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: 811-04519
| T. Rowe Price Capital Appreciation Fund |
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| (Exact name of registrant as specified in charter) |
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| 100 East Pratt Street, Baltimore, MD 21202 |
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| (Address of principal executive offices) |
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| David Oestreicher |
| 100 East Pratt Street, Baltimore, MD 21202 |
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| (Name and address of agent for service) |
Registrant’s telephone number, including area code: (410) 345-2000
Date of fiscal year end: December 31
Date of reporting period: December 31, 2012
Item 1. Report to Shareholders
| Capital Appreciation Fund | December 31, 2012 |
The views and opinions in this report were current as of December 31, 2012. 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.
REPORTS ON THE WEB
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Manager’s Letter
Fellow Shareholders
As we reflect back upon the last year, it is indeed remarkable that the S&P 500 Index ended the year up 16% given all of the economic and political challenges in 2012. Emerging market economies that had been driving global gross domestic product growth for the last five years slowed. Most European economies were either in recession or on the verge of negative growth. The U.S. economy continued to limp along with modest growth. Corporate profit growth as reflected by S&P 500 earnings per share slowed, due in part to decelerating global economic growth. Political uncertainty reared its ugly head in the U.S. as presidential elections and the looming fiscal cliff (which was partially resolved) also hurt business and consumer confidence.
So then why did the S&P 500 turn in an above-average year in 2012? The answer really comes down to housing, falling oil prices, and China.
- Housing. After roughly six years of declines, home prices appear to have finally stabilized and, in many markets, are increasing. While this helped a handful of housing stocks, it also had a significant positive impact on financials, particularly banks.
- Falling Oil Prices. The combination of weaker global oil demand and increased U.S. supply drove oil prices lower. This lifted the consumer discretionary sector in particular as lower oil prices increased discretionary income and benefited industries in which oil is an input cost.
- China. While China’s industrial demand and construction sector grew much slower than in prior years, beginning in the fourth quarter and somewhat in concert with the leadership changes in China, we began to see modestly improving economic activity and, maybe more importantly, an expectation for stronger growth in 2013. This supported the industrials and materials sectors in the latter part of 2012.
As we have discussed in previous shareholder letters, we do not have a crystal ball to tell us about the future. While we have views on the U.S. economy, Europe, China, and important policy issues like the fiscal cliff, those views do not drive our investment process. We continue to focus our time, energy, and resources on analyzing businesses, valuations, and capital allocation and try to identify stocks, bonds, leveraged loans, covered calls, and convertibles where the risk/reward is highly skewed in our favor.
Before we discuss fund performance, we would like to review the three objectives of the Capital Appreciation Fund:
(1) Generate strong risk-adjusted returns annually
(2) Preserve shareholder capital over the intermediate term (i.e., three years)
(3) Generate equity-like returns with less risk than that of the overall market over a full market cycle (i.e., normally around five years).
Against these objectives, the Capital Appreciation Fund generated solid investment performance and achieved our three objectives. In 2012, your fund generated a 14.70% return relative to the S&P 500’s return of 16%. (The performance of the Advisor Class was slightly lower, reflecting a different fee structure.)
Your fund outperformed the market on a risk-adjusted basis over this period by generating 92% of the market’s return while only taking on 64% of the market’s risk. We arrived at this number by comparing the standard deviation of the S&P 500 (10.07) with that of the fund (6.44) for the entire year. Standard deviation indicates the volatility of a portfolio’s total returns as measured against its mean performance. In general, the higher the standard deviation, the greater the volatility or risk. (The S&P 500 Index is an unmanaged equity benchmark that tracks the performance of 500 mostly large-cap U.S. stocks.)
Using a more academic measure of the fund’s risk-adjusted return, your fund produced a Sharpe ratio of 2.18 versus 1.51 for the S&P 500. Our stocks and fixed income investments both outperformed their respective benchmarks by more than 500 basis points in 2012 and drove these strong risk-adjusted returns. The Sharpe ratio is a measure of the risk-adjusted return of a portfolio. It measures how much a portfolio’s return is above or below the risk-free Treasury rate (excess return) per unit risk (measured by standard deviation). In general, the larger the number, the better the portfolio’s historical risk-adjusted return.
As for our second objective—capital preservation over the intermediate term—your fund generated a 35.02% cumulative return over the last three years. As for our final objective—equity-like returns with less risk than the market over a full market cycle—your fund significantly outperformed the S&P 500. Over the last five years, your fund generated a cumulative return of 30.83% versus the S&P 500’s total return of 8.59% despite taking on much less risk than the market. (The fund’s five-year annualized standard deviation as of December 31, 2012, was 15.19 versus 18.88 for the S&P 500.)
For the six-month and 1-, 3-, 5-, and 10-year periods ended December 31, 2012, we outperformed our Lipper and Morningstar peer group averages during every time period. However, let me reiterate that we do not manage your fund to beat these benchmarks. The Capital Appreciation Fund has very different objectives than most of its benchmark peers. It is a unique fund with a focus on strong risk-adjusted returns, intermediate-term capital preservation, and long-term capital appreciation that does not fit neatly into any current benchmark.
