European stocks ended a strong year with robust fourth-quarter gains, benefiting from reduced emphasis on austerity measures, progress on structural reforms in some countries, and signs that the region's recession had ended. The European Central Bank (ECB) cut its key lending rate by a quarter-point in November, signaling that inflation was not a problem and growth was a priority, which helped extend the market rally through the end of the year. Finally, the Federal Reserve's mid-December announcement that it would gradually wind down its monthly asset purchases beginning in January 2014 cheered investors as it removed an element of uncertainty. Regional sentiment is improving, and stocks climbed on hopes that the economic expansion will gain momentum. The largest eurozone markets generated some of the biggest returns.
The European Stock Fund returned 10.44% in the quarter compared with 7.92% for the MSCI Europe Index and 8.31% for the Lipper European Region Funds Average. For the 12 months ended December 31, 2013, the fund returned 35.43% versus 25.96% for the MSCI Europe Index and 27.49% for the Lipper European Region Funds Average. The fund's average annual total returns were 35.43%, 17.22%, and 9.21% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2013. The fund's expense ratio was 1.00% as of its fiscal year ended October 31, 2012.
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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.
All sectors were positive for the period, with materials, information technology, and financials registering double-digit gains. Consumer discretionary and industrials and business services generated more modest returns. Consumer discretionary is our second-largest sector position and our largest overweight. We are particularly upbeat about European broadcasters. Signs of economic recovery have contributed to stabilization in TV advertising trends, and we believe this will be accompanied by appreciable operating leverage as these companies have reined in costs. Consumer staples is our largest underweight. Although the sector offers good earnings growth, strong returns, and healthy dividends, valuations appear somewhat rich.
Better economic data across Europe suggest that the shallow economic recovery will continue, helped by the gradual easing of austerity measures and positive effects of a 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. The ECB signaled its intentions to provide monetary stimulus, which has helped raise valuations from historic lows. However, valuations remain reasonable by several key measures. European companies have continued to meaningfully restructure, reduce costs, and improve their market positions over this time. We believe our portfolio can potentially benefit from our positioning, which has shifted toward companies with greater revenue exposure to Europe.