Africa & Middle East Fund Africa & Middle East Fund I Class

Transcription

1 ANNual REPORT October 31, 2017 TRAMX PRAMX T. Rowe Price Africa & Middle East Fund Africa & Middle East Fund I Class The fund invests in companies in the rapidly developing Africa and Middle East region.

2 HIGHLIGHTS Stocks in African and Middle Eastern markets produced solid gains in the year ended October 31, Your fund outperformed its benchmark in our 6- and 12-month reporting periods. Country allocations helped our six-month relative results, whereas stock selection in several countries drove our 12-month outperformance. In the last six months, we reduced our exposure to Saudi Arabia but judiciously increased our South African allocation, given the widespread negative sentiment toward South Africa. We continue to have a robust outlook, driven by rising urbanization and infrastructure investment, attractive demographics, and a strong asset base in natural resources. Corporate fundamentals are generally favorable, and strong economic growth should continue to lift asset values over time. The views and opinions in this report were current as of October 31, They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the fund s future investment intent. The report is certified under the Sarbanes-Oxley Act, which requires mutual funds and other public companies to affirm that, to the best of their knowledge, the information in their financial reports is fairly and accurately stated in all material respects. REPORTS ON THE WEB Sign up for our Program, and you can begin to receive updated fund reports and prospectuses online rather than through the mail. Log in to your account at troweprice.com for more information.

3 Manager s Letter Fellow Shareholders Stocks in African and Middle Eastern markets produced solid gains in the 12-month period ended October 31, Gulf Cooperation Council markets Kuwait and Saudi Arabia produced excellent returns, helped by global economic growth and firming oil prices, but Qatari shares tumbled in the second half of our fiscal year, as several Middle Eastern countries severed ties with Qatar and accused it of supporting terrorism. In Africa, Egyptian shares dropped 25% in dollar terms over the last year because of a substantial currency devaluation last November. However, the weaker pound is benefiting exports and helping lift the economy. South African shares rose about 12%, even though economic growth remained flat, the rand weakened, and unpopular President Jacob Zuma remained in power. Among sub-saharan markets, Kenya performed well over the last year. PERFORMANCE COMPARISON Performance Comparison Total Return Periods Ended 10/31/17 6 Months 12 Months Africa & Middle East Fund 4.30% 13.38% Africa & Middle East Fund I Class * S&P Emerging/Frontier ME & Africa BMI ex IL *Since inception 3/6/17. Your fund returned 4.30% in the second half of our fiscal year and 13.38% for the full year. As shown in the Performance Comparison table, the fund outperformed its benchmark in both periods. (Performance for the fund s I Class shares, which incepted in March 2017, will vary due to a different fee structure.) 1

4 In the last six months, fund performance versus the benchmark was driven by our country allocations specifically, eliminating our exposure to Qatar and overweighting Egypt. Good stock selection in Saudi Arabia and, to a lesser extent, South Africa and Egypt also helped our relative results. For the full-year period, stock selection in several countries especially Egypt, the United Arab Emirates, and South Africa was the primary driver of our outperformance. Country allocations in aggregate had a slight positive impact. PORTFOLIO REVIEW GULF COOPERATION COUNCIL (GCC) Saudi Arabia Stocks in Saudi Arabia rose 3% in the last six months and 21% over the last year. While firming oil prices have benefited this oil-rich kingdom, the country is pursuing an ambitious economic and social reform plan spearheaded by Crown Prince Mohammed bin Salman, the 32-year-old son of King Salman. The crown prince is likely to succeed his father in the near future and through his Vision 2030 program to reduce the kingdom s reliance on oil revenues hopes to unlock Saudi Arabia s substantial economic potential. We anticipate that the kingdom will be designated an emerging market (MSCI currently does not classify it as frontier or emerging) in the next couple of years. However, the economy has been weak this year, and we have taken some profits from various holdings, reducing our exposure to 20% of fund assets, down from 24% six months ago. Companies such as Banque Saudi Fransi and National Commercial Bank were solid contributors over the last year. Following a stretch of strong performance, we trimmed positions in various bank stocks, but they remain core holdings. We believe that the market underappreciates their fundamentals and that banks will make more profitable loans as Saudi interest rates which are tied to U.S. interest rates rise over time. (Please refer to the portfolio of investments for a complete list of holdings and the amount each represents in the portfolio.) We continue to like other Saudi businesses that should benefit from increasing consumption, such as food and dairy company Almarai, and grocery store operator Savola, both of which contributed to our full-year results. Another strong contributor was hospital operator 2

5 Al Mouwasat Medical Services, a well-managed company that is benefiting not only from increased demand, but also from greater government spending on health care. In the last six months, we added Al Hammadi Development & Investment to the portfolio. Given the favorable tailwinds for the Saudi health care industry, we believe this hospital provider is attractively valued and will generate improved earnings after weak performance in the latter half of While the stock performance of Bupa Arabia for Cooperative Insurance was disappointing Market Performance over the last year, we believe this leading Periods Ended 10/31/17 Total Return Saudi health insurer has (In U.S. Dollar Terms) 6 Months 12 Months strong medium-term Kuwait 12.39% 34.54% growth prospects. Nigeria Kuwait Kenya Amid firming oil prices, Saudi Arabia Kuwaiti shares climbed United Arab Emirates % in the last six months South Africa and about 35% over the last year. Contributing Egypt to the rally recently Source: RIMES Online, using MSCI indexes. was FTSE s decision to add Kuwait to its emerging markets index in September In the past, we have had some difficulty finding high-quality, attractively valued companies here, but we are looking more closely due to an improving environment. During recent visits to Kuwait, we have seen signs that some economic stresses are dissipating and that much-needed infrastructure projects are getting underway. We also have a more favorable sentiment toward the banking system, in part because of a pickup in credit growth, and we added attractively valued Burgan Bank to the portfolio in the last six months. Over the last year, our positions in National Bank of Kuwait, the country s largest bank, and university operator Human Soft Holding were significant performance contributors, thanks in part to solid earnings. Human Soft is benefiting from more students studying domestically, rather than abroad. 3

