UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act File Number: 811-04119
| T. Rowe Price High Yield Fund, Inc. |
| (Exact name of registrant as specified in charter) |
| 100 East Pratt Street, Baltimore, MD 21202 |
| (Address of principal executive offices) |
| David Oestreicher |
| 100 East Pratt Street, Baltimore, MD 21202 |
| (Name and address of agent for service) |
Registrant’s telephone number, including area code: (410) 345-2000
Date of fiscal year end: May 31
Date of reporting period: May 31, 2014
Item 1. Report to Shareholders
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| High Yield Fund | May 31, 2014 |
The views and opinions in this report were current as of May 31, 2014. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the fund’s future investment intent. The report is certified under the Sarbanes-Oxley Act, which requires mutual funds and other public companies to affirm that, to the best of their knowledge, the information in their financial reports is fairly and accurately stated in all material respects.
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Manager’s Letter
Fellow Shareholders
High yield bonds extended their multiyear run of strong performance in the 12 months ended May 31, 2014. As we expected—and have relayed in prior shareholder letters—capital appreciation has been modest due to the stretched valuations across our asset class. Nevertheless, the overall environment for junk bonds was extremely favorable due to strong capital market conditions, low default expectations, and improving corporate balance sheets. High yield bonds were again the best-performing asset class in the U.S. fixed income universe over the past 12 months. However, we caution investors not to expect the fund’s returns in the coming 12 to 24 months to be as strong as the results we have generated over the past five years.
PORTFOLIO PERFORMANCE
The High Yield Fund posted solid absolute and relative performance during the six months and fiscal year ended May 31, 2014. We slightly outperformed our Lipper peer group and the Credit Suisse High Yield Index due to security selection, which was particularly positive in the aerospace, services, metals/minerals, housing, and gaming/leisure industries. Credit selection in utilities hurt our relative performance, as did our allocation to bank debt and short-term holdings, which we keep on hand for day-to-day operations. Results for the Advisor Class were slightly lower, reflecting its different fee structure.
The portfolio’s share price advanced $0.11 over the past 12 months, closing the reporting period at $7.30, and dividend income contributed $0.43 to the fund’s 12-month total return. The High Yield Fund’s performance continued to compare favorably with its peer group. Lipper ranked the fund in the top quintile of its high current yield funds universe for the past 12 months and for the 10-year period ended May 31, 2014. (Based on cumulative total return, Lipper ranked the High Yield Fund 97 of 586, 105 of 406, and 49 of 276 funds in the high yield funds category for the 1-, 5-, and 10-year periods ended May 31, 2014, respectively. Past performance cannot guarantee future results.)
MARKET ENVIRONMENT
A weaker U.S. macroeconomic picture helped push long-term U.S. Treasury yields lower in 2014’s first quarter, although harsh winter weather likely contributed to the subpar economic data. A slowdown in Chinese economic growth and ongoing turmoil in Ukraine also partly fueled a flight-to-quality trade and led to volatility in equity markets. For the past 12 months, bonds rated B and below outperformed higher-quality credits in the benchmark. However, as long-term U.S. Treasury yields fell in 2014, longer-duration, higher-rated BB bonds outpaced CCCs—an unexpected reversal of the trend of lower-quality bond outperformance in 2013. All in all, the high yield market held up well in the face of vacillating global economic and geopolitical trends.
The performance of companies that issue high yield bonds has remained strong over the past 12 months. A year ago, our forecast was for coupon-like returns because high yield bond prices had run up beyond par value, and there was little room left for capital appreciation. However, in the first five months of 2014, bond prices continued to rise. With absolute yields still comparing favorably with other fixed income sectors and little changed from a credit fundamentals perspective, high yield portfolios continued to draw interest from investors looking to generate above-average yields in the low-rate environment. A series of weaker-than-expected U.S. economic reports, uncertainty about the timing of Federal Reserve rate hikes, and emerging markets concerns weighed on sentiment at times, but monthly high yield bond returns have been consistently positive in 2014.
Favorable supply dynamics have also helped the asset class’s performance. According to J.P. Morgan, $173 billion of new high yield bonds have come to the market in 2014 through May, a slowdown from the record-setting $205 billion at this point last year. It is unlikely that new issuance of high yield bonds in 2014 will match the record high of $399 billion for 2013. Strong pricing has been driven by several factors. First, dealer inventories remain low from a historical perspective, and selling has been limited, making it difficult for dedicated investors to buy high yield bonds in the secondary market. Another factor is that net new supply has been low due to the heavy amount of refinancing transactions. Because the value in much of the new issuance has deteriorated, we have only participated in about 30% of the year-to-date offerings, as we remain very selective about the bonds we purchase. Meanwhile, demand for new issues remained robust despite generally poor deal structures, including low coupons, weak covenants, and limited call protection.
As the first quarter came to a close, Energy Future Holdings, also known as TXU—a massive Texas-based power producer—announced that it would skip its April 1 coupon payment and use the 30-day grace period to explore restructuring options. The company subsequently filed for bankruptcy at the end of April. The default caused a spike in the high yield market’s default rate, but from a historically low level—it is the largest high yield default on record. However, the market’s reaction was muted because the event was widely telegraphed as investors already expected this highly leveraged issuer to restructure its complex balance sheet. (Please refer to the fund’s portfolio of investments for a complete list of holdings and the amount each represents in the portfolio.)
RISK MANAGEMENT: A KEY COMPONENT OF OUR STRATEGY
Before discussing portfolio activity for the periods under review, we would like to inform shareholders about some fundamental changes that have occurred in the fixed income markets in recent years. The markets were particularly volatile at the beginning of the fund’s fiscal year as investors began to consider the ramifications of a scale-back in the Fed’s quantitative easing program and a potential rise in interest rates. The volatility subsided, but it highlighted the importance of sound risk management.
Bond fund assets have grown substantially over the past three decades, with much of the growth taking place since the end of 2008. This has been beneficial in many ways, but like all positive events, it has its side effects as well. The prospect of rising interest rates triggers concerns that some investors could change course and redeploy their assets into other areas of the market. Net outflows during periods of rising rates are not new; indeed, such was the case in 1994 and 2000 when rates turned up. The market was considerably smaller than it is today, however.
Because of this evolving environment, T. Rowe Price is taking steps to ensure that our funds function smoothly during transitional periods as the Fed makes policy changes that are likely to affect the direction of interest rates. These steps include assessing the liquidity of our portfolios, conducting stress tests that take various market scenarios under consideration, evaluating risk management strategies to determine appropriate actions, and taking other measures to ensure the continuing smooth operation of our portfolios. We do not believe that your fund will be adversely affected by the conditions we have just mentioned, but we want to inform our shareholders that we are aware of the changing market environment and are monitoring it closely.
PORTFOLIO REVIEW
The high yield asset class was resilient in our fiscal year, and our largest investments generated solid contributions. The top 20 contributors added 250 basis points (2.50%) to the fund’s return in the past 12 months, while our 20 bottom performers accounted for only 73 basis points (0.73%) of drag on results. Our biggest holdings, shown in the Twenty-Five Largest Issuers table on page 15, were almost uniformly our best contributors for the reporting period. In recent letters, we have spotlighted our reasons for holding many of these issuers, including SoftBank (the Japanese company that now owns Sprint Nextel), First Data, Univision Communications, Liberty Global, Community Health Systems, and Intelsat, and our positive thesis for these investments remains largely intact.
Our best-performing issuer over the past six months (third-best for our fiscal year) was Altice Financing. The Israel-based cable operator was in the sweet spot of several of our strongest-conviction investment themes during the past year. Altice is a cable, wireless, wireline, and Internet operator, with a presence in several European countries and emerging markets. It has benefited from the positive merger and acquisition (M&A) trend, which we think will continue to be a catalyst for our market.
T. Rowe Price’s credit and equity analyst teams both liked the company’s prospects, and we bought several Altice bond issues denominated in U.S. dollars and euros and participated in the company’s initial public offering (IPO). The company’s latest bond offering, in April 2014, to fund the acquisition of Vivendi’s wireless division was one of the largest ever in the European high yield market, and those bonds have appreciated significantly. The common stock, which we bought at the $29 IPO price, now trades near $55. In our view, the cable industry is poised to benefit from ongoing consolidation, and we have a significant overweight to the industry. Altice has become a major portfolio holding and reflects our increasingly global focus—a trend that we expect will continue to be a powerful performance driver.
NON-U.S. HOLDINGS CONTRIBUTE TO ABSOLUTE AND RELATIVE RESULTS
At the end of the reporting period, about three-quarters of the fund was invested in domestic bonds, 13% in European high yield securities, almost 8% in emerging markets, and the balance in other developed markets, primarily Canada. Our European holdings have generated almost a 12% return for the past 12 months. Emerging markets holdings struggled in 2013 but have generated a positive performance contribution for the year-to-date period. We took advantage of the negative sentiment and weakness in several emerging bond markets to add about 100 basis points to our emerging markets exposure in the past 12 months. As we have mentioned in past shareholder letters, fundamental analysis and bottom-up credit selection are the primary determinants for our allocations to individual securities and our industry, country, and regional weights.
