ANNual REPORT May 31, 2017 T. Rowe Price Personal Strategy Funds The funds invest for growth, income, or both through diversified portfolios of stocks, bonds, and money market securities.
T. Rowe Price Personal Strategy Funds HIGHLIGHTS Global stocks rallied over the past 12 months as improving growth worldwide, stronger earnings, and stable commodity prices lifted developed and emerging stock markets. U.S. investment-grade bonds generated modest positive returns, while high yield bonds posted double-digit returns amid buoyant demand for riskier assets. Non-U.S. dollar-denominated debt ended nearly flat, as strong performance in our fiscal year s second half offset first-half declines. The Personal Strategy Funds posted double-digit gains in the 12 months ended May 31, 2017. Each fund outperformed its respective combined index benchmark and Lipper peer group index. We expect that the broadening of global growth seen since the end of 2016 will continue for the next several quarters, albeit at modest levels, as increased global trade benefits export-oriented developed and emerging economies. However, financial markets face numerous geopolitical and macroeconomic headwinds in the near term. We believe that the Personal Strategy Funds broadly diversified profiles provide stability in an environment of policy and economic uncertainty and the flexibility to uncover investment opportunities across sectors and regions. The views and opinions in this report were current as of May 31, 2017. 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 Email 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.
T. Rowe Price Personal Strategy Funds Manager s Letter Fellow Shareholders A recovery in global economic growth starting at the end of 2016 continued to gain momentum in 2017. U.S. stocks surged as the major market indexes set new records this year against a backdrop of improving corporate earnings growth. Stocks in international developed and emerging markets rallied as the global recovery translated into increased trade, benefiting Japan and Europe and export-driven economies in the developing world. In fixed income, U.S. investment-grade bonds advanced amid strong investor demand in a low-yield environment globally, while high yield bonds benefited from stabilizing oil prices. Non-U.S. dollar-denominated debt ended nearly flat as declines in our reporting period s first half were offset by second-half gains resulting from stronger global currencies against the dollar. In this supportive environment, the Personal Strategy Funds generated double-digit gains in the 12 months ended May 31, 2017. Each fund outperformed its respective combined index benchmark and Lipper peer group index. Market Environment Evidence of stronger growth appeared in both developed and emerging markets over the past year and provided a positive backdrop for global financial markets. During our 12-month reporting period, U.S. stocks surged as the postelection rally continued into 2017, pushing the S&P 500 Index to record levels in May, amid investor optimism about business-friendly policies under President Donald Trump. Small-cap stocks have lagged in 2017, though they outperformed their larger counterparts over the full period given strong performance in last year s second half as investors deemed that smaller companies with greater 1
exposure to the domestic economy would benefit more from the relaxed regulations, lower taxes, and infrastructure spending advocated by the Trump administration. The U.S. economy grew at a revised 1.2% annual pace in this year s first quarter, higher than initially forecast but continuing a modest growth trend since the recession ended in mid-2009. Citing an improving labor market and rising inflation, the Federal Reserve raised interest rates by 25 basis points in December 2016 and March 2017. After the two hikes, the range for the fed funds target rate was 0.75% to 1.00%. (The Fed also raised rates in June, shortly after the end of the reporting period.) Stocks in developed European markets rose as corporate earnings and economic growth picked up across the Continent. The eurozone economy grew at a revised 1.9% pace in this year s first quarter from a year ago, marking the currency bloc s fastest growth rate since the first quarter of 2015. Against a Major Index Returns Periods Ended 5/31/17 6 Months 12 Months S&P 500 Index 10.81% 17.47% Russell 3000 Index 10.06 17.69 MSCI All Country World Index ex USA 17.01 18.80 MSCI Emerging Markets Index 17.68 27.88 Bloomberg Barclays U.S. Aggregate Bond Index 2.52 1.58 Citigroup 3-Month Treasury Bill Index 0.26 0.41 Credit Suisse High Yield Index 6.49 14.35 Bloomberg Barclays Global Aggregate ex USD Bond Index 5.19-0.04 Note: Unlike stocks and bonds, U.S. Treasuries are guaranteed as to the timely payment of principal and interest. backdrop of an improving economy, markets began to anticipate that the European Central Bank would start winding down its bond-buying program, though the ECB recently affirmed its intention to keep buying bonds at least through the end of this year. Japanese stocks advanced as that country s economy also gained momentum. Japan s gross domestic product expanded for the fifth straight quarter in the first three months of 2017 its longest growth streak in more than a decade fueled by export demand and domestic spending. Japan continued to struggle with deflation, however, and its central bank introduced a 0% target rate on 10-year government bonds in an effort to control the yield curve the latest of many unprecedented actions intended to generate sustained growth and inflation. 2
