Annual Report
October 31, 2000
Foreign Equity Fund
T. Rowe Price, Invest With Confidence (registered trademark)
Annual Report
October 31, 2000
Foreign Equity Fund
Dear Investor
International stocks declined during the six months ended October 31, 2000.
During the first half of your fund's fiscal year, Internet-related telecom,
media, and technology stocks rose sharply. Leadership changed in the second half
as a severe correction hit these sectors, while the more defensive consumer
staple, pharmaceutical, and banking stocks, which had stumbled in the first
half, found their footing. The recovery in defensive issues, however, failed to
compensate for the steep decline in tech stocks.
Performance Comparison
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Periods Ended 10/31/00 6 Months 12 Months
Foreign Equity Fund -10.22% 2.45%
MSCI EAFE Index -8.89 -2.66
Lipper International
Funds Average -10.00 2.70
Fund performance during the past six months trailed the MSCI EAFE Index and
was roughly in line with the Lipper average for similar funds. The fund's
focus on telecom, media, and technology stocks, and its lower exposure to
recovering defensive shares, hurt relative results. However, for the
12-month period, the media and technology sectors boosted results versus
the index although the return lagged the Lipper average. The portfolio's
telecom, banking, and technology hardware holdings, as well as an
underweighted position in Japan and an overweighted exposure to Latin
America, also lifted performance over the fund's fiscal year.
Investors had driven telecom, media, and technology stocks higher in 1999
and early 2000 on the expectation that their potential for powerful growth
could be sustained. However, signs of moderating demand, profit warnings,
and abundant new issuance finally weighed on these sectors and pushed share
prices down to more realistic levels. Investors began to focus on
established companies whose shares had been beaten down, including food
producers, pharmaceuticals, and banks.
Broader concerns weighing on the equities markets included slower economic
growth, high oil prices, and euro weakness. Economic growth eased in
Europe, while in Japan the consumer sector remained weak and rising
bankruptcies failed to alleviate concerns about unemployment. Economic
growth in the rest of Asia was strong, although recurring worries about
financial stability plagued some emerging markets.
PORTFOLIO REVIEW
At the end of October, Europe represented 64% of net assets, up from 59% in
April. Within Europe, the U.K. remained the largest country exposure at 22%
of net assets. We had 18% invested in Japan, down slightly from 20% in
April. In the Far East, the weighting fell from 8% to 5%, while in Latin
America 4% of the portfolio was split between Mexico and Brazil. The fund
is underweighted in Europe and Japan relative to the MSCI EAFE Index, and
overweighted in the Far East and Latin America. The changes in regional
allocations resulted from differences in local performance, as well as from
sales of stocks that had risen sharply and which we felt were unlikely to
make further gains. Purchases included banks with strong market positions
and restructuring potential, and stocks in commercial services. We also
added to selected technology and media stocks with valuable assets that we
thought were oversold. We reduced positions in technology and some media
and service holdings that had soared.
Geographic Diversification
--------------------------------------------------------------------------------
Europe Japan Other and Reserves Far East Latin America
64 18 9 5 4
Based on net assets as of 10/31/00.
Europe
Sharp declines in major telecom, media, and technology stocks and the
weakness of the euro impeded stock market performance in Europe. The
telecoms hurt markets in Germany and France, while large telecom handset
and equipment stocks Nokia and LM Ericsson had a serious impact on Finnish
and Swedish markets. On the other hand, Switzerland held up better because
telecom stocks are an insignificant part of the Swiss market.
Market Performance
---------------------------------------------------------------------------
Six Months Local Local Currency U.S.
Ended 10/31/00 Currency vs. U.S. Dollar Dollars
---------------------------------------------------------------------------
Australia 6.06% -11.20% -5.82%
France 0.66 -6.99 -6.37
Germany -5.58 -6.98 -12.18
Hong Kong -11.74 -0.13 -11.85
Italy 9.53 -6.98 1.88
Japan -13.51 -1.02 -14.39
Mexico -0.67 -1.87 -2.53
Netherlands 6.37 -6.98 -1.06
Singapore -10.17 -2.73 -12.63
Sweden -18.52 -10.65 -27.19
Switzerland 7.27 -4.32 2.65
United Kingdom 4.74 -7.20 -2.81
Source: RIMES Online, using MSCI indices.
* Telecoms European governments began to auction off the spectrum that
telecom operators need to provide third-generation,
Internet-compatible mobile telephone services. In the U.K., companies
paid unexpectedly high prices, and more licenses than expected were
sold in Germany at generally steep prices. Telecom stocks such as
British Telecom and Deutsche Telekom fell as investors worried about
the high costs for services that will not be rolled out until 2002,
with more players than expected in the important German market. In
addition, there were fears that until the new services are launched,
mobile telecom growth may slow because European penetration is already
around 50%. At the end of the period, the withdrawal of one bidder
from Italy's auction resulted in lower-than-expected prices. Relief
over this development, the conclusion of the largest license auctions,
and the low level of telecom stock prices stimulated a modest
recovery. Diversified telecoms performed significantly worse than
mobile telecoms because earnings from traditional fixed-line services
have fallen. Mobile telecoms, including Vodafone Group and Telecom
Italia Mobile, performed far better.
* Technology The challenges to telecom company growth and profitability
have direct implications for technology hardware companies that have
benefited from strong demand. Mobile handset suppliers, component
manufacturers, and equipment and infrastructure producers declined
after extended periods of extraordinary gains. Despite increasing its
market share, world leading handset manufacturer Nokia, our
second-largest holding, fell as investors worried about future growth
prospects. Results of the handset businesses at LM Ericsson and
Philips Electronics were disappointing, and news from other players in
the market also indicated that demand for handsets was healthy but
softening. A weaker outlook for handsets and reports of poor PC sales
in Europe hurt businesses that produce components, such as
semiconductors. European semiconductor equipment manufacturer ASM
Lithography, specialized semiconductor producer STMicroelectronics,
and Philips (which has a major semiconductor business) all fell.
Despite excellent results and full order books, disappointments from
technology companies such as Intel in the U.S. adversely affected
their performance. Optical network equipment producers such as Alcatel
performed better, but as the broader sector fell they also slipped
lower. Although Europe's technology hardware industry slumped over the
recent six months, over the 12-month period it achieved a stunning
return approached only by that of the media sector. Earnings growth of
technology companies remained far superior to those of companies in
other sectors.
* Media The media industry performed poorly during the past six months,
but 12-month returns were superior. Hopes faded that media companies
could accelerate earnings by providing advertising space and program
content to Internet portals and interactive TV. Signs that European
economic growth was slowing, contributing to weaker advertising
spending, raised concerns. French broadcaster Societe Television
Francaise 1 declined after a sharp rise. Dutch directory giant VNU,
which owns Nielsen Research in the U.S., also gave back some earlier
gains. WPP Group was weak until the end of the period largely due to
initial concerns about its acquisition of U.S. advertising agency Y&R.
U.K. publisher Reed International, which had performed poorly six
months ago due to its lack of Internet services, rose strongly in the
recent period. New management, progress migrating publications to the
Web, and the proposed acquisition of U.S. company Harcourt all
supported Reed's rise. Longer term, the liberalization of advertising
in Europe and increasing demand for market research and entertainment
media bode well for the sector.
