Annual Report
October 31, 1998
Foreign Equity Fund
Dear Investor
The fiscal year ended October 31, 1998, comprised two quite separate parts. In
the first, world stock markets recovered well from the Asian crisis of late
1997, and by July many of them had reached new highs. From this point on,
investor confidence was again challenged by problems in emerging markets, but
this time the culprit was Russia. The collapse of the ruble, together with
Russia's de facto default on its government bonds, precipitated a severe
correction in both established and less developed global markets. Despite these
traumas, investor confidence did not disappear entirely, and recent months
witnessed a good recovery as your fund appreciated sharply in October alone.
Performance Comparison
Periods Ended 10/31/98 6 Months 12 Months
- --------------------------------------------------------------------------------
Foreign Equity Fund - 6.27 7.65%
MSCI EAFE Index - 4.88 9.95
During the past 6- and 12-month periods, the fund's returns were behind those of
the Morgan Stanley Capital International Europe Australasia and Far East (MSCI
EAFE) Index. This shortfall was mainly due to the weakness of Latin America
where the fund held moderate positions that are not part of the index. Stock
selection, which was biased toward growth companies rather than cyclical stocks,
was also adverse.
For most of the year, Europe provided the safest markets for the international
investor as its economies made steady progress and European currencies
strengthened against the U.S. dollar. Although these markets went through an
uncomfortable period in late summer, the advent of the Economic and Monetary
Union (EMU) in January 1999 is an important milestone in the history of European
integration and presents opportunities for both corporations and investors. In
contrast, Japan's economy continued to be disappointing and a recession seems to
have widened its grip. Concern focused on the inability of the authorities to
confront the country's banking crisis, and a stream of disappointing corporate
earnings also damaged sentiment. Elsewhere in Asia, the erstwhile tiger
economies turned down following the financial collapse a year ago, but
authorities in Hong Kong were at least able to fight off the speculators and
maintain the currency peg to the U.S. dollar.
In Latin America, there was optimism during the summer that these economies
would avoid the contagion that started in the Pacific and reemerged with
Russia's financial collapse in July. After all, Latin America had courageously
pursued a path of reform and it appeared as though stock markets there deserved
more sympathetic treatment. However, sympathy is a sentiment in short supply
when fear is in the saddle, and Latin American markets were eventually dragged
into the turmoil. It looks as though Brazil, the key economy in the region, has
so far survived the worst of the crisis, and the recently announced $41 billion
support package sponsored by the International Monetary Fund (IMF) will at least
buy the country more time.
INVESTMENT REVIEW
Europe
In May 1998, a significant event occurred along the road to EMU. This was the
point at which the European Monetary Institute (EMI) would decide which
candidate countries had attained the economic convergence criteria of the
Maastricht Treaty and would adopt the euro as their currency on January 1, 1999.
At the time it was negotiated, the Maastricht Treaty laid down tough benchmarks
for public finance, inflation, and interest rates. Skeptics doubted whether many
countries would achieve these benchmarks, and it was a remarkable accomplishment
that 11 of the 15 members of the European Union made the grade. Only Greece
failed to meet the Maastricht criteria while the U.K., Sweden, and Denmark
decided for different reasons not to join EMU in the first round. The EMI has
now converted itself into the European Central Bank (ECB), which beginning in
January 1999 will have sole responsibility for monetary policy over the 11
countries joining EMU-the so-called Euro Zone. Until the euro appears as a
physical currency in 2002, the new ECB will ensure that all member currencies
trade at fixed exchange rates with one another and with the euro. National notes
and coins will be steadily withdrawn after the euro begins to circulate, and by
mid-2002 it will be the only currency of the Euro Zone.
Preparing for the Year 2000
The Year 2000 draws closer every day, and it holds special meaning beyond the
arrival of a new millennium. The issue for investors is that many computer
programs throughout the world use two digits instead of four to identify the
year and may assume the next century starts with 1900. If these programs are not
modified, they will not be able to correctly handle the century change when the
year changes from "99" to "00" on January 1, 2000, and they will no longer be
able to perform necessary functions. The Year 2000 issue affects all companies
and organizations.
T. Rowe Price has been taking steps to assure that its computer systems and
processes are capable of functioning in the Year 2000. Detailed plans for
remediation efforts have been developed and are currently being executed.
Our Plan of Action
We began to address these issues several years ago by requiring that all new
systems process and store four-digit years. We plan to complete all
reprogramming efforts for the major application systems, including business
applications required to service our customers and processing infrastructure
necessary to ensure the integrity of customer data and investments, by December
31, 1998, leaving a full 12 months for system testing. Because we exchange data
electronically with customers and vendors, we are working with them to assess
the adequacy of their own compliance efforts. Our goal is to ensure the
continuation of the same level of service to all our mutual fund shareholders
and clients after December 31, 1999.
We are asking all vendors and companies we do business with for a Year 2000
compliance status, with the expectation that some organizations will not be able
to modify their interface files prior to December 31, 1999. Our goal is to
identify any noncompliant files so that we can implement alternative solutions.
In addition, we are scheduling tests for critical vendors and companies that
claim Year 2000 compliance to ensure that time-related data and calculations
function properly as we move into the next century.
Smooth Transition Planned
We believe our programs and initiatives will provide a smooth transition into
the next millennium. We are assessing all systems providing products or services
to our retail mutual fund shareholders, retirement plan sponsors, and
participants, and we are taking steps to modify them where necessary for the
Year 2000. Our plan provides time to develop solutions for all noncompliant
systems and data files from customers or vendors.
The Securities Industry Association (SIA) is coordinating Year 2000 testing to
assure that securities markets, clearing corporations, depositories, and third
party service providers can send, receive, and process files and transactions
accurately. In late July 1998, the SIA completed a beta test of Year 2000
readiness. The test was considered successful in terms of transactions completed
and will serve as the basis for the SIA's industry-wide approach. During October
1998, T. Rowe Price completed its beta test of Year 2000 readiness with the SIA
and is ready for the industry-wide test that is scheduled for March and April
1999.
For a more detailed discussion of our Year 2000 effort, as well as continuing
updates on our progress, please check our Web site (www.troweprice.com).
The advent of a single currency will bring greater transparency to the single
market and real cost savings for business. For some time now there has been much
merger and acquisition activity as corporations positioned themselves for this
change. This was one factor fueling strong markets in Europe, but pension fund
reform and the prospect of converting savers into investors have also helped
sentiment. The arrival of the euro will not by itself have any impact on your
fund's portfolio, but the longer-term benefits of EMU remain compelling and
support a strategy where just over 64% of the fund's assets are in EU member
states (73% in Europe overall) and 41% in countries going for full monetary
union.
