Value Fund. Value Fund I Class

Transcription

1 SEMIANNUAL REPORT June 30, 2018 TRVLX T. ROWE PRICE Value Fund PAVLX Value Fund Advisor Class TRPIX Value Fund I Class The fund invests in large-cap companies that appear to be out of favor or undervalued. For more insights from T. Rowe Price investment professionals, go to troweprice.com.

2 HIGHLIGHTS The Value Fund returned -2.17% in the first half of its fiscal year and underperformed the Russell 1000 Value Index and its Lipper peer group. Stock selection in the information technology and financials sectors contributed to performance. However, a handful of consumer staples stocks detracted the most from returns. We sought to maintain the fund s defensive positioning, reflecting our view that the U.S. economy is in the latter stages of the economic cycle. We expect more volatility in the near term as signs of slowing growth have appeared in a few countries overseas following last year s synchronized global expansion. Policy risk stemming from the U.S.-China trade dispute is another near-term headwind to the U.S. economy and stock market. Go Paperless Sign up for e-delivery of your statements, confirmations, and prospectuses or shareholder reports. TO ENROLL: If you invest directly with T. Rowe Price, go to troweprice.com/paperless. If you invest through an investment advisor, a bank, or a brokerage firm, please contact that organization and ask if it can provide electronic documentation. It s fast receive your statements and confirmations faster than U.S. mail. It s convenient access your important account documents whenever you need them. It s secure we protect your online accounts using True Identity to confirm new accounts and make verification faster and more secure. It can save you money where applicable, T. Rowe Price passes on the cost savings to fund holders.* Log in to your account at troweprice.com for more information. * Certain mutual fund accounts that are assessed an annual account service fee can also save money by switching to e-delivery.

3 CIO Market Commentary Dear Shareholder U.S. stocks recorded decent gains in the first half of 2018, but unlike last year, investors had to absorb some bumps along the way. In February, volatility spiked and the S&P 500 Index briefly tumbled over 10% from its highs, putting it in correction territory. The major U.S. benchmarks recovered their losses in the spring, eventually bringing the technology-focused Nasdaq Composite Index and the smaller-cap indexes to new highs. Volatility stayed somewhat elevated, however, and many investors clearly remained anxious as the first half of your fund s fiscal year ended. Solid corporate and economic fundamentals initially seemed to promise that 2017 s strong stock market momentum might carry forward into Continued global synchronized growth led to strong profits for many multinationals. In the U.S., earnings for the S&P 500 rose by nearly 25% in the first quarter versus a year before, according to FactSet the best performance since the recovery from the financial crisis. Profit growth also picked up in Europe, Japan, and emerging markets, even as growth in many international economies cooled a bit. Inflation fears presented the first obstacle to the markets in February, however. Stocks tumbled on news that hourly wages had jumped in January, sparking fears that the Federal Reserve would pick up its pace of interest rate increases in order to head off inflation. Wage growth moderated in the following months, but a series of strong economic reports raised growth expectations and sent long-term interest rates to multiyear peaks by May. Investors also worried that the massive U.S. fiscal stimulus from December s tax cuts and March s spending bill might overheat the economy, though interest rates fell back in late May and June as Fed officials stressed their intention to move slowly in tightening monetary policy. Trade tensions soon emerged as a second impediment for the markets. The Trump administration began implementing a more populist trade stance in March, announcing tariffs on steel and aluminum imports, threatening to withdraw from the North American Free Trade Agreement (NAFTA), and later raising the possibility of taxing auto imports. The administration also announced a steady escalation in possible tariffs on Chinese goods, eventually targeting a list of $200 billion in Chinese imports. China and other U.S. trading partners vowed to retaliate proportionately. 1

4 Investors initially seemed willing to dismiss the tit-for-tat threats as negotiating tactics, but evidence eventually emerged that even the prospect of tariffs was impacting corporate strategies and profit outlooks. Stocks slumped on June 21, after German automaker Daimler lowered its earnings guidance due to possible tariff increases on SUVs it manufactures in the U.S. and sells in China. A few days later, Harley-Davidson revealed that it was planning to move some of its motorcycle production to Europe to avoid retaliatory tariffs recently announced by the European Union. Boeing, Caterpillar, and other leading exporters suffered declines as trade tensions worsened, but small-caps, which typically have far less international exposure, fared much better than large-caps in the first half of the year. Growth shares continued to outperform value shares despite the strong performance of energy stocks, which benefited from a rise in oil prices to multiyear highs. Stocks in overseas markets reacted particularly poorly to growing trade fears and fell for the period. A decline in many currencies relative to the dollar also weighed on international bond and stock returns for U.S. investors. Meanwhile, technology shares continued to dominate, with much of the market s overall gain to date in 2018 concentrated in a handful of mega-cap companies able to leverage dominant Internet platforms. Data breaches and concerns about the growing power of these firms resulted in calls for government intervention in early For now, however, the threat of increased regulation seems a longer-term one that appears minor in comparison to the powerful fundamental strength of these companies. T. Rowe Price s global team of industry experts is monitoring the possible impact of tariffs and other challenges on a wide range of companies from the global tech titans to small, domestic firms that get little analyst coverage on Wall Street. While the rest of 2018 may bring further surprises, you can rest assured that your portfolio manager is drawing on a wide range of insights in seeking to provide shareholders with superior returns while minimizing the impact of unforeseen political events or other pitfalls. Thank you for your continued confidence in T. Rowe Price. Sincerely, Robert Sharps Group Chief Investment Officer 2