Emerging markets stocks rallied as signs of economic recovery worldwide arose this year and instilled more confidence in the global growth outlook. Emerging markets assets plunged last November shortly after the U.S. election as worries about protectionism and rising U.S. interest rates caused Interest Rate Levels a sell-off in developing world assets. However, 8% 10-Year Treasury Note 5-Year Treasury Note the asset class rebounded 7 90-Day Treasury Bill in subsequent months as 6 steady growth in China, 5 rising energy prices, and 4 improved earnings growth 3 in many countries revived investors risk appetite. 2 1 0 5/31/16 8/16 11/16 2/17 5/31/17 Source: Federal Reserve Board. U.S. investment-grade bonds generated slightly positive returns as bond prices rose and yields fell over the second half of the period. Treasury yields rose sharply in the last few months of 2016 amid hopes that the Trump administration would cut taxes and increase infrastructure spending, but retraced much of their gains in recent months as geopolitical risks rose and investors surmised that the president s expansionary fiscal policies would take longer than expected to materialize. Treasury yields still ended the reporting period at higher levels than they were at the start, with the yield on the benchmark 10-year note increasing to 2.21% at the end of May from 1.84% a year earlier. High yield bonds rallied as they benefited from commodity prices stabilizing well above their lows in early 2016 and strong demand in an environment of low yields on government bonds in most developed markets. Non-U.S. dollar-denominated bonds in developed markets ended nearly flat as second-half gains resulting from stronger overseas currencies offset first-half declines. Most global currencies appreciated against the dollar starting in January 2017, bolstering the more recent returns of non-u.s. developed markets debt in dollar terms. The gains in most currencies versus the dollar this year helped offset declining prices of government bonds in local currency terms as yields increased in many developed markets. Dollar-denominated emerging markets bonds also advanced, overcoming a post-u.s. election sell-off, as relatively higher interest rates in developing countries attracted yieldseeking investors. 3
Introducing New Underlying Investment Strategies On October 1, 2016, we introduced three new underlying investment strategies to the Personal Strategy Funds. The inclusion of these strategies follows extensive quantitative and qualitative analysis in evaluating their prospective impact on the Personal Strategy Funds as we sought to add diversifying investment strategies that would benefit the risk/return profile of the portfolios. The changes include a new allocation to alternatives through a hedge fund-of-funds, as well as initiating an investment in the T. Rowe Price Dynamic Global Bond Fund and an equity index option strategy. We believe that a modest allocation to a hedge fund-of-funds with exposure to multiple hedge fund strategies and managers can benefit diversification by offering returns that historically have been less correlated with traditional stock and bond asset classes in the Personal Strategy Funds. The allocation to the Dynamic Global Bond Fund aims to diversify the Personal Strategy Funds fixed income investments by including a lower-volatility strategy with less strategic sensitivity to interest rate changes than traditional bond strategies, but with the flexibility to opportunistically adjust its exposure. This fund invests in various fixed income sectors offering the potential to add value from sources such as interest rates, credit, and currency, expressing both long and short views, while seeking to reduce downside risk and diversify against stock market volatility and rising rates. Finally, the equity index option strategy provides an alternative means of compensation for bearing the downside risk of equities. We expect this strategy, which involves selling call options on the Standard & Poor s 500 Index, to generate returns that are less correlated with the broader stock market as it earns a premium in exchange for forgoing some of the stock market s upside potential. The consistency of receiving the premium collected from selling index call options, coupled with the lower equity exposure associated with writing call options, can provide a more stable pattern of returns. We believe this strategy can be particularly beneficial by providing an alternative source of return in flat to lower equity markets. PORTFOLIO REVIEW AND POSITIONING Asset Allocation The Personal Strategy Funds have the ability to overweight or underweight allocations to asset classes or sub-asset classes based on the views of the T. Rowe Price Asset Allocation Committee. The 4