The U.K. has the largest economy of the four EU member states not adopting the
euro in January 1999. At the time of the original Maastricht negotiations, the
U.K. secured an opt-out clause. With the U.K. not joining the rest of Europe,
Prime Minister Tony Blair and his government are happy to continue with this
wait-and-see policy. Hampered by strong sterling and relatively high interest
rates, the U.K. manufacturing sector has been under pressure for some time, and
signs of a slowdown recently appeared in the service sector too. Not
surprisingly, the Bank of England loosened monetary policy with several interest
rate cuts, but because most of Britain's trade is with Continental Europe, the
authorities will want to ensure that sterling closely shadows the euro.
Market Performance
Six Months Local Local Currency U.S.
Ended 10/31/98 Currency vs. U.S. Dollar Dollars
Australia - 1.14 - 4.56 - 5.65
France - 8.17 8.29 - 0.55
Germany - 8.44 8.35 - 0.80
Hong Kong 9.60 -- 9.60
Italy - 11.13 8.16 - 3.88
Japan - 15.99 13.39 - 4.74
Mexico - 17.98 - 15.70 - 30.85
Netherlands - 15.78 8.18 - 8.89
Norway - 27.55 1.16 - 26.70
Singapore - 17.53 - 2.75 - 19.80
Sweden - 15.08 - 1.00 - 15.93
Switzerland - 10.68 10.76 - 1.07
United Kingdom - 7.76 0.16 - 7.61
Source: FAME Information Services, Inc., using MSCI indices.
The U.K. stock market, where we committed nearly 20% of portfolio assets,
behaved reasonably well during recent turbulence, with pharmaceutical giants
such as Glaxo Wellcome and SmithKline Beecham exhibiting their defensive
qualities. As on the Continent, companies have been positioning themselves for
an ever more integrated Europe. A good example is Kingfisher, which revealed
plans to swap its home improvement business for a stake in Castorama, the number
one do-it-yourself retailer in France. British Petroleum surprised the market
with its merger with Amoco in the U.S., and we recently added to Unilever, the
multinational consumer goods company that continues to increase profits by
restructuring, cutting costs, and improving asset utilization.
Turning to the Continent, the most important news was Germany's election of
Gerhard Schroeder as the new Chancellor, marking a political shift to the
center-left. The core Euro Zone economies of Germany, France, and Italy are each
showing similar characteristics of sluggish growth and stubbornly high
unemployment. Their left-of-center governments are putting pressure on the ECB
to adopt more stimulatory policies, but with considerable independence built
into its constitution, the ECB's priority will be controlling inflation. All
Continental markets fell sharply in August and early September, but declines
were softened for U.S. investors by the strength of local currencies against the
dollar. Our core positions such as publishers Wolters Kluwer (the Netherlands)
and Reed International (U.K.) continued to show steady profit growth, and their
stocks held up well. In France the drug company Sanofi and retailer
Pinault-Printemps announced better-than-expected results, as did the
pharmaceutical wholesaler and retailer Gehe, one of our largest positions in
Germany.
Although the portfolio is slightly underweighted in the financial sector, many
leading stocks suffered during the recent correction. In the Netherlands, ING
and leading Swiss banks Credit Suisse and UBS fell sharply when they announced
higher-than-expected exposure to Russia and other emerging markets.
Far East
Japan's economy moved into recession with the announcement that GDP for the
quarter ended September 30 contracted 0.8% compared with the first fiscal
quarter. Policymakers face two major issues. First, since private consumption is
such a large component of GDP, they badly need to stimulate consumer spending.
Traditionally, Japanese corporations have looked after their employees from
cradle to grave, but these cherished values have been challenged with rising
unemployment and widespread discussion on whether Japan can really provide for
its growing number of retirees. Because of such uncertainties, consumer spending
remains depressed despite historically low interest rates.
The second issue is the country's banking crisis, which came to a head a year
ago but has still not been confronted fully by the authorities. Many of Japan's
banks are technically insolvent even though the full extent of their bad debts
has not been fully disclosed. The government should probably close the weak
banks and recapitalize the better ones, but continuing inaction has contributed
to poor sentiment in the stock market. The Tankan survey of business confidence
for September revealed that sentiment was worse than expected. This survey is a
key leading indicator for future growth and capital expenditure, and it is
worrisome that it showed no sign of improvement.
Geographic Diversification pie chart
Europe Japan Far East Latin America Other
73 16 5 4 2
There has been widespread dissatisfaction in Japan with the government's
performance, and the disastrous showing of the ruling Liberal Democratic Party
(LDP) in July's election was no surprise. Following this setback Prime Minister
Hashimoto resigned, but it looked like business as usual when Keizo Obuchi, the
most conservative of the three leading candidates, became LDP leader and Prime
Minister. It remains to be seen whether he will implement the radical policies
Japan needs. Perhaps the biggest surprise came from the currency market when the
yen recovered sharply against the U.S. dollar in October. Many hedge fund
operators had been borrowing yen to buy higher-yielding U.S. Treasuries. As the
yen weakened, this strategy provided a currency gain, but as the yen recovered
traders scrambled to cover their open positions, which accelerated its upward
momentum.
The Japanese market was weak during the past six months, but the strength of the
yen moderated these declines for U.S. investors, as can be seen in the table on
page 3. We biased our holdings toward international companies operating in the
technology, consumer electronics, and business equipment fields such as Sony,
Canon, and Matsushita. These stocks performed relatively well, particularly
during periods when the yen was weak. Recently they have started to look
somewhat overvalued, and since many of them are exporters their prospects will
be hampered if the yen improves further. Therefore, we reduced positions in
Canon and TDK and invested the proceeds in more-cyclical growth companies with
strong cash flow.
Our positions in the rest of Asia were very small and were dominated by the
stock markets of Australia and Hong Kong. The Australian economy has shown
moderate growth, a considerable achievement given the downturn in Asian
countries that are now Australia's major trading partners. In the recent general
election, Mr. Howard's liberal coalition just managed to retain power, which was
well received by the stock market. The economy will benefit from gradual labor
reform and further privatization of government assets. Our positions in
Australia included media conglomerate News Corpor-ation, banking stocks such as
Westpac Bank and National Australia Bank, and several utilities. Given the
continued deflation in world commodity prices, we have avoided the natural
resource sector.
