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Dear Stockholder,

Two thousand thirteen was rewarding for many equity investors and subdued for most fixed income investors. Developed countries' equity markets provided exceptional returns that greatly exceeded the expectations of most market participants. U.S. stocks, measured by the S&P 500 Stock Index, returned approximately 32%, and the NASDAQ Composite Index, which is heavily weighted with technology companies, returned a phenomenal 38%. European markets on average gained about 26%. The Japanese stock market was rewarding for investors despite the weakness of the yen. Emerging markets struggled, with many markets in negative territory.

Anticipating an eventual shift in Federal Reserve policy and reflecting ongoing economic strength in the U.S., fixed income markets struggled as interest rates rose during the year. The Barclays U.S. Aggregate Bond Index declined by about 2%. Treasury securities were weak, with the 10-year Treasury declining by almost 8%. As has been the case in recent years, the best returns were in corporate and high yield bonds. Money market fund yields and Treasury bills continued to generate meager gains.


For 76 years, our guiding principle has been to put clients first. When our clients succeed, our company succeeds. This was certainly the case in 2013. Reflecting the strong growth in equity markets, assets under management rose from $577 billion at the beginning of 2013 to $692 billion on December 31, 2013. Average assets under management for the year rose from $549 billion in 2012 to $634 billion in 2013. Market gains generated all of this asset growth. Indeed, for the first time since 2001, our net cash flow from investors was negative, to the tune of
$12 billion.

Clients redeem assets for several reasons. They may be unhappy with performance or client service, they may need to liquidate investments to meet other needs, they may change the asset allocation of their portfolios, or they may change their investment objectives altogether.

We feel slightly better about the fact that a substantial portion of these negative cash flows were attributable to several large clients making changes to their asset allocation and
investment objectives.

Because of higher assets under management, our revenues grew from $3 billion in 2012 to nearly $3.5 billion in 2013. Net income rose from $884 million to $1.05 billion, and fully diluted earnings rose from $3.36 per share to $3.90 per share. Our balance sheet remains exceptionally strong, with no debt and cash and long-term investments of $3 billion. Our return on equity exceeded 24%.

In recognition of our solid financial performance, the Board of Directors increased our annual regular dividend in February 2013 from $1.36 per share to $1.52 per share. This was the 27th consecutive year of increasing our dividend since our 1986 IPO.

As we try to be opportunistic and price sensitive, we curtailed our stock repurchases in 2013 to approximately $14 million, lower than in recent years.

"Over the last several years we have invested heavily in our global fixed income and global equity capabilities so that we might grow these businesses and diversify our portfolio of opportunities."


The foundation for our company's future success is built on strong investment performance, outstanding client service, and client-driven innovation. In terms of investment performance, 2013 was a solid year, with 71%, 76%, 77%, and 82% of our mutual funds across their share classes outperforming their Lipper averages for the last 1, 3, 5, and 10 years, respectively. The performance of our institutional funds against their benchmarks was substantially similar. Several of our U.S. equity strategies, including our small-cap and largecap growth strategies, performed extraordinarily well, and a few of our non-U.S. equity strategies, including European equity and global equity, also performed very well. In fixed income, our high yield strategies continue to generate strong returns over most time periods. Recognizing this performance, Morningstar nominated three of our portfolio managers for its fund manager of the year awards. Mark Vaselkiv (High Yield), David Giroux (Capital Appreciation), and Larry Puglia (Blue Chip Growth) were nominated in their respective categories. We've never had three individual managers receive nominations in one calendar year. Even though none claimed the top prize, their nominations represent the well-earned recognition of outstanding performance.

We believe that future success will also be driven by new investment strategies we introduce and our ability to reach and serve clients who need them. Over the last several years, we have invested heavily in our global fixed income and global equity capabilities so that we might grow these businesses and diversify our portfolio of opportunities. In 2013, we introduced the Global Allocation Fund, which builds on our expertise of managing asset allocation portfolios. The globally diversified fund seeks long-term total return by investing in capital market opportunities across nearly 20 asset classes and sectors, including alternative investments. We also launched the new Target Retirement Funds, which are structured with lower equity exposure than our existing Retirement Funds. Special kudos go to our asset allocation team, which has done an outstanding job for our clients. During 2013, we conducted a thorough review of our distribution strategies and organization, and developed plans to broaden and deepen our coverage globally in the coming years.