5 Management s Discussion of Fund Performance INVESTMENT OBJECTIVE The fund seeks to provide long-term capital appreciation by investing in common stocks believed to be undervalued. Income is a secondary objective. FUND COMMENTARY How did the fund perform in the past six months? The Value Fund returned -2.17% in the six months ended June 30, The fund underperformed the Russell 1000 Value Index and its peer group, the Lipper Large-Cap Value Funds Index. Returns for the Advisor and I Class shares reflect different fee PERFORMANCE COMPARISON structures. (Past performance Six-Month Period Ended 6/30/18 Value Fund Value Fund Advisor Class Value Fund I Class Russell 1000 Value Index S&P 500 Index Lipper Large-Cap Value Funds Index Total Return -2.17% cannot guarantee future results.) What factors influenced the fund s performance? The information technology (IT) sector produced several top contributors. Microsoft was the fund s top performance contributor as the software company benefited from the continued success of its cloud computing business. Cisco Systems was another large contributor after the network equipment maker gave a bullish forecast and said it would repatriate $67 billion of its cash held overseas and spend much of it on share buybacks and dividends. Both Microsoft and Cisco Systems ranked among your fund s biggest positions at the end of June. (Please refer to the portfolio of investments for a complete list of holdings and the amount each represents in the portfolio.) Other significant contributors hailed from a variety of sectors, reflecting our opportunistic approach to seeking value. In the financials sector, Bermudabased insurer XL Group was the top contributor after France s AXA announced that it would pay $15.3 billion to acquire the company at a hefty premium over its previous day s close. The consumer discretionary sector added value owing to our position in media company Twenty-First Century Fox, which was the subject of a bidding war between Comcast and Walt Disney. Fox s shares have been on a tear since November, when reports first surfaced that the company 3

6 was in talks with Disney, and hit a record high at the end of June. Among industrials and business services stocks, we benefited from our large position in Boeing, whose shares repeatedly hit record highs on surging aircraft demand. Detractors were concentrated in the consumer staples sector, which weighed on returns as several holdings stumbled due to company-specific reasons. Packaged foods company Tyson Foods was the biggest performance detractor as its shares slumped amid concerns that China s retaliatory tariffs on U.S. pork and other farm products would hurt its margins, which were already under pressure from rising freight and labor costs. Philip Morris International weighed on returns after the company reported disappointing sales growth for its cigarette alternative products and weaker-than-expected cigarette shipments, triggering a sell-off in tobacco shares. Walmart detracted from performance after its shares dropped in February after it reported disappointing online sales growth in last year s holiday quarter. We leaned into the declines and added to our positions in Tyson a fundamentally sound company and solid performer over longer time periods and in Philip Morris, which we favor for its high dividend yield. We eliminated Walmart after the company announced SECTOR DIVERSIFICATION Percent of Net Assets 12/31/17 6/30/18 Financials 25.0% 22.5% Health Care Information Technology Energy Utilities Industrials and Business Services Consumer Staples Consumer Discretionary Materials Real Estate Telecommunication Services Other and Reserves Total 100.0% 100.0% Historical weightings reflect current industry/sector classifications. that it would pay $16 billion for a controlling stake in FlipKart, an online retailer in India, a deal that management admitted would hurt its bottom line for the next few years. We were concerned that the FlipKart acquisition would distract management from focusing on Walmart s U.S. storefront and online businesses, however, and used proceeds to invest in names that we believe have better long-term upside potential. How is the fund positioned? The Value Fund buys and holds fundamentally strong, attractively valued companies with the potential for better performance. Our holdings are typically higher-quality 4