* Financials Financial companies continued to restructure and make
acquisitions. Strong results lifted Royal Bank of Scotland Group, a
major holding, which is reaping the benefits of restructuring and
cost-cutting after last year's acquisition of U.K. bank NatWest. In
Italy, banks Banca Intesa and UniCredito Italiano, as well as insurer
Alleanza Assicurazioni, performed well. Banca Intesa has a new, highly
regarded CEO and has gained full control of a large subsidiary,
enabling the company to fully integrate its businesses, cut costs, and
reap synergies. Other European banks also made acquisitions to
strengthen their market positions and leverage their expertise.
Finnish/Swedish group Nordic Baltic Holding-another strong
performer-acquired Christiania Bank of Norway. Dutch banking and
insurance group ING Groep acquired U.S. insurer Reliastar and Aetna's
financial services businesses, giving it an inside track in U.S. life
and annuity premiums. Fortis began to integrate its Dutch and Belgian
businesses and announced the acquisition of a Dutch insurer. Both ING
and Fortis performed strongly. Swiss bank UBS acquired U.S. financial
services group PaineWebber for $12 billion, while Spanish banks Banco
Santander Central Hispano and Banco Bilbao Vizcaya Argentaria acquired
Mexican banks to extend their presence in the rapidly growing Latin
American market.
* Food and Beverage Unilever, Nestle, and Diageo rose as investors
sought their more predictable defensive characteristics. U.K./Dutch
Unilever acquired U.S. Bestfoods for $20 billion to create the world's
second-largest food manufacturer. Increased demand from emerging
markets together with cost-cutting and sales of noncore, lower-return
businesses helped Nestle's earnings. U.K.'s Diageo announced plans to
merge its food business, Pillsbury, with General Mills in the U.S. to
form the largest listed U.S. food business and the world's
fourth-largest food company. Diageo will focus on its higher-margin
drinks and spirits businesses.
Can the Euro Also Rise?
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Understanding why the euro has been weak helps explain why it should
recover. Several factors have pushed the euro-the common currency for 11
countries in Continental Europe-down 27% since its launch on January 1,
1999. Chris Rothery, a portfolio manager at T. Rowe Price International
(TRPI), thinks each of these factors could moderate or reverse in the next
year.
Capital flows into the U.S. have risen sharply in recent years as European
companies acquired an unprecedented number of U.S. businesses and as
Europeans invested in U.S. financial assets. Both trends are moderating,
however. This year's weakness in the U.S. stock market has made investment
here less attractive. "The Nasdaq bubble appears to have been pricked,
which should also take some steam out of the dollar," says Rothery.
The persistent strength of the U.S. economy has also hurt the euro, as it
makes the U.S. a more attractive place to invest. But U.S. growth has
showed signs of slowing recently, narrowing the advantage over European
growth.
Higher-yielding U.S. government bonds also lured investors. Recently,
however, long-term U.S. rates have declined while those in the euro zone
have remained stable.
Since the euro's launch, oil prices have more than tripled, and Europe's
demand for the dollars needed to pay for oil has surged. But oil prices are
stabilizing and expected to trend lower.
While the Federal Reserve is respected and well established, the European
Central Bank (ECB) has less than two years' experience. ECB officials have
aggravated investors' uncertainty by making confusing remarks. Lately, ECB
officials have become more politically astute and are expected to make more
careful statements.
Though TRPI portfolio managers have been surprised by the extent of the
euro's decline, they point out that markets often overshoot. It would be a
mistake for U.S. investors to shun euro assets, says Rothery.
John Ford, TRPI's chief investment officer, sees Europe at an earlier stage
of the economic cycle than the U.S., with greater room for productivity
improvement. "If we can get into a virtuous cycle, then investors can
benefit from better economic performance, higher returns on capital, and a
strong chance of currency appreciation to boot," Ford says.
The Euro vs. the U.S. Dollar
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Px Last
12/98
1.1667
1.1697
1.1837
1.1761
1.1628
1.1712
1.1585
1.1494
1.1560
1.1669
1.1690
1.1555
1.1613
1.1595
1.1565
1.1602
1.1588
1.1535
1.1560
1.1444
1.1420
1.1362
1.1309
1.1351
1.1314
1.1340
1.1266
1.1323
1.1315
1.1326
1.1223
1.1308
1.1223
1.1209
1.1248
1.1195
1.1069
1.1021
1.1007
1.1007
1.1034
1.1028
1.0892
1.0941
1.0875
1.0799
1.0823
1.0888
1.0881
1.0943
1.1042
1.0905
1.0932
1.0996
1.1002
1.0972
1.0896
1.0907
1.0892
1.0870
1.0839
1.0800
1.0732
1.0732
3/99 1.0762
1.0795
1.0786
1.0712
1.0830
1.0775
1.0742
1.0797
1.0804
1.0782
1.0802
1.0713
1.0705
1.0660
1.0625
1.0584
1.0646
1.0599
1.0590
1.0662
1.0620
1.0608
1.0570
1.0567
1.0630
1.0762
1.0792
1.0757
1.0782
1.0712
1.0646
1.0656
1.0659
1.0671
1.0674
1.0662
1.0623
1.0584
1.0607
1.0624
1.0443
1.0423
1.0429
1.0420
1.0448
1.0359
1.0324
1.0377
1.0328
1.0466
1.0466
1.0482
1.0519
1.0423
1.0426
1.0308
1.0343
1.0397
1.0347
1.0325
1.0337
1.0412
1.0430
1.0331
1.0319
6/99 1.0351
1.0230
1.0249
1.0223
1.0236
1.0222
1.0222
1.0196
1.0145
1.0170
1.0136
1.0190
1.0201
1.0313
1.0400
1.0500
1.0508
1.0504
1.0647
1.0632
1.0662
1.0725
1.0711
1.0691
1.0680
1.0776
1.0758
1.0742
1.0717
1.0710
1.0658
1.0674
1.0567
1.0581
1.0507
1.0520
1.0644
1.0672
1.0490
1.0544
1.0424
1.0453
1.0464
1.0482
1.0566
1.0582
1.0689
1.0612
1.0575
1.0587
1.0598
1.0538
1.0374
1.0424
1.0358
1.0409
1.0383
1.0423
1.0355
1.0491
1.0439
1.0503
1.0439
1.0462
1.0525
1.0645
9/99 1.0684
1.0725
1.0737
1.0737
1.0687
1.0717
1.0632
1.0638
1.0772
1.0806
1.0776
1.0894
1.0812
1.0825
1.0749
1.0802
1.0690
1.0675
1.0592
1.0518
1.0511
1.0549
1.0513
1.0527
1.0489
1.0375
1.0421
1.0383
1.0403
1.0447
1.0405
1.0318
1.0332
1.0302
1.0416
1.0296
1.0300
1.0321
1.0279
1.0185
1.0179
1.0171
1.0103
1.0093
1.0086
1.0013
1.0017
1.0228
1.0254
1.0278
1.0214
1.0134
1.0144
1.0057
1.0071
1.0170
1.0087
1.0133
1.0085
1.0093
1.0156
1.0110
1.0132
1.0070
1.0051
1.0086
12/99 1.0062
1.0243
1.0296
1.0321
1.0328
1.0295
1.0256
1.0336
1.0309
1.0258
1.0122
1.0122
1.0137
1.0133
1.0168
1.0098
1.0072
1.0009
1.0019
0.9882
0.9747
0.9707
0.9711
0.9765
0.9894
0.9832
0.9815
0.9855
0.9942
0.9854
0.9875
0.9783
0.9815
