European stocks posted solid gains in the first quarter of 2013. While the eurozone still faces significant challenges, the European Central Bank's infusion of liquidity into the region's banking system and an agreement to slash deficits reduced borrowing costs and reassured investors about the safety of the euro. The ongoing U.S. economic recovery and signs of improvement in China provided further support. Investor optimism was tempered by Italy's election stalemate and a banking crisis in Cyprus, contributing to reduced risk appetite and a market pullback later in the period. Sector performance was led by the traditionally defensive health care and consumer staples sectors. Greece, Ireland, and Switzerland were the top-performing countries, while the UK, France, and Germany lagged the broader market.
The European Stock Fund returned 4.43% in the quarter compared with 2.83% for the MSCI Europe Index and 2.91% for the Lipper European Region Funds Average. For the 12 months ended March 31, 2013, the fund returned 12.72% versus 11.29% for the MSCI Europe Index and 11.17% for the Lipper European Region Funds Average. The fund's average annual total returns were 12.72%, 0.87%, and 10.87% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2013. The fund's expense ratio was 1.00% as of its fiscal year ended October 31, 2012.
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 increased our exposure to the consumer discretionary sector, which remains our largest overweight. We focused on media stocks, especially European broadcasters, as these stocks offer attractive valuation potential amid an improved operating environment and rising risk appetite. We increased our exposure to financials stocks, with a focus on the banking industry. In addition to our longstanding exposure to Swedish and international banks, we focused on high-quality Southern European banks that have the potential to appreciate as profitability normalizes amid improving funding conditions, easing sovereign concerns, and declining provision levels. We reduced our exposure to the energy sector, particularly oil services stocks. The growth outlook for the industry is deteriorating amid flattening oil prices and cash flow constraints among key players.
We are optimistic about European equities for several reasons. A gradual economic recovery is likely to take hold over the next 12 months, and the drag of fiscal austerity is likely to abate in some countries. We are encouraged by signs of structural improvement and supportive policies in key areas, although the macroeconomic environment remains challenging. Valuations remain below historic averages despite strength in recent months. Corporate earnings are still below their pre-financial crisis levels and, in light of cost reductions and improved market positions, have ample room to grow if the European economy recovers. We will continue to use our proprietary global research platform to identify high-quality European businesses trading at attractive valuations