Most non-U.S. stock markets posted fourth-quarter losses in U.S. dollar terms due to the strengthening dollar, particularly against the euro and the yen. An appreciating U.S. dollar detracts from returns for dollar-based investors in foreign markets. The Japanese economy contracted in the second and third quarters and slipped into recession (commonly defined as two consecutive quarters of economic contraction). Tepid economic growth in the eurozone, expected to be about 1% in 2014 and only marginally better in 2015, coupled with weak inflation data caused the euro to fall. Emerging markets performance was mixed with Asian markets about flat, while the European and Latin American regions posted double-digit declines.
The International Stock Fund returned −1.43% in the quarter compared with −3.81% for the MSCI All Country World Index ex USA and −2.22% for the Lipper International Multi-Cap Growth Funds Average. For the 12 months ended December 31, 2014, the fund returned −0.82% versus −3.44% for the MSCI All Country World Index ex USA and −4.95% for the Lipper International Multi-Cap Growth Funds Average. The fund's average annual total returns were −0.82%, 6.19%, and 5.33% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2014. The fund's expense ratio was 0.85% as of its fiscal year ended October 31, 2013.
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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 International 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.
Information technology (IT) holdings generated the portfolio's best absolute performance contribution. Thanks to stock selection and an overweight versus the benchmark, it was also the portfolio's best relative performance contributor. We found many rapidly growing IT companies with reasonable valuations, particularly in emerging markets. We remain committed to the portfolio's consumer discretionary holdings (the largest overweight allocation) because of their above-average growth potential. We look to select companies that are adept at generating free cash flow, revenues, and earnings growth. The consumer discretionary overweight and, to a lesser extent, stock selection in the sector benefited absolute and relative results in the period. Although the portfolio has a significant underweight to financials, it remains the largest sector allocation at 18% of the portfolio. Stock selection and an underweight allocation detracted.
We remain optimistic about the environment for non-U.S. equities in the intermediate and longer term, but potential near-term headwinds include the strengthening U.S. dollar and lackluster economic growth. Valuations in non-U.S. equity markets appear neither excessive nor inexpensive. Although some individual stocks and sectors appear to be richly priced, there are opportunities for bottom-up stock selection. Overall, European earnings growth has been disappointing, and Europe's ability to implement structural reforms that would improve long-term growth prospects remains uncertain. In Japan, we believe domestic consumption and wage inflation need to be the next growth engines for a sustained recovery. Emerging markets returns have been reflective of underlying fundamentals at the stock and country level, a positive and overdue development, in our view.