6 United Arab Emirates (UAE) The UAE stock market returned about 7% in the last six months and 13% over the last year. The emirates diversified economy continues to attract trade and tourists. Also, the property market is generally healthy at present. At 15% of assets, our UAE allocation is our largest overweight, as we are finding good long-term investments in various sectors. Top UAE performers over the last year include logistics and transportation company Aramex and global ports operator DP World. Both have benefited from stronger-than-expected global trade. Dubai s second-largest property developer Emaar Properties continued to appreciate, while oil services company Lamprell produced more modest gains. Shares of Air Arabia sagged during our fiscal year, but the company reported strong earnings shortly after our reporting period ended. UAE banks have been lagging other GCC banks, but our stakes in Abu Dhabi Commercial Bank and Emirates NBD produced good returns over the last year. A new holding in the last six months is National Bank of Ras Al-Khaimah. This retail-focused bank has Geographic Diversification Nigeria 3% Kuwait 6% Egypt 8% United Arab Emirates 15% Based on net assets as of 10/31/17. Note: Country classification reflects location of listing exchange. United Kingdom 3% Other and Reserves 4% South Africa 41% Saudi Arabia 20% been dealing with bad loans that have hurt its earnings. Its balance sheet has remained strong, however, and we believe its earnings and dividend payouts are poised to improve in the next few years. Qatar In June, several Middle Eastern countries decided to cut diplomatic and trade ties with Qatar, accusing it of supporting terrorism in the region. The embargo has had an impact on the Qatari stock market and financial sector, as banks rely partially on external funding. We had been reducing our Qatar exposure in the first half of our fiscal year; in response to the uncertainty related to the situation which continues as we write this letter we decided to eliminate our remaining Qatari 4

7 investments. We will monitor the situation closely and look for attractive opportunities to return to the market if we see signs of a resolution or an easing of tensions. AFRICA South Africa In dollar terms, South African stocks advanced about 5% in the last six months and about 12% over the last year. Rand weakness eroded local gains to U.S. investors. The economy emerged from a brief recession earlier this year, but growth remains lackluster, and business and consumer confidence are very low. Two of the three major credit rating agencies have downgraded the sovereign debt to junk. President Jacob Zuma survived a no-confidence vote in August, but an African National Congress party leadership change in December could accelerate Zuma s departure, paving the way for a new regime and, hopefully, much-needed reforms. Given the widespread negative sentiment toward South Africa and our belief that the market could be poised for a sharp rally when the political situation improves, we have judiciously increased our exposure from 37% to 41% over the last six months. New positions include Imperial Holdings, a logistics and automotive company that should benefit next year from a turnaround in its auto import and distribution business; KAP Industrial Holdings, a conglomerate with various logistics and manufacturing businesses; and Famous Brands, a resilient restaurant operator with upside earnings potential as the political and economic landscapes turn brighter. Over the last year, our position in Naspers, which offers pay-tv and Internet services in many African countries and owns stakes in major Internet players in other emerging countries, was our top contributor. Food services company Bid also did well, as the company reported strong organic sales growth. However, retailers, such as Woolworths Holdings, which we eliminated, and apparel retailer Foschini, have struggled in the difficult consumer environment. Food retailer Shoprite Holdings was lackluster, but the company, which has broad exposure to various African markets, is executing well and increasing its dominance over domestic competitors. We have high conviction in Shoprite and believe it represents a favorable long-term risk/reward trade-off. 5

8 Stocks of our South African financial companies were mixed over the last year, with good performance from Capitec Bank Holdings, but disappointment from financial services provider Barclays Africa. Insurer Sanlam advanced nicely, as it is taking market share from competitors. With longer-term bond yields rising, we are finding Sector Diversification Percent of Net Assets 4/30/17 10/31/17 Financials 31.1% 34.6% Consumer Discretionary Materials Consumer Staples Health Care Industrials and Business Services Telecommunication Services Real Estate Energy more attractive valuations in the sector, and we added Nedbank to the portfolio. The company is very cheap relative to other banks in South Africa and in the emerging markets universe, and its earnings have been hurt by a poorly timed acquisition. However, we expect losses to peak this year and earnings to begin improving in the next few years. Utilities Sub-Saharan Africa Information Technology Our portfolio s direct Other and Reserves sub-saharan exposure is still relatively small, Total 100.0% 100.0% but we have been slowly Historical weightings reflect current industry/sector warming up to the classifications. investment opportunities in the region. Valuations are generally cheap, and economic growth is ticking higher following a sluggish 2016 stemming from droughts and food inflation. We have had exploratory trips this year to Tanzania, Botswana, and Zambia, where tangible economic progress and political stability have increased the appeal of some new investment candidates. Liquidity can be tricky, so we are watching for the right opportunities to establish new positions. Most of our investments in this region are in Nigeria and Kenya. In Nigeria, there is still a wide spread of currency rates being used. Many of the banks are using the strongest rate to report their earnings, while investors, such as ourselves, are able to buy and sell naira at the weakest rate. We have been slowly increasing our exposure to Nigeria, 6

