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, 2015
Item 1. Report to Shareholders
 |
|
Institutional Global Growth Equity Fund |
April 30, 2015 |
| Highlights |
| ● |
Japanese and developed European markets generated strong returns over the six-month period ended April 30, 2015, outperforming the U.S. and emerging markets. |
| ● |
The fund returned 6.40% in the reporting period, outperforming its benchmark as a result of strong stock selection. |
| ● |
We maintained a significant relative overweight to emerging markets, where we tend to favor financial companies and retailers. However, we recognize the importance of selectivity at the company level given headwinds from potentially rising U.S. interest rates and steep decreases in the prices of some commodities. |
| ● |
We believe that stock selection will be the most important driver of returns going forward, so our robust research platform and worldwide, fundamentally driven research process should serve our investors well. |
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.
Manager’s Letter
T. Rowe Price Institutional Global Growth Equity
Fund
Dear Investor
Global stock markets generated solid returns for the six-month reporting period, with Japan and Europe outperforming the U.S. and emerging markets. The U.S. dollar strengthened markedly against many other currencies, trimming returns for U.S.-based investors in non-U.S. markets. Central bank policies continued to diverge, with the Fed preparing to raise interest rates while many other global central banks, including the European Central Bank (ECB) and the Bank of Japan (BoJ), introduced or maintained aggressively accommodative policies. Oil prices plunged before recovering somewhat toward the end of our reporting period. In an increasingly volatile environment, your fund posted healthy returns, outperforming its benchmark as a result of strong stock selection—particularly in emerging markets. We expect stock picking to generate the bulk of the fund’s relative returns going forward.
Your fund returned 6.40% for the six-month period ended April 30, 2015. The fund outperformed both the MSCI All Country World Index and the Lipper Global Multi-Cap Growth Funds Average for the reporting period. The fund’s longer-term relative performance was also strong. Based on cumulative total return, Lipper ranked the Institutional Global Growth Equity Fund 26 of 249, 47 of 222, 58 of 168, and 10 of 122 in the global multi-cap growth funds universe for the one-, three-, and five-year and since-inception periods ended April 30, 2015, respectively. (The Lipper since-inception ranking was calculated from 10/31/08 through 4/30/15. Results will vary for other periods. Past performance cannot guarantee future results.)
Stock selection was the primary source of the fund’s outperformance of the benchmark during the reporting period. Our stock selection in emerging markets was particularly strong, where it more than offset the negative effects of the portfolio’s overweight to emerging markets, which underperformed developed markets.
Market Review
U.S. stocks generated good returns for the reporting period, although many other developed markets performed better. The U.S. dollar strengthened markedly against most other currencies, which weighed on the earnings of U.S. companies that obtain a significant portion of their revenues from international operations. Much of the strength in the dollar stemmed from the fact that the Fed is poised to begin raising interest rates even as many other global central banks, including the ECB and the BoJ, maintain aggressively accommodative policies. The U.S. economy continues to recover considerably faster than most other global regions, with the unemployment rate falling to 5.4% in April 2015 from 5.8% in November 2014. U.S. gross domestic product expanded at a 2.2% annual rate in the fourth quarter of last year, although that pace slowed to only 0.2% according to the latest available estimate for 2015’s first quarter.
Developed European stock markets advanced, although the pace slowed toward the end of the reporting period. Late in 2014, eurozone equities rallied in anticipation of the ECB’s January decision to launch a large-scale quantitative easing (QE) program involving purchases of eurozone sovereign debt. The ECB began buying 60 billion euros of bonds per month beginning in March and said that it would expand the purchases through at least September 2016. Plummeting oil prices have also helped the eurozone recovery by increasing consumers’ purchasing power and reducing costs for oil-intensive manufacturers. Investors also largely shook off concerns about Greece’s ability to obtain more aid from the ECB, the European Commission, and the International Monetary Fund in order to service its outstanding debt obligations.
Japanese equities posted impressive returns during the reporting period, rising more than 20% in local currency terms and almost 13% in terms of U.S. dollars. The continued weakening of the yen, coupled with lower oil prices, helped many Japanese companies reduce costs and generate higher revenues and earnings. The BoJ continued its low-rate policies and quantitative easing to stimulate growth. The Japanese Government Pension Investment Fund’s ongoing reallocation of assets from bonds to equities, which began in 2014, also supported Japanese stocks. On the negative side, Japan’s domestic consumption remains stagnant.