committee meets on a monthly basis to evaluate economic, market, and earnings trends, among other factors, and to look for opportunities over a 6- to 18-month investment horizon. We typically seek to overweight segments of the market that we believe are attractively valued and underweight areas that are more richly valued. Several years of strong performance have left valuations at or above fair value in many asset classes, reducing the number of compelling investment opportunities. Nevertheless, we are still finding opportunities in select areas where valuations appear more attractive and have reduced allocations where we see potential risks. As of May 31, 2017, we are underweight stocks relative to bonds. We initiated this underweight in January after last November s postelection stock market rally and further reduced our exposure in the ensuing months as we believed that stock valuations and earnings forecasts appeared extended against a backdrop of low growth and greater policy uncertainty. As for bonds, we expect modest returns given that the current low-yield environment offers a weak foundation for future returns and the potential for capital losses as interest rates rise. However, global monetary policies are expected to stay accommodative this year, which should temper downside risks to bonds. Furthermore, we believe that any rise in U.S. interest rates will be limited as growth remains subdued. Strong demand for U.S. bonds for their added yield over other developed markets bonds should also restrain a rise in long-term yields. Stocks We ended our fiscal year overweight to international stocks relative to U.S. stocks based on signs of improving economic fundamentals and stronger earnings growth outside the U.S., particularly in Europe, though this relative positioning fluctuated over the period. Europe is benefiting from greater political certainty following Emmanuel Macron s presidential election victory in France, stronger economic growth, and accommodative monetary policies. In Japan, stocks are more attractively valued compared with U.S. stocks. Moreover, we believe that Japanese stocks stand to benefit from greater emphasis on shareholder-friendly policies and corporate governance reflected in higher dividend payouts and more representation of outside directors. We gradually pared our overweight allocation to emerging markets stocks over the past 12 months and were underweight to the asset class relative to developed market stocks at period-end. Our positioning reflects the risk of a renewed decline in energy and commodity prices, as well as concerns about protectionist trade policies and the adverse impact of rising interest rates in developed markets. 5
We maintained an underweight to real assets equities over the past year given our cautious outlook for energy and commodity prices. Despite ongoing efforts to curb output by the world s top oil producers, prices are still under pressure from persistent global oversupply as rising prices encourage U.S. producers to increase production. Additionally, industrial metals demand will likely stay subdued as China rebalances its economy to reduce its dependency on industrial production. As for real estate investment trusts (REITs), we believe that fundamentals for REITs in developed markets remain positive, though they remain sensitive to rising interest rates. At the end of our reporting period, we initiated an overweight to U.S. small-cap stocks relative to large-caps, departing from our longstanding underweight to the asset class. We initiated the change based on improving relative valuations following recent underperformance for small-cap stocks, which have lagged large-caps since the start of 2017 amid diminished expectations for pro-growth policies. We are overweight U.S. growth versus value stocks due to more attractive valuations for growth stocks, as well as our expectations for a low-growth environment. While stepped-up spending, tax cuts, and deregulation espoused by the Trump administration would likely support value sectors like financials and energy, the prospects for these measures receiving congressional approval and the final scope of these proposals appear uncertain. Bonds We moved to a neutral allocation to high yield bonds relative to U.S. investment-grade bonds in April, having gradually reduced our overweight as spreads in the high yield sector fell below historical averages following strong performance. Despite the yield advantage that high yield debt has over investment-grade bonds, we believe that current yield levels offer limited room for further appreciation and a weak buffer against risks such as a downturn in commodity prices. We moved to neutral between emerging markets bonds and U.S. investment-grade bonds in February, as valuations became less compelling given a strong rally following the presidential election. Though emerging markets have benefited from stronger commodity prices since the start of 2016, concerns about protectionist trade policies, rising interest rates in developed markets, and U.S. dollar strength continue to weigh on the asset class. Furthermore, while 6
developing economies are broadly in better fiscal shape than they were just a few years ago, individual countries differ widely in their fiscal positions, political stability, and reform progress. We were underweight to nondollar bonds relative to U.S. investmentgrade bonds for most of our fiscal year, though we reduced the size of our underweight this spring. Yields outside the U.S. have increased over the year but remain at historically low levels, leaving developed markets bonds with an unattractive risk/reward trade-off. Moreover, we are underweight to nondollar bonds as the current growth and interest rate environment should be supportive for the U.S. dollar. However, we have moderated our underweight to nondollar bonds since the start of 2017 as growth outside the U.S. is picking up and global central banks prepare to unwind their accommodative monetary policies. PERFORMANCE COMPARISON Personal Strategy Income Fund The investment objective of the Personal Strategy Income Fund is to generate the highest total return consistent with a primary emphasis on