7 companies that generate strong free cash flow and trade for significantly less than our estimated sum-of-the-parts valuation. Each position is the result of careful stock picking based on the fundamental research generated by T. Rowe Price s team of equity analysts, as opposed to selection based on sector or macroeconomic trends. We spend much effort determining the potential return and risk associated with a specific company and believe that if we can successfully identify companies with asymmetric return potential, we should then be able to outperform the market and our peers over time. Financials accounted for the largest sector allocation at period-end. We sought to reduce risk by trimming economically sensitive names that performed well, such as JPMorgan Chase, and adding to more defensive banks, including U.S. Bancorp and Wells Fargo, which lagged yet have good potential to hold up in a slow-growth environment. Shares of Wells Fargo dropped in February after the Federal Reserve punished the bank by barring it from increasing its assets and stated that the bank will replace four board members by year-end. Despite the negative headlines, we view Wells Fargo as an attractively valued, fundamentally solid business whose management is taking appropriate steps to move past various regulatory actions related to the fake customer accounts scandal in In the insurance industry, we eliminated XL Group on news of its acquisition by AXA, and added to our position in insurance brokerage Marsh & McLennan, which we regard as a more defensive business since it does not underwrite catastrophe risk. IT represented the fund s largest overweight sector at period-end. Our IT allocation rose thanks to outsized gains in Microsoft, Cisco Systems, and Keysight Technologies, which makes electronic test and measurement equipment for various industries. We eliminated Intel after strong performance, and initiated a position in Facebook after the social media company revealed that an outside consulting firm improperly accessed the personal data of millions of its users. Though we have steered clear of Facebook and several other fast-growing tech companies due to their skyrocketing valuations in recent years, we bought Facebook around the time of the data controversy that pushed the company s valuation down to historically low levels. In the consumer discretionary sector, we initiated clothing company Hanesbrands and retailer L Brands, two names that have fallen out of favor due to headwinds disrupting the retail industry. Hanesbrands shares have suffered amid slowing sales of its core brands and mismanagement, but we are encouraged by the debt-cutting efforts under a new chief executive and a resurgence in its Champion athletic brand. Meanwhile, L Brands shares lost more than a third of their value over the period amid concerns about its 5

8 Victoria s Secret chain, which is grappling with online competition and weaker sales. Despite these issues, we think that L Brands shares undervalue the strength of its brands and global growth potential. Moreover, the company is a strong cash generator, and we expect it will continue to reward shareholders through dividends and share buybacks. What is portfolio management s outlook? The U.S. economy continued to strengthen in the first half of 2018 as last year s tax overhaul and financial industry deregulation benefited U.S. consumers and companies. However, the synchronized global expansion that began in late 2016 appears to be cooling as signs of sputtering growth have emerged in a few overseas markets. With the U.S. appearing to be in the latter stages of the economic cycle and the nation s bull market entering its tenth year, we aim to keep your fund defensively positioned as we expect subdued economic growth and stock market returns in the near term. A key risk to our outlook stems from policy uncertainty following this spring s rapid escalation in the U.S.-China trade dispute. Contrary to the claims of the current U.S. president, trade wars are not good for the economy, and a trade war between the U.S. and China could wreak substantial damage to global growth. With the U.S. and China locked in a tit-for-tat tariff cycle, and the European Union and Canada recently joining the fray with retaliatory tariffs on targeted U.S. goods, we expect more financial markets volatility as worries mount about when and how the current trade disputes will end. Thanks to T. Rowe Price s strengths in fundamental research and our disciplined investment process, we are well equipped to navigate a more unpredictable environment as we continue to uncover and invest in highquality, undervalued companies in our ongoing effort to generate value for shareholders. The views expressed reflect the opinions of T. Rowe Price as of the date of this report and are subject to change based on changes in market, economic, or other conditions. These views are not intended to be a forecast of future events and are no guarantee of future results. 6

9 RISKS OF STOCK INVESTING As with all stock funds, the fund s share price can fall because of weakness in the broad market, a particular industry, or specific holdings. Stock markets can decline for many reasons, including adverse local, political, social, or economic developments in the U.S. or abroad; changes in investor psychology; or heavy selling at the same time by major institutional investors in the market, such as mutual funds, pension funds, and banks. 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 adviser s assessment of companies held by the fund may prove incorrect, resulting in losses or poor performance, even in rising markets. Also, the fund s overall investment approach could fall out of favor with the investing public, resulting in lagging performance versus other types of stock funds. Legislative, regulatory, or tax developments may affect the investment strategies available to portfolio managers, which could adversely affect the ability to implement the fund s overall investment program and achieve the fund s investment objective. RISKS OF VALUE INVESTING Finding undervalued stocks requires considerable research to identify the particular company, analyze its financial condition and prospects, and assess the likelihood that the stock s underlying value will be recognized by the market and reflected in its price. A value approach to investing carries the risk that the market will not recognize a security s intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. BENCHMARK INFORMATION Note: Frank Russell Company (Russell) is the source and owner of the Russell index data contained or reflected in these materials and all trademarks and copyrights related thereto. Russell is a registered trademark of Russell. Russell is not responsible for the formatting or configuration of these materials or for any inaccuracy in T. Rowe Price Associates presentation thereof. 7

10 PORTFOLIO HIGHLIGHTS TWENTY-FIVE LARGEST HOLDINGS Percent of net Assets 6/30/18 Microsoft 4.6% Tyson Foods 4.3 Wells Fargo 3.9 NextEra Energy 2.6 Pfizer 2.3 JPMorgan Chase 2.2 Cisco Systems 2.1 International Paper 2.1 PNC Financial Services Group 1.9 Crown Castle International 1.8 Boeing 1.7 Chevron 1.7 Medtronic 1.6 Becton, Dickinson & Company 1.6 U.S. Bancorp 1.6 Texas Instruments 1.6 TransCanada 1.5 Marsh & McLennan 1.4 Northrop Grumman 1.4 Merck 1.4 Sempra Energy 1.4 Philip Morris International 1.3 DowDuPont 1.3 Chubb 1.2 American Airlines 1.2 Total 49.7% 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. 8

