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Foreign-Stock Fund Regains Its Medalist Status

T. Rowe Price International Stock Fund's manager deftly uses the same sound and distinctive strategy as his predecessor.

The following is our latest Fund Analyst Report for T. Rowe Price International Stock Fund PRITX. Morningstar Premium Members have access to full analyst reports such as this for more than 1,000 of the largest and best mutual funds. Not a Premium Member? Gain full access to our analyst reports and advanced tools immediately when you try Morningstar Premium free for 14 days.

Lead manager Richard Clattenburg has worked on T. Rowe International Stock in various capacities for 10 years now. He has gotten off to a pretty good start at the helm. And this fund’s other strengths remain intact. Therefore, this fund’s People Pillar rating and Morningstar Analyst Rating have been raised from Neutral to Positive and Bronze, respectively.

Clattenburg joined former lead manager Robert Smith as an analyst on this foreign large-growth fund in 2007. He was promoted to associate manager on this fund in 2010, and he remained in that position until he replaced Smith as the lead manager on April 1, 2015. (Smith remained at T. Rowe Price and served as a member of this fund's advisory team until he retired from the firm at the end of 2016.)

Meanwhile, Clattenburg, who has 14 years of investment experience overall, has made a number of good decisions as most emerging markets have gyrated to moderate gains during his 28 months at helm. His stock selection, for example, has paid off in China as well as several European markets. As result, from April 1, 2015, through July 31, 2017, this fund has a Morningstar Risk-Adjusted Return of 4.7% versus 4.1% for the average foreign large-growth offering and 3.1% for the MSCI ACWI ex USA Index (its benchmark).

Clattenburg has achieved these results using the same sound and distinctive strategy as Smith had employed during his 7.5-year tenure at the helm. In particular, Clattenburg has maintained the emphasis on firms with strong balance sheets, healthy free cash flows, and good growth prospects, has continued to pay ample attention to valuations, and invests in emerging-markets stocks that meet these criteria just as readily as his predecessor did.

Finally, Clattenburg has a very sizable and skilled squad of equity specialists to call on for support. This fund has a relatively modest average cost structure that gives it a leg up on most of its rivals year in and year out. And T. Rowe Price is a superior parent that has had considerable success with international equity funds.

Process Pillar: Positive | William Samuel Rocco 08/08/2017 Lead manager Richard Clattenburg, who took the helm of this foreign large-growth fund April 1, 2015 , employs the same strategy as former lead manager Robert Smith (who ran the portfolio from Oct. 1, 2007, through March 2015). Specifically, Clattenburg focuses on companies with market caps of $2 billion or more that are positioned to grow their earnings at double-digit rates over several years and have other positive attributes, including strong market shares, superior technologies or brands, cost and other structural advantages, and robust cash flows.

The fund's benchmark is the fairly emerging-markets-heavy MSCI ACWI ex USA Index, and Clattenburg readily invests in stocks in the developing world that meet his growth and other criteria. Thus, the fund consistently has a lot more emerging-markets exposure than the average foreign large-growth offering and often has a little more such exposure than the index. He also is comfortable if his stock selection leads to moderate country and sector overweightings.

However, he avoids extreme country and sector bets. He carefully considers valuations, pays ample attention to issue diversification, and moves at a pretty measured pace.

All told, the fund's strategy has an appealing combination of bold and tame attributes, and it is sound, distinctive, and repeatable. Thus, the fund earns a Positive Process rating.

Lead manager Richard Clattenburg often finds a lot of stocks in the developing world that meet this fund's growth and other criteria. For example, Clattenburg has invested in seven names in India--including Housing Development Finance Corp, the utility NTPC, and and Infosys--and this fund has a 5.1% stake in that market overall versus 2.8% for the average foreign large-growth offering and 2.2% for the MSCI ACWI ex USA Index. The fund has a 22.2% weighting in emerging-markets equities in total, whereas its typical peer has 16.4% weighting and the benchmark has a 24.0% weighting in such stocks.

This fund doesn't have any extreme sector overweightings or underweightings, but it does have some moderate ones. Bayer, Roche Holdings, and Shire are top 10 holdings, and there are 12 other healthcare stocks in the portfolio, so it has an overall position of 16.5% in that sector versus 10.6% for its average rival and 7.6% for the index. Conversely, the fund has an 8.5% stake in the consumer cyclical sector versus 15.3% for its typical peer and 11.0% for the index.

Clattenburg continues to pay ample attention to valuations and issue diversification. The fund has more moderate price multiples than the category norms and owns more names than and devotes fewer assets to its top 10 names than roughly 70% of its peers.

