T. Rowe Price
New America Growth Portfolio
Semiannual Report
June 30, 1998
Dear Investor
Financial market conditions remained extremely favorable in the first half of
1998. Continued strong domestic economic growth, low inflation, and declining
long-term interest rates sent both the stock and bond markets to new highs.
Investors shrugged off both the growing problems in Asia and record high stock
valuations. The Standard & Poor's 500 Stock Index rose 17.71% in the six months,
all the more impressive after 1997's strong 33.36% advance. Following the
pattern of recent years, large-capitalization blue chips continued to lead the
market while small- and medium-cap issues lagged significantly.
Against this backdrop of narrow market leadership, we are pleased to report that
the New America Growth Portfolio kept pace with the unmanaged S&P 500, rising
17.10% for the six months and 30.18% for the 12-month period. The fund
outperformed the average growth fund in its Lipper universe for both periods.
New America's focus on high-growth, domestic service-based companies helped it
avoid being hurt by fallout from the economic crisis in Asia.
Performance Comparison
Periods Ended 6/30/98 6 Months 12 Months
- --------------------------------------------------------------------------------
New America
Growth Portfolio 17.10% 30.18%
S&P 500 17.71 30.16
Lipper Variable Annuity
Underlying Growth
Funds Average 16.23 28.06
Market Environment
Investors continued to benefit from a nearly perfect economic and financial
climate. The U.S. economy is on its way to a record eighth consecutive year of
expansion, with growth in the first half of 1998 at or above the level forecast
by most economists. Corporate profits also remained surprisingly strong for this
late stage of the economic cycle, although signs of a slowdown are appearing.
Inflation remained low, despite the robust economy and strong labor markets. A
surging dollar has forced U.S. companies to maintain stable product prices in
order to remain competitive and has kept labor costs in check. Interest rates
declined modestly this year as well, despite the strong economy, as foreigners
sought dollar-denominated securities in response to the turmoil in Asia. In
addition, investors cheered the improved fiscal health of the U.S.; estimates of
the expected federal budget surplus, the first since 1969, increased as the year
unfolded.
The political environment in Washington remained favorable for investors. The
economy has swelled federal coffers, and anti-business sentiment in Washington
is extremely low. Last year, Congress passed a bill cutting the capital gains
tax rate for the first time since 1981. Stock market supply and demand forces
also remained positive, with equity mutual fund inflows continuing at record
levels. Strong corporate earnings and high stock prices led to a record number
of corporate mergers and a high level of stock repurchase activity. All in all,
stock market conditions were extraordinarily favorable.
The major uncertainty facing the market is whether the economic crisis in Asia
will seriously affect U.S. companies and overall domestic growth. An increasing
number of U.S. multinationals and major exporters to Asia have begun to be hurt.
Fortunately, our economy does not rely heavily on Asian demand, and, in the
short run, declining Asian currencies have forced U.S. companies to keep prices
down. At this point, we believe the U.S. economy will be able to weather the
problems in Asia without being significantly affected. The risk of a worsening
of the Asia crisis, however, will remain a wild card for the U.S. market in the
near term.
Strength in the major market indices masked the increasing underperformance of
all but a small number of large blue chips. Small- and mid-cap issues lagged by
wider and wider margins. In the first half, the 10 largest companies in the S&P
500 rose 25% on average while the 200 smallest rose just 6.5%. Valuation levels
of the large-cap market leaders soared, creating a two-tier market increasingly
reminiscent of the "Nifty Fifty" growth stock market of the early 1970s. On a
relative basis, small- and mid-cap stocks are now as cheap as at the market's
lows in 1990.
Growth stocks performed well through June, surpassing the value sector. These
stocks tend to do well when investors fear that a slowing economy will reduce
the growth rate of corporate profits. With many cyclical companies hurt by Asia,
investors sought companies whose growth prospects are relatively immune to
foreign economic conditions. This has increased investor interest in the types
of businesses New America focuses on- domestic, noncyclical, service-based
companies.
Portfolio Review
All three major sectors of the portfolio contributed to the fund's strong
first-half performance-financial services, consumer services, and business
services. Media and communications companies were the best performers for the
period. We boosted holdings in this area over the past year, and they now
represent approximately 18% of assets. Our top three performers so far this year
all are in the media and communications area: Outdoor Systems, a leading
consolidator of the outdoor advertising market; AirTouch Communications, a top
domestic and international cellular telephone service provider; and Telecom
Liberty Media, the largest owner of cable TV networks. Other top performers
include mutual fund provider Franklin Resources, cruise ship operator Carnival,
and office supplies marketer Viking Office Products.
