Item 1. Report to Shareholders
DECEMBER 31, 2004
BALANCED FUND
Annual Report
T. ROWE PRICE
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The views and opinions in this report were current as of December 31, 2004. 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 of 2002, 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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T. ROWE PRICE BALANCED FUND
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Fellow Shareholders
U.S. stocks rose moderately in the second half of 2004, capping a second
consecutive year of gains. Small- and mid-cap shares fared better than their
larger counterparts. U.S. bonds produced positive returns in the second half of
2004, even though the Federal Reserve gradually raised short-term interest
rates. High-yield bonds strongly outperformed investment-grade securities.
Non-U.S. stocks outpaced their U.S. counterparts, thanks partially to a
weakening U.S. dollar, which fell to multi-year lows against several major
currencies.
PERFORMANCE COMPARISON
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Periods Ended 12/31/04 6 Months 12 Months
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Balanced Fund 8.26% 10.32%
Merrill Lynch-Wilshire Capital Market Index 6.92 9.54
Lipper Balanced Funds Index 6.59 8.99
Combined Index Portfolio* 6.81 9.24
*An unmanaged portfolio of 50% domestic stocks (S&P 500 Stock Index), 40% bonds
(Lehman Brothers U.S. Aggregate Index), and 10% international stocks (MSCI EAFE
Index).
Your fund returned 8.26% in the second half of 2004 and 10.32% for the year. The
fund outperformed all three of its benchmarks in both periods, as shown in the
table, because we overweighted stocks, which outpaced bonds, and had a modest
bias toward value stocks, which fared better than growth stocks. In addition,
our exposure to international equities and high-yield bonds, which surpassed
domestic shares and investment-grade issues, respectively, increased our
performance advantage.
MARKET ENVIRONMENT
The economy continued to expand in the second half of 2004, overcoming a
mid-year period of softness that was largely attributable to heightened consumer
and business caution amid rising oil prices and a tight presidential election
race. Both of these concerns eased in the fourth quarter, as the price of oil
fell sharply from its October high and investors welcomed a conclusive election
result.
The Federal Reserve continued to unwind its highly accommodative monetary policy
in the last six months, though this was not to the detriment of the equity
market. Beginning on June 30, the central bank raised the federal funds target
rate gradually from 1.00% to 2.25% in five quarter-point increments. Short-term
interest rates also rose, tracking
the fed funds rate, but long-term rates declined in the second half of the year
after peaking in the spring.
U.S. stocks declined through mid-August as economic growth moderated amid rising
short-term interest rates, surging energy costs, and a heated presidential
campaign. Stock prices rose as oil prices backed away from $55 per barrel, and
gains accelerated following the election. High-profile corporate deals and
mergers late in the year were also supportive. By year-end, several major
indexes were at or near their highest levels of the year.
[Graphic Omitted]
INTEREST RATE LEVELS
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10-Year 5-Year 90-Day
Treasury Note Treasury Note Treasury Bill
12/31/2003 4.25 3.25 0.92
1/31/2004 4.13 3.14 0.91
2/29/2004 3.97 2.94 0.94
3/31/2004 3.84 2.78 0.94
4/30/2004 4.51 3.62 0.96
5/31/2004 4.65 3.79 1.06
6/30/2004 4.58 3.77 1.26
7/31/2004 4.48 3.69 1.43
8/31/2004 4.12 3.31 1.58
9/30/2004 4.12 3.37 1.70
10/31/2004 4.02 3.28 1.89
11/30/2004 4.35 3.69 2.22
12/31/2004 4.22 3.61 2.21
Small-cap shares outperformed their larger counterparts in the second half of
2004 and for the full year. The Russell 2000 Index returned 10.83% and 18.33%,
respectively, versus 7.19% and 10.88% for the S&P 500 Index. As measured by
various Russell indexes, growth stocks lagged value across all market
capitalizations in both periods. In the large-cap universe, utilities, energy,
and telecommunications services were among the strongest sectors in the last six
months. The materials and consumer discretionary sectors also performed well.
Health care and information technology shares lagged due to weakness among
pharmaceuticals and semiconductors, respectively. Consumer staples stocks were
also sluggish.
U.S. bonds produced positive returns in the last six months. High-yield bonds
did best, but long-term government bonds also produced solid returns.
Investment-grade corporate bonds were less robust, while mortgage-backed and
shorter-term securities trailed with modest gains. The Lehman Brothers U.S.
Aggregate Index, a broad measure of the investment-grade taxable bond market,
returned 4.18% in the second half of 2004 and 4.34% for the entire year.
Non-U.S. stocks have outperformed their U.S. counterparts since the end of June,
thanks partially to a weakening U.S. dollar, which fell to multi-year lows
against several major currencies. Emerging markets were strongest, led by
equities in Latin America. Developed markets also performed well, with European
bourses well ahead of Japanese shares. The MSCI EAFE Index, which measures the
performance of mostly
large-cap stocks in Europe, Australasia, and the Far East, returned 15.10% in
the last six months and 20.70% for all of 2004.
ASSET ALLOCATION STRATEGY
Our asset allocations did not change much in the last six months. Domestic and
international stocks collectively represented 66% of the fund's assets--an
overweighting relative to the 60% neutral weighting of the combined index
portfolio benchmark--with 50% in U.S. stocks and 16% in non-U.S. shares versus
51% and 15%, respectively, at mid-year. Our position in corporate bonds rose
from 17% to 19%, and our exposure to Treasury and agency bonds increased from
11% to 12%. Mortgage-backed securities remained at 3%.
[Graphic Omitted]
SECURITY DIVERSIFICATION
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Domestic Stocks 50%
Corporate Bonds 19%
International Stocks 16%
Treasury and Agency Bonds 12%
Mortgage-Backed Securities 3%
Based on net assets as of 12/31/04.
PORTFOLIO REVIEW
Domestic Stocks
Nearly all major sectors in the domestic equity portion of the fund produced
gains in the last six months. The primary exception was the information
technology sector, which was dragged lower by weakness among semiconductor
shares, especially Intel.
Industrials and business services stocks contributed substantially to the U.S.
stock portfolio's performance. Road and rail stocks, led by Landstar Systems,
paced the sector's advance. Also, market heavyweight GE greatly added value, and
machinery stocks such as Danaher and Caterpillar plowed ahead as the economy
continued to expand.
Stocks in the financials sector also performed very well. Commercial banks, such
as Bank of America, companies tied to the capital markets, including Franklin
Resources, and real estate firm ProLogis were among
our top contributors to performance. In contrast, insurance stocks lagged,
pressured by New York Attorney General Eliot Spitzer's allegations of
bid-rigging against insurance broker Marsh & McLennan--one of our largest
performance detractors--and by the broadening of his investigation into
insurance industry practices.
Stocks in the consumer discretionary sector rose broadly in the last six months.
Media giants Comcast, McGraw-Hill, and Disney contributed substantially to fund
performance. Multi-line and specialty retailers were less robust; automobile
companies lagged.
In the materials sector, metals and mining company Nucor surged more than 35% in
the last six months, as the company's financial results were bolstered by the
strongest steel cycle in the past 50 years. Another strong contributor in the
sector was Potash Corp./Saskatchewan, the world's largest maker of potash
fertilizer. Shares soared more than 60% in the second half amid improved potash
prices and volumes.
Utility stocks, though they represented a small part of the domestic equity
portfolio, produced excellent returns in the last six months. TXU Corporation,
which surprised investors with significant increases in its dividend and
earnings projections, surged about 60%. The energy sector also enjoyed a strong
second half and was one of the best performing sectors for the year. Rising oil
prices and improving business fundamentals helped both oil and gas and energy
equipment and services companies. Top performers in each segment were ExxonMobil
and Halliburton, respectively.
Although our health care holdings collectively produced gains in the last six
months, pharmaceuticals lagged significantly due to considerable declines in
Merck and Pfizer. Merck plunged when the company withdrew its Vioxx arthritis
medication from the market because a clinical trial demonstrated patients on
Vioxx faced higher risk of heart attacks and strokes after 18 months of
continuous therapy. Pfizer's Celebrex ran into similar issues after a study
linked higher doses to increased heart attack risk. Pfizer, however, has decided
to keep its drug on the market.
International Stocks
The fund benefited from its non-U.S. equity exposure in the last six months, as
our holdings performed better than the broad MSCI EAFE Index. International
equity markets were driven by positive earnings trends and falling energy prices
later in the period. All sectors posted positive results, led by
telecommunications services, utilities, materials, and financials. Information
technology and consumer stocks lagged.
The Pacific region, excluding Japan, turned in the best returns among developed
markets. The financials sector was one of the fund's best in the last six
months. Solid economic growth and the reelection of John Howard's
business-friendly government in Australia provided a tailwind for Macquarie
Bank, one of our larger non-U.S. contributors to performance. Australian
investment bank Babcock & Brown also advanced. Materials and related stocks
performed well, including Bluescope Steel, which benefited from rising steel
prices. China Unicom, however, was one of our more disappointing holdings in the
region; its share price languished amid stiff wireless services competition in
China.
Results in Europe were also favorable, led by financials and materials. Swedish
bank Nordea was the best contributor in the region. Bank Austria Creditanstalt
benefited from a good position in Eastern European countries that joined the
European Union in 2004, while Sweden's SSAB climbed with steel prices. On the
downside, shares of Tele2 AB and satellite television provider British Sky
Broadcasting declined due to sub-par subscriber growth.
BOND PORTFOLIO PROFILE
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Periods Ended 6/30/04 12/31/04
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Weighted Average Effective Duration (years) 4.80 4.81
Weighted Average Maturity (years) 7.62 7.74
Quality Diversification *
AAA 5.15% 5.51%
AA 3.13 3.31
A 11.70 12.72
BBB 10.80 12.76
BB and Below 20.44 20.72
Not Rated 9.30 0.00
U.S. Government 39.48 44.98
*Source: Standard & Poor's; if Standard & Poor's does not rate a security, then
Moody's Investors Service is used as a secondary source.
Market performance in Japan was mixed in the last six months. Mitsubishi
Corporation was one of our best contributors in the region, benefiting from its
strong position in energy trading in the midst of higher energy prices. Teijin
benefited from price increases for its chemical products and favorable prospects
for its gout medication in the U.S., and we sold the shares during the period.
Our holdings in consumer electronics maker Pioneer and telecommunications
services provider KDDI declined amid intense competition in their respective
industries.
Domestic Bonds
Bonds generated good returns in the last six months, as long-term interest rates
declined--the opposite of what one would expect when the Federal Reserve is
raising short-term rates. The high-yield component of our bond portfolio made a
solid contribution to fund performance. Our small allocation to mortgages, which
underperformed other bond segments, detracted slightly from our results.