income and a secondary emphasis on capital appreciation. Effective October 1, 2016, the fund s typical asset mix is 40% stocks, 55% bonds and cash, and 5% alternatives. The stock and bond allocations can vary as much as 10 percentage points above or below these targets, while the alternatives allocation can vary as much as five percentage points above or below its target. As shown in the Performance Comparison table on page 8, the Personal Strategy Income Fund returned 7.62% and 10.06% for the six and 12 months ended May 31, 2017, respectively. The fund outperformed its combined index benchmark and its Lipper peer group index over both periods. The Personal Strategy Income Fund s performance versus its peers over longer time periods remained excellent: The fund is in the top decile of its Lipper peer group for the trailing 1-, 3-, 5-, and 10-year periods. Based on cumulative total return, Lipper ranked the fund 29 of 360, 24 of 314, 9 of 279, and 10 of 207 mixed-asset target allocation conservative funds for the 1-, 3-, 5-, and 10-year periods ended May 31, 2017, respectively. (Past performance cannot guarantee future results.) 7
Performance Comparison Total Return Periods Ended 5/31/17 6 Months 12 Months Personal Strategy Income Fund 7.62% 10.06% Personal Strategy Income Fund I Class 7.62 10.12 Morningstar Moderately Conservative Target Risk Index 6.12 8.20 Combined Index Benchmark 5.81 7.72 Lipper Mixed-Asset Target Allocation Conservative Funds Index 5.14 7.01 For a definition of the benchmarks, please see the glossary at the end of this report. The inclusion of diversifying sectors, especially those within fixed income, contributed the most to relative performance. Our exposure to high yield bonds lifted relative returns as high yield debt surged over the past year amid strong demand from yield-seeking investors and a rebound in oil prices that benefited the commodity producers that dominate the high yield market. Our exposure to emerging markets bonds also helped as relatively higher yields in many developing countries supported demand and drove strong performance in dollar-denominated emerging markets debt. Conversely, an allocation to real assets detracted from relative performance as real assets equities lagged broader equity markets over the period. Security selection in the fund s underlying investments also helped relative performance. Selection in the fund s U.S. large-cap growth stocks added the most to relative returns, followed by selection in emerging markets bonds and international developed markets stocks. These underlying funds outpaced their respective benchmarks over the period. On the other hand, selection in investment-grade and high yield bonds detracted from relative performance as both underlying funds trailed their respective benchmarks in the past year. Tactical decisions to overweight and underweight asset classes had a modestly positive impact on relative returns, as the positive contribution from underweighting real assets equities offset the drag from our underweight to small-cap stocks. Technology stocks led contributors as investors piled into fast-growing tech companies on hopes that they would outperform the overall economy. Amazon.com, Microsoft, Facebook, and Google parent company Alphabet ranked among the fund s top contributors to 8
absolute returns. Banks and industrial companies such as Morgan Stanley, JPMorgan Chase, and Boeing performed well as investors bet that they would benefit from tax cuts, looser regulations, and infrastructure spending under the Trump administration. Among non- U.S. stocks, Chinese Internet companies Alibaba and Tencent were standout performers as both solidified their dominant positions in China s fast-growing online economy. On the other hand, UK mobile phone operator Vodafone and Royal Bank of Scotland ranked among the biggest detractors as their shares fell amid Brexit-related concerns. Other large detractors included Bristol-Myers Squibb, which suffered from unfavorable clinical results for a key cancer drug last summer, and Tyson Foods, whose shares fell amid various setbacks including disappointing earnings and allegations of antitrust violations. (Please refer to the fund s portfolio of investments for a complete list of holdings and the amount each represents in the portfolio.) Personal Strategy Balanced Fund The investment objective of the Personal Strategy Balanced Fund is to generate the highest total return consistent with an equal emphasis on income and capital appreciation. Effective October 1, 2016, the fund s typical asset mix is 60% stocks, 35% bonds and cash, and 5% alternatives. The stock and bond allocations can vary as much as 10 percentage points above or below these targets, while the alternatives allocation can vary as much as five percentage points above or below its target. This asset allocation entails higher risk but a higher potential return than the Personal Strategy Income Fund over the long term. As shown in the Performance Comparison table on page 10, the Personal Strategy Balanced Fund returned 9.80% and 13.32% for the six and 12 months ended May 31, 2017, respectively. The fund outperformed its combined index benchmark and its Lipper peer group index over both periods. The Personal Strategy Balanced Fund s performance versus its peers over longer time periods remained excellent: The fund is in the top decile of its Lipper peer group for the trailing 1-, 5-, and 10-year periods and in the top quintile for the trailing three-year period. Based on cumulative total return, Lipper ranked the fund 44 of 567, 62 of 510, 41of 464, and 14 of 336 mixed-asset target allocation moderate funds for the 1-, 3-, 5-, and 10-year periods ended May 31, 2017, respectively. (Past performance cannot guarantee future results.) 9