Industry Diversification
- --------------------------------------------------------------------------------
Percent of
Net Assets
10/31/98
Services 29.7%
Consumer Goods 21.8
Finance 19.9
Capital Equipment 11.2
Energy 10.0
Materials 3.8
Multi-industry 2.0
Miscellaneous 0.1
Reserves 1.5
Net Assets 100.0%
- --------------------------------------------------------------------------------
In Hong Kong, sentiment was dominated by a fierce battle to maintain the
exchange rate peg between the Hong Kong and U.S. dollars in the face of intense
speculation to break it. As the pressure on the Hong Kong currency mounted, the
first tactic was a dramatic increase in interest rates that only served to
provide speculators with an opportunity to sell stocks short in a falling
market. Hong Kong's Financial Secretary broadened his defense by using Hong
Kong's foreign exchange reserves to support the stock market-a courageous
strategy considering the free market principles that have made an important
contribution to Hong Kong's prosperity. Happily the strategy worked, the
speculators retreated, and the currency peg held, but the price paid was
significant damage to the economy itself, particularly the real estate market
that is so sensitive to interest rates. Although we expect the broad economic
picture in Hong Kong to remain difficult, its stock market houses some of the
region's strongest and best-managed companies. Trading, transport, and real
estate conglomerate Hutchison Whampoa remained a core holding and performed well
during the past six months. We also had positions in infrastructure plays such
as Hong Kong's HK Telecom and China's Huaneng Power International.
At the end of October, your portfolio had negligible positions in other Pacific
markets where the economies will take some time to recover from the financial
collapse that began a year ago. Having said this, the stock markets in many of
these emerging economies have recently stabilized following their disastrous
falls during the early summer. We are not yet tempted to return to these markets
but continue to monitor the situation carefully.
Latin America
The stock markets of Latin America were weak for most of the year and continued
to show extreme volatility. Brazil suffered huge outflows of foreign exchange
reserves in both August and September, and the exchange rate of the real against
the U.S. dollar was maintained only by a massive increase in interest rates. By
the middle of September, a vicious circle of higher interest rates, failing
confidence, and increased capital outflows threatened to spiral into a major
market rout, but an indication that there would be a $41 billion support package
sponsored by the IMF helped stabilize the capital markets. President Cardoso
seems to have persuaded the electorate that he has sufficient experience and
skill to deal with the financial crisis and was reelected with a comfortable
majority. However, the major weakness of the Brazilian economy is the
persistently high fiscal deficit. Now that Brazil's financial crisis has receded
and elections are over, the markets will be looking for significant action on
the deficit rather than statements of good intent.
In contrast with Brazil, Argentina demonstrated its commitment to fiscal
discipline by cutting spending by more than $1.3 billion to achieve the fiscal
deficit target of 1% of GDP agreed to with the IMF. Argentina was one of the
region's better-performing stock markets over the six months, and increasing
evidence of its economic self-discipline was a contributing factor. In Mexico,
the economy held up remarkably well despite rising interest rates and a weak
peso. Its stock market was also battered during the emerging market crisis, but
its closer ties to the U.S. will afford some protection.
Key holdings include telecommunications giants Telebras in Brazil and Telmex in
Mexico. Both companies have great potential as rising prosperity increases fixed
line telephone penetration in these highly populated countries and powers the
growth of cellular technology.
Investment Policy and Outlook
The fiscal year under review was frustrating for inter-national investors. It
started well, and by midsummer many markets reached new highs, but the
turbulence of August and early September was very disappointing. Despite the
soundness of the U.S. economy, even Wall Street was caught up in this worldwide
correction.
Now that stock markets have settled down, it is worth taking a cold hard look at
how world economies might develop from here. The starting point should be
Europe, which accounts for just over 70% of the portfolio. In only a few weeks,
the euro will arrive and 11 European countries will make a major commitment to
economic integration when they adopt full monetary union. This by itself will be
a significant achievement, but the price has been lower economic growth than
would otherwise have been the case. The prize for their endeavors, how-ever,
will be a single currency market where the potential is underpinned by sound
public finance, lower inflation, and a current account surplus. This will
provide a strong platform for future growth and is in sharp contrast to
economies of the Pacific that are still struggling. Also, many observers now
feel the euro will be a strong currency against the dollar, and if more
international trade is denominated in the euro, central banks throughout the
world will increasingly regard it as a key currency for their foreign exchange
reserves. Companies in which we invest are already exploiting the opportunities
of closer integration in Europe, and management increasingly recognizes the
importance of shareholder value. For all these reasons, it makes sense that
Europe should dominate our international portfolio.
It is perhaps more difficult to make a compelling case for other overseas
markets, but there is still plenty of opportunity. Despite continuing problems
in Japan, its stock market is too large to ignore entirely and is showing signs
of stabilizing after a long decline. As we mentioned before, Tokyo remains the
home of world-class corporations, many of which form the heart of our Japanese
portfolio. These holdings have served us well, and it is time to begin
considering some more domestically oriented blue chips. However, although we can
find Japanese companies we like, there is still too much economic uncertainty
for us to make a major push back into this market.
Turning to emerging markets, the economic turmoil that overwhelmed the smaller
Asian economies a year ago has yet to work itself out, and our positions in Asia
outside of Japan remain very low. In contrast to some of the smaller Asian
economies, governments of key Latin American countries are committed to reform
and have shown admirable economic discipline during difficult times. We believe
they are well positioned for the future and any international portfolio,
including ours, should have a commitment to this part of the world.
Thus, the fund's geographical allocation seems appropriate, and our commitment
to growth companies priced at reasonable valuations will be helpful, in our
view, if we encounter a period of slower economic growth. We believe this
strategy makes sense for the current environment and will prove rewarding in the
future.
