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: 811-07173
| T. Rowe Price Personal Strategy 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: May
31
Date of reporting period: November 30,
2015
Item 1. Report to Shareholders
 |
|
Personal
Strategy Balanced Fund |
November
30, 2015 |
The views and opinions in this report were current as of November 30, 2015. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the fund’s future investment intent. The report is certified under the Sarbanes-Oxley Act, which requires mutual funds and other public companies to affirm that, to the best of their knowledge, the information in their financial reports is fairly and accurately stated in all material respects.
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Manager’s Letter
Fellow Shareholders
U.S. stocks declined in the six months ended November 30, 2015, a volatile period for global financial markets as concerns about slowing growth in overseas markets offset signs of strength in the U.S. economy. Stocks in international markets posted steep declines as geopolitical uncertainty, slumping commodity prices, and decelerating growth in China weighed on the growth outlook. U.S. bonds produced negative returns. Investment-grade bonds fell slightly, while high yield debt lagged with a larger loss. Within international markets, non-U.S. dollar-denominated debt retreated. The dollar surged against most currencies as investors anticipated that the Federal Reserve would increase interest rates for the first time since 2006 by year-end in contrast to more accommodative monetary policies from major central banks, including the European Central Bank and the Bank of Japan.
In this uneven global growth environment, the Personal Strategy Funds posted modest losses in the first half of their fiscal year. Each fund trailed its respective combined index portfolio. The performance of each fund against its respective Morningstar index and Lipper peer group index was mixed.
MARKET ENVIRONMENT
U.S. stocks ended the reporting period slightly lower. According to various Russell indexes, U.S. large-cap stocks posted the smallest declines, followed by small- and mid-caps, respectively. The U.S. economy continued to strengthen over the past six months, and the Fed signaled that it was ready to start normalizing monetary policy by year-end. The dollar appreciated against virtually all currencies as the prospect of higher rates and relatively strong growth in the U.S. coincided with slowing growth and decisions by several central banks to expand their quantitative easing programs. A sell-off in Chinese stock markets followed by a surprise currency devaluation over the summer raised concerns about China’s decelerating economy and its impact on the global outlook. Shortly after our reporting period ended, the Fed raised its benchmark interest rate by 0.25%, a widely expected move following signs of growing strength in the U.S. economy.
Stocks in developed European markets fell as weakening global growth and slowdowns in many emerging markets threatened to derail the region’s tepid economic recovery. China’s slowdown was particularly worrisome given its position as a key export market for many European multinationals. Gross domestic product (GDP) in the euro area expanded 0.3% in the third quarter from the previous three months, the weakest pace this year, the European Union reported in November. Japanese equities declined. The Bank of Japan continued to implement its unprecedentedly large stimulus program in an effort to fight chronic deflation and lift domestic consumption. However, the country’s economic recovery remained fragile. Japan narrowly skirted a recession this year as its GDP slightly expanded in the third quarter instead of contracting as previously estimated, the government announced after our reporting period ended.
Emerging markets stocks shed roughly 17% as concerns about China’s economy, a collapse in commodity prices, and expectations of higher U.S. rates dampened risk appetite. Brazil and Russia grappled with recession. Currency weakness in many emerging markets amplified their losses in dollar terms.
U.S. bonds produced negative returns. In the investment-grade universe, Treasuries were mixed as returns of intermediate maturities rose slightly while longer maturities lost ground. High yield debt dropped as plunging oil prices drove down prices of bonds issued by energy-related companies, which account for a large part of the high yield universe. Non-U.S. dollar bonds in developed and emerging markets declined in dollar terms. The dollar’s strength against most currencies eroded gains from price appreciation on local currency bonds in developed and emerging markets.
PORTFOLIO REVIEW AND POSITIONING
Asset Allocation
The three Personal Strategy portfolios have the ability to
overweight or underweight allocations to asset classes or sub-asset classes
based on the views of the T. Rowe Price Asset Allocation Committee. The
committee meets on a monthly basis to evaluate economic, market, and earnings
trends, among other factors, and to look for opportunities over a six- to
18-month investment horizon. We typically seek to overweight segments of the
market that we believe are attractively valued and underweight areas that are
more richly valued.
As of the end of the reporting period in November, we are neutral between stocks and bonds. Equity valuations remain above historical averages with less support from earnings growth. While valuations are above historical averages across multiple measures, we believe that underlying fundamentals in most sectors remain solid and that improving economic growth should be supportive of stocks. We expect modest returns from bonds given that the current low-yield environment offers a weak foundation and the potential for capital losses as interest rates increase. Monetary policies of global central banks are expected to stay accommodative for some time as they try to support growth, which should temper downside risks to bonds. Additionally, we believe that a rise in U.S. interest rates may be limited as growth remains subdued and demand for U.S. bonds persists with U.S. yields among the highest in the developed markets.
Stocks
We favor international stocks over U.S. stocks based on prospects for
stronger earnings growth and modestly more attractive valuations, though
disparities exist in valuations across regions and sectors. While the U.S.
economic cycle is further advanced than most other major economies, many
non-U.S. economies and companies are expected to benefit from currency weakness
and support from accommodative monetary policies. Earnings and margin levels in
Europe remain well below pre-crisis levels in contrast with the U.S., where
earnings and margins are at peak levels.