On a related note, we would like our shareholders to understand that the very low interest rate environment makes the achievement of our objectives, especially our first and third ones, more difficult. In a more normal interest rate environment (e.g., 10-year Treasuries yielding 4%), the non-equity, noncash portion of your fund (bonds, bank debt, and preferred issues) should produce yields of 6% to 8%, which is reasonably close to our long-term equity market return assumptions of 7% to 9%. However, the portion of your fund invested in fixed income is currently generating a yield of slightly more than 3%. This is due to the very low risk-free rate (i.e., the 10-year Treasury bond yield is under 2%) and our desire to protect shareholders’ capital by minimizing interest rate risk by keeping our effective duration—a measure of sensitivity to interest rate fluctuations—very low (around two years).
The lack of attractive fixed income investments is also a principal reason our cash position is higher than normal. We have been able to overcome these challenges in past years with strong security selection and by adding to risk assets when opportunities arise. However, it is unlikely that we will be able to maintain indefinitely the same magnitude of outperformance in security selection as we have had over the last couple of years. We believe a return to a more normalized interest rate environment would be a very good outcome for our shareholders as it would allow us to earn higher yields, reduce our cash exposure, and make the achievement of our objectives easier to achieve. In the absence of a more normalized interest rate environment, we will not reach for yield in lower-quality credits or increase duration given our ongoing focus on intermediate-term capital preservation.
Before we review the portfolio, we want to briefly discuss the fund’s covered call overwriting strategy, which we have employed for almost five years. Covered call overwriting involves buying a stock and then selling a call option—a contract whereby we agree at a future date to sell the stock at a predetermined (strike) price. In return for selling this call option, we are paid a premium (typically a 2% to 5% annualized incremental yield) that provides extra income to the fund. While the strategy caps our upside in an individual stock (usually 10% or higher), it provides income that can enhance total returns and lower our downside risk and generally has produced excellent risk-adjusted returns. Over the last four to five years, this strategy (a return combination of underlying stocks, calls, and dividend income) has generated a stronger return than the fund itself and has done so with less risk. (From February 29, 2008, through December 31, 2012, the Capital Appreciation Fund’s portfolio of options produced an annualized return of 9.02% versus 7.25% for the fund. The option portfolio’s annualized standard deviation during that period was 11.59 versus 15.35 for the fund.) As of December 31, 2012, we had calls written against about 17% of our equity holdings. Given the excellent risk-adjusted return potential of this strategy, we believe it will continue to play a meaningful role in your fund.
PORTFOLIO REVIEW
In the equity portion of the portfolio, the consumer discretionary sector was one of the strongest contributors to both absolute and relative returns in 2012. Our big winners in this sector were Walt Disney, TRW, Lowe’s, and Delphi Automotive. Walt Disney is a great example of the kind of investment that we get excited about. In mid-2011, Disney stock fell by roughly a third as the market became concerned about the possibility of a U.S. recession. Disney has some degree of economic cyclicality due to its parks and advertising exposure. When we made the investment in the low $30s, we were not sure if there was going to be a recession or not, but what made Disney such an attractive opportunity was that its valuation was already pricing in a recession and if there was not a recession, there was a huge amount of upside potential. Since that time, the stock is up by more than 60% as the recession failed to materialize, earnings continued to grow, and the earnings multiple expanded back to its historical mid-teens range. We believe the key to generating strong risk-adjusted returns is finding these situations where the bad news is already priced in, a strategy that limits the downside potential and if fundamentals improve or, in this case, fail to get worse, there is material upside. (Please refer to the fund’s portfolio of investments for a complete list of holdings and the amount each represents in the portfolio.)
Our overweight in the health care sector also positively contributed to both absolute and relative returns. Our largest holding in the fund last year, Thermo Fisher Scientific had a very strong year both fundamentally and from a stock performance perspective. Very much like Disney, Thermo Fisher is a very high-quality franchise led by one of the most impressive CEOs I have ever come across (Marc Casper). The stock came under pressure after the third quarter of 2011 when organic growth decelerated modestly. The stock market drove the stock down to near the very low end of its historical multiple range and we responded by taking our exposure up materially and making it our largest holding. Thermo Fisher responded by buying back its stock aggressively at very attractive valuations. In addition, during a tough economic environment in 2012, when most of its peers were experiencing decelerating organic growth, Thermo Fisher actually accelerated its organic growth rate and is likely to grow earnings per share materially faster than the market in 2012 when it reports its fourth-quarter earnings. While we have cut back our exposure modestly to Thermo Fisher simply because the position size became too big, it continues to be a top three holding for your fund, and we feel very good about its prospects over the long term.