The high yield market is becoming an increasingly crowded trade in the U.S. due to the unprecedented demand for higher-yielding instruments. As a result, we need to cast a wider net to include non-U.S. exposure along with modest allocations to equities and nontraditional high yield securities. Our team scours the globe for opportunities, and, lately, we are finding excellent values in emerging markets, which were sharply lower in 2013. Over the past 12 months, we’ve systematically shifted our holdings of BB rated U.S. bonds into BBB rated emerging markets bonds. In the entire history of emerging markets investment-grade corporate bonds, there have only been two defaults. We are especially focused on high-quality emerging markets banks and energy companies that provide a yield premium.
INDUSTRY CONSOLIDATION PROVIDES ANOTHER TAILWIND
Bond takeouts due to M&A activity can generate powerful gains. For example, we established a position in Time Warner’s investment-grade bonds on the news that Charter Communications, one of the fund’s 10 largest holdings, was attempting to buy the company. Although Charter was unsuccessful in its bid—Comcast swooped in at the last minute and bought the business—Time Warner’s bonds appreciated about 20% in very short order, and our stake generated a solid capital gain.
M&A has also been a powerful contributor for us in the wireless communications, financial, and health care industries. Sprint’s bonds rallied on news of its potential merger with T-Mobile USA, which is now reflected in the performance of SoftBank, Sprint’s parent company. We also posted significant gains in Nuveen Investments when it was purchased by TIAA-CREF and subsequently sold to a strategic buyer. In health care, Valeant Pharmaceuticals is bidding for Allergan, an investment-grade company, in a stock deal that could boost Valeant’s creditworthiness and the value of its outstanding high yield bonds.
From an industry perspective, the fund generated double-digit gains from several segments, including airlines, services, and forest products/ containers. Overall, credit selection for the past 12 months was a solid contributor. Energy is our largest allocation, but we are underweight versus the benchmark because we believe that falling commodity prices will remain a headwind for the industry. Although every industry group posted a positive absolute performance, we lagged the benchmark’s results in our retail and utility positions. Additionally, as expected in a rising market environment, our short-term holdings detracted from our comparison with the benchmark index.
The financials sector, one of our largest industry allocations, has generated steady gains for many years. We believe that high yield financial companies will continue to improve their balance sheets and move closer to investment-grade ratings. Over the past 12 months, we trimmed our exposure to financials as some of these bonds were trading more like investment-grade debt than junk bonds, and their yields became less enticing.
We have been bullish on the airline segment for many years, and our exhaustive research efforts have yielded excellent returns. Our investments in the group generally have been conservative and focused on the biggest companies in the business. We’ve owned secured bonds, bank loans, convertible securities, and stock in Continental Airlines, Delta Air Lines, United Airlines, and US Airways, among others.
The portfolio’s best contributor over the past 12 months was American Airlines—a subsidiary of Fort Worth-based AMR. We bought American’s convertible bonds and defaulted bonds and took a stake in its trade claims and common stock. Although the individual positions were not large, each has performed well. Thanks to the solid gains, American Airlines is now a top portfolio holding. We’ve seen an incredible turnaround within the industry, which has been another beneficiary of M&A-related consolidation. Even the most distressed companies have the capacity for significant improvement in this environment.
We are modestly underweight to retailers, which was our poorest-performing industry group largely due to credit selection. Gymboree and Claire’s Stores were among our largest detractors, in part because stagnating income growth has hurt consumer discretionary spending, and those that are shopping have shifted to online channels. NII Holdings (Nextel International), one of Latin America’s largest wireless carriers, was the portfolio’s biggest detractor over the past 12 months and was largely responsible for our underperformance in the telecom segment. Its operations in Mexico and Brazil have posted disappointing results. We have maintained our position because we expect the company’s operations in its key markets to improve, and we think there is significant value to be gained in the restructuring of the company’s balance sheet.
OUT-OF-BENCHMARK HOLDINGS NET SOLID GAINS
A review of the Quality Diversification table shows that your fund remains focused on the upper tiers of the high yield market—issuers rated B and BB. Credit selection generated a strong positive contribution in most credit quality categories and was largely responsible for the fund’s good results. In addition to traditional high yield bonds, the portfolio holds about a 2.5% position in common stock and a bit less than 1% in preferred and convertible securities, which returned 39% and 24%, respectively. We will typically only add equity exposure to companies where we own high yield bonds and in which our high yield and equity analysts have strong conviction. The portfolio also benefited from its small stake in credit default swaps.
Over the past six months, we decreased our bank debt allocation, which, at the end of the period, represented 7.4% of the fund. Leveraged loans are typically more defensive than high yield bonds, and we think the asset class offers a compelling blend of characteristics. The income from loans is approximately the same as BB rated bonds, bank debt is senior in a company’s capital structure, and bank debt has a floating rate feature, which should help minimize portfolio volatility when rates move higher. Although leveraged loans contributed better than 5% to absolute returns, they detracted from our relative results. We trimmed the bank debt position as we found higher-yielding bond alternatives. The other out-of-benchmark allocation that hurt the fund’s performance was our short-term holdings. We will always keep some cash on hand for day-to-day liquidity and as “dry powder” for buying opportunities. The interest rate on short-term securities was barely positive over the 12-month period, crimping our relative performance.
OUTLOOK
Our outlook for the high yield market has changed very little from six months ago, when we cautioned investors not to expect the outsized returns that we have enjoyed for the past five years. While we are pleased to have generated good results for the past 12 months, we believe that capital appreciation will continue to be a smaller component than income in our total return because the average high yield bond currently trades at a premium to its par value. Most of the capital appreciation we generated over the past year came from out-of-benchmark holdings. At this point, we expect the market to generate a relatively modest, coupon-like return for the next 12 months.
However, compared with the rest of the fixed income universe, high yield appears to be one of the best places to invest. For example, we see improving credit fundamentals within the asset class. Many companies have fortified their balance sheets by issuing new debt at low rates, which bodes well for a continuation of the low default rate environment. The default rate for the high yield market (excluding TXU) is near a historical low at 0.73%, according to J.P. Morgan. We believe that it will remain below 2% for the next year or more, which is well under its long-term average of 3.9%. Liquidity remains healthy, and issuance, while unlikely to match last year’s record pace, remained robust in the first five months of the year. Additionally, steadily rising equity markets have allowed many high yield companies to issue stock, and a portion of the IPO proceeds is often used to pay down high yield debt.
However, after a five-and-a-half-year run of strong performance for the asset class, the risk/reward trade-off is not nearly as favorable as it was a year or two ago. At this time, with yields on below investment-grade bonds hovering near historically low levels and prices near all-time highs, valuations are more stretched than at any point in the past five years, and aggressively priced bonds are the norm in the new issue market. After a long period of especially strong performance, we’re expressing caution.
As always, our goal is to deliver high current income and attractive total returns over time while seeking to cushion the volatility inherent in this market. We will continue with our commitment to research and diversification, which we believe is prudent for a fund that invests in a riskier area of the bond market.
Thank you for investing with T. Rowe Price.
Respectfully submitted,
Mark J. Vaselkiv
Chairman of the fund’s Investment Advisory Committee
June 9, 2014
The committee chairman has day-to-day responsibility for managing the portfolio and works with committee members in developing and executing the fund’s investment program.
RISKS OF BOND INVESTING
Bonds are subject to interest rate risk, the decline in bond prices that usually accompanies a rise in interest rates, and credit risk, the chance that any fund holding could have its credit rating downgraded or that a bond issuer will default (fail to make timely payments of interest or principal), potentially reducing the fund’s income level and share price. High yield corporate bonds could have greater price declines than funds that invest primarily in high-quality bonds. Companies issuing high yield bonds are not as strong financially as those with higher credit ratings, so the bonds are usually considered speculative investments.
GLOSSARY
Credit Suisse High Yield Index: Tracks the performance of domestic noninvestment-grade corporate bonds.
Duration: The average time (expressed in years) needed for an investor to receive the present value of the future cash flows on a fixed income investment. It is used to measure a bond’s or bond fund’s sensitivity to interest rate changes. For example, a fund with a three-year duration would fall about 3% in price in response to a one-percentage-point increase in interest rates, and vice versa. Modified duration provides a more accurate estimate of the fund’s price sensitivity based solely on changes in real interest rates.
Lipper averages: The averages of available mutual fund performance returns for specified time periods in categories defined by Lipper Inc.
SEC yield (30-day): A method of calculating a fund’s yield that assumes all portfolio securities are held until maturity. Yield will vary and is not guaranteed.