Energy service stocks were among the fund's few decliners in the first half as
investors worried that falling oil prices and oversupply might lead to lower
future drilling activity. However, the drop in Smith International and
Schlumberger was partially offset by takeover offers for our other two energy
service holdings, Camco International and Western Atlas. Our health care
services stocks also fell, including PhyCor and Concentra Managed Care, as
investors became increasingly concerned about the profit outlook for managed
care companies.
Our largest decliner was Cendant, which fell nearly 40% in the first half.
Cendant was formed in December 1997 by the merger of CUC International and HFS,
both long-time fund holdings and major contributors to performance over the last
five years. In April, the company disclosed potential accounting irregularities
at its former CUC International unit, triggering a 45% drop in its stock the day
of the announcement. We had trimmed our Cendant holding somewhat before the
downturn and more in its aftermath. The stock declined further in July when the
company announced that last year's earnings overstatement was greater than
initially thought. The company remains profitable and generates substantial free
cash flow. Its decline is overdone, in our opinion, and we continue to hold
Cendant shares.
Changes in sector weightings in the last six months were relatively modest. As
noted, we continued to boost our media and communications holdings in the
consumer services sector with the addition of Jacor Communications and
Chancellor Media, both large owners of radio stations. Western Wireless, a
growing cellular telephone service provider, was also added. We restructured our
financial services holdings in the first half, reducing our insurance positions
and adding several new names including BANC ONE, Morgan Stanley Dean Witter
Discover, Travelers Group, and Associates First Capital.
Sector Diversification
6/30/97 12/31/97 6/30/98
- --------------------------------------------------------------------------------
Financial Services 19% 19% 16%
Consumer Services 31 43 47
Business Services 40 32 33
Reserves 10 6 4
Total 100% 100% 100%
Outlook
The U.S. economy remains healthy, with inflation and interest rate levels
supportive of continued strong financial markets. Corporate profit gains also
remain vibrant, but the rate of growth is slowing because of the maturing
economy, fallout from the strong U.S. dollar, and the effects of Asia's
difficulties. Stock market valuation levels are high by any measure but are
particularly extended for the short list of market-leading blue chips. Valuation
levels for most stocks are more reasonable, however, and can be justified as
long as interest rates and inflation remain low.
We believe the outlook for the New America Growth Portfolio is favorable. Our
holdings of noncyclical domestic service businesses have minimal exposure to the
problems in Asia or to the effects of a continued strong U.S. dollar. Should
domestic economic growth taper off, investments in such areas as financial
services, media and entertainment, communications, and business services should
be less affected than those in other sectors. Our portfolio's valuation level
has not moved up as much as the overall market and remains reasonable if our
expectation of close to 20% earnings growth for portfolio companies proves
correct. We anticipate attractive long-term returns.
