Latin American stocks fell in the final quarter of 2013, as expectations of tighter U.S. monetary policy spurred outflows from emerging markets. Fading demand from China, a major commodities consumer for the past decade, also weighed on the region's resource-driven economies. Brazilian stocks fell as the country grappled with stagflation, a troubling environment marked by slow growth and rising prices. Mexico's market rose as its economy rebounded in the third quarter after a first-half slowdown, and lawmakers passed a landmark energy bill opening up its oil and gas industries to private investment. Argentine stocks rose more than 19% on speculation that a more market-friendly government will take power in 2015 after years of economic mismanagement under the current president. Stocks in Chile and Colombia fell.
The Latin America Fund returned −3.96% in the quarter compared with −2.27% for the MSCI Emerging Markets Latin America Index and −3.15% for the Lipper Latin American Funds Average. For the 12 months ended December 31, 2013, the fund returned −15.95% versus −13.15% for the MSCI Emerging Markets Latin America Index and −13.40% for the Lipper Latin American Funds Average. The fund's average annual total returns were −15.95%, 11.99%, and 14.56% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2013. The fund's expense ratio was 1.24% as of its fiscal year ended October 31, 2012.
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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 remain the fund's two largest country allocations. In recent months we have reduced our exposure to Brazil, which faces a challenging near-term outlook, during times of market strength. Conversely, we increased our exposure to Mexico by adding names during periods of weakness. The fund owns companies in the small but rapidly growing Andean markets of Colombia, Chile, and Peru, as well as in the so-called frontier markets of Panama and Argentina. We continue to favor companies in sectors driven by domestic consumption, as we believe that consumer-driven businesses will benefit the most as the middle class grows in size and wealth. Financials and consumer discretionary stocks represented our biggest sector overweights at quarter-end, while materials and utilities accounted for the largest underweights.
Latin American stocks trailed other developing regions for the quarter and year. 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; 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. These trends (e.g., an expanding middle class, declining poverty, rising consumption, and real wage growth) are the source of huge economic potential. We are optimistic that economic and earnings growth in Latin America and other emerging markets will outpace that of developed markets over the long run despite recent disappointing performance.