Respectfully submitted,
Martin G. Wade
President
November 23, 1998
Portfolio Highlights
Twenty-Five Largest Holdings
Percent of
Net Assets
Company Country 10/31/98
- --------------------------------------------------------------------------------
National Westminster United Kingdom 2.6%
Wolters Kluwer Netherlands 2.3
SmithKline Beecham United Kingdom 2.3
Nestle Switzerland 2.1
Glaxo Wellcome United Kingdom 1.8
Diageo United Kingdom 1.6
Vivendi France 1.6
Royal Dutch Petroleum Netherlands 1.6
Novartis Switzerland 1.5
ING Groep Netherlands 1.4
Kingfisher United Kingdom 1.4
Shell Transport and Trading United Kingdom 1.3
Telecom Italia Italy 1.2
Roche Holdings Switzerland 1.1
Reed International United Kingdom 1.1
Unilever Netherlands 1.0
Total France 1.0
KBC Bancassurance Holding Belgium 1.0
UBS Switzerland 1.0
Telebras Brazil 1.0
Gehe Germany 1.0
SAP Germany 1.0
Pinault Printemps Redoute France 1.0
Bayerische Vereinsbank Germany 0.9
Telefonica de Espana Spain 0.9
- --------------------------------------------------------------------------------
Total 34.7%
- --------------------------------------------------------------------------------
Security Classification
Percent Market
of Net Cost Value
10/31/98 Assets (000) (000)
- --------------------------------------------------------------------------------
Common Stocks and
Warrants 95.7% $2,555,089 $3,068,412
Preferred Stocks 2.8 102,451 86,209
Short-Term Investments 3.0 97,373 97,373
Total Investments 101.5 2,754,913 3,251,994
Other Assets Less
Liabilities - 1.5 - 48,310 - 48,310
- --------------------------------------------------------------------------------
Net Assets 100.0% $2,706,603 $3,203,684
- --------------------------------------------------------------------------------
Summary of Investments and Cash
October 31, 1998
Percent of
Equities Cash Total MSCI EAFE
- --------------------------------------------------------------------------------
Europe
Austria -- -- -- 0.4%
Belgium 1.9% -- 1.9% 1.9
Czech Republic 0.0 -- 0.0 --
Denmark 0.4 -- 0.4 0.9
Finland 0.6 -- 0.6 1.2
France 10.6 -- 10.6 9.5
Germany 7.6 -- 7.6 10.5
Ireland 0.0 -- 0.0 0.5
Italy 5.4 -- 5.4 4.8
Netherlands 11.4 -- 11.4 5.4
Norway 1.5 -- 1.5 0.5
Portugal 0.5 -- 0.5 0.7
Russia 0.1 -- 0.1 --
Spain 3.0 -- 3.0 3.4
Sweden 3.4 -- 3.4 2.8
Switzerland 7.2 -- 7.2 8.3
United Kingdom 19.4 -- 19.4 22.0
------------------------------------------------------------------------------
Total Europe 73.0% -- 73.0% 72.8%
- --------------------------------------------------------------------------------
Pacific Basin
Australia 2.7% -- 2.7% 2.7%
China 0.2 -- 0.2 --
Hong Kong 1.4 -- 1.4 2.4
India 0.2 -- 0.2 --
Japan 15.9 -- 15.9 21.5
New Zealand 0.2 -- 0.2 0.2
Singapore 0.2 -- 0.2 0.7
South Korea 0.1 -- 0.1 --
------------------------------------------------------------------------------
Total Pacific Basin 20.9% -- 20.9% 27.5%
- --------------------------------------------------------------------------------
Americas
Argentina 0.8% -- 0.8% --
Brazil 2.0 -- 2.0 --
Canada 0.2 -- 0.2 --
Chile 0.1 -- 0.1 --
Mexico 1.5 -- 1.5 --
Panama 0.0 -- 0.0 --
Peru 0.0 -- 0.0 --
United States -- 3.0% 3.0 --
------------------------------------------------------------------------------
Total Americas 4.6% 3.0% 7.6% --
- --------------------------------------------------------------------------------
Other Assets Less Liabilities -- - 1.5 - 1.5 --
------------------------------------------------------------------------------
TOTAL 98.5% 1.5% 100.0% 100.0%*
- --------------------------------------------------------------------------------
* Total may not add to 100.0% due to rounding.
Foreign Equity Fund
10/31/98
Performance Comparison
This chart shows the value of a hypothetical $10,000 investment in the fund over
the past 10 fiscal year periods or since inception (for funds lacking 10-year
records). The result is compared with a broad-based average or index. The index
return does not reflect expenses, which have been deducted from the fund's
return.
Foreign Equity Fund
Foreign Lipper
Equity MSCI International
Fund EAFE Funds Average
9/7/89 10,000 10,000 10,000
10/89 9,660 10,039 9,920
10/90 10,099 8,779 9,921
10/91 11,088 9,421 10,759
10/92 10,728 8,205 10,263
10/93 14,412 11,314 13,749
10/94 16,135 12,488 15,350
10/95 16,238 12,480 15,380
10/96 18,589 13,827 17,204
10/97 20,132 14,508 19,347
10/98 21,673 15,951 20,229
Total Return Performance
xx Calendar
Periods Ended 1 3 Year- 1 3 5 Since
10/31/98 Month Months to-Date Year Years* Years* 9/7/89*
- --------------------------------------------------------------------------------
Foreign
Equity Fund 9.24% - 7.14 7.31% 7.65% 10.10% 8.50% 8.82%
S&P 500 Index 8.13 - 1.57 14.63 21.99 25.99 21.31 16.43
MSCI
EAFE Index 10.45 - 6.15 10.07 9.95 8.53 7.11 5.23**
Lipper
International
Funds Average 7.42 - 11.20 4.11 4.07 8.09 7.02 7.69
FT-A Euro
Pacific Index 10.65 - 5.59 9.21 7.92 7.26 6.24 4.59**
* Average annual compound total return. This table shows how the fund
would have performed each year if its actual (or cumulative) returns for
the periods shown had been earned at a constant rate.
** From 8/31/89.
Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
Financial Highlights
Foreign Equity Fund
For a share outstanding throughout each period
-----------------------------------------------
Year
Ended
10/31/98 10/31/97 10/31/96 10/31/95 10/31/94
NET ASSET VALUE
Beginning of period $ 16.51 $ 15.62 $ 13.99 $ 14.59 $ 13.32
Investment activities
Net investment income 0.28 0.21 0.21 0.18 0.09
Net realized and
unrealized gain (loss) 0.93 1.07 1.78 (0.14) 1.48
Total from
investment activities 1.21 1.28 1.99 0.04 1.57
Distributions
Net investment income (0.21) (0.22) (0.18) (0.12) (0.09)
Net realized gain (0.48) (0.17) (0.18) (0.52) (0.21)
Total distributions (0.69) (0.39) (0.36) (0.64) (0.30)
NET ASSET VALUE
End of period $ 17.03 $ 16.51 $ 15.62 $ 13.99 $ 14.59
----------------------------------------------------
Ratios/Supplemental Data
Total return* 7.65% 8.30% 14.48% 0.64% 11.96%
Ratio of expenses to
average net assets 0.74% 0.75% 0.76% 0.80% 0.82%
Ratio of net investment
income to average
net assets 1.58% 1.40% 1.67% 1.69% 1.26%
Portfolio turnover rate 18.6% 15.9% 13.8% 18.8% 22.0%
Net assets, end of period
(in millions) $ 3,204 $ 3,160 $ 2,322 $ 1,560 $ 1,058
* Total return reflects the rate that an investor would have earned on
an investment in the fund during each period, assuming reinvestment of all
distributions.
