European equities declined in U.S. dollar terms during the fourth quarter as eurozone economies stalled, fears of deflation intensified, and the euro tumbled against the U.S. dollar. Declining food prices and sharply lower energy costs led to a 0.3% eurozone inflation rate in November, well below the European Central Bank's 2% target. With leading indicators suggesting lackluster economic growth ahead and inflation expectations trending lower, the ECB has indicated that it may take more aggressive policy actions to stimulate growth. Ireland and Belgium managed slim gains, but returns for all other markets were negative.
The European Stock Fund returned 0.22% in the quarter compared with −4.30% for the MSCI Europe Index and −3.20% for the Lipper European Region Funds Average. For the 12 months ended December 31, 2014, the fund returned −5.90% versus −5.68% for the MSCI Europe Index and −7.05% for the Lipper European Region Funds Average. The fund's average annual total returns were −5.90%, 9.15%, and 6.91% for the 1-, 5-, and 10-year periods, respectively, as of December 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.
Our portfolio was slightly positive in absolute terms in a challenging market environment. Industrials, telecommunication services, and utilities led our sector returns. Financials stocks were roughly flat, and our energy shares, not surprisingly, declined by double digits. Consumer discretionary and financials stocks represent our largest sector positions and largest overweights versus our benchmark. From a geographic perspective, the UK is our largest country allocation, followed by Spain, Switzerland, France, and Germany. Spain and Italy are our largest overweight allocations, while the Netherlands, Germany, and France are the portfolio's largest underweights.
Overall, European earnings growth has been disappointing, although recent negative revisions have slowed. 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. It is encouraging that consumers appear to be regaining a measure of confidence in most markets, and credit conditions may be starting to improve. Eurozone inflation remains well below target levels, but we believe that the ECB has shown the will and has the means to introduce more stimulative policies.