Weighted average maturity: In general, the longer the average maturity, the greater the fund’s sensitivity to interest rate changes. The weighted average maturity may take into account the interest rate readjustment dates for certain securities.
Performance and Expenses
| Growth of $10,000 |
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 benchmarks, which may include a broad-based market index and a peer group average or index. Market indexes do not include expenses, which are deducted from fund returns as well as mutual fund averages and indexes.
| Fund Expense Example |
As a mutual fund shareholder, you may incur two types of costs: (1) transaction costs, such as redemption fees or sales loads, and (2) ongoing costs, including management fees, distribution and service (12b-1) fees, and other fund expenses. The following example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the most recent six-month period and held for the entire period.
Please note that the fund has two share classes: The original share class (Investor Class) charges no distribution and service (12b-1) fee, and the Advisor Class shares are offered only through unaffiliated brokers and other financial intermediaries and charge a 0.25% 12b-1 fee. Each share class is presented separately in the table.
Actual Expenses
The first line of the following table (Actual) provides information about actual account values and expenses based on the fund’s actual returns. You may use the information on this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number on the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The information on the second line of the table (Hypothetical) is based on hypothetical account values and expenses derived from the fund’s actual expense ratio and an assumed 5% per year rate of return before expenses (not the fund’s actual return). You may compare the ongoing costs of investing in the fund with other funds by contrasting this 5% hypothetical example and the 5% hypothetical examples that appear in the shareholder reports of the other funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.
Note: T. Rowe Price charges an annual account service fee of $20, generally for accounts with less than $10,000. The fee is waived for any investor whose T. Rowe Price mutual fund accounts total $50,000 or more; accounts electing to receive electronic delivery of account statements, transaction confirmations, prospectuses, and shareholder reports; or accounts of an investor who is a T. Rowe Price Preferred Services, Personal Services, or Enhanced Personal Services client (enrollment in these programs generally requires T. Rowe Price assets of at least $100,000). This fee is not included in the accompanying table. If you are subject to the fee, keep it in mind when you are estimating the ongoing expenses of investing in the fund and when comparing the expenses of this fund with other funds.
You should also be aware that the expenses shown in the table highlight only your ongoing costs and do not reflect any transaction costs, such as redemption fees or sales loads. Therefore, the second line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. To the extent a fund charges transaction costs, however, the total cost of owning that fund is higher.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
| Notes to Financial Statements |
T. Rowe Price High Yield Fund, Inc. (the fund), is registered under the Investment Company Act of 1940 (the 1940 Act) as a diversified, open-end management investment company. The fund seeks high current income and, secondarily, capital appreciation. The fund has two classes of shares: the High Yield Fund original share class, referred to in this report as the Investor Class, offered since December 31, 1984, and the High Yield Fund–Advisor Class (Advisor Class), offered since March 31, 2000. Advisor Class shares are sold only through unaffiliated brokers and other unaffiliated financial intermediaries that are compensated by the class for distribution, shareholder servicing, and/or certain administrative services under a Board-approved Rule 12b-1 plan. Each class has exclusive voting rights on matters related solely to that class; separate voting rights on matters that relate to both classes; and, in all other respects, the same rights and obligations as the other class.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation The fund is an investment company and follows accounting and reporting guidance in the Financial Accounting Standards Board Accounting Standards Codification Topic 946 (ASC 946). The accompanying financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (GAAP), including but not limited to ASC 946. GAAP requires the use of estimates made by management. Management believes that estimates and valuations are appropriate; however, actual results may differ from those estimates, and the valuations reflected in the accompanying financial statements may differ from the value ultimately realized upon sale or maturity.
Investment Transactions, Investment Income, and Distributions Income and expenses are recorded on the accrual basis. Premiums and discounts on debt securities are amortized for financial reporting purposes. Paydown gains and losses are recorded as an adjustment to interest income. Dividends received from mutual fund investments are reflected as dividend income; capital gain distributions are reflected as realized gain/loss. Dividend income and capital gain distributions are recorded on the ex-dividend date. Income tax-related interest and penalties, if incurred, would be recorded as income tax expense. Investment transactions are accounted for on the trade date. Realized gains and losses are reported on the identified cost basis. Distributions to shareholders are recorded on the ex-dividend date. Income distributions are declared by each class daily and paid monthly. Capital gain distributions, if any, are generally declared and paid by the fund annually.
Currency Translation Assets, including investments, 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 asked prices of such currencies against U.S. dollars as quoted by a major bank. Purchases and sales of securities, income, and expenses are translated into U.S. dollars at the prevailing exchange rate on the date of the transaction. The effect of changes in foreign currency exchange rates on realized and unrealized security gains and losses is reflected as a component of security gains and losses.
Class Accounting The Advisor Class pays distribution, shareholder servicing, and/or certain administrative expenses in the form of Rule 12b-1 fees, in an amount not exceeding 0.25% of the class’s average daily net assets. Shareholder servicing, prospectus, and shareholder report expenses incurred by each class are charged directly to the class to which they relate. Expenses common to both classes and investment income are allocated to the classes based upon the relative daily net assets of each class’s settled shares; realized and unrealized gains and losses are allocated based upon the relative daily net assets of each class’s outstanding shares.
Redemption Fees A 2% fee is assessed on redemptions of fund shares held for 90 days or less to deter short-term trading and to protect the interests of long-term shareholders. Redemption fees are withheld from proceeds that shareholders receive from the sale or exchange of fund shares. The fees are paid to the fund and are recorded as an increase to paid-in capital. The fees may cause the redemption price per share to differ from the net asset value per share.
New Accounting Guidance On June 1, 2013, the fund adopted new accounting guidance, issued by the Financial Accounting Standards Board, that requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Adoption had no effect on the fund’s net assets or results of operations.
NOTE 2 - VALUATION
The fund’s financial instruments are valued and each class’s net asset value (NAV) per share is computed at the close of the New York Stock Exchange (NYSE), normally 4 p.m. ET, each day the NYSE is open for business.
Fair Value The fund’s financial instruments are reported at fair value, which GAAP defines as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The T. Rowe Price Valuation Committee (the Valuation Committee) has been established by the fund’s Board of Directors (the Board) to ensure that financial instruments are appropriately priced at fair value in accordance with GAAP and the 1940 Act. Subject to oversight by the Board, the Valuation Committee develops and oversees pricing-related policies and procedures and approves all fair value determinations. Specifically, the Valuation Committee establishes procedures to value securities; determines pricing techniques, sources, and persons eligible to effect fair value pricing actions; oversees the selection, services, and performance of pricing vendors; oversees valuation-related business continuity practices; and provides guidance on internal controls and valuation-related matters. The Valuation Committee reports to the fund’s Board; is chaired by the fund’s treasurer; and has representation from legal, portfolio management and trading, operations, and risk management.
Various valuation techniques and inputs are used to determine the fair value of financial instruments. GAAP establishes the following fair value hierarchy that categorizes the inputs used to measure fair value:
Level 1 – quoted prices (unadjusted) in active markets for identical financial instruments that the fund can access at the reporting date
Level 2 – inputs other than Level 1 quoted prices that are observable, either directly or indirectly (including, but not limited to, quoted prices for similar financial instruments in active markets, quoted prices for identical or similar financial instruments in inactive markets, interest rates and yield curves, implied volatilities, and credit spreads)
Level 3 – unobservable inputs
Observable inputs are developed using market data, such as publicly available information about actual events or transactions, and reflect the assumptions that market participants would use to price the financial instrument. Unobservable inputs are those for which market data are not available and are developed using the best information available about the assumptions that market participants would use to price the financial instrument. GAAP requires valuation techniques to maximize the use of relevant observable inputs and minimize the use of unobservable inputs. When multiple inputs are used to derive fair value, the financial instrument is assigned to the level within the fair value hierarchy based on the lowest-level input that is significant to the fair value of the financial instrument. Input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level but rather the degree of judgment used in determining those values.
Valuation Techniques Debt securities generally are traded in the over-the-counter (OTC) market. Securities with remaining maturities of one year or more at the time of acquisition are valued at prices furnished by dealers who make markets in such securities or by an independent pricing service, which considers the yield or price of bonds of comparable quality, coupon, maturity, and type, as well as prices quoted by dealers who make markets in such securities. Securities with remaining maturities of less than one year at the time of acquisition generally use amortized cost in local currency to approximate fair value. However, if amortized cost is deemed not to reflect fair value or the fund holds a significant amount of such securities with remaining maturities of more than 60 days, the securities are valued at prices furnished by dealers who make markets in such securities or by an independent pricing service. Generally, debt securities are categorized in Level 2 of the fair value hierarchy; however, to the extent the valuations include significant unobservable inputs, the securities would be categorized in Level 3.
Equity securities listed or regularly traded on a securities exchange or in the over-the-counter (OTC) market are valued at the last quoted sale price or, for certain markets, the official closing price at the time the valuations are made. OTC Bulletin Board securities are valued at the mean of the closing bid and asked prices. 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. Listed securities not traded on a particular day are valued at the mean of the closing bid and asked prices for domestic securities and the last quoted sale or closing price for international securities.