The accompanying notes are an integral part of these financial statements.
Statement of Net Assets
Foreign Equity Fund
October 31, 1998
Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
ARGENTINA 0.8%
Common Stocks 0.8%
Banco de Galicia Buenos Aires
(Class B) ADR (USD) 110,440 $ 1,884
Banco Frances del Rio de la Plata
(Class B) ADR (USD) 109,808 2,292
Perez Companc (Class B) 783,762 3,873
Telefonica de Argentina Stet
(Class B) ADR (USD) 189,624 6,270
YPF Sociedad Anonima
(Class D) ADR (USD) 434,689 12,579
Total Argentina (Cost $25,547) 26,898
AUSTRALIA 2.7%
Common Stocks 2.4%
AMP Limited * 281,000 3,345
Australian Gas Light 672,473 4,840
Brambles Industries 238,000 5,223
Broken Hill Proprietary 463,087 3,939
Colonial Limited 1,354,235 4,440
Commonwealth Bank
of Australia 600,276 7,468
Fosters Brewing Group 826,000 2,030
Goodman Fielder 2,320,000 3,066
John Fairfax Holdings 1,777,000 3,112
Lend Lease 156,857 3,463
National Australia Bank 264,768 3,511
News Corporation 1,008,618 6,895
Publishing & Broadcasting 799,124 3,174
Tabcorp Holdings 770,000 5,126
Telstra, Installment Receipts,
11/17/98 2,296,458 9,121
Westpac Bank 1,024,781 6,237
Woodside Petroleum 569,000 3,009
77,999
Preferred Stocks 0.3%
News Corporation 896,815 5,396
Star City Holdings 3,199,600 2,181
7,577
Total Australia (Cost $76,863) 85,576
BELGIUM 1.9%
Common Stocks 1.9%
Dexia 24,759 $ 4,019
Fortis 55,202 15,855
KBC Bancassurance Holding 464,120 32,376
Societe Europeenne des
Satellites (Class A)* 19,300 3,218
UCB 1,039 6,064
Total Belgium (Cost $30,699) 61,532
BRAZIL 2.0%
Common Stocks 0.1%
Pao de Acucar ADR (USD) 111,340 1,795
Telecomunicacoes de
Sao Paulo * 967,420 105
Unibanco GDR (USD) 119,458 2,091
3,991
Preferred Stocks 1.9%
Banco Bradesco 465,618,322 2,654
Banco Itau 4,882,000 2,374
Brahma 5,531,989 2,597
Cia Cimento Portland Itau 4,882,700 655
Cia Energetica
Minas Gerais 104,208,392 2,027
Cia Energetica Minas
Gerais ADR (144a) (USD) 20,228 389
Cia Energetica Minas
Gerais ADR, Cv. (USD) 28,559 550
Cia Energetica Minas
Gerais ADR, Sponsored
Nonvoting (USD) 126,727 2,439
Encorpar 3,724,770 5
Pao de Acucar GDR (USD) 6,600 106
Petrol Brasileiros 56,381,021 7,089
Telebras ADR (USD) 415,442 31,548
Telecomunicacoes de
Sao Paulo 33,358,233 5,593
Telecomunicacoes de
Sao Paulo Celular (Class B)* 31,817,420 1,574
59,600
Total Brazil (Cost $82,540) 63,591
CANADA 0.2%
Common Stocks 0.2%
Alcan Aluminum 172,380 $ 4,329
Royal Bank of Canada 61,480 2,833
Total Canada (Cost $5,919) 7,162
CHILE 0.1%
Common Stocks 0.1%
Chilectra ADR (144a) (USD) 82,522 1,599
Compania Cervecerias Unidas
ADR (USD) 43,830 789
Santa Isabel ADR (USD) 16,681 97
Total Chile (Cost $2,963) 2,485
CHINA 0.2%
Common Stocks 0.2%
Huaneng Power International
ADR (USD) * 413,700 5,688
Total China (Cost $8,310) 5,688
CZECH REPUBLIC 0.0%
Common Stocks 0.0%
SPT Telecom 87,810 1,329
Total Czech Republic (Cost $834) 1,329
DENMARK 0.4%
Common Stocks 0.4%
Den Danske Bank 49,280 6,690
Tele Danmark 13,050 1,421
Unidanmark (Class A) 40,121 3,058
Total Denmark (Cost $5,759) 11,169
FINLAND 0.6%
Common Stocks 0.6%
Nokia (Class A) 206,140 18,781
Total Finland (Cost $3,971) 18,781
FRANCE 10.6%
Common Stocks 10.6%
AXA 202,951 22,940
Alcatel Alsthom 115,601 12,879
Canal Plus 12,340 2,994
Carrefour 21,335 14,162
Cie de St. Gobain 93,096 $ 13,774
Credit Commercial de France 130,863 9,191
Danone 47,870 12,657
Dexia France 16,696 2,461
Dexia France, Bearer 19,298 2,845
Dexia France, Registered 1999+ 20,520 3,025
Elf Aquitaine 99,530 11,519
GTM Entrepose 25,080 2,718
L'Oreal 12,405 7,089
Lafarge 53,841 5,504
Lapeyre 58,000 5,115
Legrand 25,609 6,527
Pathe 16,728 3,195
Pinault Printemps Redoute 184,075 30,812
Primagaz 6,680 601
Sanofi 152,790 23,925
Schneider 258,216 15,328
Societe Generale 70,212 9,288
Sodexho Alliance 128,275 24,912
Television Francaise 71,916 11,883
Total (Class B) 283,711 32,733
Vivendi 218,972 50,014
Total France (Cost $229,313) 338,091
GERMANY 7.6%
Common Stocks and Warrants 7.0%
Allianz 55,440 19,010
Bayer 295,414 12,002
Bayerische Vereinsbank 367,905 29,206
Buderus 5,392 2,243
Deutsche Bank 277,784 17,272
Deutsche Telekom 468,655 12,765
Dresdner Bank 383,327 14,926
Dresdner Bank
Warrants, 4/30/02 * 193,719 2,736
Gehe 412,714 31,019
Hoechst 94,660 3,954
Hornbach Baumarkt 14,770 642
Mannesmann 249,080 24,510
Rhoen Klinikum 52,994 5,279
SAP 45,760 19,199
Siemens 107,641 6,472
Veba 347,056 19,380
Volkswagen 64,550 4,851
225,466
Preferred Stocks 0.6%