In the second half of the year, we continued to underweight government
securities and maintained a slightly defensive duration stance to lessen the
potential impact of higher interest rates often associated with a strengthening
economy. We prefer corporate bonds to government issues in an improving economy,
as strong corporate earnings should be supportive of a positive credit
environment.
OUTLOOK
U.S. stocks have risen for two consecutive years, which has not occurred since
1998-1999. Favorable fundamentals driving the market--including solid corporate
earnings growth, relatively low inflation and interest rates, and increased
merger activity--suggest that stocks could continue to rise in 2005. However,
returns are likely to be more moderate than in the last two years.
Although the Federal Reserve is determined to continue raising short-term
interest rates incrementally, any acceleration of inflation or economic growth
could trigger a more aggressive response from the central bank. In addition,
concerns about the weakening U.S. dollar or the burgeoning trade and federal
budget deficits could add upward pressure to interest rates, which would not be
welcomed by equity investors and would make the bond market environment more
challenging. However, there may be opportunities in fixed-income sectors that
tend to perform relatively well when the economy is growing and interest rates
are rising.
Non-U.S. equity markets continue to offer diversification benefits and good
long-term investment opportunities, and valuations abroad are more appealing
relative to those of U.S. stocks than they have been in several years.
International markets could again outperform the U.S., especially if the dollar
continues to weaken versus foreign currencies, though a stronger dollar would
have the opposite effect.
The uncertainties in today's global marketplace underscore the value of
diversification while pursuing long-term capital appreciation. We believe
our broad exposure to U.S. stocks, bonds, and international equities can provide
investors with long-term returns that compete with an all-stock portfolio and a
steadier ride toward the achievement of financial goals. We appreciate your
confidence in our investment management abilities.
Respectfully submitted,
Richard T. Whitney
Chairman of the fund's Investment Advisory Committee
January 19, 2005
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 IN STOCKS
As with all stock mutual funds, the fund's share price can fall because of
weakness in the stock market, 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.
RISKS OF INTERNATIONAL INVESTING
Funds that invest overseas generally carry more risk than funds that invest
strictly in U.S. assets. Risks can result from varying stages of economic and
political development, differing regulatory environments, trading days, and
accounting standards, currency fluctuations, and higher transaction costs of
non-U.S. markets. Investments outside the United States could be subject to
governmental actions such as capital or currency controls, nationalization of a
company or industry, expropriation of assets, or imposition of high taxes.
RISKS OF INVESTING IN BONDS
Funds that invest in bonds are subject to interest rate risk, the decline in
bond prices that usually accompanies a rise in interest rates. Longer-maturity
bonds typically decline more than those with shorter maturities. Funds that
invest in bonds are also subject to 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.
GLOSSARY
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 or bond fund's sensitivity to interest rate
changes. For example, a fund with a five-year duration would fall about 5% in
price in response to a one-percentage-point increase in interest rates, and vice
versa.
Fed funds target rate: An overnight lending rate set by the Federal Reserve and
used by banks to meet reserve requirements. Banks also use the fed funds rate as
a benchmark for their prime lending rates.
Lehman Brothers U.S. Aggregate Index: A widely used benchmark for the domestic
investment-grade bond market. The index typically includes more than 5,000
fixed-income securities with an overall intermediate- to long-term average
maturity.
Lipper indexes: Consist of a small number (10 to 30) of the largest mutual funds
in a particular category as tracked by Lipper Inc.
Merrill Lynch-Wilshire Capital Market Index: A market capitalization-weighted
index including the Wilshire 5000 and Merrill Lynch, High Yield II, and Domestic
Master Indexes.
MSCI EAFE Index: Widely accepted as the benchmark for international stock
performance (EAFE refers to Europe, Australasia, and Far East). The index
represents the major markets of the world excluding the U.S. and Canada, is
listed in local currency, and includes reinvestment of dividends.
Russell 2000 Index: Tracks the stocks of 2,000 small U.S. companies.
S&P 500 Stock Index: Tracks the stocks of 500 mostly large U.S. companies.
T. ROWE PRICE BALANCED FUND
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PORTFOLIO HIGHLIGHTS
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LARGEST HOLDINGS
Percent of Percent of
Net Assets Net Assets
12/31/04 12/31/04
Stocks Bonds
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GE 2.1% U.S. Treasury 9.3%
ExxonMobil 1.5 Federal Home Loans 1.6
Bank of America 1.2 Fannie Mae Mortgages 1.4
Citigroup 1.2 Ginnie Mae 1.3
Microsoft 1.1 Fannie Mae Agency Bonds 0.7
Wal-Mart 0.8 General Electric 0.4
American International Group 0.8 Manitoba 0.3
BP 0.8 Kimberly-Clark 0.2
UnitedHealth Group 0.7 Coca-Cola Bottling 0.2
Target 0.7 Anheuser-Busch 0.2
Total 10.9% Total 15.6%
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Note: Table excludes investments in the T. Rowe Price Reserve Investment Fund
and collateral for securities lending.
T. ROWE PRICE BALANCED FUND
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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.
[Graphic Omitted]
BALANCED FUND
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As of 12/31/04
Balanced Fund $ 26,200
Combined Index Portfolio* $ 26,105
Lipper Balanced Funds Index $ 24,638
Combined Index Lipper Balanced
Balanced Fund Portfolio* Funds Index
12/94 10,000 10,000 10,000
12/95 12,488 12,706 12,489
12/96 14,308 14,399 14,119
12/97 17,022 17,341 16,985
12/98 19,740 20,845 19,547
12/99 21,766 23,471 21,302
12/00 22,220 23,113 21,810
12/01 21,336 22,009 21,105
12/02 19,513 20,007 18,849
12/03 23,749 23,897 22,607
12/04 26,200 26,105 24,638
*The combined index portfolio is composed of 50% domestic stocks (S&P 500 Stock
Index), 40% bonds (Lehman Brothers U.S. Aggregate Index), and 10% international
stocks (MSCI EAFE Index).
T. ROWE PRICE BALANCED FUND
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AVERAGE ANNUAL COMPOUND TOTAL RETURN
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This table shows how the fund and its benchmarks would have performed if their
actual (or cumulative) returns for the periods shown had been earned at a
constant rate.
Periods Ended 12/31/04 1 Year 5 Years 10 Years
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Balanced Fund 10.32% 3.78% 10.11%
Merrill Lynch-Wilshire Capital Market Index 9.54 1.23 10.11
Lipper Balanced Funds Index 8.99 2.95 9.44
Combined Index Portfolio * 9.24 2.15 10.07
*An unmanaged portfolio of 50% domestic stocks (S&P 500 Stock Index), 40% bonds
(Lehman Brothers U.S. Aggregate Index), and 10% international stocks (MSCI EAFE
Index).
Current performance may be higher or lower than the quoted past performance,
which cannot guarantee future results. Share price, principal value, and return
will vary, and you may have a gain or loss when you sell your shares. For the
most recent month-end performance information, please visit our Web site
(troweprice.com) or contact a T. Rowe Price representative at 1-800-225-5132.
Average annual total return figures include changes in principal value,
reinvested dividends, and capital gain distributions. Returns do not reflect
taxes that the shareholder may pay on fund distributions or the redemption of
fund shares. When assessing performance, investors should consider both short-
and long-term returns.
T. ROWE PRICE BALANCED FUND
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FUND EXPENSE EXAMPLE
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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.
Actual Expenses
The first line of the following table ("Actual") provides information about
actual account values and actual expenses. You may use the information in 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 in 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 small-account maintenance fee of $10,
generally for accounts with less than $2,000 ($500 for UGMA/UTMA). The fee is
waived for any investor whose T. Rowe Price mutual fund accounts total $25,000
or more, accounts employing automatic investing, and IRAs and other retirement
plan accounts that utilize a prototype plan sponsored by T. Rowe Price (although
a separate custodial or administrative fee may apply to such accounts). 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.
T. ROWE PRICE BALANCED FUND
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Beginning Ending Expenses Paid
Account Value Account Value During Period*
7/1/04 12/31/04 7/1/04 to 12/31/04
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Actual $1,000 $1,082.60 $3.66
Hypothetical (assumes 5%
return before expenses) 1,000 1,021.62 3.56
*Expenses are equal to the fund's annualized expense ratio for the six-month
period (0.70%), multiplied by the average account value over the period,
multiplied by the number of days in the most recent fiscal half year (184)
divided by the days in the year (366) to reflect the half-year period.
T. ROWE PRICE BALANCED FUND
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FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
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Year
Ended
12/31/04 12/31/03 12/31/02 12/31/01 12/31/00
NET ASSET VALUE
Beginning of period $ 18.41 $ 15.51 $ 17.49 $ 19.17 $ 19.69
Investment activities
Net investment income (loss) 0.46* 0.41* 0.47 0.51 0.54
Net realized and
unrealized gain (loss) 1.41 2.91 (1.95) (1.29) (0.13)
Total from
investment activities 1.87 3.32 (1.48) (0.78) 0.41
Distributions
Net investment income (0.46) (0.42) (0.47) (0.52) (0.53)
Net realized gain (0.12) - (0.03) (0.38) (0.40)
Total distributions (0.58) (0.42) (0.50) (0.90) (0.93)
NET ASSET VALUE
End of period $ 19.70 $ 18.41 $ 15.51 $ 17.49 $ 19.17
------------------------------------------------
Ratios/Supplemental Data
Total return^ 10.32%* 21.71%* (8.54)% (3.98)% 2.09%
Ratio of total expenses to
average net assets 0.71%* 0.78%* 0.79% 0.83% 0.79%
Ratio of net investment
income (loss) to average
net assets 2.49%* 2.50%* 2.88% 2.84% 2.75%
Portfolio turnover rate 22.9% 38.4% 49.1% 36.0% 16.5%
Net assets, end of period
(in millions) $ 2,325 $ 2,048 $ 1,582 $ 1,791 $ 1,896
^Total return reflects the rate that an investor would have earned on an
investment in the fund during each period, assuming reinvestment of all
distributions.
*See Note 4. Excludes expenses permanently waived of 0.04% and 0.02% of average
net assets for the periods ended 12/31/04 and 12/31/03, respectively, related
to investments in TRP mutual funds.
The accompanying notes are an integral part of these financial statements.