We favor emerging over developed markets stocks. Emerging markets stock valuations remain below long-term historical averages relative to developed markets given persistent underperformance. While the potential for further economic weakness and the Fed’s normalization of interest rate policy represent near-term risks, we believe that valuations in emerging markets are deeply discounting longer-term growth potential.
We remain underweight real assets equities given concerns about excess supply in the energy sector coupled with weak global growth and its impact on commodity prices. The broader impacts of declining commodity prices are increasingly evident as several emerging markets economies are in recession and many commodity-focused companies have reduced payrolls, slashed capital spending, and divested assets. We expect commodities demand will remain subdued as China tries to stabilize growth while shifting its economy to favor domestic consumption over industrial production. We believe that fundamentals for real estate investment trusts in developed markets remain favorable, though they are sensitive to rising interest rates.
We favor U.S. large-cap over small-cap stocks given our belief that small-caps are modestly more expensive than large-cap stocks although relative valuations are now less extreme given small-caps’ underperformance since 2014. We are neutral between U.S. growth over value stocks. Although broad valuation measures continue to favor growth stocks, segments of the growth sector have become increasingly expensive, including companies within the health care and technology sectors. Value stocks have higher exposure to cyclical sectors, particularly financials and energy, which tend to be reliant upon stronger economic growth and commodity demand. While higher interest rates may be supportive of financials, low global growth remains a headwind to commodity and other cyclical sectors.
Conversely, we favor international value stocks over international growth stocks given the former’s relatively attractive valuations. While valuations are modestly lower across many value-oriented sectors, such as European financials, these cyclical sectors are more dependent upon an improving economic environment.
Bonds
We lowered our allocation to high yield over the period and are
underweight high yield relative to U.S. investment-grade debt as of the end of
November. Our shift was due to the advanced stage of the credit cycle coupled
with a backdrop of greater uncertainty about global growth and U.S. monetary
policy. While weak commodity prices have driven credit spreads wider within the
energy and materials sectors, idiosyncratic risks have extended beyond these
sectors with the response to recent credit events amplified by poor liquidity.
We anticipate more pressure on high yield spreads as corporate default rates
will likely increase, albeit from historically low levels and with a
concentration in commodity-related sectors.
We are neutral between emerging markets and U.S. investment-grade bonds based on muted growth expectations, potential for further local currency weakness, and rising U.S. interest rates. Emerging markets bond yields have risen to more attractive levels, and many emerging markets currencies are at multiyear lows. However, country-specific risks, deteriorating global trade, and the start of U.S. rate hikes could further weigh on valuations.
Additionally, we are neutral between non-dollar and U.S. investment-grade bonds given that prospects for higher relative interest rates supporting the dollar have moderated. The Fed’s anticipated slow path toward interest rate normalization could limit the dollar’s appreciation particularly against the euro, which appears cheap given mounting evidence that the eurozone economy is improving. While the ongoing monetary stimulus programs in Europe and Japan could continue to weigh on their currencies, we believe that any further dollar appreciation will be less dramatic than what we experienced since the second half of 2014.
PERFORMANCE COMPARISON
Personal Strategy Income Fund
As shown in the Performance Comparison table, the Personal Strategy Income Fund returned -2.19% for the six months ended November 30, 2015, lagging the -1.45% return of its combined index portfolio. The fund underperformed its Morningstar benchmark but exceeded its Lipper peer group index.
Allocations to diversifying sectors not included in the Barclays U.S. Aggregate Bond Index detracted the most from the fund’s performance relative to its combined index portfolio. Our exposure to high yield bonds was a large detractor. U.S. high yield bonds fell in recent months as the drop in commodity prices spurred steep declines in the energy and metals and mining sectors, which account for a significant portion of the U.S. high yield market. Similarly, our exposure to real assets equities hurt performance as the commodities slump hurt energy, natural resources, and other commodities-related companies. Our exposure to international developed debt detracted from relative performance as the strong U.S. dollar eroded returns from local currency-denominated bonds. In addition, exposure to emerging markets bonds weighed on performance as slowing global growth, increased uncertainty, and credit rating agency downgrades hurt the asset class.
Our tactical decisions to overweight and underweight asset classes detracted slightly from relative performance. Our decision to overweight international over U.S. stocks hurt returns as U.S. stocks widely outperformed international stocks over the past six months. Additionally, our overweight allocation to emerging markets over developed markets stocks detracted as China-focused concerns and expectations of higher U.S. rates triggered heavy outflows from emerging markets. On the other hand, our underweight exposure to real assets equities helped relative performance.
Security selection had a mixed impact on relative performance. Selection in the fund’s U.S. large-cap growth and emerging markets stocks lifted relative returns. On the other hand, selection in U.S. large-cap value and international developed markets stocks detracted from relative performance. In the fund’s fixed income holdings, security selection in high yield and international bonds weighed on relative returns, while selection in emerging markets bonds contributed.