Fielmann 27,225 $ 1,224
Fresenius 16,900 2,898
Hornbach Holdings 42,180 3,178
SAP 24,082 11,732
19,032
Total Germany (Cost $193,229) 244,498
HONG KONG 1.4%
Common Stocks 1.4%
CLP Holdings 1,050,000 5,952
Cheung Kong Holdings 328,000 2,244
Hang Seng Bank 374,000 3,235
Henderson Land Development 1,292,000 6,372
Hong Kong
Telecommunications 2,653,200 5,310
Hutchison Whampoa 2,927,000 20,975
Sun Hung Kai Properties 318,000 2,207
Total Hong Kong (Cost $42,124) 46,295
INDIA 0.2%
Common Stocks 0.2%
Mahanagar Telephone
GDR (USD) 309,000 3,391
State Bank of India
GDR (USD) 302,700 2,445
Total India (Cost $7,978) 5,836
IRELAND 0.0%
Common Stocks 0.0%
CBT Group ADR (USD) * 120,659 1,440
Total Ireland (Cost $6,172) 1,440
ITALY 5.4%
Common Stocks 5.4%
Assicurazioni Generali 386,560 13,840
Banca Commerciale Italiana 670,000 4,140
Banca di Roma 6,485,000 11,312
Credito Italiano 3,696,429 19,840
ENI 3,327,232 19,786
Gucci Group (USD) 97,641 3,723
IMI 1,057,757 16,258
Industrie Natuzzi
ADR (USD) 132,084 2,402
Istituto Nazionale delle
Assicurazioni 2,524,000 $ 6,951
Italgas 730,325 3,343
Mediolanum 330,119 8,215
Rinascente 316,500 3,050
Telecom Italia 5,148,930 37,214
Telecom Italia Mobile 4,079,866 23,677
Total Italy (Cost $120,716) 173,751
JAPAN 15.9%
Common Stocks 15.9%
Advantest 57,000 3,594
Alps Electric 314,000 4,320
Amada 776,000 4,639
Canon 1,255,000 23,737
Citizen Watch 448,000 2,475
DDI 1,574 4,590
Daifuku 126,000 532
Daiichi Pharmaceutical 640,000 10,678
DaiNippon Screen
Manufacturing 692,000 1,514
Daiwa House 794,000 8,956
Denso 1,417,000 26,680
East Japan Railway 2,227 13,200
Fanuc 171,300 5,143
Fujitsu 311,000 3,308
Hitachi 1,563,000 7,950
Honda Motor 99,000 2,972
Inax 331,000 1,638
Ito-Yokado 319,000 18,607
Kao 676,000 13,685
Kokuyo 387,000 5,145
Komatsu 823,000 4,448
Komori 335,000 6,149
Kuraray 916,000 9,767
Kyocera 335,000 14,799
Makita 584,000 6,172
Marui 960,000 16,716
Matsushita Electric
Industrial 1,421,000 20,855
Mitsubishi 950,000 5,028
Mitsubishi Heavy Industries 4,176,000 16,119
Mitsui Fudosan 2,063,000 13,697
Murata Manufacturing 420,000 14,159
NEC 2,255,000 16,693
NTT Mobile Communication
Network 159 $ 5,742
Nippon Telegraph &
Telephone 1,130 8,840
Nomura Securities 1,417,000 10,696
Pioneer Electronic 273,000 4,496
Sangetsu 111,000 1,371
Sankyo 969,000 21,860
Sekisui Chemical 1,236,000 6,732
Sekisui House 778,000 7,748
Seven-Eleven Japan 111,000 8,436
Shin-Etsu Chemical 787,000 15,662
Shiseido 520,000 5,692
Sony 349,800 22,204
Sumitomo 1,585,000 7,586
Sumitomo Electric
Industries 2,060,000 22,795
Sumitomo Forestry 435,000 2,959
TDK 313,000 20,620
Tokio Marine &
Fire Insurance 419,000 4,762
Tokyo Electronics 181,000 5,884
Tokyo Steel Manufacturing 383,200 1,742
Toppan Printing 775,000 7,944
Uny 409,000 6,666
Yurtec 126,000 654
Total Japan (Cost $649,453) 509,056
MEXICO 1.5%
Common Stocks 1.5%
Cemex, Participating Certificates
(Represents 1 Class C share) 18,385 44
Cemex (Class B) 612,840 1,704
Cemex ADR (Represents 2
Participating Certificates)
(USD) 482,160 2,230
Cemex ADS (Represents 2
Participating Certificates)
(144a) (USD) 410,812 1,900
Cifra (Class V) ADR (USD) * 44,164 599
Femsa UBD (Represents 1 Class B
2 Series D (Class B) and
2 Series D (Class L) (shares) * 1,347,720 3,473
Gruma (Class B) 631,428 1,499
Gruma (Class B) ADS
(144a) (USD) * 153,296 1,533
Grupo Financiero Bancomer
(Class L) 8,266 1
Grupo Industrial Maseca
(Class B) 1,664,467 $ 1,350
Grupo Modelo (Class C) 1,783,456 3,758
Grupo Televisa GDR (USD) * 153,422 4,162
Kimberly-Clark de Mexico
(Class A) 1,182,310 3,427
Panamerican Beverages
(Class A) (USD) 226,428 4,585
Telefonos de Mexico (Class L)
ADR (USD) 332,614 17,566
TV Azteca ADR (USD) 194,300 1,700
Total Mexico (Cost $62,301) 49,531
NETHERLANDS 11.4%
Common Stocks 11.4%
ABN Amro 724,388 13,569
ASM Lithography 389,200 9,874
Ahold 679,887 22,597
Akzo Nobel 84,392 3,279
CSM 278,499 13,713
Elsevier 1,748,822 24,616
Fortis Amev 343,827 22,321
ING Groep 938,235 45,394
Koninklijke KPN 96,125 3,735
Numico 286,740 11,280
Philips Electronics 184,670 9,824
Polygram 329,789 19,433
Royal Dutch Petroleum 1,016,398 49,067
STMicroelectronics (FRF) * 101,150 6,190
TNT Post Groep 96,125 2,572
Unilever 446,314 33,107
Wolters Kluwer 377,111 73,063
Total Netherlands (Cost $279,633) 363,634
NEW ZEALAND 0.2%
Common Stocks 0.2%
Telecom Corporation of
New Zealand 976,372 4,007
Telecom Corporation of
New Zealand, Installment
Receipts, 3/31/99 505,000 984
