NOTE 1 - SIGNIFICANT ACCOUNTING
POLICIES
Basis of Preparation
The accompanying financial statements
were prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP), which require the use of estimates made by
management. Management believes that estimates and valuations are appropriate;
however, actual results may differ from those estimates, and the valuations
reflected in the accompanying financial statements may differ from the value
ultimately realized upon sale or maturity.
Investment Transactions,
Investment Income, and Distributions
Income and expenses are recorded on the accrual basis. Dividends received
from mutual fund investments are reflected as dividend income; capital gain
distributions are reflected as realized gain/loss. Dividend income and capital
gain distributions are recorded on the ex-dividend date. Income tax-related
interest and penalties, if incurred, would be recorded as income tax expense.
Investment transactions are accounted for on the trade date. Realized gains and
losses are reported on the identified cost basis. Distributions to shareholders
are recorded on the ex-dividend date. Income distributions are declared and paid
by each class 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.
Class Accounting
The Advisor Class pays distribution, shareholder
servicing, and/or certain administrative expenses in the form of Rule 12b-1
fees, in an amount not exceeding 0.25% of the class’s average daily net assets.
Shareholder servicing, prospectus, and shareholder report expenses incurred by
each class are charged directly to the class to which they relate. Expenses
common to both classes, investment income, and realized and unrealized gains and
losses are allocated to the classes based upon the relative daily net assets of
each class.
Rebates and Credits
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 $216,000 for the six months ended June 30, 2013.
Additionally, the fund earns credits on temporarily uninvested cash balances
held at the custodian, which reduce the fund’s custody charges. Custody expense
in the accompanying financial statements is presented before reduction for
credits.
In-Kind Redemptions
In accordance with guidelines described
in the fund’s prospectus, the fund may distribute portfolio securities rather
than cash as payment for a redemption of fund shares (in-kind redemption). For
financial reporting purposes, the fund recognizes a gain on in-kind redemptions
to the extent the value of the distributed securities on the date of redemption
exceeds the cost of those securities. Gains and losses realized on in-kind
redemptions are not recognized for tax purposes and are reclassified from
undistributed realized gain (loss) to paid-in capital. During the six months
ended June 30, 2013, the fund realized $135,531,000 of net gain on $364,720,000
of in-kind redemptions.
New Accounting Guidance
In December 2011, the Financial
Accounting Standards Board issued amended guidance requiring an entity to
disclose information about offsetting and related arrangements to enable users
of its financial statements to understand the effect of those arrangements on
its
financial position. The guidance is
effective for fiscal years and interim periods beginning on or after January 1,
2013. Adoption had no effect on the fund’s net assets or results of
operations.
NOTE 2 - VALUATION
The fund’s financial instruments are
valued and each class’s net asset value (NAV) per share is computed at the close
of the New York Stock Exchange (NYSE), normally 4 p.m. ET, each day the NYSE is
open for business.
Fair Value
The fund’s financial instruments are reported at fair
value, which GAAP defines as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The T. Rowe Price Valuation Committee (the
Valuation Committee) has been established by the fund’s Board of Directors (the
Board) to ensure that financial instruments are appropriately priced at fair
value in accordance with GAAP and the 1940 Act. Subject to oversight by the
Board, the Valuation Committee develops and oversees pricing-related policies
and procedures and approves all fair value determinations. Specifically, the
Valuation Committee establishes procedures to value securities; determines
pricing techniques, sources, and persons eligible to effect fair value pricing
actions; oversees the selection, services, and performance of pricing vendors;
oversees valuation-related business continuity practices; and provides guidance
on internal controls and valuation-related matters. The Valuation Committee
reports to the fund’s Board; is chaired by the fund’s treasurer; and has
representation from legal, portfolio management and trading, operations, and
risk management.