T. ROWE PRICE BALANCED FUND
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December 31, 2004
Portfolio of Investments (1) Shares/$ Par Value
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(Cost and value in $ 000s)
COMMON STOCKS 65.9%
CONSUMER DISCRETIONARY 7.4%
Automobiles 0.8%
Ford Motor (ss.) 334,643 4,899
GM (ss.) 95,700 3,834
Honda (JPY) 1,400 72
Honda ADR (ss.) 45,000 1,173
Peugeot (EUR) (ss.) 24,239 1,532
Renault (EUR) (ss.) 20,234 1,686
Toyota Motor (JPY) 163,700 6,645
19,841
Distributors 0.2%
Genuine Parts (ss.) 81,975 3,612
3,612
Hotels, Restaurants & Leisure 0.7%
Carnival 100,000 5,763
Hilton 100,000 2,274
McDonald's 156,200 5,008
Wendy's (ss.) 30,000 1,178
Whitbread (GBP) 101,260 1,642
15,865
Household Durables 0.6%
Fortune Brands 40,000 3,087
Goldcrest (JPY) 14,590 1,009
Persimmon (GBP) 98,808 1,308
Philips Electronics (EUR) 41,468 1,095
Pioneer (JPY) (ss.) 69,500 1,353
Sony (JPY) (ss.) 66,300 2,556
Thomson (EUR) (ss.) 106,394 2,801
13,209
Leisure Equipment & Products 0.1%
Hasbro 80,000 1,550
Noritsu Koki (JPY) (ss.) 13,000 298
1,848
Media 2.7%
Aegis (GBP) 945,621 1,956
Astro All Asia (MYR) * 13,000 18
Astro All Asia, 144A (MYR) *@ 208,100 296
Clear Channel Communications 100,000 3,349
Comcast, Class A * 342,842 11,410
Disney 362,617 10,081
Gannett 27,600 2,255
Gestevision Telecino (EUR) * 8,500 175
McGraw-Hill 71,800 6,572
New York Times, Class A (ss.) 80,000 3,264
Omnicom 26,800 2,260
Publicis (EUR) 117,010 3,778
Reader's Digest 35,000 487
Time Warner * 289,550 5,629
Tribune 40,000 1,686
Viacom (ss.) 8,152 302
Viacom, Class B 187,391 6,819
WPP Group (GBP) 209,165 2,296
WPP Group ADR 19,100 1,044
63,677
Multiline Retail 0.9%
May Department Stores 77,100 2,267
Sears (ss.) 40,000 2,041
Target 323,400 16,794
21,102
Specialty Retail 1.3%
Blockbuster, Class A (ss.) 52,404 500
Blockbuster, Class B 52,404 462
CarMax *(ss.) 53,923 1,674
Esprit Holdings (HKD) 227,500 1,376
GAP 207,300 4,378
Home Depot 311,000 13,292
RadioShack 80,000 2,630
Staples 53,155 1,792
TJX Companies 92,000 2,312
Toys "R" Us *(ss.) 64,380 1,318
29,734
Textiles, Apparel, & Luxury Goods 0.1%
Adidas-Salomon (EUR) 10,926 1,756
Yue Yuen Industrial (HKD) (ss.) 552,000 1,516
3,272
Total Consumer Discretionary 172,160
CONSUMER STAPLES 5.6%
Beverages 1.1%
Allied Domecq (GBP) 180,050 1,769
Anheuser-Busch 98,100 4,976
Coca-Cola 229,300 9,546
Kirin Brewery (JPY) (ss.) 125,000 1,228
PepsiCo 174,400 9,104
26,623
Food & Staples Retailing 2.3%
Casino Guichard-Perrachon (EUR) (ss.) 20,319 1,617
Coles Myer (AUD) 290,086 2,232
Costco Wholesale 119,100 5,766
CVS 50,000 2,254
J Sainsbury (GBP) 182,210 944
Kroger * 222,900 3,910
Matsumotokiyoshi (JPY) (ss.) 33,000 938
METRO (EUR) 87,178 4,778
Sysco 126,000 4,809
Tesco (GBP) 358,510 2,210
Wal-Mart 362,200 19,131
Wal-Mart de Mexico, Series V (MXN) 603,400 2,071
Walgreen 50,000 1,919
52,579
Food Products 0.6%
Campbell Soup 81,000 2,421
General Mills (ss.) 72,500 3,604
Nestle (CHF) 13,163 3,432
Unilever N.V. (GBP) 333,839 3,271
12,728
Household Products 1.0%
Colgate-Palmolive 67,300 3,443
Kimberly-Clark 75,400 4,962
Procter & Gamble 285,600 15,731
24,136
Personal Products 0.2%
Gillette 95,174 4,262
4,262
Tobacco 0.4%
Altria Group 160,800 9,825
9,825
Total Consumer Staples 130,153
ENERGY 5.7%
Energy Equipment & Services 0.9%
Baker Hughes 80,000 3,414
BJ Services 98,400 4,580
FMC Technologies *(ss.) 72,228 2,326
Halliburton 93,742 3,678
Schlumberger 102,600 6,869
Transocean * 11,654 494
21,361
Oil & Gas 4.8%
Amerada Hess (ss.) 103,500 8,526
BP (GBP) 441,157 4,294
BP ADR 230,902 13,485
ChevronTexaco 222,318 11,674
ConocoPhillips 50,000 4,341
Eni SPA (EUR) 118,520 2,955
Eni SPA ADR (ss.) 18,800 2,366
ExxonMobil 685,326 35,130
INPEX (JPY) (ss.)* 46 231
Murphy Oil 100,000 8,045
Norsk Hydro (NOK) 12,310 965
Petroleo Brasileiro (Petrobras) ADR (ss.) 104,000 3,766
Royal Dutch Petroleum ADS (ss.) 30,000 1,721
Shell Transport & Trading (GBP) 159,178 1,354
Shell Transport & Trading ADR 69,000 3,547
Statoil ASA (NOK) 172,865 2,700
Total (EUR) (ss.) 22,670 4,932
110,032
Total Energy 131,393
FINANCIALS 14.6%
Capital Markets 2.4%
Babcock & Brown (AUD) * 166,257 1,411
Bank of New York 100,000 3,342
Credit Suisse Group (CHF) * 79,075 3,313
Franklin Resources 98,000 6,826
Goldman Sachs 78,700 8,188
Lehman Brothers 50,000 4,374
Macquarie Bank (AUD) 66,939 2,428
Mellon Financial 172,600 5,370
Morgan Stanley 155,700 8,644
Piper Jaffray Companies *(ss.) 4,804 230
State Street 196,000 9,628
Waddell & Reed Financial, Class A 35,581 850
54,604
Commercial Banks 5.4%
ABN Amro Holdings (EUR) 84,305 2,224
Alliance & Leicester (GBP) 82,608 1,443
Australia & New Zealand Banking (AUD) 132,948 2,136
Australia & New Zealand Banking ADR (ss.) 22,800 1,845
Banco Santander Central Hispano (EUR) 207,900 2,569
Banco Santander Chile ADR (ss.) 52,151 1,766
Bank Austria Creditanstalt (EUR) 25,371 2,284
Bank of America 615,698 28,932
Bank of Ireland (Dublin Listing) (EUR) 115,698 1,919
Bank of Yokohama (JPY) 261,000 1,641
Barclays (GBP) 651,582 7,315
Barclays ADR 6,700 306
BNP Paribas (EUR) (ss.) 68,515 4,943
DBS Group (SGD) 189,000 1,864
Grupo Financiero Banorte (MXN) 711,300 4,475
HBOS (GBP) 236,615 3,844
HSBC (GBP) 110,006 1,853
National Australia Bank (AUD) 150,155 3,376
NORDEA (SEK) 463,319 4,654
Royal Bank of Scotland (GBP) 168,075 5,642
SEB, Series A (SEK) 150,387 2,897
Sumitomo Mitsui Financial (JPY) (ss.) 332 2,408
Svenska Handelsbanken, Series A (SEK) 146,434 3,798
U.S. Bancorp 480,424 15,047
UniCredito Italiano (EUR) 265,000 1,517
Wachovia 271,919 14,303
125,001
Consumer Finance 0.5%
AIFUL (JPY) 16,600 1,821
American Express 176,000 9,921
11,742
Diversified Financial Services 1.8%
Citigroup 570,938 27,508
ING Groep GDS (EUR) 77,814 2,345
J.P. Morgan Chase 293,820 11,462
Moody's (ss.) 14,100 1,224
42,539
Insurance 2.7%
Aioi Insurance (JPY) 450,000 2,072
Ambac Financial Group 33,300 2,735
American International Group 285,718 18,763
Aviva (GBP) 98,167 1,181
AXA (EUR) 91,912 2,262
CNP Assurances (EUR) (ss.) 40,249 2,871
Genworth Financial, Class A (ss.) 50,000 1,350
Marsh & McLennan 111,500 3,668
Mitsui Sumitomo Insurance (JPY) 127,000 1,100
Prudential 64,000 3,517
QBE Insurance (AUD) (ss.) 154,130 1,846
Royal & Sun Alliance (GBP) 458,388 681
SAFECO (ss.) 50,000 2,612
St. Paul Companies (ss.) 245,534 9,102
Torchmark 87,600 5,006
UnumProvident (ss.) 284,200 5,099
63,865
Real Estate 0.8%
China Overseas Land (HKD) 3,570,000 882
Corio (EUR) 16,481 962
General Property Trust, Equity Units (AUD) 254,154 742
ProLogis, REIT (ss.) 321,450 13,928
Sun Hung Kai Properties (HKD) 171,000 1,710
18,224
Thrifts & Mortgage Finance 1.0%
Bradford & Bingley (GBP) 266,979 1,717
Countrywide Credit 155,700 5,762
Fannie Mae 86,900 6,188
Freddie Mac 54,200 3,995
Hypo Real Estate (EUR) * 58,792 2,427
MGIC Investment (ss.) 23,200 1,599
Radian 50,000 2,662
24,350
Total Financials 340,325
HEALTH CARE 6.8%
Biotechnology 0.4%
Amgen * 131,000 8,404
CSL Limited (AUD) 24,779 565
8,969
Health Care Equipment & Supplies 0.8%
Baxter International 111,500 3,851
Becton, Dickinson 60,000 3,408
Guidant 42,400 3,057
Hospira * 14,170 475
Medtronic 140,400 6,974
17,765
Health Care Providers & Services 1.5%
Aetna 52,695 6,574
Cardinal Health (ss.) 96,908 5,635
Celesio (EUR) (ss.) 18,969 1,536
Health Management (ss.) 81,252 1,846
Medco * 58,637 2,439
UnitedHealth Group 196,600 17,307