Respectfully submitted,
John H. Laporte
President and Chairman of the
Investment Advisory Committee
Brian W.H. Berghuis
Executive Vice President
July 24, 1998
Portfolio Highlights
Contributions to the Change in Net Asset Value Per Share
6 Months Ended 6/30/98
TEN BEST CONTRIBUTORS
- --------------------------------------------------------------------------------
Outdoor Systems 20(cents)
AirTouch Communications 20
Telecom Liberty Media 18
Franklin Resources 17
Carnival 16
Galileo International 15
Viking Office Products 15
USA Waste Services 14
Fairfax Financial 14
WorldCom 14
- --------------------------------------------------------------------------------
Total 163(cents)
- --------------------------------------------------------------------------------
TEN WORST CONTRIBUTORS
- --------------------------------------------------------------------------------
Cendant -45(cents)
Smith International 11
PhyCor 10
Avis Rent A Car* 5
Concentra Managed Care* 4
Ikon Office Solutions** 4
UNUM** 4
MGIC Investment 3
General Nutrition 3
Schlumberger 3
- --------------------------------------------------------------------------------
Total -92(cents)
- --------------------------------------------------------------------------------
12 Months Ended 6/30/98
TEN BEST CONTRIBUTORS
- --------------------------------------------------------------------------------
AirTouch Communications 34(cents)
Outdoor Systems 32
Comcast 31
Franklin Resources 27
Carnival 26
Costco Companies 23
Cardinal Health 23
Telecom Liberty Media* 20
Home Depot 18
ACE Limited 17
- --------------------------------------------------------------------------------
Total 251(cents)
- --------------------------------------------------------------------------------
TEN WORST CONTRIBUTORS
- --------------------------------------------------------------------------------
Vencor** -16(cents)
PhyCor 14
First Data 13
Cendant 10
Smith International 10
Green Tree Financial** 6
Extended Stay America 5
Money Store** 5
Avis Rent A Car* 5
Concentra Managed Care* 5
- --------------------------------------------------------------------------------
Total -89(cents)
- --------------------------------------------------------------------------------
* Position added
** Position eliminated
Twenty-Five Largest Holdings
Percent of
Net Assets
6/30/98
- --------------------------------------------------------------
USA Waste Services 2.7%
AirTouch Communications 2.6
Franklin Resources 2.6
Outdoor Systems 2.1
Service Corp. International 2.0
Cardinal Health 2.0
Viking Office Products 2.0
General Nutrition 2.0
Comcast 1.9
Carnival 1.9
Freddie Mac 1.8
Interim Services 1.8
Telecom Liberty Media 1.8
Cendant 1.8
The CIT Group 1.8
Metamor Worldwide 1.8
WorldCom 1.7
AutoZone 1.7
Costco Companies 1.7
Circuit City Stores 1.6
Home Depot 1.6
Outback Steakhouse 1.6
Quorum Health Group 1.6
SunGard Data Systems 1.6
First Data 1.6
- ------------------------------------------------------------
Total 47.3%
- ------------------------------------------------------------
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.
New America Growth Portfolio
As of 6/30/98
Lipper Variable
New America S&P 500 Annuity Underlying
Growth Stock Growth Funds
Portfolio Index Average
3/31/94 10,000 10,000 10,000
6/30/94 9,670 10,042 9,764
6/30/95 12,504 12,660 12,057
6/30/96 17,326 15,952 14,910
6/30/97 19,964 21,487 18,687
6/30/98 25,990 27,968 23,939
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.
New America Growth Portfolio
Periods Ended 6/30/98
Since Inception
1 Year 3 Years Inception Date
- --------------------------------------------------------------------------------
30.18% 27.62% 25.21% 3/31/94
Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
Total returns do not include charges imposed by your insurance company's
separate account. If these were included, performance would have been lower.
Financial Highlights
T. Rowe Price New America Growth Portfolio
(Unaudited)
For a share outstanding throughout each period
-----------------------------------------------------
6 Months Year 3/31/94
Ended Ended Through
6/30/98 12/31/97 12/31/96 12/31/95 12/31/94
NET ASSET VALUE
Beginning of period $ 21.35 $ 17.67 $ 15.23 $ 10.10 $ 10.00
Investment activities
Net investment income (0.03) -- 0.04 0.03 0.01
Net realized and
unrealized gain (loss) 3.68 3.73 2.94 5.12 0.09
Total from
investment activities 3.65 3.73 2.98 5.15 0.10
Distributions
Net investment income -- -- (0.04) (0.02) --
Net realized gain -- (0.05) (0.50) -- --
Total distributions -- (0.05) (0.54) (0.02) --
NET ASSET VALUE
End of period $ 25.00 $ 21.35 $ 17.67 $ 15.23 $ 10.10
-----------------------------------------------------
Ratios/Supplemental Data
Total return(C) 17.10% 21.12% 20.09% 51.10% 1.00%
Ratio of expenses to
average net assets 0.85%! 0.85% 0.85% 0.85% 0.85%!
Ratio of net investment
income to average
net assets (0.30)%! 0.02% 0.18% 0.23% 0.15%!
Portfolio turnover rate 20.9% 37.3% 27.2% 54.5% 81.0%!
Net assets,
end of period
(in thousands) $122,814 $ 96,991 $ 60,241 $ 12,304 $ 2,028
(C) 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.
! Annualized.
The accompanying notes are an integral part of these financial statements.