11 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 include a broad-based market index and may also include 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. VALUE FUND $32,500 28,000 23,500 19,000 14,500 10,000 6/08 6/09 6/10 6/11 6/12 6/13 6/14 6/15 6/16 6/17 6/18 As of 6/30/18 Value Fund Russell 1000 Value Index S&P 500 Index Lipper Large-Cap Value Funds Index $24,850 22,593 26,340 22,105 Note: Performance for the Advisor and I Class shares will vary due to their differing fee structures. See returns table on the next page. 9

12 AVERAGE ANNUAL COMPOUND TOTAL RETURN Since Inception Periods Ended 6/30/18 1 Year 5 Years 10 Years Inception Date Value Fund 7.19% 10.91% 9.53% Value Fund Advisor Class Value Fund I Class % 8/28/15 The fund s performance information represents only past performance and is not necessarily an indication of future results. Current performance may be lower or higher than the performance data cited. 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 Advisor and I Class shares, This table shows how the fund would have performed each year if its actual (or cumulative) returns 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. 10

13 EXPENSE RATIO Value Fund 0.81% Value Fund Advisor Class 1.05 Value Fund I Class 0.64 The expense ratio shown is as of the fund s fiscal year ended 12/31/17. 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. 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 three share classes: The original share class (Investor Class) charges no distribution and service (12b-1) fee, the Advisor Class shares are offered only through unaffiliated brokers and other financial intermediaries and charge a 0.25% 12b-1 fee, and I Class shares are 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. 11

14 FUND EXPENSE EXAMPLE (CONTINUED) 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. VALUE FUND Beginning ending Expenses Paid Account Value Account Value During Period* 1/1/18 6/30/18 1/1/18 to 6/30/18 Investor Class Actual $1, $ $3.88 Hypothetical (assumes 5% return before expenses) 1, , Advisor Class Actual 1, 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 (181), and divided by the days in the year (365) to reflect the half-year period. The annualized expense ratio of the Investor Class was 0.79%, the Advisor Class was 1.02%, and the I Class was 0.63%. 12

15 Unaudited FINANCIAL HIGHLIGHTS For a share outstanding throughout each period Investor Class 6 Months Ended 6/30/18 Year Ended 12/31/17 12/31/16 12/31/15 12/31/14 12/31/13 NET ASSET VALUE Beginning of period $ $ $ $ $ $ Investment activities Net investment income (1) Net realized and unrealized gain/loss (1.06) (1.37) Total from investment activities (0.81) (0.66) Distributions Net investment income (0.49) (0.56) (0.65) (0.43) (0.41) Net realized gain (2.20) (0.47) (2.09) (3.09) (1.95) Total distributions (2.69) (1.03) (2.74) (3.52) (2.36) NET ASSET VALUE End of period $ $ $ $ $ $

16 Unaudited FINANCIAL HIGHLIGHTS For a share outstanding throughout each period 6 Months Ended 6/30/18 Ratios/Supplemental Data Year Ended 12/31/17 12/31/16 12/31/15 12/31/14 12/31/13 Total return (2) (2.17)% 18.94% 10.96% (1.74)% 13.37% 37.31% Ratio of total expenses to average net assets 0.79% (3) 0.80% 0.82% 0.81% 0.82% 0.84% Ratio of net investment income to average net assets 1.33% (3) 1.30% 1.87% 2.08% 1.23% 1.31% Portfolio turnover rate 79.9% 95.7% 106.5% 68.2% 54.0% 44.1% Net assets, end of period (in millions) $ 19,887 $ 22,677 $ 21,544 $ 21,660 $ 21,583 $ 17,815 (1) (2) (3) Per share amounts calculated using average shares outstanding method. 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. Total return is not annualized for periods less than one year. Annualized The accompanying notes are an integral part of these financial statements. 14

17 Unaudited FINANCIAL HIGHLIGHTS For a share outstanding throughout each period Advisor Class 6 Months Ended 6/30/18 Year Ended 12/31/17 12/31/16 12/31/15 12/31/14 12/31/13 NET ASSET VALUE Beginning of period $ $ $ $ $ $ Investment activities Net investment income (1) Net realized and unrealized gain/loss (1.04) (1.35) Total from investment activities (0.84) (0.73) Distributions Net investment income (0.36) (0.48) (0.56) (0.38) (0.36) Net realized gain (2.20) (0.47) (2.09) (3.09) (1.95) Total distributions (2.56) (0.95) (2.65) (3.47) (2.31) NET ASSET VALUE End of period $ $ $ $ $ $