Financials was the best-performing sector in 2012 after having underperformed the market ever since the housing bubble began to burst. Lower-quality banks did especially well as the stabilization in housing signaled to the market that the big losses related to the housing bubble (litigation, foreclosure costs, losses on properties) were finally in the late stages and the earnings power of these banks in two to three years out were much higher. While we were, on average, modestly underweight in financials and did not own many of the banks that did particularly well in 2012, our higher-quality investments in Invesco, State Street, and XL Capital all outperformed. During the course of the year, we increased our exposure to a number of investments that would benefit from their exposure to rising interest rates such as TD Ameritrade Holding, Northern Trust, and State Street.
Within fixed income, we outperformed on a relative and absolute basis. Our leveraged loan or bank debt investments in Univision and First Data rallied back close to par from the low to mid-90s at the beginning of the year driven by strong fundamental performance, modestly deleveraging, and pushing out maturities to later in the decade. Our large investment in Sprint also did very well as a large capital infusion from Softbank (a Japanese telecom company) resulted in a material improvement in its balance sheet. We have cut back our Univision and First Data investments on strength but continue to hold our fixed income holdings of Sprint.
PORTFOLIO STRATEGY AND OUTLOOK
In the past, we have spent considerable time in this section discussing the global economy, Federal Reserve policy, and the fiscal cliff, just to mention a few topics. It is almost impossible to generate attractive and consistent risk-adjusted returns betting on the direction of the macro economy, however, and this is not how we attempt to add value for our shareholders. Henceforth, we are going to focus this section on the portfolio positioning and where we see value in the market.
Our net equity exposure has risen modestly since our midyear shareholder letter. There are two principal reasons for this. First, we used the market weakness following the U.S. presidential election to add to existing holdings that came under pressure. Second, after two years (2010–2011) of investors chasing yield and driving up valuations of high-dividend stocks to unattractive levels, we finally saw such stocks underperform in 2012. In the latter part of the year—really for the first time in at least 18 months—we started to find a couple of attractive ideas among high-dividend-yield stocks. We have always liked higher-dividend-yield stocks given their attractive risk/reward characteristics, especially because they tend to perform well in weak equity markets, but in recent years we have been materially underweight in this class of stocks given their expensive valuations. To the extent higher-dividend stocks continue to underperform, we will likely continue to add to these names.
Our net equity exposure (beta-adjusted net equity exposure) increased from the mid- to high 50s to the very low 60s since midyear 2012. We consider the low 60s to be somewhat of a neutral level for the fund. We would likely increase this equity exposure on market weakness and/or as more attractive risk/reward opportunities present themselves. We do consider equities to be the most attractive asset class in which we invest, but that is mostly due to how unattractive the other asset classes are as opposed to how appealing equities are on an absolute basis.
We see limited value and real risk of losses in traditional fixed income securities, including Treasuries, investment-grade bonds, and high yield debt. As we discussed with Disney earlier, we look for situations with little downside but a lot of upside if things break our way. With Treasuries and investment-grade bonds, the absolute yields are so low that even if interest rates were to drop modestly from here the upside potential is low. But if rates rise or credit spreads widen, it is possible to lose a considerable amount of money. Hence, the risk/reward trade-off is very negatively skewed, especially as we believe rates are much more likely to rise than decline over the next three to five years. While we do own a number of investment-grade bonds, almost all of them have a very short duration and thus limited risk of loss from rising rates or wider credit spreads. In the case of high yield bonds, while absolute yields look on the surface attractive relative to investment-grade or Treasury bonds, they are not attractive. High yield bond yields are now at all-time lows. While 5% to 6% yields may sound fine, in a recession, the high yield bond index can easily decline in value by 10% to 20% or more.
Within fixed income, the leveraged loan asset class still looks reasonable, especially on a relative basis. The advantages of leveraged loans are that they are at the top of the capital structure, which limits risk of principal loss, and that they are floating rate in nature and thus not exposed to rising rates. The challenge for this asset class is that most new issues are now coming without good covenants, and we have chosen not to buy bank debt without good covenants. In addition, a number of names with attractive yields (like First Data and Univision) have rallied strongly to levels where we have cut back our exposure. As a result, our bank debt exposure has declined from 10.4% at midyear to 9.2% of your fund.
We see value in the market in the following areas:
- Good Capital Allocation. We believe the market fundamentally underappreciates good capital allocation. We believe your fund is materially overweight relative to the market companies that deploy capital wisely (reasonable dividends, repurchase stock, and good acquisition strategy).
- Positioned for Rising Rates. We believe negative real (inflation-adjusted) interest rates are unsustainable and that nominal interest rates are likely to revert to more normalized levels over the next three to five years. Within fixed income, our exposure to holdings with short durations and to floating rate securities helps protect our shareholders from rising rates. In equities, we own a number of companies that should benefit from rising rates.
- Free Optionality. Every year it seems as if we have one or more companies get acquired, go private, or break up into pieces, which creates value for our shareholders. This is not an accident. We try to find investment opportunities, both in equities and in bonds, where the odds of an event are small (usually 10% to 20% odds) but where we are acquiring that option for free. The acquisition of Cooper Industries this year by Eaton, the announced acquisition of El Paso by Kinder Morgan the year before that, and the acquisition of CNX Gas by CNX are all examples of this. We own 20 to 25 names where we think the odds of an event are modest, but it seems that every year one or more of these free options pay off.
