FundAlarm Annex - Fund Report

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Fund name: T. Rowe Price Overseas Stock (TROSX) (Update)

Objective: The fund seeks long-term growth of capital through investments in the common stocks of non-U.S. companies. The prospectus notes that they "generally favor companies with one or more of the following characteristics:  attractive business niche, technological leadership or proprietary advantages, seasoned management, healthy balance sheet, and potential to grow dividends or conduct share repurchases."

Adviser: T. Rowe Price. Price was founded in 1937 by Thomas Rowe Price, widely acknowledged as "the father of growth investing." The firm now serves retail and institutional clients through more than 450 separate and commingled institutional accounts and more than 90 stock, bond, and money market funds. The company�s international investment arm T. Rowe Price International is headquartered in London and has offices in Buenos Aires, Hong Kong, Paris, and Singapore. Price has $334 billion under management.

Manager: Raymond Mills. Mr. Mills joined Price in 1997 as an analyst. He is, by training, an engineer (he says it provides a strong basis for "analytical thinking") with a doctorate from Stanford and a master�s degree from MIT. Before joining Price he worked as an engineer for The Analytical Sciences Corporation, which makes data collection software for business. Mr. Mills has successfully managed the International Growth & Income (TRIGX) since 2002 and a "non-U.S. core equity portfolio" for institutional accounts since 2000.

Inception: December 29, 2006.

Minimum investment: $2,500 for regular accounts, $1000 for IRAs. Price generally waives the investment minimum for folks who set up an automatic investment program (AIP) at $50 per month or more. The current international funds prospectus does not include that waiver and Morningstar lists the automatic investment minimum as $2500. However, the new account application still allows for the waived AIP minimum and Price�s phone reps confirm that the reduced minimum is still in effect.

Expense ratio: 1.15% after waivers, which are in force through February, 2009. There�s a 2% redemption fee for sales of shares held fewer than 90 days.

Comments: One of the few disappointing elements of T. Rowe Price�s line-up has been its inability to field a really solid international fund that might serve as a primary holding. The flagship T. Rowe Price International Stock (PRITX) has been a consistently mediocre performer. While Price positions it as a growth fund, it has generally been one of the most cautious funds in its category. Over most trailing time periods, Morningstar rates it as a laggard:


+/- MSCI EAFE Total Return index, as of 1/24/07

One year

- 6.4%

Three year

- 3.1

Five year

- 3.9

Ten year

- 1.9

Those sub-par returns can�t be excused by the fund�s low volatility or risk aversion, since it�s actually more volatile � by about 8% -- than its benchmark. While Morningstar is generous in its assessment of the fund and hopeful of better days to come, the fact is that two of the three managers have been around for the entire decade of false starts and tepid performance. The alternative to International Stock has been Spectrum International (PSILX), a fund-of-funds whose major holding is International Stock (about 40% of the portfolio, as of 9/30/06). Spectrum International has performed better than International Stock (7.4% over the past decade, versus 5.8% for International) but hasn�t been able to distinguish itself from a simple index fund. Spectrum has a R-squared of 95 against the index, is more volatile but its long-term returns are consistently within one point, up or down, of its benchmark index.

It�s perhaps no surprise that Price might enlist one of their most promising international managers to run their new shot at a primary international holding. Mr. Mills has managed International Growth and Income (TRIGX) since 2002. In every year since his arrival, TRIGX has bested its benchmark by 1 � 4% and has produced only index-like volatility. In addition, Mr. Mills has managed the "non-US core equity portfolio" ("core" in the valuation sense: focused on neither high growth nor deep value stocks) for institutional investors and that portfolio follows the same strategy to be applied in this fund. While we don�t know his record with the institutional accounts (it�s not public information), it�s pretty safe to assume that Price wouldn�t be designing this fund to mimic his separate accounts unless his work there was awfully solid.

The fund will be broadly similar in its mandates to International Stock. Overseas invests "substantially all of its assets in the stocks of large companies outside the U.S." while International puts its money "worldwide in well-established, non-U.S. companies." International "diversifies broadly among developed and some emerging countries" while Overseas "diversifies broadly among developed and, to a lesser extent, emerging countries." Both have the option of investing in some smaller companies and markets. Overseas is positioned as less growth-oriented than International. Beyond that, we know little about Mr. Mills� portfolio construction. His track record suggests that this won�t be a world-beater, but is pretty likely to be a market-beater.

Bottom line: This fund is, indisputably, good news for T. Rowe Price investors. The other options for their primary international holding are both undistinguished. Mr. Mills, contrarily, brings an admirable public track record, a presumably-strong private track record and the advantages (good shareholder services, low expenses, managed risk) that characterize all of Price�s funds.

Company link: or,0,ticker=TROSX,00.html?rfpgid=7155&ddown=Fund_by_Name&scn=Find_a_Fund


February 1, 2007

Update (posted July 1, 2010):

Assets: $2.2 billion Expenses: 0.97%
YTD return (through 6/17/10): (6.6%)

Our original thesis: TROSX should offer Price investors a good alternative to the distinctly unimpressive Price International Stock (PRITX). The manager�s "track record suggests that this won�t be a world-beater, but is pretty likely to be a market-beater."

Our revised thesis: so far, not a world beater. Nor a market beater. Nor even a PRITX beater. Pity.

With the same corporate culture, analyst pool and broad mandate, it�s not surprising that TROSX has not materially outperformed PRITX. It is surprising that it has managed to modestly trail PRITX during the 2007-09 meltdown, then substantially trail it during the 2009-10 melt-up and trail modestly again during the ay 2010 mini-crash. All of which adds up to trailing substantially since inception: TROSX has dropped 24% from 2007 through mid2010 while PRITX lost "only" 14% in the same period.

The funds are similar in many ways with comparable expense ratios, market caps, yields, cash levels, portfolio concentration and so on. The difference is more PRITX�s resurgence than TROSX�s failure. In October 2007, Price appointed Bob Smith to manage PRITX. Smith replaced a team of regional specialists who had allowed the portfolio to become sprawling and unfocused. Smith had a long, successful run as head of the mostly domestic Growth Stock (PRGFX) fund. As promised, Smith cut the number of holdings a bit (to 118, still much higher than typical) and boosted emerging markets exposure (to 25% of the portfolio, also much higher than typical). In the 32 months since Smith�s arrival, PRITX has substantially outperformed its benchmark and peer group. In the preceding 32 months, it had substantially underperformed both.

By most metrics, Mr. Mills has chosen to construct a perfectly average "international core" sort of portfolio. Pretty average valuation statistics, consistently typical regional weightings, typical sector weightings, and so on. As a result, he has � to date � produced a somewhat overpriced closet index fund.

Pity. He�s capable of considerably more.

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