Emerging markets stocks declined as slowdowns in a few countries led investors to shift money out of the asset class in favor of developed markets, which have lately benefited from a better growth outlook. Slowing growth in Brazil, India, and China from the rapid pace of recent years spurred investors to rotate funds into the U.S. and Japan, where growth expectations have picked up due to unprecedented accommodative monetary policies. As a result, emerging markets stocks widely trailed stock markets in the U.S. and Japan, both of which rallied more than 10% for the quarter. However, resilient domestic demand and a few credit rating upgrades lifted stock markets in Mexico, Turkey, and most Southeast Asian countries, all of which posted solid returns and widely outperformed larger emerging markets.
The Emerging Markets Stock Fund returned −2.29% in the quarter compared with −1.57% for the MSCI Emerging Markets Index and −0.17% for the Lipper Emerging Markets Funds Average. For the 12 months ended March 31, 2013, the fund returned 4.07% versus 2.31% for the MSCI Emerging Markets Index and 3.49% for the Lipper Emerging Markets Funds Average. The fund's average annual total returns were 4.07%, −1.23%, and 16.33% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2013. The fund's expense ratio was 1.27% as of its fiscal year ended October 31, 2012.
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 broadly diversified across countries and sectors. (Diversification cannot assure a profit or protect against loss in a declining market.) China, Brazil, and South Korea represent the top three country allocations. We increased our allocation to India and reduced our exposure to China, whose government is trying to engineer a shift to a consumption-driven economy after years of rapid export-fueled growth. We slightly increased our allocations to Russia and Brazil. India, the Philippines, and Thailand ranked among the fund's largest overweight countries. Conversely, the portfolio remains underweight to South Korea and Taiwan, both relatively developed markets that offer few good growth opportunities. Sector allocations continue to reflect our preference for areas driven by domestic consumption, which should see solid long-term growth as the middle class grows in size and wealth across the developing world. Consumer staples and discretionary stocks accounted for our top overweight sectors at quarter-end.
We expect that developments in Europe, slowing growth in China, and unresolved fiscal problems in the U.S. will drive volatility in emerging markets stocks in the coming months. Recent fund flow data shows investors have retreated from emerging markets stocks as their returns have lagged those in developed markets in the year-to-date period. As a result, valuations for emerging markets stocks have become increasingly attractive relative to developed markets stocks. We believe that current valuations are pricing in many of the near-term risks for the asset class. Over the medium to long term, we remain optimistic about the growth outlook for emerging markets. We believe that increasing consumption, a growing middle class, rising real wages, and greater upward mobility will drive strong and sustainable growth across the developing world over time.