Statement of Net Assets
T. Rowe Price New America Growth Portfolio
June 30, 1998 (Unaudited)
Shares/Par Value
In thousands
- --------------------------------------------------------------------------------
COMMON STOCKS 95.7%
FINANCIAL SERVICES 15.8%
Bank and Trust 2.3%
BANC ONE 21,000 $ 1,172
Norwest 46,000 1,719
2,891
Insurance 3.0%
ACE Limited 31,000 1,209
Fairfax Financial (CAD) * 4,000 1,560
MGIC Investment 16,000 913
3,682
Investment Services 4.5%
Franklin Resources 58,000 3,132
Morgan Stanley Dean
Witter Discover 13,000 1,188
Travelers Group 19,000 1,152
5,472
Other Financial Services 6.0%
Associates First
Capital (Class A) 19,500 1,499
The CIT Group (Class A) 58,000 2,175
Fannie Mae 23,500 1,428
Freddie Mac 48,000 2,259
7,361
Total Financial Services 19,406
CONSUMER SERVICES 46.5%
Retailing/General Merchandisers 5.7%
Costco Companies * 33,000 2,082
Fred Meyer * 41,000 1,743
Kohl's * 25,000 1,297
Safeway * 46,500 1,892
7,014
Retailing/Specialty Merchandisers 9.3%
AutoZone * 66,000 2,108
Circuit City Stores 43,000 2,016
Cole National (Class A) * 46,000 1,840
General Nutrition * 77,500 2,417
Home Depot 24,000 1,993
Republic Industries * 30,000 750
Republic Industries * + 11,000 275
11,399
Entertainment and Leisure 6.5%
Carnival (Class A) 58,000 2,298
Disney 15,500 $ 1,628
Extended Stay America * 45,000 506
Extended Stay America * + 30,000 338
Hilton 40,000 1,140
Mirage Resorts * 19,500 416
Premier Parks * 24,500 1,632
7,958
Media/Communication Services 18.6%
AirTouch Communications * 55,500 3,243
Chancellor Media * 33,400 1,658
Comcast (Class A Special) 57,000 2,314
Jacor Communications * 30,000 1,772
MCI 21,000 1,220
Outdoor Systems * 90,000 2,520
Paging Network * 98,000 1,369
Sinclair Broadcast
Group (Class A) 55,000 1,578
Telecom Liberty Media
(Series A) * 57,450 2,232
Tribune 21,000 1,445
Western Wireless
(Class A) * 67,000 1,334
WorldCom * 44,000 2,127
22,812
Restaurants/Food Distribution 1.6%
Outback Steakhouse * 51,000 1,987
1,987
Personal Services 4.8%
Avis Rent A Car * 49,000 1,213
Cendant * 105,000 2,192
Service Corp. International 58,500 2,508
5,913
Total Consumer Services 57,083
BUSINESS SERVICES 32.6%
Health Care Services 5.0%
Concentra Managed Care * 62,000 1,610
PhyCor * 56,000 926
Quorum Health Group * 75,000 1,985
Total Renal Care Holdings * 47,000 1,622
6,143
Distribution Services 3.1%
Cardinal Health 26,500 2,484
Corporate Express * 105,000 1,329
3,813
Computer Services 9.1%
Acxiom * 69,000 $ 1,727
Affiliated Computer Services
(Class A) * 49,000 1,887
BISYS Group * 43,500 1,785
First Data 57,500 1,915
Galileo International 42,500 1,915
SunGard Data Systems * 50,500 1,938
11,167
Environmental Services 2.7%
USA Waste Services * 67,500 3,333
3,333
OTHER Business Services 9.6%
AccuStaff * 15,000 469
ADVO * 45,000 1,268
Catalina Marketing * 34,500 1,792
Interim Services * 70,000 2,249
Metamor Worldwide * 61,500 2,166
Paychex 34,500 1,402
Viking Office Products * 78,500 2,458
11,804
Energy Services 3.1%
Camco International 17,000 1,324
Schlumberger 11,000 751
Smith International * 20,500 714
Western Atlas 11,000 934
3,723
Total Business Services 39,983
Miscellaneous Common Stocks 0.8% 1,047
Total Common Stocks (Cost $82,365) 117,519
SHORT-TERM INVESTMENTS 4.0%
Money Market Funds 4.0%
Reserve Investment Fund
5.69% # 4,970,817 4,971
Total Short-Term Investments
Cost $4,971) 4,971
Total Investments in Securities
99.7% of Net Assets (Cost $87,336) $ 122,490
Other Assets Less Liabilities 324
NET ASSETS $ 122,814
----------
Net Assets Consist of:
Accumulated net investment income -
net of distributions $ (163)
Accumulated net realized gain/loss -
net of distributions 4,446
Net unrealized gain (loss) 35,154
Paid-in-capital applicable to 4,913,306
shares of $0.0001 par value capital stock
outstanding; 1,000,000,000 shares of the
corporation authorized 83,377
NET ASSETS $ 122,814
----------
NET ASSET VALUE PER SHARE $ 25.00
----------
# Seven-day yield
* Non-income producing
+ Securities contain some restrictions as to public resale-total of such
securities at period-end amounts to 0.50% of net assets.
