REPORT
T. Rowe Price

INSIGHTS ON INVESTING AND FINANCIAL TOPICSI S S U E N O. 145 FA LL 2019

U.S. Large-Cap Growth and ValueManagers Confront Slower Growth
Is the long U.S. economic expansion near the end of its cycle?
With different strategies, how two managers are investing.

5

Global Economy
Central Bank Independence

7

U.S. Small- and Mid-Caps
Case for Long-Term Allocation

9

Technology Stocks“Linchpin” Semiconductor Firms

12 U.S. Equities
	Incumbents Fight Disruption
14 Fixed Income
Global High Yield Risk/Return

After a record expansion lasting a decade,the U.S. economy, along with certain otherdeveloped economies, is shifting to a lower
gear. From the differing perspectives of theirinvesting strategies, Joe Fath, manager of the
Growth Stock Fund, and Mark Finn, managerof the Value Fund, discuss the implications forinvesting in large-cap stocks as well as theirstrategies and market outlook.
Q. How is the U.S. economic slowdown
affecting large-cap stocks?
Mr. Fath: The U.S. economy is showing
steady, though slow, growth. The
slowdown has not yet affected companies
significantly in terms of their profit-andloss statements, particularly the disruptive
secular growers, such as the Googles
and Amazons, as well as some softwareas-a-service stocks like Salesforce.com,
ServiceNow, and Workday. Also, weshould be mindful that year-over-yearcomparisons will reflect the fact that the
tax cuts of 2018 have begun to roll off.
The biggest weakness has been among
cyclicals, but even the technology,
health-care, and consumer discretionary
sectors—in which we have relatively
higher exposures—have mostly done well.
Such defensive sectors as consumer staples,utilities, and real estate investment trusts[REITs] and yield plays like the cellphone
tower companies also have performed
relatively well recently, due to fears that

we are in the later innings of the economic
cycle along with a flattening or inverted
interest rate yield curve.
Mr. Finn: About half of the Russell 1000
Value Index is composed of companies
with some level of cyclicality, including
financials, energy, industrials, andmaterials. So, an economic slowdown
poses challenges for stock selection in
those sectors in particular. What’s unique
about this 10-year bull market is thateach time it appeared that we were on the
precipice of a recession, the central banks
maintained their accommodative policies.
So you should be cautious about getting
too defensive even if you think we are near
the end of the cycle. In the United States,
a lot of the leading indicators are slowing,
but employment has held up well. Outside
the United States, developed market
economies are notably more sluggish.
Q. What’s the impact of rising tradetensions between the United States
and China?
Mr. Fath: For the most part, companies
have been able to mitigate the tariff
impact. They either adjusted their businessmodels or sought concessions fromsuppliers. The multinational industrials
have been hit the hardest along with
consumer companies like Dollar Treeand other retailers that import a lot from
China. But I think more companies willcontinued on page 2 >16 Last Word
Women’s Savings Gap
QUARTERLYPERFORMANCE UPDATE
17 Equity Market Review
18 Fixed Income Market Review
Fund Performance Tables

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I S S U E N O. 145 FA LL 2019

continued from page 1 >aim to de-risk by moving production away from China. With theUnited States expanding its tariffs to Chinese consumer goods,
many companies will be forced to pass along those extra costs
to consumers. It’s too early to tell the long-term ramifications
for markets. But the longer these additional costs are imposed,
the more they will impact market conditions. In China, internetcompanies Alibaba and Tencent have solid business models.
But trade tensions are a headwind to consumer sentiment anddemand, and not just for these successful platforms.
Mr. Finn: I agree that many U.S. companies have shifted
supply lines to avoid tariffs. But you can’t totally reinvent yourbusiness model and just go unplug China and plug in 10 othercountries. The longer the trade war goes on, the more risk there
is because companies will be forced to reduce orders and relocate
manufacturing away from China, and this will be costly to theirbusinesses and to the economy.
Q. How are you investing in this environment?
Mr. Finn: My bias is to quality and to be modestly defensive.
Normally, at the end of a long expansion you would be tilting
toward less cyclical exposure, including utilities, consumer staples,
and REITs. The challenge is that the market has moved that way
already. The higher-quality defensive stocks are expensive, andthose with more cyclical exposure are relatively cheap. The Federal
Reserve may do its best to avoid a natural slowdown or a recession.
So I’ve tried to invest in cyclical stocks that offer a compellinginvestment case and reasonable valuation.

Joe Fath

Mark Finnequipment manufacturers. Among materials, I’ve focused onsome of the industrial gases that are tethered to the chemical andoil infrastructure.
Mr. Fath: In the first half of this year, the defensive sectors andthe high-growth sectors performed well, and the cyclicals had
not really participated. So the market is generally telling you thatinvestors are worried that we may be in the last innings of thiseconomic expansion. But the late cyclicals are probably a reallyattractive hunting ground now. To Mr. Finn’s point, I also favor
some of the industrial gas companies, as they tend to do well late in
the cycle. There also is opportunity, in my opinion, in the industrial
semiconductor industry, such as with Texas Instruments.
Overall, my strategy looks like an upside-down pyramid. The
top sleeve is composed of secular growth names that represent
50% to 60% of the portfolio. The cyclical sleeve represents 15% to25%. That’s where we have been doing more hunting lately. The
bottom part of the pyramid, with a range of 15% to 25%, consistsof special situations, particularly companies exposed to industry
structural change or companies pivoting from value to growth.
I favor companies that have more control over their destiny, arepositioned to benefit from powerful secular trends, and are using
innovation to disrupt less efficient business models and create new
ones. I believe that firms effective at leveraging innovation will
be able to sustain robust growth in earnings and revenues as they

I am underweight financials because we are late in the credit
cycle, and low interest rates are likely to compress margins.
I’m underweight energy due to abundant supplies. Among
cyclicals, I’m meaningfully overweight technology, where I
see opportunities among semiconductors and semiconductor

Figure 1 Can the Very Long and Favorable U.S. Growth and Stock Market Cycles Persist?
U.S. Economic Expansions
S&P 500 Index Bull Markets
January 1958 Through September 2019

60%
400%

50

40

30

Current Expansion:
120 months,
25.69% growth

20

10

0

Cumulative Price Return

Real Gross Domestic Product Growth

From Fourth Quarter 1949 Through Third Quarter 2019

350
300

200
150
100
50
0

0

20

40

60

Months

80

100

120

Current Bull Market:
127 months, 305%
price appreciation

250

140 0

20

40

60

80

100

MonthsPast performance is not a reliable indicator of future performance. Sources: T. Rowe Price analysis using data from FactSet Research Systems Inc.,
all rights reserved; Bureau of Economic Analysis/Haver Analytics; and Standard & Poor’s. Additional disclosures on page 24.

2

120

140

exploit new markets and seize share in existing ones. McDonald’s,
for example, is undergoing a significant digital transformationthat enhances the customer experience. In technology, I favor theplatform business models and am underweight hardware-driven
technology enterprises that tend to be more cyclical.

We haven’t seen the excesses thatwere evident in the last financial
crisis, so if we have a recession it
should be more of a relatively normal
recession...

Q. Is increased government scrutiny of the platform
companies a concern?
Mr. Fath: We are closely monitoring the regulatory scrutiny thelarge platform companies face. This is a unique situation giventhat these big tech firms have been largely viewed as a force forgood, with the consumer as the primary beneficiary. However, thepotential for stepped-up regulation of Amazon.com, Facebook,and Alphabet (Google) increases volatility risk and the potential topressure these firms’ valuation multiples. We take a balanced view,
and investors should not lose sight of their competitive advantages
and stellar long-term growth prospects.
Q. What about the politics swirling around the health-care
sector?
Mr. Finn: The health-care sector is facing political headwinds
such as potential limits on drug pricing and single-payer healthcare initiatives, but the sector should benefit longer term fromsecular tailwinds, including an aging population, new technology
applications, and improved treatment options.
Mr. Fath: Our allocation to health care is most leveraged to
select therapeutics and medical device companies, such as
Intuitive Surgical and Stryker, that are utilizing technology andthat we believe have limited exposure to potential regulatory
pressures. I’ve avoided material exposure to pharmaceuticals
and biotechnology. The pace of innovation and growth inbiotechnology has slowed quite a bit, and big pharma is in thebull’s-eye of efforts to lower drug care costs. We’ve also reduced our
exposure to managed care due to elevated headline risk throughnext year’s election as several “Medicare for All” proposals would
drive existential risk to these for-profit businesses.
Q. What is your outlook for the U.S. economy and corporate
earnings?
Mr. Fath: We haven’t seen the excesses that were evident in thelast financial crisis, so if we have a recession it should be more ofa relatively normal recession, in which gross domestic productdeclines by 1% to 2% over a few quarters. We’re already seeing
weakening data in certain pockets, particularly transportationand manufacturing. But job growth and housing continue to look
pretty good. I think we’ll see overall growth slow, but the risks of asignificant U.S. or global economic downturn still appear limited.
In a slower-growth environment, selectivity is key. Overall, there
is a high degree of certainty that the rate of earnings growth willslow to some degree. The question is: How much it affects themarket’s valuation multiples? Does the market look past that, or isit a sign of more to come and multiples compress? The wild card is
the 2020 presidential election. The rhetoric leading up to it could
certainly affect sentiment and spur volatility.
continued on page 4 >Figure 2 U.S. and Global Growth Deteriorating
January 2015 Through September 2019

U.S. and Global Manufacturing
Index Levels

Global Manufacturing PMI**(left scale)

U.S. CEO Economic Outlook Survey***(right scale)

140

60

120

55

100

50

80

45
2015

2016

2017

2018

2019

U.S. CEO Economic Survey Index

65

U.S. Manufacturing PMI*
(left scale)60*Purchasing managers’ index (PMI): Based on a survey of purchasing managers at more than 300 manufacturing firms by the Institute for Supply Management,
the index monitors changes in production levels from month to month. **Global PMI includes the U.S. PMI (only through August). ***The quarterly U.S. CEO
Economic Outlook Index is based on a survey of Business Roundtable members. Sources: Haver Analytics/JP Morgan/IHS Markit and Business Roundtable.

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I S S U E N O. 145 FA LL 2019

continued from page 3 >Mr. Finn: I also expect earnings growth to be more challenging,
especially with the protracted trade negotiations. The U.S. economy
is not going gangbusters, but it’s doing fine. The strong labor market
and rising wages should continue to strengthen consumers’ balance
sheets. However, the expansion may have difficulty maintaining
its recent pace. A recession is definitely on the horizon, but we just
don’t know how far off that is. When the labor market weakens andconsumer credit suffers, that will tell you that the horizon could bevery near. That’s why you need to balance your strategy between
defensive and procyclical positioning.
Q. What should investors be mindful of in today’s climate?

I would not advocate that investors
concerned about the end of theeconomic cycle sell their equity
shares.
are well positioned and have a very good management team that cannavigate through choppier waters and execute well. ■Mr. Finn: Low interest rates continue to support equities andthose seeking to earn a reasonable return over time. I would not
advocate that investors concerned about the end of the economic
cycle sell their equity shares. You just need to be reasonably
balanced in your overall investment strategy and perhaps besomewhat defensively positioned. In our strategy, we are everdiligent about the risks that companies face and how disruption
is impacting companies more generally. That is really importantfor value investors, because half the battle in value investing is
avoiding value traps.

As of September 30, 2019, among stocks mentioned in this article,
Amazon.com made up 0.2% of the the Growth Stock Fund; Alphabet(Google), 0.3%; ServiceNow, 0.6%; Salesforce.com, 1.5%; Workday,
0.8%; Dollar Tree, 1.0%; Alibaba, 2.7%; Tencent, 2.0%; McDonald’s,
0.5%; Facebook, 5.5%; Intuitive Surgical, 1.5%; and Stryker, 1.8%.
Among the stocks mentioned, Dollar Tree made up 2.2% of the Value
Fund; Texas Instruments, 0.7%; McDonald’s, 1.0%; and Stryker, 0.7%.
The specific securities identified and described do not represent all of
the securities purchased, sold, or recommended, and no assumptions
should be made that investments in the securities identified anddiscussed were or will be profitable.