18 Unaudited FINANCIAL HIGHLIGHTS For a share outstanding throughout each period 6 Months Ended 6/30/18 Ratios/Supplemental Data Year Ended 12/31/17 12/31/16 12/31/15 12/31/14 12/31/13 Total return (2) (2.28)% 18.64% 10.73% (1.97)% 13.13% 36.98% Ratio of total expenses to average net assets 1.02% (3) 1.04% 1.04% 1.05% 1.04% 1.04% Ratio of net investment income to average net assets 1.10% (3) 1.05% 1.62% 1.84% 1.01% 1.10% Portfolio turnover rate 79.9% 95.7% 106.5% 68.2% 54.0% 44.1% Net assets, end of period (in millions) $ 407 $ 439 $ 535 $ 599 $ 652 $ 354 (1) (2) (3) Per share amounts calculated using average shares outstanding method. 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. Total return is not annualized for periods less than one year. Annualized The accompanying notes are an integral part of these financial statements. 16

19 Unaudited FINANCIAL HIGHLIGHTS For a share outstanding throughout each period I Class 6 Months Ended 6/30/18 Year Ended 12/31/17 12/31/16 8/28/15 (1) Through 12/31/15 NET ASSET VALUE Beginning of period $ $ $ $ Investment activities Net investment income (2) Net realized and unrealized gain/loss (1.06) Total from investment activities (0.78) Distributions Net investment income (0.55) (0.62) (0.67) Net realized gain (2.20) (0.47) (2.09) Total distributions (2.75) (1.09) (2.76) NET ASSET VALUE End of period $ $ $ $ Ratios/Supplemental Data Total return (3) (2.09)% 19.16% 11.12% 3.11% Ratio of total expenses to average net assets 0.63% (4) 0.63% 0.64% 0.66% (4) Ratio of net investment income to average net assets 1.52% (4) 1.52% 2.32% 1.61% (4) Portfolio turnover rate 79.9% 95.7% 106.5% 68.2% Net assets, end of period (in millions) $ 4,581 $ 3,508 $ 1,695 $ 157 (1) (2) (3) (4) Inception date. Per share amounts calculated using average shares outstanding method. 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. Total return is not annualized for periods less than one year. Annualized The accompanying notes are an integral part of these financial statements. 17

20 June 30, 2018 (Unaudited) PORTFOLIO OF INVESTMENTS Shares $ Value (Cost and value in $000s) COMMON STOCKS 98.8% CONSUMER DISCRETIONARY 6.8% Auto Components 0.8% Magna International 3,615, , ,150 Hotels, Restaurants & Leisure 1.2% Las Vegas Sands (1) 1,457, ,301 MGM Resorts International (1) 2,301,700 66,818 Norwegian Cruise Line Holdings (1)(2) 2,456, , ,205 Household Durables 0.1% Lennar, Class A (1) 393,772 20,673 20,673 Internet & Direct Marketing Retail 0.9% Booking Holdings (1)(2) 110, , ,140 Media 2.5% Charter Communications, Class A (1)(2) 621, ,083 Comcast, Class A (1) 4,889, ,437 Twenty-First Century Fox, Class B 5,510, , ,003 Specialty Retail 0.7% L Brands 342,000 12,613 Ross Stores (1) 1,978, , ,301 Textiles, Apparel & Luxury Goods 0.6% Hanesbrands (1) 6,874, , ,386 Total Consumer Discretionary 1,693,858 18

21 (Cost and value in $000s) CONSUMER STAPLES 7.2% Shares $ Value Beverages 0.1% PepsiCo 116,000 12,629 12,629 Food Products 5.1% Bunge 2,672, ,329 Tyson Foods, Class A (1)(3) 15,537,246 1,069,739 1,256,068 Household Products 0.7% Kimberly-Clark (1) 1,717, , ,911 Tobacco 1.3% Philip Morris International 4,132, , ,619 Total Consumer Staples 1,783,227 ENERGY 9.7% Oil, Gas & Consumable Fuels 9.7% Apache (1) 245,964 11,499 BP, ADR 5,234, ,014 Canadian Natural Resources 2,054,700 74,113 Chevron 3,339, ,229 Concho Resources (1)(2) 1,564, ,408 ConocoPhillips 1,394,344 97,074 Diamondback Energy (1) 197,200 25,946 EOG Resources (1) 1,855, ,851 Phillips 66 (1) 2,315, ,009 Plains GP Holdings, Class A (1) 3,555,249 85,006 Total, ADR 4,392, ,009 TransCanada (1) 8,407, ,208 Valero Energy (1) 1,190, ,976 Total Energy 2,423,342 19