Performance Pillar: Neutral | William Samuel Rocco 08/08/2017 This fund has earned pretty good results during the choppy 28 months since lead manager Richard Clattenburg took the helm on April 1, 2015. Several of its technology, financial-services, and other holdings have posted nice gains during the period, including China's Tencent and India's Housing Development Finance Corp HDFC. All told, this fund has posted an annualized total return of 6.7% from Clattenburg's start as lead manager through July 31, 2017, while the average foreign large-growth fund and the MSCI ACWI ex USA Index have produced 6.1% and 5.3% annualized gains over the period, respectively. This fund has also incurred average volatility over the past 28 months.

Meanwhile, Clattenburg follows the same growth-oriented strategy that his predecessor installed in October 2007, and this fund has posted solid relative returns during the nearly 10 years that strategy has been in place. From Oct. 1, 2007, through July 31, 2017, in fact, it has earned a 2.9% annualized gain versus a 1.9% return for its typical peer and a 1.1% gain for the benchmark.

But this fund suffered much more volatility than the average foreign large-growth fund and the MSCI ACWI ex USA Index from Oct. 1, 2007, through July 31, 2017, and Clattenburg's record at the helm, though pretty good, still isn't very long. Therefore, this fund earns a Neutral Performance rating at this time.

People Pillar: Positive | William Samuel Rocco 08/08/2017 Lead manager Richard Clattenburg, who joined T. Rowe Price in 2005, has worked on this fund for a decade. After two years as an associate analyst covering the real estate and lodging sectors, he spent three years working with former lead manager Robert Smith as an analyst on this fund. Clattenburg was promoted to associate manager on this fund in 2010, and he remained in that role until he replaced Smith as the lead manager on April 1, 2015.

The transition was exceptionally smooth. The manager change was announced well in advance. Smith remained at T. Rowe Price and served as a member of this fund's advisory team through the end of 2016. Clattenburg had worked on this fund for roughly 7.5 years before he took over, and he kept intact the distinctive growth strategy that he and his predecessor had used.

Clattenburg has an exceptional support team. T. Rowe Price has one of the biggest and best teams of equity specialists around. The team numbers more than 150 equity research professionals, and it contains 15 other international-stock managers with seven to 25 years of investment experience each, including the skippers of Bronze-rated T. Rowe Price European Stock PRESX, T. Rowe Price Emerging Markets Stock PRMSX, T. Rowe Price International Value TRIGX, and T. Rowe Price Overseas TROSX.

For all these reasons, this fund now earns a Positive People rating.

Parent Pillar: Positive | 04/06/2017 T. Rowe Price is evolving but retains the strong research-focused culture that's driven its long-term success. Despite the retirements of some long-tenured portfolio managers, the former CEO, and outgoing CIO Brian Rogers, the firm's careful focus on succession planning and long transition periods have eased the process. Even with a changing of the guard, there's no lack of talent. Successful former portfolio manager Rob Sharps is now co-head of global equities and oversees five CIOs who are among the firm's top managers. The analyst team is on solid footing, and the firm has continued hiring despite the pressures facing active managers. CEO Bill Stromberg, who joined T. Rowe in 1987 as an analyst, maintains an investment focus while recognizing that the business must evolve to flourish in an industry that's gravitated toward passive investing. The firm is bolstering its technology resources and is expanding its distribution overseas, achievable goals given its pristine balance sheet. In 2017, the firm opportunistically acquired the Henderson High Yield Opportunities team, led by a former T. Rowe employee, as it addresses demand for capacity-constrained strategies that are also part of its popular target-date lineup and potentially new multiasset products down the line (several T. Rowe strategies are closed). T. Rowe is sensibly adapting, and its fundholder-first mentality and ability to attract and retain investment talent support its Positive Parent rating.

Price Pillar: Positive | William Samuel Rocco 08/08/2017 Like most international-stock offerings from T. Rowe Price, this fund is attractively priced relative to similar offerings. Its no-load share class, which has roughly 85% of the fund's $15.7 billion in assets, had an expense ratio of 0.84% as of its Oct. 31, 2016, annual report and its March 1, 2017, prospectus. That expense ratio is 18 basis points below the median of 1.02% for no-load foreign large-cap funds and receives a Morningstar Fee Level of Below Average. The Institutional share classes, which have approximately 14% of the assets, also receive Below Average fee levels. The tiny Retirement and Advisor share classes have Below Average and Average fee levels. Because nearly all of its assets are in attractively priced share classes, this fund receives a Positive Price rating.

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About the Author

William Samuel Rocco

Senior Analyst, Equity Strategies, Manager Research
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Bill Rocco is a senior manager research analyst, equity strategies, for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He specializes in international-stock and emerging-markets funds and is the lead analyst covering asset managers Harding Loevner, Matthews and Seafarer. Rocco is a member of the Morningstar Analyst Ratings Committee for international-equity funds. He joined Morningstar in 1994 as a mutual fund analyst.

Rocco holds a bachelor's degree in political science from Duke University and a master's degree in comparative politics from Georgetown University.

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