0.9863
0.9878
0.9839
0.9877
1.0038
1.0036
0.9920
0.9749
0.9709
0.9642
0.9727
0.9656
0.9586
0.9586
0.9584
0.9610
0.9669
0.9637
0.9642
0.9686
0.9669
0.9696
0.9721
0.9728
0.9615
0.9610
0.9715
0.9779
0.9672
0.9605
0.9514
0.9613
3/00 0.9553
0.9553
0.9596
0.9625
0.9584
0.9553
0.9627
0.9592
0.9590
0.9524
0.9622
0.9527
0.9453
0.9402
0.9374
0.9385
0.9380
0.9208
0.9235
0.9099
0.9119
0.9158
0.9100
0.8948
0.8895
0.8970
0.8977
0.9075
0.9068
0.9016
0.9197
0.9112
0.9003
0.8959
0.8946
0.8975
0.9031
0.9071
0.9044
0.9115
0.9309
0.9266
0.9301
0.9380
0.9312
0.9463
0.9479
0.9548
0.9622
0.9560
0.9536
0.9538
0.9596
0.9579
0.9547
0.9650
0.9567
0.9548
0.9442
0.9355
0.9359
0.9369
0.9459
0.9401
0.9520
6/00 0.9525
0.9502
0.9513
0.9525
0.9507
0.9484
0.9553
0.9527
0.9424
0.9372
0.9385
0.9366
0.9248
0.9246
0.9331
0.9369
0.9337
0.9385
0.9428
0.9317
0.9230
0.9266
0.9147
0.9136
0.9061
0.9083
0.9071
0.9022
0.9006
0.9083
0.9026
0.9056
0.9135
0.9161
0.9162
0.9064
0.9017
0.8964
0.9017
0.9021
0.9021
0.9002
0.8921
0.8940
0.8878
0.8997
0.8978
0.8903
0.8702
0.8713
0.8672
0.8577
0.8640
0.8594
0.8644
0.8543
0.8537
0.8509
0.8493
0.8599
0.8766
0.8745
0.8828
0.8834
0.8791
0.8827
0.8772
0.8757
0.8735
0.8692
0.8684
0.8686
0.8716
0.8683
0.8629
0.8560
0.8499
0.8544
0.8389
0.8435
0.8420
0.8354
0.8359
0.8272
0.8303
0.8405
0.8411
10/00 0.8489
Chart shows the euro-the common currency of 11 countries in Continental
Europe-has declined steadily in value versus the U.S. dollar since its January
1, 1999, launch.
* Pharmaceuticals Sanofi-Synthelabo, Aventis, AstraZeneca Group, and
biotech company Celltech Group were among your portfolio's leading
performers. Healthy sales growth and cost-cutting pushed Sanofi and
Aventis higher. AstraZeneca climbed as new drugs with encouraging
prospects were approved or launched. Celltech's results were above
expectations, raising confidence in its already-launched drugs, strong
U.S. corporate partners, and a pipeline with many late-stage drugs.
* Economic Review for Europe European indicators point to gently slowing
economic growth. Euro zone GDP grew 3.7% in the second quarter
year-over-year. Regional business surveys and industrial production
peaked around June, then eased but remained at healthy levels.
Unemployment across the region continued to fall. Oil price strength
and euro weakness lifted euro zone year-over-year inflation to 2.8% by
September (1.4% excluding oil). Given its 2.0% inflation target, the
European Central Bank raised interest rates half a percentage point in
two steps, to 4.75%.
The U.K. economy weakened, in part because the strength of sterling
relative to the depressed euro caused difficulty for exporters. U.K.
inflation remained below the Bank of England's target, and GDP rose in the
third quarter. The euro and sterling both fell 7% over the six months. The
decline of sterling was a welcome correction from a high level, but the
euro's decline caused concern as the currency was already depressed.
Factors contributing to euro weakness included the sharp increase of
corporate acquisitions in the U.S. and-until recently-surprisingly strong
U.S. economic growth and stock market strength. In mid-September, the
European Central Bank intervened in currency markets in concert with the
U.S. Federal Reserve and other G7 central banks.
Progress with structural reforms continued. The German parliament's final
approval of significant business tax cuts-expected to stimulate business
and improve shareholder returns-was a major achievement. Germany's action
spurred France and other euro zone countries to announce similar tax cuts
so they would remain attractive to businesses that might otherwise relocate
to countries with lower taxes. Germany later pressed ahead with proposals
for important pension reforms that would further reduce the cost burden on
businesses.
Industry Diversification
---------------------------------------------------------------------------
Percent of
Net Assets
10/31/00
---------------------------------------------------------------------------
Services 29.8%
Finance 21.3
Capital Equipment 18.6
Consumer Goods 14.5
Energy 6.7
Materials 1.8
Multi-industry 1.7
Reserves 5.6
Net Assets 100.0%
---------------------------------------------------------------------------
Japan
International concerns about technology component demand, sales by foreign
investors and banks, and bankruptcies of major businesses hurt Japan's
stock market. Weakness was broadly based, and only a few cyclical and
defensive sectors rose. Banks, pharmaceuticals, and consumer goods declined
moderately, but telecom and technology stocks fell more sharply. As a
result of the controversy surrounding Bridgestone's Firestone tires, the
stock and its sector suffered. Your fund had only a small position in
Bridgestone, which we sold shortly after the initial allegations were
revealed.
* Banks The bankruptcies of major companies depressed bank stocks to
multiyear lows. As fears diminished and investors continued to avoid
telecom and technology stocks, the banking sector recovered somewhat.
The banks resisted some requests for debt forgiveness and the
government refused to rescue a major retailer. Despite these signs of
progress, Japan needs to show a greater willingness to let insolvent
businesses collapse rather than prop them up with subsidies. Banks
continued their sales of cross-holdings in one another's shares and in
other Japanese companies. The announced merger of Daichi Kangyo, IBJ,
and Fuji Bank proceeded with the stock market listing of the newly
formed holding company for the merged group, Mizuho Holdings.
* Technology and Consumer Electronics Hardware component makers were
hurt by concerns about slackening demand for mobile telecom parts,
PCs, and semiconductors. Suppliers including Kyocera, Murata
Manufacturing, Toshiba, and NEC announced better-than-expected results
and raised their forecasts, but fears about future earnings caused
their stocks to fall over the six-month period. However, they
outperformed the overall market over 12 months. Canon, benefiting from
its success in gaining market share as its competitors struggled,
outperformed the general market during the recent six months and
turned in excellent results for the fiscal year. Consumer electronics
giant Matsushita Electric Industrial, known for its Panasonic brand,
performed strongly, but Sony fell sharply. Parts shortages forced Sony
to halve the size of its eagerly awaited PlayStation 2 launch in the
U.S., and the firm's quarterly results disappointed investors.
