair value. However, the Valuation Committee may also consider other valuation methods such as market-based valuation multiples; a discount or premium from market value of a similar, freely traded security of the same issuer; or some combination. Fair value determinations are reviewed on a regular basis and updated as information becomes available, including actual purchase and sale transactions of the issue. Because any fair value determination involves a significant amount of judgment, there is a degree of subjectivity inherent in such pricing decisions and fair value prices determined by the Valuation Committee could differ from those of other market participants. Depending on the relative significance of unobservable inputs, including the valuation technique(s) used, fair valued securities may be categorized in Level 2 or 3 of the fair value hierarchy.
Valuation Inputs The following table summarizes the fund’s financial instruments, based on the inputs used to determine their fair values on April 30, 2013:
There were no material transfers between Levels 1 and 2 during the period.
Following is a reconciliation of the fund’s Level 3 holdings for the six months ended April 30, 2013. Gain (loss) reflects both realized and change in unrealized gain/loss on Level 3 holdings during the period, if any, and is included on the accompanying Statement of Operations. The change in unrealized gain/loss on Level 3 instruments held at April 30, 2013, totaled $(93,000) for the six months ended April 30, 2013.
NOTE 3 - OTHER INVESTMENT TRANSACTIONS
Consistent with its investment objective, the fund engages in the following practices to manage exposure to certain risks and/or to enhance performance. The investment objective, policies, program, and risk factors of the fund are described more fully in the fund’s prospectus and Statement of Additional Information.
Emerging Markets At April 30, 2013, approximately 24% of the fund’s net assets were invested, either directly or through investments in T. Rowe Price institutional funds, in securities of companies located in emerging markets, securities issued by governments of emerging market countries, and/or securities denominated in or linked to the currencies of emerging market countries. Emerging market securities are often subject to greater price volatility, less liquidity, and higher rates of inflation than U.S. securities. In addition, emerging markets may be subject to greater political, economic, and social uncertainty, and differing regulatory environments that may potentially impact the fund’s ability to buy or sell certain securities or repatriate proceeds to U.S. dollars.
Restricted Securities The fund may invest in securities that are subject to legal or contractual restrictions on resale. Prompt sale of such securities at an acceptable price may be difficult and may involve substantial delays and additional costs.
Securities Lending The fund lends its securities to approved brokers to earn additional income. It receives as collateral cash and U.S. government securities valued at 102% to 105% of the value of the securities on loan. Collateral is maintained over the life of the loan in an amount not less than the value of loaned securities; any additional collateral required due to changes in security values is delivered to the fund the next business day. Cash collateral is invested by the fund’s lending agent(s) in accordance with investment guidelines approved by management. Although risk is mitigated by the collateral, the fund could experience a delay in recovering its securities and a possible loss of income or value if the borrower fails to return the securities or if collateral investments decline in value. Securities lending revenue recognized by the fund consists of earnings on invested collateral and borrowing fees, net of any rebates to the borrower, compensation to the lending agent and other administrative costs. In accordance with GAAP, investments made with cash collateral are reflected in the accompanying financial statements, but collateral received in the form of securities is not. At April 30, 2013, the value of loaned securities was $4,797,000; the value of cash collateral and related investments was $5,035,000.
Other Purchases and sales of portfolio securities other than short-term securities aggregated $19,652,000 and $19,550,000, respectively, for the six months ended April 30, 2013.
NOTE 4 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and distribute to shareholders all of its taxable income and gains. Distributions determined in accordance with federal income tax regulations may differ in amount or character from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book/tax differences to reflect tax character but are not adjusted for temporary differences. The amount and character of tax-basis distributions and composition of net assets are finalized at fiscal year-end; accordingly, tax-basis balances have not been determined as of the date of this report.
The fund intends to retain realized gains to the extent of available capital loss carryforwards. As a result of the Regulated Investment Company Modernization Act of 2010, net capital losses realized on or after November 1, 2011 (effective date) may be carried forward indefinitely to offset future realized capital gains; however, post-effective losses must be used before pre-effective capital loss carryforwards with expiration dates. Accordingly, it is possible that all or a portion of the fund’s pre-effective capital loss carryforwards could expire unused. As of October 31, 2012, the fund had $14,499,000 of available capital loss carryforwards, which expire as follows: $13,879,000 in fiscal 2017; $620,000 have no expiration.
