European Equity Fund

Capital at risk. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

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Overview

Manager's Outlook

The investment environment continues to be marked by a high degree of geopolitical and economic uncertainty. The range of potential outcomes for consumer and industrial confidence and expenditure, inflation and central bank actions is still wide.

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At such times we believe it is even more important to remain focused on fundamental company research where we feel we can have an edge. While an awareness of the macroeconomic and political environment is necessary, Our goal is to construct a portfolio that prospers over the medium term whatever transpires.

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European equity valuations pulled back sharply this year, but still are not what one would describe as "cheap". Recent developments are likely to put pressure on costs, supply chains and demand, weighing on corporate earnings across most sectors this year.

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Central banks appear determined to tighten monetary and fiscal policy in Europe and elsewhere, signaling that the fight to bring down inflation takes priority over economic growth. This is a less supportive backdrop for equities, probably for the rest of this year, but the pressure to tighten policy as sharply may lessen should economies stall?and there are signs that this may already be happening.

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The multiple dramatic events of the last few years have been a trigger for transformations across many industry structures. For example, we are witnessing profound changes in the fields of sustainability and biologics. This is a dynamic that we consciously look to exploit, and we are focused on identifying those companies that will be material beneficiaries of these forces. Genuine insights here will be valuable as the market is wrestling with a lot of uncertainty as to how individual companies are positioned.

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In these uncertain times, we must be prepared for market dislocations triggered by events. The market rotation and volatility are presenting us with an increasing number of new opportunities. We also seek to defend those holdings that have recently been derated but where the business remains fundamentally robust and may even be stronger after recent events. If we do enter a slower economic environment, then the investment attractions of companies that do have a more sustainable growth outlook should become stronger.

Strategy

Fund Summary

We leverage our strong research team to identify companies with durable business models that we believe are positioned firmly on the right side of change, or those companies undergoing idiosyncratic changes which in our view will help deliver improving shareholder returns. Disciplined portfolio construction focuses on those stocks with the most compelling risk/reward profiles. The promotion of environmental and/or social characteristics is achieved through the fund's commitment to maintain at least 10% of the value of its portfolio invested in Sustainable Investments, as defined by the SFDR. Additionally, we apply a proprietary responsible screen (exclusion list). The manager is not constrained by the fund’s benchmark, which is used for performance comparison purposes only.

Investment Association Sector:

Europe Including UK

OUR VIEWS ON EUROPE

01 October 2020

Portfolio Manager Change

Effective 1 October 2020, Tobias Mueller assumed sole portfolio management responsibility for the fund.

31-Dec-2018 - Dean Tenerelli, Portfolio Manager,

Attractively Valued Stocks Emerged as Market Retrenched

Attractive opportunities have emerged in the equity market retrenchment at the end of 2018. These conditions suit our investment approach as they allow us to buy strong high-quality businesses and to diversify the portfolio. We increased our positions most in defensive sectors, such as utilities and real estate, and reduced them in the more cyclical sectors. However, the decline in cyclicals did not deter us from assessing high-quality opportunities with durable earnings that emerged there. On balance, we are tending to find more attractive opportunities in companies that have a more defensive profile or where we believe the market misunderstands the fundamental outlook and unfairly penalizes the company. At the same time, we continue to seek a relatively balanced portfolio in terms of exposures to possible economic scenarios, so that our relative performance is not dependent on a particular "macro" environment.

We altered our positioning by:

Raising our exposure to utilities, now our largest overweight, initiating in Iberdrola
Moving to an overweight in real estate, adding Great Portland Estates
Reducing our underweight in materials, investing in Koningklijke DSM
Slimming our overweight in industrials and business services

Raised Exposure to Utilities, Now Biggest Overweight

We increased our exposure to utilities, which is now our biggest overweight. We are overweight in the gas and multi-utilities industries, where we hold Italian names Italgas, a natural gas distribution company, and Hera, a public utility company. We also hold Red Electrica, a partly state-owned and public limited Spanish corporation that operates Spain's national electricity grid.