* Telecoms Following increased pressure from the U.S., the government
reduced the interconnection rates that the government-controlled
Nippon Telegraph & Telephone (NTT), one of our larger holdings,
charges other companies. Concerns that this will increase competition
and reduce NTT's revenues spurred the company to expand its
international interests and acquire U.S. Web host Verio. In October,
the government sold over $11 billion worth of its shares in NTT,
reducing its stake to 46%. This put pressure on NTT's share price,
although over the longer term reduced government control should open
the door for more rigorous management that could enhance shareholder
value. NTT's mobile subsidiary, NTT DoCoMo, outstripped forecasts as
the number of its Internet subscribers climbed to 12 million. NTT
DoCoMo also expanded abroad, buying stakes in Dutch and U.K. mobile
telecom operators, signing a strategic alliance with AOL, and
acquiring control of AOL's Japanese subsidiary. The prospect of
further share issuance hurt NTT DoCoMo's recent performance, although
the stock performed well relative to the general market over the year.
* Economic Review for Japan While Japan is no longer technically in a
recession, pockets of economic strength are limited to major
manufacturers. The confidence of large manufacturing firms has been
better than that of nonmanufacturing and smaller firms. Capital
expenditure was also heavily skewed toward the large manufacturers.
Second-quarter GDP was higher than anticipated, and industrial
production was solid in the third quarter. However, consumers remained
reluctant to spend as corporate restructuring and rising bankruptcies
kept unemployment above historic levels. Perceiving the economy to be
stable enough to withstand a slight interest rate increase, The Bank
of Japan ended its zero-interest-rate policy and raised rates to
0.25%. Yet, the continuing fragility of the economic recovery led the
government to announce an economic stimulus package amounting to $100
billion. The measure has been criticized since Japan's debt is already
130% of GDP and fiscal spending is only a short-term fix that
postpones painful, but essential, structural changes. Moody's
downgraded Japanese government debt, reflecting the rating agency's
concern about the country's increasing indebtedness.
Far East
Strong oil prices and slowing global growth hurt markets across the
Pacific. High levels of stock issuance planned for the coming quarters also
dampened regional performance. Local problems added to the pressure on
South Korea, Taiwan, and to a lesser extent India. Economic data and
company results were mostly equal to or above expectations. However, other
negative factors prevented telecom, media, and technology stocks from
maintaining earlier peaks. Over the six-month period, banks rose as
concerns about U.S. interest rate hikes subsided.
* Telecom and Media Telecom stocks China Mobile (Hong Kong) and China
Unicom, registered in Hong Kong but providing services across China,
both reported better-than-expected results, and their subscriber
numbers continued to climb sharply. The advent of mobile telecom
services, marketed in ways that are affordable to the Chinese
population, has opened vast markets. Hong Kong-based Internet company
Pacific Century CyberWorks acquired Hong Kong's largest telecom and
formed a joint venture with Australian telecom Telstra. Conglomerate
Hutchison Whampoa and its parent, Cheung Kong Holdings, reported
robust earnings. Hutchison's telecom interests include stakes in
Vodafone Group, Voicestream, and China Unicom, as well as shared
interests in several 3G licenses in Europe.
* Technology Technology stocks including Samsung Electronics and Taiwan
Semiconductor Manufact-uring (TSMC) struggled due to indications of
slower demand for mobile handset components, weak PC sales, and
falling semiconductorprices. Following earlier shortages,
manufacturers over-ordered components, but demand failed to meet
expectations and prices fell. Despite strong results from Samsung and
TSMC, negative sentiment about the outlook drove share prices lower.
* Economic Review for the Far East Economic growth and industrial
production in smaller countries moderated but remained strong. In Hong
Kong and China, a strong recovery took hold. The U.S. Senate's vote to
grant China normal trade status removed a major hurdle in China's path
to join the World Trade Organization. The government of Singapore took
steps to reduce its control of business and put pressure on local
companies to restructure and become globally competitive. In South
Korea, the government and banks appeared to take a firmer line with
debt-laden companies but failed to follow through. In Taiwan,
political infighting and the poor health of the banks created
uncertainty. The government stepped in with an economic stimulus
package and raised the possibility of allowing foreigners to invest in
or acquire Taiwanese banks.
Latin America
Mexican and Brazilian markets performed better than most international
markets, largely because of the lack of technology stocks. The clear
victory of opposition candidate Vicente Fox in Mexico's presidential
election also helped. Mexico's banks and Brazil's energy companies
performed strongly. The Mexican government promoted banking reforms, and
the acquisition of Mexican banks by foreign banks fostered confidence in
Mexico's banking system. Brazil's leading energy group, Petroleo Brasileiro
(Petrobras), capped off a buoyant six months by announcing a significant
oil discovery. Strong oil prices, a successful listing on the New York
Stock Exchange, and the Brazilian government's steps to remove limits on
energy prices contributed to Petrobras's rise over the six months.
Mexico's dominant telecom, Telefonos de Mexico (Telmex), split its business
into mobile and fixed-line divisions. The good news was balanced by a
government decision to cut fixed-line rates that Telmex can charge and to
increase competition in the industry. The Brazilian telecom sector
struggled because the government announced auctions for a significant
number of next-generation mobile spectrum licenses in the first quarter of
2001.
* Economic Review for Latin America Mexico's fiscal prudence, progress
with banking reforms, and strong exports fostered better growth, lower
inflation, and a firm currency. Close ties to the booming U.S. economy
and higher oil prices were other reasons for the country's prosperity.
There have been concerns that the vigorous economy would suffer if the
U.S. economy slowed and oil prices returned to previous levels, but
banking system improvements, fiscal reforms, and other fundamental
changes may enable Mexico to avoid a boom-bust scenario. In Brazil,
economic recovery remained on track. During the period, the central
bank cut interest rates from 18.5% to 16.5% and the government passed
additional reforms.
INVESTMENT OUTLOOK
In Europe, increasing management focus on returns and fiscal reforms should
aid earnings growth. The backdrop for stocks should also improve as
interest rates and oil prices peak, and the undervalued euro begins to
recover. In Japan, the economic environment is more challenging, but
valuations are moving toward the bottom of their recent ranges. Although it
is difficult to see a short-term catalyst for the Japanese stock market,
the downside appears limited. Elsewhere in Asia, further market
liberalization, structural reforms,and improved corporate governance are
essential if the region's superior long-term economic growth is to
translate into strong stock market performance. The recent period of
greater political stability and economic health bode well for Mexico and
Brazil.
Internationally, economies have been slowing, but we expect them to improve
by the second half of 2001. Technology sector earnings growth is likely to
ease from recent peaks but should remain significantly above that of other
sectors. Due to the short-term uncertainty about economic growth, oil
prices, technology trends, and the direction of the euro, markets could
continue to be weak or volatile. However, we expect these factors to
mitigate in coming months and remain cautiously optimistic about the
prospects for the fund in the year ahead.
Respectfully submitted,
John R. Ford
President, T. Rowe Price International Funds, Inc.