IN CLOSING
We would like to thank the members of the fund’s Investment Advisory Committee for their valuable input throughout 2012. This team, which comprises portfolio managers, quantitative analysts, fixed income analysts, and equity analysts with many decades of combined investment experience, is responsible for the oversight of your fund and is supported by a growing global equity and fixed income platform of more than 190 analysts.
Respectfully submitted,
David R. Giroux
Chairman of the fund’s Investment Advisory Committee
Steven D. Krichbaum
Associate portfolio manager
January 22, 2013
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 INVESTING
As with all stock and bond mutual funds, the fund’s share price can fall because of weakness in the stock or bond markets, a particular industry, or specific holdings. Stock markets can decline for many reasons, including adverse political or economic developments, changes in investor psychology, or heavy institutional selling. The prospects for an industry or company may deteriorate because of a variety of factors, including disappointing earnings or changes in the competitive environment. In addition, the investment manager’s assessment of companies held in a fund may prove incorrect, resulting in losses or poor performance even in rising markets. A sizable cash or fixed income position may hinder the fund from participating fully in a strong, rapidly rising bull market. In addition, significant exposure to bonds increases the risk that the fund’s share value could be hurt by rising interest rates or credit downgrades or defaults. Convertible securities are also exposed to price fluctuations of the company’s stock.
GLOSSARY
Lipper indexes: Fund benchmarks that consist of a small number of the largest mutual funds in a particular category as tracked by Lipper Inc.
Morningstar Moderate Allocation Average: Tracks the performance of funds that seek both moderate capital appreciation and income by investing in stocks, bonds, and cash.
Sharpe ratio: A measure of the risk-adjusted return of a portfolio. The Sharpe ratio measures how much a portfolio’s return is above or below the risk-free Treasury rate (excess return) per unit risk (measured by standard deviation). In general, the larger the number, the better the portfolio’s historical risk-adjusted return.
S&P 500 Index: An unmanaged index that tracks the stocks of 500 primarily large-cap U.S. companies.
Standard deviation: A measure of risk that indicates the volatility of a portfolio’s total returns as measured against its mean performance. In general, the higher the standard deviation, the greater the volatility or risk.
Performance and Expenses
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.
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 Capital Appreciation Fund (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 long-term capital appreciation by investing primarily in common stocks. It may also hold fixed-income and other securities to help preserve principal value. The fund has two classes of shares: the Capital Appreciation Fund original share class, referred to in this report as the Investor Class, offered since June 30, 1986, and the Capital Appreciation Fund–Advisor Class (Advisor Class), offered since December 31, 2004. 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 accompanying financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (GAAP), which require 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 and paid by each class annually. 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, investment income, and realized and unrealized gains and losses are allocated to the classes based upon the relative daily net assets of each class.
Rebates and Credits Subject to best execution, the fund may direct certain security trades to brokers who have agreed to rebate a portion of the related brokerage commission to the fund in cash. Commission rebates are reflected as realized gain on securities in the accompanying financial statements and totaled $126,000 for the year ended December 31, 2012. Additionally, the fund earns credits on temporarily uninvested cash balances held at the custodian, which reduce the fund’s custody charges. Custody expense in the accompanying financial statements is presented before reduction for credits, which are reflected as expenses paid indirectly.
In-Kind Redemptions In accordance with guidelines described in the fund’s prospectus, the fund may distribute portfolio securities rather than cash as payment for a redemption of fund shares (in-kind redemption). For financial reporting purposes, the fund recognizes a gain on in-kind redemptions to the extent the value of the distributed securities on the date of redemption exceeds the cost of those securities. Gains and losses realized on in-kind redemptions are not recognized for tax purposes and are reclassified from undistributed realized gain (loss) to paid-in capital. During the year ended December 31, 2012, the fund realized $7,538,000 of net gain on $27,500,000 of in-kind redemptions.
New Accounting Pronouncements In December 2011, the FASB issued amended guidance to enhance disclosure for offsetting assets and liabilities. The guidance is effective for fiscal years and interim periods beginning on or after January 1, 2013. Adoption will have no effect on the fund’s net assets or results of operations.
NOTE 2 - VALUATION
The fund’s financial instruments are reported at fair value as defined by GAAP. The fund determines the values of its assets and liabilities and computes each class’s net asset value per share at the close of the New York Stock Exchange (NYSE), normally 4 p.m. ET, each day that the NYSE is open for business.
Valuation Methods 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, except for OTC Bulletin Board securities, which are valued at the mean of the latest 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 latest bid and asked prices for domestic securities and the last quoted sale price for international securities.
Debt securities are generally traded in the 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.
Investments in mutual funds are valued at the mutual fund’s closing net asset value per share on the day of valuation. Purchased and written options, and OTC options with a listed equivalent, are valued at the mean of the closing bid and asked prices.