Various valuation techniques and
inputs are used to determine the fair value of financial instruments. GAAP
establishes the following fair value hierarchy that categorizes the inputs used
to measure fair value:
Level 1 – quoted prices (unadjusted)
in active markets for identical financial instruments that the fund can access
at the reporting date
Level 2 – inputs other than Level 1
quoted prices that are observable, either directly or indirectly (including, but
not limited to, quoted prices for similar financial instruments in active
markets, quoted prices for identical or similar financial instruments in
inactive markets, interest rates and yield curves, implied volatilities, and
credit spreads)
Level 3 – unobservable
inputs
Observable inputs are developed using
market data, such as publicly available information about actual events or
transactions, and reflect the assumptions that market participants would use to
price the financial instrument. Unobservable inputs are those for which market
data are not available and are developed using the best information available
about the assumptions that market participants would use to price the financial
instrument. GAAP requires valuation techniques to maximize the use of relevant
observable inputs and minimize the use of unobservable inputs. When multiple
inputs are used to derive fair value, the financial instrument is assigned to
the level within the fair value hierarchy based on the lowest-level input that
is significant to the fair value of the financial instrument. Input levels are
not necessarily an indication of the risk or liquidity associated with financial
instruments at that level but rather the degree of judgment used in determining
those values.
Valuation Techniques
Equity securities listed or regularly
traded on a securities exchange or in the over-the-counter (OTC) market are
valued at the last quoted sale price or, for certain markets, the official
closing price at the time the valuations are made. OTC Bulletin Board securities
are valued at the mean of the closing bid and asked prices. A security that is
listed or traded on more than one exchange is valued at the quotation on the
exchange determined to be the primary market for such security. Listed
securities not traded on a particular day are valued at the mean of the closing
bid and asked prices for domestic securities and the last quoted sale or closing
price for international securities.
For valuation purposes, the last
quoted prices of non-U.S. equity securities may be adjusted to reflect the fair
value of such securities at the close of the NYSE. If the fund determines that
developments between the close of a foreign market and the close of the NYSE
will, in its judgment, materially affect the value of some or all of its
portfolio securities, the fund will adjust the previous quoted prices to reflect
what it believes to be the fair value of the securities as of the close of the
NYSE. In deciding whether it is necessary to adjust quoted prices to reflect
fair value, the fund reviews a variety of factors, including developments in
foreign markets, the performance of U.S. securities markets, and the performance
of instruments trading in U.S. markets that represent foreign securities and
baskets of foreign securities. The fund may also fair value securities in other
situations, such as when a particular foreign market is closed but the fund is
open. The fund uses outside pricing services to provide it with quoted prices
and information to evaluate and/or adjust those prices. The fund cannot predict
how often it will use quoted prices and how often it will
determine it necessary to adjust those prices to reflect
fair value. As a means of evaluating its security valuation process, the fund
routinely compares quoted prices, the next day’s opening prices in the same
markets, and adjusted prices.
Actively traded domestic equity
securities generally are categorized in Level 1 of the fair value hierarchy.
Non-U.S. equity securities generally are categorized in Level 2 of the fair
value hierarchy despite the availability of quoted prices because, as described
above, the fund evaluates and determines whether those quoted prices reflect
fair value at the close of the NYSE or require adjustment. OTC Bulletin Board
securities, certain preferred securities, and equity securities traded in
inactive markets generally are categorized in Level 2 of the fair value
hierarchy.
Investments in mutual funds are
valued at the mutual fund’s closing net asset value per share on the day of
valuation and are categorized in Level 1 of the fair value hierarchy. Assets and
liabilities other than financial instruments, including short-term receivables
and payables, are carried at cost, or estimated realizable value, if less, which
approximates fair value.
Thinly traded financial instruments
and those for which the above valuation procedures are inappropriate or are
deemed not to reflect fair value are stated at fair value as determined in good
faith by the Valuation Committee. The objective of any fair value pricing
determination is to arrive at a price that could reasonably be expected from a
current sale. Financial instruments fair valued by the Valuation Committee are
primarily private placements, restricted securities, warrants, rights, and other
securities that are not publicly traded.