Performance Comparison Total Return Periods Ended 5/31/17 6 Months 12 Months Personal Strategy Balanced Fund 9.80% 13.32% Personal Strategy Balanced Fund I Class 9.84 13.48 Morningstar Moderate Target Risk Index 7.89 11.46 Combined Index Benchmark 7.96 11.15 Lipper Mixed-Asset Target Allocation Moderate Funds Index 7.49 11.02 For a definition of the benchmarks, please see the glossary at the end of this report. Security selection in the fund s underlying investments contributed the most to relative performance. Selection in the fund s U.S. large-cap growth stocks added the most to relative returns, followed by selection in international developed markets stocks and emerging markets bonds. These underlying funds outpaced their respective benchmarks over the period. On the other hand, selection in real assets equities, small-cap stocks, and high yield bonds detracted from relative performance as these underlying funds trailed their respective benchmarks in the past year. The inclusion of diversifying sectors, especially those within fixed income, also helped relative performance. Our exposure to high yield bonds lifted relative returns as high yield debt surged over the past year amid strong demand from yield-seeking investors and a rebound in oil prices that benefited the commodity producers that dominate the high yield market. Our exposure to emerging markets bonds also helped as relatively higher yields in many developing countries supported demand and drove strong performance in dollardenominated emerging markets debt. Conversely, an allocation to real assets detracted from relative performance as real assets equities lagged the blended equity benchmark over the period. Tactical decisions to overweight and underweight asset classes had a modestly positive impact on relative returns, as the positive contribution from underweighting real assets equities offset the drag from our underweight to small-cap stocks. Technology stocks led contributors as investors piled into fast-growing tech companies on hopes that they would outperform the overall economy. Amazon.com, Microsoft, Facebook, and Google parent company Alphabet ranked among the fund s top contributors to 10
absolute returns. Banks and industrial companies such as Morgan Stanley, JPMorgan Chase, and Boeing performed well as investors bet that they would benefit from tax cuts, looser regulations, and infrastructure spending under the Trump administration. Among non-u.s. stocks, Chinese Internet companies Alibaba and Tencent were standout performers as both solidified their dominant positions in China s fast-growing online economy. On the other hand, UK mobile phone operator Vodafone and Royal Bank of Scotland ranked among the biggest detractors as their shares fell amid Brexitrelated concerns. Other large detractors included Bristol-Myers Squibb, which suffered from unfavorable clinical results for a key cancer drug last summer, and Tyson Foods, whose shares fell amid various setbacks including disappointing earnings and allegations of antitrust violations. (Please refer to the fund s portfolio of investments for a complete list of holdings and the amount each represents in the portfolio.) Personal Strategy Growth Fund The investment objective of the Personal Strategy Growth Fund is to seek capital appreciation by investing primarily in common stocks. Effective October 1, 2016, the fund s typical asset mix is 80% stocks, 16% bonds and cash, and 4% alternatives. The allocation to stocks can vary as much as 10 percentage points above or below its target, while the allocation to bonds and cash can vary between 5% and 25%. The alternatives allocation can range from 0% to 10% of the fund. This asset allocation entails higher risk but also a higher potential long-term return than the Personal Strategy Income Fund and the Personal Strategy Balanced Fund. As shown in the Performance Comparison table on page 12, the Personal Strategy Growth Fund returned 11.97% and 16.56% for the six and 12 months ended May 31, 2017, respectively. The fund outperformed its combined index benchmark and its Lipper peer group index over both periods. The Personal Strategy Growth Fund s performance versus its peers over longer time periods remained excellent: The fund is in the top decile of its Lipper peer group for the trailing one- and five-year periods and in the top quintile in the trailing 3- and 10-year periods. Based on cumulative total return, Lipper ranked the fund 11 of 500, 60 of 446, 10 of 411, and 47 of 319 mixed-asset target allocation growth funds for the 1-, 3-, 5-, and 10-year periods ended May 31, 2017, respectively. (Past performance cannot guarantee future results.) 11