Individual stocks that contributed significantly to the past six months’ performance include technology leaders Amazon.com, Microsoft, and Alphabet, the new parent company of Google and its many subsidiaries. Shares of all three companies surged to record levels in October after each reported stronger-than-expected earnings. Detractors were led by memory chipmaker Micron Technology, whose shares sank roughly 43% over our reporting period after it reported below-forecast earnings and gave a tepid outlook, and German carmaker Volkswagen, which was hit by an emissions scandal in the fall. The fund eliminated its Volkswagen position during the period. Many detractors were concentrated in the materials and energy sectors, including oil and gas producer Canadian Natural Resources, Australian mining company BHP Billiton, and European oil major Royal Dutch Shell. (Please refer to the fund’s portfolio of investments for a complete list of holdings and the amount each represents in the portfolio.)
At the end of the reporting period, the fund’s target allocations were 40% stocks and 60% bonds and cash, which are consistent with the fund’s long-term neutral asset class allocations. Both targets were unchanged from our last report on May 31, 2015. The actual allocations may differ from the target allocations due to investment time horizon, market conditions, trading environment, and other factors.
Personal Strategy Balanced Fund
As shown in the Performance Comparison table, the Personal Strategy Balanced Fund returned -2.84% for the six months ended November 30, 2015, lagging the -2.20% return of its combined index portfolio. The fund outperformed its Morningstar benchmark and Lipper peer group index.
Allocations to diversifying sectors not included in the Barclays U.S. Aggregate Bond Index detracted the most from the fund’s performance relative to its combined index portfolio. In particular, our exposure to high yield and real assets equities hurt returns as the commodities downturn weighed on both sectors. Our exposure to international developed and emerging markets debt detracted from relative performance as the strong U.S. dollar eroded returns from local currency-denominated bonds. In addition, exposure to emerging markets bonds weighed on performance as slowing global growth, increased uncertainty, and credit rating agency downgrades hurt the asset class.
Our tactical decisions to overweight and underweight asset classes detracted slightly from relative performance. Our decision to overweight international over U.S. stocks hurt returns as U.S. stocks widely outperformed international stocks over the past six months. Additionally, our overweight allocation to emerging markets over developed markets stocks detracted as China-focused concerns and expectations of higher U.S. rates triggered heavy outflows from emerging markets. On the other hand, our underweight exposure to real assets equities helped relative performance.
Security selection contributed to relative performance. Selection in the fund’s U.S. large-cap growth and emerging markets stocks lifted relative returns and helped offset unfavorable selection in U.S. large-cap value and international developed markets stocks. In the fund’s fixed income holdings, security selection in high yield and international bonds weighed on relative returns, while selection in emerging markets bonds contributed.
Individual stocks that contributed significantly to the past six months’ performance include technology leaders Amazon.com, Microsoft, and Alphabet, the new parent company of Google and its many subsidiaries. Shares of all three companies surged to record levels in October after each reported stronger-than-expected earnings. Detractors were led by memory chipmaker Micron Technology, whose shares sank roughly 43% over our reporting period after it reported below-forecast earnings and gave a tepid outlook, and German carmaker Volkswagen, which was hit by an emissions scandal in the fall. The fund eliminated its Volkswagen position during the period. Many detractors were concentrated in the materials and energy sectors, including oil and gas producer Canadian Natural Resources, Australian mining company BHP Billiton, and European oil major Royal Dutch Shell. (Please refer to the fund’s portfolio of investments for a complete list of holdings and the amount each represents in the portfolio.)
Personal Strategy Growth Fund
As shown in the Performance Comparison table, the Personal Strategy Growth Fund returned -3.46% for the six months ended November 30, 2015, lagging the -3.00% return of its combined index portfolio. The fund outperformed its Morningstar benchmark but trailed its Lipper peer group index.
Allocations to diversifying sectors not included in the Barclays U.S. Aggregate Bond Index detracted the most from the fund’s performance relative to its combined index portfolio. In particular, our exposure to high yield and real assets equities hurt returns as the commodities downturn weighed on both sectors. Our exposure to international developed and emerging markets debt detracted from relative performance as the strong U.S. dollar eroded returns from local currency-denominated bonds. In addition, exposure to emerging markets bonds weighed on performance as slowing global growth, increased uncertainty, and credit rating agency downgrades hurt the asset class.
Our tactical decisions to overweight and underweight asset classes detracted slightly from relative performance. Our decision to overweight international over U.S. stocks hurt returns as U.S. stocks widely outperformed international stocks over the past six months. Additionally, our overweight allocation to emerging markets over developed markets stocks detracted as China-focused concerns and expectations of higher U.S. rates triggered heavy outflows from emerging markets. On the other hand, our underweight exposure to real assets equities helped relative performance.
Security selection contributed to relative performance. Selection in the fund’s U.S. large-cap growth and emerging markets stocks lifted relative returns and helped offset unfavorable selection in U.S. large-cap value and international developed markets stocks. In the fund’s fixed income holdings, security selection in high yield and international bonds weighed on relative returns, while selection in emerging markets bonds contributed.