22 (Cost and value in $000s) FINANCIALS 22.6% Shares $ Value Banks 12.1% Citigroup (1) 4,307, ,228 Fifth Third Bancorp (1) 4,826, ,508 First Republic Bank (1) 2,147, ,837 JPMorgan Chase (1) 5,183, ,075 PNC Financial Services Group 3,478, ,011 U.S. Bancorp (1) 7,867, ,536 Wells Fargo (1) 17,711, ,916 3,020,111 Capital Markets 5.1% Bank of New York Mellon (1) 5,426, ,661 Charles Schwab (1) 4,607, ,446 Intercontinental Exchange 4,179, ,410 Morgan Stanley 3,358, ,175 State Street (1) 2,819, ,454 1,257,146 Insurance 5.4% American International Group (1) 5,303, ,213 Chubb (1) 2,445, ,669 Marsh & McLennan (1) 4,293, ,931 MetLife (1) 5,843, ,771 Willis Towers Watson (1) 874, ,635 1,331,219 Total Financials 5,608,476 HEALTH CARE 14.9% Biotechnology 0.3% Gilead Sciences 950,288 67,318 67,318 Health Care Equipment & Supplies 6.2% Becton Dickinson & Company (1) 1,444, ,111 Boston Scientific (1)(2) 2,039,300 66,685 Cooper (1) 466, ,861 20

23 (Cost and value in $000s) Shares $ Value Danaher (1) 2,260, ,026 Hologic (1)(2) 2,914, ,837 Medtronic 4,758, ,413 Stryker (1) 1,408, ,856 Zimmer Biomet Holdings (1) 332,100 37,009 1,543,798 Health Care Providers & Services 3.2% Aetna 686, ,909 Anthem (1) 508, ,015 Cigna (1) 581,800 98,877 CVS Health (1) 4,683, ,403 UnitedHealth Group (1) 655, , ,975 Life Sciences Tools & Services 1.5% Agilent Technologies (1) 3,672, ,108 Thermo Fisher Scientific (1) 708, , ,802 Pharmaceuticals 3.7% Merck 5,621, ,212 Pfizer (1) 15,636, , ,506 Total Health Care 3,701,399 INDUSTRIALS & BUSINESS SERVICES 7.6% Aerospace & Defense 1.4% Northrop Grumman 1,133, , ,716 Air & Sea Transportation 2.2% Boeing 1,296, ,963 Harris (1) 770, , ,283 Airlines 1.6% American Airlines (1) 8,155, ,574 21

24 (Cost and value in $000s) Shares $ Value Southwest Airlines (1) 1,676,000 85, ,849 Building Products 0.6% Johnson Controls International (1) 4,901, , ,963 Commercial Services & Supplies 0.0% Republic Services 180,700 12,352 12,352 Industrial Conglomerates 0.9% Honeywell International 829, ,458 Roper Technologies (1) 346,288 95, ,002 Machinery 0.7% PACCAR (1) 455,278 28,209 Stanley Black & Decker (1) 1,029, , ,947 Road & Rail 0.2% Kansas City Southern (1) 504,000 53,404 53,404 Total Industrials & Business Services 1,899,516 INFORMATION TECHNOLOGY 13.8% Communications Equipment 2.1% Cisco Systems (1) 12,180, , ,119 Electronic Equipment, Instruments & Components 1.7% Corning (1) 4,999, ,534 Keysight Technologies (2) 4,584, ,601 TE Connectivity 40,649 3, ,796 Internet Software & Services 1.1% Facebook, Class A (1)(2) 1,452, , ,159 22

25 (Cost and value in $000s) Shares $ Value Semiconductors & Semiconductor Equipment 3.4% Applied Materials (1) 3,182, ,986 Broadcom 1,091, ,776 Maxim Integrated Products (1) 931,427 54,637 Texas Instruments (1) 3,543, , ,120 Software 5.5% Microsoft 11,526,700 1,136,648 Synopsys (2) 2,615, ,825 1,360,473 Total Information Technology 3,435,667 MATERIALS 3.7% Chemicals 1.6% CF Industries Holdings (1) 2,059,531 91,443 DowDuPont (1) 4,799, , ,854 Containers & Packaging 2.1% International Paper (1) 9,995, , ,581 Total Materials 928,435 REAL ESTATE 2.3% Equity Real Estate Investment Trusts 2.3% Crown Castle International, REIT (1) 4,265, ,869 SL Green Realty, REIT (1) 692,800 69,647 Weyerhaeuser, REIT 1,163,700 42,428 Total Real Estate 571,944 TELECOMMUNICATION SERVICES 1.7% Diversified Telecommunication Services 1.7% AT&T 8,691, ,076 Verizon Communications 2,776, ,706 Total Telecommunication Services 418,782 23

26 (Cost and value in $000s) UTILITIES 8.5% Shares $ Value Electric Utilities 6.5% Entergy (1) 3,823, ,874 Evergy (1) 4,891, ,656 Eversource Energy (1) 966,833 56,666 NextEra Energy 3,278, ,682 PG&E (1) 4,617, ,539 Southern Company (1) 4,968, ,110 1,614,527 Multi-Utilities 2.0% DTE Energy (1) 812,300 84,179 NiSource (1) 4,431, ,462 Sempra Energy (1) 2,495, , ,359 Total Utilities 2,104,886 Total Common Stocks (Cost $21,154,079) 24,569,532 CONVERTIBLE PREFERRED STOCKS 1.0% HEALTH CARE 0.2% Health Care Equipment & Supplies 0.2% Becton Dickinson & Company, Series A, 6.125%, 5/1/20 879,822 54,454 Total Health Care 54,454 INDUSTRIALS & BUSINESS SERVICES 0.2% Machinery 0.2% Fortive, Series A, 5.00%, 7/1/21 37,574 37,858 Total Industrials & Business Services 37,858 UTILITIES 0.6% Electric Utilities 0.4% NextEra Energy, 6.123%, 9/1/19 (1) 1,716,198 98,044 98,044 24