For valuation purposes, the last quoted prices of non-U.S. equity securities may be adjusted to reflect the fair value of such securities at the close of the NYSE. If the fund determines that developments between the close of a foreign market and the close of the NYSE will, in its judgment, materially affect the value of some or all of its portfolio securities, the fund will adjust the previous quoted prices to reflect what it believes to be the fair value of the securities as of the close of the NYSE. In deciding whether it is necessary to adjust quoted prices to reflect fair value, the fund reviews a variety of factors, including developments in foreign markets, the performance of U.S. securities markets, and the performance of instruments trading in U.S. markets that represent foreign securities and baskets of foreign securities. The fund may also fair value securities in other situations, such as when a particular foreign market is closed but the fund is open. The fund uses outside pricing services to provide it with quoted prices and information to evaluate or adjust those prices. The fund cannot predict how often it will use quoted prices and how often it will determine it necessary to adjust those prices to reflect fair value. As a means of evaluating its security valuation process, the fund routinely compares quoted prices, the next day’s opening prices in the same markets, and adjusted prices.
Actively traded domestic equity securities generally are categorized in Level 1 of the fair value hierarchy. Non-U.S. equity securities generally are categorized in Level 2 of the fair value hierarchy despite the availability of quoted prices because, as described above, the fund evaluates and determines whether those quoted prices reflect fair value at the close of the NYSE or require adjustment. OTC Bulletin Board securities, certain preferred securities, and equity securities traded in inactive markets generally are categorized in Level 2 of the fair value hierarchy.
Investments in mutual funds are valued at the mutual fund’s closing NAV per share on the day of valuation and are categorized in Level 1 of the fair value hierarchy. Listed options, and OTC options with a listed equivalent, are valued at the mean of the closing bid and asked prices and generally are categorized in Level 2 of the fair value hierarchy. Forward currency exchange contracts are valued using the prevailing forward exchange rate and are categorized in Level 2 of the fair value hierarchy. Swaps are valued at prices furnished by independent swap dealers or by an independent pricing service and generally are categorized in Level 2 of the fair value hierarchy; however, if unobservable inputs are significant to the valuation, the swap would be categorized in Level 3. Assets and liabilities other than financial instruments, including short-term receivables and payables, are carried at cost, or estimated realizable value, if less, which approximates fair value.
Thinly traded financial instruments and those 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 the Valuation Committee. The objective of any fair value pricing determination is to arrive at a price that could reasonably be expected from a current sale. Financial instruments fair valued by the Valuation Committee are primarily private placements, restricted securities, warrants, rights, and other securities that are not publicly traded.
Subject to oversight by the Board, the Valuation Committee regularly makes good faith judgments to establish and adjust the fair valuations of certain securities as events occur and circumstances warrant. For instance, in determining the fair value of troubled or thinly traded debt instruments, the Valuation Committee considers a variety of factors, which may include, but are not limited to, the issuer’s business prospects, its financial standing and performance, recent investment transactions in the issuer, strategic events affecting the company, market liquidity for the issuer, and general economic conditions and events. In consultation with the investment and pricing teams, the Valuation Committee will determine an appropriate valuation technique based on available information, which may include both observable and unobservable inputs. The Valuation Committee typically will afford greatest weight to actual prices in arm’s length transactions, to the extent they represent orderly transactions between market participants; transaction information can be reliably obtained; and prices are deemed representative of fair value. However, the Valuation Committee may also consider other valuation methods such as a discount or premium from market value of a similar, freely traded security of the same issuer; discounted cash flows; yield to maturity; or some combination. Fair value determinations are reviewed on a regular basis and updated as information becomes available, including actual purchase and sale transactions of the issue. Because any fair value determination involves a significant amount of judgment, there is a degree of subjectivity inherent in such pricing decisions and fair value prices determined by the Valuation Committee could differ from those of other market participants. Depending on the relative significance of unobservable inputs, including the valuation technique(s) used, fair valued securities may be categorized in Level 2 or 3 of the fair value hierarchy.
Valuation Inputs The following table summarizes the fund’s financial instruments, based on the inputs used to determine their fair values on May 31, 2014:
There were no material transfers between Levels 1 and 2 during the year ended May 31, 2014.
Following is a reconciliation of the fund’s Level 3 holdings for the year ended May 31, 2014. Gain (loss) reflects both realized and change in unrealized gain/loss on Level 3 holdings during the period, if any, and is included on the accompanying Statement of Operations. The change in unrealized gain/loss on Level 3 instruments held at May 31, 2014, totaled $6,027,000 for the year ended May 31, 2014.
NOTE 3 - DERIVATIVE INSTRUMENTS
During the year ended May 31, 2014, the fund invested in derivative instruments. As defined by GAAP, a derivative is a financial instrument whose value is derived from an underlying security price, foreign exchange rate, interest rate, index of prices or rates, or other variable; it requires little or no initial investment and permits or requires net settlement. The fund invests in derivatives only if the expected risks and rewards are consistent with its investment objectives, policies, and overall risk profile, as described in its prospectus and Statement of Additional Information. The fund may use derivatives for a variety of purposes, such as seeking to hedge against declines in principal value, increase yield, invest in an asset with greater efficiency and at a lower cost than is possible through direct investment, or to adjust portfolio duration and credit exposure. The risks associated with the use of derivatives are different from, and potentially much greater than, the risks associated with investing directly in the instruments on which the derivatives are based. The fund at all times maintains sufficient cash reserves, liquid assets, or other SEC-permitted asset types to cover its settlement obligations under open derivative contracts.
The fund values its derivatives at fair value, as described in Note 2, and recognizes changes in fair value currently in its results of operations. Accordingly, the fund does not follow hedge accounting, even for derivatives employed as economic hedges. Generally, the fund accounts for its derivatives on a gross basis. It does not offset the fair value of derivative liabilities against the fair value of derivative assets on its financial statements, nor does it offset the fair value of derivative instruments against the right to reclaim or obligation to return collateral. The following table summarizes the fair value of the fund’s derivative instruments held as of May 31, 2014, and the related location on the accompanying Statement of Assets and Liabilities, presented by primary underlying risk exposure:
Additionally, the amount of gains and losses on derivative instruments recognized in fund earnings during the year ended May 31, 2014, and the related location on the accompanying Statement of Operations is summarized in the following table by primary underlying risk exposure:
Counterparty Risk and Collateral The fund invests in derivatives in various markets, which expose it to differing levels of counterparty risk. Counterparty risk on exchange-traded and centrally cleared derivative contracts, such as futures, exchange-traded options, and centrally cleared swaps, is minimal because the clearinghouse provides protection against counterparty defaults. For futures and centrally cleared swaps, the fund is required to deposit collateral in an amount equal to a certain percentage of the contract value (margin requirement), and the margin requirement must be maintained over the life of the contract. Each clearing broker, in its sole discretion, may adjust the margin requirements applicable to the fund.
Derivatives, such as bilateral swaps, forward currency exchange contracts, and OTC options, that are transacted and settle directly with a counterparty (bilateral derivatives) expose the fund to greater counterparty risk. To mitigate this risk, the fund has entered into master netting arrangements (MNAs) with certain counterparties that permit net settlement under specified conditions and, for certain counterparties, also provide collateral agreements. MNAs may be in the form of International Swaps and Derivatives Association master agreements (ISDAs) or foreign exchange letter agreements (FX letters).
MNAs govern the ability to offset amounts the fund owes a counterparty against amounts the counterparty owes the fund (net settlement). Both ISDAs and FX letters generally allow net settlement in the event of contract termination and permit termination by either party prior to maturity upon the occurrence of certain stated events, such as failure to pay or bankruptcy. In addition, ISDAs specify other events, the occurrence of which would allow one of the parties to terminate. For example, a downgrade in credit rating of a counterparty would allow the fund to terminate while a decline in the fund’s net assets of more than a certain percentage would allow the counterparty to terminate. Upon termination, all bilateral derivatives with that counterparty would be liquidated and a net amount settled. ISDAs typically include collateral agreements whereas FX letters do not. Collateral requirements are determined based on the net aggregate unrealized gain or loss on all bilateral derivatives with each counterparty, subject to minimum transfer amounts that typically range from $100,000 to $250,000. Any additional collateral required due to changes in security values is transferred the next business day.