35,337
Pharmaceuticals 4.1%
Abbott Laboratories 141,700 6,610
AstraZeneca ADR (ss.) 53,100 1,932
Bristol Myers Squibb 154,700 3,964
Eisai (JPY) 31,800 1,043
Eli Lilly 100,000 5,675
Forest Laboratories * 50,000 2,243
GlaxoSmithKline (GBP) 73,591 1,723
GlaxoSmithKline ADR (ss.) 238,722 11,313
Johnson & Johnson 191,500 12,145
Kobayashi Pharmaceutical (JPY) (ss.) 41,000 1,104
Merck 196,000 6,300
Novartis (CHF) 147,638 7,414
Pfizer 586,810 15,779
Sanofi-Aventis (EUR) (ss.) 50,897 4,051
Schering-Plough 200,000 4,176
Takeda Chemical Industries (JPY) 42,500 2,135
Wyeth 210,800 8,978
96,585
Total Health Care 158,656
INDUSTRIALS & BUSINESS SERVICES 8.1%
Aerospace & Defense 1.4%
Boeing 95,900 4,965
British Aerospace (GBP) 380,052 1,678
European Aeronautic Defense & Space (EUR) 60,174 1,742
Honeywell International 177,900 6,300
Lockheed Martin 135,811 7,544
Northrop Grumman 98,942 5,379
United Technologies 48,400 5,002
32,610
Air Freight & Logistics 0.4%
TPG (EUR) 61,843 1,673
UPS, Class B 92,000 7,862
9,535
Airlines 0.0%
Qantas Airways (AUD) 232,997 674
674
Building Products 0.2%
Masco 99,800 3,646
3,646
Commercial Services & Supplies 0.2%
Waste Management 176,295 5,278
5,278
Construction & Engineering 0.2%
Acciona (EUR) (ss.) 35,767 3,152
Downer EDI (AUD) (ss.) 183,414 677
3,829
Electrical Equipment 0.0%
Sumitomo Electric Industries (JPY) 92,000 998
998
Industrial Conglomerates 3.1%
3M 47,200 3,874
GE 1,319,400 48,158
Hutchison Whampoa (HKD) 171,000 1,601
Sembcorp (SGD) 1,720,000 1,707
Siemens (EUR) 53,861 4,548
Tyco International 362,964 12,972
72,860
Machinery 1.6%
Caterpillar 50,000 4,875
Danaher (ss.) 192,400 11,046
Deere (ss.) 131,500 9,784
Fanuc (JPY) 25,200 1,644
Guinness Peat Group (NZD) 485,026 756
ITT Industries 70,000 5,911
Mitsubishi Heavy Industries (JPY) (ss.) 437,000 1,238
NSK (JPY) 191,000 958
36,212
Marine 0.1%
Nippon Yusen (JPY) (ss.) 315,000 1,693
1,693
Road & Rail 0.8%
Arriva (GBP) 235,452 2,436
CSX 120,000 4,809
Landstar Systems *(ss.) 80,000 5,891
Union Pacific 79,000 5,313
18,449
Trading Companies & Distributors 0.1%
Mitsubishi (JPY) 206,000 2,655
2,655
Total Industrials & Business Services 188,439
INFORMATION TECHNOLOGY 8.1%
Communications Equipment 0.9%
Cisco Systems * 423,900 8,181
Motorola 278,600 4,792
Nokia (EUR) 50,684 797
Nokia ADR 72,000 1,128
QUALCOMM 88,000 3,731
Sagem (EUR) (ss.) 57,445 1,220
Uniden (JPY) 34,000 669
20,518
Computers & Peripherals 1.6%
Dell * 301,600 12,710
Hewlett-Packard 295,680 6,200
IBM 144,100 14,205
Lexmark International * 25,000 2,125
Toshiba (JPY) (ss.) 339,000 1,452
36,692
Electronic Equipment & Instruments 0.4%
Flextronics *(ss.) 180,000 2,488
Jabil Circuit *(ss.) 121,800 3,116
Kyocera (JPY) 16,500 1,267
TDK (JPY) 15,000 1,108
7,979
Internet Software & Services 0.3%
IAC/InterActiveCorp *(ss.) 118,000 3,259
VeriSign * 130,000 4,358
7,617
IT Services 0.4%
Automatic Data Processing 78,000 3,459
Certegy (ss.) 8,900 316
DST Systems *(ss.) 50,000 2,606
Paychex 94,540 3,222
Sabre Holdings (ss.) 28,906 641
10,244
Office Electronics 0.1%
Canon (JPY) 55,000 2,960
2,960
Semiconductor & Semiconductor Equipment 1.9%
Altera * 152,000 3,146
Analog Devices 149,000 5,501
Applied Materials * 160,000 2,736
ASML Holding (EUR) * 89,422 1,430
Freescale Semiconductor *(ss.) 30,761 565
Intel 508,400 11,892
Jenoptik (EUR) * 59,600 626
KLA-Tencor *(ss.) 60,000 2,795
Linear Technology (ss.) 115,000 4,457
Maxim Integrated Products 111,500 4,727
Nikon (JPY) (ss.) 106,000 1,306
Semiconductor Manufacturing
International ADR *(ss.) 31,100 335
Texas Instruments 100,000 2,462
Xilinx 50,400 1,494
43,472
Software 2.5%
Adobe Systems 100,000 6,274
Electronic Arts * 30,000 1,850
Intuit * 167,200 7,359
Microsoft 949,800 25,369
NEC Soft (JPY) 16,600 525
Oracle * 727,000 9,975
SAP (EUR) 21,008 3,737
VERITAS Software * 115,000 3,283
58,372
Total Information Technology 187,854
MATERIALS 4.3%
Chemicals 1.3%
BASF (EUR) 49,713 3,567
Degussa (EUR) (ss.) 57,258 2,401
Dow Chemical 167,200 8,278
DuPont 56,315 2,762
FMC *(ss.) 42,000 2,029
Great Lakes Chemical (ss.) 25,000 712
Kaneka (JPY) 151,000 1,705
Potash Corp./Saskatchewan (ss.) 62,000 5,150
Rohm & Haas 53,417 2,363
Valspar (ss.) 36,200 1,810
Yara International (NOK) * 12,310 161
30,938
Construction Materials 0.4%
Boral (AUD) 786,445 4,215
Cemex (MXN) 333,700 2,435
Lafarge (EUR) 9,052 870
RMC (GBP) 160,279 2,607
10,127
Metals & Mining 2.2%
Alcoa 167,860 5,274
Anglo American (GBP) 45,122 1,065
Bluescope Steel (AUD) 599,976 3,861
Inco *(ss.) 200,000 7,356
Newmont Mining 60,000 2,665
Nippon Steel (JPY) 1,096,000 2,678
Nucor (ss.) 264,000 13,818
Phelps Dodge 119,300 11,801
SSAB Svenskt Stal, Series A (SEK) 106,604 2,557
51,075
Paper & Forest Products 0.4%
Georgia-Pacific 61,135 2,291
International Paper 100,000 4,200
MeadWestvaco 30,000 1,017
Neenah Paper *(ss.) 2,284 74
Weyerhaeuser 12,700 854
8,436
Total Materials 100,576
TELECOMMUNICATION SERVICES 2.7%
Diversified Telecommunication Services 1.8%
Alltel 89,100 5,236
China Telecom (H shares) (HKD) 2,788,000 1,022
Compania de Telecomunicaciones
de Chile (Class A) ADR (ss.) 69,700 784
Royal KPN (EUR) 240,429 2,275
SBC Communications 252,540 6,508
Sprint 101,800 2,530
Tele Norte Leste ADR (ss.) 92,300 1,557
Tele2, Series B (SEK) (ss.) 56,901 2,226
Telus (CAD) 60,800 1,830
Telus 89,200 2,578
Verizon Communications 356,730 14,451
40,997
Wireless Telecommunication Services 0.9%
America Movil ADR, Series L (ss.) 48,300 2,528
Bouygues (EUR) (ss.) 61,174 2,816
China Unicom (HKD) 586,000 467
KDDI (JPY) 362 1,945
mmO2 (GBP) * 1,389,562 3,268
Nextel Communications, Class A * 100,000 3,000
Telecom Italia Mobile (EUR) (ss.) 421,308 3,137
Vodafone (GBP) 238,592 646
Vodafone ADR (ss.) 147,500 4,038
21,845
Total Telecommunication Services 62,842
UTILITIES 2.6%
Electric Utilities 2.0%
E.On (EUR) 48,822 4,432
Electric Power, 144A (JPY) *@ 6,400 179
Entergy 81,400 5,502
Exelon 252,050 11,108
FirstEnergy 139,054 5,494
Hong Kong Electric (HKD) 193,571 884
Iberdrola (EUR) (ss.) 113,076 2,862
Pinnacle West Capital 50,000 2,220
Tohoku Electric Power (JPY) 144,700 2,592
TXU 156,500 10,104
45,377
Gas Utilities 0.3%
Australian Gas Light (AUD) 55,411 592
Centrica (GBP) 670,085 3,033
NiSource 150,000 3,417
7,042
Multi-Utilities & Unregulated Power 0.3%
Duke Energy (ss.) 306,230 7,757
7,757
Total Utilities 60,176
Total Common Stocks (Cost $949,188) 1,532,574
PREFERRED STOCKS 0.1%
Porsche (EUR) 2,740 1,741
Total Preferred Stocks (Cost $888) 1,741
ASSET-BACKED SECURITIES 0.2%
American Express Credit Card Master Trust, Series
2000-1 Class A, 7.20%, 9/17/07 1,135,000 1,141
Citibank Credit Card Issuance Trust, Series
2000-1 Class A1, 6.90%, 10/15/07 2,800,000 2,883
Hyundai Auto Receivables Trust, Series 2003-A
Class A4, 3.02%, 10/15/10 325,000 321
Peco Energy Transition Trust, Series 2001-A
Class A1, 6.52%, 12/31/10 450,000 502
Total Asset-Backed Securities (Cost $4,906) 4,847
CORPORATE BONDS 9.7%
AIG SunAmerica Global Financing,
144A, 7.60%, 6/15/05 !! 2,600,000 2,654
Alcan Aluminum, 4.875%, 9/15/12 700,000 709
America Movil, 5.50%, 3/1/14 545,000 536
American Axle & Manufacturing, 5.25%, 2/11/14 500,000 483
American Electric Power, 5.375%, 3/15/10 180,000 188
Amgen, 144A, 4.00%, 11/18/09 410,000 408
Anheuser-Busch, 5.75%, 4/1/10 5,000,000 5,387
AOL Time Warner, 7.625%, 4/15/31 1,625,000 1,958
AT&T Broadband, 8.375%, 3/15/13 1,800,000 2,221