Individual stocks that contributed significantly to the past six months’ performance include technology leaders Amazon.com, Microsoft, and Alphabet, the new parent company of Google and its many subsidiaries. Shares of all three companies surged to record levels in October after each reported stronger-than-expected earnings. Detractors were led by memory chipmaker Micron Technology, whose shares sank roughly 43% over our reporting period after it reported below-forecast earnings and gave a tepid outlook, and German carmaker Volkswagen, which was hit by an emissions scandal in the fall. The fund eliminated its Volkswagen position during the period. Many detractors were concentrated in the materials and energy sectors, including oil and gas producer Canadian Natural Resources, Australian mining company BHP Billiton, and European oil major Royal Dutch Shell. (Please refer to the fund’s portfolio of investments for a complete list of holdings and the amount each represents in the portfolio.)
OUTLOOK
Our global growth expectations remain modest over the next several quarters. We expect that gradual improvement in developed markets will be tempered by weakness in major emerging economies including China, Russia, and Brazil. Monetary policy across the globe is showing more divergence: After our reporting period closed, the Fed raised short-term interest rates for the first time since the 2008 financial crisis, while central banks in Europe and Japan continued their quantitative easing programs. Key risks to our global outlook include the effects of global monetary policy actions, heightened currency volatility, and political uncertainty in many countries already grappling with weaker growth.
In the U.S., private sector demand, an improving job market, and modestly higher wages are supporting economic activity. However, weakness in the energy and materials sectors, a strong dollar, declining energy-related capital spending, and a slowdown in global trade continue to weigh on corporate earnings growth. Outside the energy sector, revenue and earnings are still only expected to rise in the low-single digits. Credit fundamentals are solid outside of energy-related sectors, though corporate leverage has increased as companies have issued debt to fund mergers and acquisitions and return capital to shareholders. We expect U.S. interest rates will gradually increase as the economy improves.
In overseas developed markets, we see gradual improvement in Europe and Japan. Despite the eurozone’s GDP slowdown in the third quarter, the region is supported by diminished fiscal headwinds, an improving credit environment, lower energy costs, and a weaker currency. The European Central Bank has stepped up the quantitative easing program that it launched in March 2015 to generate inflation and sustain growth. However, Europe still faces risks from high unemployment, elevated debt levels, and political uncertainty in several countries. Growth is slowly picking up in Japan, where the central bank has continued to implement quantitative easing.
Our outlook for emerging markets is mixed. Russia and Brazil are in recession, while other major emerging economies face declining growth, weaker currencies, and high inflation. While lower energy prices will help ease inflation in many countries, the commodities downturn will weigh on growth for commodity exporters for some time. In November, China’s president signaled that the country’s annual economic growth target would be reset to 6.5% over the next five years, marking an end to periods of double-digit GDP growth.
Against the current backdrop of divergent central bank policies and uneven growth prospects, we anticipate greater volatility in global financial markets. Given China’s importance to the world economy, how its government manages the country’s slowdown will have significant repercussions on commodity prices, trade, and the pace of overall global growth. The recent uptick in geopolitical instability stemming from developments in the Middle East is another factor that could curb risk appetite. In this uncertain environment, we believe that the Personal Strategy Funds’ broad diversification and focus on fundamental research should help us deliver solid long-term returns in a variety of market environments.
Thank you for investing with T. Rowe Price.
Respectfully submitted,
Charles Shriver
Portfolio manager and chairman of the funds’
Investment Advisory Committee
December 16, 2015
The committee chairman has day-to-day responsibility for managing the portfolios and works with committee members in developing and executing the funds’ investment programs.
RISKS OF INVESTING
As with all stock and bond mutual funds, each fund’s share price can fall because of weakness in the stock or bond markets, a particular industry, or specific holdings. Stock markets can decline for many reasons, including adverse political or economic developments, changes in investor psychology, or heavy institutional selling. The prospects for an industry or company may deteriorate because of a variety of factors, including disappointing earnings or changes in the competitive environment. In addition, the investment manager’s assessment of companies held in a fund may prove incorrect, resulting in losses or poor performance even in rising markets.
Bonds are subject to interest rate risk, the decline in bond prices that usually accompanies a rise in interest rates, and credit risk, the chance that any fund holding could have its credit rating downgraded or that a bond issuer will default (fail to make timely payments of interest or principal), potentially reducing the fund’s income level and share price. High yield corporate bonds could have greater price declines than funds that invest primarily in high-quality bonds. Companies issuing high yield bonds are not as strong financially as those with higher credit ratings, so the bonds are usually considered speculative investments.
Funds that invest overseas may carry more risk than funds that invest strictly in U.S. assets. 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
Barclays U.S. Aggregate Bond Index: An unmanaged index that tracks investment-grade bonds, including corporate, government, and mortgage-backed securities.
Barclays Global Aggregate ex U.S. Dollar Bond Index: Tracks the performance of government, corporate, agency, and mortgage-related bonds in Europe, the Asia-Pacific region, and Canada.
Citigroup 3-Month Treasury Bill Index: An unmanaged index that tracks short-term U.S. government debt instruments.