CAD Canadian dollar
The accompanying notes are an integral part of these financial statements.
Statement of Operations
T. Rowe Price New America Growth Portfolio
(Unaudited)
In thousands
6 Months
Ended
6/30/98
Investment Income
Income
Dividend $ 156
Interest 146
Total income 302
Expenses
Investment management and administrative 465
Net investment income (163)
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities 4,397
Change in net unrealized gain or
loss on securities 12,826
Net realized and unrealized gain (loss) 17,223
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 17,060
---------
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Net Assets
T. Rowe Price New America Growth Portfolio
(Unaudited)
In thousands
6 Months Year
Ended Ended
6/30/98 12/31/97
Increase (Decrease) in Net Assets
Operations
Net investment income $ (163) $ 13
Net realized gain (loss) 4,397 65
Change in net unrealized
gain or loss 12,826 15,691
Increase (decrease) in
net assets from operations 17,060 15,769
Distributions to shareholders
Net realized gain -- (227)
Capital share transactions*
Shares sold 17,602 36,823
Distributions reinvested -- 227
Shares redeemed (8,839) (15,842)
Increase (decrease) in
net assets from capital
share transactions 8,763 21,208
Net Assets
Increase (decrease) during period 25,823 36,750
Beginning of period 96,991 60,241
End of period $ 122,814 $ 96,991
---------------------------------
*Share information
Shares sold 749 1,964
Distributions reinvested -- 11
Shares redeemed (378) (842)
Increase (decrease)
in shares outstanding 371 1,133
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements
T. Rowe Price New America Growth Portfolio
June 30, 1998 (Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Equity Series, Inc. (the corporation) is registered under the
Investment Company Act of 1940. The New America Growth Portfolio (the fund), a
diversified, open-end management investment company, is one of the portfolios
established by the corporation and commenced operations on March 31, 1994. The
shares of the fund are currently being offered only to separate accounts of
certain insurance companies as an investment medium for both variable annuity
contracts and variable life insurance policies.
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 listed or regularly traded on a securities exchange
are valued at the last quoted sales price on the day 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.
Listed securities not traded on a particular day and securities regularly traded
in the over-the-counter market are valued at the mean of the latest bid and
asked prices. Other equity securities are valued at a price within the limits of
the latest bid and asked prices deemed by the Board of Directors, or by persons
delegated by the Board, best to reflect fair value.
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 $31,448,000 and $22,059,000, respectively, for the six months ended
June 30, 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 June 30, 1998, the aggregate cost of investments for federal income tax and
financial reporting purposes was $87,336,000, and net unrealized gain aggregated
$35,154,000, of which $37,330,000 related to appreciated investments and
$2,176,000 to depreciated investments.
NOTE 4 - RELATED PARTY TRANSACTIONS
The investment management and administrative agreement between the fund and T.
Rowe Price Associates, Inc. (the manager) provides for an all-inclusive annual
fee, of which $68,000 was payable at June 30, 1998. The fee, computed daily and
paid monthly, is equal to 0.85% of the fund's average daily net assets. Pursuant
to the agreement, investment management, shareholder servicing, transfer agency,
accounting, and custody services are provided to the fund, and interest, taxes,
brokerage commissions, and extraordinary expenses are paid directly by the fund.
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 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 six months ended June 30, 1998, totaled
$146,000 and are reflected as interest income in the accompanying Statement of
Operations.
Invest With Confidence(registered trademark)
T. Rowe Price
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for distribution only to those who have received a
copy of the portfolio's prospectus.
T. Rowe Price Investment Services, Inc., Distributor
TRP652 (6/98) K15-055 6/30/98
