Stocks in most emerging European countries declined moderately in the first quarter, and weaker currencies exacerbated losses in U.S. dollar terms. The European sovereign debt crisis flared up again, as eurozone member Cyprus agreed to a controversial last-minute bailout that involved losses to some bank depositors. Economic and currency weakness weighed on central European markets. In dollar terms, shares in Poland and the Czech Republic fell more than 11%, while Hungarian stocks fell more than 6%. Russian shares declined about 3% on economic weakness. Turkish stocks bucked the negative trend and rose 8%, helped by an S&P upgrade of Turkish government debt to one notch below investment grade in late March.
The Emerging Europe Fund returned 0.36% in the quarter compared with −2.64% for the MSCI Emerging Markets Europe Index and −0.17% for the Lipper Emerging Markets Funds Average. For the 12 months ended March 31, 2013, the fund returned 4.20% versus 2.08% for the MSCI Emerging Markets Europe Index and 3.49% for the Lipper Emerging Markets Funds Average. The fund's average annual total returns were 4.20%, −7.24%, and 14.32% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2013. The fund's expense ratio was 1.55% as of its fiscal year ended October 31, 2012.
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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 Europe 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.
Overweighting Turkey helped our results versus the benchmark. Underweighting central European countries was also helpful. We have very little exposure to central Europe because growth there depends greatly on the eurozone, which is in recession. Russia remains our largest country weighting and one of our largest overweights versus the index. While the energy sector dominates the Russian market, we favor companies in other sectors that should benefit from increasing domestic consumption over time, such as financials and consumer staples. In Turkey, banks are our core holdings. They are well- capitalized and well managed, and Turkey's demographics augur well for future loan growth. Also, the recent easing of monetary conditions could lead to increased lending growth in 2013. We hold a few investments in former Soviet republics Kazakhstan, Ukraine, and Georgia.
Our general outlook for emerging markets remains favorable, despite their recent underperformance versus developed markets. Unfortunately, the unresolved eurozone sovereign debt crisis will continue to weigh on emerging Europe, especially central European markets. Nevertheless, we remain focused on companies with strong balance sheets, sustainable growth, and attractive valuations, and we are optimistic about the ability of these investments to perform well over the longer term. We would like to remind our investors that this fund can be extremely volatile and should represent only a small portion of a long-term investor's well-diversified portfolio.