At April 30, 2013, the cost of investments for federal income tax purposes was $81,998,000. Net unrealized gain aggregated $17,999,000 at period-end, of which $21,657,000 related to appreciated investments and $3,658,000 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 $449,000 of foreign capital loss carryforwards, including $29,000 that expire in 2016, $177,000 that expire in 2017, $109,000 that expire in 2018, $56,000 that expire in 2019, $63,000 that expire in 2020, $13,000 that expire in 2021, and $2,000 that expire in 2022.
NOTE 6 - RELATED PARTY TRANSACTIONS
The fund is managed by T. Rowe Price Associates, Inc. (Price Associates), a wholly owned subsidiary of T. Rowe Price Group, Inc. (Price Group). Price Associates has entered into subadvisory agreements with T. Rowe Price International Ltd. and T. Rowe Price Singapore Private Ltd., 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 equal to 70% of the fund’s average daily net assets. The fee is computed daily and paid monthly.
The fund is also subject to a contractual expense limitation through February 28, 2014. During the limitation period, Price Associates is required to waive its management fee and reimburse the fund for any expenses, excluding interest, taxes, brokerage commissions, and extraordinary expenses, that would otherwise cause the fund’s ratio of annualized total expenses to average net assets (expense ratio) to exceed its expense limitation of 0.75%. The fund is required to repay Price Associates for expenses previously reimbursed and management fees waived to the extent the fund’s net assets have grown or expenses have declined sufficiently to allow repayment without causing the fund’s expense ratio to exceed its expense limitation. However, no repayment will be made more than three years after the date of any reimbursement or waiver or later than February 29, 2016. Pursuant to this agreement, management fees in the amount of $115,000 were waived during the six months ended April 30, 2013. Including these amounts, management fees waived in the amount of $750,000 remain subject to repayment by the fund at April 30, 2013.
In addition, the fund has entered into service agreements with Price Associates and a wholly owned subsidiary 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. For the six months ended April 30, 2013, expenses incurred pursuant to these service agreements were $60,000 for Price Associates and $1,000 for T. Rowe Price 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 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 fund’s Statement of Additional Information. You may request this document by calling 1-800-225-5132 or by accessing the SEC’s website, sec.gov.
The description of our proxy voting policies and procedures is also available on our website, troweprice.com. To access it, click on the words “Social Responsibility” at the top of our corporate homepage. Next, click on the words “Conducting Business Responsibly” on the left side of the page that appears. Finally, click on the words “Proxy Voting Policies” on the left side of the page that appears.
Each fund’s most recent annual proxy voting record is available on our website and through the SEC’s website. To access it through our website, follow the directions above to reach the “Conducting Business Responsibly” page. Click on the words “Proxy Voting Records” on the left side of that page, and then click on the “View Proxy Voting Records” link at the bottom of the page that appears.
| 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 Sub-Advisory Agreement |
On March 5, 2013, the fund’s Board of Directors (Board), including a majority of the fund’s independent directors, approved the continuation of the investment management agreement (Advisory Contract) between the fund and its investment advisor, T. Rowe Price Associates, Inc. (Advisor), as well as the continuation of the investment subadvisory agreements (Subadvisory Contracts) that the Advisor has entered into with T. Rowe Price International Ltd and T. Rowe Price Singapore Private Ltd. (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
annual 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. While the Board did not review
information regarding profits realized from managing the fund in particular
because the fund had not achieved sufficient scale to produce meaningful profit
margin percentages, the Board concluded that the Advisor’s profits were
reasonable in light of the services provided to the funds.
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 based on the fund’s average daily net assets and the fund pays its own expenses of operations (subject to an expense limitation agreed to by the Advisor). 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 be appropriate.
Fees
The Board was provided with information regarding
industry trends in management fees and expenses, and the Board reviewed the
fund’s management fee rate, operating expenses, and total expense ratio in
comparison to fees and expenses of other comparable funds based on information
and data supplied by Lipper. The information provided to the Board indicated
that the fund’s management fee rate (after including reductions of the
management fee that resulted from fee waivers and/or expenses paid by the
Advisor) and total expense ratio were 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 Institutional 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 | ||