AT&T Wireless Services, 7.875%, 3/1/11 1,000,000 1,177
Bank of America, 4.875%, 9/15/12 500,000 514
Bank One, 5.50%, 3/26/07 2,000,000 2,094
BankAmerica, 6.625%, 8/1/07 3,000,000 3,218
BankBoston Capital Trust, 8.25%, 12/15/26 1,000,000 1,159
BB&T
4.75%, 10/1/12 935,000 942
6.375%, 6/30/05 3,000,000 3,056
Bear Stearns, 4.00%, 1/31/08 750,000 758
BHP Finance
4.80%, 4/15/13 255,000 258
6.69%, 3/1/06 2,000,000 2,079
Boeing, 8.75%, 8/15/21 2,000,000 2,697
Bottling Group, 4.625%, 11/15/12 450,000 456
BP Capital Markets, 2.35%, 6/15/06 500,000 497
Bristol-Myers Squibb, 5.75%, 10/1/11 1,000,000 1,070
British Sky Broadcasting, 8.20%, 7/15/09 1,000,000 1,155
British Telecommunications, VR,
8.375%, 12/15/10 1,000,000 1,196
Burlington Northern Santa Fe, ETC,
7.33%, 6/23/10 445,527 448
Canadian Natural Resources,
6.45%, 6/30/33 500,000 542
Capital One Bank
4.25%, 12/1/08 400,000 402
4.875%, 5/15/08 1,000,000 1,029
Caterpillar Financial Services, 3.10%, 5/15/07 500,000 496
Celulosa Arauco Y Constitucion, 8.625%, 8/15/10 800,000 945
Centerpoint Energy Houston, 5.70%, 3/15/13 1,000,000 1,062
Chevron Phillips Chemical, 5.375%, 6/15/07 560,000 579
CIT Group Holdings, 7.75%, 4/2/12 1,960,000 2,319
Citigroup
5.00%, 9/15/14 1,534,000 1,540
6.625%, 6/15/32 2,000,000 2,250
Clear Channel Communications, 7.65%, 9/15/10 1,000,000 1,138
Clorox, 144A, 4.20%, 1/15/10 600,000 602
Coca-Cola Bottling, 7.20%, 7/1/09 5,000,000 5,532
Comcast Cable Communications, 6.75%, 1/30/11 1,750,000 1,962
Consolidated Natural Gas, 5.00%, 3/1/14 1,500,000 1,503
Consumers Energy, 6.25%, 9/15/06 1,800,000 1,880
Countrywide Funding, 6.875%, 9/15/05 860,000 882
Cox Communications, 7.125%, 10/1/12 300,000 336
Credit Suisse First Boston, 6.125%, 11/15/11 1,800,000 1,975
Credit Suisse First Boston (USA), 6.50%, 1/15/12 1,175,000 1,315
CVS, 4.00%, 9/15/09 500,000 498
Daimler Chrysler North Holdings, 7.20%, 9/1/09 1,000,000 1,112
Deutsche Telekom International Finance, STEP
8.50%, 6/15/10 1,150,000 1,369
Duke Capital, 7.50%, 10/1/09 1,000,000 1,133
DuPont, 6.875%, 10/15/09 660,000 741
Energy East, 6.75%, 9/15/33 1,000,000 1,128
Enron Oil & Gas, 6.50%, 12/1/07 4,000,000 4,275
EOP Operating, 6.80%, 1/15/09 1,250,000 1,369
Equitable Resources, 7.75%, 7/15/26 2,000,000 2,412
Erac USA Finance, 144A, 8.00%, 1/15/11 2,500,000 2,920
ERP Operating, 6.95%, 3/2/11 710,000 796
Exelon Generation, 6.95%, 6/15/11 375,000 423
Federal Express, 9.95%, 8/15/06 500,000 551
First Data, 4.70%, 8/1/13 800,000 799
First Tennessee Bank, 5.05%, 1/15/15 1,000,000 998
First Union, 7.55%, 8/18/05 3,000,000 3,084
FirstEnergy, 6.45%, 11/15/11 1,000,000 1,085
Florida Power & Light, 5.95%, 10/1/33 400,000 430
Food Lion, 8.05%, 4/15/27 1,900,000 2,237
Ford Capital, 9.50%, 6/1/10 4,000,000 4,571
Ford Motor Credit
6.75%, 8/15/08 1,000,000 1,060
7.00%, 10/1/13 1,000,000 1,057
7.375%, 10/28/09 600,000 647
France Telecom, STEP, 8.50%, 3/1/11 1,590,000 1,895
General Electric Capital
3.125%, 4/1/09 6,000,000 5,816
5.45%, 1/15/13 2,500,000 2,641
General Motors
7.125%, 7/15/13 325,000 332
8.25%, 7/15/23 2,750,000 2,857
General Motors Acceptance Corp.
6.125%, 8/28/07 1,000,000 1,030
6.75%, 12/1/14 675,000 675
Goldman Sachs Group
5.15%, 1/15/14 1,200,000 1,215
6.60%, 1/15/12 2,500,000 2,790
Halliburton, 5.50%, 10/15/10 1,000,000 1,054
Harrah's Operating, 5.50%, 7/1/10 500,000 517
Hewlett Packard, 5.50%, 7/1/07 1,000,000 1,045
Household Finance, 6.375%, 10/15/11 3,200,000 3,526
HSBC Bank USA, 5.875%, 11/1/34 1,950,000 1,971
HSBC Holdings, 5.25%, 12/12/12 600,000 621
IBM, 6.45%, 8/1/07 500,000 536
ING Capital Funding Trust III, 8.439%, 12/31/49
(Tender 12/31/10) 1,000,000 1,193
International Lease Finance, 3.75%, 8/1/07 400,000 400
Jefferson Pilot, 144A, 8.14%, 1/15/46 1,500,000 1,717
Johnson Controls, 4.875%, 9/15/13 1,000,000 1,013
Kimberly-Clark, 6.375%, 1/1/28 5,000,000 5,618
Kraft Foods, 5.625%, 11/1/11 1,000,000 1,058
Kroger, 8.05%, 2/1/10 2,500,000 2,915
Lehman Brothers
3.95%, 11/10/09 1,000,000 990
4.80%, 3/13/14 1,525,000 1,512
Lockheed Martin, 7.65%, 5/1/16 1,000,000 1,220
Manufacturers & Traders Trust, 8.00%, 10/1/10 1,625,000 1,914
MBNA America Bank, 6.50%, 6/20/06 1,500,000 1,566
Mellon Funding, 5.00%, 12/1/14 1,000,000 1,015
Merrill Lynch
4.125%, 1/15/09 500,000 502
5.00%, 1/15/15 1,500,000 1,488
6.50%, 7/15/18 1,000,000 1,115
Morgan Stanley, 6.875%, 3/1/07 4,000,000 4,283
Motorola, 8.00%, 11/1/11 1,000,000 1,192
New Jersey Bell Telephone, 6.80%, 12/15/24 2,500,000 2,662
News America Holdings, 9.25%, 2/1/13 3,090,000 3,967
Niagara Mohawk Power, 7.625%, 10/1/05 368,828 380
Noram Energy, 6.50%, 2/1/08 521,000 558
Norfolk Southern, 7.80%, 5/15/27 500,000 621
Northrop Grumman, 7.875%, 3/1/26 500,000 627
NYNEX, 9.55%, 5/1/10 514,912 583
Oncor Electric Delivery, 7.25%, 1/15/33 1,800,000 2,152
Pacific Gas & Electric
3.60%, 3/1/09 500,000 493
4.80%, 3/1/14 1,000,000 993
Panhandle Eastern Pipeline, 4.80%, 8/15/08 335,000 340
Pemex Project Funding Master Trust,
7.375%, 12/15/14 2,500,000 2,775
Petrobras International, 9.875%, 5/9/08 750,000 872
Phillips Petroleum, 7.00%, 3/30/29 4,000,000 4,674
PNC Funding, 5.25%, 11/15/15 1,000,000 1,012
PPL Energy Supply, 6.40%, 11/1/11 940,000 1,025
Procter & Gamble, 4.85%, 12/15/15 500,000 503
Progress Energy, 7.10%, 3/1/11 1,200,000 1,351
Public Service Company of Colorado,
7.875%, 10/1/12 940,000 1,137
Pulte Homes, 7.875%, 8/1/11 750,000 872
Reed Elsevier, 6.125%, 8/1/06 1,000,000 1,043
Royal Bank of Canada, 3.875%, 5/4/09 350,000 347
Royal Bank of Scotland Group, 5.00%, 10/1/14 1,000,000 1,010
SBC Communications, 6.25%, 3/15/11 1,100,000 1,205
Sempra Energy, 6.00%, 2/1/13 790,000 843
Southern California Edison
4.65%, 4/1/15 500,000 493
6.00%, 1/15/34 1,000,000 1,062
Sprint Capital, 6.875%, 11/15/28 1,600,000 1,749
St. Paul Companies, 5.75%, 3/15/07 1,525,000 1,591
State Street, 7.65%, 6/15/10 1,000,000 1,170
Suntrust, 2.50%, 5/4/06 1,000,000 993
Synovus Financial, 4.875%, 2/15/13 390,000 386
Telecom Italia Capital, 5.25%, 11/15/13 1,000,000 1,009
Telefonica Europe, 7.35%, 9/15/05 1,660,000 1,709
Telefonos De Mexico, 4.50%, 11/19/08 270,000 272
Telus
7.50%, 6/1/07 400,000 434
8.00%, 6/1/11 600,000 710
Tenneco Packaging, 7.20%, 12/15/05 1,000,000 1,035
Time Warner
6.875%, 6/15/18 1,000,000 1,121
7.48%, 1/15/08 1,400,000 1,534
Transocean, 7.50%, 4/15/31 900,000 1,101
Travelers Property Casualty, 6.75%, 11/15/06 1,500,000 1,584
TXU Energy, 7.00%, 3/15/13 250,000 279
Tyco International, 6.375%, 10/15/11 750,000 827
Unilever Capital, 7.125%, 11/1/10 430,000 493
Union Bank Switzerland, 7.25%, 7/15/06 1,000,000 1,058
Union Pacific, 6.50%, 4/15/12 2,000,000 2,227
UST, 6.625%, 7/15/12 1,200,000 1,332
Verizon Global Funding, 6.875%, 6/15/12 130,000 149
Viacom, 6.625%, 5/15/11 750,000 841
Vodafone, 5.375%, 1/30/15 600,000 623
Washington Mutual, 4.375%, 1/15/08 1,250,000 1,270
Wells Fargo, 4.20%, 1/15/10 1,000,000 1,005
Wells Fargo Financial, 5.50%, 8/1/12 2,000,000 2,120
Weyerhaeuser, 5.95%, 11/1/08 750,000 803
Willamette Industries, 7.85%, 7/1/26 1,000,000 1,218
XL Capital, 6.50%, 1/15/12 1,250,000 1,363
Yum! Brands, 7.70%, 7/1/12 500,000 592
Total Corporate Bonds (Cost $213,676) 225,732
FOREIGN GOVERNMENT OBLIGATIONS & MUNICIPALITIES 1.1%
Asian Development Bank
4.875%, 2/5/07 200,000 207
6.64%, 5/27/14 1,000,000 1,160
Canada Mortgage & Housing, 2.95%, 6/2/08 500,000 490
European Investment Bank