Total New Zealand (Cost $5,670) 4,991
NORWAY 1.5%
Common Stocks 1.5%
Bergesen (Class A) 46,430 $ 643
Norsk Hydro 514,282 22,350
Orkla (Class A) 1,339,400 22,646
Saga Petroleum 85,950 1,091
Total Norway (Cost $43,315) 46,730
PANAMA 0.0%
Common Stocks 0.0%
Banco Latinoamericano de
Exportaciones (Class E) (USD) 24,726 536
Total Panama (Cost $1,217) 536
PERU 0.0%
Common Stocks 0.0%
Credicorp (USD) 35,987 243
Telefonica del Peru (Class B) 316,910 413
Total Peru (Cost $1,257) 656
PORTUGAL 0.5%
Common Stocks 0.5%
Jeronimo Martins 353,261 15,302
Total Portugal (Cost $4,666) 15,302
RUSSIA 0.1%
Common Stocks 0.1%
Lukoil ADR (USD) 22,490 366
Rao Gazprom ADS (USD) * 142,100 1,325
Total Russia (Cost $4,078) 1,691
SINGAPORE 0.2%
Common Stocks 0.2%
Singapore Press 366,039 3,171
Singapore Telecommunications 1,663,000 2,872
Total Singapore (Cost $8,839) 6,043
SOUTH KOREA 0.1%
Common Stocks 0.1%
Samsung Electronics 63,926 2,616
Total South Korea (Cost $6,444) 2,616
SPAIN 3.0%
Common Stocks 3.0%
Argentaria Banca de Espana 336,840 $ 7,329
Banco Bilbao Vizcaya 400,950 5,408
Banco Santander 836,422 15,320
Banco Santander, New * 16,728 304
Empresa Nacional de
Electricidad 524,068 13,208
Gas Natural 103,616 8,923
Iberdrola 596,256 9,630
Repsol 135,510 6,802
Telefonica de Espana 645,899 29,163
Total Spain (Cost $55,172) 96,087
SWEDEN 3.4%
Common Stocks 3.4%
ABB (Class A) 617,890 6,530
Astra (Class B) 1,586,605 24,899
Atlas Copco (Class B) 368,282 8,563
Electrolux (Class B) 978,635 14,731
Esselte (Class B) 91,130 1,331
Granges 81,378 1,063
Hennes and Mauritz (Class B) 392,615 27,663
Nordbanken Holding 2,835,248 16,998
Sandvik (Class A) 70,120 1,442
Sandvik (Class B) 308,980 6,353
Scribona (Class B) 31,260 108
Sifo Group (Class B) * 49,060 189
Total Sweden (Cost $77,181) 109,870
SWITZERLAND 7.2%
Common Stocks 7.2%
ABB 10,930 13,081
Adecco 45,643 18,186
Credit Suisse Group 90,725 13,940
Nestle 31,483 66,901
Novartis 25,713 46,292
Roche Holdings, Participating
Certificates 3,074 35,837
Swisscom * 15,059 5,100
UBS * 117,617 32,240
Total Switzerland (Cost $166,320) 231,577
UNITED KINGDOM 19.4%
Common Stocks 19.4%
Abbey National 996,440 $ 19,312
Asda Group 3,790,530 10,082
BG 1,087,352 7,134
British Petroleum 1,008,802 14,976
Cable & Wireless 2,329,200 26,217
Cadbury Schweppes 1,617,578 24,772
Caradon 2,708,215 5,666
Centrica * 901,200 1,750
Compass Group 1,542,000 15,650
David S. Smith 1,456,500 3,047
Diageo 4,632,808 50,400
Electrocomponents 847,000 5,585
Fairview Holdings * 168,825 229
GKN 378,000 4,553
Glaxo Wellcome 1,816,650 56,311
Heywood Williams Group 249,576 794
Hillsdown Holdings 337,650 478
John Laing (Class A) 594,300 2,984
Kingfisher 4,963,954 43,850
Ladbroke Group 1,611,000 5,851
National Westminster Bank 4,825,173 81,082
Rank Group 843,000 3,527
Reed International 4,114,140 34,808
Rio Tinto 1,216,960 14,767
Rolls Royce 811,851 2,996
Safeway 2,136,200 10,726
Shell Transport & Trading 6,696,000 40,414
SmithKline Beecham 5,862,230 72,974
Tesco 5,699,709 15,645
Tomkins 4,907,080 22,709
Unilever 342,000 3,434
United News & Media 1,758,620 19,456
Total United Kingdom (Cost $449,057) 622,179
SHORT-TERM INVESTMENTS 3.0%
Money Market Funds 3.0%
Reserve Investment Fund,
5.41% # 97,372,688 $ 97,373
Total Short-term
Investments (Cost $97,373) 97,373
Total Investments in Securities
101.5% of Net Assets (Cost $2,754,913) $3,251,994
Other Assets Less Liabilities (48,310)
NET ASSETS $3,203,684
----------
Net Assets Consist of:
Accumulated net investment income -
net of distributions $ 52,433
Accumulated net realized gain/loss -
net of distributions 2,614
Net unrealized gain (loss) 497,421
Paid-in-capital applicable to 188,138,905
shares of $0.01 par value capital stock out-
standing; 1,000,000,000 shares authorized 2,651,216
NET ASSETS $3,203,684
----------
NET ASSET VALUE PER SHARE $ 17.03
----------
* Non-income producing
# Seven-day yield
+ Securities contain some restrictions as to public resale-total of
such securities at year-end amounts to 0.1% of net assets.
144a Security was purchased pursuant to Rule 144a under the Securities
Act of 1933 and may not be resold subject to that rule except to qualified
institutional buyers-total of such securities at year-end amounts to 0.2%
of net assets.
ADR American depository receipt
ADS American depository share
FRF French franc
GDR Global depository receipt
GDS Global depository share
USD U.S. dollar
The accompanying notes are an integral part of these financial statements.
