Dear Stockholder:

Last year was marked by divergent investment returns amidst a volatile and global economic and geopolitical environment. Global equity markets sold off at the beginning of the year as investors focused on tension between Russia and Ukraine as well as the threat posed by terrorism in the Middle East and elsewhere. The U.S. equity market rebounded in the spring, sold off in the fall, and rallied at year—end, recording its sixth consecutive year of a bull market. Many overseas markets struggled. Slowing economic activity in Europe and Japan and mixed signals from many emerging market economies led to a "flight to quality," which benefited U.S. equities and U.S. Treasuries. We ended the year with a dramatic plunge in oil prices and renewed concerns about cybersecurity, with the successful attack on Sony Pictures.

Investors saw strong returns in the U.S. equity and fixed income markets in 2014. Returns were more moderate than in recent years but attractive relative to the low levels of inflation and returns available in the short-term money markets. The S&P 500 Index of large-cap stocks returned nearly 14%. Long-maturity U.S. Treasury securities gained in excess of 20%. Developed non-U.S. equity benchmarks declined by about 4% in dollar terms due, in part, to the surging U.S. dollar. Emerging markets declined by about 2%, though returns within the asset class varied widely. China and India performed very well, while Russia and several Latin American markets lagged. Gold was flat, and money market returns hovered barely above 0%.

Financial results

Driven by the solid advance in the U.S. equity market and our strong relative investment performance, our assets under management rose from $692 billion at the beginning of the year to $747 billion on December 31, 2014. Average assets for the year were nearly $725 billion. Net cash flow from investors was nearly $4 billion, an improvement from the $12 billion of outflows we experienced in 2013. The growth in our assets under management helped net revenues grow from $3.5 billion in 2013 to almost $4 billion in 2014. Net income rose from $1.05 billion in 2013 to $1.23 billion in 2014. Fully diluted earnings per share increased by 17% from $3.90 last year to $4.55 in 2014. Return on equity, a good measure of corporate profitability, was about 24%.

In recognition of our strong financial performance, our Board of Directors increased our regular annual dividend in February 2014 from $1.52 to $1.76 per share. This was the 28th consecutive year of dividend increases since our 1986 initial public offering. We are one of a select group of companies recognized by Standard & Poor's for having increased dividends for at least 25 consecutive years. We continue to maintain an exceptionally strong financial position, with no debt and nearly $3.4 billion in cash and sponsored fund holdings on our balance sheet.

Investment performance, outstanding client service, and client-driven innovation are the pillars that drive our success.

We funded many important initiatives during the year with cash generated from operations. We also repurchased 5.3 million shares of our common stock in 2014. In December, the Board of Directors approved a 15 million share increase in our share repurchase authorization to provide us with ample flexibility to continue opportunistic share repurchases. Our dividends and stock buybacks enabled us to return nearly $900 million to stockholders in 2014.

Performing for clients

Investment performance, outstanding client service, and client—driven innovation are the pillars that drive our success. Achieving solid long—term performance for our clients is gratifying, and we are able to report that we continued to perform well. In 2014, 73%, 74%, 80%, and 88% of our mutual funds across their share classes outperformed their Lipper averages for the last one, three, five, and 10 years, respectively. The performance of our institutional funds against their benchmarks was substantially similar. We work with some of the best investors in the business, and three of our portfolio managers—Brian Berghuis (Mid-Cap Growth), David Giroux (Capital Appreciation), and Justin Thomson (International Discovery)—were nominated by Morningstar as portfolio managers of the year in their respective categories. Even though none claimed the top prize, their nominations represent the well—earned recognition of outstanding performance. Our asset allocation business has been a tremendous success story. The performance of our retirement date funds and asset allocation strategies has been very strong.

Recruiting new talent is an immensely important activity—so that we can continue to generate outstanding investment performance and client satisfaction in the future. We seek to maximize our success by attracting and retaining highly skilled associates throughout the firm.

opportunities and challenges

We face the regular challenges of navigating the ups and downs of global financial markets in order to identify investment opportunities on behalf of our clients. We are constantly working to make sure that we maintain our focus on doing the best for our clients while seeking prudent sources of growth. Growth in our business is a result of serving our clients well.

We have devoted a great deal of effort to expanding our global fixed income and our international equity businesses. As our U.S. equity business has grown substantially, we have taken steps to moderate future asset growth to preserve our ability to generate strong performance for our current clients. Many of our other investment strategies have ample room to grow.

