Emerging markets stocks rose in the second quarter, lifted by an April rally on speculation that the Federal Reserve would delay a widely expected interest rate hike until this year's second half. Rising U.S. rates reduce the relative attractiveness of assets in emerging markets, where yields are currently higher than those in developed markets, and raise the risk of capital outflows from the developing world. The MSCI Emerging Markets Index rose to a seven-month high in late April but pared most of its gains over the rest of the quarter as talks between Greece and its creditors failed to produce an agreement on its debt. The index tumbled at the end of June after negotiations broke down and Greece imposed capital controls. Separately, Chinese stock markets in Shanghai and Shenzhen entered a bear market in June, falling from a seven-year high earlier in the month, as regulators clamped down on speculative trading.
The Emerging Markets Stock Fund returned −0.15% in the quarter compared with 0.82% for the MSCI Emerging Markets Index and 0.68% for the Lipper Emerging Markets Funds Average. For the 12 months ended June 30, 2015, the fund returned −2.24% versus −4.77% for the MSCI Emerging Markets Index and −7.00% for the Lipper Emerging Markets Funds Average. The fund's average annual total returns were −2.24%, 4.35%, and 7.44% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2015. The fund's expense ratio was 1.24% as of its fiscal year ended October 31, 2014.
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 Markets Stock 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 fund is overweight in Brazil, India, and China (including Hong Kong). The fund also holds a few companies in developed Europe that have significant exposure to emerging markets. In Russia, we hold only a few high-quality consumer-driven businesses and no energy names. South Korea and Taiwan are the biggest underweight countries due to the lack of attractive growth opportunities. Our sector allocations reflect our preference for areas driven by domestic consumption. We maintained longstanding overweights in consumer discretionary and consumer staples for their exposure to a growing middle class and rising real wages across the developing world. Our largest underweight sectors were telecommunication services, energy, and materials due to the lack of attractive growth opportunities in these areas and concerns about commodity prices.
We are optimistic about the long-term outlook for emerging markets. Rising consumption, an expanding middle class, and real wage growth are the drivers of huge economic potential in the developing world. Emerging markets are trading at a significant discount on an absolute and relative basis, making current valuations compelling for long-term investors. In recent years, we have noted growing dispersion in the returns of emerging markets stocks even within the same country and industry. We anticipate more divergence in the performance of countries and companies than we have seen in the past 15 years and believe that careful stock selection will be crucial for producing good returns over time.