Statement of Operations
Foreign Equity Fund
In thousands
Year
Ended
10/31/98
Investment Income
Income
Dividend (net of foreign taxes of $9,677) $ 71,791
Interest 6,648
Total income 78,439
Expenses
Investment management 23,624
Custody and accounting 1,131
Registration 123
Shareholder servicing 34
Legal and audit 25
Directors 10
Prospectus and shareholder reports 7
Miscellaneous 21
Total expenses 24,975
Net investment income 53,464
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 16,360
Foreign currency transactions (2,435)
Net realized gain (loss) 13,925
Change in net unrealized gain or loss
Securities 169,262
Other assets and liabilities
denominated in foreign currencies 277
Change in net unrealized gain or loss 169,539
Net realized and unrealized gain (loss) 183,464
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 236,928
---------
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Net Assets
Foreign Equity Fund
In thousands
Year
Ended
10/31/98 10/31/97
Increase (Decrease) in Net Assets
Operations
Net investment income $53,464 $40,579
Net realized gain (loss) 13,925 87,538
Change in net unrealized
gain or loss 169,539 53,367
Increase (decrease) in
net assets from operations 236,928 181,484
Distributions to shareholders
Net investment income (40,559) (33,766)
Net realized gain (92,704) (26,079)
Decrease in net assets
from distributions (133,263) (59,845)
Capital share transactions*
Shares sold 688,390 1,016,742
Distributions reinvested 102,189 43,555
Shares redeemed (850,415) (344,550)
Increase (decrease) in
net assets from capital
share transactions (59,836) 715,747
Net Assets
Increase (decrease)
during period 43,829 837,386
Beginning of period 3,159,855 2,322,469
End of period $3,203,684 $3,159,855
------------------------
*Share information
Shares sold 40,154 60,358
Distributions reinvested 6,463 2,750
Shares redeemed (49,853) (20,421)
Increase (decrease)
in shares outstanding (3,236) 42,687
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements
Foreign Equity Fund
October 31, 1998
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Institutional International Funds, Inc. (the corporation) is registered under
the Investment Company Act of 1940. The Foreign Equity Fund (the fund), a
diversified, open-end management investment company, is the sole portfolio
currently established by the corporation and commenced operations on September
7, 1989.
The accompanying financial statements are prepared in accordance with generally
accepted accounting principles for the investment company industry; these
principles may require the use of estimates by fund management.
Valuation Equity securities are valued at the last quoted sales price at the
time the valuations are made. A security which is listed or traded on more than
one exchange is valued at the quotation on the exchange determined to be the
primary market for such security. Investments in mutual funds are valued at the
closing net asset value per share of the mutual fund on the day of valuation.
For purposes of determining the fund's net asset value per share, the U.S.
dollar value of all assets and liabilities initially expressed in foreign
currencies is determined by using the mean of the bid and offer prices of such
currencies against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
fund, as authorized by the Board of Directors.
Currency Translation Assets and liabilities are translated into U.S. dollars at
the prevailing exchange rate at the end of the reporting period. Purchases and
sales of securities and income and expenses are translated into U.S. dollars at
the prevailing exchange rate on the dates of such transactions. The effect of
changes in foreign exchange rates on realized and unrealized security gains and
losses is reflected as a component of such gains and losses.
Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses are
reported on the identified cost basis. Dividend income and distributions to
shareholders are recorded by the fund on the ex-dividend date. Income and
capital gain distributions are determined in accordance with federal income tax
regulations and may differ from those determined in accordance with generally
accepted accounting principles.
NOTE 2 - INVESTMENT TRANSACTIONS
Purchases and sales of portfolio securities, other than short-term securities,
aggregated $599,315,000 and $648,149,000, respectively, for the year ended
October 31, 1998.
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of its
taxable income. At October 31, 1998, the cost of investments for federal income
tax purposes was substantially the same as for financial reporting and totaled
$2,754,913,000. Net unrealized gain aggregated $497,081,000 at period end, of
which $766,172,000 related to appreciated investments and $269,091,000 to
depreciated investments.
NOTE 4 - RELATED PARTY TRANSACTIONS
The fund is managed by Rowe Price-Fleming International, Inc. (the manager),
which is owned by T. Rowe Price Associates, Inc. (Price Associates), Robert
Fleming Holdings Limited, and Jardine Fleming Holdings Limited under a joint
venture agreement. The investment management agreement between the fund and the
manager provides for an annual investment management fee, of which $1,829,000
was payable at October 31, 1998. The fee is computed daily and paid monthly, and
is equal to 0.70% of average daily net assets.
In addition, the fund has entered into agreements with Price Associates and two
wholly owned subsidiaries of Price Associates, pursuant to which the fund
receives certain other services. Price Associates computes the daily share price
and maintains the financial records of the fund. T. Rowe Price Services, Inc.
(TRPS) is the fund's transfer and dividend disbursing agent and provides
shareholder and administrative services to the fund.
T. Rowe Price Retirement Plan Services, Inc., provides subaccounting and
recordkeeping services for certain retirement accounts invested in the fund. The
fund incurred expenses pursuant to these related party agreements totaling
approximately $136,000 for the year ended October 31, 1998, of which $12,000 was
payable at period-end.
The fund may invest in the Reserve Investment Fund and Government Reserve
Investment Fund (collectively, the Reserve Funds), open-end management
investment companies managed by T. Rowe Price Associates, Inc. The Reserve and
Government Reserve Funds are offered as cash management options only to mutual
funds and other accounts managed by T. Rowe Price and its affiliates and are not
available to the public. The Reserve Funds pay no investment management fees.
Distributions from the Reserve Funds to the fund for the year ended October 31,
1998, totaled $6,547,000 and are reflected as interest income in the
accompanying Statement of Operations.
During the year ended October 31, 1998, the fund, in the ordinary course of
business, placed security purchase and sale orders aggregating $99,098,000 with
certain affiliates of the manager and paid commissions of $208,000 related
thereto.
Report of Independent Accountants
To The Board of Directors of Institutional International Funds, Inc.
and Shareholders of Foreign Equity Fund
In our opinion, the accompanying statement of net assets and the
related statements of operations and of changes in net assets and the
financial highlights present fairly, in all material respects, the
financial position of Foreign Equity Fund (the portfolio constituting
Institutional International Funds, Inc., hereafter referred to as the
"Fund") at October 31, 1998, and the results of its operations, the changes
in its net assets and the financial highlights for each of the fiscal
periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe
that our audits, which included confirmation of securities at October 31,
1998 by correspondence with the custodian provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
November 18, 1998
Tax Information (Unaudited) for the Tax Year Ended 10/31/98
- --------------------------------------------------------------------------------
We are providing this information as required by the Internal Revenue Code. The
amounts shown may differ from those elsewhere in this report because of
differences between tax and financial reporting requirements.
The fund's distributions to shareholders included:
- -- $1,931,000 from short-term capital gains,
- -- $90,773,000 from long-term capital gains; of which $66,437,000 was
subject to the 20% rate gains category and $24,336,000 to the 28% rate
gains category.
The fund will pass through foreign source income of $62,347,000 and foreign
taxes paid of $9,677,000.
