-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RvnA0pSULp+s1rXJovnQRkbLziY1EsqEhNUlJX2hI5rG2v296NjTA/Vmwb1q5oeY xCTCEKq1GI1LEnIXQpCNtw== 0000808303-08-000015.txt : 20080827 0000808303-08-000015.hdr.sgml : 20080827 20080827121028 ACCESSION NUMBER: 0000808303-08-000015 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 51 CONFORMED PERIOD OF REPORT: 20080630 FILED AS OF DATE: 20080827 DATE AS OF CHANGE: 20080827 EFFECTIVENESS DATE: 20080827 FILER: COMPANY DATA: COMPANY CONFORMED NAME: T. Rowe Price Spectrum Fund, Inc. CENTRAL INDEX KEY: 0000808303 IRS NUMBER: 000000000 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-04998 FILM NUMBER: 081041117 BUSINESS ADDRESS: STREET 1: 100 EAST PRATT STREET CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 410-345-2000 MAIL ADDRESS: STREET 1: 100 EAST PRATT STREET CITY: BALTIMORE STATE: MD ZIP: 21202 FORMER COMPANY: FORMER CONFORMED NAME: PRICE T ROWE SPECTRUM FUND INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: PRICE T ROWE OMNI TRUST DATE OF NAME CHANGE: 19870726

0000808303 S000002122 Spectrum Income Fund

C000005512 Spectrum Income Fund RPSIX

0000808303 S000002123 Spectrum Growth Fund

C000005513 Spectrum Growth Fund PRSGX

0000808303 S000002124 Spectrum International Fund

C000005514 Spectrum International Fund PSILX

N-CSRS 1 srspc.htm T. ROWE PRICE SPECTRUM FUNDS T. Rowe Price Spectrum Funds - June 30, 2008

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act File Number: 811-4998

T. Rowe Price Spectrum Fund, Inc.

(Exact name of registrant as specified in charter)

100 East Pratt Street, Baltimore, MD 21202

(Address of principal executive offices)

David Oestreicher

100 East Pratt Street, Baltimore, MD 21202

(Name and address of agent for service)

Registrant’s telephone number, including area code: (410) 345-2000

Date of fiscal year end: December 31

Date of reporting period: June 30, 2008

Item 1: Report to Shareholders

Spectrum Funds

June 30, 2008

The views and opinions in this report were current as of June 30, 2008. 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

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Manager’s Letter

Fellow Shareholders

Global financial markets took a turn for the worse in the first half of 2008. A slowdown in the global economy, a spreading credit crunch, and soaring energy and food prices put downward pressure on equity markets worldwide. Bonds, on the other hand, weathered some interim volatility to finish the period little changed. As illustrated by the performance of the Spectrum Funds, domestic and foreign stocks suffered double-digit declines in the first six months of 2008, while bonds posted relatively flat returns.

HIGHLIGHTS

• Domestic and international stocks suffered double-digit declines, while bonds posted flat returns in the last six months.

• Spectrum Growth Fund was in line with its broad benchmark, while Spectrum International and Spectrum Income lagged.

• Broad diversification among multiple T. Rowe Price funds is at the heart of each fund’s long-term investment strategy.

• The U.S. economy will likely remain weak through the second half of 2008. Interest rates may increase to offset rising inflation, which would hinder U.S. bonds. Relatively strong growth in emerging markets is helping to offset the slowdown in the domestic economy.

MARKET ENVIRONMENT

Global economic and financial trends that took hold in late 2007 widened in scope in the first half of 2008. The U.S. housing and mortgage markets deteriorated further, providing no relief from a deepening credit crunch that hobbled liquidity in the global credit markets. As a result, financial companies around the world were saddled with substantial mortgage- and credit-related losses, leading many to seek out additional capital to bolster their balance sheets.

Inflation remained on an upward trajectory as the prices of energy, food, and other commodities soared due to strong demand from emerging markets. In the U.S., the consumer price index rose by 5% for the year ended June 30, 2008—the highest 12-month increase since 1991. Oil was the main culprit, rising approximately 45% in the first half of the year and reaching a record high of nearly $140 a barrel. However, the prices of natural gas, copper, and agricultural commodities such as corn and soybeans also rose substantially.