Emerging markets returns were mixed. Stocks in some developing countries, including Brazil and India, declined amid heightened concerns about inflation, weakening currencies, and political uncertainties. However, other emerging markets, including China, South Korea, and the Philippines, performed well as lower oil prices and more positive expectations for economic growth created a tailwind for equity prices. Overall, investors remain wary of emerging markets that are exposed to rising U.S. interest rates—the nations that are the most dependent on external funding being the most at risk—and Asian markets that are vulnerable to an economic slowdown in China. The Chinese economy expanded at a 7.0% annual pace in the first quarter, but the government said that it expects growth to slow to 6.8% in the second quarter. Many investors were anticipating that China’s central bank would enact additional stimulus measures, which benefited Chinese stocks.
Strategy and Portfolio Review
We are focused on identifying stocks with the best prospects for long-term earnings growth. Our fundamental approach concentrates on bottom-up company research instead of top-down macro analysis. As a result, our stock selection tends to drive the portfolio’s broader sector allocations. However, we are also mindful that country-specific economic, regulatory, or political factors can affect individual holdings. Our largest sector allocation at both the beginning and end of the reporting period was financials, and we increased the size of the portfolio’s allocation to the sector over the course of the six months. This allocation was a significant overweight relative to the benchmark by the end of April. Some of the additional allocation to financials came from a reduction in the portfolio’s consumer discretionary holdings after strong performance from several of our stocks in that sector. Within financials, we added positions in European real estate companies (which are classified in the financials sector) and banks that we believe will benefit from the ECB’s QE program. Materials was the smallest sector allocation at the end of the reporting period.
In terms of regional positioning, we increased the size of our allocation to European (excluding the UK) stocks in developed markets. We began to boost our European holdings in late 2014 as the falling euro benefited the region’s exporters and added to the allocation when it became clear to us that the ECB would implement an aggressive sovereign QE program. On the other hand, we trimmed our holdings in the U.S., where we found fewer companies poised to durably increase their earnings over time than in Europe. The portfolio is significantly underweight the U.S. relative to the benchmark. While Japan generated strong returns, we maintained an underweight to the country, as we believe its aggressive stimulus programs will fall short of spurring significant demand or wage growth.
We maintained a large allocation, and a significant overweight relative to the benchmark, to emerging markets stocks. Within emerging markets, we favor financial companies and retailers, particularly those with strong e-commerce franchises, because they tend to be beneficiaries of the youthful demographics and rapidly growing middle classes in emerging markets. However, we recognize the importance of selectivity at the company level given the current headwinds from strength in the dollar, potentially rising U.S. interest rates, and steep decreases in the prices of some commodities. Near the end of the reporting period, we significantly increased our allocation to Brazil, where stock valuations broadly appear attractive amid investor sentiment that seems unduly negative. Brazil’s economy continues to struggle, but the corruption scandal involving state-owned oil company Petrobras—the company avoided a technical default on its debt by filing revised financial statements for 2014 that reflect the impact of the bribery—seems to have motivated the country’s government to implement sensible fiscal reforms.
In response to the aggressive monetary accommodation measures implemented by both the ECB and the BoJ, we initiated hedge positions on both the euro and the yen against the U.S. dollar. We chose to partially hedge these currencies because we believe that their significant depreciation is likely to impair the stock price increases that we could receive from investing in domestically oriented companies in the eurozone and Japan. The sizes of the hedge positions are proportional to the sizes of our holdings of eurozone and Japanese companies with major domestic revenues. These positions are not an attempt to speculate on currency movements.
Amazon.com was the portfolio’s largest holding at the end of the reporting period and produced a strong gain in 2015 after some weakness late last year. We added to our Amazon allocation in the fourth quarter of 2014 when broad investor sentiment toward the U.S.-based e-commerce company soured. We are particularly optimistic about the prospects for long-term growth in its cloud computing and Amazon Web Services (AWS) online storage businesses. Amazon started to disclose more information about AWS in its overall financial results, which revealed that the segment has been surprisingly strong. (Please refer to the portfolio of investments for a complete list of holdings and the amount each represents in the portfolio.)
