Equities in emerging Europe generally produced good returns, helped by signs that the neighboring eurozone was coming out of a recession. In Central Eastern Europe, shares in Poland and the Czech Republic advanced 18% and 13%, respectively. Stocks in Hungary, whose growth is hindered by high levels of debt, dropped about 5%. Despite a decelerating economy and stubborn inflation, Russian equities climbed more than 13%, helped by rising oil prices. Turkish shares declined about 7%. Expectations that the U.S. Federal Reserve will begin to taper its asset purchases this year, and thus reduce global liquidity, weighed on the market and on the lira versus the dollar. The country has a sizable current account deficit and relies greatly on external funding.
The Emerging Europe Fund returned 6.72% in the quarter compared with 9.81% for the MSCI Emerging Markets Europe Index. For the 12 months ended September 30, 2013, the fund returned 7.38% versus 3.90% for the MSCI Emerging Markets Europe Index. The fund's average annual total returns were 7.38%, 2.73%, and 10.01% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 1.55% 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 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.
Fund performance was hurt by underweighting Poland, stock selection in Russia, and an overweight in Turkey. On the plus side, lack of exposure to Hungary helped relative results. We have very little exposure to central Eastern Europe, and we hold a few investments in former Soviet republics Kazakhstan, Ukraine, and Georgia to help diversify the portfolio. Russia is our largest country weighting, and our Russian energy holdings were among our best performers. However, we favor companies in sectors that should benefit from increasing domestic consumption, such as consumer staples. In Turkey, which has some of the best long-term growth prospects in the region, banks are our core holdings. They are typically well capitalized and well managed, and Turkey's demographics augur well for future loan growth. However, two of our Turkish bank stocks were significant performance detractors.
While the eurozone is emerging from recession, economic growth is likely to remain weak. The sovereign debt crisis is not over, so the potential for another flare-up may weigh on emerging Europe, especially central Eastern European markets. In addition, as U.S. monetary policy begins to normalize, a stronger dollar could be a headwind for countries with large trade deficits that depend on external financing. Nevertheless, we remain focused on companies in our opportunity set with strong balance sheets, sustainable growth, and attractive valuations. We believe such companies will perform well over the long 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.