Other investments, including restricted securities and private placements, and those financial instruments 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 T. Rowe Price Valuation Committee, established by the fund’s Board of Trustees (the Board). Subject to oversight by the Board, the Valuation Committee develops pricing-related policies and procedures and approves all fair-value determinations. The Valuation Committee regularly makes good faith judgments, using a wide variety of sources and information, to establish and adjust valuations of certain securities as events occur and circumstances warrant. For instance, in determining the fair value of private-equity instruments, the Valuation Committee considers a variety of factors, including the company’s business prospects, its financial performance, strategic events impacting the company, relevant valuations of similar companies, new rounds of financing, and any negotiated transactions of significant size between other investors in the company. Because any fair-value determination involves a significant amount of judgment, there is a degree of subjectivity inherent in such pricing decisions.
For valuation purposes, the last quoted prices of non-U.S. equity securities may be adjusted under the circumstances described below. 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 closing 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 closing 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. A 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 closing prices and information to evaluate and/or adjust those prices. The fund cannot predict how often it will use closing 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 closing prices, the next day’s opening prices in the same markets, and adjusted prices. Additionally, trading in the underlying securities of the fund may take place in various foreign markets on certain days when the fund is not open for business and does not calculate a net asset value. As a result, net asset values may be significantly affected on days when shareholders cannot make transactions.
Valuation Inputs Various inputs are used to determine the value of the fund’s financial instruments. These inputs are summarized in the three broad levels listed below:
Level 1 – quoted prices in active markets for identical financial instruments
Level 2 – observable inputs other than Level 1 quoted prices (including, but not limited to, quoted prices for similar financial instruments, interest rates, prepayment speeds, and credit risk)
Level 3 – unobservable inputs
Observable inputs are those based on market data obtained from sources independent of the fund, and unobservable inputs reflect the fund’s own assumptions based on the best information available. The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level. For example, non-U.S. equity securities actively traded in foreign markets generally are reflected in Level 2 despite the availability of closing prices because the fund evaluates and determines whether those closing prices reflect fair value at the close of the NYSE or require adjustment, as described above. The following table summarizes the fund’s financial instruments, based on the inputs used to determine their values on December 31, 2012:
NOTE 3 - DERIVATIVE INSTRUMENTS
During the year ended December 31, 2012, 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 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. Investments in derivatives can magnify returns positively or negatively; however, the fund at all times maintains sufficient cash reserves, liquid assets, or other SEC-permitted asset types to cover the settlement obligations under its open derivative contracts.
The fund values its derivatives at fair value, as described below and 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. The fund does not 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 December 31, 2012, 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 December 31, 2012, and the related location on the accompanying Statement of Operations is summarized in the following table by primary underlying risk exposure:
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 December 31, 2012, the fund’s exposure to forwards, based on underlying notional amounts, was generally less than 1% 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 call and put options to manage exposure to interest rates, security prices, 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; and/or to adjust credit exposure. 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 at any time during the period of the option. 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. Risks related to the use of options include possible illiquidity of the options markets; trading restrictions imposed by an exchange; movements in underlying security values; and, for written options, potential losses in excess of the fund’s initial investment. During the year ended December 31, 2012, the fund’s exposure to 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 December 31, 2012, were as follows:
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 December 31, 2012, approximately 13% 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 psychology. 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 may involve multiple loans with the same borrower under a single credit agreement (each loan, a tranche), and each tranche may have different terms and associated risks. A bank or other financial institution typically acts as the agent and administers a bank loan in accordance with the associated credit agreement. Bank loans are generally noninvestment grade and often involve borrowers whose financial condition is troubled or uncertain and companies that are highly leveraged. The fund may buy and sell bank loans in the form of either loan assignments or loan participations. A loan assignment transfers all legal, beneficial, and economic rights to the buyer. Although loan assignments continue to be administered by the agent, the buyer acquires direct rights against the borrower. In many cases, a loan assignment requires the consent of both the borrower and the agent. In contrast, a loan participation generally entitles the buyer to receive the cash flows from principal, interest, and any fee payments that the seller is entitled to receive from the borrower; however, the seller continues to hold legal title to the loan. As a result, with loan participations, the buyer generally has no right to enforce compliance with the terms of the credit agreement against the borrower, and the buyer is subject to the credit risk of both the borrower and the seller. Bank loans often have extended settlement periods, during which the fund is subject to nonperformance risk by the counterparty. A portion of the fund’s bank loans may require additional principal to be funded at the borrowers’ discretion at a later date (unfunded commitments), and bank loans usually may be repaid at any time at the option of the borrower. The fund reflects both the funded portion of the bank loan as well as any unfunded commitment on the loan in the Portfolio of Investments.