9 as the economy is now improving and as U.S. dollar liquidity has improved substantially. However, for us to be completely comfortable and take an overweight position, we would like to see one unified free-floating currency rate. For now, we are focusing our positions in companies such as Dangote Cement, Guaranty Trust Bank, and consumer companies Nigerian Breweries and Nestle Foods Nigeria. In Kenya, we maintained a stake in the dominant telecom services provider Safaricom but eliminated ARM Cement due to concerns about its balance sheet. We established a position in Equity Group Holdings, Kenya s second-largest bank, which has managed to partially mitigate the effects of the country s mandated interest rate caps. Egypt In dollar terms, Egypt s stock market rose about 6% in the last six months but tumbled 25% over the last year. The reforms required by the International Monetary Fund in exchange for financial assistance are contributing to an improving macro backdrop. While the November 2016 currency devaluation initially caused inflation to jump, we are beginning to see some signs of inflation easing and greater currency stability. We are optimistic about an Egyptian recovery and have been slowly building up our allocations to harness it. At 8% of assets, Egypt is one of the fund s largest overweights versus the benchmark. One of our top performance contributors in Egypt over the last year was Integrated Diagnostics Holdings, a major provider of diagnostics services. The company has been reporting strong revenue growth and positioning itself to benefit from an economic recovery. Its subsidiaries outside of Egypt have also performed well. In the financials sector, our stake in Commercial International Bank Egypt made a more moderate contribution. As the economy ramps up, it should benefit from increasing corporate loan growth. Outlook African and Middle Eastern markets have appreciated over the last year, bolstered by regional recoveries and, in some cases, meaningful country-specific improvements. While some countries have benefited from greater stability in commodity prices, we are encouraged that many governments have adapted to the lower price environment of recent years, in part by cutting subsidies to related industries. 7

10 In the Gulf Cooperation Council, Saudi Arabia s efforts to diversify its economy away from oil and its evolving political succession situation will be watched closely and will necessitate greater transparency to investors. The UAE, with its already diversified economy and steady gross domestic product growth, offers a safe haven in a turbulent region and several companies with compelling risk/reward trade-offs. South Africa has been held back by political and economic stagnation under an unpopular leader and concerns about credit rating downgrades, and investors have focused more on near-term risks than long-term corporate fundamentals. Many South African companies still have excellent management teams, however, and we believe that new leadership and economic reforms could provide a major boost for the market. In sub-saharan Africa, we are seeing improving forecasts for economic growth in 2018; longer term, we see rising incomes and favorable demographics as key tailwinds, particularly for consumer sectors. We continue to have a robust outlook for Africa and the Middle East, driven by rising urbanization and infrastructure investment, attractive demographics, and a strong asset base in natural resources. While regional stock prices have been volatile in the last few years, corporate fundamentals generally have remained favorable, and strong economic growth increasingly driven by domestic and consumer demand should continue to lift asset values over time. As always, we would like to remind our investors that this fund has a high risk/return profile. Because of its narrow geographic focus and relatively small number of holdings, this fund can be extremely volatile and should represent only a small portion of a long-term investor s well-diversified portfolio. Respectfully submitted, Oliver Bell Portfolio manager November 20, 2017 The portfolio manager has day-to-day responsibility for managing the portfolio and works with committee members in developing and executing the fund s investment program. 8

11 Benchmark Change Effective January 1, 2018, the MSCI Arabian Markets & Africa 10/40 IMI will replace the S&P Emerging/Frontier ME & Africa BMI ex IL as the fund s primary benchmark. The 10/40 means that no security will have a weight more than 10%, and the sum of securities with a weight greater than 5% will be less than 40% of the entire index. IMI refers to investable market index, which includes all investable large-, mid-, and small-cap securities. We believe that the MSCI index is a better reflection of the fund s investment universe and strategy. 9

12 Risks of International Investing Investing in the securities of non-u.s. issuers involves special risks not typically associated with investing in U.S. issuers. International securities tend to be more volatile and less liquid than investments in U.S. securities and may lose value because of adverse local, political, social, or economic developments overseas, or due to changes in the exchange rates between foreign currencies and the U.S. dollar. In addition, international investments are subject to settlement practices and regulatory and financial reporting standards that differ from those of the U.S. The risks of international investing are heightened for securities of issuers in emerging market countries. Emerging market countries tend to have economic structures that are less diverse and mature and political systems that are less stable than those of developed countries. In addition to all of the risks of investing in international developed markets, emerging markets are more susceptible to governmental interference, local taxes being imposed on international investments, restrictions on gaining access to sales proceeds, and less liquid and less efficient trading markets. Frontier markets generally have smaller economies and less mature capital markets than emerging markets. As a result, the risks of investing in emerging market countries are magnified in frontier market countries. Frontier markets are more susceptible to abrupt changes in currency values, less mature markets and settlement practices, and lower trading volumes that could lead to greater price volatility and illiquidity. Glossary Gross domestic product: The total market value of all goods and services produced in a country in a given year. S&P Emerging/Frontier ME & Africa BMI ex IL: An index that includes all of the daily priced, free-float market cap that S&P covers across the Middle East and Africa, excluding Israel. Note: MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. 10

