Emerging markets stocks jumped in the second quarter as the improving U.S. economy, a new round of stimulus in Europe, and signs of stabilization in China lifted confidence in the global economic outlook. Geopolitical uncertainty stemming from Russia's intervention in Ukraine eased over the period, boosting investors' risk appetite. Elections had a major impact on performance in several countries. India's stock market hit record highs after the country elected a new, reform-minded government in May, while Brazil's market rallied on polls showing growing support for the opposition in October's presidential elections, possibly leading to a more market-friendly administration. The MSCI Emerging Markets Index rose to a 13-month high in early June but pared some of its gains by month-end as growing turmoil in Iraq caused a spike in oil prices.
The Emerging Markets Stock Fund returned 8.00% in the quarter compared with 6.71% for the MSCI Emerging Markets Index and 6.52% for the Lipper Emerging Markets Funds Average. For the 12 months ended June 30, 2014, the fund returned 12.61% versus 14.68% for the MSCI Emerging Markets Index and 14.14% for the Lipper Emerging Markets Funds Average. The fund's average annual total returns were 12.61%, 9.27%, and 11.15% for the 1-, 5-, and 10-year periods, respectively, as of June 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. We maintained an underweight allocation to Mexico but initiated a position in a Mexican mining company, one of our biggest purchases during the quarter. Sector allocations reflect our preference for areas driven by domestic consumption. Consumer staples followed by information technology stocks accounted for our top overweights at quarter-end. Our largest underweight sectors remain materials and energy due to our concerns about commodity prices and the lack of compelling growth opportunities in these areas.
In recent years, we have noted significant dispersion in the returns of emerging markets stocks, even within the same country and industry. With the end of the global commodities boom and double-digit annual growth in China, we believe that careful stock selection will be increasingly key to long-term outperformance. Near-term risks include a worse-than-expected slowdown in China or a breakdown in its financial system; a sharp rise in U.S. interest rates due to Federal Reserve tapering, which would exacerbate capital outflows; and an unexpected rise in risk aversion due to geopolitical events. Political risk has increased in many countries holding elections in the coming months, though we believe that new governments in some cases will push through market-oriented reforms.