2.70%, 4/20/07 500,000 492
3.375%, 6/12/13 1,000,000 965
STEP, 4.00%, 8/30/05 850,000 856
Export Import Bank of Korea,
144A, 5.25%, 2/10/14 500,000 506
Government of Malaysia, 7.50%, 7/15/11 420,000 490
Hydro-Quebec, 7.50%, 4/1/16 1,000,000 1,230
Inter-American Development Bank,
6.375%, 10/22/07 1,100,000 1,186
International Bank For Reconstruction & Development
5.00%, 3/28/06 1,350,000 1,383
7.625%, 1/19/23 1,800,000 2,351
Province of Manitoba, 7.50%, 2/22/10 5,600,000 6,528
Province of Ontario, 6.00%, 2/21/06 2,650,000 2,738
Province of Quebec, 7.00%, 1/30/07 1,000,000 1,072
Republic of Chile, 5.50%, 1/15/13 115,000 121
Republic of Italy
2.50%, 3/31/06 (ss.) 1,000,000 994
4.375%, 6/15/13 330,000 332
5.375%, 6/15/33 330,000 333
Republic of Korea, 8.875%, 4/15/08 424,000 491
Republic of South Africa, 6.50%, 6/2/14 250,000 272
United Mexican States, 7.50%, 1/14/12 2,000,000 2,273
Total Foreign Government
Obligations & Municipalities
(Cost $24,978) 26,470
NON-U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES 0.8%
Bank of America Mortgage Securities,
Series 2004-1
Class 3A2, CMO, VR, 5.005%, 10/25/34 1,158,260 1,169
DLJ Commercial Mortgage,
Series 1999-CG2, Class A1B
CMO, 7.30%, 6/10/32 2,850,000 3,192
GMAC Commercial Mortgage Securities,
Series 2001-C2
Class A2, CMO, 6.70%, 4/15/34 4,200,000 4,682
Greenwich Capital Commercial Funding,
Series 2004-GG1A
Class A2, CMO, 3.835%, 6/10/36 1,500,000 1,500
J.P. Morgan Chase Commercial Mortgage,
Series 2001-CIBC
Class A3, CMO, 6.26%, 3/15/33 2,325,000 2,550
LB-UBS Commercial Mortgage Trust,
Series 2004-C2
Class A2, CMO, 3.246%, 3/15/29 2,625,000 2,546
Morgan Stanley Dean Witter Capital,
Series 2002-TOP7
Class A2, CMO, 5.98%, 1/15/39 2,800,000 3,036
Total Non-U.S. Government
Mortgage-Backed Securities
(Cost $18,628) 18,675
U.S. GOVERNMENT & AGENCY MORTGAGE-BACKED SECURITIES 3.2%
U.S. Government Agency Obligations (+/-) 1.7%
Federal Home Loan Mortgage
6.00%, 10/1/32 - 12/1/33 920,363 952
6.50%, 8/1/32 469,363 493
7.00%, 6/1/32 947,640 1,004
Federal National Mortgage Assn.
4.50%, 5/1/18 - 1/1/19 7,616,665 7,616
5.00%, 9/1/33 - 3/1/34 2,600,957 2,588
5.50%, 5/1/17 1,614,930 1,675
6.00%, 5/1/33 - 11/1/34 6,893,157 7,135
6.50%, 3/1/16 - 12/1/32 1,476,091 1,559
7.00%, 10/1/29 - 4/1/32 630,965 669
TBA
4.50%, 1/1/35 9,000,000 8,702
5.50%, 1/1/18 1,944,000 2,009
CMO, 6.00%, 10/25/08 3,619,542 3,741
U.S. Department of Veteran Affairs, CMO, VR
9.603%, 3/15/25 172,028 185
38,328
U.S. Government Obligations 1.5%
Government National Mortgage Assn.
5.00%, 9/20/33 2,610,571 2,611
5.50%, 2/20/34 14,499,185 14,801
6.00%, 2/15/14 - 8/20/34 7,077,192 7,332
6.50%, 9/15/25 - 4/15/29 1,393,694 1,472
7.00%, 12/15/23 - 3/15/31 1,240,409 1,323
7.50%, 9/15/22 - 5/15/26 717,987 774
8.00%, 6/15/17 - 11/15/25 611,598 668
8.50%, 6/15/08 - 6/20/26 464,292 509
9.00%, 2/15 - 6/20/20 88,103 98
9.50%, 8/15/09 - 8/20/22 74,799 83
10.00%, 11/15/09 - 1/20/22 7,484 8
10.50%, 5/15/15 4,054 5
11.00%, 3/15/10 - 1/15/20 145,828 165
11.50%, 3/15/10 - 3/15/16 170,908 196
ARM, 4.75%, 8/20/23 14,967 15
CMO, 5.50%, 5/20/31 5,000,000 5,143
35,203
Total U.S. Government & Agency
Mortgage-Backed Securities
(Cost $72,690) 73,531
U.S. GOVERNMENT AGENCY OBLIGATIONS
(EXCLUDING MORTGAGE-BACKED) 12.2%
U.S. Government Agency Obligations (+/-) 2.9%
Federal Home Loan Bank
5.75%, 5/15/12 6,375,000 6,918
6.34%, 10/19/05 4,875,000 5,008
Federal Home Loan Mortgage
2.375%, 4/15/06 (ss.) 10,000,000 9,914
2.75%, 3/15/08 (ss.) 150,000 146
2.875%, 5/15/07 (ss.) 5,000,000 4,948
4.50%, 1/15/14 (ss.) 310,000 311
5.125%, 7/15/12 582,000 610
6.625%, 9/15/09 7,500,000 8,375
Federal National Mortgage Assn.
2.25%, 5/15/06 (ss.) 10,000,000 9,886
5.25%, 4/15/07 - 8/1/12 (ss.) 8,310,000 8,639
6.47%, 9/25/12 3,000,000 3,406
6.625%, 9/15/09 (ss.) 7,500,000 8,376
66,537
U.S. Treasury Obligations 9.3%
U.S. Treasury Bonds
5.375%, 2/15/31 (ss.) 18,995,000 20,529
6.25%, 8/15/23 - 5/15/30 (ss.) 6,675,000 7,833
6.50%, 11/15/26 (ss.) 16,000,000 19,437
7.125%, 2/15/23 (ss.) 300,000 383
7.25%, 5/15/16 (ss.) 8,500,000 10,638
8.125%, 8/15/19 (ss.) 300,000 410
8.75%, 5/15/20 (ss.) 1,000,000 1,443
9.25%, 2/15/16 (ss.) 3,000,000 4,283
13.875%, 5/15/11 (ss.) 190,000 218
U.S. Treasury Notes
1.625%, 4/30/05 - 2/28/06 (ss.) 32,750,000 32,354
2.00%, 5/15/06 (ss.) 10,000,000 9,881
2.25%, 2/15/07 (ss.) 3,355,000 3,298
2.375%, 8/31/06 (ss.) 2,480,000 2,455
2.875%, 11/30/06 (ss.) 5,000,000 4,985
3.00%, 11/15/07 (ss.) 14,700,000 14,611
3.125%, 5/15/07 (ss.) 14,000,000 13,993
3.25%, 8/15/07 (ss.) 6,500,000 6,508
3.875%, 2/15/13 (ss.) 8,000,000 7,896
4.25%, 11/15/13 - 11/15/14 (ss.) 31,000,000 31,100
4.375%, 5/15/07 - 8/15/12 (ss.) 10,945,000 11,239
4.75%, 11/15/08 (ss.) 13,019,000 13,640
217,134
Total U.S. Government Agency Obligations
(excluding Mortgage-Backed) (Cost $279,725) 283,671
DOMESTIC BOND MUTUAL FUNDS 6.9%
T. Rowe Price Institutional High Yield
Fund, 6.77%p! 14,763,350 161,216
Total Domestic Bond Mutual Funds (Cost $155,485) 161,216
SHORT-TERM INVESTMENTS 0.7%
Money Market Fund 0.7%
T. Rowe Price Reserve Investment Fund, 2.28% #! 15,787,965 15,788
Total Short-Term Investments (Cost $15,788) 15,788
SECURITIES LENDING COLLATERAL 18.6%
Money Market Pooled Account 2.1%
Investment in money market pooled account managed by
JP Morgan Chase Bank, London, 2.322% # 48,471,983 48,472
48,472
Money Market Trust 16.5%
State Street Bank and Trust Company
of New Hampshire N.A. Securities
Lending Quality Trust units, 2.276% # 383,270,114 383,270
383,270
Total Securities Lending Collateral (Cost $431,742) 431,742
Total Investments in Securities
119.4% of Net Assets (Cost $2,167,694) $2,775,987
----------
(1) Denominated in U.S. dollars unless otherwise noted
# Seven-day yield
* Non-income producing
(ss.) All or a portion of this security is on loan at December 31, 2004 - See
Note 2
(+/-) The issuer is a publicly-traded company that operates under a
congressional charter; its securities are neither issued nor guaranteed by
the U.S. government
! Affiliated company - See Note 4
@ Valued by the T. Rowe Price Valuation Committee, established by the fund's
Board of Directors.
p SEC yield
144A Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be resold in transactions exempt from registration only to
qualified institutional buyers - total value of such securities at
period-end amounts to $9,282 and represents 0.4% of net assets
ADR American Depository Receipts
ADS American Depository Shares
ARM Adjustable Rate Mortgage
AUD Australian dollar
CAD Canadian dollar
CHF Swiss franc
CMO Collateralized Mortgage Obligation
ETC Equipment Trust Certificate
EUR Euro
GBP British pound
GDS Global Depository Shares
HKD Hong Kong dollar
JPY Japanese yen
MXN Mexican peso
MYR Malaysian ringgit
NOK Norwegian krone
NZD New Zealand dollar
REIT Real Estate Investment Trust
SEK Swedish krona
SGD Singapore dollar
STEP Stepped coupon bond for which the coupon rate of interest will adjust on
specified future date(s)
TBA To Be Announced security was purchased on a forward commitment basis
VR Variable Rate
!!Restricted Securities
Amounts in (000s)
The fund may invest in securities that cannot be offered for public resale
without first being registered under the Securities Act of 1933 and related
rules. The total restricted securities (excluding 144A issues) at period-end
amounts to $2,654 and represents 0.1% of net assets.