Mr. Fath: As growth investors, we remain cautiously positive about
U.S. equities. However, valuations are less forgiving today than at
the start of 2019. And the key risks—escalating trade disputes, theslowing economy, and political uncertainty—could trigger renewedvolatility and impede market performance. As active managers, weneed to be very selective and make sure we invest in companies that

Past performance cannot guarantee future results. All investments are
subject to market risk, including the possible loss of principal. The value
approach to investing carries the risk that the market will not recognize
a security’s intrinsic value for a long time or that a stock judged to beundervalued may actually be appropriately priced. Growth stocks havehistorically been more volatile than cyclical stocks.

Figure 3 U.S. Corporate Earnings Are Deteriorating
S&P 500 Index Earnings, Year-Over-Year Growth, From September 2014 Through September 2019
30%

ActualEstimated

Corporate Earnings Growth Rate,
Year Over Year

25

20

15

10

5

0

Estimated
-5

-10

2014

2015

2016

2017

2018

2019

Past performance is not a reliable indicator of future performance. Source: T. Rowe Price analysis using data from FactSet Research Systems Inc.
All rights reserved. Additional disclosures on page 24.

4

2020

G LO BA L EC O N O M Y

Independent Central
Banks: A Relatively
New Idea That May
Come to an End
More scrutiny of central banks due
to low growth, fallinginflation, and low rates.
BY NIKOLAJ SCHMIDT
T. ROWE PRICE CHIEF
INTERNATIONAL ECONOMIST

After a decade of extraordinary monetary
policy stimulus, it was almost too
predictable that, at the first sign of amonetary headwind to growth, President
Donald Trump would take aim at theFederal Reserve.
“Germany sells 30-year bonds offering
negative yields,” Trump tweeted inAugust. “Germany competes with theUSA. Our Federal Reserve does not allow
us to do what we must do. They put us at
a disadvantage against our competition.”
Also, he had previously accused Fed
Chairman Jerome Powell of being“clueless” and displaying a “horrendous
lack of vision.”
The president’s comments sparked fears
that the Fed’s status as an independent
central bank is threatened. However, it istrue that, despite the trillions of dollars ofmonetary stimulus, the Fed has failed to hit
its objective of 2% inflation.
Central banks in other parts of theworld also have failed to deliver on theirmandates, and similarly find themselves
under pressure from frustrated politicians.
So, is the era of the independent central
bank coming to an end?
New idea
The idea that modern economies require
independent central banks is relatively
new. It grew in the 1970s and 1980s outof the work of economists advocating“rational expectations.”

They believed that if monetary policy isleft to politicians, it will become a hostage
to the electoral cycle because incumbent
administrations will always seek tostimulate economic activity to get reelected.
As a side effect, inflation will rise.
Most modern “independent” central
banks are prohibited from financing
their governments directly. Theoreticallyat least, this creates a clear dividing line
between fiscal and monetary policy. The
central bank can impose fiscal discipline
upon the government precisely because it
does not fund it.
Typically, the central bank will begiven a narrow tangible mandate, suchas an inflation target, against which it
will be held accountable to the public.
Independence is further cemented bygiving central bank governors fixed
terms that cannot be terminated by thegovernment.

Even so, there is a clear difference between
a central bank influenced by government
policy and one controlled by politicians.
Populist threat
It remains to be seen how long thepoliticians can be kept at arm’s-length.
A world of low growth, falling inflation,and chronically low interest rates hashelped to fuel the rise of populism, which
in turn has placed the role of central banks
under renewed scrutiny.
The challenge is not just from right-wing
populists such as President Trump; theprogressive left also harbors ideas about
central banking that do not leave muchroom for truly independent central banks.
Modern monetary theory, supported bymany left-leaning populists, argues that theinstitutional constraints preventing central
banks from directly financing government
are not useful and should be dismantled.

The challenge is not just from right-wing
populists such as President Trump; theprogressive left also harbors ideas about central
banking that do not leave much room for truly
independent central banks.
This combination of job security,
accountability to the public, and a clearly
defined mandate is intended to ensurethat the governors can make decisions
that serve the central bank’s mandate
even when they are not popular with theadministration. At least, that’s the theory.
In reality, central banks’ independence issometimes exaggerated.
In the United States, the president
appoints governors to the Federal Reserve
Board, and Congress sets laws that affectthe powers of the central bank. In Europe,
the European Central Bank (ECB) becameheavily involved in the eurozone crisis, as
ECB President Mario Draghi admitted
in 2012 when he said that the ECB would
do “whatever it takes” to preserve the euro.

In the United States, the Fed’s
independence is currently protected byinstitutional rigidity. It will take time
for any president to convince Congress
to change the central bank’s mandate.
However, institutional rigidity wears
down under years of attrition. At thecurrent juncture, it seems likely that theadministration that occupies the WhiteHouse after the 2020 elections, left or right,
will have an economic agenda that, on theface of it, will benefit from an agreeable
central bank.
Vulnerable
Central banks are not well positioned towithstand these attacks for three main
reasons. First, their monetary policies
continued on page 6 >TROWEPRICE.COM

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I S S U E N O. 145 FA LL 2019

continued from page 5 >helped facilitate the imbalances that gave
rise to the global financial crisis. Second,
central banks have failed to deliver on
their inflation mandates. Third, events
over the past decade have challenged thenotion that the monetization of public
deficits leads to rampant inflation.
In short, central banks have lost credibility
with political decision-makers and the
public at large. In addition, central banks
are victims of their own success: The
painful lessons from the days of rampant
inflation have been long forgotten
by most.

Consequently, inflation in Turkey rosefrom an average rate of 7.5% in 2010–2011
to an average of 17.1% in 2018–2019. (SeeFigure 1.) In parallel, the Central Bankof Turkey had to hike its policy rate fromaround 5.75% in 2012 to 24% in 2019.
A major infringement on the independenceof the Central Bank of Turkey caused theTurkish administration to face ever-risinginterest rates—exactly the opposite of what
the administration wanted. The dismissalof the governor of the Central Bank ofTurkey in July 2019 is testament to thebank’s nonindependence.

It is worth asking: How important iscentral bank independence? In my view,
respect for the broad lines of central bankindependence is very important for the
performance of the economy and asset
markets, but minor infringements on their
independence are probably less important.

By contrast, Russia is an example of an
emerging market country that has taken
decisive shifts toward greater central bankindependence. Historically, the Central
Bank of Russia has had a dual mandateof managing inflation and the exchange
rate. Following the global financial crisis,
the bank’s mandate was simplified, and it
adopted a single inflation target of about 4%.

Figure 1 The Impact of Limiting Central Bank Independence
Turkey’s Inflation Has Risen, Russia’s Has Fallen
Turkey Inflation YoY

Russia Inflation YoY

25%

20

15

10

5

9

9

/1

/1

30

6/

1/

30

8
31

/1

7
1/

1/

31

/1

6
1/

31

/1

5
31

/1

4
1/

1/

31

/1

3
1/

31

/1

2
31

/1

1
1/

1/

31

/1

0
1/

31

/1

9
31

/0

8
1/

/0
31
1/

31

/0

7

0

1/

Year-Over-Year (YoY) Inflation Rate*

Stagflation trades
A world of reduced central bankindependence is one of higher inflation
and a more volatile business cycle as
uncurbed economic booms during
election years turn into busts.
This could create a more pronounced
presidential cycle: Equity markets rally
into elections, as the economy is primed
for the incumbent to be reelected, only toretrench after the election as the monetarystimulus starts to fade.
The similarities with the economic
conditions of the 1970s suggest that
stagflation trades could be effective:
Politically motivated central banks could
keep policy rates too low, which, in
combination with rising inflation, could
lead to a steepening of the yield curve.
And across the cycle, greater volatilityof the real economy and rising inflation
could cause equity markets to struggle tokeep up with an ever-rising rateof inflation. ■*Headline inflation rate is a measure of the total inflation within an economy, including commodities suchas food and energy prices (e.g., oil and gas), which tend to be much more volatile and prone to inflationary
spikes. Sources: Turkish Statistical Institute and Russian Federal Service of State Statistics.

6

Over time, the anchoring of inflation andinflation expectations will permit theCentral Bank of Russia to implement a very
substantial reduction of the policy rate.

A world of reduced central bank independence
is one of higher inflation and a more volatilebusiness cycle...

Why it matters
The Republic of Turkey is a good example
of what can happen when central bankindependence deteriorates. In theory, theCentral Bank of Turkey is independent to
set monetary policy to hit its 5% inflation
target. In practice, however, the Turkish
administration prioritizes growth over
inflation and will direct the central bank
to follow the party line.

30

Since then, the independence of the bankto pursue this mandate has increased. As aresult, to address excessively high inflation,
its monetary policy stance has beentightened. The real policy rate in Russia
today is around 3%, one of the highest
among emerging economies. Prior to theglobal financial crisis, the policy rate in
Russia was most often deeply negative.

U. S . S M A LL - A N D M I D - CA PS

Smaller Companies
Can Add to Returns,
Diversification, Value
Despite large-caps’ recent outperformance, thetime may be right for small- and mid-caps.
BY CURT ORGANT, T. ROWE PRICE U.S. SMALLCAP MANAGERKEY INSIGHTSρρU.S. small- and mid-cap companies have lagged their larger
counterparts over the past year. However, despite some earlysigns of rotation out of the smaller-capitalization companies,
the fundamental picture remains supportive, in our view.
ρρMoreover, there are compelling reasons for maintaining along-term, strategic allocation to the smaller-company sectors.
ρρThe United States offers a particularly supportive, pro-businessenvironment in which entrepreneurship is venerated and small
business success stories are championed, encouraging others tofollow suit.
While the S&P 500 Index of large-cap U.S. stocks was scaling
all-time highs at one point earlier this year, U.S. small- andmid-cap companies have lagged their larger counterparts overthe past year. This has prompted some investors to question
the outlook for smaller companies, as well as their continuing
exposure to the asset classes.
However, not only does the near-term fundamental environment
remain supportive, in our view, there also are compelling reasonsfor maintaining a strategic, long-term allocation to small- andmid-cap companies.
So, what’s been weighing on the smaller-company market? Some
believe that the combination of slowing global economic trends
and the U.S.-China trade war represent a particularly risky
landscape for U.S. smaller companies. Indeed, smaller companies
tend to hold higher levels of debt relative to cash and revenues,
so they are generally more sensitive to the health of the broader
economy.
However, while there is inevitably some flow through froma weaker global economy, the U.S. economy has continued
to expand. Small- and mid-cap companies tend to be moredomestically focused, with a relatively lower international
exposure, so they are more insulated from global economic
trends than their larger counterparts.
Nevertheless, it’s true that smaller companies are not immune tothe impact of the China trade war. Given that these businesses

import and export both materials and components, any
disruption here is likely to result in volatility in their stock prices.
However, it is arguable that the trade war also could potentiallyprovide a boost for some smaller U.S. companies as new, domestic
suppliers are sought to fill some of the gaps previously met by
Chinese companies.
Late-cycle concerns
Concerns about the late stage of the current economic cycle haveled some investors to reduce their small- and mid-cap exposure.
Already more than 10 years into the current expansionary phase—one of the longest growth periods in history—we likely are getting
closer to the end of the cycle.
While part of the appeal of smaller companies is that their size
makes them more responsive to changes and opportunities, italso means that they tend to be more vulnerable during periods ofslowdown. Accordingly, as we move deeper into the current cycle,
some investors have started to pivot out of smaller companies
in favor of larger, more established companies offering stableearnings, lower debt, and more substantial cash buffers.
Despite the late stage of the economic cycle, however, we believe
several factors remain supportive of smaller companies.