Combined Index Portfolios: Unmanaged portfolios composed of the following underlying indexes as of November 30, 2015:
| ● |
Personal Strategy Income—40%
stocks (28% Russell 3000 Index, 12% MSCI All Country World Index ex USA),
40% bonds (Barclays U.S. Aggregate Bond Index), and 20% money market
securities (Citigroup 3-Month Treasury Bill
Index). |
| ● |
Personal Strategy Balanced—60%
stocks (42% Russell 3000 Index, 18% MSCI All Country World Index ex USA),
30% bonds (Barclays U.S. Aggregate Bond Index), and 10% money market
securities (Citigroup 3-Month Treasury Bill
Index). |
| ● |
Personal Strategy Growth—80% stocks (56% Russell 3000 Index, 24% MSCI All Country World Index ex USA) and 20% bonds (Barclays U.S. Aggregate Bond Index). |
Credit Suisse High Yield Index: Tracks the performance of domestic non-investment-grade corporate bonds.
Gross domestic product (GDP): The total market value of all goods and services produced in a country in a given year.
Lipper Mixed-Asset Target Allocation Conservative Funds Index: A peer group benchmark that measures the performance of similar funds with a mix of between 20% and 40% equities, with the remainder invested in bonds and short-term investments.
Lipper Mixed-Asset Target Allocation Growth Funds Index: A peer group benchmark that measures the performance of similar funds with a mix of between 60% and 80% equities, with the remainder invested in bonds and short-term investments.
Lipper Mixed-Asset Target Allocation Moderate Funds Index: A peer group benchmark that measures the performance of similar funds with a mix of between 40% and 60% equities, with the remainder invested in bonds and short-term investments.
Morningstar Moderate Target Risk Index: Represents a portfolio of global equities (fixed at 60%), bonds, and other asset classes.
Morningstar Moderately Aggressive Target Risk Index: Represents a portfolio of global equities (fixed at 80%), bonds, and other asset classes.
Morningstar Moderately Conservative Target Risk Index: Represents a portfolio of global equities (fixed at 40%), bonds, and other asset classes.
MSCI All Country World Index ex USA: An index that measures equity market performance of developed and emerging countries, excluding the U.S.
MSCI Emerging Markets Index: A capitalization-weighted index of stocks from emerging market countries that only includes securities that may be traded by foreign investors.
Russell 3000 Index: An index that tracks the performance of the 3,000 largest U.S. companies, representing approximately 98% of the investable U.S. equity market.
S&P 500 Index: An index that tracks the stocks of 500 primarily large-cap U.S. companies.
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.
Note: Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell indexes. Russell® is a trademark of Russell Investment Group.
Performance and Expenses
| Growth of $10,000 |
This chart shows the value of a hypothetical $10,000 investment in the fund over the past 10 fiscal year periods or since inception (for funds lacking 10-year records). The result is compared with benchmarks, which may include a broad-based market index and a peer group average or index. Market indexes do not include expenses, which are deducted from fund returns as well as mutual fund averages and indexes.
| Growth of $10,000 |
This chart shows the value of a hypothetical $10,000 investment in the fund over the past 10 fiscal year periods or since inception (for funds lacking 10-year records). The result is compared with benchmarks, which may include a broad-based market index and a peer group average or index. Market indexes do not include expenses, which are deducted from fund returns as well as mutual fund averages and indexes.
| Growth of $10,000 |
This chart shows the value of a hypothetical $10,000 investment in the fund over the past 10 fiscal year periods or since inception (for funds lacking 10-year records). The result is compared with benchmarks, which may include a broad-based market index and a peer group average or index. Market indexes do not include expenses, which are deducted from fund returns as well as mutual fund averages and indexes.
| Fund Expense Example |
As a mutual fund shareholder, you may incur two types of costs: (1) transaction costs, such as redemption fees or sales loads, and (2) ongoing costs, including management fees, distribution and service (12b-1) fees, and other fund expenses. The following example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the most recent six-month period and held for the entire period.
Actual Expenses
The first line of the following table (Actual) provides
information about actual account values and expenses based on the fund’s actual
returns. You may use the information on this line, together with your account
balance, to estimate the expenses that you paid over the period. Simply divide
your account value by $1,000 (for example, an $8,600 account value divided by
$1,000 = 8.6), then multiply the result by the number on the first line under
the heading “Expenses Paid During Period” to estimate the expenses you paid on
your account during this period.
Hypothetical Example for Comparison
Purposes
The information on the second
line of the table (Hypothetical) is based on hypothetical account values and
expenses derived from the fund’s actual expense ratio and an assumed 5% per year
rate of return before expenses (not the fund’s actual return). You may compare
the ongoing costs of investing in the fund with other funds by contrasting this
5% hypothetical example and the 5% hypothetical examples that appear in the
shareholder reports of the other funds. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period.
Note: T. Rowe Price charges an annual account service fee of $20, generally for accounts with less than $10,000. The fee is waived for any investor whose T. Rowe Price mutual fund accounts total $50,000 or more; accounts electing to receive electronic delivery of account statements, transaction confirmations, prospectuses, and shareholder reports; or accounts of an investor who is a T. Rowe Price Preferred Services, Personal Services, or Enhanced Personal Services client (enrollment in these programs generally requires T. Rowe Price assets of at least $100,000). This fee is not included in the accompanying table. If you are subject to the fee, keep it in mind when you are estimating the ongoing expenses of investing in the fund and when comparing the expenses of this fund with other funds.