Counterparty Risk and Collateral The fund has entered into collateral agreements with certain counterparties to mitigate counterparty risk associated with certain over-the-counter (OTC) financial instruments, including swaps, forward currency exchange contracts, TBA purchase commitments, and OTC options (collectively, covered OTC instruments). Subject to certain minimum exposure requirements (which typically range from $100,000 to $500,000), collateral requirements generally are determined and transfers made based on the net aggregate unrealized gain or loss on all OTC instruments covered by a particular collateral agreement with a specified counterparty. At any point in time, the fund’s risk of loss from counterparty credit risk on covered OTC instruments is the aggregate unrealized gain on appreciated covered OTC instruments in excess of collateral, if any, pledged by the counterparty to the fund. Further, in accordance with the terms of the relevant agreements, counterparties to certain OTC instruments may be able to terminate the contracts prior to maturity upon the occurrence of certain stated events, such as a decline in net assets above a certain percentage or a failure by the fund to perform its obligations under the contract. Upon termination, all transactions would typically be liquidated and a net amount would be owed by or payable to the fund.
Counterparty risk related to exchange-traded futures and options contracts is minimal because the exchange’s clearinghouse provides protection against counterparty defaults. Generally, for exchange-traded derivatives such as futures and options, each broker, in its sole discretion, may change margin requirements applicable to the fund.
Collateral can be in the form of cash or debt securities issued by the U.S. government or related agencies. For OTC instruments, collateral both pledged by the fund to a counterparty and pledged by a counterparty to the fund, is held in a segregated account by a third-party agent. For exchange-traded instruments, margin posted by the fund is held by the broker. Cash posted by the fund as collateral or to meet margin requirements is reflected as restricted cash in the accompanying financial statements and 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. As of December 31, 2012, no collateral was pledged by either the fund or counterparties for covered OTC instruments. As of December 31, 2012, no margin had been posted by the fund to the broker for exchange-traded derivatives.
Other Purchases and sales of portfolio securities other than short-term and U.S. government securities aggregated $6,707,672,000 and $6,619,989,000, respectively, for the year ended December 31, 2012. Purchases and sales of U.S. government securities aggregated $738,929,000 and $5,200,000, respectively, for the year ended December 31, 2012.
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 redemptions in kind or a tax practice that treats a portion of the proceeds from each redemption of capital shares as a distribution of taxable net investment income and/or realized capital gain. For the year ended December 31, 2012, 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 December 31, 2012 and December 31, 2011, were characterized for tax purposes as follows:
At December 31, 2012, the tax-basis cost of investments and components of net assets were as follows:
The difference between book-basis and tax-basis net unrealized appreciation (depreciation) is attributable to the deferral of losses from wash sales and the recognition of income on contingent debt obligations for tax purposes. The fund intends to retain realized gains to the extent of available capital loss carryforwards. Net realized capital losses may be carried forward indefinitely to offset future realized capital gains. During the year ended December 31, 2012, the fund utilized $78,301,000 of capital loss carryforwards.
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 0.28% for assets in excess of $300 billion. The fund’s group fee is determined by applying the group fee rate to the fund’s average daily net assets. At December 31, 2012, the effective annual group fee rate was 0.30%.
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 December 31, 2012, expenses incurred pursuant to these service agreements were $203,000 for Price Associates; $4,232,000 for T. Rowe Price Services, Inc.; and $1,886,000 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.
The fund may invest in the T. Rowe Price Reserve Investment Fund and the T. Rowe Price Government Reserve Investment Fund (collectively, the T. Rowe Price Reserve Investment Funds), open-end management investment companies managed by Price Associates and considered affiliates of the fund. The T. Rowe Price Reserve Investment Funds are offered as cash management options to mutual funds, trusts, and other accounts managed by Price Associates and/or its affiliates and are not available for direct purchase by members of the public. The T. Rowe Price Reserve Investment Funds pay no investment management fees.
The fund may also invest in certain T. Rowe Price institutional funds (underlying institutional funds) as a means of gaining efficient and cost-effective exposure to certain markets. The underlying institutional funds are open-end management investment companies managed by Price Associates and are considered affiliates of the fund. Each underlying institutional fund pays an all-inclusive management and administrative fee to Price Associates. To ensure that the fund does not incur duplicate fees, Price Associates has agreed to permanently waive a portion of its management fee charged to the fund in an amount sufficient to fully offset the management fees paid by the underlying institutional funds related to fund assets invested therein. Accordingly, the accompanying Statement of Operations includes management fees permanently waived pursuant to this agreement. Annual fee rates and amounts waived within the accompanying Statement of Operations related to shares of the underlying institutional funds for the year ended December 31, 2012, are as follows:
| Report of Independent Registered Public Accounting Firm |
To the Board of Trustees and Shareholders of
T. Rowe Price Capital Appreciation Fund
In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of T. Rowe Price Capital Appreciation Fund (the “Fund”) at December 31, 2012, 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 December 31, 2012 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
February 15, 2013
| Tax Information (Unaudited) for the Tax Year Ended 12/31/12 |
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:
- $235,782,000 from short-term capital gains,
- $451,183,000 from long-term capital gains, subject to the 15% rate gains category.
For taxable non-corporate shareholders, $164,790,000 of the fund’s income represents qualified dividend income subject to the 15% rate category.
For corporate shareholders, $148,415 ,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, which you may request 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 “Our Company” at the top of our corporate homepage. Then, when the next page appears, click on the words “Proxy Voting Policies” on the left side of the page.