Small- and mid-cap companies tend
to be more domestically focused,with a relatively lower international
exposure, so they are more insulated
from global economic trends thantheir larger counterparts.
First, consensus expectations for the next six to 12 months are
for U.S. smaller companies to deliver earnings growth superior totheir larger counterparts. Plus, small- and mid-cap valuations are
more reasonable than those of large-caps. While we do not know
if this anticipated growth will be achieved, the consensus view isof a generally supportive landscape—given such general factors asthese companies’ greater insulation from the global environment.
In addition, mergers and acquisitions (M&A) activity also
continues to positively underpin the case for smaller companies. A
combination of tax reform; reduced regulation; and, importantly,
larger companies’ ongoing search to acquire smaller companies’
innovations should continue to stimulate M&A activity. Finally,
the Trump administration and the Federal Reserve have madeclear commitments to do whatever is necessary to arrest further
slowdowns in the economy.
continued on page 8 >TROWEPRICE.COM

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I S S U E N O. 145 FA LL 2019

continued from page 7 >assets, small- and mid-caps historically have offered the potential for greater rewards, as the potential dispersion of returns isgreater than with large-cap equities.

Long-term allocation
Moreover, there is a range of compelling reasons for maintaining along-term, strategic allocation to small- and mid-caps. Principally,
these include the potential to exceed large-cap performanceover the long term, increasing portfolio diversification, and theopportunities afforded through a well-researched selection of agreater dispersion of stocks. Consider these factors:

At the same time, smaller companies are less covered by traditional
Wall Street analysts. If an investment team has the resources toindependently meet with these under-followed companies andassess their prospects for success, there are tremendous
opportunities to add value.

nn Higher returns: U.S. smaller companies have the potential toachieve higher returns over the long term. While it is true that
smaller companies tend to be more volatile, they have historicallyoutperformed their larger-company counterparts. (See Figure 1,
left side.) That makes sense as many of these companies are in theearly stages of their development, offer potentially rapid growth,and are still small enough to deliver growth that is meaningful.
(See Figure 1, right side.)nn Lower correlations: Historically, returns of U.S. smaller com-panies have been less correlated with the large-cap segments ofinvestors’ portfolios. At the total portfolio level, adding exposure
to U.S. smaller companies, which have had historically highreturns and lower correlations to other portfolio holdings, could
improve the risk-adjusted returns of a balanced portfolio. Thatis counterintuitive to the way many investors think about theseasset classes.

nn Greater potential value: There is far greater dispersion withinsmaller companies, which historically has provided active
investment managers with more opportunities to add value.
When identifying mispriced stocks, such as uniquely advantaged
companies or businesses that are undervalued relative to their

We believe there are compelling reasons for maintaining a longterm, strategic allocation to U.S. smaller companies. While it does
come with risks and the prospect of higher volatility, consistent
exposure to smaller companies as part of a balanced portfolio can
add value over the long term.
With attractive growth potential, adding exposure to smaller
companies also could provide diversification as the drivers of
performance tend to be different from those of larger companies.
They tend to have simpler business models, with less sensitivity
to macro issues or industry developments; and they are typicallymore dependent on company-specific news and developments.
Finally, the U.S. market is a hugely important arena for smaller
companies to grow. The size of the domestic economy gives
companies plenty of room to scale up and grow into. The UnitedStates offers a particularly supportive, pro-business environment
where entrepreneurship is venerated, and smaller business successstories are championed, encouraging others to follow suit. ■All investments are subject to market risk, including the possible loss ofprincipal. Small- and mid-cap stocks have generally been more volatilein price than large-cap stocks.

Figure 1 The Long-Term Outperformance of U.S. Small- and Mid-Cap Stocks Versus Large-Caps
Returns, January 1979 Through September 2019
Growth, January 1979 Through September 2019
S&P 500 Index

Russell 2500 Index
12,000 %12.4

10,000

12.2
12.0
11.8

Total Return

Average Annualized Returns

Russell 2500 Index
12.6%

S&P 500 Index

8,000
6,000
4,000

11.6
11.4
11.2

2,000
0

79

82

85

88

91

94

97

00

03

06

09

Past performance is not a reliable indicator of future results. Sources: Standard & Poor’s and Frank Russell Company; T. Rowe Price analysis.
Additional disclosures on page 24.

8

12

15

18 19

TEC H N O LO GY STO C KS

“Linchpins” Meeting
Innovation Demands
for Semiconductors
The cloud, artificial intelligence, and emerging
technologies are driving chip needs.
BY ALAN TU, MANAGER OF THE GLOBAL TECHNOLOGY
FUND; DOM RIZZO, INVESTMENT ANALYST, EUROPE;TONY WANG, INVESTMENT ANALYST, U.S.; AND ALISON YIP,INVESTMENT ANALYST, ASIA

What keeps technology moving forward? And why do we take for
granted that the smartphones, computers, and other devices that werely on will be better in five years?
Of course, many factors are at work, but the remarkable
improvement in semiconductors has been central to the digital
revolution over the past several decades. Further progress in chiptechnology will be necessary to support artificial intelligence(AI), 5G mobile communications, autonomous driving, and othertechnologies.

largest and most self-sufficient in the industry, but challenges to bothits design and manufacturing dominance have emerged.
We see more promising opportunities in TSMC, which recently
became the first company to cross an important manufacturing
threshold. In 2017, TSMC began producing chips at the
7-nanometer (nm) process node—a measure of how finely
transistors can be etched onto silicon, and thus how manytransistors can fit on a chip of a given size.
Having beaten Intel in the race to the latest-generation
manufacturing process, TSMC is seeing very strong demand for
its new generation of 7nm chips, especially for use in smartphones
and high-performance PCs. Most prominently, TSMC uses its 7nm
process to manufacture Apple’s new A12 Bionic chips.
Designing the latest generation of chips requires advanced softwaretools. Silicon Valley’s Synopsys is another linchpin company, as
the leading maker of electronic design automation (EDA) software,
which helps chip designers analyze how the billions of components
on a chip will work together. As semiconductors become more
complex and shrinking transistors becomes more difficult, EDA
software and intellectual property are increasingly important.

Nevertheless, investors often overlook the crucial role of chipmakers,
as well as the challenges that semiconductor firms face as integrated
circuits grow smaller and more complex. In the Global Technology
Fund, we focus on a handful of “linchpin” semiconductor companies
involved in the most crucial steps of chip production.

We believe a small number ofindustry leaders offer uniqueinvestment opportunities becauseof the vital role they play in moving
technology forward.

We believe a small number of industry leaders offer uniqueinvestment opportunities because of the vital role they play inmoving technology forward. We also have select exposure to severalof their customers—companies that design and sell chips targetedat especially promising markets.

Moore’s law
Perhaps the largest challenge chipmakers have faced in recent years
has come from the slowdown in their ability to shrink chips andincrease in processor speed.

Complex ecosystem
The semiconductor industry is a large, global, and complex
ecosystem, in which no firm functions independently. The
production of an integrated circuit requires the technologies ofseparate firms specializing in design, intellectual property, software,equipment, materials, and manufacturing.
A small number of companies serve as linchpins in the design
and production process, however. One prominent set is the threecompanies that stand alone in being able to manufacture leadingedge semiconductors: Intel, South Korea’s Samsung Electronics, andTaiwan Semiconductor Manufacturing Corporation (TSMC).
Intel first developed the microprocessor five decades ago and remains
the world’s dominant manufacturer of central processing units(CPUs), the electronic nerve center of a computer, while also being aleader in the design of many other types of chips. The company is the

According to Moore’s law, named after Intel cofounder Gordon
Moore, chipmakers could be expected to double the number oftransistors on a given area of a chip roughly every two years. For
about four decades, the pattern held true.
The exponential effect was extraordinary: According to thecompany, Intel’s 4004 processor contained 2,300 transisters in 1971;
by 2010, an Intel core processor held 560 million. Apple’s latest A12
Bionic chip has 6.9 billion transistors. (See Figure 1.)
This remarkable progress relied in large part on the developmentof ultraviolet lithography, which essentially allowed circuits to be“printed” onto silicon wafers. In the past few years, however, thelatest generation of lithography technology, deep ultraviolet (DUV)
lithography, has reached the physical limits of how finely it can lay
down circuitry—akin to trying to use a fat-tipped marker to fill out
a small form.

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9

I S S U E N O. 145 FA LL 2019

continued from page 9 >DUV lithography’s limits partially contributed to Intel’s missing
the two-year doubling cycle predicted by Moore’s law. Intel’slatest-generation 10nm fabrication process (roughly equivalent
to TSMC’s 7nm process, but with a different naming convention)
is just being introduced this year. This is three years later thanoriginally predicted and Intel’s first shrink since 2014—a delay thathas caused some to declare the end of Moore’s law.

A second part of our investment
thesis focuses on the firms thatdesign and market the highperformance chips made possibleby the linchpin production
companies. In short, we want to
own the companies that have thebest product portfolio and are in
the right place for the next horizons
in technology.

EUV lithography
In our view, Moore’s law is not dead. It has just slowed, perhaps only
temporarily.
Another linchpin company, semiconductor equipment maker ASML
Holding, has developed a solution—extreme ultraviolet (EUV)
lithography. Using laser-produced plasma fired in a vacuum to lay
down chip designs at extremely high resolutions, ASML’s machines
are poised to come online in significant numbers in 2020.
This innovation will allow semiconductor makers to produce thelatest-generation chips at volume, marking an inflection point.

New markets
A second part of our investment thesis focuses on the firms thatdesign and market the high-performance chips made possible by
the linchpin production companies. In short, we want to own thecompanies that have the best product portfolio and are in the rightplace for the next horizons in technology. Our holdings provide
the chips necessary to power AI, 5G, and the so-called internet

EUV lithography technology also should allow Intel, TSMC,
Samsung, and others to make the requisite leaps to the next few
generations of chips. Given the 10 years and €10 billion it took tobring EUV lithography technology to market, ASML likely willremain the industry leader over the next decade.

Figure 1 Smaller, Better, Faster
The Progress in Semiconductors Over the Past Half-Century Has Been Astonishing

Moore’s Law in Action
Doubling a chip’s transistors roughly every two years has had an even greater
impact on processing speed. Below is a comparison of the first microprocessor
developed by Intel® versus the latest-generation chip from Apple®.
Intel® 4004 Processor
1971

Operations
per Second

60K

Feature/Process Sizein Nanometers

10K

vs.

A12 Bionic Chip
2018

5T

A12
Number ofTransistors

2,300

Operations
per Second

Feature/Process Sizein Nanometers

7

Number ofTransistors

6.9B

Linchpin Companies

Why so Much Improvement?
A12 is manufactured
with 1,400 times
the precision

Allowing it to holdover 3 million times
more transistors

Helping make it over83 million times fasterthan the Intel 4004

Sources: Intel, Apple, History of Computing Project, and T. Rowe Price estimates.
10

Unlocking New Technology
Steady progress insemiconductors has
made advancements intechnologies such as
personal computers,
smartphones, the cloud,and AI possible.