We added to our position in JPMorgan Chase, which we believe is an attractively valued leading global financial firm that has positioned itself well to grow over the long term. JPMorgan Chase has also been returning cash to shareholders by boosting its dividend. We added to a position in French financial services firm BNP Paribas because we think that the company will be able to provide durable, long-term earnings growth through cost-cutting measures and its diverse stream of revenues. Also, much as the Fed’s QE programs helped strengthen banks and other financial companies in the U.S., we believe that the ECB’s sovereign bond purchases should support eurozone banks, including BNP Paribas.
Our stock selection in the health care sector produced solid results. Shares of U.S. drug company Hospira jumped on the news that pharmaceutical giant Pfizer would acquire the smaller firm. We eliminated Hospira after its acquisition-related runup. Eisai, a Japanese pharmaceutical company, generated strong gains as a result of positive test results for a new drug to treat Alzheimer’s disease being developed by Biogen Idec that Eisai has the option to co-promote. A successful launch of the Alzheimer’s drug could greatly boost Eisai’s revenue. We sold our Eisai holdings following the stock’s gains.
Of course, we also had some disappointments. Shares of Holcim, a Switzerland-based cement manufacturer, lost ground after a sudden increase in the value of the Swiss franc impaired the company’s profitability. Holcim’s cost base is in francs, but its revenues are in other currencies. We eliminated our Holcim position in favor of higher-conviction investment ideas. BR Malls Participacoes, an operator of Brazilian shopping malls, also weighed on returns as the corruption scandal at Petrobras dragged down sentiment for many companies in Brazil. However, we think that BR Malls remains an exceptional long-term growth opportunity that is well positioned to benefit from a rebound in Brazil, so we retained our holdings of the stock.
Investment Outlook
Despite the recent bouts of volatility, we believe that the investment environment remains positive. Developed market interest rates are still low and are likely to remain at or near their current levels for an extended time, even if they move slightly higher in the U.S. Equity valuations in the U.S. are elevated on an absolute basis but are still quite attractive relative to the meager yields on bonds. We think that stock selection will be the most important source of returns as the momentum-driven rally continues to recede.
In developed markets, the U.S. economy seems to offer the most certainty of a sustainable rebound, although the recovery is advancing at a more sluggish pace than we expected. With the weaker euro and the ECB’s aggressively expansionary policies, the eurozone appears primed for an economic rebound and likely has more potential market upside than the U.S. Japan’s economy continues to make progress, but many structural headwinds remain. Given the recent strong rally in Japanese stocks, their upside may now be limited.
The disparity in returns among emerging markets countries has widened as a result of the sharp pullback in oil prices and varying levels of investor comfort with political outcomes. We expect these trends to endure. We believe that the somewhat panicked reaction to rising U.S. interest rates in 2013—when investors sold emerging markets stocks almost uniformly—is unlikely to recur when the Fed tightens monetary policy. Indeed, a Fed rate hike would hardly be a surprise given the amount of attention that investors have paid to the timing of the central bank’s “liftoff,” and we expect a more muted reaction than in 2013.
We see opportunities for success based on bottom-up, fundamental stock selection because businesses with the unique characteristics for premium growth do not command unreasonable valuation multiples. In our view, the difference between the valuations of the cheapest stocks and the most expensive stocks is abnormally low, creating an environment that lends itself to stock pickers who can identify companies with the best prospects for durable, premium growth. We are confident that our robust research platform and worldwide, fundamentally driven research process will prove well suited for increasingly selective markets.
As always, thank you for investing with T. Rowe Price.
Respectfully submitted,
R. Scott Berg
Chairman of the fund’s Investment Advisory
Committee
May 18, 2015
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 |
Gross domestic product: The total market value of all goods and services produced in a country in a given year.
Lipper averages: The average of available mutual fund performance returns in categories defined by Lipper Inc.
MSCI All Country World Index: A capitalization-weighted index of stocks from developed and emerging markets worldwide.
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.
Portfolio Highlights
Performance and Expenses
T. Rowe Price Institutional Global Growth Equity
Fund
| Growth of $1 Million |
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 Global Growth Equity
Fund
(Unaudited)
The accompanying notes are an integral part of these financial statements.
Portfolio of Investments‡
T. Rowe Price
Institutional Global Growth Equity Fund
April 30, 2015
(Unaudited)
The accompanying notes are an integral part of these financial statements.
Statement of Assets and
Liabilities
T. Rowe Price Institutional
Global Growth Equity Fund
April 30, 2015 (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 Global 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 Global
Growth Equity Fund
(Unaudited)
($000s)
The accompanying notes are an integral part of these financial statements.
