Non-U.S. stock markets posted steep declines for the quarter. The most significant reason for the third-quarter losses was the strength of the U.S. dollar, which gained nearly 8% versus the euro and the Japanese yen and 5% versus the British pound. Additionally, slower-than-expected economic growth in Europe and Asia cast a pall on non-U.S. investments. Except health care, which posted a modest positive return, every sector in the MSCI AC World Index ex USA posted a loss for the quarter.
The International Stock Fund returned −4.93% in the quarter compared with −5.19% for the MSCI All Country World Index ex USA and −5.80% for the Lipper International Multi-Cap Growth Funds Average. For the 12 months ended September 30, 2014, the fund returned 5.05% versus 5.22% for the MSCI All Country World Index ex USA and 3.07% for the Lipper International Multi-Cap Growth Funds Average. The fund's average annual total returns were 5.05%, 7.61%, and 6.90% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 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.
We remain committed to our consumer discretionary holdings because of their above-average growth potential. We look to own companies that are adept at generating free cash flow, revenues, and earnings growth. However, our overweight allocation (18% of assets) and, to a lesser extent, stock selection hurt absolute and relative results in the period. Financials (our largest allocation at 19% of the portfolio) benefited relative performance thanks to stock selection, although our underweight allocation detracted. We maintain a positive view on the sector, especially in Europe where we are finding attractive opportunities amid industry consolidation and improving fundamentals. Our information technology holdings generated the portfolio's strongest absolute performance contribution, and, thanks to stock selection, it was the portfolio's best relative performance contributor. We trimmed several holdings into strength and continued to favor Internet-related companies. We are finding many rapidly growing IT companies with reasonable valuations, particularly in emerging markets. We believe that growth in consumer and enterprise technology products represent a powerful long-term trend.
We remain optimistic about the environment for global equities in the intermediate and longer term, but global growth forecasts are being almost uniformly ratcheted lower, and our near-term outlook remains somewhat guarded. Dollar strength will remain a key focus for investors in the coming quarters. Markets have been roiled by political upheaval in Russia and Ukraine, strife in the Middle East, and civil unrest in Hong Kong. We expect further monetary stimulus in Europe and Japan as growth momentum moderates . European corporate earnings should benefit from a resumption of economic growth, and valuations are currently near historical norms, which is attractive for long-term investors.