Progress in making chips even fasterwill rely on a small set of what weterm “linchpin” companies.

of things (IoT), or the proliferation of internet connectivity into
everyday devices.
NXP Semiconductors is a world leader in the design andmanufacturing of mixed-signal semiconductors, which enable
the conversion of analog signals, such as temperature and light,
into digital ones. This technology is particularly important in theautomotive market, where sensor-driven chips haveproliferated rapidly.
NXP also recently announced a new “ultrawide band” chip forautomotive, IoT, and smart home applications. The chip will enabledevices to sense the location of nearby objects, allowing doors toopen as a trusted car or person approaches, for example.
Microchip Technology is a leader in microcontrollers—essentially,
computers shrunk down to a single chip—as well as other typesof devices used for specialized purposes. Demand for these chips
should balloon as computers find their way into a growing range of
devices, from toys to appliances.
As computing processes and data continue to migrate to the cloud,demand is rapidly growing for high-grade memory chips. The
explosion of “big data” and the tremendous computing needs of AI
are fueling almost insatiable demand.
For this reason, we are willing to wait out the periodic downcycles
in the global memory market and focus on the long-term trends
that should drive growth. Samsung and Micron Technology haverecently been our two favored holdings. The two are the largest andthird-largest suppliers, respectively, of dynamic random-accessmemory, the fastest-growing market segment.
Uncertainties
To be sure, many uncertainties hang over the semiconductor
industry.
The slowing global economy has weighed on industrial demand,
particularly in the automotive sector. The PC market has generally
been shrinking over the past decade as consumers turn tosmartphones to access the internet and as cloud-based computing
makes regular upgrades less necessary. Demand for mobile chips
continues to grow, but at a slower pace. These factors have made us
more selective, and we ended September 2019 with an underweightin the sector relative to our benchmark, the MSCI All Country
World Index Information Technology Net.
The trade conflict between the United States and China and thespecter of a technological “cold war” add another layer of opacity.
A ban on U.S. semiconductor firms doing business with major
Chinese buyers—as the Trump administration has partially
imposed on sales to telecommunications giant Huawei—clearly
would disrupt the industry.
For their part, Chinese officials have made developing a homegrown
supply of advanced chips a key part of their Made in China 2025 plan,with the aim of producing 70% of the chips it uses domestically, up
from roughly 16% currently. Signs are that China’s move away from
U.S.-based suppliers has already started. Crucially, however, China

The trade conflict between the
United States and China and thespecter of a technological “coldwar” add another layer of opacity.
A ban on U.S. semiconductor firms
doing business with major Chinese
buyers...clearly would disrupt
the industry.
cannot succeed in building its own high-performance chips without
equipment and services provided by the global linchpins.
As some companies fall victim to China’s fading demand, others arelikely to lose ground to new application-specific designs.
Nvidia has seen rapid growth in recent years, for example, thanks
to the use of its graphic-processing units (GPUs), which wereoriginally developed for video gaming but have proved especially
adept at handling the algorithms used in machine learning.
However, companies are trying to get around NVIDIA’s lock on
machine learning technology. For example, Alphabet, Google’s
parent company, is currently developing tensor processing units(TPUs), a type of application-specific integrated circuit, to power
the advanced neural networks that enable machine learning andartificial intelligence.
Such uncertainties are yet another reason to focus on the industry’s
linchpins, in our view, regardless of whether CPUs, GPUs, or TPUs
dominate the future, and whether they are sold by companies in
China, the United States, or Europe, we are confident that this small
group of global companies will remain vital to their production. ■As of September 30, 2019, stocks of the following companies mentioned inthis article were held by the Global Technology Fund: Samsung Electronics,
which made up 3.8% of the fund; Taiwan Semiconductor, 1.4%; Synopsys,
1.6%; ASML Holding, 4.6%; NXP Semiconductors, 2.1%; Microchip
Technology, 2.9%; and Micron Technology, 1.1%.
Investing in technology stocks entails specific risks, including the potential
for wide variations in performance and unusually wide price swings,
both up and down. Technology companies can be affected by, among
other things, intense competition, government regulation, earnings
disappointments, dependency on patent protection, and rapid obsolescenceof products and services due to technological innovations or changing
consumer preferences. International investments can be riskier than
U.S. investments due to currency exchange rates, differences in market
structure and liquidity, as well as specific country, regional, and economic
developments.

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I S S U E N O. 145 FA LL 2019

U.S. EQUITIESLegacy Firms Alter
Strategies to Counter
Pervasive Disruption
From Tech Changes
Disney, Walmart, and GM arenotable incumbents shifting
their strategies.
Disruption is increasingly a harshreality for many once-dominant
incumbent, or legacy, companies.
Netflix and other streaming content
services have upended cable TV.
Amazon and other online vendors havechallenged brick-and-mortar retailers.
Tesla has pushed automakers toinnovate with its electric vehicles andthe promise of self-driving ones.
But these days, “some of the legacy
companies have recognized how thisis playing out and are fighting backaggressively,” says Rob Sharps, T. RowePrice head of investments.
Varied efforts to counter disruption
abound across a wide range ofendeavors. For example, Marriott haslaunched an Airbnb-type property
rental service called Homes & Villas.
And Prudential is buying online life
insurance startup Assurance IQ.
“Incumbents are going about this inmany ways: by developing their own
capabilities, acquiring or partneringwith innovators, or some combination,”says Jason Nogueira, manager of the
Global Consumer Fund. “Some arejust trying to stem losses to upstarts.
A lot of the outcomes are yet to be
determined.”That said, three large U.S. incumbents
are well into sharp shifts.
Disney streaming
Traditional cable and broadcast TV are
dying—and, along with it, the business12

models of Disney and other incumbent
creators of movies and television shows.
TV viewing is down with all age groups,
except those age 65 years and older; it’sfallen more than 60% for viewers ages 12
to 24 since 2010. As ratings fall, so does adrevenue. And cord cutting means the cable
subscriber fees paid to content creators
are shrinking.
Disney—and other content creators like
Warner Brothers, CBS, and Viacom—
traditionally sold their products to such
distributors as Comcast or Dish in what’s
termed the “linear television ecosystem.”This provided content companies withgreat leverage, according to Paul Greene,
Communications & Technology Fundmanager, as content creators didn’t have tobuild relations with individual consumers
and could stuff some channels withsyndicated reruns.

“By offering a limited number ofblockbuster movies every year, Disney+will be more event-driven and likely
function well alongside the ongoing
vast selection offered by Netflix,” hesays. “It’s a really smart move.”
Disney of course is not alone. Manyother content creators are taking
similar steps, Mr. Greene says, but few—
save perhaps Amazon—have the brandand resources to compete with Netflix
for general entertainment.
“It’s hard to find legacy media
companies that are going to be
successful at this,” he says. “This is agreat narrative right now, but let’s checkback in five years. I believe Netflix isgoing to keep winning and others will
stumble—except for Disney because of
its unique intellectual property.”

Some are just trying to stem losses to upstarts.
A lot of the outcomes are yet to be determined.
But then came Netflix, offering highquality content globally, with no ads, on
demand, and at an affordable price—
demonstrating that “TV’s future is direct
to consumer,” Mr. Greene says. With
about 150 million global subscribers,
Netflix can invest huge sums in creating
content—it came out with more than 50
new shows in August 2019 alone.
To counter, Disney has taken the radical
step of pulling back its content from
distributors and launching an online,
direct-to-consumer service, Disney+. It also
will offer a separate bundle that includes
Disney’s majority-owned Hulu and aspin-off of its ESPN subsidiary, ESPN+.
From now on, Star Wars, Marvel, Pixar,
and other Disney movie franchises—whichcollectively accounted for about half of thissummer’s U.S. box-office receipts—will goto theaters first and then right to Disney+,skipping premium cable channels and DVD
sales, Mr. Greene says.

Walmart “click and collect”
Every day brings new evidence of the“retail apocalypse,” the devastationof brick-and-mortar stores wroughtby Amazon’s rocketing growth. But
long-dominant Walmart, itself oncea disrupter, is fighting back by rapidly
developing its online channels.
In turn, even as Walmart’s profits havefallen because of its mounting online
investments, its stock price—once
trading at a low multiple of earnings—
has soared. (See Figure 1.) “The market’s
been willing to pay a higher multiple
because it’s now giving Walmart credit
that it’s going to be around and perhaps
doing well for a long time,”
Mr. Nogueira says.
For example, on August 15 of this year,
Walmart’s stock jumped 6.1% after its
second-quarter earnings report showedsame-store sales up year over year byabout 2.8%, with e-commerce sales
jumping 37% over the same period.
Walmart’s transition began with thepurchase of Jet, an online retailer, andFlipkart, an Indian online vendor—
plus heavy investments in its digital
capabilities. “In the beginning, themarket didn’t give Walmart the benefit ofthe doubt,” Mr. Nogueira says. “But now
it’s demonstrated that it can win, at leastin certain segments, such as groceries.”
For now, the key to Walmart’s grocery
gains has been no-cost “click andcollect.” Customers order groceries
online and pick them up at a designatedtime, with the orders brought to theircars—somewhat like a drive-throughlane at a fast-food outlet. Recently, it
launched an unlimited grocery homedelivery service for $98 a year.
Ultimately, Mr. Nogueira says, “click
and collect” is a hybrid solution. The
endgame, he says, will be free homedelivery of groceries within hours ofordering. “The question is who will getthere first,” he says.
In this, Walmart faces many competitors,
not least Amazon; Target; Costco; andKroger, the nation’s largest supermarket
chain, now partnering with British
logistics firm Ocado to master delivery.

“Hiring someone to go around a Walmart
and pick up grocery items is not costeffective in the long run, versus having
dedicated, fully automated warehouses tofill orders,” Mr. Nogueira says. “Beyond
that, Amazon, with its much greater
density of delivery routes, may have along-term advantage as well.”General Motors’s EVs
In the future, cars will be electric-powered,self-driving, and perhaps available on
demand rather than individually owned.
But no one knows when that future will
arrive. Tesla, while not profitable, ishurtling forward and pushing General
Motors (GM), more than 110 years old, toundergo a historic transition faster thanonce anticipated.
GM has announced that over the next
few years it will introduce about 20 new
electric vehicles (EVs). “GM has decided
that, in the next 10 to 15 years, it’s allabout electric vehicles,” says Joel Grant, aT. Rowe Price auto analyst.
After more than a century of gas-poweredengines, this profound change means all
car components—save for the chassis andinterior—are changing too, Mr. Grant
says. GM and other original equipment
manufacturers (OEMs) “are rethinking carsfrom the ground up,” he says.

Figure 1 Walmart’s Future Earnings Estimates Fall, Stock Price Rises
January 2015 Through September 2019
Walmart Stock Price(left scale)

Consensus Fiscal Year 2020 (FY20) Earnings(right scale)

$120

$8

100

7

80

6

60

5

40

4

2015

2016

2017

2018

While GM’s pickup and SUV
franchises remain strong, Mr. Grant
says, “it essentially decided EVs aregoing to be cheaper, better cars, and wemust embrace this and be really goodat it. This is risky because no company
is making money on EVs, and mostconsumers are unwilling to pay theEVs’ premium. But that premium is
expected to fall rapidly with greater
production scale—to where the costs
are relatively the same as combustion
vehicles.”Beyond EVs, GM also has jumped intodeveloping self-driving cars by buying
a startup, now called GM Cruise LLC,
as a separate entity to attract talentand outside capital. In the meantime,
GM separately has come out with newtechnology on certain Cadillacs, called“Super Cruise,” which GM says is “thefirst true hands-free driving assistancefeature” for certain types of highways,
but which Mr. Grant says is like Tesla’s
autopilot feature.
As with Disney and Walmart, GM is
not alone in responding to disruption.
Volkswagen and Daimler similarly areembracing EVs, for example. “There’s
still skepticism about EVs’ profitability.”
Mr. Grant says. “So the question over the
next couple years is how much profits
from trucks and SUVs can sustain
manufacturers transitioning to EVs.” ■All investments are subject to market risk,
including the possible loss of principal. A
fund’s concentration in stocks withincertain sectors may make its share pricemore volatile than that of more diversified
funds. Among the stocks mentioned inthis article, as of September 30, 2019,
Amazon.com made up 13.1% of theCommunications & Technology Fund;
Netflix, 3.5%; Walt Disney Co., 0.3%;
and Comcast, 4.3%. As of the same date,Amazon.com made up 9.7% of the Global
Consumer Fund; Netflix, 0.3%; andKroger, 0.5%.