13 Portfolio Highlights TWENTY-FIVE LARGEST HOLDINGS Percent of Net Assets 10/31/17 Naspers, South Africa 11.2% National Bank of Abu Dhabi, United Arab Emirates 2.9 Saudi Basic Industries, Saudi Arabia 2.9 FirstRand, South Africa 2.9 Aspen Pharmacare Holdings, South Africa 2.8 National Bank of Kuwait, Kuwait 2.8 MTN Group, South Africa 2.5 Emaar Properties, United Arab Emirates 2.3 Sasol, South Africa 2.3 DP World, United Arab Emirates 2.3 Bid, South Africa 2.2 Samba Financial, Saudi Arabia 2.2 Mr Price, South Africa 2.2 Al Mouwasat Medical Services, Saudi Arabia 2.1 Banque Saudi Fransi, Saudi Arabia 2.1 Commercial International Bank Egypt, Egypt 2.1 Saudi British Bank, Saudi Arabia 2.1 Almarai, Saudi Arabia 2.0 Aramex, United Arab Emirates 1.8 Capitec Bank Holdings, South Africa 1.8 Human Soft Holding, Kuwait 1.8 Barclays Africa, South Africa 1.7 Abu Dhabi Commercial Bank, United Arab Emirates 1.5 Savola, Saudi Arabia 1.5 Shoprite Holdings, South Africa 1.5 Total 63.5% Note: The information shown does not reflect any exchange-traded funds (ETFs), cash reserves, or collateral for securities lending that may be held in the portfolio. 11

14 Performance and Expenses Growth of $10,000 This chart shows the value of a hypothetical $10,000 investment in the fund over the past 10 fiscal year periods or since inception (for funds lacking 10-year records). The result is compared with benchmarks, which may include a broad-based market index and a peer group average or index. Market indexes do not include expenses, which are deducted from fund returns as well as mutual fund averages and indexes. AFRICA & MIDDLE EAST FUND $24,000 20,500 17,000 13,500 10,000 6,500 As of 10/31/17 Africa & Middle East Fund $9,343 S&P Emerging/Frontier ME & Africa BMI ex IL $10,005 Linked Performance Benchmark* $10,156 10/07 10/08 10/09 10/10 10/11 10/12 10/13 10/14 10/15 10/16 10/17 Note: Performance for the I Class will vary due to its differing fee structure. See returns table below. *The linked performance benchmark represents the performance of the S&P/IFCG Africa & Middle East Index (excluding Saudi Arabia and Israel) through 6/30/09 (prior to 9/1/08, the index also excluded Kuwait), the performance of the MSCI Arabian Markets and Africa Index from 7/1/09 through 9/29/10, and the performance of the S&P Emerging/Frontier ME & Africa BMI ex IL from 9/30/10 forward. Average Annual Compound Total Return Since Inception Periods Ended 10/31/17 1 Year 5 Years 10 Years Inception Date Africa & Middle East Fund 13.38% 6.00% -0.68% Africa & Middle East Fund I Class 6.85% 3/6/17 This table shows how the fund would have performed each year if its actual (or cumulative) returns for the periods shown had been earned at a constant rate. Returns do not reflect taxes that the shareholder may pay on fund distributions or the redemption of fund shares. Past performance cannot guarantee future results. 12

15 Fund Expense Example As a mutual fund shareholder, you may incur two types of costs: (1) transaction costs, such as redemption fees or sales loads, and (2) ongoing costs, including management fees, distribution and service (12b-1) fees, and other fund expenses. The following example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the most recent six-month period and held for the entire period. Please note that the fund has two share classes: The original share class (Investor Class) charges no distribution and service (12b-1) fee, and the I Class shares are also available to institutionally oriented clients and impose no 12b-1 or administrative fee payment. Each share class is presented separately in the table. Actual Expenses The first line of the following table (Actual) provides information about actual account values and expenses based on the fund s actual returns. You may use the information on this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number on the first line under the heading Expenses Paid During Period to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The information on the second line of the table (Hypothetical) is based on hypothetical account values and expenses derived from the fund s actual expense ratio and an assumed 5% per year rate of return before expenses (not the fund s actual return). You may compare the ongoing costs of investing in the fund with other funds by contrasting this 5% hypothetical example and the 5% hypothetical examples that appear in the shareholder reports of the other funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. Note: T. Rowe Price charges an annual account service fee of $20, generally for accounts with less than $10,000. The fee is waived for any investor whose T. Rowe Price mutual fund accounts total $50,000 or more; accounts electing to receive electronic delivery of account statements, transaction confirmations, prospectuses, and shareholder reports; or accounts of an investor who is a T. Rowe Price Personal Services or Enhanced Personal Services client (enrollment in these programs generally requires T. Rowe Price assets of at least $250,000). This fee is not included in the accompanying table. If you are subject to the fee, keep it in mind when you are estimating the ongoing expenses of investing in the fund and when comparing the expenses of this fund with other funds. You should also be aware that the expenses shown in the table highlight only your ongoing costs and do not reflect any transaction costs, such as redemption fees or sales loads. Therefore, the second line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. To the extent a fund charges transaction costs, however, the total cost of owning that fund is higher. 13