Subject to oversight by the Board,
the Valuation Committee regularly makes good faith judgments to establish and
adjust the fair valuations of certain securities as events occur and
circumstances warrant. For instance, in determining the fair value of an equity
investment with limited market activity, such as a private placement or a thinly
traded public company stock, the Valuation Committee considers a variety of
factors, which may include, but are not limited to, the issuer’s business
prospects, its financial standing and performance, recent investment
transactions in the issuer, new rounds of financing, negotiated transactions of
significant size between other investors in the company, relevant market
valuations of peer companies, strategic events affecting the company, market
liquidity for the issuer, and general economic conditions and events. In
consultation with the investment and pricing teams, the Valuation Committee will
determine an appropriate valuation technique based on available information,
which may include both observable and
unobservable inputs. The Valuation Committee typically will afford
greatest weight to actual prices in arm’s length transactions, to the extent
they represent orderly transactions between market participants; transaction
information can be reliably obtained; and prices are deemed representative of
fair value. However, the Valuation Committee may also consider other valuation
methods such as market-based valuation multiples; a discount or premium from
market value of a similar, freely traded security of the same issuer; or some
combination. Fair value determinations are reviewed on a regular basis and
updated as information becomes available, including actual purchase and sale
transactions of the issue. Because any fair value determination involves a
significant amount of judgment, there is a degree of subjectivity inherent in
such pricing decisions and fair value prices determined by the Valuation
Committee could differ from those of other market participants. Depending on the
relative significance of unobservable inputs, including the valuation
technique(s) used, fair valued securities may be categorized in Level 2 or 3 of
the fair value hierarchy.
Valuation Inputs
The following table summarizes the fund’s financial
instruments, based on the inputs used to determine their fair values on June 30,
2013:
There were no material transfers
between Levels 1 and 2 during the period.
NOTE 3 - OTHER INVESTMENT
TRANSACTIONS
Consistent with its investment
objective, the fund engages in the following practices to manage exposure to
certain risks and/or to enhance performance. The investment objective, policies,
program, and risk factors of the fund are described more fully in the fund’s
prospectus and Statement of Additional Information.
Securities Lending
The fund lends 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. It receives as collateral cash and U.S. government securities valued
at 102% to 105% of the value of the securities on loan. Collateral is maintained
over the life of the loan in an amount not less than the value of loaned
securities; any additional collateral required due to changes in security values
is delivered to the fund the next business day. Cash collateral is invested by
the fund’s lending agent(s) in accordance with investment guidelines approved by
management. Additionally, the lending agent indemnifies the fund against losses
resulting from borrower default. Although risk is mitigated by the collateral,
the fund could experience a delay in recovering its securities and a possible
loss of income or value if the borrower fails to return the securities,
collateral investments decline in value, or the lending agent fails to perform.
Securities lending revenue recognized by the fund consists of earnings on
invested collateral and borrowing fees, net of any rebates to the borrower,
compensation to the lending agent and other administrative costs. In accordance
with GAAP, investments made with cash collateral are reflected in the
accompanying financial statements, but collateral received in the form of
securities is not. At June 30, 2013, the value of loaned securities was
$67,993,000; the value of cash collateral and related investments was
$69,798,000.
When-Issued Securities
The fund may enter into when-issued
purchases and/or sales commitments, pursuant to which it agrees to purchase or
sell, respectively, the underlying security for a fixed unit price, with payment
and delivery at a scheduled future date generally beyond the customary
settlement period for such securities. When-issued refers to securities that
have not yet been issued but will be issued in the future and may include new
securities or securities obtained through a corporate action on a current
holding. The fund normally purchases when-issued securities with the intention
of taking possession but may enter into a separate agreement to sell the
securities before the settlement date. Until settlement, the fund maintains cash
reserves and liquid assets sufficient to settle its when-issued commitments.