Performance Comparison Total Return Periods Ended 5/31/17 6 Months 12 Months Personal Strategy Growth Fund 11.97% 16.56% Personal Strategy Growth Fund I Class 12.03 16.67 Morningstar Moderately Aggressive Target Risk Index 9.93 14.91 Combined Index Benchmark 10.15 14.65 Lipper Mixed-Asset Target Allocation Growth Funds Index 8.84 12.95 For a definition of the benchmarks, please see the glossary at the end of this report. Security selection in the fund s underlying investments contributed the most to relative performance. Selection in the fund s U.S. largecap growth stocks added the most to relative returns, followed by selection in international developed markets stocks. These underlying funds outpaced their respective benchmarks over the period. On the other hand, selection in real assets equities and small-cap stocks detracted from relative performance as both underlying funds trailed their respective benchmarks in the past year. The inclusion of diversifying sectors, especially those within fixed income, also helped relative performance. Our exposure to high yield bonds lifted relative returns as high yield debt surged over the past year amid strong demand from yield-seeking investors and a rebound in oil prices that benefited the commodity producers that dominate the high yield market. Our exposure to emerging markets bonds also helped as relatively higher yields in many developing countries supported demand and drove strong performance in dollar-denominated emerging markets debt. Conversely, an allocation to real assets detracted from relative performance as real assets equities lagged the blended equity benchmark over the period. Tactical decisions to overweight and underweight asset classes had a modestly positive impact on relative returns, as the positive contribution from underweighting real assets equities offset the drag from our underweight to small-cap stocks. Technology stocks led contributors as investors piled into fast-growing tech companies on hopes that they would outperform the overall economy. Amazon.com, Microsoft, Facebook, and Google parent company Alphabet ranked among the fund s top contributors to absolute returns. Banks and industrial companies such as Morgan Stanley, JPMorgan Chase, and Boeing performed well as investors 12
bet that they would benefit from tax cuts, looser regulations, and infrastructure spending under the Trump administration. Among non- U.S. stocks, Chinese Internet companies Alibaba and Tencent were standout performers as both solidified their dominant positions in China s fast-growing online economy. On the other hand, UK mobile phone operator Vodafone and Royal Bank of Scotland ranked among the biggest detractors as their shares fell amid Brexit-related concerns. Other large detractors included Bristol-Myers Squibb, which suffered from unfavorable clinical results for a key cancer drug last summer, and Tyson Foods, whose shares fell amid various setbacks including disappointing earnings and allegations of antitrust violations. (Please refer to the fund s portfolio of investments for a complete list of holdings and the amount each represents in the portfolio.) Outlook We expect that the modest global recovery that began at the end of 2016 will continue as improving global trade boosts export-oriented developed and emerging economies. We are encouraged to see evidence of stronger growth across most developed and emerging markets, an uncommon development in the current economic cycle. This improving economic environment should serve as a supportive catalyst to earnings growth. Outside the U.S., growth in Europe is expected to improve this year, supported by rising household consumption, improving business investment, and increased global trade. Fears about a disorderly breakup of the euro have subsided after mainstream candidates won several key elections this year. Japan s recent growth streak offers evidence that years of unorthodox fiscal and monetary stimulus under Abenomics may finally be working, though the country still struggles with weak consumption and low inflation. In emerging markets, growth is expected to pick up as Brazil and Russia exit recession, though recent corruption charges against Brazil s president may slow reform momentum. Growth is expected to moderate in China, which is in the midst of a long-term transition to slower but more sustainable growth as Beijing tries to rebalance the drivers of economic activity. Our outlook is tempered by several issues that could disrupt global markets in the near term. These risks include a potential misstep in monetary policy by the Fed or the possibility that U.S. fiscal policy will disappoint investors expectations. Given that U.S. stocks are trading 13
near record price levels based on hopes for infrastructure spending, lower taxes, and deregulation promised by President Trump, any setback regarding the passage of these measures could derail the rally. In Europe, sovereign risks remain with Germany s federal election and a possible early election in Italy set to occur this fall. Meanwhile, several European countries are still grappling with high debt and unemployment. In emerging markets, the prospect of reduced global trade and cross-border investment flows resulting from a shift toward U.S. protectionism remains a risk, as does a recent decline in energy prices. Finally, unexpected geopolitical developments could potentially curtail the global recovery, particularly given rising tensions with North Korea and in the South China Sea. We believe that the broadening of global growth that began late last year will continue, albeit at modest levels, for the next several quarters. Nevertheless, we are mindful of the many geopolitical and policy developments that could undermine the current recovery. Given the numerous crosscurrents affecting global financial markets, we believe that the Personal Strategy Funds broad diversification and T. Rowe Price s strengths in fundamental research will allow us to continue generating solid returns for our shareholders over the long run. Thank you for investing with T. Rowe Price. Respectfully submitted, Charles Shriver Portfolio manager and chairman of the funds Investment Advisory Committee June 14, 2017 The committee chairman has day-to-day responsibility for managing the portfolios and works with committee members in developing and executing the funds investment programs. 14