Collateral may be in the form of cash or debt securities issued by the U.S. government or related agencies. Cash and currencies posted by the fund are reflected as cash deposits in the accompanying financial statements and generally are restricted from withdrawal by the fund; securities posted by the fund are so noted in the accompanying Portfolio of Investments; both remain in the fund’s assets. Collateral pledged by counterparties is not included in the fund’s assets because the fund does not obtain effective control over those assets. For bilateral derivatives, collateral posted or received by the fund is held in a segregated account by the fund’s custodian. As of May 31, 2014, securities valued at $6,127,000 had been posted by the fund to counterparties for bilateral derivatives. As of May 31, 2014, collateral pledged by counterparties to the fund for bilateral derivatives consisted of $7,970,000 cash and securities valued at $6,229,000. As of May 31, 2014, no margin had been posted by the fund for exchange-traded and/or centrally cleared derivatives.
Forward Currency Exchange Contracts The fund is subject to foreign currency exchange rate risk in the normal course of pursuing its investment objectives. It uses forward currency exchange contracts (forwards) primarily to protect its non-U.S. dollar-denominated securities from adverse currency movements relative to the U.S. dollar. A forward involves an obligation to purchase or sell a fixed amount of a specific currency on a future date at a price set at the time of the contract. Although certain forwards may be settled by exchanging only the net gain or loss on the contract, most forwards are settled with the exchange of the underlying currencies in accordance with the specified terms. Forwards are valued at the unrealized gain or loss on the contract, which reflects the net amount the fund either is entitled to receive or obligated to deliver, as measured by the difference between the forward exchange rates at the date of entry into the contract and the forward rates at the reporting date. Appreciated forwards are reflected as assets, and depreciated forwards are reflected as liabilities on the accompanying Statement of Assets and Liabilities. Risks related to the use of forwards include the possible failure of counterparties to meet the terms of the agreements; that anticipated currency movements will not occur, thereby reducing the fund’s total return; and the potential for losses in excess of the fund’s initial investment. During the year ended May 31, 2014, the volume of the fund’s activity in forwards, based on underlying notional amounts, was generally between 7% and 10% of net assets.
Options The fund is subject to equity price risk in the normal course of pursuing its investment objectives and uses options to help manage such risk. The fund may use options to manage exposure to security prices, interest rates, foreign currencies, and credit quality; as an efficient means of adjusting exposure to all or a part of a target market; to enhance income; as a cash management tool; or to adjust credit exposure. Options are included in net assets at fair value; purchased options are included in Investments in Securities; and written options are separately reflected as a liability on the accompanying Statement of Assets and Liabilities. Premiums on unexercised, expired options are recorded as realized gains or losses; premiums on exercised options are recorded as an adjustment to the proceeds from the sale or cost of the purchase. The difference between the premium and the amount received or paid in a closing transaction is also treated as realized gain or loss. In return for a premium paid, call and put options give the holder the right, but not the obligation, to purchase or sell, respectively, a security at a specified exercise price. Risks related to the use of options include possible illiquidity of the options markets; trading restrictions imposed by an exchange or counterparty; movements in the underlying security values and, for written options, potential losses in excess of the fund’s initial investment. During the year ended May 31, 2014, the volume of the fund’s activity in options, based on underlying notional amounts, was generally less than 1% of net assets. Transactions in written options and related premiums received during the year ended May 31, 2014, were as follows:
Swaps The fund is subject to credit risk in the normal course of pursuing its investment objectives and uses swap contracts to help manage such risk. The fund may use swaps in an effort to manage exposure to changes in interest rates, inflation rates, and credit quality; to adjust overall exposure to certain markets; to enhance total return or protect the value of portfolio securities; to serve as a cash management tool; or to adjust portfolio duration and credit exposure. Swap agreements can be settled either directly with the counterparty (bilateral swap) or through a central clearinghouse (centrally cleared swap). Fluctuations in the fair value of a contract are reflected in unrealized gain or loss and are reclassified to realized gain or loss upon contract termination or cash settlement. Net periodic receipts or payments required by a contract increase or decrease, respectively, the value of the contract until the contractual payment date, at which time such amounts are reclassified from unrealized to realized gain or loss. For bilateral swaps, cash payments are made or received by the fund on a periodic basis in accordance with contract terms; unrealized gain on contracts and premiums paid are reflected as assets, and unrealized loss on contracts and premiums received are reflected as liabilities on the accompanying Statement of Assets and Liabilities. For centrally cleared swaps, payments are made or received by the fund each day to settle the daily fluctuation in the value of the contract (variation margin). Accordingly, the value of a centrally cleared swap included in net assets is the unsettled variation margin; net variation margin receivable is reflected as an asset and net variation margin payable is reflected as a liability on the accompanying Statement of Assets and Liabilities.
Credit default swaps are agreements where one party (the protection buyer) agrees to make periodic payments to another party (the protection seller) in exchange for protection against specified credit events, such as certain defaults and bankruptcies related to an underlying credit instrument, or issuer or index of such instruments. Upon occurrence of a specified credit event, the protection seller is required to pay the buyer the difference between the notional amount of the swap and the value of the underlying credit, either in the form of a net cash settlement or by paying the gross notional amount and accepting delivery of the relevant underlying credit. For credit default swaps where the underlying credit is an index, a specified credit event may affect all or individual underlying securities included in the index and will be settled based upon the relative weighting of the affected underlying security(s) within the index. Generally, the payment risk for the seller of protection is inversely related to the current market price or credit rating of the underlying credit or the market value of the contract relative to the notional amount, which are indicators of the markets’ valuation of credit quality. As of May 31, 2014, the notional amount of protection sold by the fund totaled $154,625,000 (1.5% of net assets), which reflects the maximum potential amount the fund could be required to pay under such contracts. Risks related to the use of credit default swaps include the possible inability of the fund to accurately assess the current and future creditworthiness of underlying issuers, the possible failure of a counterparty to perform in accordance with the terms of the swap agreements, potential government regulation that could adversely affect the fund’s swap investments, and potential losses in excess of the fund’s initial investment.
During the year ended May 31, 2014, the volume of the fund’s activity in swaps, based on underlying notional amounts, was generally between 0% and 2% of net assets.
NOTE 4 - OTHER INVESTMENT TRANSACTIONS
Consistent with its investment objective, the fund engages in the following practices to manage exposure to certain risks and/or to enhance performance. The investment objective, policies, program, and risk factors of the fund are described more fully in the fund’s prospectus and Statement of Additional Information.
Noninvestment-Grade Debt Securities At May 31, 2014, approximately 92% of the fund’s net assets were invested, either directly or through its investment in T. Rowe Price institutional funds, in noninvestment-grade debt securities, commonly referred to as “high yield” or “junk” bonds. The noninvestment-grade bond market may experience sudden and sharp price swings due to a variety of factors, including changes in economic forecasts, stock market activity, large sustained sales by major investors, a high-profile default, or a change in market sentiment. These events may decrease the ability of issuers to make principal and interest payments and adversely affect the liquidity or value, or both, of such securities.
Restricted Securities The fund may invest in securities that are subject to legal or contractual restrictions on resale. Prompt sale of such securities at an acceptable price may be difficult and may involve substantial delays and additional costs.
Bank Loans The fund may invest in bank loans, which represent an interest in amounts owed by a borrower to a syndication of lenders. Bank loans are generally noninvestment grade and often involve borrowers whose financial condition is troubled or highly leveraged. Bank loans may be in the form of either assignments or participations. A loan assignment transfers all legal, beneficial, and economic rights to the buyer, and transfer typically requires consent of both the borrower and agent. In contrast, a loan participation generally entitles the buyer to receive the cash flows from principal, interest, and any fee payments; however, the seller continues to hold legal title to the loan. As a result, the buyer of a loan participation generally has no direct rights against the borrower and is exposed to credit risk of both the borrower and seller of the participation. Bank loans often have extended settlement periods, usually may be repaid at any time at the option of the borrower, and may require additional principal to be funded at the borrowers’ discretion at a later date (unfunded commitments). Until settlement, the fund maintains liquid assets sufficient to settle its unfunded loan commitments. The fund reflects both the funded portion of a bank loan as well as its unfunded commitment in the Portfolio of Investments. However, to the extent a credit agreement provides no initial funding of a tranche and funding of the full commitment at a future date(s) is at the borrower’s discretion and considered uncertain, no loan is reflected in the Portfolio of Investments until paid.
Other Purchases and sales of portfolio securities other than short-term securities aggregated $5,622,955,000 and $5,185,893,000, respectively, for the year ended May 31, 2014.
NOTE 5 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and distribute to shareholders all of its taxable income and gains. Distributions determined in accordance with federal income tax regulations may differ in amount or character from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book/tax differences to reflect tax character but are not adjusted for temporary differences.
The fund files U.S. federal, state, and local tax returns as required. The fund’s tax returns are subject to examination by the relevant tax authorities until expiration of the applicable statute of limitations, which is generally three years after the filing of the tax return but which can be extended to six years in certain circumstances. Tax returns for open years have incorporated no uncertain tax positions that require a provision for income taxes.
