Stocks in several small emerging European equity markets rose in the first quarter, but losses in Russia weighed on the region. The Russian market tumbled more than 14% in U.S. dollar terms-in part because of a 6.5% decline in the ruble versus the greenback-as Russia's annexation of Ukraine's Crimean peninsula raised geopolitical tensions. There were also concerns that retaliatory sanctions by the U.S. and the European Union would further weaken Russia's struggling economy. In Hungary, which depends significantly on Russian natural gas supplies and whose growth outlook is poor, shares slumped almost 9% in dollar terms-in part because of a 3% decline in the forint.
The Emerging Europe Fund returned −14.16% in the quarter compared with −6.52% for the MSCI Emerging Markets Europe Index and −0.79% for the Lipper Emerging Markets Funds Average. For the 12 months ended March 31, 2014, the fund returned −11.06% versus −7.69% for the MSCI Emerging Markets Europe Index and −0.71% for the Lipper Emerging Markets Funds Average. The fund's average annual total returns were −11.06%, 18.02%, and 4.98% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2014. The fund's expense ratio was 1.47% as of its fiscal year ended October 31, 2013.
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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.
Poor performance of our holdings in former Soviet republics Kazakhstan, Ukraine, and especially Russia-which represents more than 50% of the fund and the index-hurt our results versus the benchmark. Underweighting Poland and overweighting Russia also detracted from our relative performance. On the plus side, stock selection in Greece and Turkey added value. During the quarter, we reduced our Russian overweight but added to positions in Greece and Poland. Greece moved from the developed to the emerging markets universe in late 2013, while Poland seems poised for solid growth this year and into 2015.
The Ukraine situation remains unsettled, increasing the risk of protracted regional instability and uncertainty, as well as economic disruption to Ukraine and Russia. Sanctions imposed against Russia thus far have been limited in terms of direct impact to the Russian economy, but an escalation of the crisis leading to tougher sanctions is a key risk. While a mid-April joint declaration from the U.S., the EU, Russia, and Ukraine raises hopes for a de-escalation of the crisis, we continue to monitor the situation very closely.