T. Rowe Price Personal Strategy Funds Risks of Investing As with all stock and bond mutual funds, each fund s share price can fall because of weakness in the stock or bond markets, a particular industry, or specific holdings. Stock markets can decline for many reasons, including adverse political or economic developments, changes in investor psychology, or heavy institutional selling. The prospects for an industry or company may deteriorate because of a variety of factors, including disappointing earnings or changes in the competitive environment. In addition, the investment manager s assessment of companies held in a fund may prove incorrect, resulting in losses or poor performance even in rising markets. Bonds are subject to interest rate risk, the decline in bond prices that usually accompanies a rise in interest rates, and credit risk, the chance that any fund holding could have its credit rating downgraded or that a bond issuer will default (fail to make timely payments of interest or principal), potentially reducing the fund s income level and share price. High yield corporate bonds could have greater price declines than funds that invest primarily in high-quality bonds. Companies issuing high yield bonds are not as strong financially as those with higher credit ratings, so the bonds are usually considered speculative investments. Funds that invest overseas may carry more risk than funds that invest strictly in U.S. assets. Risks can result from varying stages of economic and political development; differing regulatory environments, trading days, and accounting standards; and higher transaction costs of non-u.s. markets. Non-U.S. investments are also subject to currency risk, or a decline in the value of a foreign currency versus the U.S. dollar, which reduces the dollar value of securities denominated in that currency. Glossary Bloomberg Barclays Global Aggregate ex U.S. Dollar Bond Index: Tracks the performance of government, corporate, agency, and mortgage-related bonds in Europe, the Asia- Pacific region, and Canada. Bloomberg Barclays U.S. Aggregate Bond Index: An unmanaged index that tracks investment-grade bonds, including corporate, government, and mortgagebacked securities. Citigroup 3-Month Treasury Bill Index: An unmanaged index that tracks short-term U.S. government debt instruments. Combined index benchmarks: Unmanaged portfolios composed of the following underlying indexes as of May 31, 2016: Personal Strategy Income 40% stocks (28% Russell 3000 Index, 12% MSCI All Country World Index ex USA), 40% bonds (Bloomberg Barclays U.S. Aggregate Bond Index), and 20% money market securities (Citigroup 3-Month Treasury Bill Index). 15
T. Rowe Price Personal Strategy Funds Glossary (continued) Personal Strategy Balanced 60% stocks (42% Russell 3000 Index, 18% MSCI All Country World Index ex USA), 30% bonds (Bloomberg Barclays U.S. Aggregate Bond Index), and 10% money market securities (Citigroup 3-Month Treasury Bill Index). Personal Strategy Growth 80% stocks (56% Russell 3000 Index, 24% MSCI All Country World Index ex USA) and 20% bonds (Bloomberg Barclays U.S. Aggregate Bond Index). Credit Suisse High Yield Index: Tracks the performance of domestic noninvestment-grade corporate bonds. Federal funds rate (or target rate): The interest rate charged on overnight loans of reserves by one financial institution to another in the United States. The Federal Reserve sets a target federal funds rate to affect the direction of interest rates. Gross domestic product: The total market value of all goods and services produced in a country in a given year. Lipper Mixed-Asset Target Allocation Conservative Funds Index: A peer group benchmark that measures the performance of similar funds with a mix of between 20% and 40% equities, with the remainder invested in bonds and short-term investments. Lipper Mixed-Asset Target Allocation Growth Funds Index: A peer group benchmark that measures the performance of similar funds with a mix of between 60% and 80% equities, with the remainder invested in bonds and short-term investments. Lipper Mixed-Asset Target Allocation Moderate Funds Index: A peer group benchmark that measures the performance of similar funds with a mix of between 40% and 60% equities, with the remainder invested in bonds and short-term investments. Morningstar Moderate Target Risk Index: Represents a portfolio of global equities (fixed at 60%), bonds, and other asset classes. Morningstar Moderately Aggressive Target Risk Index: Represents a portfolio of global equities (fixed at 80%), bonds, and other asset classes. Morningstar Moderately Conservative Target Risk Index: Represents a portfolio of global equities (fixed at 40%), bonds, and other asset classes. MSCI All Country World Index ex USA: An index that measures equity market performance of developed and emerging countries, excluding the U.S. MSCI Emerging Markets Index: A capitalization-weighted index of stocks from emerging market countries that only includes securities that may be traded by foreign investors. 16