16 Fund Expense Example (continued) Africa & Middle East Fund Beginning Ending Expenses Paid Account Value Account Value During Period* 5/1/17 10/31/17 5/1/17 to 10/31/17 Investor Class Actual $1, $1, $6.85 Hypothetical (assumes 5% return before expenses) 1, , I Class Actual 1, , Hypothetical (assumes 5% return before expenses) 1, , * Expenses are equal to the fund s annualized expense ratio for the 6-month period, multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half year (184), and divided by the days in the year (365) to reflect the half-year period. The annualized expense ratio of the Investor Class was 1.33%, and the I Class was 1.13%. 14

17 Quarter-End Returns Since Inception Periods Ended 9/30/17 1 Year 5 Years 10 Years Inception Date Africa & Middle East Fund 15.82% 6.16% 0.53% Africa & Middle East Fund I Class 7.33% 3/6/17 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, please visit our website (troweprice.com) or contact a T. Rowe Price representative at or, for I Class shares, The performance information shown does not reflect the deduction of a 2% redemption fee on shares held for 90 days or less. If it did, the performance would be lower. This table provides returns through the most recent calendar quarter-end rather than through the end of the fund s fiscal period. It shows how the fund would have performed each year if its actual (or cumulative) returns for the periods shown had been earned at a constant rate. 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. Expense Ratio Africa & Middle East Fund 1.56% Africa & Middle East Fund I Class 1.29 The expense ratio shown is as of the fund s fiscal year ended 10/31/16. The expense ratio for the Africa & Middle East Fund I Class is estimated as of the class s inception date of 3/6/17. This number may vary from the expense ratio shown elsewhere in this report because it is based on a different time period and, if applicable, includes acquired fund fees and expenses but does not include fee or expense waivers. 15

18 Financial Highlights For a share outstanding throughout each period Investor Class Year Ended 10/31/17 10/31/16 10/31/15 10/31/14 10/31/13 NET ASSET VALUE Beginning of period $ 7.85 $ 8.50 $ $ 8.76 $ 7.31 Investment activities Net investment income (1) 0.14 (3) Net realized and unrealized gain / loss 0.89 (0.57) (2.08) Total from investment activities 1.03 (0.39) (1.94) Distributions Net investment income (0.15) (0.15) (0.13) (0.13) (0.15) Net realized gain (0.11) (0.01) (0.07) Total distributions (0.15) (0.26) (0.13) (0.14) (0.22) NET ASSET VALUE End of period $ 8.73 $ 7.85 $ 8.50 $ $ 8.76 Ratios/Supplemental Data Total return (2) 13.38% (3) (4.42)% (18.41)% 22.60% 23.46% Ratio of total expenses to average net assets 1.42% (3) 1.56% 1.47% 1.42% 1.47% Ratio of net investment income to average net assets 1.69% (3) 2.42% 1.40% 1.27% 1.65% Portfolio turnover rate 60.2% 82.5% 60.4% 59.3% 56.1% Net assets, end of period (in millions) $ 132 $ 121 $ 157 $ 224 $ 182 (1) Per share amounts calculated using average shares outstanding method. (2) 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 and payment of no redemption or account fees. (3) Excludes expenses waived related to the waiver of fund-level expenses ratably across all classes in accordance with SEC rules. The accompanying notes are an integral part of these financial statements. 16

19 Financial Highlights For a share outstanding throughout the period I Class NET ASSET VALUE 3/6/17 Through 10/31/17 (1) Beginning of period $ 8.18 Investment activities Net investment income (2) 0.10 (3)(6) Net realized and unrealized gain / loss 0.46 Total from investment activities 0.56 NET ASSET VALUE End of period $ 8.74 Ratios/Supplemental Data Total return (4) 6.85% (3)(6) Ratio of total expenses to average net assets 1.13% (3)(5)(6) Ratio of net investment income to average net assets 1.81% (3)(5)(6) Portfolio turnover rate 60.2% Net assets, end of period (in thousands) $ 7,016 (1) Inception date (2) Per share amount calculated using average shares outstanding method. (3) See Note 6. Excludes expenses in excess of a 0.05% contractual operating expense limitation in effect through 2/28/19. (4) Total return reflects the rate that an investor would have earned on an investment in the fund during the period, assuming reinvestment of all distributions and payment of no redemption or account fees. Total return is not annualized for periods less than one year. (5) Annualized (6) Includes investment-related costs borne by the fund in excess of the expense limitation (see Note 6). The accompanying notes are an integral part of these financial statements. 17

20 October 31, 2017 Portfolio of Investments Shares $ Value (Cost and value in $000s) BOTSWANA 0.3% Common Stocks 0.3% First National Bank fo Botswana 1,862, Total Botswana (Cost $435) 410 CANADA 1.0% Common Stocks 1.0% Africa Oil (SEK) (1) 482, First Quantum Minerals 63, Total Canada (Cost $1,315) 1,319 EGYPT 7.6% Common Stocks 7.6% Commercial International Bank Egypt, GDR (USD) 633,996 2,894 Egyptian Financial Group-Hermes Holding 497, Elsewedy Electric 266,132 1,705 Integrated Diagnostics Holdings (USD) 504,290 1,967 OCI (EUR) (1) 59,634 1,415 Oriental Weavers 821, Telecom Egypt 1,558,426 1,142 Total Egypt (Cost $10,033) 10,611 KENYA 1.5% Common Stocks 1.5% Equity Group Holdings 2,585, Safaricom 4,414,700 1,118 Total Kenya (Cost $1,876) 2,074 KUWAIT 5.9% Common Stocks 5.9% Agility 246,