The combination of worsening conditions in the credit markets and rising inflation contributed to a broad slowdown in global economic growth. The most pronounced downturn occurred in the U.S., where the economy grew at an annualized rate of 1% or less in both the fourth quarter of 2007 and the first quarter of 2008. Weakness in employment and consumer spending led the Federal Reserve to cut interest rates aggressively to stave off a recession. Europe also experienced a slowdown in economic activity, though it was more modest than in the U.S. Even the rapidly growing economies in China and India slowed noticeably during the period.

The challenging economic and credit environment weighed on U.S. stocks, which declined in the first six months of the year. Corporate profit growth decelerated as the economy slowed and higher raw materials prices squeezed profit margins. After a disastrous first quarter, the U.S. market recovered somewhat in April and May amid optimism that the economy and credit markets were on the mend, but stocks gave back the gains in June as weak economic data and financial sector losses resurfaced. The major stock indexes declined more than 10% in the six-month period. Small-cap stocks held up better than large-cap issues, and growth stocks continued to outperform value across all market capitalizations.

Foreign stocks tracked the performance of the domestic market, declining steadily amid slowing global economic growth and a general shift toward risk aversion. Despite strong returns from Latin America, emerging markets lagged as China and India—the largest of the developing markets—suffered sizable declines. Japan held up the best among developed markets, while European bourses were the weakest performers.

The U.S. bond market advanced modestly in the first six months of 2008. Early in the year, bonds attracted strong demand as a safe haven from the slowing economy, credit turmoil, and financial market volatility. Bonds also benefited from the Fed’s four short-term interest rate cuts in the first four months of the year. However, the bond market surrendered some of its earlier gains toward the end of the period as inflation fears drove interest rates higher and bond prices lower. The broad Lehman Brothers U.S. Aggregate Index returned 1.13% for the six months. The flight to quality lifted Treasury and mortgage-backed securities, which generated the best returns, while credit market turbulence weighed on corporate bonds.

Overseas bonds were mixed, but generally outperformed domestic fixed-income securities as the U.S. dollar continued to weaken versus major foreign currencies. The J.P. Morgan Non-U.S. Dollar Government Bond Index returned 5.47% in the first half of 2008, while the J.P. Morgan Emerging Markets Bond Index Plus returned -0.64%.

SPECTRUM GROWTH FUND

Your fund’s results in the first half of 2008 reflected the broad decline in the global equity markets. As the accompanying table shows, Spectrum Growth returned -11.02% for the six months ended June 30, 2008, outpacing its old benchmark, the S&P 500 Index, and performing in line with its new benchmark, the Russell 3000 Index. (The new benchmark represents a broader measure of U.S. equity performance and better reflects the fund’s strategy.) The fund modestly trailed the Lipper Multi-Cap Core Funds Index for the six-month period.

There was little variation in the performance of the portfolio’s individual components, with all but two posting declines of 10%–15%. The best-performing holding in the portfolio was Mid-Cap Value, which benefited from the general outperformance of mid-cap stocks. The fund’s growth holdings also held up well, most notably the large-cap Growth Stock and Blue Chip Growth Funds.

The weaker performers included the fund’s international holdings, with Emerging Markets Stock—the top performer in 2007—producing the worst return in the portfolio for the first half of 2008. International Growth & Income, which focuses on value stocks in developed overseas markets, also lagged during the period as value shares underperformed. The biggest laggard among domestic holdings was Equity Income, another value-oriented holding.

We made some adjustments to the portfolio’s asset allocation during the first half of the year. Although we still favor growth over value, the outperformance of growth stocks over the past 18 months has led us to reduce our overweight in this segment of the market. As a result, we lowered our weightings in Growth Stock and Blue Chip Growth, as well as New Horizons, our small-cap growth fund. We shifted these assets into our domestic value components—Equity Income, Value, and Mid-Cap Value. We also brought up our weighting in Emerging Markets Stock to a more neutral position after the recent underper-formance in emerging markets made valuations more reasonable.