2019

Past performance cannot guarantee future results. Source: FactSet. Copyright 2019 FactSet.
All Rights Reserved. factset.com

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13

I S S U E N O. 145 FA LL 2019

FIXED INCOME

Going Global Potentially
Can Help High-Income
Bond Investors Diversify
Global high yield bonds may provide improved
returns with less risk.
BY MARK VASELKIV, CO-MANAGER, GLOBAL HIGH YIELD FUND;MICHAEL DELLA VEDOVA, CO-PORTFOLIO MANAGER, GLOBALHIGH YIELD FUND; MICHAEL CONNELLY, ASSOCIATE PORTFOLIOMANAGER, GLOBAL HIGH INCOME STRATEGIES; AND SAMYMUADDI, PORTFOLIO MANAGER, EMERGING MARKETSCORPORATE BOND FUND

Fixed income investors may want to focus on higher-yielding,
sub-investment-grade strategies as global central banks shift backinto monetary easing, pushing yields on high-quality investmentgrade bonds to very low—or negative—levels.
In this environment, the diversification benefits of a high yield
portfolio that invests across a truly global opportunity set may
prove especially important.
A global high yield strategy should seek to take advantage ofunsynchronized credit cycles, relative value disparities, andgeopolitical events that create pricing dislocations. Also, thediversification benefits of this type of portfolio may deliver resultswith less risk than a more traditional, U.S.-focused highyield strategy.
Risk and return data for the five years ended June 30, 2019, support
this claim. Over that five-year period, the ICE BofA Merrill Lynch
Global High Yield Index (USD Hedged) (BAML Global HY)—the primary benchmark for T. Rowe Price’s global high income
strategies and a suitable proxy for the global high yield opportunity
set—outperformed the more traditional ICE BofA Merrill Lynch
U.S. High Yield Index (BAML U.S. HY) with lower volatility as
measured by the standard deviation of returns.*
In addition, a global high yield allocation, represented by the BAML
Global HY, has held up meaningfully better in high yield market
sell-offs while sometimes outperforming the U.S. high yield market
in up markets. In the 10 years ended in June 2019, the BAML Global
HY outperformed in negative markets and also performed slightly
better in positive environments for high yield.**
International flavor
A decade ago, the high yield market consisted primarily of North
American issuers. Today it is much broader, with an increasinglyinternational flavor coming from European and emerging
markets (EM).
This is largely due to an increase in issuance outside the UnitedStates, while the U.S. high yield market has modestly shrunk—

14

trends we expect to continue. The European high yield market
has more than quadrupled in size since 2008 and is now almost
one-third the size of the U.S. high yield market. The European
market also has much less exposure to energy-related sectors, which
can be an advantage when commodity prices are falling.
Like European high yield, the EM high yield corporate segment has
experienced tremendous growth and now stands close to $1 trillion.
Companies in emerging markets have primarily used the corporatebond market to refinance existing loans at more favorable terms.
The balance sheets of EM corporations are often sturdier than thoseof their developed market peers, with lower leverage and higher
cash-to-debt ratios.
Both the European and EM high yield markets are less mature andless followed by investors than the U.S. market, making them more
inefficient and more volatile and presenting more opportunities forskilled active managers to take advantage of pricing dislocations
and attractive relative value.
Because macroeconomic and political developments, along withenvironmental, social, and governance (ESG) concerns, can havea large impact on the performance of international bonds, we
supplement our fundamental credit analysis with top-down insightsfrom our team of sovereign and ESG analysts.
Their input is essential for developing regional allocations and canhelp sidestep country-specific issues, such as the turbulence in Turkey
in the first half of 2018.
European opportunities
In our view, Altice is a compelling European high yield credit story
that illustrates the benefits of detailed credit analysis and a flexible
approach to portfolio construction. The multinational cable andtelecommunication services company is one of the largest issuers of
below investment-grade debt through various entities in Europe.
Weak earnings from Altice’s French operations in late 2017 weighedon its bonds and convinced the company’s founder, Patrick Drahi, tostep in as CEO of the company’s French entity. At that time, we soldout of positions in Altice’s French complex and bought secured notesof Altice’s other operating company (Altice Internatonal), where wesaw better value.
As Altice progressed with selling assets in 2018, we moved backinto obligations of its French entity based on the potential for
consolidation in European telecom markets. These positions
have performed well, demonstrating the benefits of applying
fundamental credit analysis with a long-term perspective.
EM opportunities
The idiosyncratic nature of the global high yield opportunity set
can provide fertile opportunities to generate returns above market
benchmarks.
For example, we have a favorable view of Minerva, a Brazilian beef
producer with operations throughout South America. The company’s
bonds rallied in 2018 after it acquired competitor National Beef,
making Minerva the second-largest beef producer in the world.

Minerva deleveraged later in 2018 by spinning off parts of its SouthAmerican operations and using the proceeds to pay down debt. We
expect global beef demand to continue to rise, which, combinedwith the company’s low leverage and attractive yield, supports ourpositive outlook on Minerva’s debt.

Loans can potentially present opportunities to take advantage
of valuation differences in an issuer’s capital structure or to gain
exposure to attractive loan-only issuers. Loans often are senior tobonds in the capital structure, giving them repayment priority inthe event of issuer bankruptcy.

So far, a global approach to high yield investing has resulted inhigher returns with lower risk, measured in terms of standard
deviation. However, as with all high yield investing, it is not for
the faint of heart. Due to the opportunity set’s exposure to EMs
with less developed political and economic systems, geopoliticaldevelopments and ESG concerns warrant caution.

However, given deteriorating loan underwriting standards, solid
fundamental analysis is just as important for bank loans as it is forhigh yield bonds.

In addition, market liquidity can be particularly challenging in
EM debt, though liquidity has improved as the market has grown.
Volatility and economic uncertainty also can create rewarding
investment opportunities. Overall, we believe that the enhanced
diversification of a global high yield strategy can help overcome
periodic bouts of changing market sentiment toward particularcountries or regions.
Bank loans
Bank loans are another segment of the global high yield market that
potentially can be a useful source of diversification from U.S. highyield bonds.

Figure 1 Global High Income Market Growth
Issuance of Bonds, 2010—June 2019
U.S. High Yield

European High Yield

Emerging Markets Corporates High Yield
U.S. Leveraged Loans
European Leveraged Loans$5,000An actively managed global high income portfolio can benefit fromexposure to divergent credit cycles, relative value disparities, andperformance variations between regions, while not necessarily
taking on more risk than a U.S.-centric high yield strategy.
There also is potential to profit from valuation dislocations driven
by the ever-present economic and political uncertainties across theglobal landscape. And it’s important to note that our global highincome strategy hedges any non-U.S. dollar holdings back to dollars,
allowing our credit selection to be the main driver of returns. ■As of September 30, 2019, Altice made up 3.0% of the Global High
Income Fund and Minerva made up 0.9%. At the same time, Minerva
made up 0.9% of the Emerging Markets Corporate Bond Fund.
*From July 2015 through June 2019, the ICE BofA Merrill Lynch Global
High Yield Index (USD Hedged) had an annual average return of
5.13% with a standard deviation of 5.18%—versus the ICE BofA Merrill
Lynch U.S. High Yield Index, which returned less (an annual average of4.7%) with more volatility (a standard deviation of 5.6%). Additional
disclosures on page 24.
**From July 2009 through June 2019, the ICE BofA Merrill Lynch Global
High Yield Index (USD Hedged) had 95.0% of the ICE BofA Merrill
Lynch U.S. High Yield Index’s losses in down markets and 101.7% of its
return in up markets. Additional disclosures on page 24.

4,000

New Issuance, Billions

Core allocation
As the world’s credit markets continue to evolve, we believe that a
global high yield portfolio should be a core allocation so that investors
can take full advantage of the entire sub-investment-grade universe.

Fixed income securities are subject to credit risk, liquidity risk, call risk,
and interest rate risk. As interest rates rise, bond prices generally fall.
Investments in high yield bonds involve greater risk of price volatility,
illiquidity, and default than higher-rated debt. International investments
can be riskier than U.S. investments due to the adverse effects of currency
exchange rates, differences in market structure and liquidity, as well as
specific country, regional, and economic developments. These risks are
generally greater for investments in emerging markets.

3,000

2,000

18
20

17
20

16
20

15
20

14
20

13
20

12
20

11
20

20
10

0

Ju
n
20 e
19

1,000

Sources: All data from Credit Suisse except for emerging market corporates highyield bond issuance, sourced from J.P. Morgan Chase. Additional disclosures on
page 24.

TROWEPRICE.COM

15

I S S U E N O. 145 FA LL 2019

LAST WORD

Women Significantly
Lag Male Peers
When It Comes to
Retirement Savings
Survey finds domino effect withlower earnings contributing toless savings.
Women—in both the baby boomer
and millennial generations—reportmuch lower savings balances in theirworkplace 401(k) retirement accounts,
a T. Rowe Price national survey
has found.
The survey found that baby boomer
women have a median 401(k) savingsbalance of less than half that of men,
$59,000 versus $138,000 for baby
boomer men. Millennial womenreported a median 401(k) balancethat is $30,000 less than their malecounterparts.
At the root of women’s struggle to savefor retirement is a significant income
gap: Women’s median annual incomesare almost $27,000 less than that ofmen, the survey found.
“The gender income gap is contributing
to a domino effect on women’s finances,with lower earnings influencing current
financial decisions that ultimately
impact their retirement savings andtheir financial future,” says Judith
Ward, CFP®, a T. Rowe Price seniorfinancial planner.
Other survey findings:
nn Women tend to defer income to their
401(k) accounts at a lower rate thanmen.
nn More women than men report they are

not contributing as much as financial
experts recommend (which
generally is 15% of their salaries,

including their employer’s matching contribution) because they already are saving
as much as they can afford.
nn Women also are less likely than men to besaving for retirement using other vehicles.

Retirement
As a result, women said in the survey thatthey are more likely than men to believe
they will have to reduce their standardof living in retirement, with 46% of them
reporting that sentiment versus 37% of men.
And almost half of men said they believe
they will live well or better in retirement,
compared with only one-third of women.
An additional factor impacting women’s
financial well-being in retirement is thatsignificantly more women than men are
divorced or widowed in retirement.
Within the first five to 10 years of retirement,
33% of women reported being widowed or
divorced versus 17% of men. After 11 yearsof retirement, a greater percentage of women
were widowed or divorced (45%), while thepercentage of men barely changed to 18%.

Judith Ward
comes to money and saving,” Ms. Wardsays, “and we need to seek guidance andeducation to put ourselves on the path tosuccessful financial futures.” ■The findings of this survey are based ona national study of 3,005 adults age 21
and older who have never retired and are
currently contributing to a 401(k) planor are eligible to contribute and have an
account balance of at least $1,000, and of
1,005 current retirees who have a Rollover
IRA or left-in-plan 401(k) balance. NMG
Consulting conducted the online survey for
T. Rowe Price from July 24, 2018, toAugust 14, 2018.

The survey’s results underscore that, “Aswomen, we need to be proactive when it

As women, we need to be proactive when it
comes to money and saving, and we need toseek guidance and education to put ourselveson the path to successful financial futures.
Figure 1 Working Women Often Report More Difficulty Saving
Survey Responses Among Those Saving Less Than Recommended

66% 31% 10%

Of the women say “I amcontributing all I canafford” to retirementsavings versus 50% ofcomparable men.

Of the women say “I’mpaying back debt otherthan student loans” versus
22% of comparable men.

Of the women say, “I’msaving for retirement throughother vehicles” than theirworkplace savings planversus 32% of comparable
men.

Source: Online survey conducted for T. Rowe Price from July 24, 2018, to August 14, 2018.

16

PERFO RM A N CE S U MM A RY PAST Q UA RTE R , Y E A R , A N D AV E R AG E A N N UA L TOTA L RE TU RN S PE RI O D S E N D E D S E P TE M B E R 30, 2019

T. Rowe Price

Quarterly Performance Update
Central Banks Respond to Slowing
Growth, Trade Uncertainty

September 30, 2019

KEY POINTSDeveloped European stock markets weremixed, with German shares falling 4%
amid recession fears. UK shares and theBritish pound struggled amid continued
Brexit uncertainty. Most developed Asianmarkets fell, especially Hong Kong, where
shares plunged 12%—even though the city’s
chief executive withdrew a controversial
extradition bill—as demonstrators
continued to demand other changes fromthe government. Japanese shares rose slightly
more than 3%.
In emerging Asia, most markets declined,
but shares in Taiwan gained about 6%.
Central European markets sagged, but
Turkish shares soared close to 12%, helped
by declining inflation and deep interest rate
cuts. Latin American markets were broadly
negative, especially Argentina.

