European equities managed a modest overall gain in euro terms, but a sharp appreciation in the value of the U.S. dollar led to steep declines for dollar-based investors across all markets. Expectations for higher interest rates in the U.S. against a backdrop of deteriorating economic data in Europe saw the dollar rise 8% against the euro over the period. Ongoing geopolitical tension in Eastern Europe and concerns about China's economic slowdown also weighed on investor sentiment, leading to further underperformance in more cyclical areas of the market. Northern European markets Finland, Belgium, and Denmark fared best, while Portugal and Austria fell sharply.
The European Stock Fund returned −8.70% in the quarter compared with −6.98% for the MSCI Europe Index and −7.59% for the Lipper European Region Funds Average. For the 12 months ended September 30, 2014, the fund returned 3.70% versus 6.36% for the MSCI Europe Index and 4.06% for the Lipper European Region Funds Average. The fund's average annual total returns were 3.70%, 9.29%, and 8.34% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2014. The fund's expense ratio was 0.96% as of its fiscal year ended October 31, 2013.
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.
Increased investor appetite for defensive, higher-yielding stocks led the utilities sector to outperform for a second consecutive quarter. We trimmed several positions on this strength but are continuing to look for buying opportunities. The UK gas supply market is a particular area of interest, as valuations have fallen considerably as political pressure to freeze prices until after the election has weighed on the industry. Consumer discretionary remains our largest sector overweight, and we increased our exposure further during the quarter. We remain upbeat about European broadcasters, where we are seeing signs of stabilization in television advertising trends, and the luxury goods industry.
Following steady improvement since the middle of 2012, European economic data have deteriorated as of late. Corporate earnings have continued to disappoint, as weaker demand from emerging markets and euro strength before the recent correction has weighed on companies with operations outside of Europe. European companies have continued to meaningfully restructure, reduce costs, and improve their market positions, and we believe that many companies will experience significant operating leverage once a gradual recovery in Europe unfolds. Our investment philosophy remains clear: identify high-quality businesses in Europe that trade at attractive valuations.