21 (Cost and value in $000s) Shares $ Value Burgan Bank 1,146,923 1,274 Human Soft Holding 187,793 2,455 National Bank of Kuwait 1,532,413 3,884 Total Kuwait (Cost $7,408) 8,243 MOROCCO 1.0% Common Stocks 1.0% Attijariwafa Bank 13, Societe d'expliotation des Ports 52, Total Morocco (Cost $1,378) 1,457 NIGERIA 3.1% Common Stocks 3.1% Dangote Cement 1,647, FBN Holdings 13,706, Guaranty Trust Bank 14,900,867 1,745 Nestle Foods Nigeria 199, Nigerian Breweries 1,736, Total Nigeria (Cost $4,713) 4,370 SAUDI ARABIA 20.4% Common Stocks 20.4% Al Hammadi Development & Investment (1) 78, Almarai 192,383 2,828 Banque Saudi Fransi 382,457 2,905 Bupa Arabia For Cooperative Insurance 68,678 1,989 Herfy Food Services 114,586 1,451 Mouwasat Medical Services 68,538 2,912 National Commercial Bank 135,866 1,722 Samba Financial 515,766 3,052 Saudi Arabian Mining (1) 76,414 1,052 19

22 (Cost and value in $000s) Shares $ Value Saudi Basic Industries 151,817 4,022 Saudi British Bank 434,197 2,864 Savola (1) 191,974 2,033 Yanbu National Petrochemical 48, Total Saudi Arabia (Cost $25,949) 28,270 SOUTH AFRICA 41.3% Common Stocks 41.3% Ascendis Health 412, Aspen Pharmacare Holdings 172,659 3,901 AVI 270,558 1,886 Barclays Africa 240,414 2,382 Bid 141,010 3,101 Brait 292,376 1,093 Capitec Bank Holdings 37,636 2,503 Famous Brands (1) 110, FirstRand 1,091,208 3,961 Foschini 116,099 1,113 Imperial Holdings 66, KAP Industrial Holdings 1,826,219 1,098 Life Healthcare Group Holdings 489, Mr Price Group 242,754 3,009 MTN Group 392,818 3,411 Naspers, N Shares 63,750 15,532 Nedbank 45, Psg 68,501 1,272 Sanlam 299,339 1,498 Sasol 110,461 3,227 Shoprite Holdings 140,929 2,017 Steinhoff Africa Retail (1) 342,

23 (Cost and value in $000s) Shares $ Value Vodacom Group 169,755 1,845 Total South Africa (Cost $54,039) 57,242 TANZANIA 0.8% Common Stocks 0.8% National Microfinance Bank 415, Vodacom Tanzania 1,750, Total Tanzania (Cost $1,533) 1,094 UNITED ARAB EMIRATES 14.7% Common Stocks 14.7% Abu Dhabi Commercial Bank 1,047,708 2,111 ADES International Holdings (USD) (1) 73, Air Arabia 2,239, Aramex 1,826,006 2,540 DP World (USD) 134,483 3,193 Emaar Malls PJSC 1,526, Emaar Properties 1,433,460 3,235 Emirates NBD 317, Lamprell (GBP) (1) 711, National Bank of Abu Dhabi 1,440,780 4,057 National Bank of Ras Al-Khaimah PSC 852,217 1,147 Total United Arab Emirates (Cost $18,718) 20,413 UNITED KINGDOM 3.0% Common Stocks 3.0% Anglo American (ZAR) 80,278 1,504 Centamin 250, Petra Diamonds (1) 644,

24 (Cost and value in $000s) Shares $ Value Tullow Oil (1) 634,967 1,536 Total United Kingdom (Cost $4,383) 4,162 ZAMBIA 0.7% Common Stocks 0.7% Standard Chartered Bank Zambia 4,098, Total Zambia (Cost $890) 918 SHORT-TERM INVESTMENTS 0.0% Money Market Funds 0.0% T. Rowe Price Government Reserve Fund, 1.09% (2)(3) 1,003 1 Total Short-Term Investments (Cost $1) 1 Total Investments in Securities 101.3% of Net Assets (Cost $132,671) $ 140,584 Country classifications are generally based on MSCI categories or another unaffiliated third party data provider; Shares are denominated in the currency of the country presented unless otherwise noted. (1) Non-income producing (2) Seven-day yield (3) Affiliated Company EUR Euro GBP British Pound GDR Global Depositary Receipts SEK Swedish Krona USD U.S. Dollar ZAR South African Rand 22

25 Affiliated Companies ($000s) The fund may invest in certain securities that are considered affiliated companies. As defined by the 1940 Act, an affiliated company is one in which the fund owns 5% or more of the outstanding voting securities, or a company that is under common ownership or control. The following securities were considered affiliated companies for all or some portion of the year ended October 31, Net realized gain (loss), investment income, change in net unrealized gain/loss, and purchase and sales cost reflect all activity for the period then ended. Net Realized Gain (Loss) Change in Net Unrealized Gain/Loss Investment Income Affiliate T. Rowe Price Government Reserve Fund $ $ $ 1 Totals $ # $ $ 1+ Supplementary Investment Schedule Affiliate Value 10/31/16 Purchase Cost Sales Cost Value 10/31/17 T. Rowe Price Government Reserve Fund $ 1 $ 1 $ 1^ # Capital gain/loss distributions from mutual funds represented $0 of the net realized gain(loss). + Investment income comprised $1 of dividend income and $0 of interest income. Purchase and sale information not shown for cash management funds. ^ The cost basis of investments in affiliated companies was $1. The accompanying notes are an integral part of these financial statements. 23