Financial Highlights

(in millions, except assets under management and per-share data)
  2013 2014
Assets under management
at December 31 (in billions)
692 747
Net revenues 3,484 3,982
Net income 1,048 1,230
Net cash provided by operating activities 1,233 1,291
Basic earnings per common share 4.02 4.68
Diluted earnings per common share 3.90 4.55
Cash dividends per common share 1.52 1.76
Stockholders' equity at December 31 4,818 5,395

We have also been focused on expanding our global reach in Europe, the Middle East, Asia, and Australia to tap new sources of business and better serve our clients. We're investing in building outstanding sales and client service capabilities to move us in this direction.

We also introduced several new investment strategies in 2014. We launched a new Asian equity strategy, a frontier markets fund (for markets less established than emerging markets), and a new credit opportunities strategy to complement our very successful high yield bond business.

Much has been written about the increasing popularity of passive strategies, including index funds and exchange—traded funds (ETFs). Among our active strategies, which form the bedrock of our investment approach, we seek to outperform relevant investment benchmarks over longer—term horizons. There is certainly nothing wrong with passive investment strategies. In fact, we offer several index products for our clients. Our belief, however, is that the vast majority of our clients are attracted to T. Rowe Price's value proposition, which consists of strong long—term performance anchored by fundamental research, risk awareness, and reasonable costs. While assets dedicated to passive index funds and passive ETFs have steadily grown in recent years, we believe there is and always will be an important role for well—executed active investment management strategies in diversified portfolios that seek out superior long—term performance.

ETFs are simply a way of packaging and delivering an investment strategy to market. In recent years, the number of ETFs and the amount of assets in them have grown rapidly. The mortality rate of ETFs has also been quite high as many ETFs fail to achieve critical mass. We do not believe that passive ETFs will be a major business opportunity for us, and we have moved carefully with regard to plans to introduce active ETFs. In 2013,
we received exemptive relief, or approval, from the SEC for transparent actively managed ETFs. That same year, we also applied for exemptive relief for several nontransparent active ETFs. At some point, we hope to receive approval from the SEC to offer these nontransparent active ETFs.

We have also been focused on expanding our global reach in Europe, the Middle East, Asia, and Australia to tap new sources of business and better serve our clients.


Two of our long‐serving colleagues deserve special recognition this year. Gretchen Park retired as our head of Human Resources at the end of 2014. Gretchen served us well in her 15 years with us and is greatly respected across the company. She is responsible for the increased sophistication of our human resource program and talent development activities. Congratulations and thanks, Gretchen.

Barbara Hawkins retired at the end of the year after 45 years of service. Many of our clients know Barbara from her work at our institutional investor conferences. It is humbling to think of someone who began her career at T. Rowe Price when Richard Nixon was in the White House. Well done, Barbara.

Last, Mike Gitlin, our head of Fixed Income, resigned in January 2015 to accept another opportunity in the business. We are sorry to see Mike leave, but we are excited that Ted Wiese, an outstanding member of our Fixed Income leadership team, has become our new head of Fixed Income. Ted has 30 years of experience with us and will do a great job.

the year ahead

As we look ahead to 2015, the outlook for global economic growth is mixed. Economic growth in the U.S. is expected to be moderate, though not as strong as in the second half of 2014. We have been particularly encouraged by the continued healing in the real estate sector and in labor markets and are encouraged by the continued decline in the unemployment rate, which was 5.6% at year–end. The economic outlook for Europe and Japan is fairly anemic as demographic and political headwinds have offset the impact of very pro—growth economic policies. In emerging market economies, the outlooks vary widely among the energy—producing and energy—consuming economies. Investors are focused on growth trends and reform efforts in China and India.

In 2015, we are likely to see moderate corporate earnings growth and varying interest rate trends around the world. In the U.S., we expect the Fed to begin to raise short‐term rates later this year, a shift that most investors seem to be expecting.

After several years of very healthy returns from both stocks and bonds, we enter 2015 with more modest return expectations for both asset classes. Our view is that global equity markets will outperform fixed income markets but that absolute return levels will be modest. Whatever the investment environment, your company is well positioned. We have
a wide range of investment capabilities and highly talented associates dedicated to meeting our clients' needs. We remain focused on growing the long‐term value of your investment.