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 directions above, then click on the words “Proxy Voting Records” on the right side of the Proxy Voting Policies page.
| 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.
| About the Fund’s Trustees and Officers |
Your fund is overseen by a Board of Trustees (Board) that meets regularly to review a wide variety of matters affecting the fund, including performance, investment programs, compliance matters, advisory fees and expenses, service providers, and other business 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” trustees are employees or officers of T. Rowe Price. The business address of each trustee and officer is 100 East Pratt Street, Baltimore, Maryland 21202. The Statement of Additional Information includes additional information about the fund trustees and is available without charge by calling a T. Rowe Price representative at 1-800-638-5660.
Independent Trustees
| 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, M.D., Ph.D. | | President and Trustee, Salk Institute for Biological Studies (2009 |
| (1944) | | to present); Director, Novartis, Inc. (2009 to present); Director, IBM |
| 2009 | | (2007 to present); President and Trustee, Johns Hopkins University |
| [142] | | (1996 to 2009); Chairman of Executive Committee and Trustee, |
| | Johns Hopkins Health System (1996 to 2009) |
| | | |
| Anthony W. Deering | | Chairman, Exeter Capital, LLC, a private investment firm (2004 |
| (1945) | | to present); Director, Under Armour (2008 to present); Director, |
| 2001 | | Vornado Real Estate Investment Trust (2004 to present); Director |
| [142] | | and Member of the Advisory Board, Deutsche Bank North America |
| | (2004 to present); Director, Mercantile Bankshares (2002 to 2007) |
| | | |
| Donald W. Dick, Jr. | | Principal, EuroCapital Partners, LLC, an acquisition and management |
| (1943) | | advisory firm (1995 to present) |
| 1986 | | |
| [142] | | |
| | | |
| Robert J. Gerrard, Jr. | | Chairman of Compensation Committee and Director, Syniverse |
| (1952) | | Holdings, Inc. (2008 to 2011); Executive Vice President and General |
| 2012 | | Counsel, Scripps Networks, LLC (1997 to 2009); Advisory Board |
| [90] | | Member, Pipeline Crisis/Winning Strategies (1997 to present) |
| | | |
| Karen N. Horn | | Senior Managing Director, Brock Capital Group, an advisory and |
| (1943] | | investment banking firm (2004 to present); Director, Eli Lilly and |
| 2003 | | Company (1987 to present); Director, Simon Property Group (2004 |
| [142] | | to present); Director, Norfolk Southern (2008 to present); Director, |
| | Fannie Mae (2006 to 2008) |
| | | |
| Theo C. Rodgers | | President, A&R Development Corporation (1977 to present) |
| (1941) | | |
| 2005 | | |
| [142] | | |
| | | |
| Cecilia E. Rouse, Ph.D. | | Professor and Researcher, Princeton University (1992 to present); |
| (1963) | | Director, MDRC (2011 to present); Member, National Academy of |
| 2012 | | Education (2010 to present); Research Associate, National Bureau |
| [90] | | of Economic Research’s Labor Studies Program (1998 to 2009 |
| | and 2011 to present); Member, President’s Council of Economic |
| | Advisors (2009 to 2011); Member, The MacArthur Foundation |
| | Network on the Transition to Adulthood and Public Policy (2000 to |
| | 2008); Member, National Advisory Committee for the Robert Wood |
| | Johnson Foundation’s Scholars in Health Policy Research Program |
| | (2008); Director and Member, National Economic Association |
| | (2006 to 2008); Member, Association of Public Policy Analysis and |
| | Management Policy Council (2006 to 2008); Member, Hamilton |
| | Project’s Advisory Board at The Brookings Institute (2006 to 2008); |
| | Chair of Committee on the Status of Minority Groups in the Economic |
| | Profession, American Economic Association (2006 to 2008) |
| | | |
| John G. Schreiber | | Owner/President, Centaur Capital Partners, Inc., a real estate |
| (1946) | | investment company (1991 to present); Cofounder and Partner, |
| 2001 | | Blackstone Real Estate Advisors, L.P. (1992 to present); Director, |
| [142] | | General Growth Properties, Inc. (2010 to present) |
| | | |
| Mark R. Tercek | | President and Chief Executive Officer, The Nature Conservancy (2008 |
| (1957) | | to present); Managing Director, The Goldman Sachs Group, Inc. |
| 2009 | | (1984 to 2008) |
| [142] | | |
| |
| *Each independent trustee serves until retirement, resignation, or election of a successor. |
Inside Trustees
| 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 |
| [142] | | Investment Services, Inc.; Chairman of the Board and Director, |
| | T. Rowe Price Retirement Plan Services, Inc., T. Rowe Price Savings |
| | Bank, and T. Rowe Price Services, Inc.; Chairman of the Board, Chief |
