European stocks fell sharply in the quarter, trailing U.S. shares but outperforming equities from other non-U.S. developed markets. Second-quarter eurozone economic growth was revised higher to a 1.5% annualized rate, supported by a weaker euro, improved consumer spending, easier credit, and low energy costs. However, the slowing Chinese economy and its impact on global economic growth weighed heavily on market sentiment, as did uncertainty about U.S. interest rate policy and Greece's status in the eurozone. Greece plunged 36%, while low global oil prices punished Norway. Germany fell nearly 11% amid concerns about its exposure to China.
The European Stock Fund returned −6.62% in the quarter compared with −8.66% for the MSCI Europe Index and −7.13% for the Lipper European Region Funds Average. For the 12 months ended September 30, 2015, the fund returned −0.95% versus −8.85% for the MSCI Europe Index and −4.31% for the Lipper European Region Funds Average. The fund's average annual total returns were −0.95%, 8.80%, and 6.11% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2015. The fund's expense ratio was 0.96% as of its fiscal year ended October 31, 2014.
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 information technology, utilities, and consumer staples stocks bucked the negative trend and posted solid gains for the period. Although the consumer staples sector generally offers good earnings growth, strong returns, and healthy dividends, valuations continue to look somewhat rich. Smaller positions in the materials and energy sectors recorded steep losses in a challenging global supply/demand environment. Financials remains our largest absolute sector allocation and our second-largest overweight relative to our benchmark. We expect a multiyear cycle of earnings upgrades at higher-quality banks as lending and revenues improve along with the regional economy.
Europe's labor market is improving, and businesses and consumers appear to be regaining a measure of confidence. European companies have meaningfully restructured, reduced costs, and improved their market positions since the global financial crisis of 2008-2009. As a result, operating leverage is relatively high for many European companies, meaning that even modest revenue growth could translate into earnings growth. Meanwhile, aggressive quantitative easing by the European Central Bank is providing direct support for asset prices. It has become difficult to find good companies selling at favorable valuations, highlighting the importance of our team's bottom-up fundamental research.