We invested heavily in both human and physical capital in 2013. We completed several real estate projects, including expansions and improvements in our Maryland, London, Tokyo, and Singapore offices. After a thorough analysis, we decided to renew our headquarters lease in downtown Baltimore through 2027. We spent nearly $106 million on a range of capital projects to enhance our capabilities and improve our service reliability. To deepen our investment staff and expand our client service capabilities, we added approximately 300 associates during the year. At the same time, several of our investment professionals elected to leave the firm over the last year. While we cannot always anticipate departures, we are prepared for them. Indeed, our talent review and succession planning efforts enabled us to quickly name successors. We have invested significant resources in our capabilities to serve the best interests of our clients, and we will continue to do so.


One of the dilemmas in the investment management business is the dynamic arising from generating strong investment performance, which attracts assets but can make it more challenging to generate future performance. As our company has grown, we have worked to manage this dynamic. And, as you would imagine, this is a frequent topic of conversation within our company. Prudent growth in our business is an integral component of how we create value for you, our stockholders. At the same time, we have to be sensitive about how our continued success and asset growth affects our ability to invest on behalf of existing clients. While we always seek to attract new business, ranging from the smallest individual investor to the largest institutional investor, we are committed to doing so in the context of protecting the interests of our existing investors. Put another way, growth for growth's sake is not our objective. Meeting clients' needs is our objective.

Reflecting on the substantial growth in assets in recent years, we decided to close several of our small-company investment strategies to new investors, effective December 31, 2013. We made a similar decision over a year ago with respect to our high yield bond strategy and several years ago with our mid-cap strategies. We do not take these actions lightly. When continued asset growth may limit our ability to successfully invest, we opt to curtail inflows to protect
clients' interests.


Last year we lost two former colleagues who played important roles in our company's history. Jack Laporte, longtime portfolio manager of the New Horizons Fund, retired at the end of 2012. We cited Jack's many contributions in last year's letter.

Unfortunately, Jack passed away in August. Jack had a long and stellar career as an investor and played an integral role in building and leading our organization. Our thoughts and prayers go out to Jack's family.

In December, Curran (Cub) W. Harvey passed away at the age of 84. Cub served as our president in the early 1980s when he led our company during a tumultuous period for financial markets and a time when our company was recovering from the turmoil of the 1970s. Cub's steady hand and the respect he commanded were invaluable in helping position T. Rowe Price to become the company we are today. We extend our sympathy to Cub's family.

In terms of a happier transition, our associate, Lillian Mathews, retired after a 45-year career with the company. It's hard to believe that Lillian joined us during the first Nixon administration. Well done, Lillian.

"Prudent growth in our business is an integral component of how we create value for you, our shareholders."


We welcomed three new members to our Board of Directors in 2013. Dr. Freeman Hrabowski joined us in January. Freeman is a leading educator with significant public company Board experience. In June, we welcomed the Honorable Olympia Snowe, a former U.S. Senator from Maine. During her distinguished career, Olympia was a role model of bipartisan leadership, and we are fortunate to have her perspective. Mark Bartlett joined the Board in December. Mark brings strong accounting and audit expertise to our Board. He joined us in anticipation of the upcoming retirement of our long-serving director, Jim Brady. Jim chaired our Audit Committee for many years and has always had a unique ability to translate the most complex accounting issues into plain English. On behalf of all stockholders, Jim, thank you for your service.


Looking ahead, we believe that 2014 will be a good year for global growth. The U.S. economy continues to grow at a moderate pace, supported by improvements in the housing and labor markets. In Europe, economic growth is mixed, though it appears to be strengthening, while Japan is in the early stages of an economic recovery. China and India continue to generate healthy, albeit volatile, rates of growth, and we believe many emerging market economies should do well in 2014. The question, of course, is to what extent recent global equity gains have discounted continued positive economic news. Corporate balance sheets are in very good shape, but because valuations are somewhat extended, our view is that equity returns will moderate relative to the strong pace of the last couple of years.

All eyes will be focused on the Federal Reserve under new Chair Janet Yellen. Financial markets have thus far uneventfully digested the news that the Fed would gradually reduce its asset purchases in 2014. It remains unclear as to how the Fed's unwinding program will evolve and affect interest rates. Fixed income returns have been subdued, and we expect this pattern to continue in 2014.

We continually invest in our capabilities to ensure that we can deliver for our clients. Our financial position remains exceptionally strong. We are prepared for short-term periods of adversity should the market backdrop prove more challenging. As always, we maintain our focus on providing our clients with outstanding performance, service, and guidance. Thank you for your continued confidence in T. Rowe Price.