November 24, 2000
Portfolio Highlights
Twenty-Five Largest Holdings
--------------------------------------------------------------------------------
Percent of
Net Assets
Company Country 10/31/00
------------------------------------------------------------------------------
Vodafone Group United Kingdom 3.0%
Nokia Finland 2.2
Royal Bank of Scotland Group United Kingdom 2.0
Glaxo Wellcome United Kingdom 2.0
TotalFinaElf France 1.6
Shell Transport & Trading United Kingdom 1.6
Sony Japan 1.6
Vivendi France 1.6
Reed International United Kingdom 1.4
Philips Electronics Netherlands 1.4
LM Ericsson Sweden 1.4
ING Groep Netherlands 1.4
Canon Japan 1.3
Banca Intesa Italy 1.2
Cable & Wireless United Kingdom 1.2
Nestle Switzerland 1.2
Granada Compass United Kingdom 1.2
SmithKline Beecham United Kingdom 1.2
Aventis France 1.2
Matsushita Electric
Industrial Japan 1.1
AXA France 1.1
VNU Netherlands 1.1
Kyocera Japan 1.1
Nippon Telegraph &
Telephone Japan 1.0
Securitas Sweden 1.0
Total 36.1%
Note: Table excludes reserves
Security Classification
Percent Market
of Net Cost Value
10/31/00 Assets (000) (000)
--------------------------------------------------------------------------------
Common Stocks 93.1% $2,273,511 $2,922,604
Preferred Stocks 1.3 35,938 42,301
Short-Term Investments 0.8 23,287 23,287
Total Investments 95.2 2,332,736 2,988,192
Other Assets Less
Liabilities 4.8 149,594 149,594
Net Assets 100.0% $2,482,330 $3,137,786
--------------------------------------------------------------------------------
Summary of Investments and Cash
--------------------------------------------------------------------------------
October 31, 2000
Percent of
Equities Cash Total MSCI EAFE
--------------------------------------------------------------------------------
Europe
--------------------------------------------------------------------------------
Austria -- -- -- 0.2%
Belgium 0.8% -- 0.8% 0.8
Denmark 0.1 -- 0.1 0.9
Finland 2.2 -- 2.2 2.6
France 12.0 -- 12.0 11.2
Germany 3.8 -- 3.8 8.6
Ireland 0.3 -- 0.3 0.4
Italy 5.7 -- 5.7 4.5
Netherlands 6.4 -- 6.4 5.5
Norway 0.2 -- 0.2 0.4
Portugal 0.1 -- 0.1 0.5
Spain 2.7 -- 2.7 2.9
Sweden 3.6 -- 3.6 2.9
Switzerland 3.7 -- 3.7 6.1
United Kingdom 22.0 -- 22.0 21.4
Total Europe 63.6% -- 63.6% 68.9%
--------------------------------------------------------------------------------
Pacific Basin
--------------------------------------------------------------------------------
Australia 1.6% -- 1.6% 2.6%
Hong Kong 2.7 -- 2.7 2.0
India 0.7 -- 0.7 --
Japan 18.4 -- 18.4 25.4
New Zealand 0.1 -- 0.1 0.1
Singapore 0.9 -- 0.9 1.0
South Korea 0.7 -- 0.7 --
Taiwan 0.6 -- 0.6 --
Total Pacific Basin 25.7% -- 25.7% 31.1%
--------------------------------------------------------------------------------
Americas
--------------------------------------------------------------------------------
Argentina -- -- -- --
Brazil 1.6% -- 1.6% --
Canada 1.3 -- 1.3 --
Chile -- -- -- --
Mexico 2.0 -- 2.0 --
Panama -- -- -- --
Peru -- -- -- --
United States 0.2 0.8% 1.0 --
Venezuela -- -- -- --
Total Americas 5.1% 0.8% 5.9% 0.0%
--------------------------------------------------------------------------------
Other Assets Less Liabilities -- 4.8 4.8 --
--------------------------------------------------------------------------------
TOTAL 94.4% 5.6% 100.0% 100.0%*
--------------------------------------------------------------------------------
* Total may not add to 100.0% due to rounding.
--------------------------------------------------------------------------------
Foreign Equity Fund
10/31/00
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 MSCI EAFE Lipper
10/31/90 10 10 10
10/91 10.98 10.731 10.842
10/92 10.623 9.347 10.307
10/93 14.271 12.887 13.762
10/94 15.977 14.225 15.36
10/95 16.08 14.216 15.444
10/96 18.408 15.751 17.328
10/97 19.935 16.526 19.433
10/98 21.461 18.17 20.457
10/99 25.921 22.416 24.878
10/00 26.557 21.819 24.902
Total Return Performance
--------------------------------------------------------------------------------
1 3 Calendar 1 3 5 10
Periods Ended Month Months Year- Year Years* Years* Years
10/31/00 to-Date
--------------------------------------------------------------------------------
Foreign Equity Fund -4.01% -8.15% -15.07% 2.45% 10.03% 10.56% 10.26%
S&P 500 Index -0.42 0.18 -1.81 6.09 17.60 21.67 19.44
MSCI EAFE Index -2.34 -6.25 -13.71 -2.66 9.70 8.95 8.11
Lipper International -3.75 -7.71 -14.8 2.70 9.96 9.33 9.30
FT-A Euro Pacific Ind -2.81 -5.82 -14.46 -3.75 9.58 8.51 7.67
* 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.
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
10/31/00 10/31/99 10/31/98 10/31/97 10/31/96
NET ASSET VALUE
--------------------------------------------------------------------------------
Beginning of period $ 20.08 $ 17.03 $ 16.51 $ 15.62 $ 13.99
--------------------------------------------------------------------------------
Investment activities
Net investment income
(loss) 0.13 0.21 0.28 0.21 0.21
Net realized and
unrealized gain (loss) 0.46 3.26 0.93 1.07 1.78
Total from
investment activities 0.59 3.47 1.21 1.28 1.99
Distributions
Net investment income (0.17) (0.29) (0.21) (0.22) (0.18)
Net realized gain (1.34) (0.13) (0.48) (0.17) (0.18)
Total distributions (1.51) (0.42) (0.69) (0.39) (0.36)
NET ASSET VALUE
End of period $ 19.16 $ 20.08 $ 17.03 $ 16.51 $ 15.62
--------------------------------------------------------------------------------
Ratios/Supplemental Data
--------------------------------------------------------------------------------
Total return(diamond) 2.45% 20.79% 7.65% 8.30% 14.48%
Ratio of total expenses
to average net assets 0.74% 0.74% 0.74% 0.75%
0.76%
Ratio of net investment
income (loss) to average
net assets 0.57% 1.08% 1.58% 1.40% 1.67%
Portfolio turnover rate 39.7% 18.2% 18.6% 15.9%
13.8%
Net assets, end of period
(in millions) $ 3,138 $ 3,361 $ 3,204 $ 3,160 $ 2,322
(diamond) 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.