26 October 31, 2017 Statement of Assets and Liabilities ($000s, except shares and per share amounts) Assets Investments in securities, at value (cost $132,671) $ 140,584 Foreign currency (cost $271) 269 Receivable for shares sold 68 Dividends receivable 60 Due from affiliates 20 Other assets 35 Total assets 141,036 Liabilities Payable for investment securities purchased 235 Payable for shares redeemed 131 Investment management fees payable 124 Due to affiliates 34 Other liabilities 1,778 Total liabilities 2,302 NET ASSETS $ 138,734 Net Assets Consist of: Undistributed net investment income $ 1,772 Accumulated undistributed net realized loss (38,288) Net unrealized gain 7,911 Paid-in capital applicable to 15,888,304 shares of $0.01 par value capital stock outstanding; 18,000,000,000 shares of the Corporation authorized 167,339 NET ASSETS $ 138,734 Investor Class ($131,717,414/ 15,085,778 shares outstanding) $ 8.73 I Class ($7,016,363 / 802,526 shares outstanding) $ 8.74 The accompanying notes are an integral part of these financial statements. 24

27 Statement of Operations ($000s) Investment Income (Loss) Year Ended 10/31/17 Income Dividend (net of foreign taxes of $321) $ 4,186 Interest 1 Total income 4,187 Expenses Investment management 1,398 Shareholder servicing Investor Class 284 Prospectus and shareholder reports Investor Class 34 Custody and accounting 185 Registration 53 Legal and audit 33 Directors 1 Miscellaneous 83 Waived / paid by Price Associates (162) Total expenses 1,909 Net investment income 2,278 Realized and Unrealized Gain / Loss Net realized gain (loss) Securities 5,734 Foreign currency transactions (253) Net realized gain 5,481 Change in net unrealized gain / loss on securities 9,317 Net realized and unrealized gain / loss 14,798 INCREASE IN NET ASSETS FROM OPERATIONS $ 17,076 The accompanying notes are an integral part of these financial statements. 25

28 Statement of Changes in Net Assets ($000s) Increase (Decrease) in Net Assets Year Ended 10/31/17 10/31/16 Operations Net investment income $ 2,278 $ 3,101 Net realized gain (loss) 5,481 (15,437) Change in net unrealized gain / loss 9,317 4,091 Increase (decrease) in net assets from operations 17,076 (8,245) Distributions to shareholders Net investment income Investor Class (2,480) (2,668) Net realized gain Investor Class (1,956) Decrease in net assets from distributions (2,480) (4,624) Capital share transactions* Shares sold Investor Class 21,436 13,214 I Class 7,300 Distributions reinvested Investor Class 2,307 4,161 Shares redeemed Investor Class (27,834) (40,057) I Class (223) Redemption fees received 8 7 Increase (decrease) in net assets from capital share transactions 2,994 (22,675) Net Assets Increase (decrease) during period 17,590 (35,544) Beginning of period 121, ,688 End of period $ 138,734 $ 121,144 26

29 Statement of Changes in Net Assets ($000s) Year Ended 10/31/17 10/31/16 Undistributed net investment income 1,772 2,194 *Share information Shares sold Investor Class 2,716 1,762 I Class 828 Distributions reinvested Investor Class Shares redeemed Investor Class (3,369) (5,325) I Class (25) Decrease in shares outstanding 450 (3,004) The accompanying notes are an integral part of these financial statements. 27

30 October 31, 2017 Notes to Financial Statements Funds, Inc. (the corporation), is registered under the Investment Company Act of 1940 (the 1940 Act). The Africa & Middle East Fund (the fund) is a nondiversified, open-end management investment company established by the corporation. The fund seeks long-term growth of capital by investing primarily in the common stocks of companies located (or with primary operations) in Africa and the Middle East. The fund has two classes of shares: the Africa & Middle East Fund (Investor Class) and the Africa & Middle East Fund I Class (I Class). I Class shares generally are available only to investors meeting a $1,000,000 minimum investment or certain other criteria. Each class has exclusive voting rights on matters related solely to that class; separate voting rights on matters that relate to both classes; and, in all other respects, the same rights and obligations as the other class. Note 1 - Significant Accounting Policies Basis of Preparation The fund is an investment company and follows accounting and reporting guidance in the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 (ASC 946). The accompanying financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (GAAP), including, but not limited to, ASC 946. GAAP requires the use of estimates made by management. Management believes that estimates and valuations are appropriate; however, actual results may differ from those estimates, and the valuations reflected in the accompanying financial statements may differ from the value ultimately realized upon sale or maturity. Investment Transactions, Investment Income, and Distributions Investment transactions are accounted for on the trade date basis. Income and expenses are recorded on the accrual basis. Realized gains and losses are reported on the identified cost basis. Dividends received from mutual fund investments are reflected as dividend income; capital gain distributions are reflected as realized gain/loss. Dividend income and capital gain distributions are recorded on the ex-dividend date. Income tax-related interest and penalties, if incurred, would be recorded as income tax expense. Income distributions are declared and paid by each class annually. Distributions to shareholders are recorded on the ex-dividend date. A capital gain distribution may also be declared and paid by the fund annually. 28

