European stocks posted solid gains for the first quarter of 2014 and generally outperformed other developed markets. Overall, the region benefited from reduced emphasis on austerity measures and progress on structural reforms in some countries. Despite pockets of weakness, the broader macroeconomic picture is improving and supporting optimism about its longer-term trajectory. Markets also received a boost from indications that the European Central Bank may inject more liquidity into the financial system in 2014 to bolster economic growth. Although Germany and the UK recorded modest losses, several markets, including Denmark, Ireland, and Italy, generated double-digit gains. Utilities, health care, and financials were the region's top-performing sectors, while telecommunication services and information technology declined.
The European Stock Fund returned 2.80% in the quarter compared with 2.21% for the MSCI Europe Index and 2.34% for the Lipper European Region Funds Average. For the 12 months ended March 31, 2014, the fund returned 33.32% versus 25.20% for the MSCI Europe Index and 26.50% for the Lipper European Region Funds Average. The fund's average annual total returns were 33.32%, 21.23%, and 9.36% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 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.
We have shifted our exposure over the past 18 months toward companies that should benefit from gradually improving economic prospects in Europe. At the same time, we have deemphasized companies with greater exposure to emerging markets, where growth has been slowing for some time. Many European companies have continued to meaningfully restructure, reduce costs, and improve their market positions since the global financial crisis, and equity valuations remain well below their historical averages. Although the portfolio's consumer discretionary shares lost ground over the quarter, it remains our largest overweight position relative to the benchmark because we believe the broadening economic recovery will eventually drive gains in consumer spending.
Better economic data across Europe suggest that the region's shallow economic recovery will continue, helped by the gradual easing of austerity measures, supportive monetary policy, and positive impacts from the ongoing U.S. recovery. Although we await further structural improvements, it is clear that confidence is returning to the markets, and this should feed into both consumer and corporate spending. We continue to find opportunities in high-quality European businesses trading at attractive valuations, including domestically oriented businesses that have been overlooked by the market and certain global franchises that have lost value amid recent emerging market growth concerns.