You should also be aware that the expenses shown in the table highlight only your ongoing costs and do not reflect any transaction costs, such as redemption fees or sales loads. Therefore, the second line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. To the extent a fund charges transaction costs, however, the total cost of owning that fund is higher.
Unaudited
The accompanying notes are an integral part of these financial statements.
Unaudited
The accompanying notes are an integral part of these financial statements.
Unaudited
The accompanying notes are an integral part of these financial statements.
Unaudited
The accompanying notes are an integral part of these financial statements.
Unaudited
The accompanying notes are an integral part of these financial statements.
Unaudited
| Notes to Financial Statements |
T. Rowe Price Personal Strategy Funds, Inc. (the corporation), is registered under the Investment Company Act of 1940 (the 1940 Act). The Personal Strategy Balanced Fund (the fund) is a diversified, open-end management investment company established by the corporation. The fund commenced operations on July 29, 1994. The fund seeks the highest total return over time consistent with an emphasis on both capital growth and income. The fund pursues this objective by investing in a diversified portfolio typically consisting of approximately 60% stocks, 30% bonds, and 10% money market securities.
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. Premiums and discounts on debt securities are amortized for financial reporting purposes. Paydown gains and losses are recorded as an adjustment to interest income. Inflation adjustments to the principal amount of inflation-indexed bonds are reflected as interest income. 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. 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 quarterly. 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.
Rebates Subject to best execution, the fund may direct certain security trades to brokers who have agreed to rebate a portion of the related brokerage commission to the fund in cash. Commission rebates are reflected as realized gain on securities in the accompanying financial statements and totaled $8,000 for the six months ended November 30, 2015.
New Accounting Guidance 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 and has representation from legal, portfolio management and trading, operations, risk management, and the fund’s treasurer.
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 equity securities listed on a domestic exchange 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.
Debt securities generally are traded in the OTC market. Securities with remaining maturities of one year or more at the time of acquisition are valued at prices furnished by dealers who make markets in such securities or by an independent pricing service, which considers the yield or price of bonds of comparable quality, coupon, maturity, and type, as well as prices quoted by dealers who make markets in such securities. Generally, debt securities are categorized in Level 2 of the fair value hierarchy; however, to the extent the valuations include significant unobservable inputs, the securities would be categorized in Level 3.
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. Financial futures contracts are valued at closing settlement prices and are categorized in Level 1 of the fair value hierarchy. Swaps are valued at prices furnished by independent swap dealers or by an independent pricing service and generally are categorized in Level 2 of the fair value hierarchy; however, if unobservable inputs are significant to the valuation, the swap would be categorized in Level 3. 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 November 30, 2015:
There were no material transfers between Levels 1 and 2 during the six months ended November 30, 2015.
Following is a reconciliation of the fund’s Level 3 holdings for the six months ended November 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 November 30, 2015, totaled $15,000 for the six months ended November 30, 2015.
NOTE 3 - DERIVATIVE INSTRUMENTS
During the six months ended November 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.
The following table summarizes the fair value of the fund’s derivative instruments held as of November 30, 2015, and the related location on the accompanying Statement of Assets and Liabilities, presented by primary underlying risk exposure:
Additionally, the amount of gains and losses on derivative instruments recognized in fund earnings during the six months ended November 30, 2015, and the related location on the accompanying Statement of Operations is summarized in the following table by primary underlying risk exposure:
Counterparty Risk and Collateral The fund invests in derivatives in various markets, which expose it to differing levels of counterparty risk. Counterparty risk on exchange-traded and centrally cleared derivative contracts, such as futures, exchange-traded options, and centrally cleared swaps, is minimal because the clearinghouse provides protection against counterparty defaults. For futures and centrally cleared swaps, the fund is required to deposit collateral in an amount equal to a certain percentage of the contract value (margin requirement), and the margin requirement must be maintained over the life of the contract. Each clearing broker, in its sole discretion, may adjust the margin requirements applicable to the fund.
Derivatives, such as bilateral swaps, forward currency exchange contracts, and OTC options, that are transacted and settle directly with a counterparty (bilateral derivatives) expose the fund to greater 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 November 30, 2015, no collateral was pledged by either the fund or counterparties for bilateral derivatives. As of November 30, 2015, securities valued at $321,000 had been posted by the fund for exchange-traded and/or centrally cleared derivatives.
Futures Contracts The fund is subject to interest rate risk in the normal course of pursuing its investment objectives and uses futures contracts to help manage such risk. The fund may enter into futures contracts to manage exposure to interest rates, security prices, foreign currencies, and credit quality; as an efficient means of adjusting exposure to all or part of a target market; to enhance income; as a cash management tool; or to adjust credit exposure. A futures contract provides for the future sale by one party and purchase by another of a specified amount of a specific underlying financial instrument at an agreed-upon price, date, time, and place. The fund currently invests only in exchange-traded futures, which generally are standardized as to maturity date, underlying financial instrument, and other contract terms. Payments are made or received by the fund each day to settle daily fluctuations in the value of the contract (variation margin), which reflect changes in the value of the underlying financial instrument. Variation margin is recorded as unrealized gain or loss until the contract is closed. The value of a futures contract included in net assets is the amount of unsettled variation margin; net variation margin receivable is reflected as an asset, and net variation margin payable is reflected as a liability on the accompanying Statement of Assets and Liabilities. Risks related to the use of futures contracts include possible illiquidity of the futures markets, contract prices that can be highly volatile and imperfectly correlated to movements in hedged security values and/or interest rates, and potential losses in excess of the fund’s initial investment. During the six months ended November 30, 2015, the volume of the fund’s activity in futures, based on underlying notional amounts, was generally between 1% and 2% of net assets.