Notes to Financial
Statements
T. Rowe Price Institutional
Global Growth Equity Fund
April 30, 2015 (Unaudited)
T. Rowe Price Institutional International Funds, Inc. (the corporation), is registered under the Investment Company Act of 1940 (the 1940 Act). The Institutional Global Growth Equity Fund (the fund) is a diversified, open-end management investment company established by the corporation. The fund commenced operations on October 27, 2008. The fund seeks long-term growth of capital through investments primarily in the common stocks of large-cap companies throughout the world, including the U.S.
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. Earnings on investments recognized as partnerships for federal income tax purposes reflect the tax character of such earnings. 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. Distributions from REITs are initially recorded as dividend income and, to the extent such represent a return of capital or capital gain for tax purposes, are reclassified when such information becomes available. 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. Forward currency exchange contracts are valued using the prevailing forward exchange rate and are categorized in Level 2 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.
Following is a reconciliation of the fund’s Level 3 holdings for the six months ended April 30, 2015. 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, 2015, totaled $128,000 for the six months ended April 30, 2015.
NOTE 3 - DERIVATIVE INSTRUMENTS
During the six months ended April 30, 2015, the fund invested in derivative instruments. As defined by GAAP, a derivative is a financial instrument whose value is derived from an underlying security price, foreign exchange rate, interest rate, index of prices or rates, or other variable; it requires little or no initial investment and permits or requires net settlement. The fund invests in derivatives only if the expected risks and rewards are consistent with its investment objectives, policies, and overall risk profile, as described in its prospectus and Statement of Additional Information. The fund may use derivatives for a variety of purposes, such as seeking to hedge against declines in principal value, increase yield, invest in an asset with greater efficiency and at a lower cost than is possible through direct investment, or to adjust credit exposure. The risks associated with the use of derivatives are different from, and potentially much greater than, the risks associated with investing directly in the instruments on which the derivatives are based. The fund at all times maintains sufficient cash reserves, liquid assets, or other SEC-permitted asset types to cover its settlement obligations under open derivative contracts.
The fund values its derivatives at fair value, as described in Note 2, and recognizes changes in fair value currently in its results of operations. Accordingly, the fund does not follow hedge accounting, even for derivatives employed as economic hedges. Generally, the fund accounts for its derivatives on a gross basis. It does not offset the fair value of derivative liabilities against the fair value of derivative assets on its financial statements, nor does it offset the fair value of derivative instruments against the right to reclaim or obligation to return collateral. As of April 30, 2015, the fund held foreign exchange derivatives with a fair value of $68,000, included in Unrealized gain on forward currency exchange contracts, and $608,000, included in Unrealized loss on forward currency exchange contracts, on the accompanying Statement of Assets and Liabilities.
Additionally, during the six months ended April 30, 2015, the fund recognized $1,218,000 of realized gain on Foreign Currency Transactions and a $(671,000) change in unrealized gain/loss on Foreign Currency Transactions related to its investments in foreign exchange derivatives; such amounts are included on the accompanying Statement of Operations.
Counterparty Risk and Collateral The fund invests in derivatives, such as bilateral swaps, forward currency exchange contracts, or OTC options, that are transacted and settle directly with a counterparty (bilateral derivatives), and thereby expose the fund to counterparty risk. To mitigate this risk, the fund has entered into master netting arrangements (MNAs) with certain counterparties that permit net settlement under specified conditions and, for certain counterparties, also provide collateral agreements. MNAs may be in the form of International Swaps and Derivatives Association master agreements (ISDAs) or foreign exchange letter agreements (FX letters).
MNAs govern the ability to offset amounts the fund owes a counterparty against amounts the counterparty owes the fund (net settlement). Both ISDAs and FX letters generally allow net settlement in the event of contract termination and permit termination by either party prior to maturity upon the occurrence of certain stated events, such as failure to pay or bankruptcy. In addition, ISDAs specify other events, the occurrence of which would allow one of the parties to terminate. For example, a downgrade in credit rating of a counterparty would allow the fund to terminate while a decline in the fund’s net assets of more than a certain percentage would allow the counterparty to terminate. Upon termination, all bilateral derivatives with that counterparty would be liquidated and a net amount settled. ISDAs typically include collateral agreements whereas FX letters do not. Collateral requirements are determined based on the net aggregate unrealized gain or loss on all bilateral derivatives with each counterparty, subject to minimum transfer amounts that typically range from $100,000 to $250,000. Any additional collateral required due to changes in security values is transferred the next business day.