Portfolio of Investments
--------------------------------------------------------------------------------
Foreign Equity Fund
October 31, 2000
Shares Value
--------------------------------------------------------------------------------
In thousands
AUSTRALIA 1.6%
Common Stocks 1.0%
Brambles Industries 314,500 $ 8,154
Commonwealth Bank
of Australia 337,691 5,026
Publishing & Broadcasting 1,156,904 7,898
Telstra 2,712,098 8,851
29,929
Preferred Stocks 0.6%
News Corporation 2,243,362 20,117
20,117
Total Australia (Cost $44,525) 50,046
BELGIUM 0.8%
Common Stocks 0.8%
Dexia (EUR) 62,381 9,375
Fortis B (EUR) 376,198 11,525
Societe Europeenne des Satellites
(Class A) (EUR) 16,676 2,222
UCB (EUR) 40,015 1,426
Total Belgium (Cost $14,776) 24,548
BRAZIL 1.6%
Common Stocks 0.9%
Embratel Participacoes
ADR (USD) 151,000 2,444
Petrol Brasileiro (Petrobas)
ADR (USD) * 143,400 4,168
Telebras ADR (USD) 233,052 17,071
Unibanco GDR (USD) 114,158 2,883
26,566
Preferred Stocks 0.7%
Petrol Brasileiro (Petrobas) 772,060 20,468
Telesp Cellular Participacoes
ADR (USD) 145,075,041 1,716
22,184
Total Brazil (Cost $45,282) 48,750
CANADA 1.3%
Common Stocks 1.3%
Alcan Aluminum 125,100 3,935
Celestica (USD) * 347,936 25,008
Nortel Networks (USD) 49,900 2,271
Nortel Networks 139,580 6,314
Royal Bank of Canada 108,420 $ 3,428
Total Canada (Cost $23,164) 40,956
DENMARK 0.1%
Common Stocks 0.1%
Tele Danmark 40,850 1,933
Total Denmark (Cost $1,523) 1,933
FINLAND 2.2%
Common Stocks 2.2%
Nokia (EUR) 1,701,564 70,017
Total Finland (Cost $8,593) 70,017
FRANCE 12.0%
Common Stocks 12.0%
Alcatel (EUR) 482,715 29,453
Altran Technologies (EUR) 28,150 5,755
Aventis (EUR) 435,086 31,383
Aventis
(DAX Exchange) (EUR) 67,709 4,855
AXA (EUR) 269,411 35,665
BNP Paribas (EUR) 342,770 29,553
Bouygues (EUR) 117,960 6,006
Canal Plus (EUR) 18,190 2,632
Cap Gemini (EUR) 55,160 8,800
Compagnie
de St. Gobain (EUR) 70,046 9,267
Groupe Danone (EUR) 37,240 5,208
Hermes International (EUR) 44,320 5,980
L'Oreal (EUR) 51,620 3,942
Lafarge (EUR) 19,550 1,443
Legrand (EUR) 65,339 10,535
LVMH (EUR) 52,665 3,844
Sanofi-Synthelabo (EUR) 441,140 23,210
Schneider Electric (EUR) 59,878 3,900
Societe Generale (EUR) 100,724 5,718
Societe Television
Francaise 1 (EUR) 483,560 26,386
Sodexho Alliance (EUR) 26,110 4,088
STMicroelectronics (EUR) 326,989 16,496
TotalFinaElf (Class B) (EUR) 360,914 51,637
Vivendi (EUR) 695,154 49,965
Total France (Cost $253,311) 375,721
GERMANY 3.8%
Common Stocks 3.8%
Allianz (EUR) 52,210 $17,702
Bayer (EUR) 104,824 4,550
Bayerische Vereinsbank (EUR) 336,014 18,449
Deutsche Bank (EUR) 335,427 27,462
Deutsche Telekom (EUR) 80,762 3,033
E.On (EUR) 143,236 7,279
Gehe (EUR) 162,214 5,905
Rhoen-Klinikum (EUR) 61,502 3,353
SAP (EUR) 151,740 24,968
Siemens (EUR) 38,751 4,934
Total Germany (Cost $91,406) 117,635
HONG KONG 2.7%
Common Stocks 2.7%
Cheung Kong Holdings 1,665,670 18,421
China Mobile (Hong Kong) * 4,046,130 25,940
China Unicom * 1,472,000 2,954
Dao Heng Bank Group 1,265,500 6,393
Henderson Land Development 570,050 2,456
Hutchison Whampoa 1,738,626 21,624
Pacific Century CyberWorks * 7,036,327 5,413
Total Hong Kong (Cost $53,629) 83,201
INDIA 0.7%
Common Stocks 0.7%
Global Tele-Systems* 380,060 8,553
Hindustan Lever 1,856,000 7,064
ICICI 1,750,000 2,798
ICICI ADR (USD) 439,970 4,152
Total India (Cost $35,034) 22,567
IRELAND 0.3%
Common Stocks 0.3%
SmartForce ADR (USD) * 212,538 10,667
Total Ireland (Cost $5,377) 10,667
ITALY 5.7%
Common Stocks 5.7%
Alleanza Assicurazioni (EUR) 1,017,000 13,489
Assicurazioni Generali (EUR) 109,000 3,584
Banca Intesa (EUR) 9,059,848 37,595
Bipop-Carire (EUR) 1,641,300 $12,981
ENI (EUR) 2,744,532 14,859
Mediaset (EUR) 260,000 3,762
Mediolanum (EUR) 803,845 11,781
Olivetti (EUR) 5,029,268 15,236
San Paolo IMI (EUR) 140,006 2,269
Tecnost (EUR) * 1,608,000 5,417
Telecom Italia (EUR) 820,244 9,501
Telecom Italia
Mobile (EUR) 2,987,256 25,401
UniCredito Italiano (EUR) 4,375,719 22,280
Total Italy (Cost $126,161) 178,155
JAPAN 18.4%
Common Stocks 18.4%
Canon 1,003,000 39,802
DDI 588 2,759
East Japan Railway 708 4,068
Fanuc 129,900 11,667
Fuji Television 1,501 16,507
Fujitsu 679,000 12,097
Furukawa Electric * 247,000 6,497
Hitachi 449,000 4,814
Ito-Yokado 113,000 5,106
Kao 203,000 6,084
Kokuyo 315,000 4,850
Kyocera 255,000 33,185
Makita 404,000 2,944
Marui 629,000 9,281
Matsushita Communication
Industrial 41,000 5,373
Matsushita Electric Industrial 1,230,000 35,734
Mitsui Fudosan 1,128,000 13,667
Mizuho Holdings * 3,925 30,180
Murata Manufacturing 263,100 31,491
NEC 1,528,000 29,127
Nippon Telegraph
& Telephone 3,559 32,389
Nomura Securities 1,208,000 25,629
NTT DoCoMo 984 24,258
Sankyo 401,000 8,838
Seven-Eleven Japan 212,000 13,795
Shin-Etsu Chemical 242,000 9,936
Shiseido 370,000 4,781
Softbank 89,400 $ 5,367
Sony 628,600 50,235
Sumitomo 922,000 8,112
Sumitomo Bank 1,854,000 22,513
TDK 99,000 9,980
Tokyo Electron 159,700 12,499
Toshiba 3,338,000 23,861
Yamanouchi Pharmaceutical 458,000 20,735
Total Japan (Cost $471,703) 578,161
MEXICO 2.0%
Common Stocks 2.0%
Femsa UBD, Units
(Represents 1 Series
B and 4 Series D shares) 2,164,690 8,240
Grupo Iusacell ADR (USD) * 266,000 3,458