Swaps The fund is subject to credit risk in the normal course of pursuing its investment objectives and uses swap contracts to help manage such risk. The fund may use swaps in an effort to manage exposure to changes in interest rates, inflation rates, and credit quality; to adjust overall exposure to certain markets; to enhance total return or protect the value of portfolio securities; to serve as a cash management tool; or to adjust credit exposure. Swap agreements can be settled either directly with the counterparty (bilateral swap) or through a central clearinghouse (centrally cleared swap). Fluctuations in the fair value of a contract are reflected in unrealized gain or loss and are reclassified to realized gain or loss upon contract termination or cash settlement. Net periodic receipts or payments required by a contract increase or decrease, respectively, the value of the contract until the contractual payment date, at which time such amounts are reclassified from unrealized to realized gain or loss. For bilateral swaps, cash payments are made or received by the fund on a periodic basis in accordance with contract terms; unrealized gain on contracts and premiums paid are reflected as assets and unrealized loss on contracts and premiums received are reflected as liabilities on the accompanying Statement of Assets and Liabilities. For centrally cleared swaps, payments are made or received by the fund each day to settle the daily fluctuation in the value of the contract (variation margin). Accordingly, the value of a centrally cleared swap included in net assets is the unsettled variation margin; net variation margin receivable is reflected as an asset and net variation margin payable is reflected as a liability on the accompanying Statement of Assets and Liabilities.
Credit default swaps are agreements where one party (the protection buyer) agrees to make periodic payments to another party (the protection seller) in exchange for protection against specified credit events, such as certain defaults and bankruptcies related to an underlying credit instrument, or issuer or index of such instruments. Upon occurrence of a specified credit event, the protection seller is required to pay the buyer the difference between the notional amount of the swap and the value of the underlying credit, either in the form of a net cash settlement or by paying the gross notional amount and accepting delivery of the relevant underlying credit. For credit default swaps where the underlying credit is an index, a specified credit event may affect all or individual underlying securities included in the index and will be settled based upon the relative weighting of the affected underlying security(ies) within the index. Generally, the payment risk for the seller of protection is inversely related to the current market price or credit rating of the underlying credit or the market value of the contract relative to the notional amount, which are indicators of the markets’ valuation of credit quality. As of November 30, 2015, the notional amount of protection sold by the fund totaled $920,000 (0.0% of net assets), which reflects the maximum potential amount the fund could be required to pay under such contracts. Risks related to the use of credit default swaps include the possible inability of the fund to accurately assess the current and future creditworthiness of underlying issuers, the possible failure of a counterparty to perform in accordance with the terms of the swap agreements, potential government regulation that could adversely affect the fund’s swap investments, and potential losses in excess of the fund’s initial investment.
During the six months ended November 30, 2015, the volume of the fund’s activity in swaps, based on underlying notional amounts, was generally less than 1% 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 and Frontier 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 and frontier market countries; at period-end, approximately 9% of the fund’s net assets were invested in emerging markets and 2% in frontier markets. Emerging markets, and to a greater extent frontier markets, generally have economic structures that are less diverse and mature, and political systems that are less stable, than developed countries. 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. Investing in frontier markets is significantly riskier than investing in other countries, including emerging markets.
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.
TBA Purchase and Sale Commitments The fund may enter into to-be-announced (TBA) purchase or sale commitments, pursuant to which it agrees to purchase or sell, respectively, mortgage-backed securities for a fixed unit price, with payment and delivery at a scheduled future date beyond the customary settlement period for such securities. With TBA transactions, the particular securities to be delivered are not identified at the trade date; however, delivered securities must meet specified terms, including issuer, rate, and mortgage term, and be within industry-accepted “good delivery” standards. The fund may enter into TBA purchase transactions with the intention of taking possession of the underlying securities, may elect to extend the settlement by “rolling” the transaction, and/or may use TBAs to gain interim exposure to underlying securities. Until settlement, the fund maintains liquid assets sufficient to settle its TBA commitments.
To mitigate counterparty risk, the fund has entered into agreements with TBA counterparties that provide for collateral and the right to offset amounts due to or from those counterparties under specified conditions. Subject to minimum transfer amounts, collateral requirements are determined and transfers made based on the net aggregate unrealized gain or loss on all TBA commitments with a particular counterparty. At any time, the fund’s risk of loss from a particular counterparty related to its TBA commitments is the aggregate unrealized gain on appreciated TBAs in excess of unrealized loss on depreciated TBAs and collateral received, if any, from such counterparty. As of November 30, 2015, no collateral was pledged by the fund or counterparties for TBAs.
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 November 30, 2015, the value of loaned securities was $4,586,000 the value of cash collateral and related investments was $4,762,000.
