International developed markets stocks fell in the first quarter of 2016. Japanese equities fell 6% in U.S. dollar terms. Japan's economy remained sluggish despite the series of accommodative monetary and fiscal policies and structural reforms known as Abenomics. Policymakers downgraded their growth expectations near the end of the quarter. European equity markets generally declined, though shares in the Netherlands and Portugal bucked the negative trend. Many markets were hurt by weakness among bank stocks amid concerns about negative interest rates, nonperforming loans, especially in Italy, and exposure to the energy sector. Stocks in emerging markets gained in the first quarter, thanks to a March rally. The U.S. dollar weakened against several major currencies, boosting returns for U.S. investors.
The Overseas Stock Fund returned −1.33% in the quarter compared with −2.88% for the MSCI EAFE Index and −2.17% for the Lipper International Large-Cap Core Funds Average. For the 12 months ended March 31, 2016, the fund returned −8.98% versus −7.87% for the MSCI EAFE Index and −9.79% for the Lipper International Large-Cap Core Funds Average. The fund's average annual total returns were −8.98%, 2.72%, and 0.86% for the 1-, 5-, and Since Inception (12/29/2006) periods, respectively, as of March 31, 2016. The fund's expense ratio was 0.84% as of its fiscal year ended October 31, 2015.
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if it did, the performance would be lower.
The current market remains very stock-specific, with opportunities in areas like industrials and materials likely to continue given the lingering worries over demand growth and weak commodity pricing. Many consumer staples names appear expensive, as investors continue to favor the sector as a source of income in lieu of low-yielding bonds. Meanwhile, health care valuations look more attractive now. The sector has struggled year-to-date, but many health care companies are posting better growth than staples companies. We are finding opportunities to add to our holdings in the pharmaceutical industry in particular, given what we believe to be somewhat exaggerated concerns over pricing power.
International equity valuations still appear broadly reasonable after a volatile quarter. In Europe, we expect modest economic improvement to continue, but the current political atmosphere suggests that the European Union requires a more lasting and comprehensive solution to its problems than has been considered to date. A rise in populism in Europe's largest democracies could increase the risk that such a solution fails to gain broad support and could inhibit further beneficial economic integration. We are marginally more pessimistic on the outlook for Japan, as the results from three years of Abenomics have been mixed. While corporate governance has improved, Japan's economic growth and inflation remain disappointing.