Emerging markets stocks declined in the first quarter as losses in January due to a currency selloff offset gains in February and March. January's turmoil was sparked by a private survey that showed manufacturing in China unexpectedly contracted to a six-month low, which triggered a flight from risk that hit emerging markets currencies particularly hard. In response to the selloff, central banks in Brazil, India, South Africa, and Turkey raised their respective benchmark lending rates. The rate hikes helped most emerging markets currencies recover by quarter-end, defusing worries about a destabilizing currency crisis. Separately, political uncertainty in many countries hurt sentiment as investors weighed the risks of a widening corruption probe in Turkey, a governance crisis in Thailand, and Russia's annexation of Ukraine's Crimea region.
The Emerging Markets Stock Fund returned −0.62% in the quarter compared with −0.37% for the MSCI Emerging Markets Index and −0.79% for the Lipper Emerging Markets Funds Average. For the 12 months ended March 31, 2014, the fund returned −3.06% versus −1.07% for the MSCI Emerging Markets Index and −0.71% for the Lipper Emerging Markets Funds Average. The fund's average annual total returns were −3.06%, 15.43%, and 9.27% for the 1-, 5-, and 10-year periods, respectively, as of March 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 broadly diversified across countries and sectors. At the end of March, the portfolio was underweight in emerging Asia and in Latin America and slightly overweight in emerging Europe, the Middle East, and Africa. The portfolio also holds a few European companies that generate a significant portion of their profits in emerging markets. The portfolio is overweight in the largest emerging markets of Brazil, Russia, India, and China (including Hong Kong). Over the quarter, we added to underperforming names in Brazil and Russia and initiated positions in select South Korean banks. Sector allocations continue to reflect our preference for areas driven by domestic consumption. Consumer staples followed by discretionary stocks accounted for the top overweights at quarter-end, while materials represented the biggest underweight.
We believe that emerging markets may not outperform developed markets by the wide margin achieved over the past decade, but they will resume their role as global leaders over time. Stocks across the developing world are trading at a significant discount relative to their history and their developed market peers, making current valuations compelling for long-term investors. Most emerging markets today have stronger financial positions, larger foreign exchange reserves, and more flexible exchange policies. Political uncertainties have risen in many countries with elections in the coming months, but new governments in some cases will bring market-oriented reforms, in our view. Near-term risks for emerging markets include: a worse-than-expected economic slowdown in China; a further rise in investors' risk aversion; and a sharp rise in U.S. interest rates due to Federal Reserve tapering, which would exacerbate capital outflows from emerging markets. With the end of the global commodities boom and annual double-digit growth in China, we believe that successful stock selection will be increasingly crucial for long-term outperformance.