| | Executive Officer, and Director, T. Rowe Price International; Chief |
| | Executive Officer, Chairman of the Board, Director, and President, |
| | | T. Rowe Price Trust Company; Chairman of the Board, all funds |
| | | |
| Brian C. Rogers, CFA, CIC | | Chief Investment Officer, Director, and Vice President, T. Rowe Price; |
| (1955) | | Chairman of the Board, Chief Investment Officer, Director, and Vice |
| 2006 | | President, T. Rowe Price Group, Inc.; Vice President, T. Rowe Price |
| [75] | | Trust Company |
| |
| *Each inside trustee serves until retirement, resignation, or election of a successor. |
Officers
| Name (Year of Birth) | | |
| Position Held With Capital Appreciation Fund | | Principal Occupation(s) |
| | | |
| Francisco Alonso (1978) | | Vice President, T. Rowe Price and T. Rowe Price |
| Vice President | | Group, Inc. |
| | | |
| Ryan N. Burgess, CFA (1974) | | 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 |
| | | |
| Mark S. Finn, CFA, CPA (1963) | | 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. |
| | | |
| David R. Giroux, CFA (1975) | | Vice President, T. Rowe Price, T. Rowe Price |
| President | | Group, Inc., and T. Rowe Price Trust Company |
| | | |
| Gregory S. Golczewski (1966) | | Vice President, T. Rowe Price and T. Rowe Price |
| Vice President | | Trust Company |
| | | |
| Paul D. Greene II (1978) | | Vice President, T. Rowe Price and T. Rowe Price |
| Vice President | | Group, Inc. |
| | | |
| Gregory K. Hinkle, CPA (1958) | | Vice President, T. Rowe Price, T. Rowe Price |
| Treasurer | | Group, Inc., and T. Rowe Price Trust Company |
| | | |
| Steven D. Krichbaum (1977) | | Vice President, T. Rowe Price and T. Rowe Price |
| Vice President | | Group, Inc.; formerly student, University of |
| | Michigan, Stephen M. Ross School of Business |
| | (to 2007) |
| | | |
| John D. Linehan, CFA (1965) | | Vice President, T. Rowe Price, T. Rowe Price |
| Vice President | | Group, Inc., and T. Rowe Price Trust Company |
| | | |
| 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 |
| | | |
| Heather K. McPherson, CPA (1967) | | Vice President, T. Rowe Price and T. Rowe Price |
| Vice President | | Group, Inc. |
| | | |
| Joseph M. Milano, CFA (1972) | | Vice President, T. Rowe Price and T. Rowe Price |
| Vice President | | Group, Inc. |
| | | |
| Sudhir Nanda, Ph.D., CFA (1959) | | Vice President, T. Rowe Price and T. Rowe Price |
| Vice President | | Group, Inc. |
| | | |
| 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; Vice President and Secretary, |
| | T. Rowe Price, T. Rowe Price Group, Inc., and |
| | T. Rowe Price International; Vice President, |
| | Price Hong Kong and Price Singapore |
| | | |
| Robert T. Quinn, Jr. (1972) | | Vice President, T. Rowe Price and T. Rowe Price |
| Vice President | | Group, Inc. |
| | | |
| 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. |
| | | |
| Gabriel Solomon (1977) | | Vice President, T. Rowe Price and T. Rowe Price |
| Vice President | | Group, Inc. |
| | | |
| William J. Stromberg, CFA (1960) | | Director and Vice President, T. Rowe Price; Vice |
| Vice President | | President, Price Hong Kong, Price Singapore, |
| | T. Rowe Price Group, Inc., T. Rowe Price |
| | International, and T. Rowe Price Trust Company |
| | | |
| Taymour R. Tamaddon, CFA (1976) | | Vice President, T. Rowe Price and T. Rowe Price |
| Vice President | | Group, Inc. |
| | | |
| Susan G. Troll, CPA (1966) | | Vice President, T. Rowe Price and T. Rowe Price |
| Vice President | | Group, Inc. |
| | | |
| Eric L. Veiel, CFA (1972) | | Vice President, T. Rowe Price and T. Rowe Price |
| Vice President | | Group, Inc. |
| | | |
| Julie L. Waples (1970) | | Vice President, T. Rowe Price |
| Vice President | | |
| | | |
| Tamara P. Wiggs (1979) | | Vice President, T. Rowe Price and T. Rowe |
| Vice President | | Price Group, Inc.; formerly Vice President, |
| | Institutional Equity Trading, Merrill Lynch & Co., |
| | Inc. (to 2007) |
| |
| 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 $1,802,000 and $1,764,000, 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.
(2) Separate certifications by the registrant's principal executive officer and principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(a) under the Investment Company Act of 1940, are attached.
(3) Written solicitation to repurchase securities issued by closed-end companies: not applicable.
(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 Capital Appreciation Fund
| | By | /s/ Edward C. Bernard |
| | Edward C. Bernard |
| | Principal Executive Officer |
| |
| Date February 15, 2013 | | |
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 February 15, 2013 | | |
| |
| |
| By | /s/ Gregory K. Hinkle |
| | Gregory K. Hinkle |
| | Principal Financial Officer |
| |
| Date February 15, 2013 | | |