Reclassifications to paid-in capital 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 or realized capital gain. Reclassifications between income and gain relate primarily to differences between book/tax amortization policies. For the year ended May 31, 2014, the following reclassifications were recorded to reflect tax character (there was no impact on results of operations or net assets):
Distributions during the years ended May 31, 2014 and May 31, 2013, were characterized for tax purposes as follows:
At May 31, 2014, the tax-basis cost of investments and components of net assets were as follows:
NOTE 6 - RELATED PARTY TRANSACTIONS
The fund is managed by T. Rowe Price Associates, Inc. (Price Associates), a wholly owned subsidiary of T. Rowe Price Group, Inc. (Price Group). The investment management agreement between the fund and Price Associates provides for an annual investment management fee, which is computed daily and paid monthly. The fee consists of an individual fund fee, equal to 0.30% of the fund’s average daily net assets, and a group fee. The group fee rate is calculated based on the combined net assets of certain mutual funds sponsored by Price Associates (the group) applied to a graduated fee schedule, with rates ranging from 0.48% for the first $1 billion of assets to 0.275% for assets in excess of $400 billion. The fund’s group fee is determined by applying the group fee rate to the fund’s average daily net assets. At May 31, 2014, the effective annual group fee rate was 0.29%.
In addition, the fund has entered into service agreements with Price Associates and two wholly owned subsidiaries of Price Associates (collectively, Price). Price Associates computes the daily share prices and provides certain other administrative services to the fund. T. Rowe Price Services, Inc., provides shareholder and administrative services in its capacity as the fund’s transfer and dividend-disbursing agent. T. Rowe Price Retirement Plan Services, Inc., provides subaccounting and recordkeeping services for certain retirement accounts invested in the Investor Class. For the year ended May 31, 2014, expenses incurred pursuant to these service agreements were $201,000 for Price Associates; $1,474,000 for T. Rowe Price Services, Inc.; and $360,000 for T. Rowe Price Retirement Plan Services, Inc. The total amount payable at period-end pursuant to these service agreements is reflected as Due to Affiliates in the accompanying financial statements.
Additionally, the fund is one of several mutual funds in which certain college savings plans managed by Price Associates may invest. As approved by the fund’s Board of Directors, shareholder servicing costs associated with each college savings plan are borne by the fund in proportion to the average daily value of its shares owned by the college savings plan. For the year ended May 31, 2014, the fund was charged $17,000 for shareholder servicing costs related to the college savings plans, of which $14,000 was for services provided by Price. The amount payable at period-end pursuant to this agreement is reflected as Due to Affiliates in the accompanying financial statements. At May 31, 2014, less than 1% of the outstanding shares of the Investor Class were held by college savings plans.
The fund is also one of several mutual funds sponsored by Price Associates (underlying Price funds) in which the T. Rowe Price Spectrum Funds (Spectrum Funds), as well as the T. Rowe Price Retirement Funds and T. Rowe Price Target Retirement Funds (Retirement Funds) may invest. Neither the Spectrum Funds nor the Retirement Funds invest in the underlying Price funds for the purpose of exercising management or control. Pursuant to separate special servicing agreements, expenses associated with the operation of the Spectrum Funds and Retirement Funds are borne by each underlying Price fund to the extent of estimated savings to it and in proportion to the average daily value of its shares owned by the Spectrum Funds and Retirement Funds, respectively. Expenses allocated under these agreements are reflected as shareholder servicing expenses in the accompanying financial statements. For the year ended May 31, 2014, the fund was allocated $1,702,000 of Spectrum Funds’ expenses and $4,572,000 of Retirement Funds’ expenses. Of these amounts, $3,279,000 related to services provided by Price. At period-end, the amount payable to Price pursuant to this agreement is reflected as Due to Affiliates in the accompanying financial statements. At May 31, 2014, approximately 13% of the outstanding shares of the Investor Class were held by the Spectrum Funds and 32% were held by the Retirement Funds.
The fund may invest in the T. Rowe Price Reserve Investment Fund, the T. Rowe Price Government Reserve Investment Fund, or the T. Rowe Price Short-Term Reserve Fund (collectively, the Price Reserve Investment Funds), open-end management investment companies managed by Price Associates and considered affiliates of the fund. The Price Reserve Investment Funds are offered as short-term investment options to mutual funds, trusts, and other accounts managed by Price Associates or its affiliates and are not available for direct purchase by members of the public. The Price Reserve Investment Funds pay no investment management fees.
The fund may also invest in certain other T. Rowe Price fund(s) as a means of gaining efficient and cost-effective exposure to certain markets. The fund does not invest for the purpose of exercising management or control; however, investments by the fund may represent a significant portion of an underlying T. Rowe Price fund’s net assets. Each underlying T. Rowe Price fund is an open-end management investment company managed by Price Associates and is considered an affiliate of the fund. To ensure that the fund does not incur duplicate management fees (paid by the underlying T. Rowe Price fund(s) and the fund), Price Associates has agreed to permanently waive a portion of its management fee charged to the fund in an amount sufficient to fully offset that portion of management fees paid by each underlying T. Rowe Price fund related to the fund’s investment therein. The accompanying Statement of Operations reflects management fees permanently waived pursuant to this agreement. Annual fee rates and management fees waived related to investments in the underlying T. Rowe Price fund(s) for the year ended May 31, 2014, are as follows:
| Report of Independent Registered Public Accounting Firm |
To the Board of Directors and Shareholders of T. Rowe Price
High Yield Fund, Inc.
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 T. Rowe Price High Yield Fund, Inc. (the “Fund”) at May 31, 2014, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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 May 31, 2014 by correspondence with the custodian and brokers, and confirmation of the underlying funds by correspondence with the transfer agent, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Baltimore, Maryland
July 17, 2014
| Tax Information (Unaudited) for the Tax Year Ended 5/31/14 |
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:
- $8,353,000 from short-term capital gains,
- $84,957,000 from long-term capital gains, subject to a long-term capital gains tax rate of not greater than 20%.
For taxable non-corporate shareholders, $3,684,000 of the fund’s income represents qualified dividend income subject to a long-term capital gains tax rate of not greater than 20%.
For corporate shareholders, $3,548,000 of the fund’s income qualifies for the dividends-received deduction.
| Information on Proxy Voting Policies, Procedures, and Records |
A description of the policies and procedures used by T. Rowe Price funds and portfolios to determine how to vote proxies relating to portfolio securities is available in each fund’s Statement of Additional Information. You may request this document by calling 1-800-225-5132 or by accessing the SEC’s website, sec.gov.
The description of our proxy voting policies and procedures is also available on our website, troweprice.com. To access it, click on the words “Social Responsibility” at the top of our corporate homepage. Next, click on the words “Conducting Business Responsibly” on the left side of the page that appears. Finally, click on the words “Proxy Voting Policies” on the left side of the page that appears.
Each fund’s most recent annual proxy voting record is available on our website and through the SEC’s website. To access it through our website, follow the above directions to reach the “Conducting Business Responsibly” page. Click on the words “Proxy Voting Records” on the left side of that page, and then click on the “View Proxy Voting Records” link at the bottom of the page that appears.
| How to Obtain Quarterly Portfolio Holdings |
The fund files a complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available electronically on the SEC’s website (sec.gov); hard copies may be reviewed and copied at the SEC’s Public Reference Room, 100 F St. N.E., Washington, DC 20549. For more information on the Public Reference Room, call 1-800-SEC-0330.
| Approval of Investment Management Agreement |
On April 30, 2014, the fund’s Board of Directors (Board), including a majority of the fund’s independent directors, approved the continuation of the investment management agreement (Advisory Contract) between the fund and its investment advisor, T. Rowe Price Associates, Inc. (Advisor). The April meeting followed a telephonic meeting held on March 4, 2014, during which the Board reviewed information and discussed the continuation of the Advisory Contract. In connection with their deliberations, the Board requested, and the Advisor provided such information as the Board (with advice from independent legal counsel) deemed reasonably necessary. The Board considered a variety of factors in connection with its review of the Advisory Contract, also taking into account information provided by the Advisor during the course of the year, as discussed below:
Services Provided by the Advisor
The Board considered the nature, quality, and extent of the services provided to the fund by the Advisor. These services included, but were not limited to, directing the fund’s investments in accordance with its investment program and the overall management of the fund’s portfolio, as well as a variety of related activities such as financial, investment operations, and administrative services; compliance; maintaining the fund’s records and registrations; and shareholder communications. The Board also reviewed the background and experience of the Advisor’s senior management team and investment personnel involved in the management of the fund, as well as the Advisor’s compliance record. The Board concluded that it was satisfied with the nature, quality, and extent of the services provided by the Advisor.
Investment Performance of the Fund
The Board reviewed the fund’s 3-month, 1-year, and year-by-year returns, as well as the fund’s average annualized total returns over the 3-, 5-, and 10-year periods, and compared these returns with a wide variety of previously agreed upon comparable performance measures and market data, including those supplied by Lipper and Morningstar, which are independent providers of mutual fund data.
