Latin American stocks fell in the third quarter. Brazilian stocks slumped amid a September sell-off after polls showed a greater chance of President Dilma Rousseff winning reelection in October, dampening speculation that a new government will take power and implement more market-friendly policies. Separately, Brazil's economy fell into a recession in the year's first half, and Moody's cut its credit outlook on Brazil to negative. Mexican stocks advanced as data indicated that its economy was picking up after a sluggish start this year. Chilean stocks retreated amid slower economic growth arising from weaker commodity prices. Chile's economy grew at its slowest pace in the second quarter since the 2009 recession, causing the government to slash its annual growth forecast. Stock markets in Peru and Colombia also lost ground.
The Latin America Fund returned −5.67% in the quarter compared with −5.44% for the MSCI Emerging Markets Latin America Index and −6.53% for the Lipper Latin American Funds Average. For the 12 months ended September 30, 2014, the fund returned −3.67% versus −0.74% for the MSCI Emerging Markets Latin America Index and −3.54% for the Lipper Latin American Funds Average. The fund's average annual total returns were −3.67%, −1.27%, and 13.08% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2014. The fund's expense ratio was 1.25% as of its fiscal year ended October 31, 2013.
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The Latin America 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.
Brazil and Mexico are the fund's largest country allocations. Over the quarter, we reduced our exposure and moved further underweight to Brazil. Our Mexico allocation was roughly even with the benchmark at the end of September. The fund owns companies in the small but rapidly growing Andean markets of Colombia, Chile, and Peru and in the so-called frontier markets of Panama and Argentina. Our largest purchase was initiating a position in a Colombian banking conglomerate that issued American depository receipts in September. The fund's sector allocations stayed broadly unchanged. We continue to favor companies in sectors that stand to benefit from rising domestic consumption and a growing middle class. Consumer staples and financials represented our biggest overweights at quarter-end, while materials and utilities accounted for the largest underweights.
Latin American stocks have lagged the broader emerging markets benchmark over the past 12 months and the year-to-date period. However, we believe that the reasons for investing in the region are intact. Most countries have implemented sound macroeconomic policies in the past 15 years, resulting in greater fiscal discipline, tame inflation, and stronger financial systems, which are all positive developments in a region with a history of boom and bust cycles. Over the past decade, the size of the middle class in Latin America has soared while the portion of people in poverty has fallen. The trends of an expanding middle class, declining poverty, rising consumption, and real wage growth are the drivers of huge economic potential. Over time, we believe that economic and earnings growth in Latin America and other emerging markets will outpace that of developed markets.