Collateral may be in the form of cash or debt securities issued by the U.S. government or related agencies. Cash and currencies posted by the fund are reflected as cash deposits in the accompanying financial statements and generally are restricted from withdrawal by the fund; securities posted by the fund are so noted in the accompanying Portfolio of Investments; both remain in the fund’s assets. Collateral pledged by counterparties is not included in the fund’s assets because the fund does not obtain effective control over those assets. For bilateral derivatives, collateral posted or received by the fund is held in a segregated account by the fund’s custodian. As of April 30, 2015, no collateral was pledged by either the fund or counterparties for bilateral derivatives.
Forward Currency Exchange Contracts The fund is subject to foreign currency exchange rate risk in the normal course of pursuing its investment objectives. It uses forward currency exchange contracts (forwards) primarily to protect its non-U.S. dollar-denominated securities from adverse currency movements relative to the U.S. dollar. A forward involves an obligation to purchase or sell a fixed amount of a specific currency on a future date at a price set at the time of the contract. Although certain forwards may be settled by exchanging only the net gain or loss on the contract, most forwards are settled with the exchange of the underlying currencies in accordance with the specified terms. Forwards are valued at the unrealized gain or loss on the contract, which reflects the net amount the fund either is entitled to receive or obligated to deliver, as measured by the difference between the forward exchange rates at the date of entry into the contract and the forward rates at the reporting date. Appreciated forwards are reflected as assets, and depreciated forwards are reflected as liabilities on the accompanying Statement of Assets and Liabilities. Risks related to the use of forwards include the possible failure of counterparties to meet the terms of the agreements; that anticipated currency movements will not occur, thereby reducing the fund’s total return; and the potential for losses in excess of the fund’s initial investment. During the six months ended April 30, 2015, the volume of the fund’s activity in forwards, based on underlying notional amounts, was generally between 2% and 7% of net assets.
NOTE 4 - 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 24% 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.
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 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 $2,569,000 the value of cash collateral and related investments was $2,727,000.
Other Purchases and sales of portfolio securities other than short-term securities aggregated $172,127,000 and $148,902,000, respectively, for the six months ended April 30, 2015.
NOTE 5 - 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 $263,015,000. Net unrealized gain aggregated $32,765,000 at period-end, of which $42,225,000 related to appreciated investments and $9,460,000 related to depreciated investments.
NOTE 6 - 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 $115,000 of foreign capital loss carryforwards, including $53,000 that expire in 2020, $51,000 that expire in 2021, and $11,000 that expire in 2022.
NOTE 7 - 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). The investment management agreement between the fund and Price Associates provides for an annual investment management fee equal to 0.65% 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, 2017. 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 its net assets grow or expenses decline 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 a reimbursement or waiver or, in any case, later than February 28, 2020. Pursuant to this agreement, management fees in the amount of $24,000 were waived and expenses in the amount of $1,000 were repaid to Price Associates during the six months ended April 30, 2015. Including these amounts, management fees waived and expenses previously reimbursed by Price Associates in the amount of $388,000 remain subject to repayment by the fund at April 30, 2015.
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, 2015, expenses incurred pursuant to these service agreements were $60,000 for Price Associates and less than $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, 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.
As of April 30, 2015, T. Rowe Price Group, Inc., or its wholly owned subsidiaries owned 500,000 shares of the fund, representing 4% of the fund’s net assets.
| 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 |
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). 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, also taking into account information provided by the Advisor during the course of the year, as discussed below:
Services Provided by the
Advisor
The Board considered the nature,
quality, and extent of the services provided to the fund by the Advisor. 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 senior management team
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.
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 three-year and five-year and since-inception
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) 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 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). 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 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 and total expense ratio (after including management fee
waivers and/or expenses paid by the Advisor pursuant to the expense limitation)
were 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
As noted, the Board approved the
continuation of the Advisory Contract. No single factor was considered in
isolation or to be determinative to the decision. Rather, the Board concluded,
in light of a weighting and balancing of all factors considered, that it was in
the best interests of the fund and its shareholders for the Board to approve the
continuation of the Advisory Contract (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 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 | ||