Grupo Televisa GDR (USD) * 493,362 26,703
Telefonos de Mexico (Telmex)
(Class L) ADR (USD) 474,328 25,584
Total Mexico (Cost $51,421) 63,985
NETHERLANDS 6.4%
Common Stocks 6.4%
ABN Amro Holding (EUR) 160,699 3,723
Akzo Nobel (EUR) 29,831 1,358
ASM Lithography (EUR) * 630,150 17,224
CSM (EUR) 178,928 4,084
Equant (EUR) * 49,010 1,641
Fortis (EUR) 535,444 16,358
ING Groep (EUR) 632,695 43,446
KPN (EUR) 145,016 2,937
Philips Electronics (EUR) 1,120,434 44,032
Royal Dutch Petroleum (EUR) 349,538 20,731
United Pan-Europe
Communications (EUR) * 69,987 1,226
VNU (EUR) 707,650 33,328
Wolters Kluwer (EUR) 429,090 9,657
Total Netherlands (Cost $146,811) 199,745
NEW ZEALAND 0.1%
Common Stocks 0.1%
Telecom Corporation
of New Zealand 1,656,592 3,666
Total New Zealand (Cost $7,359) 3,666
NORWAY 0.2%
Common Stocks 0.2%
Orkla (Class A) 418,395 $ 7,553
Total Norway (Cost $4,737) 7,553
PORTUGAL 0.1%
Common Stocks 0.1%
Jeronimo Martins (EUR) 250,281 2,413
Total Portugal (Cost $2,051) 2,413
SINGAPORE 0.9%
Common Stocks 0.9%
DSB Group Holdings 294,000 3,465
Flextronics (USD) * 174,200 6,614
Singapore Telecommunications 2,223,000 3,683
United Overseas Bank 2,121,560 15,704
Total Singapore (Cost $27,413) 29,466
SOUTH KOREA 0.7%
Common Stocks 0.7%
Korea Telecom ADR (USD) 278,000 10,251
Pohang Iron & Steel ADR (USD) 98,572 1,559
Samsung Electronics 81,583 10,220
Total South Korea (Cost $21,272) 22,030
SPAIN 2.7%
Common Stocks 2.7%
Banco Bilbao Vizcaya
Argentaria (EUR) 1,611,523 21,470
Banco Santander Central
Hispano (EUR) 1,964,384 19,037
Empresa Nacional de
Electricidad (EUR) 899,108 14,649
Repsol (EUR) 438,521 6,966
Telefonica (EUR) * 856,914 16,340
Telefonica ADR (USD) * 129,700 7,515
Total Spain (Cost $70,740) 85,977
SWEDEN 3.6%
Common Stocks 3.6%
Atlas Copco (Class B) 88,352 1,826
Electrolux (Class B) 376,305 4,745
Hennes & Mauritz (Class B) 566,320 10,598
LM Ericsson (Class B) * 3,299,610 $43,919
Nordic Baltic Holding * 2,286,278 17,160
Nordic Baltic Holding (DKK) 352,167 2,651
Sandvik 58,670 1,295
Securitas (Class B) 1,513,135 32,254
Total Sweden (Cost $99,946) 114,448
SWITZERLAND 3.7%
Common Stocks 3.7%
ABB 93,947 8,349
ABB (SEK) 72,100 6,407
Adecco 21,673 14,986
Credit Suisse Group 67,555 12,665
Nestle 17,643 36,560
Roche Holding * 1,437 13,126
UBS 178,214 24,686
Total Switzerland (Cost $75,708) 116,779
TAIWAN 0.6%
Common Stocks 0.6%
Hon Hai Precision 1,365,100 7,143
Taiwan Semiconductor
Manufacturing * 4,026,988 12,218
Total Taiwan (Cost $20,519) 19,361
UNITED KINGDOM 22.0%
Common Stocks 22.0%
Abbey National 424,100 5,889
AstraZeneca Group 561,307 26,420
Autonomy Corporation * 43,000 2,196
Baltimore Technologies * 338,647 2,604
BG Group 409,600 1,652
BP Amoco 1,497,304 12,698
British Telecom 1,052,000 12,349
Cable & Wireless 2,605,500 36,935
Cadbury Schweppes 1,618,378 10,044
Celltech Group * 466,000 9,385
Centrica 869,710 3,013
David S. Smith Holdings 532,185 1,174
Diageo 1,702,924 16,080
Dimension Data * 303,000 2,651
Electrocomponents 510,640 5,127
GKN 117,700 $ 1,364
Glaxo Wellcome 2,164,700 62,346
Granada Compass * 4,209,250 36,461
Granada Media * 274,103 1,607
Hays 2,313,000 12,627
Hilton Group 646,940 1,800
HSBC Holdings (HKD) 471,600 6,561
Kingfisher 1,370,977 8,235
Lattice Group * 409,600 871
Marconi 1,460,000 18,483
Reckitt Benckiser 120,000 1,580
Reed International 4,918,691 45,247
Rio Tinto 1,116,060 18,056
Royal Bank of Scotland Group 2,824,599 63,401
Shell Transport & Trading 6,275,400 50,534
SmithKline Beecham 2,812,880 36,324
Standard Chartered 1,047,000 15,115
Tesco 3,199,504 12,209
Tomkins 2,849,256 6,832
Unilever 1,416,946 9,596
United News & Media 536,510 6,681
Vodafone Group 22,568,087 94,306
WPP Group 2,322,000 31,282
Total United Kingdom (Cost $601,731) 689,735
UNITED STATES 1.0%
Common Stocks 0.2%
Comverse Technology * 66,145 7,390
Total United States (Cost $5,257) 7,390
SHORT-TERM INVESTMENTS 0.8%
Money Market Funds 0.8%
Reserve Investment Fund
6.68% # 23,287,540 23,287
Total Short-Term Investments
(Cost $23,287) 23,287
Total Investments in Securities
95.2% of Net Assets (Cost $2,332,736) $2,988,192
Other Assets Less Liabilities 149,594
NET ASSETS $3,137,786
* Non-income producing
# Seven-day yield
ADR American depository receipt
DKK Danish krone
EUR Euro
GDR Global depository receipt
HKD Hong Kong dollar
SEK Swedish krona
USD U.S. dollar
The accompanying notes are an integral part of these financial statements.
Statement of Assets and Liabilities
Foreign Equity Fund
October 31, 2000
In thousands
Assets
Investments in securities, at value (cost $2,332,736) $2,988,192
Other assets 179,834
Total assets 3,168,026
Liabilities
Total liabilities 30,240
NET ASSETS $3,137,786
----------
Net Assets Consist of:
Accumulated net investment income - net of distributions $ 17,766
Accumulated net realized gain/loss - net of distributions 227,415
Net unrealized gain (loss) 652,695
Paid-in-capital applicable to 163,747,380 shares of
$0.01 par value capital stock outstanding;
1,000,000,000 shares authorized 2,239,910
NET ASSETS $3,137,786
----------
NET ASSET VALUE PER SHARE $ 19.16
----------
The accompanying notes are an integral part of these financial statements.
