European stocks recorded solid gains in a volatile fourth quarter of 2015. Shares rose through the first two months of the period on optimism about the European Central Bank's (ECB) stimulus measures and reassuring economic data from China, a key end market for many European companies. Stocks fell in December, however, after a disappointingly small stimulus announcement by the ECB. Signs of weak demand in China and further deterioration in the global commodities market also sapped investor confidence. German shares rose more than 7% as concerns about its exposure to slowing Chinese demand receded, while France and the UK trailed with more modest gains.
The European Stock Fund returned 1.78% in the quarter compared with 2.53% for the MSCI Europe Index and 3.06% for the Lipper European Region Funds Average. For the 12 months ended December 31, 2015, the fund returned 0.60% versus −2.34% for the MSCI Europe Index and 1.75% for the Lipper European Region Funds Average. The fund's average annual total returns were 0.60%, 7.46%, and 6.06% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2015. The fund's expense ratio was 0.96% as of its fiscal year ended October 31, 2014.
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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 and materials shares generated the strongest performance for the fund during the period. Consumer discretionary and health care shares posted more modest gains. Energy and utilities trailed with negative returns as a longstanding supply/demand imbalance worsened further. Consumer discretionary is our largest overweight position versus the benchmark, with an emphasis on media companies with improving penetration rates and industry consolidation. Financials remains our largest absolute sector allocation and our second-largest overweight relative to the benchmark. We expect a multiyear cycle of earnings upgrades at higher-quality banks as lending and revenues improve along with the regional economy.
Despite some volatility, we continue to be encouraged by Europe's economic data. Manufacturing remains in expansive territory, while a weak euro, cheap oil, and ECB stimulus measures offer ongoing support. Consumers appear to be regaining a measure of confidence, and credit conditions have improved. Stock valuations remain relatively attractive on a cyclically adjusted basis. European companies have meaningfully restructured, reduced costs, and improved their market positions since the global financial crisis of 2008-2009, meaning that even modest revenue growth could translate into earnings growth. We continue to see opportunities in domestically oriented businesses overlooked by investors, as well as high-quality global franchises that have been oversold due to emerging markets concerns.