Mortgage-Backed Securities The fund may invest in mortgage-backed securities (MBS or pass-through certificates) that represent an interest in a pool of specific underlying mortgage loans and entitle the fund to the periodic payments of principal and interest from those mortgages. MBS may be issued by government agencies or corporations, or private issuers. Most MBS issued by government agencies are guaranteed; however, the degree of protection differs based on the issuer. The fund also may invest in stripped MBS, created when a traditional MBS is split into an interest-only (IO) and a principal-only (PO) strip. MBS, including IOs and POs, are sensitive to changes in economic conditions that affect the rate of prepayments and defaults on the underlying mortgages; accordingly, the value, income, and related cash flows from MBS may be more volatile than other debt instruments. IOs also risk loss of invested principal from faster-than-anticipated prepayments.
Other Purchases and sales of portfolio securities other than short-term and U.S. government securities aggregated $377,344,000 and $346,777,000, respectively, for the six months ended November 30, 2015. Purchases and sales of U.S. government securities aggregated $281,703,000 and $307,486,000, respectively, for the six months ended November 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 November 30, 2015, the cost of investments for federal income tax purposes was $1,713,387,000. Net unrealized gain aggregated $311,277,000 at period-end, of which $391,312,000 related to appreciated investments and $80,035,000 related to depreciated investments.
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). The investment management agreement between the fund and Price Associates provides for an annual investment management fee, which is computed daily and paid monthly. The fee consists of an individual fund fee, equal to 0.25% of the fund’s average daily net assets, and a group fee. The group fee rate is calculated based on the combined net assets of certain mutual funds sponsored by Price Associates (the group) applied to a graduated fee schedule, with rates ranging from 0.48% for the first $1 billion of assets to 0.275% for assets in excess of $400 billion. The fund’s group fee is determined by applying the group fee rate to the fund’s average daily net assets. At November 30, 2015, the effective annual group fee rate was 0.29%.
In addition, the fund has entered into service agreements with Price Associates and two wholly owned subsidiaries of Price Associates (collectively, Price). Price Associates provides certain accounting and administrative services to the fund. T. Rowe Price Services, Inc., provides shareholder and administrative services in its capacity as the fund’s transfer and dividend-disbursing agent. T. Rowe Price Retirement Plan Services, Inc., provides subaccounting and recordkeeping services for certain retirement accounts invested in the fund. For the six months ended November 30, 2015, expenses incurred pursuant to these service agreements were $49,000 for Price Associates; $285,000 for T. Rowe Price Services, Inc.; and $413,000 for T. Rowe Price Retirement Plan Services, Inc. The total amount payable at period-end pursuant to these service agreements is reflected as Due to Affiliates in the accompanying financial statements.
The fund 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.
The fund may also invest in certain other T. Rowe Price funds (Price Funds) as a means of gaining efficient and cost-effective exposure to certain markets. The fund does not invest for the purpose of exercising management or control; however, investments by the fund may represent a significant portion of an underlying Price Fund’s net assets. Each underlying Price Fund is an open-end management investment company managed by Price Associates and is considered an affiliate of the fund. To ensure that the fund does not incur duplicate management fees (paid by the underlying Price Fund(s) and the fund), Price Associates has agreed to permanently waive a portion of its management fee charged to the fund in an amount sufficient to fully offset that portion of management fees paid by each underlying Price Fund related to the fund’s investment therein. Annual management fee rates and amounts waived related to investments in the underlying Price Fund(s) for the six months ended November 30, 2015, are as follows:
| Information on Proxy Voting Policies, Procedures, and Records |
A description of the policies and procedures used by T. Rowe Price funds and portfolios to determine how to vote proxies relating to portfolio securities is available in each fund’s Statement of Additional Information. You may request this document by calling 1-800-225-5132 or by accessing the SEC’s website, sec.gov.
The description of our proxy voting policies and procedures is also available on our website, troweprice.com. To access it, click on the words “Social Responsibility” at the top of our corporate homepage. Next, click on the words “Conducting Business Responsibly” on the left side of the page that appears. Finally, click on the words “Proxy Voting Policies” on the left side of the page that appears.
Each fund’s most recent annual proxy voting record is available on our website and through the SEC’s website. To access it through our website, follow the above directions to reach the “Conducting Business Responsibly” page. Click on the words “Proxy Voting Records” on the left side of that page, and then click on the “View Proxy Voting Records” link at the bottom of the page that appears.
| How to Obtain Quarterly Portfolio Holdings |
The fund files a complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available electronically on the SEC’s website (sec.gov); hard copies may be reviewed and copied at the SEC’s Public Reference Room, 100 F St. N.E., Washington, DC 20549. For more information on the Public Reference Room, call 1-800-SEC-0330.
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 Personal Strategy Funds,
Inc.
| By | /s/ Edward C. Bernard | |
| Edward C. Bernard | ||
| Principal Executive Officer | ||
| Date January 19, 2016 | ||
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 January 19, 2016 | ||
| By | /s/ Catherine D. Mathews | |
| Catherine D. Mathews | ||
| Principal Financial Officer | ||
| Date January 19, 2016 | ||