31 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 respective date of such transaction. The portion of the results of operations attributable to changes in foreign exchange rates on investments is not bifurcated from the portion attributable to changes in market prices. The effect of changes in foreign currency exchange rates on realized and unrealized security gains and losses is reflected as a component of security gains and losses. Class Accounting Shareholder servicing, prospectus, and shareholder report expenses incurred by each class are charged directly to the class to which they relate. Expenses common to both classes, investment income, and realized and unrealized gains and losses are allocated to the classes based upon the relative daily net assets of each class. To the extent any expenses are waived or reimbursed in accordance with an expense limitation (see Note 6), the waiver or reimbursement is charged to the applicable class or allocated across the classes in the same manner as the related expense. Redemption Fees A 2% fee is assessed on redemptions of fund shares held for 90 days or less to deter short-term trading and to protect the interests of long-term shareholders. Redemption fees are withheld from proceeds that shareholders receive from the sale or exchange of fund shares. The fees are paid to the fund and are recorded as an increase to paid-in capital. The fees may cause the redemption price per share to differ from the net asset value per share. In-Kind Subscriptions Under certain circumstances, and when considered to be in the best interest of all shareholders, the fund may accept portfolio securities rather than cash as payment for the purchase of fund shares (in-kind subscription). For financial reporting and tax purposes, the cost basis of contributed securities is equal to the market value of the securities on the date of contribution. In-kind subscriptions result in no gain or loss and no tax consequences for the fund. During the year ended October 31, 2017, the fund accepted $3,278,000 of in-kind subscriptions, all of which were from other T. Rowe Price funds. New Accounting Guidance In March 2017, the FASB issued amended guidance to shorten the amortization period for certain callable debt securities, held at a premium. The guidance is effective for fiscal years and interim periods beginning after December 15, Adoption will have no effect on the fund s net assets or results of operations. 29

32 On August 1, 2017, the fund implemented amendments to Regulation S-X, issued by the Securities and Exchange Commission, which require standardized, enhanced disclosures, particularly related to derivatives, in investment company financial statements. Adoption had no effect on the fund s net assets or results of operations. Indemnification In the normal course of business, the fund may provide indemnification in connection with its officers and directors, service providers, and/or private company investments. The fund s maximum exposure under these arrangements is unknown; however, the risk of material loss is currently considered to be remote. Note 2 - VALUATION The fund s financial instruments are valued and each class s net asset value (NAV) per share is computed at the close of the New York Stock Exchange (NYSE), normally 4 p.m. ET, each day the NYSE is open for business. However, the NAV per share may be calculated at a time other than the normal close of the NYSE if trading on the NYSE is restricted, if the NYSE closes earlier, or as may be permitted by the SEC. Fair Value The fund s financial instruments are reported at fair value, which GAAP defines as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The T. Rowe Price Valuation Committee (the Valuation Committee) is an internal committee that has been delegated certain responsibilities by the fund s Board of Directors (the Board) to ensure that financial instruments are appropriately priced at fair value in accordance with GAAP and the 1940 Act. Subject to oversight by the Board, the Valuation Committee develops and oversees pricing-related policies and procedures and approves all fair value determinations. Specifically, the Valuation Committee establishes procedures to value securities; determines pricing techniques, sources, and persons eligible to effect fair value pricing actions; oversees the selection, services, and performance of pricing vendors; oversees valuation-related business continuity practices; and provides guidance on internal controls and valuation-related matters. The Valuation Committee reports to the Board and has representation from legal, portfolio management and trading, operations, risk management, and the fund s treasurer. 30

33 Various valuation techniques and inputs are used to determine the fair value of financial instruments. GAAP establishes the following fair value hierarchy that categorizes the inputs used to measure fair value: Level 1 quoted prices (unadjusted) in active markets for identical financial instruments that the fund can access at the reporting date Level 2 inputs other than Level 1 quoted prices that are observable, either directly or indirectly (including, but not limited to, quoted prices for similar financial instruments in active markets, quoted prices for identical or similar financial instruments in inactive markets, interest rates and yield curves, implied volatilities, and credit spreads) Level 3 unobservable inputs Observable inputs are developed using market data, such as publicly available information about actual events or transactions, and reflect the assumptions that market participants would use to price the financial instrument. Unobservable inputs are those for which market data are not available and are developed using the best information available about the assumptions that market participants would use to price the financial instrument. GAAP requires valuation techniques to maximize the use of relevant observable inputs and minimize the use of unobservable inputs. When multiple inputs are used to derive fair value, the financial instrument is assigned to the level within the fair value hierarchy based on the lowest-level input that is significant to the fair value of the financial instrument. Input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level but rather the degree of judgment used in determining those values. Valuation Techniques Equity securities listed or regularly traded on a securities exchange or in the over-the-counter (OTC) market are valued at the last quoted sale price or, for certain markets, the official closing price at the time the valuations are made. OTC Bulletin Board securities are valued at the mean of the closing bid and asked prices. A security that is listed or traded on more than one exchange is valued at the quotation on the exchange determined to be the primary market for such security. Listed securities not traded on a particular day are valued at the mean of the closing bid and asked prices for domestic securities and the last quoted sale or closing price for international securities. 31