S&P MidCap 400 Index
Russell 2000 Index

MSCI EAFE Index
MSCI Emerging Markets Index

12

-8.89

-8

-1.63

-0.82
-4.11

-1.00

-0.58

-4

-2.49

0

-2.40

4

4.25

8

-0.09

In the U.S., higher-yielding real estate andutilities stocks did best. Consumer staples
stocks also posted strong returns. Healthcare stocks declined, but energy shares fared
worst despite a mid-September attack on
Saudi oil facilities that led to a short-lived oil
price spike.

S&P 500 Index
NASDAQ Composite Index(Principal Return)-0.09

EQ U IT Y RE V I E W
Non-U.S. Markets Decline;
Large-Caps in U.S. Outperform

Figure 1 U.S. and International Stock Market Performance
Total Returns for Periods Ended September 30, 20191.70

ρρFederal Reserve reduced rates twice;
European Central Bank cut rates andrestarted monthly bond purchases.
ρρGovernment bond yields tumbled inAugust as U.S.-China trade tensions
weighed on world equity markets.
ρρQuarter ended with optimism about
trade negotiations resuming in
October.

-12
3 Months

1 Year3 Months

1 YearFigure 2 Performance of Wilshire 5000 Series
Total Returns for Periods Ended September 30, 2019
■ 3 Months■ 1 Year

8.05
25.66
7.55
20.56
5.76
15.09
2.62
7.96
2.43
5.80
1.63
2.41
0.64
0.39
0.22
0.31
-0.04
-5.63
-3.76
-5.43
-7.19
-22.61

Utilities
Real EstateConsumer Staples
Information Technology
Communication Services
Financials
Industrials and Business Services
Consumer Discretionary
Materials
Health Care
Energy-30-24
Ranked by highest to lowest quarterly returns.

-18

-12

-6

0

6

12

18

24

TROWEPRICE.COM

30

17

Figure 3 U.S. and International Bond Market Performance
Total Returns for Periods Ended September 30, 2019

10.30

12

Bloomberg Barclays Global
Aggregate ex USD Bond Index
J.P. Morgan Emerging Markets
Bond Index Global
10.74

Bloomberg Barclays U.S. Aggregate Bond Index
Bloomberg Barclays Municipal Bond Index
Credit Suisse High Yield Index

8.55

10

5.79

8

1.34

2

1.03

4

1.58

6

5.34

The Federal Reserve reduced short-term
interest rates twice. Treasury yields fell acrossall maturities, but longer-term rates generally
fell more than shorter-term yields, resulting
in a partially inverted Treasury yield curveat times. In the investment-grade universe,
long-term Treasuries did best, but corporate
bonds also posted good returns. Mortgageand asset-backed securities lagged. Municipal
bonds rose but underperformed taxablebonds. High yield bonds posted decent
returns but lagged higher-quality issues.

2.27

0

Bonds in developed non-U.S. countries
produced modest negative returns in U.S.
dollar terms. Longer-term interest rates inmany countries declined, which lifted bondprices, but major currencies fell versus thedollar, reducing returns to U.S. investors.
In September, the European Central Bank
(ECB) reduced its key short-term interest
rate and relaunched its quantitative easing
program, saying it would purchase€20 billion of securities every month
beginning November 1. In Japan, the central
bank kept short-term interest rates at -0.1%.

-0.58

F I X E D I N C O M E RE V I E W
Treasuries Rally; Stronger U.S. Dollar
Limits Overseas Bond Returns-2

3 Months

1 Year3 Months

1 YearFigure 4 Trends in Interest Rates
As of September 30, 201925

90-Day Treasury Bill

Bloomberg Barclays U.S. Aggregate Bond Index1

Bloomberg Barclays Municipal Bond Index1

Credit Suisse High Yield Index1

20
15Emerging markets bonds were mixed, withlocal currency bonds underperforming
amid broad dollar strength. Most developing
market currencies fell during the quarter, but
the Turkish lira rose more than 2% versus
the dollar.

10

6.23
2.26
1.88
1.85

5
0
-5
9/09
1

9/10

9/11

9/12

9/13

9/14

9/15

9/16

9/17

9/18

Yield-to-worst

Figure 5 Stock and Bond Market Performance
Total Returns for Periods Ended September 30, 2019
S&P 500 Index
12
10
8
6
4
2
0
-2
-4
-6
-8
-10

S&P MidCap 400 Index

Bloomberg Barclays U.S. Aggregate Bond Index

NASDAQ Composite Index (Principal Return)Russell 2000 Index

Bloomberg Barclays Municipal Bond Index

Credit Suisse High Yield Index
10.30

2.27
-0.09

-0.09
-2.40

1.58

1.03

-1.00

3 Months
Unlike stocks, U.S. government bonds are guaranteed as to the timely payment of interest and principal.

18

8.55
5.79

4.25
1.70

MSCI EAFE Index

-0.58

-0.82

-2.49

-8.89

1 Year9/19

PERFO RM A N CE S U MM A RY PAST Q UA RTE R , Y E A R , A N D AV E R AG E A N N UA L TOTA L RE TU RN S PE RI O D S E N D E D S E P TE M B E R 30, 2019

The performance information presented here includes changes in principal value, reinvested dividends, and capital gain distributions. Current
performance may be higher or lower than the quoted past performance, which cannot guarantee future results. Share price, principal value, yield,
and return will vary, and you may have a gain or loss when you sell your shares. To obtain the most recent month-end performance, call us at
1-800-225-5132 or visit our website. Call 1-800-225-5132 to request a prospectus or summary prospectus; each includes investment objectives,
risks, fees, expenses, and other information that you should read and consider carefully before investing. Funds are placed in alphabetical orderin each category. To learn more about each fund’s objective and risk/reward potential, visit troweprice.com/mutualfunds.

Figure 6 Stock Funds

Domestic

Blue Chip Growth
Capital Appreciation2
Communications & Technology3
Diversified Mid-Cap Growth
Dividend Growth
Equity Income
Equity Index 500
Extended Equity Market Index
Financial Services
Growth & Income
Growth Stock
Health Sciences
Mid-Cap Growth2
Mid-Cap Value2
New America Growth
New EraNew Horizons2
QM U.S. Small-Cap Growth Equity
QM U.S. Small & Mid-Cap Core Equity
QM U.S. Value Equity
Real Assets
Real Estate
Science & Technology
Small-Cap Stock2
Small-Cap Value
Tax-Efficient Equity4
Returns before taxes
Returns after taxes on distributions
Returns after taxes on distributions
and sale of fund shares
Total Equity Market Index
U.S. Equity Research5
U.S. Large-Cap Core
Value

Tickersymbol

TRBCX
PRWCX
PRMTX
PRDMX
PRDGX
PRFDX
PREIX
PEXMX
PRISX
PRGIX
PRGFX
PRHSX
RPMGX
TRMCX
PRWAX
PRNEX
PRNHX
PRDSX
TQSMX
TQMVX
PRAFX
TRREX
PRSCX
OTCFX
PRSVX
PREFX

POMIX
PRCOX
TRULX
TRVLX

3 months

1 year

3 years

5 years

10 yearsor since
inception1-1.64%
0.58
-1.94
-0.66
2.45
2.24
1.63
-1.40
3.79
1.22
-1.18
-7.66
-0.73
-1.13
0.08
-4.86
-3.13
-1.04
0.13
1.53
-1.39
5.56
2.28
0.10
0.30

1.97%
10.64
7.00
8.72
11.56
3.74
4.04
-3.77
5.70
6.63
2.06
-8.64
7.14
-5.20
4.46
-12.48
4.83
-1.41
-0.55
-1.31
1.00
11.79
10.10
4.21
-4.10

18.16%
11.14
15.80
15.76
14.01
10.20
13.15
9.84
14.54
12.31
16.31
10.19
14.88
5.86
18.39
0.97
19.71
12.98
10.25
8.95
2.85
4.57
16.90
14.21
10.17

14.15%
10.39
14.25
12.47
12.01
7.42
10.58
8.40
10.14
10.86
13.01
9.62
13.17
6.61
13.88
-2.40
15.81
11.07
—
—
1.85
8.13
15.82
11.69
9.27

15.79%
11.78
16.96
14.29
13.18
10.58
12.96
12.36
10.84
12.51
14.94
17.79
14.87
10.42
14.75
2.20
18.37
14.94
13.26
11.33
3.23
11.91
15.61
14.41
11.56

-0.81
—

5.99
5.67

16.83
16.41

13.13
12.63

14.40
14.07

—

3.71

13.19

10.40

12.10

1.06
1.49
1.26
2.64

2.86
4.48
6.53
8.15

12.56
13.80
12.18
10.73

10.24
11.19
11.23
8.23

12.89
13.04
13.10
12.12

Inception
date

Expenseratio

Expenseratio as ofdate

6/30/93
6/30/86
10/13/93
12/31/03
12/30/92
10/31/85
3/30/90
1/30/98
9/30/96
12/21/82
4/11/50
12/29/95
6/30/92
6/28/96
9/30/85
1/20/69
6/3/606/30/97
2/26/16
2/26/16
7/28/1010/31/97
9/30/87
6/1/56
6/30/88
12/29/00

0.70%
0.72
0.78
0.83
0.64
0.64
0.20
0.35
0.87
0.65
0.66
0.77
0.75
0.78
0.79
0.69
0.77
0.80
1.22
1.95
0.81
0.78
0.79
0.89
0.85
0.81

12/31/2018
12/31/2018
12/31/2018
12/31/2018
12/31/2018
12/31/2018
12/31/2018
12/31/2018
12/31/2018
12/31/2018
12/31/2018
12/31/2018
12/31/2018
12/31/2018
12/31/2018
12/31/2018
12/31/2018
12/31/2018
12/31/2018
12/31/2018
12/31/2018
12/31/2018
12/31/2018
12/31/2018
12/31/2018
2/28/2019

1/30/98
11/30/94
6/26/09
9/30/94

0.30
0.54
0.76
0.79

12/31/2018
6/1/2019
12/31/2018
12/31/2018

The expense ratios shown are the gross expense ratios as of the most recent prospectus. Please see the prospectus for additional information.
1
If a fund has less than 10 years of performance history, its since-inception return is shown.
2
Closed to new investors except for a direct rollover from a retirement plan into a T. Rowe Price IRA invested in this fund.
3
Formerly the T. Rowe Price Media & Telecommunications Fund.
4
The returns presented reflect the return before taxes; the return after taxes on dividends and capital gain distributions; and the return after taxes on dividends, capital gain distributions, and gains(or losses) from redemptions of shares held for 1-, 5-, and 10-year periods, as applicable. After-tax returns reflect the highest federal income tax rate but exclude state and local taxes. The after-tax
returns reflect the rates applicable to ordinary and qualified dividends and capital gains effective in 2003. During periods when a fund incurs a loss, the post-liquidation after-tax return may exceed
the fund’s other returns because the loss generates a tax benefit that is factored into the result. An investor’s actual after-tax return will likely differ from those shown and depend on his or her tax
situation. Past before- and after-tax returns do not necessarily indicate future performance.
5
Formerly the T. Rowe Price Capital Opportunity Fund.

