Stockholder Letter

Dear Stockholder:

If ever there was a year that defied experts’ forecasts, 2016 would win the prize. We began the year with a crowded field of presidential candidates and ended with one of the most remarkable upsets in recent U.S. political history. This result followed upheaval in Europe, where UK citizens voted to withdraw from the European Union. Similar movements across the Continent could create further disruptions to the status quo in 2017. Financial markets fell sharply in January over concerns that a slowing economy in China would hurt global economic growth. Stocks demonstrated remarkable resilience though and clawed their way back to attractive returns for the year.


The S&P 500 Index delivered 12% in 2016 and small-cap stocks performed even better, with the Russell 2000 Index returning in excess of 21%. The MSCI All Country World Index (excluding the U.S.) returned 5%, and the MSCI Emerging Markets Index gained nearly 12%. All in all it was a rewarding year for equity investors.


Gains in fixed income markets were harder to come by, with the exception of the high yield bond sector, which generated equity-like returns. The Bloomberg Barclays U.S. Aggregate Bond Index returned 2.7% as interest rates rose modestly during the year. In a widely expected decision, the Federal Reserve raised its federal funds target rate in December and suggested that additional increases are likely in 2017. After several years of essentially zero returns, money market fund investors are looking forward to a more normalized interest rate environment.




Despite growing industry headwinds, your company performed reasonably well in 2016. Assets under management (AUM) increased from $763 billion at the beginning of 2016 to $811 billion on December 31, 2016. Average AUM for the period was $778 billion. Revenues of $4.2 billion rose 0.5% versus 2015, while net income was approximately $1.2 billion. Fully diluted earnings per common share rose from $4.63 in 2015 to $4.75 in 2016, primarily reflecting fewer shares outstanding. Our return on equity, a good measure of corporate profitability, rose from 24% in 2015 to 25%.


Our financial position remained exceptionally strong, with cash and sponsored investments of approximately $3.2 billion and no debt. During the year, we invested several hundred million dollars in “seed capital” to jump-start a range of new investment offerings and business opportunities. We also repurchased 10 million shares of stock—4% of outstanding shares. In February 2016, our Board of Directors increased our regular annual dividend from $2.08 per share to $2.16 per share, representing the 30th consecutive year of dividend increases since our initial public offering in 1986. We view regular dividend increases and stock repurchases (at reasonable prices) as important components of our long-term strategy to build stockholder value.




Delivering strong investment performance and world-class service for our clients are always our top priorities—and we worked hard on both in 2016. Our 2016 investment performance was solid, with 53% of our funds outperforming their Lipper averages. Longer-term results, though, have been outstanding, with 84%, 80%, and 86% of our funds outperforming their Lipper averages over three, five, and 10 years, respectively. Investment performance over longer time periods was similarly strong in our institutional investment offerings. Our client satisfaction scores across all distribution channels remained excellent.


We had particularly outstanding investment performance in several investment areas. Most notably, David Wallack, who manages our Mid-Cap Value Fund, was named by Morningstar as its 2016 U.S. Domestic Stock Fund Manager of the Year—the “Academy Award” for outstanding investment performance. David Wagner, manager of our Small-Cap Value Fund, also did a great job and was cited by Bloomberg as one of the top stock pickers for 2016. Several of our international portfolio managers also performed particularly well: Archie Ciganer, portfolio manager of our Japan Fund, and Gonzalo Pángaro, portfolio manager of our emerging markets equity strategy, generated very strong performance in a challenging environment. On the fixed income side, Steve Huber, manager of our global multi-sector bond portfolios, and Mike Conelius, manager of our Emerging Markets Bond Fund, likewise deserve special mention.


The investment management industry grows increasingly competitive every year, with more and more strategies vying for investors’ attention. In 2016, passive strategies captured the lion’s share of net cash flows, and we experienced modest redemptions—despite our strong long-term performance. We believe there is a place for both active and passive strategies in clients’ portfolios, and in fact, we use both in many of our asset allocation portfolios. Well-executed active management may not be easy, but T. Rowe Price has a long history of doing it well. One example that drives home the point is the long-term performance of our Retirement Date Strategies, which invest across a range of underlying T. Rowe Price portfolios. Each of our Retirement Funds with at least 10 years of history has outperformed its passive benchmark, highlighting the broad strength of our investment platform.