We initiated an investment in Iberdrola, a Spain-based integrated utility company, taking advantage of weakness in the share price, which is driven by regulatory uncertainty. The company is attractively valued, provides a steady income stream, and should benefit over the longer term from its position in the decarbonized renewables and electricity transmission markets. It also has a potential pipeline of new assets extending beyond 2025.

Moved to Overweight in Real Estate

As we seek to maintain a balanced portfolio to counter the impact of market volatility, we raised our exposure to the real estate sector by adding UK office developer Great Portland Estates (GPOR). Our other investment is in Aedas Homes, a Spanish house builder with a large land bank.

We believe GPOR, which operates in central London, is undervalued by the market. The management team has an excellent track record, the balance sheet is strong, and the values of its office assets are being underestimated. We believe there is a high probability that GPOR will return capital to shareholders after a successful disposals program.

Reduced Underweight in Materials

We increased our allocation to materials, a sector that we have not favored largely because we did not like the business models of many companies within it. However, when opportunities to own high-quality companies arise, such as in the current market retrenchment, we are happy to invest in them. To this end, we opened a position in Koningklijke DSM, a leading vitamin maker and performance materials business.

We currently own France-based Air Liquide, a large international industrial gas company; Corbion, a Dutch biobased ingredients company operating in the food and biochemical sectors; and Johnson Matthey, a specialty chemicals company that is also the world's biggest auto catalyst maker.

We took advantage of share price weakness to invest in DSM. We believe the business is becoming more stable and focused on growth, thanks to the acquisition-driven transformation program. In our view, improving organic growth, an effective cost and capital efficiency program, and the end of the headwind of falling vitamin E prices should drive a share price recovery and outperformance.

Reduced Overweight in Industrials and Business Services

We reduced our overweight industrials and business services amid signs that the European economy is losing momentum, a less favorable environment for this cyclical sector.

We continued to adjust the composition of our holdings, taking advantage of the market decline to sell companies that have underperformed and invest in high-quality businesses with strong industry positions and durable earnings that are now more realistically valued.

We sold out of CNH Industrial, one of the world's largest capital good companies; Trelleborg, a Sweden-based engineering company that develops polymer sealing solutions and wheel systems; and Wolters Kluwer, a Dutch print and digital publisher, after a strong run.

In terms of industry, our largest weight is still professional services companies. We own Bureau Veritas, a France-based international certification agency, and Experian, the leading global provider of credit information with operations in 17 countries, and we swapped Wolters Kluwer for RELX, the world's leading publisher of science journals and a provider of risk assessments on transactions with retail customers. Electrical equipment and aerospace and defense are also overweights. In the former, our biggest position is Schneider Electric, a global specialist in energy management and automation. In the latter, we also hold Dassault Aviation, another French company.

We started investing in RELX because we believe the market underestimates the quality and sustainability of growth at the risk business, which provides one of the leading online identity verification tools. It should benefit from the recent acquisition of the ThreatMetrix, one of the leading electronic devices databases. We also believe the risks around the science publishing business are overdone.

We sold our position in CNH Industrial because slowing economic momentum and increasing uncertainty in the agricultural sector about the possible impact of tariffs and trade disruptions could further curb sales growth in the main divisions. We exited Trelleborg as signs of weakening demand and emerging risks in the automotive agricultural and industrials segments could, in our view, weigh further on the share price after a period of underperformance.

Maintained Health Care Overweight; Exited Fresenius

We have retained our overweight allocation to the health care sector amid the market uncertainty, which favors defensive sectors. We sold Fresenius, a provider of health care-related products and services, and sister company Fresenius Medical Care after both companies issued a second surprise profit warning in the space of two months. Neither company now expects net income growth in 2019.

We hold sizable positions in pharmaceuticals, with overweights in two Swiss companies, Roche Holding and Novartis, a manufacturer of health care and nutritional products. We also hold Getinge, an off-benchmark Swedish medical technology company with product areas such as surgery, intensive care, infection control, and patient handling.