TROWEPRICE.COM

19

PAST Q UA RTE R , Y E A R , A N D AV E R AG E A N N UA L TOTA L RE TU RN S PE RI O D S E N D E D S E P TE M B E R 30, 2019 PERFO RM A N CE S U MM A RY

Figure 7 Benchmarks
Domestic Stock

3 months

1 year

3 years

5 years

10 years

S&P 500 Index
S&P MidCap 400 Index
NASDAQ Composite Index (Principal Return)Russell 2000 Index
Lipper Indexes
Large-Cap Core Funds
Equity Income Funds
Small-Cap Core Funds

1.70%
-0.09
-0.09
-2.40

4.25%
-2.49
-0.58
-8.89

13.39%
9.38
14.62
8.23

10.84%
8.88
12.23
8.19

13.24%
12.56
14.19
11.19

1.17
2.58
-0.99

2.80
5.87
-6.21

12.28
10.66
8.70

9.56
8.26
8.12

11.82
11.10
11.03

Figure 8 Stock Funds

International/Global

Tickersymbol3 months

1 year

3 years

Africa & Middle East
Asia Opportunities
Emerging Europe
Emerging Markets Discovery Stock6
Emerging Markets Stock2
European Stock
Global Consumer
Global Growth Stock
Global Industrials
Global Real Estate
Global Stock
Global Technology2
International Disciplined Equity7
International Discovery2
International Equity Index
International Stock
International Value Equity8Japan
Latin America
New Asia
Overseas Stock
QM Global Equity

TRAMX
TRAOX
TREMX
PRIJX
PRMSX
PRESX
PGLOX
RPGEX
RPGIX
TRGRX
PRGSX
PRGTX
PRCNX
PRIDX
PIEQX
PRITX
TRIGX
PRJPX
PRLAX
PRASX
TROSX
TQGEX

-8.45%
-0.68
-4.24
-8.03
-2.70
-1.55
-0.47
-1.41
-1.34
3.80
-0.96
-3.02
1.28
-2.61
-1.18
-1.03
-1.05
1.94
-5.40
-0.34
0.00
0.08

-1.74%
5.97
5.44
-1.16
5.05
1.66
1.59
5.64
0.67
11.22
3.29
8.65
2.04
-5.02
-2.39
1.38
-5.66
-6.32
16.52
5.54
-3.29
3.01

5.80%
9.32
7.37
7.56
7.91
6.29
7.90
13.00
9.76
4.05
14.49
15.25
5.89
7.07
6.01
6.89
1.75
8.39
7.55
7.77
6.26
9.76

5 years

10 yearsor since
inception1

Inception
date

Expenseratio

Expenseratio as ofdate-1.89%
8.15
0.15
—
5.37
2.79
—
9.60
7.80
5.80
11.98
16.54
4.24
7.24
3.13
4.97
0.13
9.93
1.55
5.35
3.28
—

3.97%
8.31
0.59
8.62
4.92
5.99
9.31
10.22
6.71
8.57
11.67
18.60
3.28
9.08
4.72
6.28
3.58
8.74
0.13
7.27
5.49
9.95

9/4/07
5/21/148/31/00
9/14/15
3/31/95
2/28/90
6/27/16
10/27/08
10/24/13
10/27/08
12/29/95
9/29/00
8/22/14
12/30/88
11/30/00
5/9/8012/21/98
12/30/91
12/29/93
9/28/90
12/29/06
4/15/16

1.52%
1.32
1.62
1.90
1.22
0.97
2.37
0.92
1.99
1.12
0.82
0.91
1.22
1.20
0.46
0.81
0.81
0.96
1.32
0.93
0.81
2.24

10/31/2018
10/31/2018
10/31/2018
10/31/2018
10/31/2018
10/31/2018
12/31/2018
3/1/2019
12/31/2018
12/31/2018
10/31/2018
12/31/2018
10/31/2018
10/31/2018
10/31/2018
10/31/2018
10/31/2018
10/31/2018
10/31/2018
10/31/2018
10/31/2018
12/31/2018

Figure 9 Benchmarks
International/Global StockMSCI EAFE Index
Lipper Averages
Emerging Markets Funds
International Large-Cap Core Funds
International Large-Cap Growth Funds
International Small/Mid-Cap Growth Funds

3 months

1 year

3 years

5 years

10 years-1.00%-0.82%

7.01%

3.77%

5.39%

-3.47
-1.43
-1.33
-1.96

0.57
-2.83
1.25
-6.09

5.27
5.24
6.86
5.54

1.84
1.42
4.01
4.86

3.51
3.82
5.19
7.81

Formerly the T. Rowe Price Emerging Markets Value Stock Fund.
F ormerly the T. Rowe Price International Concentrated Equity Fund.
8 
Formerly the T. Rowe Price International Growth & Income Fund.
All mutual funds are subject to market risk, including possible loss of principal. Funds that invest overseas generally carry more risk than funds that invest strictly in U.S. assets due to factors suchas currency risk, geographic risk, and emerging markets risk. Funds that invest in fixed income securities are subject to credit risk and liquidity risk, with high yield securities having a greater riskof default than higher-quality securities. Such funds are also subject to the risk that a rise in interest rates will cause the price of a fixed rate debt security to fall. During periods of extremely low
or negative interest rates, some funds may not be able to maintain a positive yield.
MSCI index returns are shown with gross dividends reinvested.
6

7

20

PERFO RM A N CE S U MM A RY PAST Q UA RTE R , Y E A R , A N D AV E R AG E A N N UA L TOTA L RE TU RN S PE RI O D S E N D E D S E P TE M B E R 30, 2019

Figure 10 Bond Funds

Domestic Tax-Free

9

California Tax-Free Bond
Georgia Tax-Free Bond
Intermediate Tax-Free High Yield
Maryland Short-Term Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Summit Municipal Income
Summit Municipal Intermediate
Tax-Free High Yield
Tax-Free Income
Tax-Free Short-Intermediate
Virginia Tax-Free Bond

Tickersymbol3 months

1 year

3 years

PRXCX
GTFBX
PRIHX
PRMDX
MDXBX
NJTFX
PRNYX
PRINX
PRSMX
PRFHX
PRTAX
PRFSX
PRVAX

1.77%
1.68
1.48
0.33
1.62
1.52
1.66
1.79
1.19
2.12
1.70
0.41
1.69

8.04%
7.90
7.09
3.11
7.73
7.63
7.54
8.36
7.48
8.51
7.88
4.22
7.48

2.79%
2.56
3.23
1.02
2.94
2.96
2.68
3.10
2.50
3.80
2.92
1.41
2.77

5 years

10 yearsor since
inception1

Inception
date

Expenseratio

Expenseratio as of
date

3.67%
3.29
3.87
0.89
3.51
3.61
3.46
3.82
2.92
4.77
3.49
1.38
3.42

4.54%
3.90
3.98
0.91
4.14
4.20
4.07
4.65
3.51
5.86
4.19
1.84
3.96

9/15/86
3/31/93
7/24/14
1/29/93
3/31/87
4/30/91
8/28/86
10/29/93
10/29/93
3/1/85
10/26/76
12/23/83
4/30/91

0.54%
0.59
1.08
0.65
0.48
0.58
0.54
0.53
0.52
0.72
0.54
0.52
0.51

2/28/20192/28/2019
7/1/2019
2/28/20192/28/20192/28/20192/28/2019
3/1/2019
3/1/2019
7/1/2019
2/28/20192/28/20192/28/2019

Inception
date

Expenseratio

Expenseratio as ofdate

10/31/95
4/29/14
7/29/11
11/26/85
12/31/84
10/31/02
9/29/06
8/31/73
3/2/84
11/15/16
12/3/12
11/30/00
5/19/17
9/29/89
9/29/89

0.61%
1.28
0.76
0.59
0.72
0.57
0.48
0.54
0.44
1.20
0.42
0.30
0.93
0.50
0.44

5/31/2019
5/31/2019
5/31/2019
5/31/2019
5/31/2019
5/31/2019
5/31/2019
5/31/2019
5/31/2019
5/31/2019
10/1/201910/31/2018
5/31/2019
10/1/2019
5/31/2019

Figure 11 Bond Funds

Domestic Taxable

Tickersymbol3 months

1 year

3 years

5 years

10 yearsor since
inception1

Corporate Income
Credit Opportunities
Floating Rate
GNMA10High Yield2
Inflation Protected Bond
Limited Duration Inflation Focused Bond
New Income
Short-Term Bond
Total Return
Ultra Short-Term Bond
U.S. Bond Enhanced Index
U.S. High Yield11
U.S. Treasury Intermediate10
U.S. Treasury Long-Term10

PRPIX
PRCPX
PRFRX
PRGMX
PRHYX
PRIPX
TRBFX
PRCIX
PRWBX
PTTFX
TRBUX
PBDIX
TUHYX
PRTIX
PRULX

3.55%
1.75
1.23
1.30
1.81
1.46
0.21
2.08
0.63
2.41
0.67
2.34
2.22
1.66
7.93

13.03%
7.42
3.63
6.32
7.43
7.48
3.78
9.83
4.36
10.62
3.31
10.40
6.16
10.36
24.33

3.97%
6.47
3.88
1.79
5.89
2.05
1.44
2.88
1.98
—
2.33
2.95
—
1.80
3.71

4.32%
3.91
3.75
2.07
4.89
2.19
1.02
3.18
1.69
—
1.81
3.38
—
2.55
6.18

5.65%
3.26
3.81
2.82
7.52
3.13
1.17
3.81
1.77
4.81
1.41
3.72
5.03
3.00
6.29

Figure 12 Benchmarks
Bond

Bloomberg Barclays U.S. Aggregate Bond Index
Bloomberg Barclays Municipal Bond Index
Credit Suisse High Yield Index
Lipper Averages
Short Investment Grade Debt Funds
Core Bond Funds
GNMA Funds
High Yield Funds
Short Municipal Debt Funds
Intermediate Municipal Debt Funds
General & Insured Municipal Debt Funds

3 months

1 year

3 years

5 years

10 years

2.27%
1.58
1.03

10.30%
8.55
5.79

2.92%
3.19
5.96

3.38%
3.66
5.17

3.75%
4.16
7.74

0.72
2.08
1.30
1.17
0.41
1.22
1.72

4.26
9.49
6.90
5.50
2.90
7.05
8.20

2.11
2.80
1.65
5.25
1.29
2.34
3.00

1.75
3.06
1.95
4.29
1.04
2.68
3.48

2.14
3.87
2.72
6.82
1.17
3.24
4.09

Some income from the tax-free funds may be subject to state and local taxes and the federal alternative minimum tax.
The market value of shares is not guaranteed by the U.S. government.
11 
The T. Rowe Price U.S. High Yield Fund (Fund) commenced operations on May 19, 2017. At that time, the Fund received all of the assets and liabilities of the Henderson High Yield Opportunities
Fund (the Predecessor Fund) and adopted its performance and accounting history. The Fund and the Predecessor Fund have substantially similar investment objectives and strategies. The
Predecessor Fund was managed by the same portfolio manager as the Fund.
9

10

TROWEPRICE.COM

21

PAST Q UA RTE R , Y E A R , A N D AV E R AG E A N N UA L TOTA L RE TU RN S PE RI O D S E N D E D S E P TE M B E R 30, 2019 PERFO RM A N CE S U MM A RY

Figure 13 Bond Funds

International/Global

Dynamic Credit
Dynamic Global Bond12
Emerging Markets Bond
Emerging Markets Corporate Bond
Emerging Markets Local Currency
Bond
Global High Income Bond
Global Multi-Sector Bond
International Bond
International Bond (USD Hedged)

5 years

10 yearsor since
inception1

Inception
date

Expenseratio

Expenseratio as ofdate—-0.69%
2.18
5.27

—
—
4.23%
5.11

4.58%
1.15
5.61
5.60

1/10/19
1/22/15
12/30/94
5/24/12

1.92%
0.66
0.91
1.40

1/10/2019
5/1/2019
12/31/2018
12/31/2018

9.75

2.83

0.22

-0.21

5/26/110.95

12/31/2018

8.53
10.30
6.12
11.21

6.39
4.72
0.58
—

—
4.29
1.02
—

6.80
5.19
1.35
5.91

1/22/15
12/15/08
9/10/86
9/12/17

1.05
0.71
0.67
0.67

12/31/2018
10/1/201912/31/2018
12/31/2018

Tickersymbol3 months

1 year

3 years

RPIDX
RPIEX
PREMX
TRECX

0.90%
-2.39
-2.42
1.79

—
-0.79%
5.64
10.63

PRELX

-1.28

RPIHX
PRSNX
RPIBX
TNIBX

1.89
1.94
-0.49
2.49

Figure 14 Benchmarks
International/Global Bond

Bloomberg Barclays Global Aggregate ex USD
Bond Index
J.P. Morgan Emerging Markets Bond Index Global
Lipper Averages
Emerging Market Hard Currency Debt Funds
International Income Funds