27 (Cost and value in $000s) Shares $ Value Multi-Utilities 0.2% Sempra Energy, Series A, 6.00%, 1/15/21 484,437 50,535 Total Utilities 148,579 Total Convertible Preferred Stocks (Cost $215,388) 240,891 SHORT-TERM INVESTMENTS 0.5% Money Market Funds 0.5% T. Rowe Price Government Reserve Fund, 1.91% (3)(4) 136,111, ,112 Total Short-Term Investments (Cost $136,112) 136,112 SECURITIES LENDING COLLATERAL 5.3% Investments in a Pooled Account through Securities Lending Program with State Street Bank and Trust Company 5.3% Short-Term Funds 5.3% T. Rowe Price Short-Term Fund, 2.08% (3)(4) 131,428,732 1,314,287 Total Investments through Securities Lending Program with State Street Bank and Trust Company 1,314,287 Total Securities Lending Collateral (Cost $1,314,287) 1,314,287 Total Investments in Securities 105.6% of Net Assets (Cost $22,819,866) $ 26,260,822 Shares are denominated in U.S. dollars unless otherwise noted. (1) All or a portion of this security is on loan at June 30, total value of such securities at period-end amounts to $1,238,124. See Note 3. (2) Non-income producing (3) Affiliated Company (4) Seven-day yield ADR American Depositary Receipts REIT A domestic Real Estate Investment Trust whose distributions pass-through with original tax character to the shareholder 25

28 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 six months ended June 30, 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. Affiliate Net Realized Gain (Loss) Change in Net Unrealized Gain/Loss Investment Income Tyson Foods $ 28,720 $ (209,593) $ 8,889 T. Rowe Price Government Reserve Fund 676 T. Rowe Price Short-Term Fund ++ Totals $ 28,720# $ (209,593) $ 9,565+ Supplementary Investment Schedule Value Affiliate 12/31/17 Purchase Cost Sales Cost Value 6/30/18 Tyson Foods $ 1,208,579 $ 166,899 $ 96,146 $ 1,069,739 T. Rowe Price Government Reserve Fund 254, ,112 T. Rowe Price Short-Term Fund 204,149 1,314,287 $ 2,520,138^ # Capital gain distributions from mutual funds represented $0 of the net realized gain (loss). ++ Excludes earnings on securities lending collateral, which are subject to rebates and fees such as described in Note 4. + Investment income comprised $9,565 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 $2,263,215. The accompanying notes are an integral part of these financial statements. 26

29 June 30, 2018 (Unaudited) STATEMENT OF ASSETS AND LIABILITIES ($000s, except shares and per share amounts) Assets Investments in securities, at value (cost $22,819,866) $ 26,260,822 Receivable for investment securities sold 375,216 Receivable for shares sold 66,642 Dividends receivable 28,407 Other assets 2,913 Total assets 26,734,000 Liabilities Obligation to return securities lending collateral 1,314,287 Payable for investment securities purchased 341,061 Payable for shares redeemed 186,847 Investment management fees payable 13,029 Due to affiliates 1,191 Payable to directors 21 Other liabilities 2,786 Total liabilities 1,859,222 NET ASSETS $ 24, 87 4,778 27

30 June 30, 2018 (Unaudited) STATEMENT OF ASSETS AND LIABILITIES ($000s, except shares and per share amounts) Net Assets Consist of: Undistributed net investment income $ 173,663 Accumulated undistributed net realized gain 1,818,575 Net unrealized gain 3,440,902 Paid-in capital applicable to 681,426,343 shares of $.0001 par value capital stock outstanding; 2,000,000,000 shares authorized 19,441,638 NET ASSETS $ 24, 87 4,778 NET ASSET VALUE PER SHARE Investor Class ($19,886,880,036 / 544,719,709 shares outstanding) $ Advisor Class ($406,619,602 / 11,316,634 shares outstanding) $ I Class ($4,581,278,314 / 125,390,000 shares outstanding) $ The accompanying notes are an integral part of these financial statements. 28