T. Rowe Price Personal Strategy Funds Glossary (continued) Russell 3000 Index: An index that tracks the performance of the 3,000 largest U.S. companies, representing approximately 98% of the investable U.S. equity market. S&P 500 Index: An index that tracks the stocks of 500 primarily large-cap U.S. companies. Note: Bloomberg Index Services Ltd. Copyright 2017, Bloomberg Index Services Ltd. Used with permission. 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. Note: Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell indexes. Russell is a trademark of Russell Investment Group. 17
T. Rowe Price Personal Strategy Funds Portfolio Highlights PORTFOLIO OVERVIEW Personal Strategy Income Reserves 7.6% Bonds 49.1 Stocks 38.4 Hedged Fund 4.9 Total 100.0% Percent of Percent of Net Assets Net Assets 5/31/17 5/31/17 Largest Stock Holdings Amazon.com 1.1% Alphabet 0.8 Microsoft 0.8 Facebook 0.6 JPMorgan Chase 0.6 Personal Strategy Balanced Reserves 1.5% Bonds 35.1 Stocks 58.2 Hedged Fund 5.2 Total 100.0 Largest Stock Holdings Amazon.com 1.6% Alphabet 1.3 Microsoft 1.2 Facebook 0.9 JPMorgan Chase 0.9 Personal Strategy Growth Reserves 1.4% Bonds 16.6 Stocks 78.2 Hedged Fund 3.8 Total 100.0 Largest Stock Holdings Amazon.com 2.1% Alphabet 1.7 Microsoft 1.6 Facebook 1.3 JPMorgan Chase 1.2 18
T. Rowe Price Personal Strategy Funds 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. PERSONAL STRATEGY INCOME FUND $35,000 30,000 25,000 20,000 15,000 10,000 As of 5/31/17 Personal Strategy Income Fund $17,017 Linked Performance Benchmark* $19,534 Morningstar Moderately Conservative Target Risk Index $16,037 Lipper Mixed-Asset Target Allocation Conservative Funds Index $15,323 5/07 5/08 5/09 5/10 5/11 5/12 5/13 5/14 5/15 5/16 5/17 Note: Performance for the I Class will vary due to its differing fee structure. See returns table below. *The linked performance benchmark reflects the performance of the Bloomberg Barclays U.S. Aggregate Bond Index to 6/30/09 and the performance of the Morningstar Moderately Conservative Target Risk Index from 7/1/09 forward. Average Annual Compound Total Return Since Inception Periods Ended 5/31/17 1 Year 5 Years 10 Years Inception Date Personal Strategy Income Fund 10.06% 7.61% 5.46% Personal Strategy Income Fund I Class 10.12 10.44% 3/23/16 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. 19
T. Rowe Price Personal Strategy Funds 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. PERSONAL STRATEGY BALANCED FUND $35,000 30,000 25,000 20,000 15,000 10,000 As of 5/31/17 Personal Strategy Balanced Fund $17,800 Linked Performance Benchmark* $15,791 Morningstar Moderate Target Risk Index $16,624 Lipper Mixed-Asset Target Allocation Moderate Funds Index $15,449 5/07 5/08 5/09 5/10 5/11 5/12 5/13 5/14 5/15 5/16 5/17 Note: Performance for the I Class will vary due to its differing fee structure. See returns table below. *The linked performance benchmark reflects the performance of the Merrill Lynch-Wilshire Capital Market Index to 6/30/09 and the performance of the Morningstar Moderate Target Risk Index from 7/1/09 forward. Average Annual Compound Total Return Since Inception Periods Ended 5/31/17 1 Year 5 Years 10 Years Inception Date Personal Strategy Balanced Fund 13.32% 9.97% 5.94% Personal Strategy Balanced Fund I Class 13.48 13.64% 3/23/16 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. 20
T. Rowe Price Personal Strategy Funds 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. PERSONAL STRATEGY GROWTH FUND $35,000 30,000 25,000 20,000 15,000 10,000 As of 5/31/17 Personal Strategy Growth Fund $17,708 Linked Performance Benchmark* $17,954 Morningstar Moderately Aggressive Target Risk Index $16,791 Lipper Mixed-Asset Target Allocation Growth Funds Index $16,761 5/07 5/08 5/09 5/10 5/11 5/12 5/13 5/14 5/15 5/16 5/17 Note: Performance for the I Class will vary due to its differing fee structure. See returns table below. *The linked performance benchmark reflects the performance of the Merrill Lynch-Wilshire Capital Market Index to 6/30/09 and the performance of the Morningstar Moderately Aggressive Target Risk Index from 7/1/09 forward. Average Annual Compound Total Return Since Inception Periods Ended 5/31/17 1 Year 5 Years 10 Years Inception Date Personal Strategy Growth Fund 16.56% 12.17% 5.88% Personal Strategy Growth Fund I Class 16.67 16.67% 3/23/16 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. 21
T. Rowe Price Personal Strategy Funds 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. 22
T. Rowe Price Personal Strategy Funds Fund Expense Example (continued) Personal Strategy Income Fund Beginning Ending Expenses Paid Account Value Account Value During Period* 12/1/16 5/31/17 12/1/16 to 5/31/17 Investor Class Actual $1,000.00 $1,076.20 $2.12 Hypothetical (assumes 5% return before expenses) 1,000.00 1,022.89 2.07 I Class Actual 1,000.00 1,076.20 1.71 Hypothetical (assumes 5% return before expenses) 1,000.00 1,023.29 1.66 * 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 (182), and divided by the days in the year (365) to reflect the half-year period. The annualized expense ratio of the Investor Class was 0.41%, and the I Class was 0.33%. Personal Strategy Balanced Fund Beginning Ending Expenses Paid Account Value Account Value During Period* 12/1/16 5/31/17 12/1/16 to 5/31/17 Investor Class Actual $1,000.00 $1,098.00 $2.93 Hypothetical (assumes 5% return before expenses) 1,000.00 1,022.14 2.82 I Class Actual 1,000.00 1,098.40 2.35 Hypothetical (assumes 5% return before expenses) 1,000.00 1,022.69 2.27 * 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 (182), and divided by the days in the year (365) to reflect the half-year period. The annualized expense ratio of the Investor Class was 0.56%, and the I Class was 0.45%. 23