Emerging markets stocks fell in the third quarter as a sell-off in September erased gains from the prior two months. September's drop, which snapped seven straight months of gains for the asset class, came as signs of a stronger U.S. economy and expectations for higher interest rates diminished the appeal of emerging markets. Currency weakness also reduced the attractiveness of emerging markets assets as anticipation of higher U.S. rates caused the dollar to rally. Nearly all currencies fell against the dollar. The declines were biggest in developing countries with a poor growth outlook such as Russia and Brazil, whose currencies posted double-digit losses for the quarter. Protests in Hong Kong late in the quarter further curbed risk appetite as investors worried that the unrest could provoke a harsh response from Beijing.
The Emerging Markets Stock Fund returned −2.75% in the quarter compared with −3.36% for the MSCI Emerging Markets Index and −3.42% for the Lipper Emerging Markets Funds Average. For the 12 months ended September 30, 2014, the fund returned 5.85% versus 4.66% for the MSCI Emerging Markets Index and 4.80% for the Lipper Emerging Markets Funds Average. The fund's average annual total returns were 5.85%, 4.47%, and 10.12% 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.
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. Our largest purchase for the quarter was initiating a position in China's e-commerce leader, which had its initial public offer in September. 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 materials, telecommunication services, and energy due to our concerns about commodity prices and the lack of attractive growth opportunities in these areas.
Given the wide dispersion in returns of emerging markets stocks in recent years, we believe that careful stock selection is key to long-term outperformance in the asset class. Emerging markets appear cheap in aggregate, but valuations vary widely by country and sector. Near-term risks include a worse-than-expected slowdown in China or a breakdown in its financial system, a sharp rise in U.S. rates as the Fed ends tapering, and an unexpected bout of risk aversion due to geopolitical events. Overall, developing world stocks are trading at a significant discount relative to their history and developed market peers, making current valuations compelling for long-term investors.