Emerging markets stocks fell in the fourth quarter as plunging oil prices and a full-blown currency crisis in Russia sparked a bout of global risk aversion. Though cheaper oil is good for consumers and the finances of oil-importing countries, it spells trouble for many commodity-dependent emerging markets. Oil's collapse was particularly painful for Russia, whose economy began contracting and whose currency repeatedly fell to record lows during the quarter. Currencies in Turkey, Indonesia, Brazil, and South Africa also hit record or multiyear lows in December as investors sold higher-risk assets. The MSCI Emerging Markets Index slid to its lowest level since July 2013 on December 16, when the ruble suffered a big selloff. However, it partly recovered by month-end as investors took comfort from the Federal Reserve's announcement the next day that it would be "patient" in deciding when to raise interest rates.
The Emerging Markets Stock Fund returned −2.84% in the quarter compared with −4.44% for the MSCI Emerging Markets Index and −5.32% for the Lipper Emerging Markets Funds Average. For the 12 months ended December 31, 2014, the fund returned 1.41% versus −1.82% for the MSCI Emerging Markets Index and −3.23% for the Lipper Emerging Markets Funds Average. The fund's average annual total returns were 1.41%, 2.26%, and 7.89% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2014. The fund's expense ratio was 1.25% as of its fiscal year ended October 31, 2013.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
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 Emerging Markets 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.
The portfolio is overweight in the largest emerging markets of Brazil, Russia, India, and China (including Hong Kong). The portfolio also holds a few companies in developed Europe that generate a significant portion of their profits in emerging markets. In Russia, we avoided energy-related companies and concentrated on a few high-quality, consumer-driven businesses. Sector allocations reflect our preference for areas driven by domestic consumption. Consumer staples and information technology stocks accounted for the portfolio's top overweights at quarter-end. The largest underweight sectors were telecommunication services, materials, and energy due to our concerns about commodity prices and the lack of attractive growth opportunities in these areas.
We are optimistic about the long-term outlook for emerging markets. Rising consumption, an expanding middle class, and real wage growth are the drivers of huge economic potential in the developing world. Emerging markets are trading at a significant discount on an absolute and relative basis, making current valuations compelling for long-term investors. Since the onset of China's slowdown and the end of the global commodities boom, we have noted significant dispersion in the returns of emerging markets stocks even within the same country and industry. Going forward, we anticipate more divergence in the performance of countries and companies than we've seen in the past 15 years, and we believe that careful stock selection will be crucial for producing good returns over time.