Amounts realized on when-issued transactions are included with realized
gain/loss on securities in the accompanying financial statements.
Other
Purchases and sales of portfolio securities other than
short-term securities aggregated $3,284,409,000 and $3,601,756,000,
respectively, for the six months ended June 30, 2013.
NOTE 4 - FEDERAL INCOME
TAXES
No provision for federal income taxes
is required since the fund intends to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code and
distribute to shareholders all of its taxable income and gains. Distributions
determined in accordance with federal income tax regulations may differ in
amount or character from net investment income and realized gains for financial
reporting purposes. Financial reporting records are adjusted for permanent
book/tax differences to reflect tax character but are not adjusted for temporary
differences. The amount and character of tax-basis distributions and composition
of net assets are finalized at fiscal year-end; accordingly, tax-basis balances
have not been determined as of the date of this report.
The fund intends to retain realized
gains to the extent of available capital loss carryforwards. Net realized
capital losses may be carried forward indefinitely to offset future realized
capital gains.
At June 30, 2013, the cost of
investments for federal income tax purposes was $12,033,773,000. Net unrealized
gain aggregated $3,560,825,000 at period-end, of which $3,714,351,000 related to
appreciated investments and $153,526,000 related to depreciated
investments.
NOTE 5 - 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 0.35% 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 June
30, 2013, the effective annual group fee rate was 0.30%.
In addition, the fund has entered
into service agreements with Price Associates and two wholly owned subsidiaries
of Price Associates (collectively, Price). Price Associates computes the daily
share prices and provides certain other
administrative services to the fund. T. Rowe Price Services, Inc.,
provides shareholder and administrative services in its capacity as the fund’s
transfer and dividend disbursing agent. T. Rowe Price Retirement Plan Services,
Inc., provides subaccounting and recordkeeping services for certain retirement
accounts invested in the Investor Class. For the six months ended June 30, 2013,
expenses incurred pursuant to these service agreements were $57,000 for Price
Associates; $340,000 for T. Rowe Price Services, Inc.; and $524,000 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.
Additionally, the fund is one of
several mutual funds in which certain college savings plans managed by Price
Associates may invest. As approved by the fund’s Board of Directors, shareholder
servicing costs associated with each college savings plan are borne by the fund
in proportion to the average daily value of its shares owned by the college
savings plan. For the six months ended June 30, 2013, the fund was charged
$260,000 for shareholder servicing costs related to the college savings plans,
of which $206,000 was for services provided by Price. The amount payable at
period-end pursuant to this agreement is reflected as Due to Affiliates in the
accompanying financial statements. At June 30, 2013, approximately 2% of the
outstanding shares of the Investor Class were held by college savings
plans.
The fund is also one of several
mutual funds sponsored by Price Associates (underlying Price funds) in which the
T. Rowe Price Spectrum Funds (Spectrum Funds) and T. Rowe Price Retirement Funds
(Retirement Funds) may invest. Neither the Spectrum Funds nor the Retirement
Funds invest in the underlying Price funds for the purpose of exercising
management or control. Pursuant to separate special servicing agreements,
expenses associated with the operation of the Spectrum and Retirement Funds are
borne by each underlying Price fund to the extent of estimated savings to it and
in proportion to the average daily value of its shares owned by the Spectrum and
Retirement Funds, respectively. Expenses allocated under these agreements are
reflected as shareholder servicing expenses in the accompanying financial
statements. For the six months ended June 30, 2013, the fund was allocated
$277,000 of Spectrum Funds’ expenses and $11,637,000 of Retirement Funds’
expenses. Of these amounts, $6,335,000 related to services provided by Price.
The amount payable at period-end pursuant to this agreement is reflected as Due
to Affiliates in the accompanying financial statements. At June 30, 2013,
approximately 3% of the outstanding shares of the Investor Class were held by
the Spectrum Funds and 76% were held by the Retirement Funds.