Team

Tobias Mueller,
Portfolio Manager

Tobias Mueller is a regional portfolio manager for the European Select Strategy, effective October 2018, and for the Europe Equity and Europe ex-UK Equity Strategies, effective October 2020.

Portfolio Manager since

2020

Years at T. Rowe Price

Years investment experience

Andrew Clifton,
Portfolio Specialist

Andrew Clifton is a portfolio specialist in the Equity Division at T. Rowe Price.

Years at
T. Rowe Price

Years investment experience

Benchmark Data Source: MSCI. MSCI index returns are shown with reinvestment of dividends after the deduction of withholding taxes. MSCI and its affiliates and third party sources and providers (collectively, “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. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

Past performance is not a reliable indicator of future performance.

Source for performance: T. Rowe Price. Fund performance is calculated using the official NAV with dividends reinvested, if any. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested. It will be affected by changes in the exchange rate between the base currency of the fund and the subscription currency, if different. Sales charges (up to a maximum of 5% for the A Class), taxes and other locally applied costs have not been deducted and if applicable, they will reduce the performance figures.

Daily performance data is based on the latest available NAV.

The Funds are sub-funds of the T. Rowe Price Funds SICAV, a Luxembourg investment company with variable capital which is registered with Commission de Surveillance du Secteur Financier and which qualifies as an undertaking for collective investment in transferable securities (“UCITS”). Full details of the objectives, investment policies and risks are located in the prospectus which is available with the key investor information documents and/or key information document (KID) in English and in an official language of the jurisdictions in which the Funds are registered for public sale, together with the articles of incorporation and the annual and semi-annual reports (together “Fund Documents”). Any decision to invest should be made on the basis of the Fund Documents which are available free of charge from the local representative, local information/paying agent or from authorised distributors. They can also be found along with a summary of investor rights in English at www.troweprice.com. The Management Company reserves the right to terminate marketing arrangements.

Please note that the Fund typically has a risk of high volatility.

Hedged share classes (denoted by 'h') utilise investment techniques to mitigate currency risk between the underlying investment currency(ies) of the fund and the currency of the hedged share class. The costs of doing so will be borne by the share class and there is no guarantee that such hedging will be effective.

The specific securities identified and described in this website do not represent all of the securities purchased, sold, or recommended for the sub-fund and no assumptions should be made that the securities identified and discussed were or will be profitable.

Attribution Data: Analysis represents the total performance of the portfolio as calculated by the FactSet attribution model and is inclusive of other assets that that will not receive a classification assignment in the detailed structure shown. Returns will not match official T. Rowe Price performance because FactSet uses different exchange rate sources and does not capture intra-day trading. Performance for each security is obtained in the local currency and, if necessary, is converted to U.S. dollars using an exchange rate determined by an independent third party. Figures are shown with gross dividends reinvested.

Sources: Copyright © 2023 FactSet Research Systems Inc. All rights reserved. MSCI/S&P GICS Sectors; Analysis by T. Rowe Price Associates, Inc. T. Rowe Price uses the MSCI/S&P Global Industry Classification Standard (GICS) for sector and industry reporting. Each year, MSCI and S&P make changes to the GICS structure. The last change occurred on September 28, 2018. T. Rowe Price will adhere to all future updates to GICS for prospective reporting.

The Global Industry Classification Standard ("GICS") was developed by and is the exclusive property and a service mark of Morgan Stanley Capital International Inc, ("MSCI") and Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P") and is licensed for use by [Licensee]. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classifications makes any express or impIied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability and fitness for a particular purpose with respect to any or such standard or classification, Without limiting any or the foregoing, in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

A full list of the currently issued Share Classes including Distributing, Hedged, and Accumulating Categories may be obtained, free of charge and upon request, from the registered office of the Company.

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Citywire Data Source: Citywire – where the fund manager is rated by Citywire, the rating is based on the manager’s 3-year risk adjusted performance. For further information on ratings methodology, please visit www.aboutcitywire.com.