On the basis of this evaluation and the Board’s ongoing review of investment results, and factoring in the relative market conditions during certain of the performance periods, the Board concluded that the fund’s performance was satisfactory.
Costs, Benefits, Profits, and Economies of Scale
The Board reviewed detailed information regarding the revenues received by the Advisor under the Advisory Contract and other benefits that the Advisor (and its affiliates) may have realized from its relationship with the fund, including any research received under “soft dollar” agreements and commission-sharing arrangements with broker-dealers. The Board considered that the Advisor may receive some benefit from soft-dollar arrangements pursuant to which research is received from broker-dealers that execute the applicable fund’s portfolio transactions. The Board received information on the estimated costs incurred and profits realized by the Advisor from managing T. Rowe Price mutual funds.
The Board also reviewed estimates of the profits realized from managing the fund in particular and the Board concluded that the Advisor’s profits were reasonable in light of the services provided to the fund.
The Board also considered whether the fund benefits under the fee levels set forth in the Advisory Contract from any economies of scale realized by the Advisor. Under the Advisory Contract, the fund pays a fee to the Advisor for investment management services composed of two components—a group fee rate based on the combined average net assets of most of the T. Rowe Price mutual funds (including the fund) that declines at certain asset levels and an individual fund fee rate based on the fund’s average daily net assets—and the fund pays its own expenses of operations. The Board concluded that the advisory fee structure for the fund continued to provide for a reasonable sharing of benefits from any economies of scale with the fund’s investors.
Fees
The Board was provided with information regarding industry trends in management fees and expenses and the Board reviewed the fund’s management fee rate, operating expenses, and total expense ratio (for the Investor Class and Advisor Class) in comparison to fees and expenses of other comparable funds based on information and data supplied by Lipper. The information provided to the Board indicated that the fund’s management fee rate was above the median for comparable funds. The information also indicated that the total expense ratio (for the Investor Class) was above the median for certain groups of comparable funds and at or below the median for other groups of comparable funds, and the total expense ratio (for the Advisor Class) was at or below the median for comparable funds.
The Board also reviewed the fee schedules for institutional accounts and private accounts with similar mandates that are advised or subadvised by the Advisor and its affiliates. Management provided the Board with information about the Advisor’s responsibilities and services provided to institutional account clients, including information about how the requirements and economics of the institutional business are fundamentally different from those of the mutual fund business. The Board considered information showing that the mutual fund business is generally more complex from a business and compliance perspective than the institutional business, and that the Advisor generally performs significant additional services and assumes greater risk in managing the fund and other T. Rowe Price mutual funds than it does for institutional account clients.
On the basis of the information provided and the factors considered, the Board concluded that the fees paid by the fund under the Advisory Contract are reasonable.
Approval of the Advisory Contract
As noted, the Board approved the continuation of the Advisory Contract. No single factor was considered in isolation or to be determinative to the decision. Rather, the Board concluded, in light of a weighting and balancing of all factors considered, that it was in the best interests of the fund and its shareholders for the Board to approve the continuation of the Advisory Contract (including the fees to be charged for services thereunder). The independent directors were advised throughout the process by independent legal counsel.
| About the Fund’s Directors and Officers |
Your fund is overseen by a Board of Directors (Board) that meets regularly to review a wide variety of matters affecting or potentially affecting the fund, including performance, investment programs, compliance matters, advisory fees and expenses, service providers, and business and regulatory affairs. The Board elects the fund’s officers, who are listed in the final table. At least 75% of the Board’s members are independent of T. Rowe Price Associates, Inc. (T. Rowe Price), and its affiliates; “inside” or “interested” directors are employees or officers of T. Rowe Price. The business address of each director and officer is 100 East Pratt Street, Baltimore, Maryland 21202. The Statement of Additional Information includes additional information about the fund directors and is available without charge by calling a T. Rowe Price representative at 1-800-638-5660.
| Independent Directors | ||
| Name | ||
| (Year of Birth) | ||
| Year Elected* | ||
| [Number of T. Rowe Price | Principal Occupation(s) and Directorships of Public Companies and | |
| Portfolios Overseen] | Other Investment Companies During the Past Five Years | |
| William R. Brody | President and Trustee, Salk Institute for Biological Studies (2009 to | |
| (1944) | present); Director, BioMed Realty Trust (2013 to present); Director, | |
| 2009 | Novartis, Inc. (2009 to present); Director, IBM (2007 to present) | |
| [159] | ||
| Anthony W. Deering | Chairman, Exeter Capital, LLC, a private investment firm (2004 to | |
| (1945) | present); Director, Brixmor Real Estate Investment Trust (2012 to | |
| 1984 | present); Director and Member of the Advisory Board, Deutsche | |
| [159] | Bank North America (2004 to present); Director, Under Armour | |
| (2008 to present); Director, Vornado Real Estate Investment Trust | ||
| (2004 to 2012) | ||
| Donald W. Dick, Jr. | Principal, EuroCapital Partners, LLC, an acquisition and management | |
| (1943) | advisory firm (1995 to present) | |
| 2001 | ||
| [159] | ||
| Bruce W. Duncan | President, Chief Executive Officer, and Director, First Industrial Realty | |
| (1951) | Trust, owner and operator of industrial properties (2009 to present); | |
| 2013 | Chairman of the Board (2005 to present), Interim Chief Executive | |
| [159] | Officer (2007), and Director (1999 to present), Starwood Hotels & | |
| Resorts, a hotel and leisure company | ||
| Robert J. Gerrard, Jr. | Advisory Board Member, Pipeline Crisis/Winning Strategies (1997 | |
| (1952) | to present); Chairman of Compensation Committee and Director, | |
| 2013 | Syniverse Holdings, Inc. (2008 to 2011) | |
| [159] | ||
| Karen N. Horn | Limited Partner and Senior Managing Director, Brock Capital | |
| (1943) | Group, an advisory and investment banking firm (2004 to present); | |
| 2003 | Director, Eli Lilly and Company (1987 to present); Director, Simon | |
| [159] | Property Group (2004 to present); Director, Norfolk Southern (2008 | |
| to present) | ||
| Paul F. McBride | Former Company Officer and Senior Vice President, Human | |
| (1956) | Resources and Corporate Initiatives, Black & Decker Corporation | |
| 2013 | (2004 to 2010) | |
| [159] | ||
| Cecilia E. Rouse, Ph.D. | Dean, Woodrow Wilson School (2012 to present); Professor and | |
| (1963) | Researcher, Princeton University (1992 to present); Director, MDRC, | |
| 2013 | a nonprofit education and social policy research organization | |
| [159] | (2011 to present); Member, National Academy of Education (2010 | |
| to present); Research Associate, National Bureau of Economic | ||
| Research’s Labor Studies Program (2011 to present); Member, | ||
| President’s Council of Economic Advisors (2009 to 2011); Chair | ||
| of Committee on the Status of Minority Groups in the Economic | ||
| Profession, American Economic Association (2012 to present) | ||
| John G. Schreiber | Owner/President, Centaur Capital Partners, Inc., a real estate | |
| (1946) | investment company (1991 to present); Cofounder and Partner, | |
| 1992 | Blackstone Real Estate Advisors, L.P. (1992 to present); Director, | |
| [159] | General Growth Properties, Inc. (2010 to 2013); Director, BXMT | |
| (formerly Capital Trust, Inc.), a real estate investment company | ||
| (2012 to present); Director and Chairman of the Board, Brixmor | ||
| Property Group, Inc. (2013 to present); Director, Hilton Worldwide | ||
| (2013 to present) | ||
| Mark R. Tercek | President and Chief Executive Officer, The Nature Conservancy (2008 | |
| (1957) | to present) | |
| 2009 | ||
| [159] | ||
| *Each independent director serves until retirement, resignation, or election of a successor. | ||
| Inside Directors | ||
| Name | ||
| (Year of Birth) | ||
| Year Elected* | ||
| [Number of T. Rowe Price | Principal Occupation(s) and Directorships of Public Companies and | |
| Portfolios Overseen] | Other Investment Companies During the Past Five Years | |
| Edward C. Bernard | Director and Vice President, T. Rowe Price; Vice Chairman of the | |
| (1956) | Board, Director, and Vice President, T. Rowe Price Group, Inc.; | |
| 2006 | Chairman of the Board, Director, and President, T. Rowe Price | |
| [159] | Investment Services, Inc.; Chairman of the Board and Director, | |
| T. Rowe Price Retirement Plan Services, Inc., and T. Rowe Price | ||
