Non-U.S. stocks in developed markets surged in the fourth quarter after the U.S. Federal Reserve unexpectedly announced that it would not begin tapering its asset purchases in mid-September. Subsequently, the European Central Bank cut its key lending rate by 0.25 percentage points in November, signaling that inflation was not a problem and growth was a priority, which helped extend the broad-based international stock market rally through the end of the year. Finally, the Fed's mid-December announcement that it would gradually wind down its large-scale asset purchases beginning in January 2014 cheered investors as it removed an element of uncertainty. Large- and small-cap stocks in developed markets posted similar returns. Conditions in emerging economies were mixed, with many opting for tighter monetary policies to bolster their currencies and contain inflation.
The International Discovery Fund returned 6.73% in the quarter compared with 5.18% for the S&P Global ex-U.S. Small Cap Index and 6.23% for the Lipper International Small/Mid-Cap Growth Funds Average. For the 12 months ended December 31, 2013, the fund returned 24.37% versus 20.71% for the S&P Global ex-U.S. Small Cap Index and 25.75% for the Lipper International Small/Mid-Cap Growth Funds Average. The fund's average annual total returns were 24.37%, 20.35%, and 11.53% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2013. The fund's expense ratio was 1.23% 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 International Discovery 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's overweight to the information technology sector made a positive contribution to our relative performance. The sector is the portfolio's largest overweight position; within information technology, we continue to favor software, Internet, and IT services companies with innovative and resilient business models supported by solid bases of recurring revenues or driven by structural trends. We increased the size of our overweight to the consumer discretionary sector, where we favor media stocks amid further signs of economic improvement in Europe and Japan. In terms of regional allocations, stock selection in Australia and India helped our Pacific Ex-Japan holdings contribute to the fund's relative performance. On the negative side, stock selection in the UK financials and consumer discretionary sectors detracted from our relative returns.
We continue to believe that small-cap developed equity markets outside the U.S. present attractive value opportunities. While we think that many economies are stable or improving, the results may take some time and could be uneven. Although non-U.S. stock valuations are no longer as cheap as they were a year ago, they are still below their long-term averages. Markets will likely need signs of healthy earnings growth to move sustainably higher, so we are striving to remain selective and to focus on valuation discipline. In many emerging markets, we are still confident that a growing middle class, rising consumption, and increasing upward mobility will lift stock prices over the long term.