European stocks declined in the second quarter, which was dominated by the buildup to and aftermath of the UK's decision to leave the European Union, or Brexit. Markets were reasonably steady in April and May as the region's economy found support in accommodative monetary policies, stabilizing oil prices, and increased confidence. Starting in June, markets rose and fell with daily opinion polls before the June 23 Brexit referendum, and UK and European markets fell sharply after the results stunned investors. European bank stocks were among the hardest hit after the referendum, particularly Italian banks already struggling with concerns about nonperforming loans. The euro fell 2.5% versus the U.S. dollar, and the sterling tumbled roughly 7%.
The European Stock Fund returned −4.17% in the quarter compared with −2.29% for the MSCI Europe Index and −2.98% for the Lipper European Region Funds Average. For the 12 months ended June 30, 2016, the fund returned −13.01% versus −10.67% for the MSCI Europe Index and −9.46% for the Lipper European Region Funds Average. The fund's average annual total returns were −13.01%, 3.54%, and 4.20% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2016. The fund's expense ratio was 0.95% as of its fiscal year ended October 31, 2015.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
Share price, principal value, and return will vary and you may have a gain or loss when you sell your shares.
The European Stock Fund charges a 2%
redemption fee on shares held 90 days or less.
The performance information shown does not reflect the deduction of the redemption fee;
if it did, the performance would be lower.
Our materials and energy shares generated the portfolio's largest absolute gains as energy and commodity prices rebounded. Our consumer staples shares also advanced, but an underweight exposure versus the benchmark hurt results as investors favored less cyclical stocks. Consumer discretionary and industrials and business services shares fell by double digits as Brexit-related uncertainty soured sentiment about cyclical stocks. From a country perspective, we were reluctant to predict the outcome of the Brexit vote and, as a result, left our UK exposure relatively unchanged, although we did trim our financials exposure as the quarter progressed.
Economic data continue to show modest growth in Europe, but the outlook is more uncertain after Brexit due to fears that the region's fragile recovery could lose momentum as the UK and the EU negotiate a new relationship. In addition, political and economic instability could increase as other member states reconsider their relationships with the EU. However, we are encouraged by the robust response from European policymakers aimed at supporting the EU project, stimulating economic growth, and calming market uncertainty. Overall European equity valuations do not appear excessive and should have room for appreciation if the economic recovery can be sustained. We retain our conviction that the best way to ride out market instability is to continue investing in high quality businesses trading at attractive valuations.