We are also making changes to the fund’s overall investment program. Effective September 1, 2008, Mid-Cap Growth and Small-Cap Value will join the list of underlying funds in the Spectrum Growth portfolio. In addition, we plan to increase our target allocation range for Blue Chip Growth and Growth Stock in an effort to better focus on this segment of the market. Furthermore, we intend to reduce the target allocation range for New Horizons.

SPECTRUM INCOME FUND

Your fund declined modestly in the first half of 2008. Spectrum Income returned -1.28% for the six months ended June 30, 2008, trailing the positive return of the Lehman Brothers U.S. Aggregate Index, but in line with the performance of the Lipper General Bond Funds Average as shown in the accompanying performance table. The fund’s underperformance of its benchmark index was driven largely by its notable position in dividend-paying stocks, which declined sharply in the first half of the year.

The portfolio’s two best performers in the first six months of 2008 were also the top performers in 2007—International Bond, which benefited from further weakness in the U.S. dollar, and U.S. Treasury Long-Term, which continued to rally as the slowing economy and financial market turmoil led investors to the relative safety of Treasury bonds. We reduced our exposure to these two funds during the period, taking profits after their strong performance over the past 18 months.

Other positive performers within the portfolio included Short-Term Bond, which benefited from the Fed’s interest rate cuts in the first four months of the period, and GNMA, which reflected the outperformance of high-quality mortgage-backed securities. New Income, the portfolio’s largest position, also advanced in the first half of the year thanks to its well-diversified bond holdings. We increased our exposure to all three of these funds over the last six months.

Equity Income, which invests in dividend-paying stocks, was by far the worst-performing component in the portfolio, declining more than 13%. High Yield also produced a negative return as expectations of higher defaults were priced into the high-yield corporate bond market. We remained slightly overweight in Equity Income and slightly underweight in High Yield.

Other decliners included two of the smallest positions in the portfolio—Emerging Markets Bond and Corporate Income. We increased our exposure to Corporate Income as valuations in the corporate bond market have become more attractive.

SPECTRUM INTERNATIONAL FUND

As the accompanying table illustrates, your fund declined in the first half of 2008. Spectrum International returned -12.59% for the six months ended June 30, 2008, underperforming both its combined index benchmark and the Lipper International Multi-Cap Core Funds Average. The main factor contributing to Spectrum International’s outperformance of its benchmark in 2007—noteworthy exposure to emerging markets, particularly in Asia—was responsible for its underperformance of the index in the first half of 2008.

Every component of the portfolio declined during the six-month period. New Asia, the portfolio’s best performer in 2006 and 2007, suffered the most substantial losses, falling by more than 36%. A sharp drop in the stock markets of China and India was the main reason behind New Asia’s sizable decline.

Emerging Markets Stock was another significant detractor, reflecting the general underperformance of emerging markets during the period. European Stock and the value-oriented International Growth & Income, two of the larger positions in the portfolio, also fell notably. Europe was the weakest-performing region among developed markets, while value shares underperformed on a global basis.

The best performer in the first half of the year was Japan, which was the only portfolio holding to decline by less than 10%. The fund’s largest holding, International Stock, also held up better than the broad international equity indexes.

The portfolio’s individual fund weightings remained unchanged during the six-month period. Developed markets remain the primary emphasis in Spectrum International—Europe and Japan account for nearly three-quarters of the portfolio—but a meaningful position in emerging markets provides additional growth potential and diversification.

OUTLOOK

Uncertainty regarding the health of the U.S. economy has clouded the global economic outlook. Despite significant monetary and fiscal stimulus from the central bank and the federal government, recent data suggest that the U.S. economy will likely remain weak through the second half of the year. In addition, the lingering problems in the financial system have yet to be resolved, and higher input prices (resulting mainly from soaring energy costs) continue to exert pressure on corporate profits.

On the positive side, however, the financial markets have already priced in much of the bad news regarding the economic, credit, and inflationary environment. Furthermore, relatively strong growth in emerging markets is helping to offset the slowdown in the domestic economy.

Overall, the potential for additional market turmoil remains, highlighting the importance of the broad diversification found in the Spectrum Funds.

Respectfully submitted,

Edmund M. Notzon III
President of the Spectrum Funds and chairman of the Investment Advisory Committee

July 21, 2008

The committee has day-to-day responsibility for managing the portfolios
and works with committee members in developing and executing the funds’
investment program.