Acquisition Acquisition
Description Date Cost
- ------------------------------------------------ ----------- -----------
AIG SunAmerica Global Financing,
144A, 7.60%, 6/15/05 6/8/00 $ 2,600
Totals $ 2,600
---------
The fund has registration rights for certain restricted securities held as of
December 31, 2004. Any costs related to such registration are borne by the
issuer.
The accompanying notes are an integral part of these financial statements.
T. ROWE PRICE BALANCED FUND
- --------------------------------------------------------------------------------
December 31, 2004
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
(In thousands except shares and per share amounts)
Assets
Investments in securities, at value
Affiliated companies (cost $171,273) $ 177,004
Non-affiliated companies (cost $1,996,421) 2,598,983
Total investments in securities 2,775,987
Other assets 14,376
Total assets 2,790,363
Liabilities
Obligation to return securities lending collateral 431,742
Other liabilities 33,898
Total liabilities 465,640
NET ASSETS $ 2,324,723
---------------
Net Assets Consist of:
Undistributed net investment income (loss) $ 673
Undistributed net realized gain (loss) 18,529
Net unrealized gain (loss) 608,295
Paid-in-capital applicable to 117,978,832 shares of
$0.01 par value capital stock outstanding;
1,000,000,000 shares authorized 1,697,226
NET ASSETS $ 2,324,723
---------------
NET ASSET VALUE PER SHARE $ 19.70
---------------
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Balanced Fund
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
($ 000s)
Year
Ended
12/31/04
Investment Income (Loss)
Income
Dividend $ 43,081
Interest 25,427
Securities lending 630
Total income 69,138
Expenses
Investment management 10,021
Shareholder servicing 5,566
Custody and accounting 314
Registration 75
Prospectus and shareholder reports 72
Legal and audit 18
Directors 8
Miscellaneous 23
Reductions/repayments of fees and expenses
Investment management fees (waived) repaid (771)
Total expenses 15,326
Net investment income (loss) 53,812
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 40,640
Capital gain distributions from mutual funds 3,467
Foreign currency transactions (135)
Net realized gain (loss) 43,972
Change in net unrealized gain (loss)
Securities 119,027
Other assets and liabilities
denominated in foreign currencies (7)
Change in net unrealized gain (loss) 119,020
Net realized and unrealized gain (loss) 162,992
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 216,804
--------------
The accompanying notes are an integral part of these financial statements.
T. ROWE PRICE BALANCED FUND
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
($ 000s)
Year
Ended
12/31/04 12/31/03
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ 53,812 $ 44,732
Net realized gain (loss) 43,972 15,370
Change in net unrealized gain (loss) 119,020 302,161
Increase (decrease) in net assets from operations 216,804 362,263
Distributions to shareholders
Net investment income (53,274) (45,522)
Net realized gain (14,042) -
Decrease in net assets from distributions (67,316) (45,522)
Capital share transactions *
Shares sold 464,024 402,481
Distributions reinvested 65,050 43,840
Shares redeemed (401,485) (297,199)
Increase (decrease) in net assets from capital
share transactions 127,589 149,122
Net Assets
Increase (decrease) during period 277,077 465,863
Beginning of period 2,047,646 1,581,783
End of period $ 2,324,723 $ 2,047,646
----------- -----------
(Including undistributed net investment income of
$673 at 12/31/04 and $0 at 12/31/03)
*Share information
Shares sold 24,795 24,597
Distributions reinvested 3,433 2,618
Shares redeemed (21,473) (18,004)
Increase (decrease) in shares outstanding 6,755 9,211
The accompanying notes are an integral part of these financial statements.
T. ROWE PRICE BALANCED FUND
- --------------------------------------------------------------------------------
December 31, 2004
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Balanced 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 commenced operations on December 31, 1939. The fund
seeks to provide capital growth, current income, and preservation of capital
through a portfolio of stocks and fixed-income securities.
The accompanying financial statements were prepared in accordance with
accounting principles generally accepted in the United States of America, which
require the use of estimates made by fund management.
Valuation
The fund values its investments and computes its 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. Equity securities listed or regularly traded
on a securities exchange or in the over-the-counter 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 over-the-counter market. Securities
with original maturities of one year or more are valued at prices furnished by
dealers who make markets in such securities or by an independent pricing
service, which considers 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 original maturities of less than one year are valued
at amortized cost in local currency, which approximates fair value when combined
with accrued interest.
Investments in mutual funds are valued at the mutual fund's closing net asset
value per share on the day of valuation.
Other investments, including restricted securities, 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 T. Rowe Price
Valuation Committee, established by the fund's Board of Directors.
Most foreign markets close before the close of trading on 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, which in turn will affect the fund's share price, the
fund will adjust the previous closing prices to reflect the fair value of the
securities as of the close of the NYSE, as determined in good faith by the T.
Rowe Price Valuation Committee, established by the fund's Board of Directors. A
fund may also fair value securities in other situations, such as when a
particular foreign market is closed but the fund is open. In deciding whether to
make fair value adjustments, 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 uses outside pricing
services to provide it with closing market prices and information used for
adjusting those prices. The fund cannot predict how often it will use closing
prices and how often it will adjust those prices. As a means of evaluating its
fair value process, the fund routinely compares closing market prices, the next
day's opening prices in the same markets, and adjusted prices.
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.
Rebates
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 included in realized gain on
securities in the accompanying financial statements and totaled $10,000 for the
year ended December 31, 2004.
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. 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. Investment
transactions are accounted for on the trade date. Realized gains and losses are
reported on the identified cost basis.
Paydown gains and losses are recorded as an adjustment to interest income.
Distributions to shareholders are recorded on the ex-dividend date. Income
distributions are declared and paid on a quarterly basis. Capital gain
distributions, if any, are declared and paid by the fund, typically on an annual
basis. During the year ended December 31, 2004, the fund received a one-time
special dividend on a security held in its portfolio (Microsoft Corp.). The
dividend, which totaled $2,295,000, represents 5.3% of dividend income reflected
in the accompanying financial statements and is not expected to recur.
Other
In the normal course of business, the fund enters into contracts that provide
general indemnifications. The fund's maximum exposure under these arrangements
is dependent on claims that may be made against the fund in the future and,
therefore, cannot be estimated; however, based on experience, the risk of
material loss from such claims is considered remote.
NOTE 2 - INVESTMENT TRANSACTIONS
Consistent with its investment objective, the fund engages in the following
practices to manage exposure to certain risks or 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.
Restricted Securities
The fund may invest in securities that are subject to legal or contractual
restrictions on resale. Although certain of these securities may be readily
sold, for example, under Rule 144A, others may be illiquid, and their sale may
involve substantial delays and additional costs, and prompt sale at an
acceptable price may be difficult.
Securities Lending
The fund lends its securities to approved brokers to earn additional income. It
receives as collateral cash and U.S. government securities valued at 102% to
105% of the value of the securities on loan. Cash collateral is invested in
money market pooled accounts managed by the fund's lending agents in accordance
with investment guidelines approved by fund management. Collateral is maintained
over the life of the loan in an amount not less than the value of loaned
securities, as determined at the close of fund business each day; any additional
collateral required due to changes in security values is delivered to the fund
the next business day. Although risk is mitigated by the collateral, the fund
could experience a delay in recovering its securities and a possible loss of
income or value if the borrower fails to return the securities. Securities
lending revenue recognized by the fund consists of earnings on invested
collateral and borrowing
fees, net of any rebates to the borrower and compensation to the lending agent.
At December 31, 2004, the value of loaned securities was $419,915,000; aggregate
collateral consisted of $431,742,000 in money market pooled accounts and U.S.
government securities valued at $396,000.
Other
Purchases and sales of portfolio securities, other than short-term and U.S.
government securities, aggregated $269,652,000 and $197,256,000, respectively,
for the year ended December 31, 2004. Purchases and sales of U.S. government
securities aggregated $366,141,000 and $283,388,000, respectively, for the year
ended December 31, 2004.
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company under Subchapter M of the
Internal Revenue Code and distribute to shareholders all of its taxable income
and gains. Federal income tax regulations differ from generally accepted
accounting principles; therefore, distributions determined in accordance with
tax regulations may differ significantly 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. Financial records are not adjusted for temporary differences.
Distributions during the year ended December 31, 2004 were characterized as
follows for tax purposes:
- --------------------------------------------------------------------------------
Ordinary income $ 55,614,000
Long-term capital gain 11,702,000
Total distributions $ 67,316,000
---------------
At December 31, 2004, the tax-basis components of net assets were as follows:
- --------------------------------------------------------------------------------
Unrealized appreciation $ 642,436,000
Unrealized depreciation (35,210,000)
Net unrealized appreciation (depreciation) 607,226,000
Undistributed ordinary income 1,403,000
Undistributed long-term capital gain 18,868,000
Paid-in capital 1,697,226,000
Net assets $ 2,324,723,000
---------------
Federal income tax regulations require the fund to treat the gain/loss on
passive foreign investment companies as realized on the last day of the tax
year; accordingly, $1,070,000 of unrealized gains reflected in the accompanying
financial statements were realized for tax purposes as of December 31, 2004.
The fund intends to retain realized gains to the extent of available capital
loss carryforwards for federal income tax purposes. During the year ended
December 31, 2004, the fund utilized $9,793,000 of capital loss carryforwards.
For the year ended December 31, 2004, the fund recorded the following permanent
reclassifications to reflect tax character. 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 and/or realized capital gain. Results of operations and net assets were
not affected by these reclassifications.
- --------------------------------------------------------------------------------
Undistributed net investment income $ 135,000
Undistributed net realized gain (1,278,000)
Paid-in capital 1,143,000
At December 31, 2004, the cost of investments for federal income tax purposes
was $2,168,763,000.
NOTE 4 - RELATED PARTY TRANSACTIONS
The fund is managed by T. Rowe Price Associates, Inc. (the manager or Price
Associates), a wholly owned subsidiary of T. Rowe Price Group, Inc. The
investment management agreement between the fund and the manager provides for an
annual investment management fee, which is computed daily and paid monthly. The
fee consists of an individual fund fee, equal to 0.15% of the fund's average
daily net assets, and the fund's pro-rata share of a group fee. The group fee 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 0.295% for assets in
excess of $120 billion. The fund's portion of the group fee is determined by the
ratio of its average daily net assets to those of the group. At December 31,
2004, the effective annual group fee rate was 0.31%, and investment management
fee payable totaled $835,000.