31 Unaudited STATEMENT OF OPERATIONS ($000s) 6 Months Ended 6/30/18 Investment Income (Loss) Income Dividend $ 270,080 Securities lending 1,350 Total income 271,430 Expenses Investment management 79,914 Shareholder servicing Investor Class $ 16,379 Advisor Class 284 I Class 15 16,678 Rule 12b-1 fees Advisor Class 531 Prospectus and shareholder reports Investor Class 85 Advisor Class 12 I Class Custody and accounting 230 Registration 54 Legal and audit 14 Directors 44 Proxy and annual meeting 76 Miscellaneous 119 Total expenses 97,767 Net investment income 173,663 Realized and Unrealized Gain / Loss Net realized gain (loss) Securities 1,700,625 Foreign currency transactions 219 Net realized gain 1,700,844 29

32 Unaudited STATEMENT OF OPERATIONS ($000s) 6 Months Ended 6/30/18 Change in net unrealized gain / loss Securities (2,405,323) Other assets and liabilities denominated in foreign currencies (87) Change in net unrealized gain / loss (2,405,410) Net realized and unrealized gain / loss (704,566) DECREAS E IN NET ASSETS FROM OPERATIO NS $ (530,903) The accompanying notes are an integral part of these financial statements. 30

33 Unaudited STATEMENT OF CHANGES IN NET ASSETS ($000s) 6 Months Ended 6/30/18 Year Ended 12/31/17 Increase (Decrease) in Net Assets Operations Net investment income $ 173,663 $ 331,110 Net realized gain 1,700,844 2,401,683 Change in net unrealized gain / loss (2,405,410) 1,622,281 Increase (decrease) in net assets from operations (530,903) 4,355,074 Distributions to shareholders Net investment income Investor Class (282,037) Advisor Class (4,112) I Class (47,015) Net realized gain Investor Class (1,266,277) Advisor Class (25,127) I Class (188,058) Decrease in net assets from distributions (1,812,626) Capital share transactions* Shares sold Investor Class 685,341 2,357,858 Advisor Class 29, ,315 I Class 1,453,437 1,768,964 Distributions reinvested Investor Class 1,512,339 Advisor Class 28,994 I Class 231,043 Shares redeemed Investor Class (3,053,264) (5,001,507) Advisor Class (52,291) (292,886) I Class (281,122) (405,045) Increase (decrease) in net assets from capital share transactions (1,218,204) 308,075 31

34 Unaudited STATEMENT OF CHANGES IN NET ASSETS ($000s) 6 Months Ended 6/30/18 Year Ended 12/31/17 Net Assets Increase (decrease) during period (1,749,107) 2,850,523 Beginning of period 26,623,885 23,773,362 E n d o f p e r i o d $ 2 4, 8 7 4, $ 2 6, 6 2 3, Undistributed net investment income 173,663 *Share information Shares sold Investor Class 18,412 64,334 Advisor Class 805 3,016 I Class 38,903 48,477 Distributions reinvested Investor Class 40,731 Advisor Class 792 I Class 6,222 Shares redeemed Investor Class (81,404) (137,644) Advisor Class (1,425) (8,007) I Class (7,518) (11,070) Increase (decrease) in shares outstanding (32,227) 6,851 The accompanying notes are an integral part of these financial statements. 32

35 Unaudited NOTES TO FINANCIAL STATEMENTS, Inc. (the fund) is registered under the Investment Company Act of 1940 (the 1940 Act) as a diversified, open-end management investment company. The fund seeks to provide long-term capital appreciation by investing in common stocks believed to be undervalued. Income is a secondary objective. The fund has three classes of shares: the Value Fund (Investor Class), the Value Fund Advisor Class (Advisor Class), and the Value Fund I Class (I Class). Advisor Class shares are sold only through unaffiliated brokers and other unaffiliated financial intermediaries. I Class shares generally are available only to investors meeting a $1,000,000 minimum investment or certain other criteria. The Advisor Class operates under a Board-approved Rule 12b-1 plan pursuant to which the class compensates financial intermediaries for distribution, shareholder servicing, and/or certain administrative services; the Investor and I Classes do not pay Rule 12b-1 fees. Each class has exclusive voting rights on matters related solely to that class; separate voting rights on matters that relate to all classes; and, in all other respects, the same rights and obligations as the other classes. 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, are recorded as income tax expense. Distributions from REITs are initially recorded as dividend income and, to the extent such represent a return of capital or capital gain for tax purposes, are reclassified when such information becomes 33

36 available. Income distributions, if any, 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. 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 all 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 5), the waiver or reimbursement is charged to the applicable class or allocated across the classes in the same manner as the related expense. The Advisor Class pays Rule 12b-1 fees, in an amount not exceeding 0.25% of the class s average daily net assets. 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 reflected as realized gain on securities in the accompanying financial statements and totaled $39,000 for the six months ended June 30, In-Kind Redemptions In accordance with guidelines described in the fund s prospectus, and when considered to be in the best interest of all shareholders, the fund may distribute portfolio securities rather than cash as payment for a redemption of fund shares (in-kind redemption). Gains and losses realized on in-kind redemptions are not recognized for tax purposes and are reclassified from undistributed realized gain (loss) to paid-in capital. During the six months ended June 30, 2018, the fund realized $442,755,000 of net gain on $1,393,739,000 of in-kind redemptions. 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. 34