We accelerated investment in three key areas to grow and further diversify our company, including a number of initiatives to broaden our investment capabilities. We introduced several new quantitative investment strategies in 2016, labeled T. Rowe Price QM, to complement our more fundamentally based equity strategies. We also completed the groundwork to introduce new funds in 2017—with a focus on providing investment income and retirement income solutions—and we established a three-year product development plan for our equity, fixed income, and asset allocation businesses.


Broadening our distribution capabilities is also a key focus, and we are in the midst of a multiyear plan to strengthen our sales and client service teams. We want to be a trusted partner for a growing number of clients around the world. To enhance our clients’ experiences with us, we’re investing heavily to upgrade online capabilities. We are boosting our investment in technology and talent, and we are pleased with our early progress.




Last year was notable for the retirements of several long-tenured investors who have served our clients extremely well for many years.


Rich Whitney, who skillfully led our asset allocation business, worked at the firm for more than 30 years and is responsible for many innovations at the firm over the last three decades. Bob Smith managed both the Growth Stock Fund and the International Stock Fund and had distinguished investment performance during his several-decade tenure. Preston Athey, manager of our Small-Cap Value Fund, joined the firm almost 40 years ago and became one of the industry’s best-known small-cap investors. And finally, Greg McCrickard, manager of our Small-Cap Stock Fund, retired in the fall of 2016 after 24 years of strong investment leadership. Greg, however, will return as a part-time consultant in April 2017.


These individuals represent the best of T. Rowe Price. And while we spend an enormous amount of energy planning for transitions like these and have a deep bench of talented associates ready to carry the torch, we will miss each of them and wish them all the best.




In 2016, we welcomed a new director, Sandra Wijnberg, to our Board. Sandra has a wide range of financial experience as Executive Advisor of Aquiline Capital Partners and having previously served as the chief financial officer of Marsh & McLennan. She has a keen understanding of the financial services sector and the investment management industry. We are very pleased to have her join our Board of Directors.




We expect that the U.S. economy will continue to grow at a moderate pace in 2017. There has been no shortage of conjecture on the potential impact of many of the pro-growth proposals put forth by President Trump, and the U.S. equity market has rallied in anticipation of increased stimulus. We look forward to progress on tax reform, deregulation, and an infrastructure program that would provide a boost to the U.S. economy. Time will tell how successful these initiatives will be.


Following the Fed’s December 2016 short-term interest rate increase, it appears that the central bank will gradually raise rates during the year. Recent action in the bond market, however, suggests that fixed income assets may face some headwinds in 2017 as investors carefully watch for signs of inflation and acceleration in economic growth. And after eight years of gains following the end of the global financial crisis, stocks’ valuations are now above long-term averages, and we expect more moderate returns in the coming years.


Whatever the environment, your company is reinvesting to prosper in the years ahead. Our talented associates, six thousand strong, are focused on helping our clients achieve their investment objectives. Our strong reputation and financial position provide the ingredients necessary to grow the value of your investment over time.



A note from Bill Stromberg on Brian Rogers

In November of last year, we announced that Brian Rogers would retire from T. Rowe Price on March 31, 2017, after nearly 35 years of service to our firm and our clients. Brian will step down from his role as chief investment officer at that time but will remain on the Board of Directors and serve as non-executive chair.

Brian joined T. Rowe Price as a portfolio manager in 1982 and subsequently served as portfolio manager of the Equity Income Fund for a remarkable 30 years. He also was the first manager of the Value Fund and founding member of the team managing the Institutional Large-Cap Value Equity Strategy. Brian was named chief investment officer in 2004 and became T. Rowe Price’s Board chair in 2007.

Brian has been a calm and steady hand at the helm through multiple market cycles and will long be remembered for his insightful industry perspective, sound financial discipline, commitment to Board diversity, and corporate governance focus. He is generous of spirit and his time and has made as positive an impact on the firm and our clients’ success as he has on the industry and our community.

While we will certainly miss you in our day-to-day operations, Brian, we congratulate you on a truly outstanding career and look forward to your continued leadership as Board chair.

Bill Stromberg


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