The fund may invest in the T. Rowe
Price Reserve Investment Fund and the T. Rowe Price Government Reserve
Investment Fund (collectively, the T. Rowe Price Reserve Investment Funds),
open-end management investment companies managed by Price Associates and
considered affiliates of the fund. The T. Rowe Price Reserve Investment Funds
are offered as cash management options to mutual funds, trusts, and other
accounts managed by Price Associates and/or its affiliates and are not available
for direct purchase by members of the public. The T. Rowe Price Reserve
Investment Funds pay no investment management fees.
As of June 30, 2013, T. Rowe Price
Group, Inc., and/or its wholly owned subsidiaries owned 1,424,654 shares of the
Investor Class, representing less than 1% 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 above directions to reach the
“Conducting Business Responsibly” page. Click on the words “Proxy Voting
Records” on the left side of that page, and then click on the “View Proxy Voting
Records” link at the bottom of the page that appears.
|
How to Obtain Quarterly Portfolio
Holdings
|
The fund files a complete schedule of
portfolio holdings with the Securities and Exchange Commission for the first and
third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available
electronically on the SEC’s website (sec.gov); hard copies may be reviewed and
copied at the SEC’s Public Reference Room, 100 F St. N.E., Washington, DC 20549.
For more information on the Public Reference Room, call 1-800-SEC-0330.
|
Approval of Investment Management
Agreement
|
On March 5, 2013, the fund’s Board of
Directors (Board), including a majority of the fund’s independent directors,
approved the continuation of the investment management agreement (Advisory
Contract) between the fund and its investment advisor, T. Rowe Price Associates,
Inc. (Advisor). 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 3-, 5-, and 10-year periods, and compared
these returns with a wide variety of previously agreed upon comparable
performance measures and market data, including those supplied by Lipper and
Morningstar, which are independent providers of mutual fund data.
On the basis of this evaluation and
the Board’s ongoing review of investment results, and factoring in the relative
market conditions during certain of the performance periods, the Board concluded
that the fund’s performance was satisfactory.
Costs, Benefits, Profits, and
Economies of Scale
The Board reviewed
detailed information regarding the revenues received by the Advisor under the
Advisory Contract and other benefits that the Advisor (and its affiliates) 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. The Board also reviewed
estimates of the profits realized from managing the fund in particular, and the
Board concluded that the Advisor’s profits were reasonable in light of the
services provided to the fund.
The Board also considered whether the
fund benefits under the fee levels set forth in the Advisory Contract from any
economies of scale realized by the Advisor. Under the Advisory Contract, the
fund pays a fee to the Advisor for investment management services composed of
two components—a group fee rate based on the combined average net assets of most
of the T. Rowe Price mutual funds (including the fund) that declines at certain
asset levels and an individual fund fee rate based on the fund’s average daily
net assets—and the fund pays its own expenses of operations. The Board concluded
that the advisory fee structure for the fund continued to provide for a
reasonable sharing of benefits from any economies of scale with the fund’s
investors.
Fees
The Board was provided with information regarding
industry trends in management fees and expenses, and the Board reviewed the
fund’s management fee rate, operating expenses, and total expense ratio (for the
Investor Class and Advisor Class) in comparison with fees and expenses of other
comparable funds based on information and data supplied by Lipper. The
information provided to the Board indicated that the fund’s management fee rate
was above the median for certain groups of comparable funds and at or below the
median for other groups of comparable funds. The information also indicated that
the total expense ratio for the Investor Class was above the median for certain
groups of comparable funds and below the median for other groups of comparable
funds, and the total expense ratio for the Advisor Class was below the median
for comparable funds.
The Board also reviewed the fee
schedules for institutional accounts and private accounts with similar mandates
that are advised or subadvised by the Advisor and its affiliates. Management
provided the Board with information about the 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.