| Services, Inc.; Chairman of the Board, Chief Executive Officer, | ||
| and Director, T. Rowe Price International; Chairman of the Board, | ||
| Chief Executive Officer, Director, and President, T. Rowe Price Trust | ||
| Company; Chairman of the Board, all funds | ||
| Michael C. Gitlin | Vice President, Price Hong Kong, Price Singapore, T. Rowe | |
| (1970) | Price, T. Rowe Price Group, Inc., and T. Rowe Price International | |
| 2010 | ||
| [54] | ||
| *Each inside director serves until retirement, resignation, or election of a successor. | ||
| Officers | ||
| Name (Year of Birth) | ||
| Position Held With High Yield Fund | Principal Occupation(s) | |
| Jason A. Bauer (1979) | Vice President, T. Rowe Price and T. Rowe Price | |
| Vice President | Group, Inc. | |
| Andrew M. Brooks (1956) | Vice President, T. Rowe Price and T. Rowe Price | |
| Vice President | Group, Inc. | |
| Andrew L. Cohen, CFA (1979) | Vice President, T. Rowe Price and T. Rowe | |
| Vice President | Price Group, Inc.; formerly Associate, Power | |
| & Energy/Strategic Investments, Metlife | ||
| Investments (to 2010) | ||
| Michael F. Connelly, CFA (1977) | Vice President, T. Rowe Price and T. Rowe Price | |
| Vice President | Group, Inc. | |
| Michael Della Vedova (1969) | Vice President, T. Rowe Price Group, Inc. and | |
| Vice President | T. Rowe Price International | |
| Carson R. Dickson, CFA, CPA (1976) | Vice President, T. Rowe Price and T. Rowe Price | |
| Vice President | Group, Inc. | |
| Roger L. Fiery III, CPA (1959) | Vice President, Price Hong Kong, Price | |
| Vice President | Singapore, T. Rowe Price, T. Rowe Price Group, | |
| Inc., T. Rowe Price International, and T. Rowe | ||
| Price Trust Company | ||
| Stephen M. Finamore, CPA (1976) | Vice President, T. Rowe Price and T. Rowe Price | |
| Vice President | Group, Inc. | |
| Justin T. Gerbereux, CFA (1975) | Vice President, T. Rowe Price, T. Rowe Price | |
| Vice President | Group, Inc., and T. Rowe Price Trust Company | |
| John R. Gilner (1961) | Chief Compliance Officer and Vice President, | |
| Chief Compliance Officer | T. Rowe Price; Vice President, T. Rowe Price | |
| Group, Inc., and T. Rowe Price Investment | ||
| Services, Inc. | ||
| Gregory S. Golczewski (1966) | Vice President, T. Rowe Price and T. Rowe Price | |
| Vice President | Trust Company | |
| Gregory K. Hinkle, CPA (1958) | Vice President, T. Rowe Price, T. Rowe Price | |
| Treasurer | Group, Inc., and T. Rowe Price Trust Company | |
| Andrew P. Jamison (1981) | Vice President, T. Rowe Price and T. Rowe Price | |
| Vice President | Group, Inc. | |
| Paul A. Karpers, CFA (1967) | Vice President, T. Rowe Price and T. Rowe Price | |
| Vice President | Group, Inc. | |
| Patricia B. Lippert (1953) | Assistant Vice President, T. Rowe Price and | |
| Secretary | T. Rowe Price Investment Services, Inc. | |
| Paul M. Massaro, CFA (1975) | Vice President, T. Rowe Price, T. Rowe Price | |
| Vice President | Group, Inc., and T. Rowe Price Trust Company | |
| David Oestreicher (1967) | Director, Vice President, and Secretary, T. Rowe | |
| Vice President | Price Investment Services, Inc., T. Rowe | |
| Price Retirement Plan Services, Inc., T. Rowe | ||
| Price Services, Inc., and T. Rowe Price Trust | ||
| Company; Chief Legal Officer, Vice President, | ||
| and Secretary, T. Rowe Price Group, Inc.; Vice | ||
| President and Secretary, T. Rowe Price and | ||
| T. Rowe Price International; Vice President, | ||
| Price Hong Kong and Price Singapore | ||
| Brian A. Rubin, CPA (1974) | Vice President, T. Rowe Price, T. Rowe Price | |
| Vice President | Group, Inc., and T. Rowe Price Trust Company | |
| Deborah D. Seidel (1962) | Vice President, T. Rowe Price, T. Rowe Price | |
| Vice President | Group, Inc., T. Rowe Price Investment Services, | |
| Inc., and T. Rowe Price Services, Inc. | ||
| Thomas E. Tewksbury (1961) | Vice President, T. Rowe Price, T. Rowe Price | |
| Vice President | Group, Inc., and T. Rowe Price Trust Company | |
| Michael J. Trivino (1981) | Vice President, T. Rowe Price and T. Rowe Price | |
| Vice President | Group, Inc.; formerly Private Equity Group, | |
| Welsh, Carson & Stowe (to 2011) | ||
| Mark J. Vaselkiv (1958) | Vice President, T. Rowe Price, T. Rowe Price | |
| President | Group, Inc., and T. Rowe Price Trust Company | |
| Julie L. Waples (1970) | Vice President, T. Rowe Price | |
| Vice President | ||
| Thea N. Williams (1961) | Vice President, T. Rowe Price, T. Rowe Price | |
| Vice President | Group, Inc., and T. Rowe Price Trust Company | |
| Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe Price International for at least 5 years. | ||
Item 2. Code of Ethics.
The registrant has adopted a code of ethics, as defined in Item 2 of Form N-CSR, applicable to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of this code of ethics is filed as an exhibit to this Form N-CSR. No substantive amendments were approved or waivers were granted to this code of ethics during the period covered by this report.
Item 3. Audit Committee Financial Expert.
The registrant’s Board of Directors/Trustees has determined that Mr. Anthony W. Deering qualifies as an audit committee financial expert, as defined in Item 3 of Form N-CSR. Mr. Deering is considered independent for purposes of Item 3 of Form N-CSR.
Item 4. Principal Accountant Fees and Services.
(a) – (d) Aggregate fees billed for the last two fiscal years for professional services rendered to, or on behalf of, the registrant by the registrant’s principal accountant were as follows:
Audit fees include amounts related to the audit of the registrant’s annual financial statements and services normally provided by the accountant in connection with statutory and regulatory filings. Audit-related fees include amounts reasonably related to the performance of the audit of the registrant’s financial statements and specifically include the issuance of a report on internal controls and, if applicable, agreed-upon procedures related to fund acquisitions. Tax fees include amounts related to services for tax compliance, tax planning, and tax advice. The nature of these services specifically includes the review of distribution calculations and the preparation of Federal, state, and excise tax returns. All other fees include the registrant’s pro-rata share of amounts for agreed-upon procedures in conjunction with service contract approvals by the registrant’s Board of Directors/Trustees.
(e)(1) The registrant’s audit committee has adopted a policy whereby audit and non-audit services performed by the registrant’s principal accountant for the registrant, its investment adviser, and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant require pre-approval in advance at regularly scheduled audit committee meetings. If such a service is required between regularly scheduled audit committee meetings, pre-approval may be authorized by one audit committee member with ratification at the next scheduled audit committee meeting. Waiver of pre-approval for audit or non-audit services requiring fees of a de minimis amount is not permitted.
(2) No services included in (b) – (d) above were approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Less than 50 percent of the hours expended on the principal accountant’s engagement to audit the registrant’s financial statements for the most recent fiscal year were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees.
(g) The aggregate fees billed for the most recent fiscal year and the preceding fiscal year by the registrant’s principal accountant for non-audit services rendered to the registrant, its investment adviser, and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant were $1,759,000 and $1,794,000, respectively.
(h) All non-audit services rendered in (g) above were pre-approved by the registrant’s audit committee. Accordingly, these services were considered by the registrant’s audit committee in maintaining the principal accountant’s independence.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Investments.
(a) Not applicable. The complete schedule of investments is included in Item 1 of this Form N-CSR.
(b) Not applicable.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 11. Controls and Procedures.
(a) The registrant’s principal executive officer and principal financial officer have evaluated the registrant’s disclosure controls and procedures within 90 days of this filing and have concluded that the registrant’s disclosure controls and procedures were effective, as of that date, in ensuring that information required to be disclosed by the registrant in this Form N-CSR was recorded, processed, summarized, and reported timely.
(b) The registrant’s principal executive officer and principal financial officer are aware of no change in the registrant’s internal control over financial reporting that occurred during the registrant’s second fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
Item 12. Exhibits.
(a)(1) The registrant’s code of ethics pursuant to Item 2 of Form N-CSR is attached.
(b) A certification by the registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(b) under the Investment Company Act of 1940, is attached.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
T. Rowe Price High Yield Fund, Inc.
| By | /s/ Edward C. Bernard | |
| Edward C. Bernard | ||
| Principal Executive Officer | ||
| Date July 17, 2014 | ||
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By | /s/ Edward C. Bernard | |
| Edward C. Bernard | ||
| Principal Executive Officer | ||
| Date July 17, 2014 | ||
| By | /s/ Gregory K. Hinkle | |
| Gregory K. Hinkle | ||
| Principal Financial Officer | ||
| Date July 17, 2014 | ||