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 price and maintains the financial
records of 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 fund. For the year ended December 31, 2004, expenses incurred
pursuant to these service agreements were $107,000 for Price Associates,
$658,000 for T. Rowe Price Services, Inc., and $3,759,000 for T. Rowe Price
Retirement Plan Services, Inc. At period-end, a total of $386,000 of these
expenses was payable.
The fund may invest in the T. Rowe Price Reserve Investment Fund and the T. Rowe
Price Government Reserve Investment Fund (collectively, the Reserve Funds),
open-end management investment companies managed by Price Associates and
affiliates of the fund. The Reserve 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 Reserve Funds pay no investment management fees. During the year
ended December 31, 2004, dividend income from the Reserve Funds totaled
$970,000, and the value of shares of the Reserve Funds held at December 31, 2004
and December 31, 2003 was $15,788,000 and $56,297,000, respectively
The fund may invest in the T. Rowe Price Institutional High Yield Fund, Inc.
(High Yield Fund) as a means of gaining efficient and cost-effective exposure to
the high-yield bond markets. The High Yield Fund is an open-end management
investment company managed by Price Associates, and an affiliate of the fund.
The High Yield Fund pays an annual all-inclusive management and administrative
fee to Price Associates equal to 0.50% of average daily net assets. To ensure
that Balanced
Fund does not incur duplicate fees for its assets invested in High Yield Fund,
Price Associates has agreed to reduce its management fee to the fund.
Accordingly, the management fee waiver reflected on the accompanying Statement
of Operations includes $771,000 of management fees permanently waived pursuant
to this agreement. During the year ended December 31, 2004, purchases and sales
of High Yield Fund were $15,724,000 and $0, respectively. Realized gains or
losses during the period were $3,467,000, and investment income during the
period was $12,280,000. At December 31, 2004 and December 31, 2003, the value of
shares of High Yield Fund held were $161,216,000 and $145,848,000, respectively.
T. ROWE PRICE BALANCED FUND
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
T. Rowe Price Balanced 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 Balanced Fund, Inc.
(the "Fund") at December 31, 2004, and the results of its operations, the
changes in its net assets and the financial highlights for each of the fiscal
periods presented, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the auditing 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, 2004 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Baltimore, Maryland
February 11, 2005
T. ROWE PRICE BALANCED FUND
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED) FOR THE TAX YEAR ENDED 12/31/04
- --------------------------------------------------------------------------------
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:
o $3,082,000 from short-term capital gains,
o $12,104,000 from long-term capital gains, subject to the 15% rate gains
category.
For taxable non-corporate shareholders, $24,875,000 of the fund's income
represents qualified dividend income subject to the 15% rate category.
For corporate shareholders, $19,515,000 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 Web site,
www.sec.gov. The description of our proxy voting policies and procedures is also
available on our Web site, www.troweprice.com. To access it, click on the words
"Company Info" at the top of our homepage for individual investors. Then, in the
window that appears, click on the "Proxy Voting Policy" navigation button in the
top left corner.
Each fund's most recent annual proxy voting record is available on our Web site
and through the SEC's Web site. To access it through our Web site, follow the
directions above, then click on the words "Proxy Voting Record" at the bottom of
the Proxy Voting Policy 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 Web site
(www.sec.gov); hard copies may be reviewed and copied at the SEC's Public
Reference Room, 450 Fifth St. N.W., Washington, DC 20549. For more information
on the Public Reference Room, call 1-800-SEC-0330.
T. ROWE PRICE BALANCED FUND
- --------------------------------------------------------------------------------
ABOUT THE FUND'S DIRECTORS AND OFFICERS
- --------------------------------------------------------------------------------
Your fund is governed by a Board of Directors that meets regularly to review
investments, performance, compliance matters, advisory fees, expenses, and other
business affairs, and is responsible for protecting the interests of
shareholders. The majority of the fund's directors are independent of T. Rowe
Price Associates, Inc. (T. Rowe Price); "inside" directors are officers of T.
Rowe Price. The Board of Directors elects the fund's officers, who are listed in
the final table. The business address of each director and officer is 100 East
Pratt Street, Baltimore, MD 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 1-800-225-5132.
Independent Directors
Name
(Year of Birth) Principal Occupation(s) During Past 5 Years
Year Elected * and Directorships of Other Public Companies
Anthony W. Deering Director, Chairman of the Board, President, and
(1945) Chief Executive Officer, The Rouse Company, real
2001 estate developers; Director, Mercantile Bank
(4/03 to present)
Donald W. Dick, Jr. Principal, EuroCapital Advisors, LLC, an
(1943) acquisition and management advisory firm
1991
David K. Fagin Director, Golden Star Resources Ltd., Canyon
(1938) Resources Corp. (5/00 to present), and Pacific
1991 Rim Mining Corp. (2/02 to present); Chairman and
President, Nye Corp.
Karen N. Horn Managing Director and President, Global Private
(1943) Client Services, Marsh Inc. (1999-2003); Managing
2003 Director and Head of International Private
Banking, Bankers Trust (1996-1999); Director, Eli
Lilly and Company and Georgia Pacific
(5/04 to present)
F. Pierce Linaweaver President, F. Pierce Linaweaver & Associates,
(1934) Inc., consulting environmental and civil engineers
2001
John G. Schreiber Owner/President, Centaur Capital Partners, Inc., a
(1946) real estate investment company; Partner,
2001 Blackstone Real Estate Advisors, L.P.; Director,
AMLI Residential Properties Trust and The Rouse
Company, real estate developers
*Each independent director oversees 112 T. Rowe Price portfolios and 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) During Past 5 Years
Portfolios Overseen] and Directorships of Other Public Companies
James A.C. Kennedy, CFA Director and Vice President, T. Rowe Price and
(1953) T. Rowe Price Group, Inc.; Director, T. Rowe
1997 Price Global Investment Services Limited and
[43] T. Rowe Price International, Inc.
James S. Riepe Director and Vice President, T. Rowe Price; Vice
(1943) Chairman of the Board, Director, and Vice
1991 President, T. Rowe Price Group, Inc.; Chairman of
[112] the Board and Director, T. Rowe Price Global Asset
Management Limited, T. Rowe Price Global
Investment Services Limited, T. Rowe Price
Investment Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price
Services, Inc.; Chairman of the Board, Director,
President, and Trust Officer, T. Rowe Price Trust
Company; Director, T. Rowe Price International,
Inc.; Chairman of the Board, Balanced Fund
*Each inside director serves until retirement, resignation, or election of a
successor.
Officers
Name (Year of Birth)
Title and Fund(s) Served Principal Occupation(s)
Stephen W. Boesel (1944) Vice President, T. Rowe Price, T. Rowe Price
Vice President, Balanced Fund Group, Inc., and T. Rowe Price Trust Company
Stephen V. Booth, CPA (1961) Vice President, T. Rowe Price, T. Rowe Price
Vice President, Balanced Fund Group, Inc., and T. Rowe Price Trust Company
Joseph A. Carrier (1960) Vice President, T. Rowe Price, T. Rowe Price
Treasurer, Balanced Fund Group, Inc., T. Rowe Price Investment
Services, Inc., and T. Rowe Price Trust
Company
Wendy R. Diffenbaugh (1953) Vice President, T. Rowe Price
Vice President, Balanced Fund
Roger Fiery III, CPA (1959) Vice President, T. Rowe Price, T. Rowe Price
Vice President, Balanced Fund Group, Inc., T. Rowe Price International,
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 five years.
Name (Year of Birth)
Title and Fund(s) Served Principal Occupation(s)
John R. Gilner (1961) Chief Compliance Officer and Vice President,
Chief Compliance Officer, T. Rowe Price; Vice President, T. Rowe Price
Balanced Fund Investment Services, Inc., and T. Rowe Price
Group, Inc.
Gregory S. Golczewski (1966) Vice President, T. Rowe Price and T. Rowe
Vice President, Balanced Fund Price Trust Company
Henry H. Hopkins (1942) Director and Vice President, T. Rowe Price
Vice President, Balanced Fund Investment Services, Inc., T. Rowe Price
Services, Inc., and T. Rowe Price Trust
Company; Vice President, T. Rowe Price,
T. Rowe Price Group, Inc., T. Rowe Price
International, Inc., and T. Rowe Price
Retirement Plan Services, Inc.
Patricia B. Lippert (1953) Assistant Vice President, T. Rowe Price and
Secretary, Balanced Fund T. Rowe Price Investment Services, Inc.
Raymond A. Mills, Ph.D., CFA Vice President, T. Rowe Price, T. Rowe Price
(1960) Group, Inc., and T. Rowe Price International,
Vice President, Balanced Fund Inc.
Edmund M. Notzon III, Ph.D., Vice President, T. Rowe Price, T. Rowe Price
CFA (1945) Group, Inc., T. Rowe Price Investment
Vice President, Balanced Fund Services, Inc., and T. Rowe Price Trust
Company
Mark J. Vaselkiv (1958) Vice President, T. Rowe Price and T. Rowe
Vice President, Balanced Fund Price Group, Inc.
Julie L. Waples (1970) Vice President, T. Rowe Price
Vice President, Balanced Fund
Richard T. Whitney, CFA (1958) Vice President, T. Rowe Price, T. Rowe Price
President, Balanced Fund Group, Inc., T. Rowe Price International,
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 five 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. David K.
Fagin qualifies as an audit committee financial expert, as defined in Item 3 of
Form N-CSR. Mr. Fagin is considered independent for purposes of Item 3 of Form
N-CSR.
Item 4. Principal Accountant Fees and Services.
(a) - (d) Aggregate fees billed to the registrant for the last two fiscal years
for professional services rendered by the registrant's principal accountant were
as follows:
2004 2003
Audit Fees $9,523 $11,236
Audit-Related Fees 1,316 668
Tax Fees 2,583 2,918
All Other Fees - 124
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, specifically the issuance of a report on internal
controls. Tax fees include amounts related to tax compliance, tax planning, and
tax advice. 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 $903,000 and $821,000, respectively, and
were less than the aggregate fees billed for those same periods by the
registrant's principal accountant for audit services rendered to the T. Rowe
Price Funds.
(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. Schedule of Investments.
Not applicable. The complete schedule of investments is included in Item 1 of
this Form N-CSR.
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 Balanced Fund, Inc.
By /s/ James S. Riepe
-----------------------------------
James S. Riepe
Principal Executive Officer
Date February 18, 2005
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/ James S. Riepe
-----------------------------------
James S. Riepe
Principal Executive Officer
Date February 18, 2005
By /s/ Joseph A. Carrier
-----------------------------------
Joseph A. Carrier
Principal Financial Officer
Date February 18, 2005