3 months

1 year

3 years

5 years

10 years-0.58%

5.34%

0.43%

0.87%

1.27%

1.34

10.74

3.84

5.10

6.51

-0.09
-0.35

8.79
5.77

3.71
1.85

3.38
1.14

5.02
2.58

Figure 15 Money Market Funds

5 years

10 yearsor since
inception1

Inception
date

Expense
ratio

0.57%
0.73
0.64
0.79
0.80

0.35%
0.44
0.39
0.48
0.49

0.18%
0.22
0.20
0.25
0.25

9/15/86
3/30/01
8/28/86
10/29/93
4/8/81

0.96% 2/28/2019
0.83 2/28/2019
0.91 2/28/2019
0.45 10/31/2018
0.55 2/28/2019

1.34%
1.17
1.16

0.81%
0.70
0.70

0.41%
0.36
0.35

10/29/93
1/26/76
6/28/82

0.45% 10/31/2018
0.42 5/31/2019
0.43 5/31/2019

Tax-Free9

Tickersymbol

7-day
yield

7-day
unsubsidized
yield13

3 months

1 year

3 years

California Tax-Free Money◊
Maryland Tax-Free Money◊
New York Tax-Free Money◊
Summit Municipal Money Market◊
Tax-Exempt Money◊

PCTXX
TMDXX
NYTXX
TRSXX
PTEXX

0.79%
1.15
0.95
1.02
1.07

0.54%
0.89
0.72
1.01
1.04

0.19%
0.26
0.21
0.25
0.26

0.88%
1.19
1.00
1.17
1.19

TSCXX
PRRXX
PRTXX

1.76%
1.66
1.71

1.76%
1.66
1.71

0.49%
0.48
0.48

2.08%
2.01
2.00

Expenseratio as ofdate

TaxableCash Reserves◊14
Government Money‡15
U.S. Treasury Money‡

Formerly the T. Rowe Price Global Unconstrained Bond Fund.
In an effort to maintain a zero or positive net yield for the fund, T. Rowe Price may voluntarily waive all or a portion of the management fee it is entitled to receive from the fund. This voluntary
waiver would be in addition to any contractual expense ratio limitation in effect for the fund and may be amended or terminated at any time without prior notice. This fee waiver would have theeffect of increasing the fund’s 7-day yield. Please see the prospectus for more details.
14
Formerly the T. Rowe Price Summit Cash Reserves Fund.
15
Formerly the T. Rowe Price Prime Reserve Fund.
12
13

Money Market Funds:◊Retail Funds: You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00
per share, it cannot guarantee it will do so. Beginning October 14, 2016, the Fund may impose a fee upon the sale of your shares or
may temporarily suspend your ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions
or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any othergovernment agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect thatthe sponsor will provide financial support to the Fund at any time.
Government Funds: You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment
at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to theFund, and you should not expect that the sponsor will provide financial support to the Fund at any time.

‡22

PERFO RM A N CE S U MM A RY PAST Q UA RTE R , Y E A R , A N D AV E R AG E A N N UA L TOTA L RE TU RN S PE RI O D S E N D E D S E P TE M B E R 30, 2019

Figure 16 Asset Allocation Funds

Asset Allocation

Tickersymbol3 months

1 year

3 years

Balanced
Global Allocation
Multi-Strategy Total Return
Personal Strategy Balanced
Personal Strategy Growth
Personal Strategy Income
Retirement 2005
Retirement 2010Retirement 2015
Retirement 2020
Retirement 2025
Retirement 2030
Retirement 2035
Retirement 2040
Retirement 2045
Retirement 2050
Retirement 2055
Retirement 2060
Retirement Balanced
Retirement Income 2020
Spectrum Growth
Spectrum Income
Spectrum International
Target 2005
Target 2010
Target 2015
Target 2020
Target 2025
Target 2030
Target 2035
Target 2040
Target 2045
Target 2050
Target 2055
Target 2060

RPBAX
RPGAX
TMSRX
TRPBX
TRSGX
PRSIX
TRRFX
TRRAX
TRRGX
TRRBX
TRRHX
TRRCX
TRRJX
TRRDX
TRRKX
TRRMX
TRRNX
TRRLX
TRRIX
TRLAX
PRSGX
RPSIX
PSILX
TRARX
TRROX
TRRTX
TRRUX
TRRVX
TRRWX
RPGRX
TRHRX
RPTFX
TRFOX
TRFFX
TRTFX

1.13%
0.31
0.72
0.68
0.49
0.71
0.96
0.89
0.83
0.73
0.63
0.51
0.37
0.30
0.22
0.20
0.19
0.16
0.66
0.75
-0.38
1.40
-1.12
0.95
0.95
0.84
0.74
0.64
0.55
0.54
0.45
0.37
0.29
0.29
0.17

5.26%
4.10
2.09
5.43
4.45
5.82
5.85
5.64
5.37
5.06
4.74
4.38
4.01
3.74
3.53
3.49
3.47
3.44
5.06
4.90
1.65
7.74
-0.56
5.99
5.90
5.78
5.39
5.01
4.84
4.74
4.47
4.27
3.87
3.71
3.48

8.68%
7.06
—
8.36
10.04
6.45
5.60
6.04
6.73
7.59
8.28
8.93
9.38
9.79
9.90
9.91
9.88
9.87
5.55
—
10.71
4.01
5.71
5.31
5.47
5.82
6.38
6.96
7.63
8.23
8.77
9.16
9.52
9.78
9.80

5 years

10 yearsor since
inception1

Inception
date

Expenseratio

Expenseratio as of
date

6.86%
5.68
—
6.71
7.72
5.45
4.87
5.19
5.68
6.27
6.74
7.16
7.44
7.66
7.73
7.73
7.72
7.72
4.65
—
8.28
3.86
3.63
4.65
4.75
4.96
5.34
5.76
6.28
6.72
7.06
7.31
7.49
7.64
7.67

8.80%
6.07
0.67
8.76
10.16
7.04
6.52
7.08
7.83
8.56
9.14
9.67
9.99
10.21
10.25
10.25
10.24
6.96
6.00
6.13
10.84
5.22
5.74
5.24
5.41
5.70
6.19
6.73
7.35
7.88
8.27
8.56
8.80
8.95
6.91

12/31/39
5/28/13
2/23/18
7/29/94
7/29/94
7/29/94
2/27/04
9/30/02
2/27/04
9/30/02
2/27/04
9/30/02
2/27/04
9/30/02
5/31/05
12/29/06
12/29/06
6/23/149/30/02
5/25/17
6/29/90
6/29/90
12/31/96
8/20/13
8/20/13
8/20/13
8/20/13
8/20/13
8/20/13
8/20/13
8/20/13
8/20/13
8/20/13
8/20/13
6/23/14

0.61%
1.09
1.93
0.87
0.89
0.79
0.53
0.53
0.56
0.59
0.63
0.66
0.68
0.70
0.71
0.71
0.72
0.72
0.51
1.23
0.77
0.62
0.90
1.04
0.77
0.58
0.60
0.65
0.70
0.79
0.84
0.90
0.98
1.17
2.04

12/31/2018
10/31/2018
10/31/2018
5/31/2019
5/31/2019
5/31/2019
5/31/2019
5/31/2019
5/31/2019
5/31/2019
5/31/2019
5/31/2019
5/31/2019
5/31/2019
5/31/2019
5/31/2019
5/31/2019
5/31/2019
5/31/201912/31/2018
12/31/2018
12/31/2018
12/31/2018
10/1/2019
10/1/2019
10/1/2019
10/1/2019
10/1/2019
10/1/2019
10/1/2019
10/1/2019
10/1/2019
10/1/2019
10/1/2019
10/1/2019

Indexes included in this update track the following: S&P 500—500 large-company U.S. stocks; S&P MidCap 400—stocks of 400 mid-size U.S. companies; NASDAQ Composite (principal only)—U.S.
stocks traded in the over-the-counter market; Russell 2000—stocks of 2,000 small U.S. companies; MSCI EAFE—stocks of about 1,000 companies in Europe, Australasia, and the Far East; MSCIEmerging Markets—more than 850 stocks traded in over 20 emerging markets; Bloomberg Barclays U.S. Aggregate Bond—investment-grade corporate and government bonds; Bloomberg Barclays
Municipal Bond—tax-free investment-grade U.S. bonds; Credit Suisse High Yield—noninvestment-grade corporate U.S. bonds; Bloomberg Barclays Global Aggregate ex USD Bond—investment-grade
government, corporate, agency, and mortgage-related bonds in markets outside the U.S.; J.P. Morgan Emerging Markets Bond–Global—U.S. dollar-denominated Brady Bonds, Eurobonds, tradedloans, and local market debt instruments issued by sovereign and quasi-sovereign entities; Lipper averages—all funds in each investment objective category; and Lipper indexes—equally weighted
indexes of typically the 30 largest mutual funds within their respective investment objective categories. It is not possible to invest directly in an index.

TROWEPRICE.COM

23

I S S U E N O. 145 FA LL 2019

Additional Disclosure
Source: BofA Merrill Lynch, used with permission. BofA Merrill Lynch is licensing the BofA Merrill Lynch indices “as is”; makes no warranties regarding same; does not guarantee the suitability,
quality, accuracy, timeliness, and/or completeness of the BofA Merrill Lynch indices or any data included in, related to, or derived there from; assumes no liability in connection with their use; anddoes not sponsor, endorse, or recommend T. Rowe Price or any of its products or services.
Bloomberg Index Services Ltd. Copyright © 2019, Bloomberg Index Services Ltd. Used with permission.
Information has been obtained from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy. The index is used with permission. The index may not be
copied, used, or distributed without J.P. Morgan’s prior written approval. Copyright © 2019, J.P. Morgan Chase & Co. All rights reserved.
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.
Frank Russell Company (Russell) is the source and owner of the Russell index data contained or reflected in these materials and all trademarks and copyrights related thereto. Russell® is a
registered trademark of Russell. Russell is not responsible for the formatting or configuration of these materials or for any inaccuracy in T. Rowe Price Associates’ presentation thereof.
The views contained herein are those of the authors as of the date of publication and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.
Copyright © 2019, S&P Global Market Intelligence (and its affiliates, as applicable). Reproduction of S&P 500 Index and S&P MidCap 400 Index in any form is prohibited except with the priorwritten permission of S&P Global Market Intelligence (S&P). Neither S&P, its affiliates, or its suppliers guarantee the accuracy, adequacy, completeness, or availability of any information and is not
responsible for any errors or omissions, regardless of the cause, or for the results obtained from the use of such information. In no event shall S&P, its affiliates, or any of its suppliers be liable forany damages, costs, expenses, legal fees, or losses (including lost income or lost profit and opportunity costs) in connection with any use of S&P information.
Index performance is for illustrative purposes only and is not indicative of any specific investment. Investors cannot invest directly in an index.

Editor: Robert Benjamin
Writers: John Dixon, Derek Johnson, Nick Loney,
Chris McMennemin, and Steven E. Norwitz
Editor Emeritus: Steven E. Norwitz

M00-06624

9/1904779_UD

201910-976278

Charts and examples in this issue showing investment performance (excluding those in the Performance Update section) are forillustrative purposes only and do not reflect the performance of any T. Rowe Price fund or security. A manager’s view of theattractiveness of a company may change, and the fund could sell the holding at any time. This material should not be deemed arecommendation to buy or sell shares of any of the securities discussed. Past performance cannot guarantee future results.
T. Rowe Price, Invest With Confidence, and the bighorn sheep design are trademarks or registered trademarks of T. Rowe Price
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