Statement of Operations
Foreign Equity Fund
In thousands
Year
Ended
10/31/00
Investment Income (Loss)
Income
Dividend (net of foreign taxes of $5,257) $ 41,076
Interest (net of foreign taxes of $32) 6,175
Total income 47,251
Expenses
Investment management 25,279
Custody and accounting 1,128
Registration 48
Shareholder servicing 34
Legal and audit 34
Directors 9
Prospectus and shareholder reports 3
Miscellaneous 17
Total expenses 26,552
Expenses paid indirectly (2)
Net expenses 26,550
Net investment income (loss) 20,701
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 281,812
Foreign currency transactions (14,767)
Net realized gain (loss) 267,045
Change in net unrealized gain or loss
Securities (171,371)
Other assets and liabilities
denominated in foreign currencies (2,320)
Change in net unrealized gain or loss (173,691)
Net realized and unrealized gain (loss) 93,354
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 114,055
----------
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Net Assets
Foreign Equity Fund
In thousands
Year
Ended
10/31/00 10/31/99
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ 20,701 $ 35,439
Net realized gain (loss) 267,045 254,287
Change in net unrealized gain or loss (173,691) 328,965
Increase (decrease) in net assets from
operations 114,055 618,691
Distributions to shareholders
Net investment income (28,399) (53,955)
Net realized gain (223,838) (24,187)
Decrease in net assets from
distributions (252,237) (78,142)
Capital share transactions *
Shares sold 605,925 534,332
Distributions reinvested 198,990 58,440
Shares redeemed (889,767) (976,185)
Increase (decrease) in net assets
from capital share transactions (84,852) (383,413)
Net Assets
Increase (decrease) during period (223,034) 157,136
Beginning of period 3,360,820 3,203,684
End of period $3,137,786 $3,360,820
------------------------
*Share information
Shares sold 28,248 28,737
Distributions reinvested 9,716 3,394
Shares redeemed (41,613) (52,874)
Increase (decrease) in shares
outstanding (3,649) (20,743)
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements
Foreign Equity Fund
October 31, 2000
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 established by the corporation, and commenced operations on
September 7, 1989. The fund seeks long-term growth of capital through
investments primarily in the common stocks of established, non-U.S.
companies.
The accompanying financial statements were prepared in accordance with
generally accepted accounting principles, which require the use of
estimates made by fund management.
Valuation Equity securities are valued at the last quoted sales price at
the time the valuations are made. A security that is listed or traded on
more than one exchange is valued at the quotation on the exchange
determined to be the primary market for such security.
Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation.
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 denominated in foreign
currencies are translated into U.S. dollar values each day at the
prevailing exchange rate, using the mean of the bid and offer prices of
such currencies against U.S. dollars quoted by a major bank. 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 net investment
income and realized gains determined in accordance with generally accepted
accounting principles. Expenses paid indirectly reflect credits earned on
daily uninvested cash balances at the custodian and are used to reduce the
fund's custody charges.
NOTE 2 - INVESTMENT TRANSACTIONS
Purchases and sales of portfolio securities, other than short-term
securities, aggregated $1,364,427,000 and $1,741,475,000, respectively, for
the year ended October 31, 2000.
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.
In order for the fund's capital accounts and distributions to shareholders
to reflect the tax character of certain transactions, the following
reclassifications were made during the year ended October 31, 2000. The
reclassifications relate primarily to a tax practice that treats a portion
of the proceeds from each redemption of capital shares as a distribution of
taxable net investment income and/or realized capital gain. The results of
operations and net assets were not affected by the increases/(decreases) to
these accounts.
--------------------------------------------------------------------------------
Undistributed net investment income $(1,782,000)
Undistributed net realized gain (29,882,000)
Paid-in-capital 31,664,000
At October 31, 2000, the cost of investments for federal income tax
purposes was substantially the same as for financial reporting and totaled
$2,332,736,000. Net unrealized gain aggregated $655,456,000 at period-end,
of which $814,549,000 related to appreciated investments and $159,093,000
to depreciated investments.
NOTE 4 - FOREIGN TAXES
The fund is subject to foreign income taxes imposed by certain countries in
which it invests. Foreign income taxes are accrued by the fund as a
reduction of dividend and interest income.
NOTE 5 - RELATED PARTY TRANSACTIONS
The fund is managed by T. Rowe Price International, Inc. (the manager), a
wholly owned subsidiary of T. Rowe Price Associates, Inc. (Price
Associates). The investment management agreement between the fund and the
manager provides for an annual investment management fee, of which
$1,864,000 was payable at October 31, 2000. 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. 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 $134,000 for the year ended October 31, 2000, 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 Price Associates. The Reserve Funds are
offered as cash management options only to mutual funds and other accounts
managed by Price Associates or T. Rowe Price International, 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, 2000, totaled $5,021,000 and are reflected as interest income
in the accompanying Statement of Operations.
During the year ended October 31, 2000, the fund, in the ordinary course of
business, placed security purchase and sale orders aggregating $83,092,000
with certain affiliates of the manager and paid commissions of $105,000
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 assets and liabilities,
including the portfolio of investments, 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 comprising Institutional International Funds,
Inc., hereafter referred to as the "Fund") at October 31, 2000, 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
accounting principles generally accepted in the United States of America.
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 auditing standards generally accepted in the United
States of America 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, 2000 by correspondence with the
custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Baltimore, Maryland
November 17, 2000
Foreign Equity Fund
Tax Information (Unaudited) for the Tax Year Ended 10/31/00
--------------------------------------------------------------------------------
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:
* $612,000 from short-term capital gains,
* $253,109,000 from long-term capital gains, subject to the 20% rate gains
category.
The fund will pass through foreign source income of $32,105,000 and foreign
taxes paid of $5,289,000.
Foreign Equity Fund
Annual Meeting Results
The T. Rowe Price Foreign Equity Fund held an annual meeting on October 25,
2000, to approve a new investment management agreement, to amend the fund's
fundamental policy to permit it to engage in securities lending, to elect
directors, and to ratify the appointment of PricewaterhouseCoopers LLP as the
fund's independent accountants.
The results of voting were as follows, by number of shares:
For approval of a new investment management agreement:
Affirmative: 94,404,326.715
Against: 1,012,673.609
Abstain: 388,323.499
Total: 95,805,323.823
To amend the fund's fundamental policy to permit it to engage in securities
lending:
Affirmative: 90,509,297.951
Against: 3,646,676.049
Abstain: 367,750.824
Broker Non-votes: 1,281,598.999
Total: 95,805,323.823
For nominees to the Board of Directors of the Foreign Equity Fund:
M. David Testa
Affirmative: 94,431,263.605
Withhold: 1,374,060.218
Total: 95,805,323.823
Martin G. Wade
Affirmative: 94,431,263.605
Withhold: 1,374,060.218
Total: 95,805,323.823
Anthony W. Deering
Affirmative: 94,431,263.605
Withhold: 1,374,060.218
Total: 95,805,323.823
Donald W. Dick, Jr.
Affirmative: 94,431,263.605
Withhold: 1,374,060.218
Total: 95,805,323.823
Paul M. Wythes
Affirmative: 94,431,263.605
Withhold: 1,374,060.218
Total: 95,805,323.823
To ratify the appointment of PricewaterhouseCoopers LLP as independent
accountants:
Affirmative: 94,428,749.657
Against: 734,777.607
Abstain: 641,796.559
Total: 95,805,323.823