T. ROWE PRICE SPECTRUM FUND, INC.
SPECTRUM GROWTH FUND
SPECTRUM INCOME FUND
SUPPLEMENT TO PROSPECTUS DATED MAY 1, 2008

The following updates the Spectrum Funds’ prospectus dated May 1, 2008:

Spectrum Growth and Spectrum Income Funds are no longer subject to the restriction that they will not redeem from any underlying fund at a rate in excess of 1% of the underlying fund’s assets in any period of less than 15 days. Elimination of this restriction is designed to provide greater flexibility in managing the funds. On April 22, 2008, the Board of Directors for the Spectrum Funds approved removing the restriction but it inadvertently remained in the prospectus. The third operating policy under “Other Investment Restrictions” on page 33 is hereby deleted.

The date of this supplement is June 30, 2008.

T. ROWE PRICE SPECTRUM FUND, INC.
SPECTRUM GROWTH FUND
SUPPLEMENT TO PROSPECTUS DATED MAY 1, 2008

Please note that the T. Rowe Price Mid-Cap Growth Fund and T. Rowe Price Small-Cap Value Fund have been added to the list of funds in which T. Rowe Price Spectrum Growth Fund can invest. Initial investments in these funds will begin on September 1, 2008, or later, depending on market conditions. The prospectus sets the minimum and maximum percentages of the Spectrum Growth Fund’s portfolio that can be allocated to each underlying fund. The fund will be permitted to allocate up to 15% of its assets to the Mid-Cap Growth Fund and up to 15% of its assets to the Small-Cap Value Fund.

Additionally, the fund has changed the minimum and/or maximum percentages of its portfolio that can be allocated to other underlying funds. The percentages are set forth below:

Table 1 Asset Allocation Ranges for Underlying Funds

The Mid-Cap Growth Fund seeks to provide long-term capital appreciation by investing in mid-cap stocks with potential for above-average earnings growth. The Small-Cap Value Fund seeks long-term capital growth by investing primarily in small companies whose common stocks are believed to be undervalued.

The table entitled “Description of Underlying Funds” in Section 3 of the prospectus is hereby revised accordingly.

The date of this supplement is August 15, 2008.

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

J.P. Morgan Non-U.S. Dollar Government Bond Index: An unmanaged index that tracks the performance of major non-U.S. bond markets.

J.P. Morgan Emerging Markets Bond Index: An unmanaged index that tracks dollar-denominated bonds issued by emerging market countries.

Lehman Brothers U.S. Aggregate Index: An unmanaged index that tracks investment-grade corporate and government bonds.

MSCI EAFE Index: An unmanaged index that tracks the stocks of about 1,000 companies in Europe, Australasia, and the Far East (EAFE).

MSCI Emerging Markets Free Index: An unmanaged index that tracks stocks in 26 emerging market countries.

Russell 2000 Index: An unmanaged index that tracks the smallest 2,000 of the largest 3,000 U.S. stocks.

S&P 500 Stock Index: An unmanaged index that tracks the stocks of 500 U.S. primarily large-cap companies.

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.

AVERAGE ANNUAL COMPOUND TOTAL RETURN

This table shows how the fund would have performed each year if its actual (or cumulative) returns had been earned at a constant rate.

GROWTH OF $10,000

AVERAGE ANNUAL COMPOUND TOTAL RETURN

This table shows how the fund would have performed each year if its actual (or cumulative) returns had been earned at a constant rate.

GROWTH OF $10,000

AVERAGE ANNUAL COMPOUND TOTAL RETURN

This table shows how the fund would have performed each year if its actual (or cumulative) returns had been earned at a constant rate.

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.

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 in 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 in 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 small-account maintenance fee of $10, generally for accounts with less than $2,000 ($500 for UGMA/UTMA). The fee is waived for any investor whose T. Rowe Price mutual fund accounts total $25,000 or more, accounts employing automatic investing, and IRAs and other retirement plan accounts that utilize a prototype plan sponsored by T. Rowe Price (although a separate custodial or administrative fee may apply to such accounts). 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.

T. ROWE PRICE SPECTRUM GROWTH FUND

Unaudited